One obvious way to get exposure to the metaverse, as an investor, is through buying shares in Meta Platforms, the company formerly known as Facebook. It’s currently spending around $10bn per year to build its metaverse. However, there are plenty of other stocks that offer exposure to this exciting growth story. Here’s a look at three I’d be happy to buy today.

Microsoft

One of my top stock picks for metaverse exposure is Big Tech giant Microsoft (NASDAQ: MSFT). As a major player in both video gaming and collaboration software, I expect it to be at the forefront of the metaverse revolution in the years ahead.

In terms of its plans for the metaverse, Microsoft CEO Satya Nadella has said that the group is currently creating an entirely new platform designed to bring people, places, and things together with the digital world. This will have applications in both the consumer space and the enterprise space. An important development here is its new Mesh product. This is a collaborative platform for virtual experiences that can be accessed from any device.

The risk here is that MSFT is likely to face plenty of competition from Meta Platforms in the years ahead. So, there’s no guarantee it will be a winner in the metaverse. I’m comfortable with this risk though, as Microsoft is a diversified company with exposure to a number of other high-growth industries.

Overall, I think it’s a great stock for me to own for the long term.

Nvidia

Another top metaverse stock, in my view, is Nvidia (NASDAQ: NVDA). It designs high-power computing chips that are used to power video gaming and artificial intelligence applications. Given the strength of its chips, I think Nvidia is likely to be a key ‘enabler’ of the metaverse.

Last year, Nvidia announced that it had developed its own metaverse-type platform, the ‘Omniverse’. This is an advanced technology platform that brings together the group’s expertise in AI simulation and graphics, and can be used to create virtual avatar characters, interpret speech, and create new 3D worlds. This platform appears to have a lot of potential.

Nvidia is an expensive stock that’s highly volatile. So, it’s not one for those seeking capital preservation. I’m willing to tolerate short-term share price swings, however. I think the long-term growth potential here is significant.

Roblox

Finally, I like Roblox (NYSE: RBLX) as a more speculative play on the metaverse. It’s a video gaming company with a platform that enables users to come together to play, learn, communicate, explore, and expand their friendships online. With over 50m daily users, you could say that Roblox has already created its own metaverse.

Roblox stock has underperformed recently, however, the company continues to grow at a rapid rate. Last year, for example, revenue increased 108% year on year to $1.9bn. Given the popularity of video gaming globally, I see plenty of growth ahead. This year, analysts expect revenue of around $2.9bn.

I’ll point out that Roblox is not a stock I’d load up on. The company isn’t yet profitable, so it’s a high-risk investment. I do see plenty of growth potential though. So, I’d be willing to take a small position here.

I’ve been monitoring Roblox closely as I’m quite bullish on the video gaming market and it looks like it could be a major player in the metaverse. So has the recent share price fall provided an attractive entry point for me? Let’s take a look.

Why did Roblox stock fall?

Looking at the Q4 results, it’s not hard to see why Roblox stock tanked. For starters, both revenue and earnings missed Wall Street’s estimates.

For the quarter, revenue amounted to $770m, below the $772m analysts had been expecting. Meanwhile, the loss for the quarter of $0.25 was greater than the $0.13 loss expected.

Additionally, January 2022 bookings (equal to the amount of virtual currency purchased by users in a given period of time) were down significantly on recent monthly booking figures. For the month, bookings were between $220m and $223m, up just 2-3% year-on-year.

By contrast, in October, November and December, the company posted bookings growth of 15%, 23%, and 21% respectively.

This figure suggests the company is seeing a bit of a slowdown right now. That’s not so surprising though, given the world is reopening after the pandemic.

“Once stuck-inside kids and teens are now spending weekdays off their devices and out in the real world,” commented Jefferies’ analyst Andrew Uerkwitz.

The growth story is still in play

Stepping back a bit and looking at the bigger picture however, the growth story here appears to be intact.

For 2021, revenue increased 108% over fiscal year 2020 to $1.9bn, while bookings rose 45% year-on-year to $2.7bn. Net cash provided by operating activities jumped 26% to $659.1m.

And at the end of January, the company had daily active users (DAUs) of 54.7m, up 32% from January 2021.

“With nearly 55 million daily active users, Roblox is increasingly an integral part of people’s lives,” said CEO David Baszucki. “Our 2021 results demonstrate that the investments we were able to make in our technology and developer community are generating strong returns, and we will continue leaning into the business as we focus on the large, long-term growth opportunity ahead of us,” he added.

This is all quite encouraging, to my mind. However, it’s worth pointing out that Roblox is not expected to be profitable in the near term. For 2022, analysts expect the group to post a net loss of $365m. This adds risk to the investment case. Unprofitable company stocks can be highly volatile.

Valuation

As for the valuation, at the current share price Roblox has a market-cap of around $32.5bn. Given that analysts expect revenue of $3.31bn for 2022, that puts the price-to-sales ratio at just under 10.

That is high, which again adds risk. But I don’t think it’s outrageous, given Roblox’s huge user base and metaverse-related growth prospects. That valuation is not a deal-breaker for me.

My move now

Putting all this together, I see Roblox as a ‘speculative buy’ for me right now. But this is not a stock I’d load up on. However, given that the video gaming industry looks set for strong growth in the years ahead, I’d be comfortable taking a small position at the current share price.

Powering the meta

Nvidia is a semiconductor superpower and is an established graphics processing unit (GPU) brand in the gaming world. It is now the leading metaverse hardware developer with an 83% market share. Investors finally caught up to the potential of the company and the share price rose 125% in 2021, making it one of the top global performers last year. But do I think this rise is justified? The answer is a resounding yes.

Given the expansion of virtual worlds, the computing and graphic capabilities of the average computer or console has grown rapidly in the last decade. This demand caused Nvidia’s revenue to jump over 100% in just three years. Its premium chipsets have grown in both capacity and price. And the firm is making the transition to offering a software framework via the Nvidia Omniverse. The platform will allow creators to seamlessly implement graphic upgrades to existing virtual worlds.

But I think replicating this run in 2022 is very unlikely. At $276, the Nvidia share price is now trading with a mindboggling price-to-earnings ratio of 85 times. Analyst’s estimates suggest an 18%-20% growth in revenue this year, which is far from its 2021 revenue growth of 52%. Also, given the expenditure that comes with expansion, investors are taking profits right now and its share price has been falling since mid-December.

But I am not looking for explosive gains but the best stock to invest in the metaverse. And despite the huge overvaluation, I think Nvidia will continue its market reign as a computing powerhouse and could offer steady growth. Although I missed its incredible run last year, Nvidia still remains the top metaverse stock for my portfolio in 2022.

Meta gaming

I cannot overlook Roblox and its role in shaping the early days of the metaverse. After its listing in July 2021 at $45, the Roblox share price shot up to $135 in November. But it has fallen steadily since and is currently trading at $88. And I think Roblox’s value was grossly inflated given the pandemic gaming boom. 

Roblox’s surge in daily users last year means the platform now has over 50m unique games and is child-friendly. Both strong positives. But can it front the gaming revolution on the metaverse? I do not think so. The gaming world is so fragmented and full of diverse sects. I think there is so much scope for expansion and Roblox is just one piece of the puzzle.

It does not help that Roblox is still loss-making. Losses in 2021 stood at $348m and it could be years before the gaming company starts making money. It is too early to call how metaverse gaming will develop. The hardware, however, is a different question. Processors are crucial to creating this virtual world. This is why I think Nvidia is the top metaverse stock for me to buy today.

What Roblox does

Roblox is an online gaming platform. Importantly, it also allows users to create games using Roblox’s proprietary system. In fact, it has over 50m different games that can be played right now. 

The company started out in 2006, but really saw growth accelerating during the pandemic. This is logical, given the lockdowns and time we all had to spend at home. Roblox is child-friendly which is another reason for the large growth, as the social aspect of gaming together has picked up. 

After strong growth during 2020, it went public in early 2021. Roblox shares were set at $45, and rallied in the initial aftermath. They currently trade at $124, meaning that I’d have almost tripled my investment within a year.

A brave new world

The vision for buying Roblox shares now is less to do with its finances and profit/loss and more about the trend towards the metaverse. I’ll hold my hands up and say that I’m by no means an expert on the subject. However, it’s clear that many smart people are investing a lot of time and money in this sector.

For example, Facebook has completely rebranded to Meta pivot to virtual reality, with CEO Mark Zuckerberg being a huge advocate. Another case is Nike. Only last week it was announced that Nike has created Nikeland within Roblox, allowing players to kit out their avatars in Nike products.

The very nature of Roblox is that it’s a virtual world, in which anyone can create anything (within reason). The ability for players to create different games within the system naturally helps the company to get bigger. If we continue to see large brands get involved in this space then it should benefit Roblox shares. Higher user participation, larger spends and greater publicity are all positives here.

Risks to be aware of 

I see a couple of risks in this area though. Firstly, Roblox is losing money. In fact, the latest Q3 results show that in the nine months through to the end of September, it lost more than in the same period last year. This was a loss of $348m in comparison to the 2020 figure of $194m.

Secondly, could the whole metaverse play simply be a fad? If it is, then investors could quickly move on to the next big thing, leaving me holding shares in Roblox at a loss.

But I’m still strongly considering buying shares in Roblox as a play on the metaverse growth in years to come. 

So, why did the Roblox share price surge so spectacularly yesterday? And is this a stock I should consider for my growth portfolio?

Why Roblox’s share price just spiked higher

The reason the RBLX share price spiked higher yesterday was that the company posted a very strong set of third-quarter results on Monday night.

For the quarter ended 30 September, revenue increased 102% year on year to $509.3m, while bookings increased 28% year on year to $637.8m. Average daily active users (DAUs) was up 31% year on year to 47.3m, while ‘hours engaged’ increased 28% year on year to 11.2bn. 

These are very impressive numbers when we consider that in the third quarter of last year, many people were stuck at home on lockdown. Unlike many other lockdown beneficiaries, which have struggled recently as the world has reopened (just look at the Peloton share price), Roblox seems to be going from strength to strength.

“It’s clear that even as users revert back to pre-pandemic routines and behaviors, Roblox remains an important part of their day,” wrote management in a letter to shareholders.

Investors were also impressed with the commentary in relation to the company’s October performance. “Based on our October results, we appear to be having a great start to the last quarter of the year,” said CFO Michael Guthrie. This commentary suggests that the company could be set to deliver a big Q4 performance.

Should I buy RBLX shares now?

While Roblox has strong momentum right now and looks set for further growth in the years ahead, I’m not totally convinced that the stock offers an attractive risk/reward proposition right now.

One issue for me is the high valuation. This year, analysts expect the company to generate revenue of $2.7bn (it could beat this estimate). That means that at the current share price and market cap ($63bn), the forward-looking price-to-sales ratio is about 23. That’s high and doesn’t leave much of a margin of safety.

Another issue is the lack of profitability. This year analysts expect the group to post a net loss of $437m. Next year, they expect a net loss of $397m. This adds risk to the investment case. If bond yields start to rise again and tech stocks take a hit, I’d expect the share price to be very volatile given the lack of profits here.

I’ll point out that I do think Roblox is an interesting company with a lot of potential. At some stage in the future, I may invest in it as I’m quite bullish on the prospects for the video gaming industry as a whole. However, given the high valuation here, there are other stocks I’d prefer to buy right now.

Operationally Roblox has reported revenues of $387m for the first quarter of 2021, a 140% year-on-year increase. Average daily active users of the Roblox platform increased 79% year-on-year to 42.1m. However, operating losses swelled to $135m in the first quarter of 2021, from $73m a year previously.

So, the Roblox share price and the company itself have been growing robustly. Of course, the pandemic helped in that it meant more people spending more time on digital leisure activities. Although that effect will dissipate, Roblox has ambitious plans for continuing to grow into the future.

What is Roblox?

Roblox is not a game; it’s a place where people (mainly under 13 years old) go to play games made by other developers. The developers create the games using Roblox’s tools. To play games, users have to download the Roblox app for desktop, mobile, or console. To create games, users have to download Roblox Studio. Roblox and Roblox Studio are free to download and use. 

Roblox Studio looks a little like the Unity development platform. Both allow games to be developed with and without coding. However, Unity’s platform is a fully-fledged game engine with fewer restrictions and a higher ceiling for developing games that can be deployed to any platform. 

It could be said that Roblox is to game content what YouTube is to video content. It gives games creators a space to showcase and earn money from their work.

Robux

Roblox users buy Robux, the platform currency, with real-world currency. Robux are used to access advanced features and customisations for the platform and games. Roblox splits the real revenue earned by selling Robux three ways. Around a quarter goes to app stores that users used to download and operate the Roblox platform. Another quarter goes to games developers. That leaves around half for Roblox.

Source: Roblox presentation

The rest of Roblox’s revenue comes from advertising, licensing, and royalties. For example, Roblox-branded items are licensed for sale through third parties, and various media companies advertise on Roblox.

Roblox share price

I think comparing the Roblox platform to YouTube is reasonable. Needham & Company, a research firm, valued YouTube at roughly $300bn as a standalone entity based on revenue multiples. Roblox’s current market cap is $51bn. If Roblox can eventually rival YouTube in terms of revenue and scale, I would expect the Roblox share price to move higher.

Roblox wants to grow into a place where users can play games and learn and hold parties with their virtual friends. Artists are already hosting launch parties on Roblox. That could support a move to YouTube-like valuations. On the other hand, the Roblox platform’s audience is much younger than YouTube, and it does not have the breadth of content yet. That would argue for Roblox not achieving YouTube-like valuations. With the entire US tech sector looking pricy, I think the Roblux share price could go either way, and at the moment, I am watching from the sidelines.

Notwithstanding this, I’m not as confident as some that the share price will continue to soar from here, at least in the near future.

Now, don’t get me wrong. Roblox’s chief pull — allowing players to create avatars that can move between games, all of which have been built by members of its own community — is attractive. When players can switch from creating a theme park to racing a car to starring in a fashion show, it’s perhaps no surprise Roblox is one of the biggest-grossing apps on Apple and Google devices.

Should this be the case, I think there’s a better way to play the gaming theme. 

Top UK growth stock 

Today’s full-year results from Dublin-based gaming services provider Keywords Studios (LSE: KWS) were as good as you might expect. Despite Covid-19 forcing many of the company’s employees to work from home, group revenue increased 14.4% to €373.5m. Pre-tax profit rose a whopping 86.6% to €32.5m. On top of this, Keywords ended the year with net cash (€102.9m), thanks in part to a successful €110m placing conducted in May.

The outlook for earnings looks just as good. As a result of new console launches (Playstation 5 and Xbox X/S Series), Keywords expects to see increased demand across its service lines “in 2021 and beyond.” Indeed, joint interim CEO Jon Hauck said the company was “very confident” in its future, thanks to “the continued trend towards outsourcing and an increased focus on content creation in a growing video games market.”

Buyer beware

All this surely bodes well for the KWS share price over the medium-to-long term. This isn’t to say there won’t be some volatility along the way. Although up more than 1,000% over the last five years, the KWS share price has suffered some not-insignificant reversals over this period. 

Like Roblox, there’s also the possibility that demand for the shares may moderate as investors grow wary that even the most committed gamers will want to get outside more over the next few months. These things matter when it’s considered that KWS shares already traded on a heady 38 times forecast earnings before markets opened this morning. 

Even so, I’d definitely feel more comfortable backing Keywords over Roblox. Aside from making real profits, the former is less focused on fickle young gamers. The ‘picks and shovels’ nature of its business also gives Keywords some earnings diversification that Roblox arguably doesn’t have. 

That said, I’m happy to continue funneling my money into this gaming-focused fund instead.

Roblox shares: a great long-term investment?

Roblox is a gaming platform that allows users to both play and create games within an expansive virtual universe. Players are able (and encouraged) to make in-game purchases with the virtual currency ‘Robux’. With over half of under-16s in the US having used the platform, this is a great avenue for revenue.

Since listing on the NYSE, Roblox shares have looked like an exciting investment opportunity. The company expects an explosive Q1, pushed forward by 60% growth in active players and a doubling of revenue in comparison to last year. For 2021 as a whole, its expectations are a little more restrained. But roughly $1.4bn in revenue still represents growth of around 50% year-on-year. Impressive.

I’m also confident that Roblox shares would not be harmed by any negative pandemic developments. In fact, they could actually benefit if children are stuck at home once more (something we all hope doesn’t happen). The more likely scenario is that the world starts returning to normal in the coming months.

But this creates the very real risk that player numbers could start to decline to pre-pandemic levels.

Another risk is that Roblox shares are potentially overvalued. My colleague Edward Sheldon certainly thinks that its jump from a $4bn valuation last year to around $40bn poses a risk. This isn’t helped by the difference between its market cap and revenue resulting in a high P/S ratio of 27.

And don’t forget, all it takes is one viral gaming sensation to drive users away from the platform. Remember Fortnite?

Coupang: advantages and disadvantages

The performance of Coupang when it joined the NYSE was encouraging. The company is seen by many as the ‘Amazon of South Korea’, so demand was understandably high.

This interest comes on the back of a wonderful year for the relatively new company. Its revenue doubled in comparison to the previous year, reaching an impressive $12bn. It also managed to increase its market share from 18% to 25%.

However, both of these positives come with caveats. Its market share might be increasing, but strong competition makes innovation a must if it wants to avoid being smothered by the likes of Gmarket and WeMakePrice.

It also isn’t profitable. Despite its $12bn revenue last year, it actually ended up with losses of almost $500m. This is an improvement on the year before, but doesn’t guarantee that the company will become profitable any time soon.

This lack of profitability and the risk its competitors pose means I’ll probably hang back from Coupang for a while.

I’m willing to overlook the risk of overvaluation in regard to Roblox shares, though. Once the dust has settled over the next few days, I’ll probably be making an investment that I’ll maintain for the long term.

That’s quite an impressive level of growth for only 24 hours of trading, in my opinion, even though it has fallen back a little since then. So, should I be adding the stock to my portfolio? To answer that question, let’s take a look at what Roblox does and the challenges that lie before it.

A gaming giant for younger audiences

Roblox is a video game company. But unlike a typical game developer, the players are the content creators. They can design and share their own mini-games, levels, and puzzles without needing any advanced programming knowledge. I think this is rather ingenious. Let me explain why.

Games usually only have a limited amount of content. And so, the player base begins to contract within a relatively short period of time. But by having a continuous stream of new content being created by the players, Roblox extends its playable lifespan at little expense beyond keeping the servers online and tools up to date.

In addition, this generates a network effect. As new players join the community they have an enormous library of experiences to enjoy. Some of these new players may try their hand at creating their own mini-game within Roblox. This in turn adds more content that attracts even more players and the cycle repeats itself. In my experience, network effects are powerful business drivers. Therefore I think the Roblox share price may be able to grow substantially in the future. But as with every investment, there are risks to consider.

Several risks lie ahead

Over the last 16 years since Roblox launched, its player base has grown to over 31 million daily active users. However, the vast majority of these players are children. This exposes the company to additional online legislation that provides greater protection to younger people when interacting online. Any breach of these laws would land the business with substantial fines, as well as significant reputational damage that would likely cause the Roblox share price to suffer.

Another risk to consider is how Roblox makes money. The game itself is actually free to play, but players can purchase in-game currency to unlock extra content through micro-transactions. Making the game available for free has undoubtedly helped in growing the player base. However, each additional player increases server costs and not all of these individuals will end up spending any money. Consequently, the firm is currently unprofitable, with no clear guidance as to when that may change. 

Should I buy Roblox at its current share price?

I really like the business model of Roblox, as it has some significant advantages over competing video game developers. However, as an investor, I think the Roblox share price is far too high.

The current market capitalisation of the company is just over $38bn. Comparing that to the $589m of revenue generated in the first nine months of 2020 places the P/S ratio at around 64. Personally, I think there are other growth opportunities available right now at far better prices, so I’m not adding the stock to my portfolio today. 

Roblox is described as a digital universe. It’s filled with thousands of games, many made by the gamers who signed up to the platform. The enticing reason for this is that Roblox rewards its creators with a 70% cut of any revenue generated from their games. Some independent users have made million-dollar fortunes from the platform.

Long-term investment opportunity

For many investors, the primary reason they’re attracted to Roblox is its staying power. The company has been around for nearly 17 years. It’s massively popular with youngsters for both playing alone or with their friends in an online environment. The extensive choice of game genres means there’s something for everyone, and word of mouth plays a powerful part in attracting new users.

While the games are free, in-game purchase options bring in the money. While under no obligation to spend, the temptation is there. And many children are choosing to spend their pocket money in this way to enhance their gaming experience.

ARK Invest, a popular US ETF provider founded by Cathie Wood, focuses on tech plays with a long-term vision. Roblox appears to fit the bill, because ARK invested in 519,000 ($36m) Roblox shares at IPO. ARK’s endorsement gives a more bullish case to the company and could entice further retail investment.

Roblox revenue risks

I think there are a few risks to the company’s revenues, and these could lead to volatility in the Roblox share price.

In its early days, the company came under fire for a lack of regulation over its game content. This led to children being exposed to games with less than suitable content. It’s since been attempting to tighten this up, but I think the risk remains. And now that it’s publicly listed, any negative press alarming parents could destructively affect the Roblox share price.

Gaming has had a revenue boost from pandemic lockdowns and Roblox has benefited from this. But there’s a risk that its popularity will slump when the world gets moving again.

Furthermore, I believe Roblox must tighten up its security as high-profile hacking is on the rise.

Would I buy shares in Roblox?

I can see the popularity in Roblox, it has a massive fanbase and a potentially endless market to tap. As children get older and discover the worlds it presents, they naturally want to join. However, the gaming industry is notoriously competitive, and its ongoing success depends on growing its user base and revenue streams.

I think it has the potential to keep advancing, it’s already said it expects Q1 revenue to double. Prior to IPO, Roblox raised over $850m in venture capital funding rounds. So it has a lot of institutional backing. And, having witnessed how children engage with the platform, I think it’s got staying power. Personally, I’m tempted to buy shares in Roblox as a long-term investment.