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Could you profit from the metaverse? What investors need to know

Thirty years ago, Neal Stephenson’s novel Snow Crash introduced the idea of humans escaping from a dystopian nightmare by immersing themselves in a virtual reality world called the ‘metaverse’.

At the time it felt like a vision of the world that belonged in science fiction, along with The Matrix, the cult movie which touched on a similar theme seven years later.

But today the idea that humans can exist and thrive in an alternative virtual world is starting to feel closer to reality.

New era: The idea that humans can exist and thrive in an alternative virtual world is starting to feel closer to reality

Technology giant Facebook believes so strongly in the concept that it is planning to spend $10billion (£7.4billion) this year developing its own metaverse, a virtual world where people can socialise, work and play. Facebook has even changed the name of its holding company to Meta to reflect its aspirations.

The idea of fully immersing yourself in an alternative world has been made possible by the development of virtual reality (VR) headsets in the gaming industry, transporting people to exciting places. 

Augmented reality (AR) equipment will also play a role in the metaverse. AR differs from VR because it superimposes images on to a real setting.

Time to build a whole new virtual identity   

The metaverse will enable people to adopt a digital identity via an ‘avatar’ to play games, see friends, meet new people, attend virtual work meetings, watch events such as concerts and sports matches, and to buy a host of items.

Simon Powell, equity strategist at investment bank Jefferies, says: ‘A single metaverse could be more than a decade away, but it has the potential to disrupt almost everything in human life that has not yet already been disrupted.’

With this in mind, fund managers and investment analysts are excited about the potential investment opportunities that accompany the creation of this parallel digital world.

They point to progress made in the gaming industry where early versions of the metaverse already exist. For example, popular games such as Roblox, Fortnite and Grand Theft Auto have created their own virtual worlds and social networks.

What is particularly striking about these games is the opportunity they have created for players to spend money – something that hasn’t gone unnoticed by some big consumer brands.

Nike, for example, recently filed seven trademarks to sell virtual clothes and trainers, joining the likes of Gucci and Puma which also offer digital ranges.

Virtual real estate has also proved popular, with buyers spending millions of dollars in cryptocurrencies and non-fungible tokens (NFTs) – digital receipts that prove you own something in the virtual world.

Last November a plot of virtual land in the metaverse operated by Sandbox sold for a record $4.3million (£3.2million). It was bought by Republic Realm, an investor in virtual real estate.

Initiative: Facebook believes so strongly in the concept that it is planning to spend $10bn (£7.4bn) this year developing its own metaverse

Initiative: Facebook believes so strongly in the concept that it is planning to spend $10bn (£7.4bn) this year developing its own metaverse

Which companies will dominate the new world? 

While the development of this virtual world sounds exciting, it is still early days. At this point, there is no way of telling which companies will dominate. Facebook has made its intentions clear, but Apple and Google are yet to explain what their vision of a metaverse could look like.

Stephen Yiu is manager of investment fund Blue Whale Growth. He is concerned that Meta (Facebook) will end up spending tens of billions of dollars on its metaverse without any guarantee of success.

If anything, he says both Apple and Google have a natural advantage over Facebook because they already own the two dominant operating systems for smartphones – Apple iOS and Android – as well as their respective app stores. 

These will be key if they choose to build their own metaverses. For any metaverse to succeed, virtual reality headsets will need to move into the mainstream, beyond being a niche hobby for gamers. Yet Walter Price, manager of investment trust Allianz Technology, is not convinced this is going to happen any time soon.

He says: ‘I suspect we are going to see better, more immersive games and less expensive virtual reality headsets. 

‘A portion of the population will play and enjoy these games, but to me it is a bridge too far to say that everybody is going to move over to this next wave of technology and meet up for virtual rather than real experiences.’

He adds: ‘If anything, the pandemic has taught us to crave real experiences and to spend time with people in real life.’ 

Ben Rogoff, manager of investment trust Polar Capital Technology, says that of all the well-known technology companies, Apple has the most potential to bring the metaverse to a broader audience, especially if it launched an augmented reality headset. 

He adds: ‘As things stand it is not obvious what the catalyst will be, but one accessory product from Apple could well ignite the metaverse market.’

While it is not clear what an allencompassing metaverse will look like, and which company will operate it, we do know that it needs to be built and powered.

Yiu highlights Nvidia as a potential winner in this respect. This company, listed on the Nasdaq market in the United States, produces the GPU – a graphics card – which is commonly used in gaming and dominates its market. 

Smart thinking: Gucci offers a range of clothes for avatars in game

Smart thinking: Gucci offers a range of clothes for avatars in game

Yiu adds: ‘If the metaverse is going to come, it will need a lot of Nvidia’s cards. It would be a clear winner, irrespective of whether the metaverse is developed by Facebook, Google or Amazon.’

Rogoff also points to the infrastructure needed to support a parallel digital world, particularly servers, memory and semiconductor chips. Potential beneficiaries include Samsung, Micron Technology (which produces computer memory and storage) as well as chip producer AMD.

Why a technology fund may be the answer

So, is it worth having exposure to the metaverse in your investment portfolio? Some experts believe so, including Nathan Sweeney, deputy chief investment officer in charge of multi-assets at Marlborough Investment Management. 

He says: ‘The metaverse has similarities to the early days of the internet in terms of investment opportunity. The whole concept is in its infancy, but there will be winners and losers along the way.’

Although we are likely to see dedicated metaverse funds popping up over the coming years, Sweeney suggests a technology fund may make better sense.

For example, investment fund iShares S&P 500 Information Technology Sector holds the likes of Apple, Nvidia, Micron and Microsoft in its portfolio. Annual charges total 0.15 per cent and shares in the fund can be bought via major investment platform providers such as Hargreaves Lansdown.

Nick Wood, head of fund research at wealth manager Quilter Cheviot, likes investment trust Polar Capital Technology.

The metaverse represents one of eight themes that fund manager Rogoff is pursuing – an approach that Wood describes as sensible because it is not clear whether the metaverse will actually take off.

Polar Capital Technology is listed on the London Stock Exchange and its stock market identification code is 0422002. 

Annual charges total 0.82 per cent and over the past year it has generated a return of 19 per cent. Other technology funds that may at some stage provide exposure to the metaverse include Allianz Technology (code: BNG2M15), Axa Framlington Global Technology (B4W52V5) and L&G Global Technology Index (B0CNH16).

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