Thematic investment opportunities in the metaverse
January 2022
Marketing Material
Meta-investment
The metaverse offers a new world of investment opportunities across social media, e-commerce, remote learning and working.
Written by
Anjali Bastianpillai
Senior Client Portfolio Manager
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Fancy going for a run with an old friend along the banks of the Seine on a balmy summer’s day? It may be winter, and neither of you live in Paris, but that should not stop you. Welcome to the world of the metaverse – the hot new phenomenon in the digital world. The metaverse is where the physical and digital worlds coalesce across virtual and augmented reality (VR and AR). It is a place that provides a sense of immediacy and immersion – a shared virtual environment that, we believe, will be the successor to Internet 3.0 over the next five to 10 years.
Fig. 1 - Meta opportunity
Global metaverse market forecast, USD billion
Source: Bloomberg. Data as of 12.2021.
So, while the last decade was all about digitalisation, the next one could be about the metaverse. The concept is gaining particularly strong traction among GenZ – the generation born from late 1990s to early 2010s, which now represents a third of the global population. True digital natives, they are already at home with virtual environments through digital streaming and social media platforms including Instagram and Snapchat, as well as through video games, like Fortnite and Roblox, where they can imagine and create their own avatars.
The global metaverse market could grow to around USD800 billion by the mid-2020s, according to Bloomberg research (Fig. 1). That represents a big opportunity for the digital industry – and for those who invest in it. So big, in fact, that Facebook’s parent company has seen fit to rename itself ‘Meta’. Its vision of the metaverse of the future features digital avatars, VR glasses and immersive experiences across social networks, gaming and fitness, with additional monetisation opportunities via e-commerce.
However, the metaverse is definitely not a “one winner takes all” model and no one can build it on their own. Many other large enterprises, including Google, Microsoft and Apple, are also exploring how to enhance their product offering. The National Football League (NFL) has opened a virtual store within the Roblox universe, while Adobe is working on new design tool to enable the creation of customised 3D objects in the virtual world.
Interoperability
Broadly, we see four key areas which are needed to enable us to access the metaverse, and which have strong potential for further growth and development:
Hardware: VR headsets and glasses put us into an immersive, three-dimensional digital environment. Meanwhile, smart phones allows us to access AR, where digital graphics are overlaid on reality. Smart AR glasses and headsets, meanwhile, can connect us to the metaverse with sensors, although they are less advanced than VR headsets, due to the complexity of the optics technology required.
Software: The virtual world covers all aspects of human activity - including socialising, shopping, education and work from anywhere - through software applications. Gaming and online entertainment currently provide the best experience today in the metaverse with games like Fortnite’s virtual worlds. Increasingly, there is the opportunity to play, build, own, and monetise the virtual experience through in-game money as well as virtual goods, art, real estate and more.
Cloud: We need ever more powerful computers (powered by ever more advanced semiconductors) to run the software needed to enter the metaverse. Datacentres are also essential and the largest datacentre providers are also well placed for technological advances in the metaverse.
Infrastructure: Better operability of our networks, increased bandwidth and reduced latency will all increase the reliability of the metaverse universe and, above all, the interoperability. Interoperability requires companies to open their platforms to the likes of Meta, Microsoft or Apple, rather than having a series of walled gardens.
Pandemic boost
Although VR tech at first failed to live up to its early promise, the metaverse has been given a new lease of life by the Covid pandemic. With some 3.9 billion people forced to stay at home, socialising, entertainment, shopping, working and exercising went digital almost overnight. This coincided with new technological advances. VR/AR enabled people to connect, using technology to provide a greater sense of immediacy and immersion compared to simply looking at a website or communicating via a smartphone.
Fig. 2 - Beyond games
VR/AR market forecast by sector, USD billion
Source: Citi Research. Data as of June 2020.
Globally, spending on VR and AR headsets rose by around a quarter in 2020, to some USD12 billion.1 That is only the beginning. According to industry estimates, the compound annual growth rate (CAGR) for this technology should climb to the 40-50 per cent range 2020 and 2025, according to Citi Research.
That, in turn, should prove a big boost to e-commerce. The retail industry already spends over USD1 billion annually on VR and AR solutions, and spending has grown by 240 percent per year, according to the VR/AR Association.
VR and AR tech’s appeal to the retail industry stems from the fact that it can make products on a screen more real with images that can be rotated, enlarged, and experienced interactively. Traditional retailers, such as Macy’s and Adidas, are among a growing number exploring the potential of virtual changing rooms. Other options include virtual test drives of cars and previews of holiday accommodation.
At the other end of the scale, the metaverse is giving rise to new types of non-tangible products that only have value in the digital world. The most popular are non-fungible tokens (NFTs) – digital assets that can include photos, videos and audio.
For all this to really take off, improved digital infrastructure is crucial. The technology demands higher bandwidth (the amount of data that can be transmitted over a unit of time), low latency and high reliability. Growing demands from metaverse-related devices could encourage innovation and investment in this area.
The biggest challenge will be interoperability. To be able to jump seamlessly from one world to another and keep the same virtual identity no matter which world we’re in. Cross-platform play between consoles and PCs already works and exists as proof of concept.
We believe that all adds up to a wide range of digital investment opportunities. Sectors such as e-commerce, gaming, social media, e-health and fitness, online education, online entertainment, and work platforms should benefit from the expansion of the metaverse and improve the monetisation via better retention rates, user experience and customer loyalty.
The digitalisation of our world, it seems, is only just beginning. By investing in the metaverse, we can become part of the transformation.
Anjali Bastianpillai joined Pictet Asset Management in 2016 and is a Senior Client Portfolio Manager in our Thematic Equities team, responsible for our Robotics, Security and Digital strategies. Prior to taking on her current role in 2018, she was a Senior Client Portfolio Manager for the Total Return Fixed Income team focusing on Credit Long/Short and EM Debt Long/Short strategies.
Anjali joins from Tide Pool Capital (a marketplace lending fund focused on US consumer credit loans) where she was Head of Credit & Risk. Prior to Tide Pool Capital, she was at Vitol Services Limited as a Senior Credit Officer and The Carlyle Group as Head of Investor Relations for European Leveraged Loans. Anjali started her career as a Financial Analyst at Capital Markets Assurance Corporation (now MBIA Inc) before working as a securitisation analyst at Standard & Poor’s.
Anjali holds a Bachelor of Science in Business Administration from Georgetown University.
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