Investing in the metaverse: architects, enablers and the dynamics of disruption

Beyond the bandwagon

As long-term investors, we look for opportunities that are likely to remain attractive for years or even decades. Such an approach is imperative in distinguishing investing – in the very strictest sense of the word – from mere speculation or, worse still, gambling.

Increasingly, long-term investing compels us to think thematically – that is, to take account of the major structural trends remolding our day-to-day lives. Digitization has now been the most influential and enduring theme for around half a century, and its all-encompassing impact is clearly set to continue.

The metaverse may mark the next milestone on this journey. It represents a genuine “genesis trend” – an investment phenomenon that occurs when the growth of a technology or a market becomes sufficient to trigger a significant, lasting shift. We believe that understanding creative trends is critical to investing in the metaverse. Maybe the most important point to absorb is that they rely on enablers as well as architects, as a result of which there can be attractions in backing hidden gems and high-profile giants alike.

This means anyone hoping to make the most of investing in the metaverse must explore both the margins and the mainstream. This is not a simple matter of jumping aboard a bandwagon and seizing on the Next Big Thing: it is a complex question of discerning the dynamics of disruption.

A quick lesson from history

Every investor knows the past is not necessarily a guide to the future, but we also appreciate Mark Twain’s maxim that history – while it might not repeat – at least tends to rhyme. To grasp the full scale of the investment opportunities presented by the metaverse, it is therefore instructive to briefly reflect on a previous genesis trend.

The smartphone offers a classic illustration. In January 2007, when the original iPhone was unveiled, Apple’s share price stood at around USD3; by January 2022, with smartphones at the heart of many aspects of daily life, it stood at around USD160.

It does not take an expert economist to deduce that anyone who invested in Apple at the start of this genesis trend has since enjoyed sizeable returns. Yet it is worth noting that Apple was already a household name when the iPhone hit the shelves and that companies that were far less renowned at the time have gone on to deliver even more spectacular performance.

These include Innox Corp, a South Korean manufacturer of semiconductors, and Sanan Optoelectronics, a Chinese maker of light-emitting diodes. Both have generated returns of approximately 20,000% since the iPhone’s launch – not by designing and marketing smartphones themselves but by making the components that allow smartphones to function.

Along with many others like it, this story provides vital context for anyone preparing to invest in the metaverse. It underlines why the architects of a genesis trend should not be regarded as the sole beneficiaries – or even the biggest – in terms of long-term growth.

Enablers of metaverse mass disruption

This truth should influence our thinking when we assess the investment opportunities to which the metaverse gives rise. It is one thing to focus on the likely architects – those businesses, such as Meta and Unity, that have openly expressed their intention to bring the concept into being – and quite another to recognize the enablers whose contributions are prerequisites for overall success.

Consider, for example, augmented reality (AR) and virtual reality (VR). No discussion of the metaverse can ignore these technologies, which are key to rendering platforms wholly immersive and thereby dramatically reshaping how individuals interact with products, services, organizations and each other.

Apple CEO Tim Cook has described AR in particular as both fundamental to the next digital transformation and critical to his company’s future¹. Again, though, it would be misguided to believe the largest corporation on the planet is unique in holding this view: as with the iPhone, Apple cannot do everything itself.

Similarly, take computer hardware – the basic building blocks of any digital system. The metaverse will exert enormous and varied demands on this market – predicted to be worth around USD1.5 trillion by 2025².

For example, some businesses make processors. As we have already seen, others make semiconductors or LEDs. Others make motherboards, power supplies or even ventilation fans. Every space will see the emergence of market leaders as the metaverse takes shape.

Creativity, connectivity and currency

Artificial intelligence (AI) will be another principal enabler. It will equip the metaverse’s architects with “scaffolding”, greatly assist the creation of virtual environments and help develop sophisticated forms of engagement and storytelling for users.

The global AI market was valued at around USD50 billion in 2021 and is expected to be worth more than USD360 billion by 2025². Specifically outlining its role in supporting the metaverse, Meta CEO Mark Zuckerberg has labeled AI “perhaps the most important foundational technology of our time”³.

New levels of wireless broadband connectivity will also be essential. Tapping into higher frequencies that is predecessors could not access, 5G technology is poised to reduce latency – the time between a device making a request and receiving a response from a server – to almost zero.

Here, too, the past is enlightening. Companies that were at the forefront of earlier telecommunications revolutions have produced strong investment performance over lengthy periods – as shown by 2G pioneer Qualcomm, which has seen its returns rise by more than 20,000% since it devised a groundbreaking protocol for facilitating data flows in the early 1990s.

Finally, cryptocurrencies may have an important part to play. These virtual currencies, which exist only digitally and have no centralized issuing or regulating authority, are likely to facilitate all metaverse transactions, as will the blockchain* technology that underpins them.

Rising above the noise

Many potentially game-changing innovations are surrounded by noise. The clamor often turns out to be unjustified, with the din gradually subsiding in the face of unrealized promise.

That is why future-oriented investors are already looking for relevant architects and pioneers. As already mentioned, they thereby want to grasp the dynamics of upheaval - the fundamentals of technology-driven upheaval, the triggers of comprehensive leaps in the development of our lives and work, the hidden cogs of the high-tech wheel.

This is a difficult task because many answers are not obvious. As indicated earlier, investing more and more in Apple or Meta, or funding the companies that might one day be on par with these giants, is not the same thing. 

In the end, it makes a big difference between occasionally controlling the stock price of a recognized tech giant and determinedly pursuing startups that unobtrusively raise venture capital and private equity. The metaverse will perhaps show us more clearly than other creative trends before that concrete use cases and expertise are needed for long-term investing.

Dr Henning Stein is Invesco’s Global Head of Thought Leadership and Market Strategy.