Think about a virtual world that’s so real you wouldn’t know it’s virtual. Maybe we’re living in such a world already, and that’s called the simulation hypothesis. If you’re in a simulation, and you create another simulation, then you have nested simulations. Elon Musk believes there’s a one in a million chance we’re NOT living in a nested simulation. A simulation that’s built to mimic our own world might also be referred to as a metaverse. Given the broad scope of what a metaverse might be, it’s important we first define what metaverse thesis we want to invest in.
The Social Metaverse
Creating digital worlds is hardly new. Companies like Improbable have been building virtual worlds for a while. Working through all the kinks of a virtual world isn’t easy. Just look at all the controversy surrounding Second Life – the original metaverse – and all the problems they’ve had over the years since they first started selling digital real estate. Users are already complaining about getting groped in Meta’s metaverse, and it’s only a matter of time before someone institutes the “no looking at people for more than 3 seconds” rule. The social metaverse is turning out just as we envision it – a world where everyone shows off their collection of digital assets with no intrinsic value while trying desperately not to offend anyone.
Any company that creates a world where people interact with one another – a social metaverse – is subject to the fickle whims of its users. In today’s day and age, it also means employing thousands of individuals to play referee because trolls will be trolls. Whatever value social media brought humanity seems largely maximized, and we’re not convinced a social metaverse changes that. Our interest lies in the enterprise metaverse.
The Enterprise Metaverse
The original idea of the Internet of Things or IoT was that everything in the world would be connected such that tremendous amounts of data exhaust would be generated and used to run things more efficiently in real-time. A digital twin is the representation of a real-world object or system defined within a virtual world. That’s why it’s important for NVIDIA to complete their purchase of ARM because the latter is building all the sensors we need for tomorrow’s digital twins. At a broader scale, a digital twin might be a factory or even a smart city. The amalgamation of digital twins then becomes an “enterprise metaverse.” That’s a future vision we’d like to place some chips on.
Investing in The Metaverse
As with any disruptive tech theme, we first want to see if any ETFs have been built that give us a broad level of exposure. While the metaverse isn’t exactly new, it hasn’t quite been flushed out enough for an ETF to make sense. Regardless, the first metaverse ETF was launched in June – the Roundhill Ball Metaverse ETF (META) – and it has already attracted over $900 million in assets under management (AUM). Here are the top six holdings which constitute nearly 40% of the fund.
The Top Six Metaverse Stocks – 39.80%
Let’s briefly discuss each of these top six “metaverse stocks.”
As the largest social media company out there, Facebook’s 2.9 billion monthly active users (MAUs) have made it a $900 billion company. Pivoting towards the metaverse means Facebook hopes to build “a set of interconnected digital spaces that lets you do things you can’t do in the physical world.” The picture painted by Mr. Zuckerberg isn’t overly compelling as the company works to “improve virtual and augmented reality as we know them today” and “to help realize the full social potential of the metaverse in the future.” Will this increase the number of MAUs? Will it increase revenue from existing MAUs?
Facebook isn’t a startup anymore, and completely reinventing a $900 billion company by throwing some virtual reality (VR) headsets into the mix seems a stretch. Sure, VR is just one way of navigating the metaverse, but we don’t believe that creating more reasons for people to waste time on Facebook is what humanity needs.
We’ve been invested in NVIDIA for a long time now, and it’s not because of the metaverse. It seems increasingly likely that NVIDIA won’t be successful in acquiring ARM, so that’s a strike against Mr. Huang’s vision. If you’re going to invest in the world’s largest semiconductor company with a $682 billion market cap, don’t do it because of the metaverse.
With a market cap of $2.36 trillion, Microsoft is the world’s second largest company next to Apple (also a “metaverse stock” found in the ETF). Including Microsoft, or any of the FAMGA, in any disruptive tech ETF seems a bit lazy given the company dabbles in so many different areas. More on this in a bit.
Roblox is the first stock that might be considered a pure play on the metaverse, but it also falls squarely into the social metaverse with its platform that allows users to program games and play games created by other users. It’s social media with a much richer functionality set, one that’s growing revenues like mad thanks to adoption by America’s youth. (Nearly half of all children aged under 16 in the United States are on Roblox.) Should the platform fall out of favor with these fickle youngsters, Roblox will then need to rebrand itself and pivot into something else. We prefer platforms that have an Intel-inside business model – like Unity Software.
Unity is the world’s leading platform for creating and operating interactive, real-time 3D content with penetration that rivals Facebook – approximately 2.7 billion MAUs consumed content created or operated with Unity solutions. Games are virtual worlds that can be accessed in numerous ways, from mobile phones to virtual reality headsets. (71% of the top 1,000 mobile games were made with Unity.) Whether or not VR gaming takes off as everyone expected, Unity still stands to benefit. Consumers may stop using Facebook and Roblox, but it’s highly unlikely developers will stop using Unity to create games.
Formerly known as Snpachat, Snap has shown just how much money there is to be made from selling people software that lets them do stupid stuff and share it with their friends. The company now calls itself a camera company, mainly because of their software that manipulates smartphone cameras, and their latest foray into augmented reality is wearable hardware called Spectacles. Frankly, it feels like just another social media company trying to pivot its way back into relevance as fickle consumers jump from one online distraction to another. And on that note, maybe it’s time to look at the next 14 stocks in the ETF which – together with the top six – make up just over 81% of the ETF’s exposure.
The FAMGA – 14.50%
Investing in everything with Google is the misguided idea that the largest companies in the world can provide investors with meaningful exposure to an emerging tech theme. Apple, Amazon, Sony, Samsung, and Google aren’t metaverse stocks, no matter how we try and spin it. These companies represent around 14.5% of the ETF’s exposure
Chipmakers – 11.78%
In addition to NVIDIA, the ETF also includes four other chipmakers – Qualcomm, AMD, Taiwan Semiconductor, and Intel – which have a combined weighting of 11.78%. These companies stand to benefit from any number of emerging disruptive tech themes – robotics, autonomous vehicles, and 5G to name a few – and the metaverse is just part of that, albeit a very small part right now.
The Rest – 15.55%
Software eats the world, and Autodesk is a $57 billion multinational software corporation that makes software products and services for the architecture, engineering, construction, manufacturing, media, education, and entertainment industries. Computer aided drafting is pretty meta, but Autodesk has been doing their thing for a while now. So has Adobe, a $250 billion software company that mainly serves up tools for audio-visual content creation, editing, and publishing. Sea Limited is a Singaporean tech conglomerate, and TenCent is a Chinese tech conglomerate that also happens to be the largest gaming company in the world from buying up or investing in other gaming companies. Other large gaming companies in the ETF include Electronic Arts and Take-Two Interactive. Lastly, there’s Fastly, an edge cloud platform provider.
Of the 21 “metaverse stocks” we’ve discussed so far, we’ve invested in only several, and it has nothing to do with the metaverse. We’re left wondering if perhaps it’s too early for investors to find anything useful from trying to interpret the metaverse label.
What Exactly is the Metaverse?
We only invest in what we understand, so we expect that every thesis can be explained simply. Ball Metaverse Research Partners created and maintains the Ball Metaverse Index which the Roundhill Ball Metaverse ETF is based on, and their attempt at explaining the metaverse can be found in a nine-part 33,000-word primer (about the length of 17 articles like this one). Nobody should be asked to suffer through such a long explanation, much less need so many words to understand something they’re investing in. From this we can conclude two things. First, the metaverse contains elements of just about everything, something that helps explain the ETF’s constituent selection.
And second, the metaverse can be described in many ways which means anyone can become a “thought leader” by saying whatever is on their mind (yours truly as well). We proposed two prongs of the metaverse – social and enterprise – but perhaps we need to give some time for the metaverse dust to settle so we can see where we should actually place our bets.
Setting the definition of a metaverse aside for a moment, we can all agree that IoT, the Internet of Everything, Digital Twins, 5G connectivity etc. will generate a tremendous amount of data exhaust. That data will need to be analyzed as quickly as possible so that we can react at the speed of business. Data will become the central nervous system of every enterprise, and companies that can analyze data in real-time will provide a pick-and-shovel play on the metaverse. It’s something we talked about in our recent piece on Confluent Stock: A Metaverse Big Data Play. We may not be able to agree on a definition of the metaverse yet, but we can probably agree that it’s going to produce a lot of big data that needs to be analyzed very quickly.
At least one other metaverse ETF will soon debut, the Proshares Metaverse Theme ETF, which will track the The Solactive Metaverse Theme Index. There are also some options for foreign investors as well in Korea and Canada. While we may cherry-pick any interesting companies from these portfolios and cover them, we certainly won’t be investing in metaverse ETFs anytime soon. For those of you looking to invest in “the metaverse,” don’t let others define it for you. Put some pen to paper and figure out what the metaverse means to you, then start figuring out how to get some exposure. Or just let our team of MBAs do all the heavy lifting for you.
Before investing in any disruptive tech theme, we need to sufficiently understand it, something that requires peering through the hype to discern what substance there is. The metaverse is a convoluted term that’s being hijacked by a fair number of businesses trying to convince investors they’re part of the next big thing. Investing in the metaverse may be more about waiting until things are flushed out and less about trying to force feed a handful of companies into a framework.
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