How to invest in the metaverse
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What is it really, and is it a good investment?
Published
September 4, 2024
What is it really, and is it a good investment?
You might be tempted to believe Zuck wears the badge of honour for coining the term ‘metaverse’. But the real sheriff in town is Neal Stephenson.
Once upon a time (June of 1992, to be exact), long before the dot.com crash and Y2K, a novel named ‘Snow Crash’ was written. Stephenson’s book was based on a computer program that simulated life. Essentially, the main character’s life actually played out in a digital game as opposed to real life.
Think Second Life, or Sims.
Fast forward to 2022, or maybe just grab your headset to get there, and the metaverse looks very different.
At the very least, it’s now much more commercialised than its humble roots in a novel.
These days, it’s also more commonly dubbed the metaverse, though initially, it was all about a metaverse.
A metaverse was a virtual reality and a premise, but more commonly it’s alluding to the race among tech companies to create the metaverse.
This is where it can get confusing. Visions of one, singular digital reality probably don’t paint the picture of what will happen next.
Sure, Meta might envision selling ad banners that plaster themselves on your coffee mug when you’ve got your goggles on. And Minecraft could see it as an opportunity to turn your living room into a battleground.
Those are two very different outcomes though. And this is what’s vital to first understand when it comes to the metaverse: it isn’t a singular thing, it’s many.
Before we get stuck into the ways of investing in the metaverse, it’s important to highlight that this isn’t a suggestion or recommendation that you buy or sell any of the securities mentioned.
Everyone has their own goals and unique financial circumstances. These, along with your tolerance for investment risk and time horizon, should inform the mix of assets in your portfolio.
Our resource hub for investing in the stock market might be able to help make that blend a bit clearer for you and our guide on how to invest in stocks is a great start for first-time investors. And if you are still unsure of how to pick investments, speak to a qualified financial advisor.
Wondering “how do I invest in the metaverse?”
You can think of investing in the metaverse as a similar concept to investing in health care or energy. For instance, investing in health care might mean you look at companies in pharmaceuticals, biotech, medical software, prosthetics and experimental treatments.
That means you can buy metaverse stock by investing in companies with a huge array of operations. Typically, the metaverse is deemed to include augmented and virtual reality, 3D graphics, semiconductors, high-speed wireless communications, online gaming, video streaming, blockchain technologies, NFTs and digital land, connected cloud, file and data storage.
Talk about range. You might choose to invest in a basket of stocks falling under that umbrella through an ETF for example, or you may prefer to choose your stocks individually.
Either way, the metaverse is essentially a theme, meaning it's full of tons of businesses with vastly different products and revenue streams. Because of that, there are dozens of micro themes and trends within the metaverse.
The ETC Group Global Metaverse ETF (£METP) is an example of that. It holds a selection of companies linked to the metaverse in some way shape or form. These firms all fall under the list of examples of metaverse-related industries above.
Remember, just because you’re investing in multiple stocks through an ETF, you aren’t guaranteed diversification.
For instance, there is very little geographic dispersion among METP’s top holdings. Most of the firms are based in the US, Japan and China. And then there’s the metaverse glue that holds them together.
If it turns out to be a theme that never really takes off, or the concept faces delays or regulatory hurdles, the whole ecosystem could take a hit.
Also, bear in mind many of the industries falling under the metaverse label are in their growth phase. Because of that, the level of risk associated with each might differ greatly. The risk involved with a well-established cloud company might be very different to that of a new VR firm, for example.
Past performance isn’t a reliable indicator of future returns. Source: FE, as at 16 May 2022. Basis: bid-bid in local currency terms with income reinvested.
Each industry’s performance of course varies greatly too. The above table shows how returns have varied across three ETFs in cybersecurity, cloud computing and blockchain. This year, cybersecurity has performed relatively better than cloud and blockchain technologies. But in the year prior, the blockchain’s ETF was through the roof.
The point is, the metaverse encompasses tons of emerging industries and well-established ones too. It’s not all one and the same, so if you’re interested in investing in a particular technology, make sure you know exactly what you’re looking for. Otherwise, investing in a metaverse ETF might mean you’re getting the whole lot instead.
Something else to keep in mind is that, because of all the different technologies linked with the metaverse, you won’t always know how much a firm is involving itself in the trend.
That’s particularly true in terms of how much money they’re making from their metaverse endeavours. Not even Meta has ‘metaverse revenues’ as a line item on the income statement.
The reality is that, for now, most firms in the space are dipping their toes into the theme rather than diving right in. Maybe those trial runs will go well and business divisions will emerge to serve the metaverse directly.
But until then, it might be a case of accessing different companies for the multitude of ways they profit from the metaverse.
The following list of metaverse stocks is not a recommendation to buy or sell any assets. It’s simply a list of stocks that are commonly found in metaverse ETFs, as the companies have made statements of their interest in taking part in the trend.
These stocks are in no particular order. And there are plenty of other companies dabbling in the metaverse in some way shape or form.
Many choose not to link their operations and revenues to the word per se, perhaps out of fear of what the implication of their involvement might be. Or perhaps because they know that they were already participating in metaverse technology long before it became a buzzword.
Apple has mostly steered clear from uttering the m-word in statements to the press. Though, the firm has definitely talked up the importance of augmented reality (AR) to its top line.
Unlike Meta, Apple’s mostly focused on AR as opposed to virtual reality (VR). In the words of Tim Cook, “There are clearly some cool niche things for VR. But it’s not profound in my view. AR is profound".
Cook firmly believes AR will be “one of Apple’s biggest contributions in the future”. Part of that comes from Apple’s success with AR kit apps (which help other companies implement AR into their own tech) on the App Store.
While Apple doesn’t develop these apps, it makes money off them. Apple’s ‘Services’ revenue encompasses App store fees, and although the segment was a relatively trim $19.8bn compared to Apple’s $77.5bn from ‘Products’ last quarter, it continues to grow in importance.
Apple doesn’t break out the proportion of its Services revenue stemming from the App Store every year. But in January, the firm revealed it’s generated a total of $260bn since 2008. So it’s certainly an important factor in the firm’s success.
PTC is an industrial tech provider. It’s been bridging physical and digital since 1998 with its CAD software, which turns digital 3D designs into real life objects.
3D technology is a vital component for creating good, believable AR. In addition to being a 3D specialist, PTC also has a fleet of IoT (internet of things) offerings, which essentially leverage data from the physical world to be used in the digital world.
Because PTC’s main offering is software, it’s able to generate recurring revenue from customers tied into its software contracts. PTC’s 2021 recurring revenue was $1.6bn, a 26% increase in 2020. Its licensing and professional services streams represent a much more subdued $33m and $157.8m respectively, further highlighting just how vital contracts are to its sustained revenue growth.
While recurring revenue is important if costs are high, the firm’s net income will stay trim and it’ll have a harder time driving growth. But PTC has managed to keep costs low, widening its operating margin from 14.5% to 21.1% last year.
But even though the firm’s demonstrated some impressive growth metrics, it’s important to consider the numbers up against its share price. As of 19 May 2022, according to Bloomberg, PTC was trading at nearly 27x earnings.
While over the past few years, it hasn’t been uncommon for tech firms to trade at a similarly high valuation, many of those firms have seen their share prices crumble throughout 2022.
As an investor, it’s always important to make sure you believe the price you’re paying is fair. Even if a company is growing in leaps and bounds, if it’s overpriced, it might not be worth your while.
In the words of Snap CEO Evan Spiegel, the metaverse is “ambiguous and hypothetical”.
But whether or not Spiegel likes it, Snap’s revenue streams definitely fall under the metaverse umbrella.
250m Snapchat users apply AR filters every day on the app. Some just toss on the dog ear filter and call it a day. Others use Snap’s AR digital fitting rooms to try on new fits offered by its retail partners.
And soon, Snap’s AR glasses will offer an ‘overlay’ for the real world. Think boundless flower gardens in a concrete jungle or blue skies on a stormy day.
Snap’s AR Spectacles have been tried out by a number of journalists, who’ve so far had pretty mixed reviews. With a slide of the glasses down the bridge of your nose, you can play ping pong (without a real ball or paddle) or chase zombies (also without a real monster).
While that all sounds like fun and games, the 30-minute battery life and tiny screen size have apparently made for a subpar user experience.
Still, Snap won’t finish the development of its Spectacles until at least 2024, so there’s no need to make a snap judgement just yet.
Zuck’s vision for the metaverse is much more immersive than Apple’s. Oculus headsets are all about injecting yourself into a new reality, and less so about superimposing a world onto the real one surrounding you.
Meta supposedly has $10bn invested in developing just that. The budget is over five times what it paid to acquire the manufacturer of its Oculus goggles. So it seems safe to say Meta has more irons in the fire we aren’t yet privy to.
For now, Meta’s headsets are its clearest investment in the space. Meta Quest 2 is its leading VR headset. And later this year, it’s set to release Project Cambria, which will supposedly be a better fit for business-related VR ventures.
Zuck said these goggles will eventually replace the laptop, augmenting one’s “sense of presence” in digital meeting rooms, for instance.
Meta’s ‘Reality Labs’ revenue stream includes its metaverse endeavours, and it earned the firm $695m in Q1, a 30.1% increase in 2021. Meanwhile, the costs to operate Reality Labs grew 62% to $3bn.
Those are some eye-bulging expenses, but they’re to be expected when you’re reinventing the wheel.
Metaverse aside, the fact is, when you invest in Meta, you’re investing in digital advertising.
That’s the tech titan’s main revenue driver (as much as the headlines might like you to believe otherwise), and in Q1, the firm raked in $27bn in ad revenue, a 6% increase on the year prior.
Unity makes interactive, real-time 3D (RT3D) content. RT3D can help companies model prototypes faster and with greater accuracy, catching any mistakes earlier in the process. That means it can help firms bring products to market sooner. And when it comes to revenue generation, for startups, it’s usually a case of the earlier the better.
RT3D also has a huge role in immersive video games. The tangibility of its real-time adaptive models has even made it a popular choice for military simulations.
Unity’s systems have reportedly been used by the US Army and Air Force. When employees and developers discovered their work was being used in military contracts, a number of employees said they’d been left in the dark, and a fair bit of controversy ensued.
Potential ethical quandaries aside, Unity has really leveraged its market positioning in the space.
In Q1, the firm broke its revenue records, hitting $320m which was a 36% increase compared to 2021.
Revenue is broken down into ‘Create’ and ‘Operate’ segments, each accounting for 25% and 75% of the total figure, respectively.
On the Create side of things, Unity builds software for firms. For instance, it can transform building plans into VR spaces for housing developers, which customers can then navigate through to experience a site pre-construction.
Unity’s Operate stream on the other hand creates tools and analytics software for developers creating video games.
Unity’s revenue guidance for 2022 is between $1.35-$1.43bn, which implies the upcoming quarters will need to be even more expansive than its most recent set of earnings.
eXp is a holding company with a number of different businesses. Most of them share in common that they provide cloud technologies to help other businesses scale globally.
eXp Realty is one of those businesses. It’s a cloud-based real estate brokerage with 81,000 agents. It enables local real estate agents to work remotely as opposed to in-office. eXp Realty has an online portal where agents can attend virtual business meetings and real-estate classes through their avatar. But the agents do real, on-the-ground sales.
In Q1, eXp’s revenue grew a staggering 73% to $1bn after increasing the number of agents and brokers on the platform by 55% to 78,196.
More agents usually means more money for eXp Realty, since it makes 80% in commission charges on an agent’s first $80k in sales.
The firm’s share price flourished throughout 2020 after announcing new expansion regions including Puerto Rico, Brazil, Italy and Hong Kong. But most of its transactions happen in the US and Canada, with total Q1 real estate sold increasing by 69% to $41.4bn.
The firm’s share price has since cooled off, after tumbling back down throughout 2021.
Sundar Pichai, Alphabet’s CEO, has been vocal about AI.
He has identified it as a key area of focus and expansion for the firm, dubbing it one of Alphabet’s biggest areas for growth.
That’s a big reason why Alphabet’s metaverse vision these days is less about Google Glass AR headsets and more about big data.
Google Glass was more or less a flop. The smart glasses had a $1,500 price tag. And whether it was their cost or the fact they looked like a hair band had accidentally fallen in front of your eyes, they just didn’t take off.
Despite its best attempts (Alphabet even worked with Fashion Week models to try and glam up the glasses’ reputation), Google Glass didn’t measure up.
That might be why Alphabet’s doubling down on what it already does well: data.
The firm’s adapting its search and AI algorithms to better answer consumers’ questions in adapted ways.
For instance, as we start engaging more with technology in new ways (through voice as opposed to text or in new digital worlds through avatars) Google will need to answer us in new ways too.
Roblox is a live stream gaming platform.
The firm just reported its Q1 earnings, and although revenue increased 39% to $537.1m, it was far off analysts’ expectations. Simultaneously, Roblox widened its loss from operations by 12.3% to $151.6m. Its share price fell post-earnings release, and has been tumbling more or less throughout the year.
Though, the declining share price of pandemic winners, especially those in tech, isn’t isolated to Roblox. And largely, the trend looks more to do with lofty overvaluations being trimmed down as opposed to huge shifts in company performance.
But taking a step back from Roblox’s latest earnings, the baseline comparable was a year when many of its operating regions were in lockdowns. Given that economies have now reopened and alternatives aside from spending hours on the computer are revving back up, the firm is still pulling off some impressive growth.
Also, most of Roblox’s increases in costs were from rising research and development expenses. So theoretically, those should lead to new products and services that will bolster revenue down the line.
That’s going to be a likely scenario for many of the firms investing in the metaverse right now. They’re probably not making money off their emerging technology just yet, but they’re hoping to in the near future.
Another reason for hope with Roblox might be its age spread. While the firm has historically mostly catered to users under 13, the proportion of those over 13 is growing. It’s not just that it’s gaining traction among older teens, it’s that kids are sticking around as they grow up too.
That’s a good testament to the firm’s staying power. If it can latch onto its users when they’re young, they’re less likely to go elsewhere for gaming as they get older.
Earlier this year, Microsoft forked out nearly $70bn in cash for Call of Duty owner Activision Blizzard.
Microsoft sent a signal, loud and clear, of just how seriously it takes gaming. The acquisition earned the title of the biggest tech deal of all time, as Microsoft tacked on one of the world's largest video game publishers to its portfolio of companies.
In 2021, Activision’s annual revenue was $8.8bn while Microsoft’s was $168bn. While the gaming firm’s income may seem marginal relative to what was paid for it, Microsoft clearly sees Activision as a big growth opportunity.
Likely, that’s partly since Microsoft can offer Activision’s games within its Xbox Game Pass and PC Game Pass. Ideally, it can leverage those popular titles to accelerate the traction of its cloud gaming business.
Another way Microsoft’s metaverse-ing it up? By amping up its cybersecurity businesses.
CEO Satya Nadella is focused on beefing up Microsoft’s security offerings, which he believes will become increasingly important as the metaverse proliferates.
Imagine strolling into a metaverse meeting room. Your avatar shakes pseudo-hands with a business partner’s avatar. You talk business and perhaps sign a contract at the end of the meeting.
It might sound fanatical, but it’s Zuckerberg and Nadella’s vision of what’s next for remote meetings. And without proper security, encryption and safe information-sharing, what you thought was a business deal could have been an information-exploitation nightmare.
The metaverse’s ability to generate trust and integrity among users is a growing concern. Microsoft is leveraging its cloud business, Azure, and multi-factor authentication (MFA) systems to try and bolster that.
Coinbase is a crypto platform generating the majority of its revenues from fees tied to trading.
If metaverse worlds take off, cryptocurrency will become increasingly vital to their success. Because in virtual worlds, you need to have virtual money to spend.
Web3, the concept of the internet’s third generation (following web1, the advent of the world wide web, and web2, social media’s growth explosion), the internet will be an experience.
We’ll engage with our environments much more. And although cryptocurrency has existed separately from the metaverse thus far, there’s reason to believe they’ll become increasingly intertwined.
Transacting with cryptocurrency as opposed to online banking could foster a much more seamless payment system in metaverse worlds. If so, Coinbase could be poised to benefit.
This would surely be welcomed news, given cryptocurrency trades have been on the decline since November of last year, having peaked in May 2021.
When cryptocurrency exchange volumes decline, so does Coinbase’s revenue. The firm’s Q1 revenue slid 27% down to $1.2bn, and its share price went tumbling too. The firm’s now at one-fifth of its IPO price.
Evidently, there’s a lot of volatility and differing risk associated with firms operating in the metaverse.
The business models and main operations among the above companies vary greatly. A firm that’s doubling down on cloud technologies to one banking on cryptocurrency will have vastly different risk levels involved as an investment.
That’s not to say both can’t have a place in a balanced portfolio, but you should make sure that the firm and its business segments align with the level of risk you’re willing to take on for the return you are hoping to achieve.
You can buy metaverse stocks in the same places you buy other stocks and shares.
Once you have decided on the metaverse stock you want to buy, you can check with your preferred stock brokerage platform whether they offer shares in the company.
There are over 6,000 US, UK and European shares to buy and sell commission-free on the Freetrade app. Given many metaverse stocks are American companies, fractional shares can be a great way to access higher-priced stocks. That’s because they offer you a slice of a company, which means even the most expensive stocks become affordable.
Still, a lower price tag doesn’t mean a better-valued stock. And when it comes to investing in emerging technologies, it can be even more crucial to determine whether that price is fair.
Tech companies can command rich valuations, especially when they’re expected to experience rapid growth. So keep a watchful eye on what the company’s really doing behind the fluff, that’s the best way to make sure you won’t get swooped up in the hype of a buzzword.
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