If business leaders and investment value creators like Mark Zuckerberg and Satya Nadella, whose job is to create the future, are investing in the Metaverse, should we, the relatively passive, non-control investors, not be paying close attention to the growth vector?
While the Metaverse might sound like another buzzword or fad, a look at the evolution of the Internet through different phases might throw some light on how the foundational technology, consumer devices, customer value, and the cash flow-generating business model has evolved. This will help visualise how the Metaverse could look in the next few years.
The birth of the internet and why did fund managers chase it?
The Internet was born as the ARPANET in 1969 as part of a defense project with the aim of having a decentralised communication system which could not be destroyed since it had no central location which the enemy could target. It was used for communication and sharing of information.
The next evolution, circa 1993-2007, Web 1.0 provided the browser to use the Internet and the desktop computer was the typical device used. The focus was on consuming the information on the Internet. This era ended with the domination of Google, which disrupted the earlier directory portals like Yahoo, and Amazon, which disrupted offline retail. The primary contributors to the internet market were digital advertising and e-commerce.
The next evolution, starting circa 2007, Web 2.0, was based on 4G, smart phones, cloud and social media apps. Web 2.0 is about, both creating and consuming content. Digital marketing and e-commerce continue being the core revenue contributors of Web 2.0. Today, technology companies dominate the S&P 500 with nearly 40 percent contribution classified under Information Technology, Communication Services and Consumer Discretionary.
The next big investment idea: Metaverse?
The next stage is Web 3.0 or Metaverse. The Metaverse is a digital universe which supports avatars — i.e., 3-dimensional representations in the digital universe — of individual users. These are persistent avatars which carry over from one platform to another. The individual is the focus rather than the platforms. Digital worlds in which the avatars live can evolve, and individuals can develop them or develop assets in these worlds as well as own them and benefit financially from them.
Blockchain-based digital currencies could provide the way to transact financially. But conventional digital payments could also work. This could allow people to interact in the Metaverse with their friends and family and enjoy social events together. They could also participate in concerts or visit digital locations together or even compete in digital games or sports contests.
People can see and feel the presence, including peripheral vision, body language and facial expressions. People could eventually touch and smell things too in the Metaverse. Similarly, business meetings could take place in the 3-dimensional world with people using their professional avatars.
The Metaverse is supported by AR/VR devices for the consumer experience and would be supported by the cloud infrastructure as well as numerous back-end technologies which allow the creation of avatars or 3-dimensional spaces. Gaming engines provide a strong technological infrastructure for the Metaverse.
Also read: The promise and the peril of the Metaverse
Metaverse and investment ideas
Already, popular consumer brands have started using these platforms and the race for creating their presence in the Metaverse has begun in earnest. The Metaverse market size is estimated at $40-60 billion in 2021 and expected to reach around $8-13 trillion by 2030, according to major investment banks like Goldman Sachs, Morgan Stanley and Citibank.
The question is how to take an investment exposure to the Metaverse and benefit from this red hot growth which could be as high as 70 percent CAGR based on the above estimates? Currently, numerous technology companies are contributing to the Metaverse. From the well-known Big Tech companies to lesser-known companies working on AR/VR or immersive technologies, including devices, gaming, hardware, specialised chips, cloud, artificial intelligence, blockchain, payments technologies, digital marketing, networking, and cyber security, all provide exposure to the Metaverse growth vector.
As a scientific investor, one should recognise that this growth vector is getting recognised strongly. The focus of the scientific investor should be on the companies which have potential or existing strength in the Metaverse technologies but are still not recognised by Mr. Market. There are companies which are mispriced, given their existing and future cash flows. Further, they have strong technologies or plans for the Metaverse. Several such companies are part of the baskets of portfolios on some of the largest international stock investing platforms meant for Indian investors. One could also take exposure through an INR or Rupee-based portfolio of India-listed technology stocks on a smallcase platform.
Alternatively, one could learn about the companies working on the Metaverse (hint: see the technologies enumerated above) and assemble a portfolio of companies available at significant discounts to their intrinsic values and consistent with scientific investing principles of “no capital destroyers, no capital eroders and no capital imploders, only capital multipliers”. Of course, any investment should be based on one’s investment objectives, risk profile and investment horizon. Given the high-risk, high-return nature, the Metaverse growth vector can only be a satellite allocation and not a core allocation, since, currently, it is still in its early stages. Or, it can be part of a core portfolio, which is composed of multiple growth vectors. As the Metaverse economy grows and becomes part of the core economy, the allocation, too, can become more and more significant.
Ideally, the Metaverse portfolio should be dynamic with companies which become overvalued going out of the portfolio and mispriced companies entering the portfolio. This provides the benefit of the economic growth of the Metaverse and the benefit of rerating alpha.