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David Rosenberg: The metaverse offer investors a new universe of opportunities

Morgan Stanley forecasts the VR/AR market will be worth $100 billion by 2030 and grow fivefold in the decade after that

Despite all of the recent hype around the “metaverse,” it’s still a fairly vague term without much consensus regarding what it actually means. Broadly speaking, it describes shared virtual spaces that simulate the real world. This could mean simple augmented reality (such as Pokémon Go) or full immersion into a science-fiction-like virtual reality (like Stephen Spielberg’s Ready Player One) or any step in between.

However it looks, Big Tech players seem to see it as the future of their industry, which alone creates opportunities for investors given the influx of funding into the metaverse’s value chain. This includes everything directly involved in the space, such as virtual reality/augmented reality (VR/AR) hardware and software, network infrastructure, cloud storage, digital platforms, etc., as well as industries poised to benefit, including e-commerce, advertising, leisure/hospitality, education/health, social media/content providers and countless other areas.

That Big Tech sees the metaverse as the way of the future became abundantly clear when Facebook Inc. renamed itself Meta Platforms Inc. in October. The company indicated in its third-quarter earnings release that it intends to spend US$10 billion this year on its Facebook Reality Labs division and it is “committed to bringing this long-term vision to life and we expect to increase our investments for the next several years,” regarding its spending on software, hardware and content for the metaverse.

Last week, Meta released a prototype of its “soft robotics” handwear — gloves that simulate grasping and touching sensations for virtual reality. We can expect more of these types of innovations to come as AR/VR technology matures. But while Facebook’s (Meta’s) pivot has been high profile recently, Microsoft Corp. has also been immersed in the space, winning United States military contracts for augmented reality headsets and cloud services worth at least US$30 billion over the past few years.

On the civilian front, Microsoft plans to launch a new version of its Teams platform next year that will integrate personal avatars and 3D graphics (though not quite in the virtual reality realm just yet). And Apple Inc. has developed its own augmented reality platform for mobile devices and is expected to be a key player in AR/VR hardware even if it’s slower to enter the space than some competitors (remember, the first iPhone was only released in 2007, eight years after the first BlackBerry device was introduced, but it has since dominated the space).

Outside Big Tech, we also see retailers such as Nike Inc. now creating digital fashion lines to get a piece of what could be a very lucrative market for dressing up personal avatars. On the surface, it may sound like an impractical product expansion, but an estimated US$80 billion is already spent annually on virtual goods in video games — something that could drastically expand if VR becomes part of everyday life.

Though there are seemingly endless possibilities for how the technologies related to the metaverse could be used, it isn’t clear at this point that these won’t just be niche products or fads. Proponents of the metaverse see its development as something much grander in scale: the next iteration of the internet that revolutionizes how we interact, work and play.

But, as of right now, it is hard to imagine VR concerts fully replacing the in-person experience, or seeing how a meeting of 3D AI-powered avatars provides more value than what can be accomplished over webcams (or, again, in person outside of a pandemic environment). Much of the technology is still in very early stages. Widespread adoption of AR/VR technology is still likely a long way off and has many challenges to overcome first.

But with all of the investments being made in this space — Morgan Stanley forecasts the VR/AR market will be worth US$100 billion by 2030 and grow fivefold in the subsequent decade — it is possible certain industries will reap substantial benefits.

Online retailers seem an obvious beneficiary of 3D technology that allows shoppers to assess a product from all angles rather than guessing size and shape from an image or description. And even if not all recreational activities are conducted in a virtual space, there are likely many new virtual experiences that will become more mainstream.

The same could be said for education and health services as well as social platforms, particularly with Facebook leading the charge (which also extends into the advertising space since Facebook is primarily an ad platform).

As metaverse implies, this is a very broad space in which to invest. For those looking specifically at the technologies being developed to facilitate the metaverse, there are several metaverse-themed exchange-traded funds now available, highly skewed towards software (including for gaming), internet and semiconductor players.

There is also the option of looking at the key players developing the hardware, software, data storage and infrastructure, including many of the big technology firms, but also a plethora of small companies looking to get a toehold with niche products and services.

For those who are really convinced this will be a transformational development, blockchain technology and cryptocurrencies are expected to play a role, though we remain skeptical of this space beyond speculative or entertainment purposes. More broadly, e-commerce, social media and advertising will stand to benefit, as well as the leisure/hospitality and education/health industries to a more limited extent near term.

Source: Financial Post