Into the metaverse

Supported by the advent of devices, software and platforms built around blockchain technology and non-fungible tokens (NFTs), the metaverse has dominated headlines over the past few months.

Increasingly, asset managers are recognising the metaverse as an important investment theme, as many of the metaverse-related companies possess long term-secular growth drivers that will enable them to ride the digital disruption wave successfully.

But is it all just hype? Maybe not. Gene Marks, a columnist for The Guardian, recently wrote: “For people over the age of 30 the metaverse sounds strange, foreign … and even a little sad and creepy. But for the next generation — particularly the Gen Z-types born after 1995 and the kids currently in elementary school — the metaverse will be commonplace.”

This online world could also generate big money in the future: Bloomberg Intelligence — drawing on its own analysis as well as data from video game analytics firm Newzoo, market researchers IDC and Statista, professional services network PWC and sports marketing agency Two Circles — estimates that the global metaverse revenue opportunity could approach US$800 billion ($1 trillion) in 2024. The primary market for online game makers and gaming hardware may exceed US$400 billion in 2024, while opportunities in live entertainment and social media make up the remainder.

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With this much money-making potential, it is perhaps unsurprising to learn that Zuckerberg and other big brands are riding the metaverse bandwagon. Mario Stefanidis, vice-president of research at Roundhill Investments — a US-based investment firm which launched the world’s first metaverse exchange-traded fund (ETF) in June — tells The Edge Singapore that the metaverse is poised to be the greatest technological innovation in the next decade.

“As it is now a norm for meetings to happen virtually, companies are realising that it just doesn’t make sense to meet in person anymore, both from a cost as well as productivity perspective. The metaverse is an area where you can meet, socialise and play games, but it is going to be so much more.”

While the concept of the metaverse itself has been in the making for decades as companies explored augmented reality (AR) and VR technologies, he adds that the Covid-19 pandemic has accelerated developments in the space as it bridges the physical gap between individuals in their daily lives.

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Stefanidis also sees numerous possibilities ranging from gaming, e-commerce and even healthcare. “Imagine visiting a doctor and their clinic is in a virtual real estate. As developments continue to exponentially accelerate, so much of our lives are going to be taking place in AR and VR, and the metaverse is instrumental in that.”

Shared experiences

Agreeing, DBS chief investment officer Hou Wey Fook adds that some versions of the metaverse are already available. Microsoft Mesh, for example, enables presence and shared experiences from any devices, anywhere, through mixed reality applications. He says: “When you put on the headset, you are able to feel that you are in the same place with colleagues sharing content with eye contact, facial expressions and gestures.”

Similarly, Meta has built Horizon Workrooms, which are virtual meeting spaces where participants can bring their desks, computer and keyboard into VR with them to brainstorm using a virtual whiteboard together. While acknowledging that Facebook’s transition into a metaverse company was the landmark moment that triggered the world’s attention, Hou says DBS’s interest in the metaverse began even before the announcement. Other than remote working, he believes that social media and video gaming are some of the drivers that will propel the metaverse to the fore.

Social media usage is set to grow on the back of rising Internet penetration. According to Datasocial, 93% of the 4.7 billion internet users as at April last year are active social media users, accounting for 57% of the world’s population. Hou adds: “Globally, internet users have been growing at an annualised growth rate of 5.7% and the pace of growth is expected to increase in a post-pandemic world. Should social media companies like Meta be successful in selling affordable VR headsets and enticing users to the virtual world, this certainly augurs well for the growth outlook of the metaverse and the immense opportunities that it brings.”

Meanwhile, the burgeoning video gaming industry is expected to see the number of games grow to 3.1 billion by 2023 from 2.7 billion in 2020, estimates Newzoo. Gamers will play a pivotal role in setting the foundation for early versions of the metaverse — apart from gaming with one another, gamers also interact and engage in other social activities within the game (see sidebar).

For instance, Roblox — an online gaming platform with over 199 million monthly active users — collaborated with Italian high-end luxury fashion house Gucci to host a “Gucci Garden Experience”, where players were able to try on or buy in-game Gucci fashion accessories for their in-game avatars. “This demonstrates the ability of games in acting as a platform for blockbuster events that can turn millions of gamers into a ready pool of customers,” adds Hou.

Masters of the metaverse

So, who are the winners of the metaverse? DBS has identified three key pillars — big tech companies, hardware producers and game engine developers: Amazon.com, Apple, Microsoft Corp and Google’s parent company Alphabet have a combined market value of US$10 trillion. Apple alone has recently hit US$3 trillion in market value (down to US$2.66 trillion as at March 7), with a clear metaverse ambition.

Hou believes that the second group of key beneficiaries are the hardware players. They are the ones that will make the devices such as AR and VR headsets used by consumers to immerse in the metaverse; they also include the makers of cloud infrastructure and edge computing chipset makers.

Content developers, also known as the architects of the metaverse who create life-like visuals and interaction software, are also key says Hou, adding that metaverse winners are well represented within DBS’s I.D.E.A. (Innovators, Disruptors, Enablers and Adapters) framework.

The I.D.E.A. Fund invests in companies which fit the firm’s classification and based on its framework, DBS has identified 20 dynamic and dominant themes which include the metaverse, electric vehicle, cloud computing, semiconductor and energy transition, among others.

Speaking at the recent DBS Private Bank 1st Half 2022 Market Outlook, Hou says innovators include semiconductor companies such as Nvidia, which is known for their state-of-the-art integrated circuit design capabilities and Apple for its mobile gadgets and upcoming AR glasses.

“Disruptors are companies that change the status quo, sometimes even disrupting themselves to stay ahead. A clear example is Meta, while Tencent Holdings is also in a good position to transform its mammoth gaming platform to a new generation of gaming in the metaverse,” he adds.

But running the metaverse will require a lot of computing power. This can be supported by players like German semiconductor company Infineon, which plays an important role in designing power management and motion sensor chips as well as Taiwan Semiconductor Manufacturing Co which manufactures leading edge chipset that go into complex server and data centres.

Activision Blizzard, which Microsoft is in the midst of acquiring for US$75 billion, is one of the biggest gaming players and the owner of titles like Call of Duty, Warcraft, Overwatch and Candy Crush. Hou continues: “Such content will certainly find a way into the metaverse, bringing gaming experience into another level altogether.” There is definitely a place for traditional companies to adapt and thrive in the metaverse space, he adds. Some of the companies that have entered this space include Nike, Adidas, Gucci (part of Kering) and Walt Disney Co.

Meanwhile, the newly-incorporated Roundhill Ball Metaverse ETF (METV ETF) tracks the Ball Metaverse Index, the first such index designed to track the sector’s performance. It is managed by Ball Metaverse Research Partners, a newly-formed indexing and research firm led by seasoned investor and metaverse researcher Matthew Ball consisting of a tiered weight portfolio of globally-listed companies actively involved in the metaverse.

Among others, the classification of companies within the index include networking (companies providing real-time connections, high bandwidth, and data services to consumers), interchange standards (companies building tools, protocols, formats, services and engines which serve as actual or de facto standard for interoperability and enable the creation of the metaverse) and payments (companies that support digital payment processes and operations which includes fiat on-ramps to pure-play digital currencies and financial services).

As at Feb 15, METV ETF’s top 10 holdings are Nvidia (8.86%), Microsoft (7.02%), Meta (6.22%), Roblox (6.18%), Unity Software (5.29%), Snap (5.01%), TSMC (4.41%), Apple (4.26%), Amazon (3.79%) and Qualcomm (3.74%).

Nvidia — which has both hardware and software capabilities — are strong on both sides of the coin, says Stefanidis. “They are the GPU (graphics processing units) of choice for gamers, I believe their market share is north of 70% for gamers that use dedicated GPUs. Nvidia’s GPUs are also used in large scale computing efforts and their data centres are located across the world. On the software side they have Omniverse, which is a real-time physics rendering platform allowing users to collaborate simultaneously and create realistic 3D models and avatars.”

Chart: Credit Suisse

Going all in

Meta is the company behind VR headset Meta Quest (previously known as Oculus), which can be used to access the metaverse. Stefanidis notes that a substantial amount of over 20% of Meta’s workforce is currently devoted to the metaverse and the company has mentioned that this figure is set to increase. He adds: “Mark Zuckerberg said in 2021 that their operating expenses were US$10 billion higher due to spending on the metaverse. I don’t think there are any companies right now as devoted to the metaverse as Meta has.”.

Microsoft, on the other hand, is behind Microsoft Teams and Stefanidis says that Microsoft CEO Satya Nadella has mentioned the desire for teams to be the premier messaging platform in the metaverse, having already integrated teams with VR. “Microsoft is also behind Xbox Game Studios, one of the largest gaming companies in the world especially with the Activision Blizzard acquisition. While we are not sure if the metaverse is really the key for that acquisition, it is clear that the leadership at Microsoft is thinking about the metaverse in almost everything they do in the past year.”

Roblox is a free-to-play online game platform released in 2006. The platform hosts user-created games and allows in-game purchases through its virtual currency “Robux”. The company recorded US$1.9 billion in revenue for the full year of 2021 and is currently working on turning the platform into a metaverse that would turn the gaming space to a virtual world seen through VR headsets.

Unity Software is the largest game engine in the world, competing tightly with Unreal Engine for the spot, he adds. “Over 50% of the new games created using Unity are on mobile, but there are several AAA titles being created with it. Recently, it is also being used for applications as well as physics rendering as well as growing us for special effects in top movie titles.”

Stefanidis also says the METV ETF performed strongly from its inception until November last year, when growth stocks in the US took a hit due to stretched valuations and fears of rising interest rates. But the fund did not perform disproportionately to the US growth stocks. The ETF has provided a return of 0.63% on the NAV from inception as at end December last year.

Other metaverse themed ETFs include Samsung Asset Management’s KODEX US Metaverse Nasdaq Active ETF and KODEX K-Metaverse Active ETF. The former seeks to outperform the daily performance of the Nasdaq Yewno Metaverse Index (US markets), while the latter seeks to outperform the daily performance of the FnGuide K-Metaverse (Korea Composite Stock Price Index and Korea Composite Stock Price Index).

Yewno CEO Roberto Lazzarotto tells The Edge Singapore that Nasdaq Yewno Metaverse Index tracks are selected based on proprietary data for VR and AR, aggregated by Yewno from news and patents data. He says while it is uncertain whether Nasdaq would licence the index to different issuers, he thinks there would be more issuers turning to bodies like Yewno to identify themes and create investable universes through its concept-based approach.

He adds: “The metaverse, for example, is all about completely disruptive technology. I would not be surprised if we see more products coming out based on that index or perhaps even mutual funds or actively managed strategies that would leverage on our ability to define the theme. We will implement a more actively rebalanced approach in order to track the theme more in line with how it evolves over time. As of now, the knowledge graph updates itself every seven minutes.”

As at Feb 16, KODEX US Metaverse Nasdaq Active ETF’s top ten stock holdings are Apple (9.47%), Microsoft (9.29%), Alphabet (9.2%), Nvidia (8.61%), TSMC (4.66%), Amazon (4.59%), Meta Platforms (4.22%), Advanced Micro Devices (3.67%), Walt Disney (3.19%), Accenture (2.99%) and Service Now (2.74%). The ETF has provided a return of -16.14% on the NAV from inception.

Opportunities in Korea and China

Currently, funds investing in the metaverse themes are heavily concentrated on the US. While China has very large tech companies that are primed to capitalise on metaverse opportunities such as Tencent Holdings, Baidu, Alibaba Group Holdings and ByteDance (which is slated to be a publicly-listed company this year), the moves by the Chinese government last year to rein in its big tech names may have put a dampener on these counters for now. “If we ever saw an environment where regulatory restrictions are loosening rather than tightening, I could see China commanding a bigger weight in the METV ETF,” says Stefanidis.

Credit Suisse is similarly anticipating upside from China. According to the Swiss private bank’s Metaverse: A Guide to the Next Gen Internet report, the metaverse is presently still at a very nascent stage in China given tight regulations on cryptocurrency exchanges and initial coin offerings. Chinese internet companies tend to approach it as an extension of existing industries, through opportunities that most resemble the metaverse concepts centring around games, social networking and NFTs.

Research analysts Kenneth Fong, Ivy Ji and Lauren Zuo says Tencent is one of the companies that are well-positioned to be a front-runner in the metaverse race in China, thanks to its expansive ecosystem. For instance, Tencent recently introduced a major update to its legacy mobile QQ app with a touch of metaverse elements. Its recently introduced Super QQ Show allows users to create their own avatars and socialise in a 3D interactive space. Tencent also debuted its first NFT platform Huanhe last August, with plans to launch more diversified formats of digital collectibles. Other than Tencent, metaverse players in China include NetEase, ByteDance and Alibaba.

Over in South Korea, Credit Suisse senior equity research analyst Soyun Shin notes of the already advanced use cases of the metaverse, such as in marketing and digital assets. On the subject of marketing, Shin says that there is an increasing number of large brands that have adopted metaverse as one of their marketing solutions.

Target the ‘unique demographic’

Blackpink, the most followed girl group on Spotify with 28 million followers, hosted a virtual fan meeting on Zepeto, a metaverse platform owned by Naver Corp. Zepeto was recently funded by Softbank Vision Fund and various entertainment companies, with a valuation of US$1.2 billion. Of the 240 million user base, 70% of them are females of the younger generation, representing a “very unique demographic compared to players on gaming or gather-purpose-based metaverse platforms which are mostly used by corporates and adults,” adds Shin.

Brands such as Hyundai Motors, Gucci and Christian Dior have also leveraged on Zepeto to reach its user base. Hyundai Motors, for example, provides a driving experience of Sonata N lines while the luxury apparel brands offer their own maps to incarnate an offline shopping experience, allowing users to buy products for their avatars.

Given the rising interest in virtual worlds and transactions inside the platform, there has been an increasing demand to verify the value of any format of digital goods inside any metaverse platform, says Shin. This is done through NFTs, which authorises digital goods based on blockchain technologies.

Monetising through in-game items has already been a familiar concept for heavy gamers in Korea and has been one of the retention strategies for hard-core gamers. But incentivisation through this financial gain has not always proved to be sustainable as there is no verification on the valuation of game items and channels to trade these items.

“As NFT enables users to store verified digital assets inside e-wallets and also trade on the marketplaces, authentication and trade issues could all be resolved with the adoption. We believe that online gaming companies have the best capability to develop quality metaverse platforms that can generate valuation virtual goods on the back of sustainable traffic and engagement,” says Shin.

Wemade Co is the first Korean online gaming company to adopt NFT or the play-and-earn business model utilising blockchain technology. Following its success, various game developers including Com2us Corp, Kakao Games Corp and NCSOFT Corp have also announced their plans to launch similar business models.

Simultaneously, locally-listed companies in Singapore that have expressed interest to penetrate the metaverse space include investment banking firm AMTD International and entertainment group mm2 Asia.

In Jan 20, AMTD announced that it had acquired global fashion media group L’Officiel, appointing the latter’s CEO as its chief metaverse officer. AMTD later said it would be marching into the metaverse “full scale”, establishing the presence of “AMTD SpiderNet World” into “best and most promising metaverses” such as virtual platform The Sandbox. On Jan 11, mm2 announced that it will be launching a new NFT marketplace called Metaviva for licensed digital entertainment tokens and collectibles. Analysts at UOB Kay Hian say Metaviva’s potential valuation would be theoretically sizeable, drawing comparison to OpenSea — the world’s largest marketplace for digital collectibles — which is currently valued at US$13.3 billion.

From left: DBS chief investment officer Hou Wey Fook and Roundhill Investments vice-president of research Mario Stefanidis

Are we there yet?

While the metaverse as an investment theme is quickly gaining traction, some players have raised concerns. For one, many have argued that the metaverse remains an overhyped buzz-word to excite investors. Commonly hearing this criticism, Roundhill’s Stefanidis reiterated that the metaverse is not something that one can ignore, especially if they believe in metaverse literatures as well as top CEOs like Zuckerberg, Nadella and Nvidia’s Jensen Huang.

“Huang said the metaverse economy will eventually be larger than our global physical economy, which is currently at around US$80 trillion — that is a crazy statement and is something that would probably only happen in the next 20 to 30 years, if ever. Imagine the opportunity there, given that the metaverse right now is probably still in the few hundred billion dollars,” says Stefanidis.

Meanwhile, Capital Group investment director Andy Budden recognises that the metaverse is going to become an important theme over the next decade but it is going to take time for it to really take off. “The reason for that is a very practical one, which is that the metaverse demands large amounts of very high performance connectivity. That basically means that we need a lot of broadband power and it needs to be very reliable, or else the metaverse simply will not function. We are not there yet,” he adds.

Capital Group thinks about metaverse investing in three levels — level one is the opportunity that is already material today, which is investments in the infrastructure of the internet, such as semiconductors. The next level up is devices that one needs to experience the metaverse. This is an opportunity that is going to be more interesting over the next few years.

The final one is companies that create the metaverse environment — this is an opportunity that will take a bit longer to be investable until the bandwidth problem is solved. “So, it is a very exciting next 10 years but probably not the right time to be buying a metaverse ETF, for example,” says Budden.

Stefanidis says it ultimately depends on one’s investment horizon. Those with a shorter horizon could consider virtual platform names as it is clear what they are developing for the metaverse. “Other categories, such as networking, computing and payments might be slower burn, but these are pick and shovel names that are going to underlie the metaverse. Without them, the experience layer of the virtual platforms will not be possible. So that would be more suitable for those with a longer investment horizon.”

It pays to be early from the risk and reward standpoint, he adds. “The index construction tries to be as thoughtful as possible considering that the metaverse has not come to fruition yet and companies are not deriving substantial amounts of revenues from it. But if investors get into these companies in the next five to ten years when the metaverse is already fleshed out, they are going to lose on that tailwind because a lot of the growth has already been priced in.”

Moving forward, Stefanidis believes both mega and small cap companies will continue to announce their metaverse plans. He adds that it will be interesting to see whether the small cap companies would eventually be able to participate materially in the metaverse theme, or whether they will be acquired by the larger companies.

“I think the next 12 to 24 months will be a shake-out period where we will see some mergers and acquisition activities. We will see companies bailing out of the race and taking leadership positions.”

Cover photo: Bloomberg