CONTRIBUTORS
Marcus Weyerer, CFA
Director of ETF Investment Strategy EMEA
Franklin Templeton ETFs
Key takeaways:
- Last year, artificial intelligence (AI) and metaverse-related stocks outperformed the broad technology sector by double digits.
- The Application Software and Interactive Media sub-industries were the main drivers behind the 71% performance of the Solactive Global Metaverse Innovation Index in 2023.
- Applications span a vast spectrum of use cases, from entertainment and retail to government and military.
- AI has emerged as a key technology that is improving, and in some cases transforming, the metaverse user experience.
The metaverse provides a decentralized, blockchain-based virtual realm in which users can engage in immersive social, work, business and leisure experiences. In recent years, major corporations have embraced the metaverse to enhance efficiency in planning and manufacturing operations. For instance, leading German automaker BMW is leveraging NVIDIA’s Omniverse to simulate factory setups well before actual production commences. This proactive approach enables the company to detect and address issues as well as streamline processes and mitigate inefficiencies—ultimately saving real-world costs. Industrial metaverse usage may lack the glitz and entertainment of the consumer metaverse, which can feature leisure activities such as virtual beachside cafe get-togethers. But industrial use is projected to contribute significantly to the overall growth of the metaverse market, which could approach US$500 billion by the end of the decade.1
Both branches of the virtual world are increasingly tapping into another powerful technology—AI. AI not only enhances the quality of the user’s experience but is also transforming it. Consider a virtual cafe social for a moment; the more accurate your friends’ facial expressions and mannerisms are, the more authentic the interaction becomes. Additionally, perhaps you prefer a bustling atmosphere with other “people” frequenting the cafe. Here too, AI can help create a more life-like environment where you can interact with digital humans rather than stale, more traditional non-player characters (NPCs). Furthermore, if actual humans are indeed virtually present, you can engage with them in your preferred language due to AI advancements.
In South Korea, an early AI adopter, AI-generated K-pop bands are storming the charts and conquering the hearts of viewers. Beyond entertainment, Seoul has committed an initial US$180 million to building out its metaverse infrastructure. Technology research firm ABI Research expects that by 2030, some 700 cities globally are going to rely on the metaverse for eGovernment services, virtual tourism and the provision of remote working spaces.2
AI applications are arguably even more significant in the industrial metaverse, not the least in monetary terms. An example is Surgical Science, a provider of equipment and software for medical procedure simulations. Their simulations have shown substantial error reduction rates following training. Beyond medicine, AI-driven environments can accurately replicate real-world scenarios, making training more efficient, effective and essentially risk-free. For example, last year, the UK’s Royal Air Force partnered with an augmented reality (AR) technology firm to enhance their air combat training.3 The simulations not only cut costs and environmental impact but also significantly improve safety. With the help of AI, pilots wearing AR headsets can even train in close-range combat with full-color and high-resolution visuals, simulating scenarios practically impossible to replicate in traditional training setups.
Solactive Global Metaverse Innovation Index vs. Nasdaq-100 Index
December 2022-December 2023
Source: Bloomberg, as of December 31, 2023. The Solactive Global Metaverse Innovation Index represents companies that provide or use innovative technologies to offer products and services around the metaverse and supporting blockchain technologies. The Nasdaq-100 Index is a stock market index made up of 101 equity securities issued by 100 of the largest non-financial companies listed on the Nasdaq stock exchange. It is a modified capitalization-weighted index. Past performance is not an indicator or a guarantee of future performance. Indexes are unmanaged and one cannot invest directly in an index. Important data provider notices and terms available at www.franklintempletondatasources.com.
Investors looking for high flying returns might also consider the metaverse. For the technology sector, last year was a comeback year, and metaverse and AI stocks did particularly well. With a 2023 performance of 71%, the Solactive Global Metaverse Innovation Index outpaced the Nasdaq-100 Index by some 17 percentage points.4 Overweightings in the application software and interactive media sub-industries, and substantial exposure to AI-related stocks nearing 40%, helped boost the Solactive Index’s performance. Despite the bold index composition, the metaverse index is only marginally pricier than the Nasdaq-100 on a cash flow basis (price-to-cash flow of 24.1 vs. 22.3), but a whopping 50% cheaper on a price-to-book basis.5
We believe that the metaverse’s position at the intersection of blockchain technology and AI continues to present compelling investment opportunities. As recent performance demonstrates, these sectors have remarkable growth potential. With its diverse applications across industries, an AI-powered metaverse promises to reshape how we interact, work and do business in the future. Investors can participate in these structural trends if they can stomach the innate volatility that comes with new technology investing.
Endnotes
- Source: Statista Metaverse Worldwide Outlook, October 2023.
- Source: ABI Research, October 2023.
- Source: Red 6, June 20, 2023.
- Source: Bloomberg, as of December 31, 2023. The Solactive Global Metaverse Innovation Index represents companies that provide or use innovative technologies to offer products and services around the metaverse and supporting blockchain technologies. The Nasdaq-100 Index is a stock market index made up of 101 equity securities issued by 100 of the largest non-financial companies listed on the Nasdaq stock exchange. It is a modified capitalization-weighted index. Past performance is not an indicator or a guarantee of future performance. Indexes are unmanaged and one cannot invest directly in an index. Important data provider notices and terms available at www.franklintempletondatasources.com.
- Source: Bloomberg, as of February 2024.
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