The investment implications of the metaverse

Author: Frank Tsui


The metaverse is more than immersive experiences for gamers. It is expected to be widely adopted in many areas, and offers a host of investment opportunities, suggests Frank Tsui, senior fund manager and head of ESG investment at Value Partners.


The metaverse has become a hot topic over the past year, with various tech giants citing it as the future of digital life. Major technology leaders such as Meta, Microsoft, Apple, Amazon, Baidu, Alibaba and Tencent are already announcing their investments in the field. But what exactly is the metaverse?


The metaverse combines the words “meta”, meaning “beyond”, and “universe”. In technology, it can be viewed as a wrapper for various digital platforms to jointly form a universe. When combining this universe that is built upon the internet with hardware tech, it could shift physical experiences to the virtual, enabling users to live in it. Currently, this more immersive digital experience is seen in the rise of 3D or virtually integrated environments.


An Emerging Trend

As the metaverse is still in its early stages, its development is first seen in entertainment, especially in games. Many games and other forms of entertainment, as well as social media, now have immersive experience offerings. Currently, a handful of game developers, entertainment companies, and social platforms have started investing and are working together with technology leaders, ecosystem and programming engine developers to enhance and broaden the scope of immersive experiences, and are getting their platforms ready for metaverse engagement.


Other than entertainment, the metaverse is also expected to be adopted in other areas, such as work, education and ecommerce, especially after the pandemic has driven us to shift more of our lives online. Findings show that around 40% of the world’s population is ready for the metaverse (United Nations, Jefferies Research 2021), indicating that the trend will most likely be adopted in various facets of life. They include various segments of the population: Gen X created the internet and is receptive to the shift, while Millennials drove the build of the internet and spend much of their time online. Meanwhile, the younger generation – Gen Z – has been living with the internet since they were born. With the use of various technologies in the physical world, almost all human activity can migrate to the metaverse.


Investment opportunities

As more users migrate towards immersive experiences, investment opportunities arise. Digitising everyday life would require a number of enablers involving end devices, chipsets, and optical and displays components. To name a few examples, they include digital sensors, VR (virtual reality) devices, IoT (internet of things), smartphones, and optical lenses. Infrastructure is also key to metaverse development: cloud and computing power and bandwidths are needed for the set-up. Semiconductors are particularly essential, as they are required in almost every device, and cloud or high-performance computing depends on them. With the rollout of 5G, more of these enabled technologies are maturing and ready for commercial use, taking us a step closer to metaverse.


Making An Investment Case: VR device manufacturer

Consider the case study of a China-based forerunner in electronic component parts, including acoustics, optics, microelectronic and enclosure parts. The company is a beneficiary of the metaverse trend, as it is also a major AR/VR headset assembler. The company has superior product development, supply chain management and efficiency, given its dedication to the research and development of VR devices and acoustics. Considering that AR/VR devices are widely used in the metaverse, it is expected that demand for newer AR/VR models will increase as more companies globally are adopting the new trend. Currently, the company is also the sole supplier of the world’s two major VR device brands, which take up a combined 85% market share.


This is one example of the variety of companies that are exposed to the metaverse in different ways, offering investors potential access to massive opportunities that they bring on the back of this fast-growing trend.


Risks

While opportunities may arise from the new trend, we also acknowledge the risks associated with the metaverse. A metaverse could take more than a decade to build, as numerous different layers and technologies are involved. Since we are still at the stage of shaping the metaverse, it is too early to tell the details of its development. Given this, we prefer at this stage enablers that are involved in the digitisation of hardware, as they offer higher visibility.


We are also wary of any potential policy impact on the sector. As we have seen in the past, any emerging technology or trend is eventually subject to regulatory scrutiny to protect the welfare and interests of end-users. Given that the metaverse is expected to bring huge numbers of people together, they may also be vulnerable to security risks, such as fraud, and abuse. Currently, as we monitor the development of the metaverse, we are also on the lookout for any regulatory risks that may impact the theme.


Conclusion

To conclude, we’re cautiously optimistic about the investment opportunities the metaverse could provide for investors seeking opportunities in mainland China, Hong Kong, Taiwan and selective ASEAN markets. There is no question that the evolving metaverse technology coupled with the global shift towards home working, home-based entertainment, and online shopping could pave the way for this new industry to blossom.


We’ll be closely analysing companies within the industry from an ‘on the ground’ bottom-up perspective.


How will the advent of the metaverse change our future? (cfauk.org)

Frank Tsui is senior fund manager. and head of ESG investment at Value Partners.