Demystifying the Metaverse

The Metaverse: A deep-dive into what many are calling the 2021 buzzword of the year. From Facebook (Meta)’s massive investment, to Microsoft’s medical miracle, to Nvidia’s place as a supplier of all things “high-tech”. Let this be your guide to all things ‘Meta’.

The Metaverse is a hot topic right now. Despite all the buzz, much of the talk is superficial. There are your standard doomsayers, like the New York Post, who recently claimed that the Metaverse will expose us to “terrifying dangers” and that it “must be policed”. Others have gone even further, like this BBC article that claims the Metaverse will lead us to a dystopian future. Then we have this Atlantic article, which begins with the implication that adoption of the Metaverse will bring about a sci-fi “end of the world” sequence. Yawn. 

Others brush off the Metaverse as “a worse version of the internet”, with writer Ethan Zuckerman boldly titling his article, “Hey Facebook, I made a Metaverse 27 years ago.” The subtitle: “It was terrible then, and it’s terrible now.” Analytical minds will question if this Zuck had allocated the same $10 billion in funding as Facebook’s Zuck — a silly, rhetorical question, for a silly, rudimentary article.

In reality, the Metaverse is already changing the way we live. From gaming, to medicine, to capitalism; most of society isn’t ready for what Cathie Wood calls a “massive wave of innovation” that “we cannot even imagine right now”. There are plenty of stocks (and plenty of cryptocurrencies) that stand to benefit from the Metaverse’ wide adoption. Before we get into that, let’s take a brief look into the history of technophobia.

Fear before innovation 

Technophobia has existed throughout history, like the time people said trains would move so fast that they would rip passengers limb from limb — or even melt them with their supreme speed. Or when the 1800’s New York Times claimed the telephone would lead to the end of privacy as we know it. Even the inventor of the radio cautioned that he had “added a menace” to the world with the creation of his invention. That is, until the television was invented, hurting “the radio” and “reading” as well as threatening to “vulgarize” American family life. 

Then came computers, and along with it, computerphobia. Even virtual reality, the precursor to the Metaverse, was criticized as early as 1992, when author Howard Rheingold wrote, “If you are in a virtual world and you have a model of your office, you’ll be able to pick up a virtual shotgun and blow your boss away because it might be amusing.” (Though Rheingold’s pessimistic prediction proved incorrect, he did loosely predict the plot of the game Budget Cuts, and we think that’s pretty neat.)

Hindsight is 20/20

These assertions seem silly, overdone in retrospect. But at the time they were written, they were the real concerns of prominent societal figures. Of course, trains aren’t going to move so fast that they literally melt their passengers. Likewise, the Metaverse isn’t going to lead us into the type of dystopian society that The Giver was based on.

Conversely, the same naysayers who claimed the internet would be a passing fad exist in different form today. Recently CNBC contributor and Ritzholtz capital manager Josh Brown said on an episode of CNBC’s Halftime Report “The Metaverse is going to be mostly for work.” 

He later claimed that Facebook ($FB) wasn’t currently worth investing in, as it wouldn’t be able to turn a profit on its Metaverse-related investments for at least ten years. On his podcast “The Compound and Friends”, Josh doubled down on the hype, naming his first episode, “Miss me with that Metaverse s***.” Notably, Josh is invested in some Metaverse-adjacent cryptocurrencies, like Solana ($SOL1). Speaking of cryptocurrency…

Tied to the Metaverse: The future of crypto

Solana’s co-founder Anatoly Yakovenko stated recently that he believes his cryptocurrency will be one of the main drivers of commerce in the Metaverse and that it offers a chance to “wipe out broken business models”, like internet ad platforms. His isn’t the only cryptocurrency seeking widespread ‘Meta’doption’. Coins like MANA (Decentraland) and SAND (Sandbox) are offering investors a stake in digital ‘real estate’ — assets that can be bought using the namesake coin. 

Some celebrities, most notably Snoop Dogg, are all-in. He currently owns a virtual version of his real-life poolside mansion. Snoop is no stranger to decentralized digital currency. The rapper, influencer, and activist recently revealed himself to be Cozomo Medici, a Twitter-famous whale investor currently holding a $17 million dollar collection of NFT artwork. Although NFT’s aren’t technically a cryptocurrency, they are still a decentralized digital token. And they’re often thought of as the future of artwork if the Metaverse receives wide adoption.

On investability

While Josh Brown doesn’t believe Facebook will be able to turn a profit off the Metaverse, that may not be what CEO Mark Zuckerberg is looking for. The CEO announced earlier in the year that his company, which renamed itself Meta, would be spending $10 billion this year alone on Metaverse-based investments — and much more in the future. That money is going towards things like haptic gloves that will allow the user to “feel” virtual objects. 

Will an enormous investment in the future without the promise of near-term growth create a discrepancy in Facebook’s profit margins? Probably. Does that mean the stock is now uninvestable? Probably not. Facebook is staking out a new claim to growth. Rewriting their story from one that could end with a cultural shift away from social media — into a story that is creating a cultural shift right under our feet. That’s a bet that some growth investors, including Cathie Wood, are willing to take.

But… What is the Metaverse?

Why is it so hard for investors to wrap their collective heads around the concept of the Metaverse? Because it is, itself, an entire universe of concepts. An abstract mixture of virtual reality, augmented reality, mixed reality, and artificial intelligence. The idea of the Metaverse is hard to pin down. But just as the internet is for more than just communication, the Metaverse is for more than just casual gaming and escapism. Rather, the Metaverse promises the integration of the digital world with the physical. That sounds far off, but it’s actually closer than we think.

From Metaverse to medicine

Even though it’s extremely early into the story, the Metaverse is seeing swift adoption in an unlikely sector: Medicine. Though Facebook’s name change attempts to paint itself as the quintessential Metaverse play, Microsoft’s HoloLens ($MSFT) is the product that industry innovator Stryker has chosen as its conduit into the medical Metaverse. 

Stryker engages in several medical markets, including the design of custom, AI-assisted operating rooms. ORs often have very specific needs from equipment to storage space to lighting. Stryker’s partnership with HoloLens allows rooms to be spec’d out, perfected, and drafted by architects without any need to step foot inside the building. 

From ORs to AR, surgeons at Johns Hopkins Spinal Neurosurgery Lab were able to use the HoloLens to complete one of the first augmented-reality assisted surgeries wherein the surgical team placed six pins inside of a patient’s spine. Doctor Timothy Witham said it was like “having a GPS navigator in front of your eyes” — a glowing review. It’s not hard to see why this would be useful. 

The HoloLens allows for a true level-up on the concept of Doctors Without Borders. In areas where medical assistance is limited, patients could theoretically receive top-quality healthcare. For instance, specialized surgeries that they would otherwise have to relocate for. Third-world countries and even remote areas of the United States are likely listening in closely.

A multi-use training tool

Outside of the OR, HoloLens is being used to train medical professionals in a safe, realistic, virtual environment. From teaching covid-protocols. To peeling back anatomically accurate muscle groups. To practicing complex surgical maneuvers. The HoloLens may one day become a staple in the medical industry.

Microsoft’s HoloLens has also been the AR platform of choice for the U.S. Army, which recently signed a contract with Microsoft. The deal bids $21.9 billion dollars in exchange for 120,000 HoloLens headsets. Those headsets will be used for everything from combat training to drone-operation. 

An interesting tie-in, Microsoft’s HoloLens is also being used by soldiers suffering from post-traumatic stress disorder. Clinicians at the University of Maryland use the hyper-realistic sensations of the HoloLens to treat PTSD sufferers with exposure therapy. Treatment is facilitated by a licensed psychologist, who talks the patient through feelings that the visuals and sounds invoke. 

Tech titans tussle

Facebook is investing, Microsoft is innovating, but another name shares perhaps an even closer tie to all things Metaverse: Nvidia ($NVDA). Following their most recent earnings call, CEO Jensen Huang took CNBC’s Jim Cramer through a time machine. Of course, it was just a simulation. A demonstration of what Nvidia, makers of what is bar-none the most graphically-powerful chip in circulation, can do. 

While Josh Brown took ire with Facebook’s estimated 10-year, no-profit investment in the Metaverse, he’s pretty bullish on Nvidia. It’s not hard to see why — their applications span far wider than lofty aspirations for the Metaverse. From smart-fridges and washing machines to smart-cars and autonomous driving start-ups, Nvidia’s chips are indispensable. 

The valuation conversation

If you think the chips are expensive, check out the stock. Nvidia’s price-to-earnings ratio is considerably higher than the rest of its sector, with a P/E of ~80, versus a sector average of ~24. But for growth investors who believe in Jensen Huang’s “big vision”, that doesn’t matter. 

Fundamentally, how can we estimate the earnings potential of the Metaverse, an abstract concept that many don’t even fully understand? Even for those who do “understand”, its use cases are constantly growing. Today’s knowledge is constantly being built upon, and who knows what tomorrow might bring?

The bottom line

The future of Metaverse applications (and subsequent profit potential) are essentially infinite. Microsoft’s AR-assisted surgeries exist in limited capacity today. But how long until the infrastructure is built for remote-surgery to become the international norm? Facebook’s $10 billion dollar investment of 2022 could become the next paradigm-shifting adaptation to everyday life in 2023. After all, it wasn’t long ago that Facebook was a lo-fi website for college students to network. Now, it’s literally both a noun and a verb in the Oxford English Language Dictionary. 

For many investors, a concept as mystifying as the Metaverse deserves no mathematical valuation based on the calculations of yesteryear. Rather, investors are resting their chips on the table and putting their faith in a bet that the Metaverse really is all that it’s cracked up to be.