In this article I use AAII’s A+ Investor Stock Grades to provide insight into three stocks that are tied to the “metaverse.” For investors interested in this emerging segment, should you consider these three metaverse stocks of Autodesk
ADSK
Metaverse Recent News
The word metaverse is used to describe an immersive ecosystem similar to a 3D version of the internet. Though it only exists in the form of niche products so far, the metaverse is a proposed way to virtually interact with people and things utilizing tools such as augmented reality (AR), 3D technology and real-time collaborative software. This enhanced interaction would bring about new forms of communication, connection and entertainment.
Several stocks have allocated significant research and development (R&D) resources to metaverse technology. Autodesk provides engineers and architects with the ability to design and render virtual 3D models, Meta Platforms (formerly Facebook) is seeking to take the social media experience to a new dimension and Unity Software makes real-time content for use in video games to enhance players’ experience. These companies serve very different markets, but they are all using enhanced technology to expand into the metaverse.
Grand View Research predicts that the global metaverse market will total $936.6 billion by 2030. The growth is expected to be driven by the popularity of the metaverse, as well as demand from the media & entertainment (especially the gaming segment), education and aerospace & defense industries. The report forecasts a compounded annual growth rate (CAGR) of 41.6% for the metaverse market from 2023 to 2030.
Overall, this industry is poised to grow with more companies planning to get involved. Some of the metaverse technologies include virtual reality (VR), characterized by virtual worlds that continue to exist even when you are not playing, as well as AR, which combines aspects of digital and physical worlds.
Grading Metaverse Stocks With AAII’s A+ Stock Grades
When analyzing a company, it is useful to have an objective framework that allows you to compare companies in the same way. This is why AAII created the A+ Stock Grades, which evaluate companies across five factors that have been shown to identify market-beating stocks in the long run: value, growth, momentum, earnings estimate revisions (and surprises) and quality.
Using AAII’s A+ Stock Grades, the following table summarizes the attractiveness of three metaverse stocks—Autodesk, Meta Platforms and Unity Software—based on their fundamentals.
AAII’s A+ Stock Grade Summary for Three Metaverse Stocks
What the A+ Stock Grades Reveal
Autodesk (ADSK) is an application software company that serves industries in architecture, engineering and construction; product design and manufacturing; and media and entertainment. Autodesk software enables the design, modeling and rendering needs of these industries. The company’s product offerings include design software products AutoCAD, AutoCAD LT, 3ds Max, Maya, Revit, Inventor, AutoCAD Civil 3D, computer-aided manufacturing solutions, Fusion 360, BIM 360, PlanGrid, Vault and Shotgun. The company has over four million paid subscribers across 180 countries.
Earnings estimate revisions offer an indication of how analysts view the short-term prospects of a firm. Autodesk has an Earnings Estimate Revisions Grade of B, based on a score of 67, which is positive. The grade is based on the statistical significance of its latest two quarterly earnings surprises and the percentage change in its consensus estimate for the current fiscal year over the past month and past three months.
Autodesk reported a positive earnings surprise of 3.9% for the third quarter of 2024 and a surprise of 10.7% in the prior quarter. Over the last month, the consensus estimate for the fourth quarter of 2024 ending in January has decreased from $2.011 to $1.960 per share due to two upward revisions and 14 downward revisions. Over the last month, the consensus earnings estimate for fiscal-year 2024 has increased slightly from $7.460 to $7.486 per share.
The components of the Growth Composite Score consider a company’s success in growing sales on a year‐over‐year and long‐term annualized basis and its ability to consistently generate positive cash from its core operations. Autodesk currently has a Growth Grade of A, with a score of 94. The company has a five-year sales growth rate of 19.5% and has seen sales increase year over year for five consecutive years. Cash from operations has also been positive in the past five years.
Autodesk has a Momentum Grade of C, based on its Momentum Score of 58. This means that it is average in terms of its weighted relative price strength over the last four quarters. This score is derived from an above-sector-median relative price strength of –7.1% in the most recent quarter, 2.8% in the second-most-recent quarter and –4.0% in the third-most-recent quarter, offset by below-median relative price strength of 0.8% in the fourth-most-recent quarter. The scores are 51, 69, 70 and 48, sequentially from the most recent quarter. The weighted four-quarter relative price strength is –2.9%, which translates to a rank of 58. The weighted four-quarter relative strength rank is the relative price change for each of the past four quarters, with the most recent quarterly price change given a weight of 40% and each of the three previous quarters given a weighting of 20%.
The company has a Value Grade of F, based on its Value Score of 11, which is ultraexpensive. Higher scores indicate a more attractive stock for value investors and, thus, a better grade. The Value Grade is the percentile rank of the average of the percentile ranks of the price-to-sales (P/S) ratio, price-earnings (P/E) ratio, price-to-book-value (P/B) ratio, price-to-free-cash-flow (P/FCF) ratio, shareholder yield and the ratio of enterprise value to earnings before interest, taxes, depreciation and amortization (EBITDA). Autodesk’s price-to-sales ratio, price-earnings ratio and price-to-book ratio are all above the sector medians and rank in the 88th, 85th and 98th percentiles, respectively, among all stocks.
Meta Platforms (META), formerly Facebook, is the world’s largest online social network, with 2.5 billion monthly active users. Users engage with each other in different ways, exchanging messages and sharing news events, photos and videos. The firm’s ecosystem consists mainly of the Facebook app, Instagram, Messenger, WhatsApp and many features surrounding these products. Users can access Facebook on mobile devices and desktops. Its segments are family of apps (FOA) and Facebook Reality Labs (FRL). The FOA segment includes the aforementioned social media apps and other services. The FRL segment includes AR- and VR-related consumer hardware, software and content. On the video side, the firm is in the process of building a library of premium content and monetizing it via advertisements or subscription revenue. Meta Platforms refers to this as Facebook Watch.
Meta Platforms has a Value Grade of D, based on its Value Score of 21, which is expensive. The company has a rank of 23 for shareholder yield, 86 for the price-to-sales ratio and 73 for the enterprise-value-to-Ebitda ratio. The company has a shareholder yield of 4.0%, a price-to-sales ratio of 6.88 and an enterprise-value-to-EBITDA ratio of 15.6.
A higher-quality stock possesses traits associated with upside potential and reduced downside risk. Backtesting of the Quality Grade shows that stocks with higher grades, on average, outperformed stocks with lower grades over the period from 1998 through 2019.
Meta Platforms has a Quality Grade of A, with a score of 94. The A+ Quality Grade is the percentile rank of the average of the percentile ranks of return on assets (ROA), return on invested capital (ROIC), gross profit to assets, buyback yield, change in total liabilities to assets, accruals to assets, Z double prime bankruptcy risk (Z) score and F-Score. The score is variable, meaning it can consider all eight measures or, should any of the eight measures not be valid, the valid remaining measures. To be assigned a Quality Score, though, stocks must have a valid (non-null) measure and corresponding ranking for at least four of the eight quality measures.
The company ranks strongly in terms of its gross income to assets and return on assets. Meta Platforms has gross income to assets of 46.4% and a return on assets of 15.0%. The sector median for gross income to assets is 27.7% and the median return on assets is –5.2%. The only quality metric that ranks below the sector median for Meta Platforms is its change in accruals to assets, in the 80th percentile.
Meta Platforms reported a positive earnings surprise for third-quarter 2023 of 20.9%, and in the prior quarter reported a positive earnings surprise of 2.2%. Over the last month, the consensus earnings estimate for the fourth quarter of 2023 has remained at $4.903 per share, in spite of 20 upward revisions and 16 downward revisions. Over the last month, the consensus earnings estimate for full-year 2023 has increased 1.9% from $14.069 to $14.348 per share, based on 48 upward revisions.
Unity Software (U) provides a software platform for creating and operating interactive, real-time 3D content. The platform can be used to create, run and monetize interactive, real-time 2D and 3D content for mobile phones, tablets, personal computers (PCs), consoles and AR and VR devices. Unity Software makes content that it can adapt to users’ behavior and feedback. Its creation solutions products are used by content creators, developers, designers, engineers and architects to create interactive 2D and 3D content. Its products, Unity Ads and Unity IAP (in-app purchases), help developers enhance the revenue potential of their content. It offers solutions for the delivery of content and provides back-end management, such as multiplayer hosting in games or Vivox voice chat to enable player-to-player communications in games. The business is spread across the U.S., Greater China, the Middle East, Africa and Asia-Pacific. The products are used in the gaming industry, architecture and construction sector, animation industry and designing sector.
Unity Software has a Quality Grade of F, with a score of 19, which is very weak. The company ranks poorly in terms of the seven value factors that it has a valid number for.
Unity Software has a Value Grade of F, based on a score of 3, which is ultraexpensive. The company’s price-to-free-cash-flow ratio is 233.4, which translates to a rank of 97, and its price-to-sales ratio is 5.55, which translates to a rank of 83. A lower price-to-book ratio is considered a better value. The price-to-book ratio is 3.48, which translates to a rank of 76.
Unity Software reported a negative earnings surprise of 348.1% for third-quarter 2023, and in the prior quarter it reported a positive earnings surprise of 216.5%. Over the last month, the consensus earnings estimate for the fourth quarter of 2023 decreased from $0.134 to a loss of $0.420 per share. Additionally, the past month has seen the consensus earnings estimate for full-year 2023 decrease from $0.434 to a loss of $1.564 per share, based on two upward and five downward revisions.
Unity Software has a Momentum Grade of D, with a score of 34, meaning it has weak weighted relative strength over the last four quarters. Unity Software has above-sector-median relative price strength in the second- and third-most-recent quarters but very poor relative price strength in the first- and fourth-most-recent quarters.
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The stocks meeting the criteria of the approach do not represent a “recommended” or “buy” list. It is important to perform due diligence.
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