One investing theme that definitely came to the forefront in 2021 and remains a hot topic in 2022 is the metaverse. The discussions accelerated when Facebook decided to change its name to Meta Platforms ( FB 1.50% ) last fall and announced it was investing $10 billion a year into the nascent industry. Now many investors are trying to find ways to invest in this growing trend. But what is the metaverse? At its core, the metaverse is a collection of digital 3D worlds that you can experience through internet-connected computing devices, including smartphones and virtual reality headsets.
Big technology companies like Meta Platforms, Apple, and Microsoft are investing heavily to develop the hardware and platforms for this next stage of the internet. But there are plenty of other smaller companies poised to benefit if the general public starts spending more and more time in virtual worlds. Here are three top metaverse stocks to buy in March.
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1. Electronic Arts
Electronic Arts ( EA -2.71% ) is one of the largest video game publishers worldwide. The company publishes long-standing sports titles like FIFA Soccer and Madden NFL, along with other gaming franchises like Battlefield, the Sims, and Apex Legends. With different exclusive licenses with sports leagues around the world and established player bases across a diversified set of franchises, EA is set to ride the steady growth of video game spending over the next decade. In 2021, it is estimated that people spent $178 billion on the video game industry worldwide, which is expected to grow to $269 billion in 2025.
A big reason for this growth is the rise of virtual reality (VR), augmented reality (AR), and the potential of cloud gaming. Cloud gaming will allow gamers to stream games to their homes without the need for expensive hardware, similar to how Netflix works, and could lower the hurdle for more gamers to join and start playing games under EA’s portfolio.
This fiscal year, which ends in March, EA is expecting to generate $6.9 billion in revenue and $1.9 billion in operating cash flow (the best metric for measuring the profitability of a gaming company). At a market cap of approximately $35 billion, the stock trades at a price-to-operating-cash-flow (P/OCF) of 18.4 if it can hit its full-year guidance. With a durable tailwind coming from the continued growth of all these metaverse technologies, EA stock is an easy buy right now.
2. Match Group
Moving outside of the video game industry, we have Match Group ( MTCH -1.66% ). The company is the dominant player in online dating, owning many popular dating apps and websites like Tinder, Match.com, and Hinge.
As more and more of our communication has moved to the virtual world through different messaging and social media platforms, so has dating. It is estimated that 49 million people use online dating services in the United States (about 15% of the population). Right now, the majority of Match Group’s business flows through smartphones.
However, management is preparing for the next stage of the internet and the potential metaverse-style platforms that may become popular over the next decade. For example, one of its subsidiaries launched an application called Single Town in South Korea, a virtual world where single people have avatars and can interact with other people who join the community. It is very experimental, but it shows that Match Group is investing in the future and that online dating, in general, should benefit from the growth of the metaverse around the world.
As of this writing, Match Group stock trades at a market cap of $26 billion. In 2021, the company generated $833 million in free cash flow, giving the stock a trailing price-to-free cash flow (P/FCF) of 31. While not cheap, with such a strong tailwind ahead of it that could accelerate along with the growth of the metaverse, Match Group stock could be a great long-term investment at these prices.
The first two companies build software for the consumer metaverse. Autodesk ( ADSK -1.58% ) builds software tools for the industrial and engineering metaverse. What does that mean? To keep it simple, Autodesk’s software tools enable people to design, build, simulate, and manage buildings/machinery virtually. This includes Revit (3D software for architects), Fusion 360 (3D software for engineers), and many other software tools.
With the emergence of metaverse hardware tools like VR headsets and AR goggles, and the continued growth of cloud computing, Autodesk should steadily enhance how immersive and valuable its software tools are for its customers. For example, it recently launched Autodesk Tandem, a digital twin software tool that allows building owners to manage and monitor their assets all from a software program.
If this all sounds like complicated and highly technical stuff, just understand that as our digital/metaverse-style tools become better and better, Autodesk will be able to build better and better products for its customers. This in turn should lead to higher revenue and profits for the company over the long term. At a market cap of $45 billion and forward guidance for $2.17 billion in free cash flow, Autodesk stock trades at a P/FCF of 21. With the long-term tailwinds from the digitization of the construction and engineering industries around the globe, now looks like a great time to take a position in Autodesk stock.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.