Metaverse – The Next Big Tech Trade?

IS THE METAVERSE THE NEXT BIG TECH TRADE？

The metaverse investment theme is gaining traction, as earnings from stocks like Unity Software (U) and Roblox (RBLX) highlight its explosive growth potential. Not to mention the recent performance of chipmakers Advanced Micro Devices (AMD) and Nvidia (NVDA). While Facebook has even gone as far as changing its corporate name to Meta, to emphasize its newfound strategic focus. But, what exactly is the metaverse？

WHAT IS THE METAVERSE？

The Metaverse is often described as the next iteration of the internet, where our physical and digital realties overlap. A virtual world with the potential to transform commerce, work, communities, and even our global economy. Emerging from a technological novelty to a marketplace for “digital goods” thats now responsible for $80 billion dollars in consumer spending, according to the Wall Street Journal.

At this stage, the term Metaverse is often associated with online games such as Roblox (RBLX,) and VR headsets like the Oculus (FB). But it‘s early, and since it’s so new, I‘d argue it’s nearly impossible to predict how the metaverse will materialize. Though, if Facebooks recent corporate name change to Meta offers any indication, it could be the next major growth catalyst for big tech.

METAVERSE PORTFOLIO

Big tech has the capital available to make inroads during its nascency, but I think most brands will eventually be forced towards developing their metaverse strategy. Not differently than how it has become almost inconceivable for a company to lack a digital strategy within todays existing internet/social media landscape.

With that said, lets look at a handful of names across both hardware and software currently associated with a “metaverse portfolio,” as well as an ETF that could be used to get bullish exposure to the theme.

METAVERSE HARDWARE COMPANIES

Facebook (FB) and Microsoft (MSFT) are developing both hardware and software to power their versions of a metaverse experience. Facebooks hardware efforts are focused on its Oculus VR headset and partnership with Ray-Ban, while Microsoft is targeting the commercial workforce with its HoloLens device.

Presently, the segment represents a small part of each companys business, but with the market for VR equipment is expected to grow from an estimated 9 million units today, to roughly 29 million shipments by 2025, per International Data Corp. As a result, metaverse related hardware could represent a meaningful revenue growth opportunity over the long run.

Additionally, significant investment in data centers and network infrastructure is needed to power this new digital frontier.

This is where chipmakers like AMD and NVDA could play a role. For example, Facebook will use AMD chips in its data centers. An area Facebook is investing heavily in, given an announcement from its last earnings call highlighting plans to increase infrastructure investments by an additional $10 billion during 2022.

METAVERSE SOFTWARE COMPANIES

While major tech and semi-conductor companies are spearheading the development of the metaverse infrastructure, it is the relatively smaller software makers creating the online experiences that are attracting users to this space.

On this front, the three names that stand out are Roblox (RBLX), maker of the wildly popular Roblox online game, Unity Software (U) which builds software for real-time 3D project development, and Glimpse Group (VRAR), a platform company focused on VR and AR software development.

These companies are another way to gain exposure to the metaverse investment theme, but they are more volatile, as seen in the IVx (Implied Volatility Index) column on the tastyworks watchlist below.

METAVERSE ETF

Finally, if you are an investor looking to gain exposure to a basket of these and other metaverse related stocks, there‘s an ETF that has recently come to market. I suspect it won’t be the last fund to focus on the space, but the Roundhill Ball Metaverse ETF (META) is the first. The fund launched in June, currently has $573 million in assets under management, an expense ratio of 0.75%, and counts Roblox RBLX with a 9.6% weight as its largest position.

META ETF PERFORMANCE % RETURN SINCE INCEPTION

Not surprisingly, many of the companies related to the metaverse theme are household tech names and have already experienced significant stock price increases year-to-date. This is not to say smaller companies won‘t emerge and ultimately be available to trade publicly, but keep in mind it’s still early. And remember... Manage risk and size positions appropriately.