Founded in 1993 by brothers Tom and David Gardner, The Motley Fool helps millions of people attain financial freedom through our website, podcasts, books, newspaper column, radio show, and premium investing services.

Founded in 1993 by brothers Tom and David Gardner, The Motley Fool helps millions of people attain financial freedom through our website, podcasts, books, newspaper column, radio show, and premium investing services.

Motley Fool Issues Rare “All In” Buy Alert

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The metaverse has emerged as one of the next big growth areas in tech. Strategic Market Research estimates its market size could surge to $1.6 trillion by 2030, amounting to a compound annual growth rate (CAGR) of 38%.

That level of growth is likely to turn many investments across several tech subsectors into metaverse stocks. But two stocks, in particular, are forecast to drive outsized returns from the metaverse -- Unity Software (U 3.69% ) and Zoom Video Communications (ZM 2.57% ) . Let's find out a bit more about these two monster metaverse stocks with potential for long-term growth.

Unity is expected to prosper from metaverse interest because it specializes in providing many of the tools the sector needs to grow. Its software, originally designed for high-level video games, helps developers to build representations of 2D and 3D spaces. It is a market leader among video game developers who are adept at creating metaverse-type environments.

But the interest in Unity goes well beyond just gaming. The architecture, film, robotics, construction, and automotive sectors all can build applications that rely on Unity's tools. One example that speaks to both the automotive and construction capabilities became public in January as Hyundai Motor announced a partnership with Unity to develop a "digital twin" of an existing auto factory to use in efforts to improve plant operations.

In the first quarter of 2022, Unity reported record revenue of $320 million. While that represents a 36% gain year over year, it means some slowing from the 44% revenue growth in 2021. Additionally, both the cost of revenue and operating expenses grew at a faster pace due primarily to stock-based compensation expenses and the amortization of intangibles. When not considering these factors, non-GAAP (generally accepted accounting principles) net losses came in at $25 million versus $27 million in the year-ago quarter.

Moreover, the company expects revenue of $1.35 billion to $1.425 billion for all of 2022. This is 25% growth at the midpoint and would mean further slowing for the metaverse stock. Investors have not responded well as Unity's stock price has fallen more than 80% from its 52-week high in November.

But investors should also remember that this has brought Unity's price-to-sales (P/S) ratio to 10. That level is near an all-time low and probably prices in the slowing growth. In the end, Unity's struggles look to be temporary, given the bright future of its emerging metaverse growth driver.

Zoom is arguably the more unexpected metaverse play here. This stock became a pandemic darling as a locked-down populous turned to Zoom for office meetings and personal communications.

Now, many jobs have left the office permanently, and when workers separated by distance need to meet, they are starting to turn to the metaverse to help and doing it through Zoom.

Zoom has developed a virtual reality-based experience that can make two people across the world from one another seem like they are in the same room. The company has also added a whiteboard capability that allows all meeting participants to see the same visuals. Such innovation should help Zoom maintain the 75% market share it holds in the video conferencing industry, according to Datanyze.

And even though revenue has slowed down from pandemic peaks, revenue for its fiscal first quarter of 2023 (ended April 30) grew 12% year over year to almost $1.1 billion. Since it invested heavily in itself, research and development and sales and marketing spending took operating expenses 34% higher during the period, leading to a 50% decrease in net income to $114 million.

Admittedly, growth may not improve immediately. But one intriguing forecast came from Cathie Wood, who has made Zoom the No. 1 holding in the ARK Innovation ETF. Wood set a price target between $700 per share and $2,000 per share for Zoom by 2026. Given Zoom's 80%-plus drop to the $110 per share range, some analysts think Wood is almost certainly wrong about its growth levels.

However, With the P/S ratio near all-time lows at just eight, the stock price likely reflects its challenges. As an online meeting ecosystem develops in the metaverse, it will probably take Zoom stock much higher over time.

Will Healy has positions in Zoom Video Communications. The Motley Fool has positions in and recommends Unity Software Inc. and Zoom Video Communications. The Motley Fool has a disclosure policy.

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Market-beating stocks from our award-winning analyst team.

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 07/15/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Calculated by Time-Weighted Return since 2002. Volatility profiles based on trailing-three-year calculations of the standard deviation of service investment returns.

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.

Making the world smarter, happier, and richer.

Market data powered by Xignite.