Rob Brookby Vice President and Senior Portfolio Manager at American Century
Nalin Yogasundram, Vice President and Portfolio Manager at American Century
Mark Krutty, CFA, Investment Analyst at American Century
Have you ever played Roblox or Fortnite? Or maybe you’ve used an avatar to attend a virtual concert or meeting? If so, you’ve already participated in the metaverse – a virtual space that blends the physical and digital worlds.
Most of us have seen metaverse concepts play out in movies such as “Avatar,” “The Matrix” or “Ready Player One.” But entertainment isn’t the only sector interested in this space.
The metaverse has also attracted interest from investors and companies seeking to be part of this immersive, next-generation version of the internet. While companies involved in the metaverse have the potential to grow, they also face significant challenges and risks investors should understand.
Here’s is an overview of this burgeoning investing theme and the various headwinds companies may face in this new space:
An emerging investment theme
Though the metaverse is early in its growth trajectory, many investors believe it could be the next big investment theme that has the potential to reshape our world. Those investors are betting on a future where metaverse gateways (like Fortnite) support the core elements of our lives: education, work, finances, social life, virtual travel, shopping and entertainment.
One sign of its growing significance is the increasing use of the term in companies’ quarterly earnings calls with investment analysts. From Q3 2021 to Q4 2021, corporate management’s usage of the term “metaverse” skyrocketed more than 500% and held steady in Q1 2022.
Metaverse in action
Several companies have already seized on the metaverse and seek to shape it. A high-profile example is Facebook, which recently changed its name to Meta Platforms.
Another example is Nvidia, whose Omniverse offers a 3-D simulation and a design platform that allows collaboration in a shared virtual world. Lesser-known entrants include companies like Unity Software, which offers tools that enable users to design the real-time, 3-D environments essential to the metaverse.
Digital platform Roblox has also staked out a position in the metaverse with its variety of interactive experiences (games) and in-platform currency called Robux.
Challenges for metaverse competitors
While the metaverse theme has powerful growth catalysts, the companies battling for leadership in this space face significant hurdles:
- Users from all walks of life can enter the metaverse through a variety of games, virtual worlds and platforms. Successful companies must build lasting bonds with users to maintain users’ loyalty as their lives and interests change.
- Keeping users safe from online predators and privacy risks is critical to users, parents of users and investors.
- Having users around the globe is vital to a company’s success. However, strict regulations in a country like China could stunt a company’s growth.
- There are already plenty of competitors, with new ones jumping in, so the risk of new entrants taking market share is constant.
Thematic investing involves significant risk
While the metaverse may be an interesting investment prospect, nothing is guaranteed. Some investment themes will come to fruition while others will not. Likewise, some participating companies will succeed while others will fail.
To avoid investing in a fad, thematic investors should look to strategies that rely on rigorous research and a long-term perspective. Investors also should avoid concentrated risk by diversifying their portfolios across and within the major asset classes.1 But keep in mind that diversification does not assure a profit, nor does it protect against loss of principal.
Are metaverse-related technology stocks right for you?
If you’re interested in metaverse investments opportunities, reach out to your Ameriprise financial advisor. They can help you weigh your options and provide you with personalized recommendations that align with your risk tolerance and help you meet your financial goals