The Metaverse – The trough

The enterprise is where the immediate action will be.

• With both device sales and gaming revenues likely to decline this year, the consumer Metaverse theme remains uninvestible, leaving only the enterprise as a viable proposition for the next few years.
• RFM research (see here and here) has identified that the Metaverse is a potential replacement for the smartphone as a place for users to live their digital lives, but it is going to take many years to come to fruition.
• This means that in the meantime, the companies that are best placed to benefit such as Meta Platforms, Unity, Roblox and so on are going to be driven by their current businesses.
• These are digital advertising and mobile gaming both of which have gotten into significant difficulty this year by either slowing down meaningfully or going into decline.
• Furthermore, following Meta’s $100 increase in the price of the leading device (Meta Quest 2), shipments have fallen significantly meaning a slowdown in Metaverse user growth as well as app development activity.
• Two analysis groups Ampere Analysis and Newzoo are confirming what I have long suspected and have downgraded their 2022 growth expectations for mobile gaming to a decline of more than 5%.
• Furthermore, with interest rates still rising and inflation remaining stubbornly high, the outlook for a sudden turnaround is not great.
• Hence, going into 2023, the Metaverse-related companies are unlikely to report much in the way of good news.
• This combined with the fact that many of them continue to have high valuations compared to the rest of the technology sector means that their multiples could unravel further.
• Consequently, I don’t think that the consumer Metaverse is going to have much going for it in 2023.
• However, the enterprise is a different story as there are use cases that can deliver utility immediately meaning that this is where the focus is likely to be.
• A large part of the reason for this is that in the enterprise, the quality of the user experience is less important given that the user is not paying to have the experience.
• This means that as long as the app or service reduces costs or makes operations more efficient, it will be viable even with the current technological limitations.
• The leading use case here is digital twins where real assets like buildings or factories can be recreated virtually so that they can be tested under certain situations as well as used to manage the real asset more effectively.
• Education, maintenance and medicine are other use cases and it is here that I expect to see developments over the medium term.
• Unfortunately, from an investment perspective, this is going to be a difficult theme as the players tend to be either small private start-ups with a single product or service or larger and more diversified companies.
• Despite this difficulty, this is one area where I am keeping an eye open for opportunities in 2023.