Fintech on Friday: Should investors care about the metaverse?

We stand at the threshold of a new 3D virtual world of the metaverse. Where are the opportunities for investors?

What exactly is the metaverse? And why should investors learn more about it? Simply put, the metaverse is the digitalisation of human activity and disruptor of everything that hasn’t been disrupted yet. It is a new virtual world where our physical and digital lives converge.

The current iteration of the internet, Web 3.0, is on the brink of an irreversible shift to a new 3-dimensional virtual world. This new ecosystem will affect how we shop, socialise, entertain ourselves, engage on social media – and change how these aspects interact together.

Consider a reality where you buy real items in virtual 3D stores and pick them up in the real world, or you attend a virtual 3D concert of a real-world artist, or visit a virtual 3D home before you buy a property.  These scenarios could all become normal for us in the near future.

There are four key areas in the metaverse where we think investors can find attractive opportunities:

Digital content

3D content – such as 360 virtual reality concerts and events, conferences, games and education that provide more cognitively enhanced and immersive experiences – could be game-changers in how we live, work and play. The evolution of the internet shifts from a centrally owned ecosystem, controlled by the web giants, to open ecosystems. In the metaverse, they’ll operate in a decentralised fashion powered by blockchain technology. This new regime allows players to create and own their own digital assets in the form of non fungible tokens (NFTs) which can be traded and transferred to digital wallets, creating an entirely new digital economy with real monetary value.

According to HSBC’s research, video games, online videos and music streaming generated more than $200bn in 2019, with more than three-quarters of the volume coming from video games alone. The gaming industry’s revenue is predicted to boom from circa $180bn in 2020 to about $400bn in 2025 due to continued monetisation by video game developers, according to Grayscale.

A key trend here is a move away from paid games to games that are ‘free-to-play’, which the developers monetise by selling players’ virtual items or real estate to improve their experience and social status within these virtual worlds.

Delivery

As the metaverse evolves and integrates with the real world, wearable devices are also predicted to drive investment opportunities. Virtual Reality (VR) headsets are already a key way to experience a highly immersive, 3D metaverse experience, and we see great investment opportunities in this hardware space. Current headsets have a reputation for being heavy, less sensitive to sensory movements and difficult to wear for long. For VR to grow beyond a niche product, wired devices need to transition into wireless devices. As the quality of the headsets improves – with greater tech sensitivity to voices, eyeball movements and gestures, higher download speeds, and extra cameras – these smarter gadgets will work better with other hardware and become easier and more enjoyable to wear.

Infrastructure and connectivity

Software ecosystems such as artificial intelligence (AI) servers, cloud supply chains and datacentre providers will form the key infrastructure necessary for the metaverse, making these attractive investment areas. Selective companies which specialise in the AI-server space and pose entry-barriers to new entrants (due to server motherboard design difficulties) offer attractive investment opportunities and have the potential to grow and gain market share due to their prior experience in AI-server infrastructure and the experience of working with big tech names like Google and Apple.

Moreover, a number of technology companies in Asia have started placing themselves into the new metaverse era by acquiring related technologies. Strategic investments and partnerships with such companies, and astute acquisitions of innovative start-ups, offer great value-add potential to investors.

Virtualisation and digital twins

The idea of ‘digital twins’ is one of the biggest recent developments. Digital twins are a virtual replication of a physical system, process or product. ‘Twins’ are linked to live streams of data collected from sensors and other connected devices, which allows them to mirror, analyse and predict the behaviour of their real world equivalents and the impact of proposed improvements or sudden changes. Companies using an enhanced ‘digital twins’ model, and associated technologies, are likely to improve their product quality, operational efficiency and face fewer real-world reprimands, fines or regulatory issues due to improved safety. Such companies also offer better value to both customers and investors alike.

Ones to avoid

However, there are some other areas of the metaverse which we are less convinced by, primarily due to a lack of well-established public markets and potential regulatory concerns. We therefore prefer not to invest in virtual real estate, NFTs and cryptocurrencies.

Investors can find great opportunities in the metaverse space such as 3D digital content and its delivery (especially VR hardware and wearable devices), the digital infrastructure arena, and in companies using the concept of ‘digital twins’ to improve their product life cycle management.

Much like today’s smartphones, we expect metaverse developments to become new norms, as more people get comfortable with their new virtual world, and get involved with what it offers. However, this will take time and is very much a long-term investment theme. For astute investors, the time is now to learn about the metaverse, identify its bountiful opportunities and selectively invest in them for the medium-to-long term.

Willem Sels is global chief investment officer, Wealth Management and Private Banking, at HSBC