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How to safely invest in the developing metaverse

If you have a balanced portfolio, you are already there as technology leaders explore the possibilities.

For a few months this past autumn, the word metaverse was on everyone’s lips – a term with a futuristic ring referring to the possibility of a new world of shared online communities that simulate the real world.

The experiences aren’t real in the sense that they don’t have a physical form. But they’re very real because they can be imagined and felt. They’re brought to life in 3D on the internet using tools like virtual reality (VR) or augmented reality (AR) headsets and sophisticated software.

It left investors wondering if they should pay attention and, if so, how best to take advantage of the theme. The good news, analysts say, is that if investors have a balanced portfolio, they’re likely already in the metaverse as technology leaders explore the possibilities. But the rewards are for those who are patient because a payoff may be a while in coming.

“From a [consumer] adoption and value creation standpoint, this could be a decade-plus journey,” says Brad Erickson, managing director with RBC Capital Markets in Portland, Ore. “So, what do you want to own? Great businesses with solid balance sheets and strong cash flow that have moats and growth opportunities.”

He says the spotlight was intense because Facebook (FB-Q ) rebranded itself as Meta Platforms Inc. As a tech giant and influencer, its opinion matters.

“When someone as influential as Mark Zuckerberg changes the name of his company, a lot of people say, ‘Wait a minute, this is clearly going to be a big deal,’” says Mr. Erickson, who leads RBC Capital Markets’ internet equity research team.

However, six months after Meta Platforms’ big reveal, its shares are down 33 per cent. The COVID-19 Omicron variant and now the Russian invasion of Ukraine have shifted the focus elsewhere.

Overall, many don’t know where the metaverse is going, how companies will make money, when it will arrive in a big way, or what the blockbuster products will be. However, areas in which products are developing include gaming, military, medical, and retail.

Dan Ives, managing director of equity research at Wedbush Securities Inc. in New York, says after gaming, he sees e-commerce and social media playing a major role in the metaverse’s development.

Dan Ives is managing director of equity research for Wedbush Securities Inc. in New York. Credit: Supplied photo

He says gaming is the “first core use case for the metaverse,” which is one reason why Microsoft Corp.(MSFT-Q)  has launched a US$69-billion takeover deal for video game maker Activision Blizzard Inc. (ATVI-Q ) Microsoft markets the Xbox gaming system and its gaming division generated US$16.2-billion in revenue in 2021, 10 per cent of the company’s total. The Activision takeover will add another US$8.8-billion a year.

In a related development, Microsoft landed an augmented reality contract with the Pentagon last March worth as much as US$22-billion over 10 years. It’s supplying 120,000 augmented reality headsets to the U.S. Army based on its HoloLens device.

Mr. Ives says there are plenty of other examples still in their early days.

One involves Stryker Corp.  (SYK-N) a leader in the global medical device industry. It’s using Microsoft’s HoloLens to help designers visualize operating rooms by seeing the space in 3D and playing with the possibilities before settling on a final configuration. Pinterest Inc.  (PINS-N)  is using augmented reality technology to allow shoppers to place 3D furniture and accessories onto pictures of rooms in their homes using a smartphone camera. Zoom Video Communications Inc.  (ZM-Q)  is also working with Oculus, a division of Meta Platforms to create virtual conference rooms. Meanwhile, Apple Inc. ( AAPL-Q) chief executive officer Tim Cook said recently he sees a lot of potential in the theme.

However, in this jittery environment, Mr. Ives says, the Street is focused on software, cloud, and chips, not investments still years off. He likes Microsoft, Roblox Corp.  (RBLX-N)  and Unity Software Inc. ( U-N) as leaders in the space. Unity provides tools to video game creators and Roblox is a global gaming platform. He says Alphabet Inc. (GOOGL-Q),  Meta Platforms, and Electronic Arts (EA-Q)  are also of interest.

Two Canadian metaverse exchange-traded funds (ETFs) were launched last November and contain many big tech names. Evolve Metaverse ETF MESH-T, and Horizons Global Metaverse Index ETF  MTAV-T  are both down more than 25 per cent since they began trading amid the broader tech tumble.

Mr. Erickson says Meta wants to build a dominant platform that will act as a gateway for its 2.9-billion active monthly users. He calls it a walled garden – a place where other products and services pay to get in for access to the audience.

Mr. Erickson believes that at its current price, Meta Platforms investors are getting the metaverse assets for free. But like Mr. Ives, he sees a long road before the products gain wide acceptance. Many are expensive and play to niche interests.

“Companies are working on this because they can, but not necessarily because it’s something people need,” he says. “I have no doubt there’s going to be a subset of consumers that are going to be all over this, and it’s going to be a huge part of their lives. But, that’s millions of users, not billions.”

This article appeared in the Globe Advisor section of the Globe & Mail’s Report on Business on March 22, 2022. For reprint information please view this page.

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