The metaverse is undoubtedly one of the hottest tech trends today. It refers to a network ofpersistent, real-time, seamless, and immersive 3D virtual reality or mixed reality worlds and simulations, wherein humans can interact with digital-world objects through a range of devices. The metaverse is expected to enable people to shift more and more activities done currently in the physical world to the virtual world.
Bloomberg estimates the global metaverse market opportunity to be around $800 billion by 2024. While the metaverse is an exciting opportunity, it is not yet monetized. Hence, it would make more sense for retail investors to opt only for financially stable and technologically sound companies (that are not over-reliant on success in the metaverse) that are preparing to grab a significant share of the metaverse.
Against this backdrop, Microsoft (NASDAQ:MSFT) and Adobe Systems (NASDAQ:ADBE) seem to be two such blue chip companies that can prove to be solid metaverse stocks in the long run.
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1. Microsoft
On Jan. 18, enterprise giant Microsoft announced plans to acquire leading pure-play video game developer Activision Blizzard (NASDAQ:ATVI) in an all-cash $75 billion deal. This is the largest-ever deal in Microsoft's history and is expected to spur the growth of its mobile, desktop, console, and cloud gaming businesses. Activision's gaming portfolio coupled with Microsoft's technology expertise (Azure cloud platform, gaming infrastructure, HoloLens, and mixed reality devices, Microsoft Mesh) will emerge as a one-stop shop for all the key components (content, customer base, collaboration software, augmented reality and virtual reality hardware, and cloud infrastructure) required for the evolution of metaverse platforms.
Bernstein analyst Mark Moerdler also believes that Microsoft is "best positioned to be a big winner from the metaverse." The company is also focused on the enterprise use cases in the metaverse. To leverage this opportunity, it has introduced Microsoft Mesh for Teams, which enables remote virtual collaboration in an immersive mixed-reality environment between employees with the help of customized avatars.
While the metaverse is a big future growth opportunity for Microsoft, the company's intelligent cloud and business productivity tools are the major top-line drivers. Currently, Azure accounts for 21% of the global cloud infrastructure services market, behind Amazon's AWS (32% market share). However, Bessemer Venture Partners expects Azure to surpass AWS in market share in the next two years. Microsoft has also positioned itself as a developer-first company by acquiring GitHub, which can play a major role in boosting enterprise adoption of Azure.
Analysts are now estimating Microsoft's revenue and earnings to grow year over year by 17.2% and 14.5%, respectively, in fiscal 2022. The company has a strong balance sheet, with a cash balance of $130.6 billion and debt of $78.9 billion.
In the context of a strong existing business, robust financials, and the now-evolving metaverse opportunity, I consider Microsoft as a safe long-term pick for retail investors.
2. Adobe Systems
Once known mainly for inventing the portable document format (PDF), Adobe Systems is now a leading software-as-a-service (SaaS) digital media player in the world. The company has three major cloud-based offerings: Creative Cloud, Document Cloud, and Experience Cloud.
Creative Cloud involves several creator economy-focused software products such as Photoshop, Adobe Spark, Illustrator, Adobe Premiere Pro, Adobe XD, and Adobe Substance 3D. Many of these software products have wide applications in the metaverse. Adobe Substance 3D reported a 100% year-over-year jump in revenue in the fourth quarter (ending Dec. 3, 2021), thanks to robust demand for creating 3D objects and from emerging metaverse platforms. Substance 3D is used for designing realistic 3D objects and for rendering and staging virtual scenes in a time and resource optimal manner. Adobe Aero is used by creators to develop immersive augmented reality experiences.
Adobe is also launching a Photoshop feature called Content Credentials, which will help verify the credibility and authenticity of non-fungible token (NFT) art. Virtual goods need to have ownership and monetary value associated with them in the metaverse. Hence, NFTs (digital certificates representing ownership of digital assets) will be used extensively for facilitating financial transactions in the metaverse. Content Credentials will help reduce the possibility of fraud and scams in the metaverse.
Finally, these software tools are compatible with a range of operating systems. Against this backdrop, Jefferies tech analyst Brent Thill seems to be rightfully claiming that "Adobe is the best software play for the metaverse -- its creative tools will enable the next generation of the internet."
In fiscal 2021 (ending Dec. 3, 2021), Adobe's revenue was up by 23% year over year to $15.79 billion. Of this, over 92% was subscription-based recurring revenue. This highlights the company's high revenue visibility, a characteristic that usually results in premium valuations. The company generated over $7 billion in operating cash flows, making it well-positioned to invest capital in any future growth opportunities.
Hence, considering Adobe's established leadership in enabling the development of creative content and its formidable financial position, the company is well-poised to be an attractive metaverse pick for the next decade.
