Metaverse stocks: Can Meta and Roblox tap into the growing theme?

The metaverse has become one of the most talked about concepts in the world of tech over the past couple of years, and stocks like Meta, Roblox and Tencent are some to play the investment theme. Here, we take a look at why.

Though there is some debate about its exact definition, the metaverse is frequently regarded as the next generation of the internet. Those who are most bullish about the concept say it is where people will live, work and interact with each other in virtual environments. This is good news for tech firms leading the way in the space, such as Meta [META], Roblox [RBLX] and Tencent [TCEHY].

While critics argue the concept of the metaverse has been overhyped, Citi analysts led by Andre Lin believe that “falling tech valuations enhance the metaverse optionality value”. And although the metaverse is in its infancy, it could have “potentially profound implications for key players”, the analysts wrote in a note to clients seen by Barron’s.

But which stocks will be the key beneficiaries of the metaverse? As with any technology that’s at an early stage, it’s always hard to predict winners, according to Manish Nigam, head of global sector research at Credit Suisse, but “the metaverse’s prevalence will mean that current mega companies who fail to adapt to the era will lose out to those that do”.

Meta: the obvious play

Meta CEO Mark Zuckerberg has single-handedly pushed the concept to the forefront of investors’ minds by rebranding Facebook to reflect the company’s ambition to build the metaverse.

Its Reality Labs division reported a hefty $2.9bn loss in the first quarter of 2022, having lost $10bn in fiscal 2021. But this isn’t a major concern for Zuckerberg, who is focused on attracting more people to the platform before monetising virtual experiences.

“By the end of the decade, we hope to basically get to around a billion people in the metaverse doing hundreds of dollars of commerce each," he told CNBC’s Jim Cramer in June.

“Buying digital goods, digital content, different things to express themselves… I feel there’s going to be a massive economy around this.”

Meta’s share price has been cut in half year-to-date though 1 July, falling to $160.03. It recorded a 52-week low of $154.25 on 23 June.

Roblox: showing young ‘tech giant’ potential

Gaming has become a battleground for creating digital, immersive and virtual experiences. Roblox is taking advantage of this by building its metaverse.

The company’s Q1 2022 revenue was up 39% year-over-year. It generates revenue from a mix of advertising deals, licensing agreements, royalties and purchases of its in-game currency, Robux.

As Christina Wootton, vice president of global brand partnerships, explained to Vogue Business, Roblox is working with brands like Gucci and Vans to create and sell digital clothes and fashion accessories in virtual worlds.

Though yet to turn a profit, Roblox’s potential to be a metaverse gaming leader gives it “young tech giant” potential as it “appears to have the only fully fledged metaverse product on the market”, Bank of America analysts wrote in a note to clients back in February. They have a ‘buy’ rating on the stock.

However, hit by the wider tech selloff, the Roblox share price has plunged 66% year-to-date through 1 July to $35.07, although it has recovered since setting a 52-week low of $21.65 on 10 May.

Tencent: a clear winner in China

At the start of the year, Tencent upgraded its QQ app to allow users to interact in virtual spaces where they watch shows and play games.

Kenneth Fong, head of China internet securities research at Credit Suisse, has praised the feature and likened it to Roblox, which allows players to create avatars using facial recognition and artificial intelligence.

In a bid to capitalise on the metaverse, the company has established an extended reality unit that will be led by current Tencent Games CTO Li Shen, Reuters reported last month.

“Tencent is a clear winner in China’s metaverse play given its strength in gaming and media content,” Charlie Chai, vice head of research at 86Research told S&P Global in March.

The Tencent share price is down 22% year-to-date through 1 July amid broader headwinds for Chinese stocks. The stock fell nearly 4% between 1 July and 27 June after its biggest stakeholder, Naspers [NPSNY], announced it would be slashing its stake to fund share buybacks.