Franklin Templeton- the metaverse: a multi-decade opportunity

by | May 23, 2023

The metaverse—represented by immersive, shared online virtual worlds—has captured the attention not only of gamers, but also global enterprise across many industries. And it’s unlocking new investment opportunities, according to Dina Ting, Head of Global Index Portfolio Management, Franklin Templeton ETFs.   

While metaverse-related stocks have struggled amid the recently beaten down technology sector environment, innovation from companies and content producers has hardly slowed. Take the recent interest in artificial intelligence (AI), for example. Mentions of AI in earnings calls are up 75%1 so far this year, with such discussions increasingly global and spanning more industries. The new wave of generative AI systems, like ChatGPT and DALL-E, use deep learning networks for innovation in creating content and automating workflows. They’ve also captivated investor attention, imagination and funding.

Last year, just over 100 generative AI-focused US startups fetched US$2.6 billion in investments and estimates for the funding outlook this year are comparable.2 Not only is AI technology key to the buildout and powering of the metaverse, but it’s also an area that appears to be expanding in tandem with that of immersive technology. Both themes boast a growing array of industrial use cases such as data augmentation, chip design, drug design and material science.

To take a step back, for the unindoctrinated, we typically define the metaverse as the next iteration of the internet—the successor to today’s global connectivity and communication methods via shared virtual and mixed reality spaces that are 3D, decentralized and interactive. As the hottest thematic concept for exchange-traded funds in 2022, the metaverse is a multi-trillion-dollar, multi-decade opportunity.

Mimicking internet growth      

While metaverse development is still in its early stages and quite fragmented, change could come quickly. The total addressable metaverse market could reach up to an estimated five billion users—or nearly 63% of the global population—and generate revenues of between US$8 trillion and US$13 trillion by 2030, according to Citi.3 But even before then, 25% of people will spend at least one hour a day in the metaverse, predicts research firm Gartner.4 To put this growth and potential in context, nearly 64% of the world uses the internet now, with most users (three billion) residing in Asia as of last year.5

Of course, the metaverse continuum is not without its skeptics, who fear that there’s currently more buzz than adoption. Granted, the “metaverse” term itself may make it feel surreal. Nevertheless, even in this realm of infancy, the competitive business landscape has changed. Companies are clamoring for the metaverse edge and enterprise investment into the space is growing. We are also already seeing and experiencing a morphing of real and digital worlds (i.e., cycling through the Pyrenees from a stationary bike in your basement).

While entertainment (gaming and socializing) in metaverse worlds is well-known, the technology’s further potential lies in how it can aid industries. A company planning to manufacture a new product can now use more advanced forms of virtual reality (VR) to perfect fabrication plans more efficiently and collaboratively.

The possibilities are immense

Just within the auto industry alone, applications for the metaverse are already proliferating. German vehicle maker BMW is utilizing “digital twin” factories for new design customizations, which allows different manufacturing locations to sync up and learn from each other. And just like Meta’s slogan (“The metaverse may be virtual but the impact will be real”), the significant savings in time and production cost has real value to investors.

Several other new use cases were promoted and unveiled at this year’s CES (the Computer Technology Association’s annual trade show). This included VR experiences for rear-seat passengers; virtual showrooms like that of Fiat and Kia Germany—which allow for customizations and “in-world” purchasing; the use of ChatGPT for sales and feature tutorials; mixed reality technician servicing and haptic devices that simulate touch. The benefits range from futuristic entertainment to efficiencies in inventory management.

In other new use cases, Johns Hopkins University neurosurgeons are already using augmented reality to perform spinal surgery. Last year, the National Aeronautics and Space Administration (NASA) launched a metaverse coding challenge, and the US Army and local law enforcement have also ramped up virtual world efforts for recruitment and instruction. As a global innovation hub, South Korea has several government and corporate initiatives well under way, including Metaverse Seoul, which will give users access to public services, such as permitting avatars to visit tax offices.

While a chatbot didn’t write this particular commentary, the global financial services industry is also tapping into the innovation. Investors looking to add metaverse exposure to portfolios can themselves leverage the potential benefits of AI’s role in index methodology. This is accomplished via tools using natural language processing algorithms to parse large volumes of data that guide portfolio selection.

The Solactive Global Metaverse Innovation Index, for example, employs such a proprietary tool to select, vet and rebalance technology companies that offer metaverse products, including blockchain applications.6 Each stock is screened for sustainability and governance compliance and assigned a relevancy score and ranking. Will Google lose the AI war to ChatGPT? Does the metaverse’s brightest future tilt more toward consumer or industrial sectors? Rules-based ETF strategies tracking such indexes can offer an advantage in that they automatically adjust portfolios to capture optimal metaverse exposure.

While the environment for businesses and end users to move seamlessly between various worlds is still nascent, new networks are already forming. Enterprise use cases in coming years will likely span internal collaboration, client contact, sales and marketing, advertising, events, engineering and design, and workforce training and recruitment. The enhancement of progressive technology and rising computation power has paved the way for a growing number of global firms to develop new ways to profoundly impact societies and global economic growth. We expect that enthusiasm for immersive technology and virtual marketplaces will persist and that the secular growth of digitalization and the opportunity set for driving long-term investor returns will be too big to be ignored.

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