Whitney Tilson has a new teaser pitch out that talks about something he calls “Connexa Terra” and which most of the rest of the world now calls “The Metaverse” — the ad is his latest effort to recruit subscribers to Empire Investment Report ($49/yr, that’s one of the entry level “top of the funnel” newsletters published by Marketwise (MKTW)), and it hints at five different investments for “Connexa Terra,” so let’s dig in and see what Tilson is teasing.

If you’re not familiar with the metaverse, it’s basically a metaphor for a more immersive internet — one with more of a real world digital 3D video presence, whether that’s a remote visit with a doctor, or a conference call that takes place with digital versions of the participants interacting instead of just talking heads on a Zoom call, or a full-on 3D immersive video game in virtual reality. There’s no one definition for what the metaverse is, but the basic idea is a virtual world that’s immersive and shared, with most applications of metaverse/”connexa terra”/omniverse currently experienced through some version of virtual reality goggles.

A lot of the chatter about “metaverse” is probably getting ahead of itself, just like the chatter about self-driving cars dominating the world by 2020 did five or ten years ago, all these kinds of things tend to be evolutions rather than revolutions… but yes, the huge push to work and play from home did give the “metaverse” a big push, and just about everyone in the investing world has been talking up virtual reality and augmented reality and “metaverse” themes for the past six months or so.

Whitney Tilson doesn’t actually use the word “metaverse” in his ad, but the basic idea is the same — here’s a little taste of what he says to get us interested:

“The technology I’m about to share with you today is so powerful, it could:

• Slash your medical bills
• Cut your grocery spending
• Drop your transportation costs
• Lower your travel expenses
• Reduce what you pay for gas

“And that’s just the tip of the iceberg.”

He also includes part of a quote about the metaverse that’s often tossed around, from Tim Sweeney of Epic Games, here’s the full version:

“This Metaverse is going to be far more pervasive and powerful than anything else. If one central company gains control of this, they will become more powerful than any government and be a god on Earth.”

And Tilson goes on, comparing the growth of this idea of virtual worlds to the original iterations of the internet…

“I hate to refer to it as the ‘next version’ of the internet, but that’s the easiest way to describe what it is.

“So if you missed getting in on the ground floor of past internet gold rushes, this is your chance to get in early on this one.

“And remember, ‘Connexa Terra’ is already worth nearly $48 billion.

“And it’s projected to hit $800 billion within the next two years.

“So it’s growing 893 times faster than ALL iterations of the internet we’ve seen so far… combined.”

The goal is to make money, right? So Tilson does toss in many of the industries that will be changed by this “Connexa Terra” evolution, implying that the disruption of these huge industries will lead to riches for investors…

“Nearly all of the top 50 tech companies in the world are in a relentless race to control ‘Connexa Terra.’

“Why?

“Because this technology is set to completely disrupt the entire $85 trillion global economy.

“This includes:

• The $33 trillion real estate industry
• The $20 trillion retail industry
• The $8 trillion health care industry
• The $9 trillion banking industry
• The $2 trillion entertainment industry”

And then, of course, he starts to bait the hook… he says he has picked five stocks to profit from “Connexa Terra,” and that he’ll tell you about one for free, but just hint at the other four. So we’ll put the Thinkolator to work, and see if we can name those four other “Connexa Terra” stocks for you. Ready?

This is how he introduces them:

“The five stocks I’ve found – including the one I’m about to reveal for free – all have the potential to soar 3x… 5x… even 10x as “Connexa Terra” comes to life.”

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Here’s the free one first — it won’t come as a big surprise, this is quite similar to when Tilson “gave away” Alphabet (GOOG) and Waymo as his “free” pick for Transportation as a Service (TaaS) a couple years ago, in his first really big promo campaign for this newsletter. Give ’em the big and obvious one, and hint about the “secret” ideas to get them to pull out their credit cards…

“That company is Meta (formerly known as Facebook), which is leading the charge on this new technology.

“I already mentioned it, but Meta has already hired 10,000 people dedicated to “Connexa Terra.”

“It’s also spending $10 billion per year to make sure it happens.

“Zuckerberg has gone all-in.

“In fact, the company even changed its name recently to reflect this new emphasis….”

And a little bit of the investing rationale from the ad….

“What makes this such a great investment is that you can buy Meta today, which is an incredible cash cow of a business…

“Before this new technology becomes fully realized… and essentially pay nothing for it.

“In other words, you’ll own everything Meta owns (Instagram, WhatsApp, and of course, Facebook)…

“And you’ll also get in on ‘Connexa Terra’ before most investors are truly focused on it.

“So you’re buying an already enormously profitable business that’s now in position to dominate the world’s newest world-changing technology.”

Tilson gets specific, too:

“The stock symbol is FB, and I recommend you do not pay more than $375 per share.”

I owned Facebook for many years, and sold when it hit a stop loss because owning the company was beginning to make me feel nauseated — not because of the price or the valuation, which were and are quite compelling, but because I hate the product so much.

Everything is personal — some people won’t buy oil stocks or cigarette stocks for personal or environmental or ethical reasons, I don’t want to own Facebook. Or now, I guess, I don’t want to own Meta. I agree that it’s very nicely valued, however — given their revenue and earnings growth and the massive user base and high engagement at Facebook and Instagram, it’s arguably trading at the lowest valuation among the megacap tech stocks (it’s similarly valued to Alphabet, and similarly dependent on ad revenue, but growing faster), so if you’re looking for exposure to the metaverse it’s certainly a fine place to begin your search. $375 would be a valuation of about 25X forward earnings estimates, and right now it’s in the $330s.

No big surprises there, you probably already have an opinion about Meta/Facebook, and you can certainly find tons of information about their plans and their potential, interspersed with creepy memes about Mark Zuckerberg. Let’s move on to the more “secret” stuff… what’s Tilson’s second “Connexa Terra” idea?

“Investment #2: Own the ‘Connexa Terra’ Stock Hidden to Most Investors

“Now, one of the most influential companies in music history is taking advantage…

“I’m talking about a company with a catalog of subsidiaries in 42 different countries and 15 different recording labels.

“It’s worked with everyone from The Beatles and the Bee Gees to Michael Jackson and Ray Charles.

“It earns almost $6 billion per year and employs more than 8,000 people.

“Yet, right now, few people have taken notice of the massive move this company just made.

“They just created an entire band that will be tied directly to ‘Connexa Terra.’

:Only this band won’t include any musical artists you’ve ever heard of.

“Instead, it’s a first-of-a-kind ensemble with four members created specifically to perform using ‘Connexa Terra’s’ world-changing tech.”

Interesting, only a couple companies this could really be… and given Tilson’s history, I bet I know the answer… but let’s see what other clues he drops:

“And my team and I have found the one company that we believe is positioned to completely dominate this market once “Connexa Terra” is fully realized.

“They’ve already made a huge move into this space, and I have no doubt they’ll be making even bigger splashes in the months and years to come.

“Even better, for now, you can get in at just $25 per share.

“It’s the perfect way to invest in the booming online music industry and get in on ‘Connexa Terra’ at the same time.”

OK, so Thinkolator sez that’s got to be Universal Music Group (UMG in Amsterdam, UMGNF or UNVGY OTC in the US — UNVGY is an ADR representing half a share in Amsterdam, UMGNF is 1:1).

Universal went public as it was spun out of Vivendi earlier this year, and was very high profile in part because Bill Ackman’s Pershing Square Tontine SPAC (PSTH) tried to buy part of the company and failed to get SEC approval. That’s neither here nor there at this point, the company is now publicly traded (though Pershing Square’s hedge fund, Pershing Square Holdings, did follow through with a purchase and Universal Music is their largest holding), but I bring it up mostly because Tilson and Ackman are old college buddies, and there are often connections between them — and, more importantly, because if you want to get a good background on Universal Music, Ackman’s presentation touting the (since failed) acquisition gives a nice bullish take on the potential. That presentation is a great place to start to get an understanding of UMG, just ignore the PSTH part.

I don’t know whether UMG will end up being a winner from the “metaverse,” but certainly music is an increasingly important part of all kinds of immersive entertainment — and they are the largest owner of recorded music rights in the world, the biggest part of a global oligopoly that’s dominated by Sony Music, Universal Music and Warner Music. And among those three, UMG still stands out to me as the cheapest and most profitable play — if the company that has the best growth and best margins also has the largest market share, that’s a pretty strong position.

The level of subscription revenue collected by Apple Music and Tencent Music and, most importantly, Spotify will be a much bigger driver of UMG’s revenue in the next couple years than will any next-generation attempts to stake out leadership in virtual concerts or other metaverse plays — more than half of UMG’s revenue comes from music streaming royalties and the metaverse is really in its infancy, so in the near future even the royalties they get from Peloton playlists will probably be bigger than any real metaverse revenue, but one never knows how fast things will change. Right now, UMG is responsible for the lion’s share of the biggest music hits in the world, too, and that could also change for the worse if their competitors get a leg up with a few new megastars — that’s not terribly predictable, though UMG has certainly been a leader in music publishing for generations and has taken a lot of the chance and randomness out of the star-making business.

And yes, though it won’t impact their income statement in the near future, UMG is certainly planting its flag in “Connexa Terra”, working hard to monetize their artists in the metaverse and create new virtual artists — from artist merchandise or artist avatars that can be sold in or perform in virtual worlds, as NFTs or otherwise, to the actual “metaverse group” that they created, as Tilson teased, basically turning a few characters from the Bored Apes Yacht Club series of NFTs into a potential music group called Kingship.

Not a bad idea, “connexa terra” or no. I do own shares of Pershing Square Holdings (PSH.AS, PSHZF), and more than 10% of that fund is now allocated to UMG shares, so that gives me pretty substantial exposure to UMG already… but if I were to add a music publishing company to my portfolio, that would be the first place I’d look.

Next?

“Investment #3: Own “Connexa Terra’s” Backbone….

“Artificial intelligence plays a huge role in many of today’s technologies.

“In fact, you likely use it every day without even realizing it.

“And it will form the backbone of “Connexa Terra.”

“So the best way to take advantage of this boom in artificial intelligence is to buy a company that’s in position to provide the countless chips and graphics interfaces that will be needed in the coming years.”

OK, that’s starting to sound familiar. Other clues?

“The company also recently released a set of software tools that will allow companies to collaborate in building “Connexa Terra,” the computing power for which will, naturally, come from this company.

“The company’s CEO believes about half its ‘Connexa Terra’ revenue will come from chips and half from software.”

That’s all pointing us straight toward GPU chip leader NVIDIA (NVDA), which was also one of Tilson’s TaaS plays and has its fingers in pretty much all of the “hot” ideas in technology in recent years. NVIDIA CEO Jensen Huang has been speculating that the metaverse, which he calls the omniverse, will drive demand for both NVIDIA’s chips and their software, and he did say after their last quarterly update that the revenue likely to be split 50/50 between hardware and software. And certainly they’re the leader in AI chips for data centers and autonomous driving as well as the high-end gaming GPUs that power much of what we can see as immersive virtual worlds today, largely in video gaming.

What can you say about NVIDIA? It’s an amazing company, it has a clear lead over the competition for their high-end products (that’s Advanced Micro Devices (AMD)), and it has been the leader in AI processing for so long that they get a huge network effect benefit from that — everyone who learned AI tools in college learned on NVIDIA equipment, many startups in virtual reality or AI or autonomous driving built on top of NVIDIA equipment and used their software platform, and if all the experts and leaders use your tools it is very hard for new companies to take share from you. They’re hoping to extend that lead to the multiverse/omniverse, and it’s hard to bet against them.

Personally, though, it’s also hard for me to buy the stock here — as I’ve told the Irregulars a few times in recent months, this falls in the category of companies that I love, who have amazing market leadership and huge growth potential, but that are trading at prices where I can’t buy the shares. I’ve just been holding NVIDIA shares for years, which has been a mistake in retrospect — I should have been steadily buying, given how strongly the stock has surged — but I can’t pay this price with a straight face. NVIDIA is now the largest semiconductor company in the world, by a pretty wide margin as the market cap tops $700 billion (it was over $800 billion not long ago), and that’s justified… but it doesn’t mean it’s easy to pay 65X earnings for what is still, despite their growing software business, primarily a semiconductor company.

Analysts have typically been terrible in estimating NVIDIA’s growth potential, they typically lowball that earnings potential — mostly because they keep predicting that NVIDIA’s cash cow, the sale of high-end video gaming GPUs, will eventually hit a soft patch, and it almost never does (except for that lull in 2018, when cryptocurrency miners were driving demand for GPUs and the sudden collapse of bitcoin prices caused a brief inventory glut). Right now, analysts are predicting that NVIDIA will post $4.33 in earnings per share in 2022, which gives them a forward PE of about 65 — the only other mega-size companies (over $100 billion market cap) that are this richly valued are Tesla and Shopify, so that’s pretty rarefied air they’re breathing.

Can it work out from here? Absolutely. The long-term estimates that Yahoo Finance collects for NVIDIA indicate that analysts think they’ll grow earnings by 40% a year over the next five years, which means that NVDA has a PEG ratio of only about 1.5 — not outlandish (PEG is just the forward PE ratio divided by the expected annual growth rate — conventional wisdom is that a number between 1 and 2 falls into the “reasonable” range). Those analysts don’t know the future any more than you or I do, but it’s certainly possible NVIDIA will keep up a growth rate in that area, even if I’m a little skeptical that investors will continue to be willing to pay very high valuations for a huge chip stock indefinitely.

It’s quite possible that I’m just too cautious because I’ve owned NVIDIA for so long, and I’m probably also a little hung up on the old ideas we used to have that companies of this massive size would become “too big to grow” — we should probably abandon that phrase entirely now that Apple has crested the $3 trillion level in market capitalization, but some hangups die hard. You can justify NVIDIA here, particularly because of its software leadership in AI and the omniverse that should lead to continuing strong demand for their GPU chips, and I’m certainly holding because of their huge potential and their dominant position in Artificial Intelligence processing, but I’m still holding out for lower prices before I think about adding.

Moving on, what’s the next idea teased?

“Investment #4: Own the Currency

“The entire cryptocurrency market is now worth more than $3 trillion.

“And in a world that’s growing increasingly digital, the number of people using cryptocurrencies to pay for things has also grown.

“Globally, 220 million people use cryptos.

“And I believe cryptocurrencies will be the primary form of currency as it pertains to “Connexa Terra.”

“The U.S. dollar will still be used, of course, but cryptos are becoming more and more mainstream.

“And there’s one in particular that I believe will soar.

“Right now, there are several new cryptos coming out that are tied specifically to ‘Connexa Terra.’

“And they are ALL based on the coin that I suggest you should buy immediately.”

So… which one?

“Some are even projecting that this coin could be the new Bitcoin and hit values as high as $50,000 per coin by 2030.

“Right now, it’s much cheaper than Bitcoin…”

That pretty well has to be Ethereum (ETH), since so many of the cryptocurrencies that are tied to virtual worlds or online games are ethereum tokens. It could be one of the others, I suppose, but that’s unlikely for a mass-market $49 newsletter and for a fairly traditional equities guy like Whitney Tilson — so there’s no way to be certain with those clues, but I’ll go out on a limb and say he’s just pitching ETH.

That’s self-serving, too, since ethereum is my biggest cryptocurrency position by a fair bit (ETH is about 40% of my crypto holdings, if you’re curious — second place is Bitcoin, at about 25%… I do have small positions in many little tokens, including some of the “metaverse” focused cryptos like Polygon (MATIC) and Decentraland (MANA), but those are far more speculative). There are a lot of virtual world cryptocurrencies out there, most of them tied to a specific game or immersive experience platform, and that means all of them are bets on the popularity of one particular community or game and are therefore highly speculative, but it’s certainly possible that some of these virtual worlds will bloom into large and sustainable economic entities over time. We won’t know for a while, but in case you feel like dabbling in the world of hyper speculation and NFT mania the ones I’ve looked at, at least briefly, include those two that I do own (Polygon and Decentraland) as well as a few I haven’t yet experimented with (Enjin (ENJ), Gala (GALA), Sandbox (SAND), Axie Infinity (AXS)).

Next?

“Investment #5: Own Part of This $240 Billion Industry

“Research shows that there are currently 2.7 billion gamers in the world.

“So it should come as no surprise that the video game industry is worth a massive $178 billion.
And gaming will be a huge part of ‘Connexa Terra.’

“140 million people play Minecraft
“202 million play Roblox
“350 million play Fortnite
“And these figures are only likely to grow…
“As is the gaming sector as a whole….”

OK, so it looks like we’re getting a gaming stock pitch — which one? More from Tilson:

“One company is in position to dominate this industry, and it’s not the makers of Minecraft, Roblox, or Fortnite.

“Instead, it’s a company you probably haven’t heard of.

“They’ve been around since the ’80s and have produced some of the most popular video game titles in the world.

“And I believe they’re going to be one of the major players as ‘Connexa Terra’ hits full stride.”

If it’s a video gaming company that’s been around since the ’80s, I’m sure I’ve heard of it — and many of my fellow old-timers will have as well. But we need some more clues, no? Tilson obliges:

“Already they publish a wildly popular online game that has more than a dozen iterations and the beta version of their newest version has already been played by 7.7 million people.

“What’s great is, this is a well-established, already profitable company…

“Which happens to be in the exact right place at the exact right time.

“So I fully expect the share price to soar much higher.”

Thinkolator sez: That’s very likely Electronic Arts (EA), given that one specific clue that Tilson dropped. Their next big release, Battlefield 2042, has been delayed, and that kind of thing seems to always happen with big games, and to always worry investors… but it did reportedly have 7.7 million users playing the open beta version as of November. That’s actually not a huge number, the big release of Battlefield 1 15 years ago had 13 million players try its open beta release in just a couple weeks, and many popular games over the decades have been in that 5-10 million range for beta users, but yes, Battlefield is a huge gaming franchise and gamers were excited to try it out (it was formally released in December, so it’s no longer in “beta”).

It’s hard to argue with Electronic Arts here, since it’s also my largest gaming investment (I used to also own Activision Blizzard (ATVI), their biggest competitor, but sold out of it earlier this year as their HR problems turned into a nightmare). It’s not in a high earnings growth surge right now, and as a hit-driven enterprise it does tend to be lumpy as new releases hit or flop (or get delayed, as so frequently happens), but they have had a lock on many of the most popular sports titles for years (including Madden NFL, FIFA and more recently F1), and have built on that with hugely popular games like the various Star Wars games, The Sims, and the Fortnite competitor Apex Legends.

Like many gaming companies, they’ve become adept at selling live services and add-ons and subscriptions in addition to selling digital downloads of full games, so the number of gamers spending $10-20 at a clip to add new skins to their characters, unlock special players for sports games, or whatever else, are really the driving force for revenue now. And they’ve added meaningfully to their growth through acquisitions, buying racing game leader Codemasters and baseball game developer Metalhead Software to continue to boost their leadership in sports games, as well as Glu Mobile to push them further into mobile casual games, an area where they had been really absent for years compared to Activision Blizzard’s dominant Candy Crush franchise (which ATVI acquired by buying King Digital back in 2016, both of these gaming studio titans have grown through acquisitions over the decades).

I don’t know whether EA will be a core part of whatever you think the “Metaverse” might be, but gaming is certainly where immersive 3D video is first being adopted… and the business is growing nicely, and carries a pretty easy-to-like valuation — EA right now trades at a forward PE of about 19, is likely to grow earnings at a decent clip (probably at least 10% a year most years, that has been roughly the average over the past five years, though the average five-year forecast from analysts is a much more optimistic 27% per year), so it strikes me as a solid “growth at a reasonable price” story these days. Pretty easy to buy in the $130s, as long as you can stomach the volatility that’s inherent to this hit-driven business (the stakes are high, many of the biggest-performing games cost far more to develop than a Hollywood blockbuster… and every studio has some flops — the most recent high-profile one was Cyberpunk 2077 in late 2020, which cost five years and probably at least $300 million to develop and fizzled immediately upon release, partly because it was full of bugs, and that studio has poured another year, and presumably millions more, into trying to fix the game).

And… that’s it! I go looking for some “metaverse” names of interest in this “connexa terra” tease from Whitney Tilson, and find out that I already own or have some serious exposure to most of them… and that as we might expect from an “entry level” newsletter, they’re all pretty mainstream ideas that are pretty hard to argue with, not wild and more speculative “virtual worlds” startups. How about you, have any favorite plays on this evolution of virtual worlds? Think that Universal Music Group, Electronic Arts, NVIDIA and Meta are likely to be big winners in the future, or do you think they’ll lose out to smaller upstarts? Prefer the bulk of Ethereum or the wild speculative fervor of the smaller NFT peddlers? Let us know with a comment below… thanks for reading!

Disclosure: Of the investments mentioned above I have positions in the cryptocurrencies Ethereum, Polygon and Decentraland, and equity and/or call option positions in Electronic Arts, Advanced Micro Devices, NVIDIA, Alphabet, and have money invested in the Pershing Square Holdings hedge fund. I will not trade in any stocks covered for at least three days after publication, per Stock Gumshoe’s trading rules.