Morgan Stanley says virtual reality is real this time, picks 5 stocks to cash in

Published Thu, Nov 18 202110:00 PM EST

Analysts at Morgan Stanley have named a number of "underappreciated" stock plays for investors looking to cash in as augmented and virtual reality gain traction. The success of augmented reality mobile game Pokemon Go in 2016 added $20 billion to Nintendo 's market value and highlighted the massive potential of Metaverse applications, according to Morgan Stanley. Half a decade later and following a series of "false dawns," analysts at the bank believe that virtual reality is now in the "early innings of exponential growth." The VR hardware market is projected to be valued at $60 billion by 2030 and more than $250 billion by 2040, equity strategist Edward Stanley said in a note on Nov. 12. "Previous AR and VR hype cycles lacked corporate and venture backing as well as high quality [research and development]. These missing pieces of the puzzle are rapidly changing, and the stars are beginning to align," the analysts noted. With the industry still in its nascent stages, investors could be forgiven for thinking Meta — previously known as Facebook — was the main way to gain exposure to the industry . After all, Meta's current VR products are among the market leaders in terms of capabilities and sales volume, the analysts said. However, Morgan Stanley has named a number of additional stocks offering investors exposure throughout the metaverse supply chain. All are rated overweight by the investment bank. Stock picks Italian-French eyewear company EssilorLuxotica is one of the bank's less obvious picks. Its wearable product — Ray-Ban Stories (a collaboration between the company and Meta) — is viewed by Morgan Stanley as the "first smart-glass wearable product ever developed that has the potential to be commercially viable." The bank expects the company to be one of just two key players in this segment, alongside Apple . The company's wearables segment could play a much more significant role in the long-term growth of the company should the business become more material, the analysts added. The bank has put a price target of 195 euros ($223) on the stock, which closed at around 183 euros on Nov. 12. The bank also likes British telecommunications giant Vodafone . The company could benefit from the development of new AR/VR apps, as well as the launch of stand-alone 5G networks in 2023 that could drive a new wave of innovation in the sector, the analysts said. Morgan Stanley has a price target of 185 pence ($2.48) on the stock, an implied upside of 64% on its closing price of around 113 pence on Nov. 12. Universal Music Group also made the bank's list. The company could generate revenues of 3-5 billion euros by 2030 through emerging platforms such as metaverse concerts, virtual goods and non-fungible tokens, the analysts noted. They added that the company is expected to post revenues of around 400 million euros in 2021 from social media, connected fitness and video games. Shares in the company closed at 27 euros on Nov. 12. Morgan Stanley has a price target of 31 euros — an implied upside of 15%. Beijing-based Xiaomi is another of Morgan Stanley's augmented and virtual reality picks. The bank noted that AR/VR will become a key product under Xiaomi's AIoT (artificial intelligence of things) division, and represents a "large growth opportunity." Excluding the potential of these products, the bank estimates the division to register growth of 19% to 114 billion renminbi ($18 billion) by 2023. "Given the large size of Xiaomi's AIoT revenue but relatively small revenue scale of AR/VR at the initial stage, we believe this is not reflected in the share price currently and will be a free option," the analysts added. The bank has a price target of 31.5 Hong Kong dollar ($4) on the stock, implying a 48% upside to the stock's closing price of 21.3 Hong Kong dollars on Nov. 15. Morgan Stanley also likes French video game maker Ubisoft . The company has been targeting AR/VR applications as well as NFT metaverse platforms as natural add-ons to its gaming business, the analysts noted. To-date, Ubisoft's involvement in AR and VR extends beyond gaming to include education, sports and medical partnerships. The bank believes that the company is well positioned to benefit from growing capital deployment in the space. Morgan Stanley has ascribed the stock a price target of 70 euros — an implied upside of 49% to its closing price of 47 euros on Nov. 12.

Pokemon Go app on an iPhone, Tokyo, Japan, July 22, 2016.

Toru Hanai | Reuters

Analysts at Morgan Stanley have named a number of "underappreciated" stock plays for investors looking to cash in as augmented and virtual reality gain traction.