Metavers

2 Metaverse Stocks to Buy Hand Over Fist and 1 to Avoid Like the Plague

Though there are no shortage of high-growth trends for investors to choose from, none appears to offer more potential than the metaverse.

In simple terms, the metaverse is the next iteration of the internet. It’ll allow users to interact with their surroundings and each other in 3D virtual worlds. Aside from providing entertainment, these virtual worlds represents brand-new ecosystems that can be monetized in a variety of ways. In addition to payments within these virtual landscapes, there’s the processing, storage, latency, digital identity/verification, and so on, that needs to be addressed to make the metaverse work.

The estimated market value of the metaverse varies wildly. Matthew Ball, CEO of venture capital company Epyllion, believes the metaverse grows into a $10 trillion to $30 trillion market within 10 to 15 years. Meanwhile, Morgan Stanley foresees the metaverse being worth $8 trillion in China alone.

A person wearing a virtual reality headset who's interacting with something in the virtual world.

Image source: Getty Images.

These lofty dollar figures signal an enormous opportunity for investors. But it’s important to recognize that not every company is going to be a winner. Below are two metaverse stocks (of varying risk levels) that can be bought hand over fist, as well as one for investors to avoid like the plague.

The first metaverse stock to buy hand over fist: Microsoft

While it’s not a selection that’ll win any awards for originality, tech giant Microsoft (NASDAQ: MSFT) is the first metaverse stock investors can confidently buy hand over fist. In my view, Microsoft has three catalysts that make it one of the smartest stocks to take advantage of metaverse growth.

To start with, there’s the elephant in the room: the company’s January-announced $68.7 billion all-cash acquisition of interactive gaming company Activision Blizzard (NASDAQ: ATVI). On top of acquiring Activision’s numerous well-known gaming franchises (Warcraft, Call of Dutyand Candy Crush), this deal is about Microsoft democratizing the game-building process and expanding the metaverse beyond gaming. Even though Microsoft CEO Satya Nadella isn’t entirely certain what the definition of “metaverse” will pertain to, he does believe it’ll represent a “collection of communities and individual identities anchored in strong content franchises accessible on every device.”

Secondly, Microsoft’s roots to the metaverse were planted well ahead of the Activision Blizzard buyout announcement. As an example, Microsoft has been developing mixed-reality headsets for more than a half-decade. It’s currently working on the third generation of its HoloLens headset, which, according to TheVerge.com, may be used by the US Army for life-like mixed reality training. With mixed reality and virtual reality headsets being the initial gateway to the metaverse, Microsoft looks to be one of the few companies in position to thrive.

The third catalyst is simply Microsoft’s enormous operating cash flow. Thanks to rapid growth from cloud infrastructure service Azure, and exceptionally high margins and stable demand from its Windows and Office franchises, Microsoft brought in $83.9 billion in operating cash flow over the trailing 12 months. This gives the company an abundance of capital, and quite the buffer, to invest aggressively in the metaverse.

An engineer placing a hard drive into a data center server tower.

Image source: Getty Images.

The second metaverse stock to buy hand over fist: Fastly

For investors with a stronger stomach for risk (and reward), Fastly (NYSE: FSLY) is the second metaverse stock that can be bought hand over fist.

The metaverse is going to take many years to develop, which means there are a number of moving parts that extend well beyond mixed reality and virtual reality headsets. Fastly is one of the better-known content delivery networks (CDNs). It’s responsible for delivering content from the edge of the cloud to its destination as quickly and securely as possible. In other words, its task within the metaverse will be to reduce latency. When an action is taken within a virtual environment, Fastly will ensure there’s as little delay as possible in processing that action.

We’ve already witnessed plenty of evidence that Fastly’s CDN is a popular and trusted solution. Over the past year, the company’s total customer count rose to more than 2,800 from less than 2,400, while the number of enterprise customers jumped to 445 from around 380. This latter increase is particularly important, as it demonstrates enterprise clients have looked past a network out in June 2021.

Additionally, Fastly’s dollar-based net expansion rate of 121% in the fourth quarter of 2021 signals that its existing customers are increasing their spending (in this case by 21% from the prior-year period). That’s good news for Fastly’s usage-based platform.

What investors have to be mindful of are Fastly’s near-term losses, which have consistently come in larger than expected. However, with the company expected to pare back its marketing expenses in 2022, wider-than-anticipated losses could be a thing of the past.

There’s no denying Fastly’s potential, but investors will have to be patient if they want to realize a big payday.

A person holding a smartphone that's displaying a volatile crypto chart with buy and sell buttons above it.

Image source: Getty Images.

The metaverse stock to avoid like the plague: Coinbase Global

On the other side of the coin, cryptocurrency exchange and ecosystem Coinbase Global (NASDAQ: COIN) is a metaverse stock I believe investors can avoid like the plague.

Coinbase looks to have two pathways to relevance in the metaverse. First, it’s the most-popular platform to buy and sell digital currencies — and blockchain-tethered tokens have proved essential in the early stages of the metaverse.

Secondly, Coinbase sees itself as providing “an identity on-ramp into the metaverse.” Similar to Nadella’s thinking, Coinbase believes the metaverse will be a collection of communities that’ll be linked together. Coinbase is working on creating a non-fungible token (NFT)-based identity tags that’ll be used to move seamlessly from one metaverse to another.

Beyond the metaverse, Coinbase has executed well. The company ended 2021 with 11.4 million monthly transacting users, and it recorded a jaw-dropping $3.62 billion in full-year net income. That was up more than tenfold from the previous year.

But there also look to be fatal flaws with Coinbase’s operating model. For instance, the barrier to entry for cryptocurrency exchanges is relatively low. We’ve already watched trading commissions for online stock brokerages race to $0. My suspicion is we’ll witness similar pricing competition in the cryptocurrency space, which will erode Coinbase’s margins over time.

The other substantial issue with Coinbase is that its trading platform is heavily reliant on Bitcoin and Ethereum. Unless this dynamic duo is consistently heading higher, interest in crypto investing tends to suffer through big ebbs and flows. The point being that the emotions of crypto investors, rather than Coinbase’s innovation(s), are what’s driving this company.

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Sean Williams owns Fastly. The Motley Fool owns and recommends Activision Blizzard, Bitcoin, Coinbase Global, Ethereum, Fastly, and Microsoft. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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