Metaverse a potentially lucrative investment opportunity

Feb 09, 2022

COMPANIES are grasping at ways to make money from the metaverse.

Among the most notable plays on the theme is Facebook, which renamed itself Meta Platforms last year to signal its ambition to be a key player in this space.

Last month, Microsoft also announced it will acquire gaming company Activision Blizzard for US$68.7 billion - its largest-ever purchase - and said this would provide a building block for its own metaverse plans.

Envisioned as a multilayered virtual reality, where people might be able to spend their time and money, the metaverse is still a work in progress.

But analysts say it is this emerging status that makes the metaverse such a potentially lucrative investment opportunity.

"The metaverse is touted to be the next evolution or 3D version of the Internet," said Phillip Securities research analyst Jonathan Woo.

"We can look at it similar to how we viewed the emergence of the Internet 20-30 years ago - when Microsoft, Intel, Cisco and Dell benefited from their roles in developing the initial iterations of the Internet."

Woo added that the theme looks interesting, given estimates that the metaverse represents a US$1 trillion opportunity.

He is not alone in his optimism.

Eli Lee, head of investment strategy at Bank of Singapore, called the metaverse "one of the most compelling investment themes of 2022".

Bank of Singapore analysts observed in a January investment note that there are still competing and differing visions of what the metaverse could be, as the space is still in the early stages of being properly defined by market participants.

"The jury is clearly still out on the eventual definition/construct of the metaverse, but this (is) precisely where opportunities are waiting to be uncovered," they said.

The Internet, as most know it today, thrives on users being able to create content and upload it onto platforms. The future iteration of the Internet is expected to be even more decentralised, with more opportunities for new players.

KGI Securities analyst Megan Choo said: "Moving forward into the future where metaverse gains a foothold, we might see the evolution into Web 3.0 - which will usher in a whole new level of experience. In Web 3.0, we are developers and owners; and communication is multi-directional."

There are also many aspects to be considered in the metaverse.

The concept demonstrated by Meta at its rebranding event included both augmented and virtual reality technologies, facilitating interactions in an immersive virtual world. Meanwhile, KGI's Choo noted that among the most popular representations of the metaverse are gaming applications: users donning virtual reality headsets and engaging in individual or multi-player games.

But Choo noted that there are many more layers presenting investment opportunities.

Indeed, a widely used definition of the metaverse incorporates 7 different layers: experience, discovery, creator economy, spatial computing, decentralisation, human interface and infrastructure.

Social networks or gaming companies - such as Nintendo, Electronic Arts or Activision - would fall under the experience layer.

Phillip Securities' Woo said investors should also consider looking at the infrastructure layer, as this represents the foundation on which the metaverse is built.

"This includes 5/6G providers, next-generation semiconductors, cloud computing, platform engines, etc; companies like Unity, Nvidia, Roblox," he said.

"Other assets that are also direct opportunities within the metaverse can be purchasing NFTs (non-fungible tokens) or virtual land."

DBS, meanwhile, has proposed its own "I.D.E.A framework" for investing in the metaverse, consisting of innovators, disruptors, enablers and adapters.

Innovators include companies such as Apple and Advanced Micro Devices, which design gadgets and chips. Disruptors, meanwhile, could involve companies such as Meta and Tencent Holdings, which challenge the status quo and disrupt traditional business models to stay ahead.

At a DBS private bank market outlook webinar in January, chief investment officer Hou Wey Fook said there is also a place for traditional companies that can adapt and thrive in the new ecosystem. Companies such as Nike and Gucci, for example, have already created digital apparel and accessories that can be worn by avatars in the metaverse.

"Not dissimilar to the Internet and the smartphone, which came upon us and very quickly changed the way we live, work and play, the adoption of the metaverse will come," Hou said, adding that drivers include remote work, social media and video gaming.

The recent pullback in US tech share prices may entice investors who are keen on this space.

KGI's Choo said: "If investors want to look at entering into a single stock, it could be a buy-the-dip opportunity.

"However, we are unable to ascertain the bottom amid a volatile and uncertain stock market environment."

For broad exposure to the metaverse theme across the various layers, KGI recommended investors look at the Roundhill Ball Metaverse exchange traded fund (ETF).

"Investors are able to gain large exposure to all metaverse stocks; that might be safer, in a sense, as the risk-reward is spread across a basket, not just banking on one stock."

Top holdings in the ETF include Nvidia Corp, Microsoft, Meta and Qualcomm. "They are not only involved in the metaverse, but are also large-cap tech stocks - which gives credibility to the ETF".

Singapore-listed companies are also venturing into the metaverse arena. Companies that have announced forays into this space include SMI Vantage, Alpha DX Group, OIO Holdings and Vividthree Holdings.

Local investors could keep an eye on developments from these counters, but Choo said KGI is not currently making any recommendations on Singapore-listed stocks in the metaverse theme as there are no tangible results as yet.

Besides execution risk, investors should also be aware that regulation and changing consumer interests or requirements could yet derail the metaverse theme.

KGI's Choo said: "Potential risks in terms of consumer sentiment are that people may not get used to the concept of the metaverse, and still prefer the human touch.

As for the stock market, metaverse-related stocks, being tech in nature, are exposed to macro events such as the (United States Federal Reserve's) bond-tapering programme and interest rate hikes upcoming in 2022."

Bank of Singapore's Lee noted that data security and privacy concerns will need to be addressed too, as consumers are increasingly concerned about how data is tracked and used. "This means that investors will have to contend (with) regulatory risk as policy makers globally address these issues ahead."

The lack of interoperability between platforms is another constraint, he said.

The current metaverse ecosystem comprises many digital worlds - some owned by large companies, others decentralised.

Lee added that "exciting new areas of technology advancements tend to be highly cyclical and it is therefore key for investors to take a long-term view".

"A diversified investment approach is also critical," he noted. "While there will be highly successful enterprises that emerge, there is a significant failure rate that is inherent to high-growth early-stage investments."