Is Investing in the Metaverse Wise in 2022?
The metaverse is one of the hottest investment trends in 2022 as large tech companies such as Meta (recently renamed from Facebook) have captured headlines by making big bets on this emerging collection of technologies.
But first, what is the metaverse exactly? Well, the term metaverse is a relatively recent term, coined by author Neil Stevenson in his sci-fi book Snow Crash. The metaverse depicted in this novel is representative of the usage of the term today; an immerse virtual world where citizens can connect and communicate.
Right now, the metaverse exists in a nascent form, with several tech firms offering competing virtual reality headsets that host operating systems which can play a variety of games and apps developed by third parties.
It’s possibly the beginning of something massive – so should you invest in the companies driving their way into this new field?
Nobody can say for sure, and this article is certainly not investment advice. We will discuss the pros and cons for investing in metaverse companies in 2022 through a stockbroker.
Hyped concepts produce asset bubbles
The first item to address is the elephant in the room – asset bubbles. Whenever a completely new tech comes along that captures the attention of the financial markets, they tend to create bubbles.
Nobody wants to miss out on the ‘next Google’ and therefore these new companies attract tonnes of capital.
But so much money chasing such small projects results in sky-high valuations for the companies involved. In the dot-com bubble of the late 1990s and early 2000s, the emerging internet was the driver of much hype and speculation regarding the future of web-based companies. Even companies with uncommercial, unworkable or outright unprofitable ideas found it easy to raise capital at billion-dollar valuations – seemingly becoming valuable companies overnight despite the fact that a critical assessment of their business plan would have suggested their valuation should be much lower.
When we look at the metaverse – most of the main players, such as Meta, Google, Apple have existing, profitable businesses and large market capitalisation. This reduces the impact of excitable investors on share prices but we cannot derive too much comfort from this fact. These companies could still be pumped up to unsustainably high prices.
The issue with asset bubbles is that when valuations are so high – even smart investors who ultimately bet on the correct companies could lose money in the long run. It pays to be the early investors who invest before the bubble is inflated. For the metaverse in 2022, we’re already in bubble territory therefore that ship has sailed.
This should make us cautious about simply chasing the trend.
Tech stocks have experienced a recent tumble in valuations
Our next point follows on from this valuation question by pointing out that the Nasdaq Composite index is currently down 27.67% year-to-date at the time of writing.
Investors who have remained in cash throughout the recent surge in equity prices may be breathing a sigh of relief as they flex their wallets for a potential buying opportunity.
However, the difficulty in timing the market is in deciding how much of a crash gives a discount? If prices were ‘frothy’ and ‘over-valued’ before, then how much do prices need to fall before they represent a true bargain? We will only know this answer with the benefit of hindsight after prices have rebounded and the opportunity is lost.
Attempting to buy the dip is therefore a gamble.
Metaverse could have a few big winners and many losers
In the era of the personal computer from 2000 – 2010, Microsoft reigned supreme with its ubiquitous operating system Windows.
Software licenses for Windows, and the Office document processing programs meant that Microsoft collected cash from almost every PC user at the time. This was seen as a monopoly, but when we step back, it was actually a relatively benign one.
For example, Microsoft placed few practical restrictions on what type of software could be run on a PC, and did not take a ‘cut’ of software sales in exchange for being allowed to be run on Windows.
Contrast this to more modern gatekeepers like Apple’s App store, which is the only official way to download third-party apps onto an Apple device without voiding its product warranty. The Apple store uses its privileged position to effectively ‘tax’ all economic activity that results from a download. It has come fire from a lawsuit recently for alleged abuse of monopoly power.
Having seen the success (and profitability) of the App Store, it is likely that the metaverse guardians of the future will also attempt to act as gatekeepers to the metaverse and extract a financial reward for doing so. This will create a world of extreme financial returns to the firm that establishes the dominant metaverse operation system & app store.
The metaverse will benefit from network effects, meaning that first-mover advantage and ‘winner-takes-all’ will apply.
From an investment perspective, this means that failure rates will be high, and perhaps only one or two companies will see a very lucrative return from the metaverse itself. This prediction reinforces the need to diversify vary widely across metaverse firms to reduce the risk that you don’t hold the stocks that return 10x or even 100x after they crack the business model for success in this industry.
