Does the future belong to the metaverse with virtual reality worlds like Ariana Grande’s Fortnite tour?
#Metaverse is the latest trend word. But is the metaverse really so new, and can investors profit from this megatrend? Decalia’s Quirien Lemey explains where metaverse developments stand and which companies are likely to benefit in the future.
Metaverse, or “metaverse” in English, is the latest buzzword among investors. Ever since Facebook, one of the largest companies in the world, decided to change its name to Meta and invest ten billion dollars a year in the metaverse for the next ten years, the stock prices of companies even remotely related to the metaverse have skyrocketed. “Then, in the wake of the sell-off in technology stocks at the beginning of the new year, they took a massive tumble. The big-tech industry is celebrating the metaverse as the next stage of the Internet. The question with this phenomenon is whether it’s really something new and how investors can profit from this megatrend,” says Quirien Lemey, senior fund manager at Decalia.
What is it and is it new?
The metaverse is nothing new, according to Lemey. He explains, “Already 30 years ago, Neal Stephenson mentioned this term in his science fiction novel Snow Crash: In it, the author describes the metaverse as a combination of virtual and augmented reality (VR and AR for short) and the Internet. People can work, study, go shopping, attend concerts and interact with each other there in an immersive environment. If that’s not visionary. In addition, the virtual online world Second Life has still existed for about 20 years. “The metaverse can therefore certainly not be described as a new phenomenon. But how then can the sudden enthusiasm for the metaverse be explained?” asks the fund manager.
Facebook is not uninvolved in this, he says: The Menlo Park-based company is not only a digital giant willing to spend billions on its metaverse, he says. The company also tends to focus on the issues that attract and captivate attention. For example, it bought #WhatsApp and Instagram because it saw that young people were spending their time on platforms other than Facebook. For today’s youth, Facebook is something mom and dad use, he said. From this perspective, Instagram was a very good acquisition in retrospect, even if the market was less enthusiastic about the negotiated price at the time.
“So people are right to be wary of Facebook’s positioning,” Lemey points out. Mark Zuckerberg and his staff likely would have noted that Fortnite and Roblox have built substantial user bases worldwide. However, this very young user base doesn’t just play games on these platforms. They also use them as meeting places, attending concerts like Ariana Grande recently did in Fortnite, or visiting virtual stores like Vans world’s. Given these advances, Facebook inevitably sees the concept of metaverse as a huge opportunity for advertising revenue. Add to that NFTs (non-fungible tokens) and cryptocurrencies that can thrive in a virtual world, and you have a carnival of trending words that capture the market’s imagination.
Wild fantasies?
“The question is whether our fantasies are going too far, or whether we are actually on our way to a world like the one seen in Stephen Spielberg’s Ready Player One,” Lemey posits. First of all, it should be noted that there is no “one” metaverse. Rather, there are currently many different versions and forms of it. At least in the foreseeable future, therefore, there will be different experiences. “Second, try wearing a virtual reality headset for a few hours. You wouldn’t be the first person to experience nausea afterwards. However, we also don’t believe that accessing a metaverse necessarily has to be via a VR headset. Alternatively, terminal devices such as smartphones, tablets, PCs or consoles are also available, although in these cases the experience is likely to be less immersive,” says the expert. One should therefore be curious about the potential uses of augmented reality, which can be used to project digital elements onto the real world. A headset is still needed (for now), he adds, but that could just be a simple pair of glasses. “It would be nice to finally be able to make phone calls like in Star Wars,” Lemey says.
Recent rumors have Apple working on a headset called “Mixed Reality” that would combine virtual reality and augmented reality…. Third, it makes one a bit skeptical that the elderly or the next generations could be made to do everything in a virtual world. One can imagine holding virtual meetings and attending an online concert now and then. But when it comes to watching movies or Netflix – which most still spend much of their free time doing – Lemey says it would be surprising if many wanted to dive into a virtual world to watch Netflix with friends on a screen within a screen: “Netflix and chill, that is, enjoying video-on-demand in a relaxed way, as far as you can still imagine.”
On the other hand, many may also be too old to properly understand what drives a teenager these days. In addition, the expert says, while people can imagine occasional virtual meetings. But the real live conversations and interactions are too important to move them entirely into the digital space, he said. In conclusion, there will be more and more successful applications in the metaverse – at least enough to look for investment opportunities in this area. But the transition will be gradual and hopefully there will be limits that society will accept.
So how to invest?
Although Lemey says this question is by no means exhaustive, there are some areas that could be of interest to investors: First and foremost, given the potential “first mover” advantages, are the existing Metaverse platforms: the only real, publicly traded “pure player” here is Roblox, as the fund manager goes on to say, “There are on average about 50 million daily users who spend billions of hours on the platform. Nike, Disney, Gucci and many others are already involved in sponsorship programs on the platform, and the CEO is known to have stated that in three to five years, all brands will have their Roblox strategy.”
Facebook appears to have recently launched Horizon Worlds, a similar world where you can now create your own floating avatar. Lemey asks, “The beginning of Facebook’s metaverse?” Then, he says, there’s Fortnite, developed by privately held Epic Games, in which Tencent in turn has a large stake. In Asia, there is the South Korean company Naver, which has an existing metaverse platform, Zepeto, that offers only virtual experiences. However, a new hybrid called Arcverse is also being developed right now, according to the expert, which will combine digital and real worlds. Also in Asia, NetEase, as one of the largest gaming providers in the world, cannot of course lag behind here and will release its own user-generated game creation system. This works like Roblox, but is focused on adults. The challenge with Roblox is that a large part of its user base consists of under 13-year-olds.
Gaming sector as beneficiary
“Instead of figuring out which metaverse platform might win the race, you might consider investing in the ‘weapon procurers’ for the meta-wars. These platforms need content. Because without content, users quickly get bored,” Lemey said. It is against this backdrop that one might view the largest acquisition in Microsoft’s history: game developer Activision for $68.7 billion. Gaming continues to be one of the most obvious beneficiaries of these virtual worlds and one of the most attractive to users, he said. From Microsoft’s perspective, Activision is an excellent acquisition that adds the world’s most successful video game brands (Warcraft, Starcraft, Call of Duty, etc.) to its portfolio.
However, whether the acquisition would be waved through without further ado is another question. Since in this case a large distributor (Xbox) takes over a leading content developer and Microsoft as a technology heavyweight makes a large acquisition (although the transaction is not so large compared to the size of Microsoft), it remains to be seen whether the US regulators will only bark or bite. Certainly, this transaction put other game developers like EA, Take Two and Ubisoft in the spotlight. And, of course, gaming experiences would have to be created – perhaps using Unity Software’s engine? Another potentially interesting area, he said, is music, which has been given new life thanks to streaming providers like Spotify. This area is likely to increasingly generate its revenue from games and the metaverse in the future, Lemey says.
He goes on to say that beyond software and IPs, “the hardware sector could also be interesting,” Lemey says, continuing, “For example, think of companies that produce components for VR headsets – from displays to lenses and sensors. However, many of the hardware component manufacturers are to be avoided – among other things because of the risk of commoditization. Nvidia may be an exception, he said, given the company’s massive technological lead and opportunities with top silicon. Also of interest is Nvidia’s Omniverse, a powerful 3D virtual platform designed to allow users to simulate ‘digital twins’ – digital twins – of real-world objects/structures.
And what about ESG considerations?
In this context, according to the expert, there is an increasing need to address the inevitable question of incorporating ESG (i.e., environmental, social and governance) considerations: Facebook/Meta, to put it mildly, is not among investors’ ESG favorites. From product targeting of minors – research shows this has led to suicide for some teenage girls – to spreading misinformation and influencing election results: The allegations against the company are too numerous to mention. Add to that the metaverse and a recent Financial Times article that examined hundreds of applications to the U.S. Patent and Trademark Office (USPTO) to find out exactly how Facebook might benefit from the metaverse. Given the research findings, it shouldn’t be surprising if the company uses hyper-targeted advertising and sponsored content. But using biometric user data like eye movements to give this type of advertising and content more clout could prove a bit more controversial, Lemey says.
Meta has also built in the possibility of safe zones, he says, because there have been cases of users being sexually harassed in virtual worlds. The latter is not just a Meta-specific problem, of course, but it shows that even in a virtual world, user safety is an issue. The impact of this industry is neutral overall, with individual companies definitely having the potential for a positive impact, provided they establish appropriate regulations and implement effective measures – for example, around the issue of protecting minors. A company could also produce additional educational games to score positively. “We also see similar positive and negative effects from the metaverse and could therefore also classify it as neutral, supplemented by in-depth ESG analysis at the individual company level,” says Decalia’s fund manager.
Many different metaverses will compete
“There are many companies that can benefit from all these investments in the metaverse. However, since there is no discernible development towards a single true metaverse, it can be assumed that many different metaverses will compete with each other and therefore the true potential of this phenomenon may be limited. Further, there are limits to what people will do in this alternate reality. Who is willing to give up a real-life after-work beer with colleagues? From an investment perspective, there are indeed many opportunities, from advertising and shopping to music consumption and gaming. But the all-encompassing metaverse is not expected to change the rules of the game for all industries. Close monitoring, careful stock picking, a review of fundamentals and the inclusion of ESG considerations are therefore warranted here,” Lemey concludes.
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