Lemon_tm/iStock via Getty Images
This week, we use AAII’s A+ Investor Stock Grades to provide insight into three stocks that are somehow tied to the “metaverse.” For investors interested in this emerging segment, should you consider these three metaverse stocks of Autodesk Inc. (NASDAQ:ADSK), Meta Platforms Inc. (NASDAQ:FB) and Unity Software Inc. (NYSE:U)?
The metaverse and what it is may be difficult to comprehend, as there really is not one good or service that fully encompasses its meaning. In short, the metaverse is a way in which users will be able to interact with something utilizing virtual or augmented reality features.
That “something” is why these three stocks were chosen in particular: Autodesk provides engineers and architects with the ability to design and render virtual models, Meta Platforms (formerly known as Facebook) is seeking to take social media experience to an unseen level and Unity Software is building the video game engines that players will interact with in their games. These companies serve very different markets that all utilize and plan to expand into the metaverse.
A recent report from Reports and Data outlined that the metaverse industry is set to grow at a compound annual growth rate (OTC:CAGR) of 44.1% between 2021 and 2028 to an estimated $872 billion at the end of the forecast period. Another report from Brandessence Market Research outlined a similar CAGR of 44.8% to projected value of $596 billion by the end of 2027.
Overall, this industry is poised to grow with more companies planning to get involved. The technologies that are involved with the metaverse can include virtual reality (NYSE:VR), characterized by persistent virtual worlds that continue to exist even when you are not playing, as well as augmented reality (NYSE:AR) that combines aspects of the digital and physical worlds.
According to market research firm International Data Corp., the total demand for augmented and virtual reality products, including VR headsets, is forecast to hit $36 million by 2025. Meta Platforms’ Oculus Quest 2 headset tops the list. Bill Gates says he believes that in the coming “two or three years,” most virtual meetings will move from two-dimensional, Zoom-style interfaces to the metaverse. Gates added that Microsoft is working on its own “interim” VR tools in conjunction with its planned virtual workspace, Mesh for Microsoft Teams.
For those looking to gain diverse metaverse exposure through exchange-traded funds (ETFs), the Roundhill Ball Metaverse ETF (METV) has 45 holdings as of February 3, with the median market capitalization of these holdings at $68 billion. Its management fee of 0.59% is the lowest among ETFs that track the metaverse. While these stocks have clear metaverse ties, there is a good chance these companies will also have profitable core businesses that will fund metaverse research and development.
When analyzing a company, it is useful to have an objective framework that allows you to compare companies in the same way. This is one reason why AAII created the A+ Stock Grades, which evaluate companies across five factors that have been shown to identify market-beating stocks in the long run: value, growth, momentum, earnings estimate revisions (and surprises) and quality.
Using AAII’s A+ Stock Grades, the following table summarizes the attractiveness of three metaverse stocks-Autodesk, Meta Platforms and Unity Software-based on their fundamentals.
AAII’s A+ Stock Grade Summary for Three Metaverse Stocks
American Association of Individual Investors
Autodesk Inc. (ADSK) is an application software company that serves industries in architecture, engineering and construction; product design and manufacturing; and media and entertainment. Autodesk software enables design, modeling and rendering needs of these industries. The company’s product offerings include AutoCAD, AutoCAD LT, 3ds Max, Maya, Revit, Inventor, AutoCAD Civil three-dimensional (3D), computer-aided manufacturing (NYSE:CAM) solutions, Fusion 360, BIM 360, PlanGrid, Vault and Shotgun. The company has over four million paid subscribers across 180 countries.
Engineers and architects use the company’s Revit building information modeling program to create virtual models of structures, and Autodesk Rendering can transform those models into a virtual reality setting. About 70% of Autodesk’s business comes from design software for architecture, engineering and construction (NYSE:AEC). Autodesk has a suite of products designed specifically for building VR and AR 3D animations and buildings, a perfect fit for metaverse construction.
Autodesk has an A+ Growth Grade of B. The growth grade considers both the near- and longer-term historical growth in revenue, earnings per share and operating cash flow. The company reported third-quarter 2021 revenues of $1.1 billion, up 18% from $952 million in the year-ago quarter. The company reported quarterly diluted earnings per share of $1.33, growing 28% from $1.04 per share year over year. The company reported cash flow from operating activities of $361 million, an increase of $85 million compared to the prior-year quarter.
The company has an average Momentum Grade of D and a Quality Grade of B, based on respective scores of 36 and 62. The low Momentum Score is driven by low relative price strength in the first and fourth quarters of -23.8% and -16.6%, respectively, offset by relative price strength of 13.5% in the third quarter. The Quality Grade was driven by a return on assets (ROA) score of 93 and gross income to assets score of 83. Autodesk does not currently pay a dividend.
Meta Platforms Inc. (FB), formerly Facebook Inc., is the world’s largest online social network, with 2.5 billion monthly active users. Users engage with each other in different ways, exchanging messages and sharing news events, photos and videos. The firm’s ecosystem consists mainly of the Facebook app, Instagram, Messenger, WhatsApp and many features surrounding these products. Users can access Facebook on mobile devices and desktops. Its segments include Family of Apps (FoA) and Facebook Reality Labs (NYSE:FRL). The FoA segment includes Facebook, Instagram, Messenger, WhatsApp and other services. The FRL segment includes AR- and VR-related consumer hardware, software and content. On the video side, the firm is in the process of building a library of premium content and monetizing it via ads or subscription revenue. Facebook refers to this as Facebook Watch.
Meta Platforms CEO Mark Zuckerberg is so committed to shifting the company’s priority to the metaverse that he changed the name of the company. Zuckerberg announced an initial $10 billion investment in metaverse development, and Meta Platforms recently received many patents related to technology that uses metaverse users’ biometric data to help generate what they see and perceive in the virtual world. Its Oculus and Horizon VR subsidiaries will also likely play a large role in its metaverse push. The company plans to monetize the metaverse via virtual commerce and advertising revenue streams.
Meta Platforms has a Value Grade of C, based on its Value Score of 58, which is considered to be average. The company’s Value Score ranking is based on several traditional valuation metrics. The company has a score of 45 for the price-to-free-cash-flow (P/FCF) ratio, 17 for shareholder yield and 49 for the price-earnings (P/E) ratio (remember, the lower the score the better for value). Meta Platforms has a price-to-free-cash-flow ratio of 16.4, a price-earnings ratio of 16.3 and a 3.2% shareholder yield. Successful stock investing involves buying low and selling high, so stock valuation is an important consideration for stock selection.
The Value Grade is the percentile rank of the average of the percentile ranks of the valuation metrics mentioned above along with the price-to-sales, enterprise-value-to-EBITDA and price-to-book ratios.
A higher-quality stock possesses traits associated with upside potential and reduced downside risk. Backtesting of the quality grade shows that stocks with higher quality grades, on average, outperformed stocks with lower grades over the period from 1998 through 2019.
Meta Platforms has a Quality Grade of A with a score of 99. The A+ Quality Grade is the percentile rank of the average of the percentile ranks of return on assets, return on invested capital (NASDAQ:ROIC), gross profit to assets, buyback yield, change in total liabilities to assets, accruals to assets, Z double prime bankruptcy risk (NASDAQ:Z) score and F-Score. The score is variable, meaning it can consider all eight measures or, should any of the eight measures not be valid, the valid remaining measures. To be assigned a quality score, though, stocks must have a valid (non-null) measure and corresponding ranking for at least four of the eight quality measures.
The company ranks strongly in terms of its F-Score and return on assets, ranking in the 94th and 96th percentiles of all U.S.-listed stocks, respectively. However, it ranks poorly in terms of its accruals to assets, in the 77th percentile.
The company has a strong Growth Grade of B, a Momentum Grade of D and does not currently pay a dividend.
Unity Software Inc. (U) provides a software platform for creating and operating interactive, real-time 3D content. The platform can be used to create, run and monetize interactive, real-time 2D and 3D content for mobile phones, tablets, personal computers (PCs), consoles and AR and VR devices. Unity Software makes real-time content, allowing it to adapt to users’ behavior and feedback. Its Create Solutions are used by content creators, developers, designers, engineers and architects to create interactive 2D and 3D content. Its products, Unity Ads and Unity IAP (in-app purchases), help developers to enhance the revenue potential of their content. It offers solutions for the delivery of content and provides back-end management, such as Multiplay for multiplayer hosting in games, or Vivox to enable player-to-player communications in games. The business is spread across the U.S., Greater China, the Middle East and Africa and Asia-Pacific. The products are used in the gaming industry, architecture and construction sector, animation industry and designing sector.
Unity Software has a Momentum Grade of C, based on its Momentum Score of 45. This means that it ranks in the middle tier of all stocks in terms of its weighted relative strength over the last four quarters. This score is derived from low relative price strengths of -32.4% and -39.6% in the first and fourth quarters, respectively, offset by high relative price strengths of 43.8% and 20.5% in the second and third quarters. The scores are 24, 96, 89 and 18 sequentially from the first quarter. The weighted fourth-quarter relative strength rank is the relative price change for each of the past four quarters.
Earnings estimate revisions offer an indication of how analysts are viewing the short-term prospects of a firm. The company has an Earnings Estimate Revisions Grade of D, which is considered negative. The grade is based on the statistical significance of its last two quarterly earnings surprises and the percentage change in its consensus estimate for the current fiscal year over the past month and past three months.
The company reported a positive earnings surprise for fourth-quarter 2021 of 27.5%, and in the preceding quarter reported a positive earnings surprise of 11.8%. Over the last month, the consensus earnings estimate for the first quarter of 2022 has fallen from a loss of $0.065 to a loss of $0.086 per share based on two upward and six downward revisions.
Unity Software has a strong Growth Grade of B with a score of 71, driven by quarterly sales growth year over year of 42.6% (score of 76) and quarterly operating cash growth year over year of 112.1% (score of 85). The company does not currently pay a dividend.
This article was written by
Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: The stocks meeting the criteria of the approach do not represent a “recommended” or “buy” list. It is important to perform due diligence.