Nikhil Salvi is AVP in the Investment Research practice. He has over 15 years of experience in analyzing macroeconomics and global capital markets and is currently leading the Equities team at Aranca. He is an MMS (JBIMS) and a Computer Engineer from Mumbai University.
In mid-August 2022, Mark Zuckerberg posted a “digital selfie” of his meta-avatar in front of the digital avatar of Eiffel Tower in Horizon Worlds metaverse and promptly got trolled for the poor graphics quality. Some even compared it to the 20-year-old video game Second Life. He had to clarify that the later upgrades to the metaverse would not appear as bad as the selfie he had posted. Nonetheless, there is a near consensus that the next evolutionary phase of everything online will be the metaverse, and everyone – users, companies, and investors – is excited to varying degrees about how it will shape up. A large amount of literature has been created to explain what the metaverse is and can be. Needless to say, there are many investment opportunities in this fast-emerging sector.
In case anyone had any doubt, the metaverse is already a revenue-generating segment (consumers have spent around USD 54 billion on virtual products in 2020 itself) and is estimated to reach USD 800 billion by 2024 and cater to one billion individuals by 2030. This growth is partly driven by hardware (such as VR headsets) and many real-world companies setting up their versions on the metaverse. Several renowned brands ranging from media and entertainment (Disney), retail (Walmart, Kroger, Target), automobile (Ford, Hyundai, BMW) to fast food chains (McDonald’s, Taco Bell), and tech companies (Meta and Microsoft), have already started operating in the metaverse. In an instance of metaverse popularity, around seven million people from over 200 countries visited Nikeland, Nike’s metaverse store, in less than six months of its inauguration in November 2021. Companies are exploring the metaverse for a diverse range of engagement opportunities, from virtual showrooms to providing AR product visualization as part of the sales process to provide immersive business communication, in training programs, and even exploring activities such as delivering virtual primary care that was so far presumed to be the exclusive domain of in-person experience.
These opportunities are being driven by the rapid adoption of users. About 86% of Gen Z and 81% of millennials are familiar with the metaverse concept. More than 66% of people in India, China, Peru, and Saudi Arabia are optimistic about the adoption of extended reality compared to nearly a third in developed nations such as Canada, the UK, France, and Germany. From the viewpoint of playing online games, typically the entry point for the meta universe, approximately 77% of millennials and 81% of Gen Z associated themselves with the gaming community in 2021. As such, both the current and older generation is willing to try new ways of online shopping and adopting novel technologies.
In terms of opportunities for investors to exploit this growth, these can be roughly divided into two categories. New businesses that provide access to the metaverse or enable ease of use (such as game engines) will be at the forefront of investment opportunities in the initial phases, such as web browsers at the advent of the internet. Microsoft introduced Internet Explorer in 1995 as a primary tool for accessing the internet. During the mobile internet or social media era, Facebook (as it was called then) bought WhatsApp due to its popularity among users as a messaging app. Similarly, there could be a new device (a combination of mobile, VR headset, and other multiple devices) that could be a breakthrough product; for example, the way Apple’s iPod when it was launched. However, without having to wait for such a pioneering product and its company to invest in, investors could also seek long-term opportunities in existing businesses that can adapt (as seamlessly as possible) to operating in the metaverse alongside the real world. There would also be many smaller subsegments of the broader metaverse concept. For instance, security in the metaverse could emerge as a “must have” considering the potential for mischief. As clear “investment plays” into the metaverse emerge, a number of companies will look promising to investors in terms of potential for huge returns. However, history shows it is quite challenging to accurately identify which of these opportunities will provide real returns to investors. There could also be a “meta bubble” phase if meta as an investment theme turns in to a frenzy, just like the “dotcom bubble” with unreasonable optimism about the success of early internet companies. Investors will need to be cautious about where they invest in this phase.
When an investor does not have the requisite expertise to make investment decisions, as an alternative to active investing (or directly investing in companies), passive investing or the exchange-traded fund (ETF) route is often recommended. In terms of metaverse as an investment theme, several ETFs were launched in 2021 and this trend is expected to continue into 2022. One of the earliest such funds was the Roundhill Ball ETF. Launched in June 2021, it was the first global index fund designed to track the performance of the Ball Metaverse Index, a composite of globally listed securities in the metaverse. Many others have been launched since then, including Mirae Asset Tiger ETF, Samsung Kodex ETF, Fount Metaverse ETF, Evolve Metaverse ETF, Horizons Global ETF, Subversive ETF, and ProShares ETF. Institutional investments in the metaverse have also increased, with the number of such investors in the world’s first metaverse ETF (METV), rising from 15 in Q3 2021 to 126 in Q1 2022. Overall, the rise in investments in metaverse opportunities is expected to continue along with growth in the metaverse itself.