The Metaverse could be the next big thing in 2022
The Metaverse is here, ready to take the 'buzzword' mantle from cryptocurrencies and NFT's. Virtual reality was always a fun concept, but technological advancements the last decade have turned those dreams into a reality, no pun intended. Ubiquity among households may have already been reached on a conversational basis, but there's still potential for contrarian investors to sniff out opportunities as the intricacies of this new universe are unpacked.
Bespoke has already cobbled together a Metaverse index, 30 companies with exposure to the continued rollout of this new virtual reality. These companies in some way, shape, or form are involved in this new frontier. It features synonymous heavyweights like Meta Platforms(FB) and Microsoft (MSFT), but also meta-adjacent stocks like Nvidia (NVDA), Roblox (RBLX), and Adobe (ADBE). You may not buy into the long-term viability of this new trend, but you can't deny its widespread reach or ability to impact the tech sector. That means a savvy investor can push their chips into the Metaverse pile without actually betting on its overarching success.
Cloudflare Inc (NYSE:NET) is one example. The software platform acts as a content deliver network (CDN), which in layman's terms means it helps support infrastructure of the Metaverse. Being long on NET in relation to the Metaverse is similar to going long on steel stocks when President Biden's infrastructure bill was passed.
The entry point to take a flier on a stock like Cloudflare is imminent. NET scored a record high of $221.64 on Nov. 18 but has since taken a 39% haircut. The good news is this pullback has taken the stock within one standard deviation of its 80-day moving average, a historically friendly trendline. According to data from Schaeffer's Senior Quantitative Analyst Rocky White, three similar signals have occurred in the past three years. In two of those cases, NET enjoyed positive returns one month later, averaging a 4.2% gain.
Other contrarian factors to consider are the majority of analysts on the sidelines with tepid "hold" ratings, making upgrade potential a feasible possibility in 2022.Plus, put traders have been growing bolder in recent months. This is indicated by NET's 50-day put/call volume ratio of 1.28 at the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), which ranks four percentage points from an annual high. Echoing this, the Schaeffer's put/call open interest ratio (SOIR) comes in at 1.23 and ranks in the 86th percentile of its annual range. This indicates near-term put open interest outweighs call open interest by a wider-than-usual margin at the moment.
It's not just Cloudflare that has put traders buzzing; the entire Metaverse index is seeing a spike in put activity. Per the chart below curated by Schaeffer's Senior Market Strategist Chris Prybal, the 10-day buy-to-open put/call ratio of the cumulative 30 meta stocks is drifting toward its highest level in September. Plotted with the tech-heavy Nasdaq-100 Index (NDX), you can see there isn't much of a correlation between the two.
There's always a risk betting on the latest flavor of the week. Consider the Humphrey Neill quote; "the public is right during the trend and wrong on both ends." But because options allow an investor to put minimal dollars at risk, there's wiggle room in mining for potentially lucrative trading ideas. And between a glimpse of where options traders are putting their money and NET's intriguing entry point, there's opportunity to profit off the Metaverse without actually tumbling down the rabbit hole.
Subscribers to Chart of the Week received this commentary on Sunday, December 12.