The term “metaverse” means different things to different people. Even the tech titans of today have different definitions as they race to occupy large areas of this sprawling virtual world.
For now, most would agree that the term refers to a visually immersive digital setting in which people can interact with one another. It’s a place where people can engage in many of the things they use the internet for today - socializing, gaming, shopping, and learning - but in a way that feels more tactile and engrossing.
Investors are starting to see the potential of this new wave. The challenge, however, is that the metaverse, like the ocean, is vast. Investing in its potential is difficult because it still isn’t clear where the edges are and how deep it runs.
The solution is to invest in the core technology that powers the metaverse: semiconductors.
Semiconductor Demand is Rising
One of the most crucial components powering the metaverse is semiconductors. Data from Accenture showed that 85% of the semiconductor executives surveyed believe that the metaverse will have a positive impact on their organizations. Almost half stated that it will have a breakthrough or transformational impact. These findings illustrate a key point: an investment in the metaverse is an investment in semiconductors.
Demand is growing. Macroeconomic research from McKinsey forecasts an average annual growth rate of 6 to 8 percent a year up to 2030. This would make semiconductors a trillion-dollar industry by the end of the decade. This growth presents enormous potential for semiconductor companies. This demand, combined with the semiconductor’s industry average gross margin of about 54% compared to the total market average of 36%, suggests that investors are poised to benefit.
The industry is already seeing evidence that McKinsey’s forecast is coming true. A 2022 report from the US Department of Commerce shows that recently “semiconductor fabs operated at over 90% utilization.” Companies are racing to make the capital investments necessary to increase production. In the meantime, it’s clear that demand will remain sustained for a long time as consumers seek the hardware that uses semiconductors to process the massive amounts of data needed to bring the metaverse to life.
Semiconductors Represent a Diversified Investment
An investment in semiconductors offers broad exposure to other industries. Semiconductors have found their way into automobiles, wireless devices, data storage, and industrial electronics. As these industries grow the demand for semiconductors will also rise. Consider that over half of all car sales are expected to be electric by 2030.
Semiconductors also offer investors the opportunity for geographic diversification. Manufacturing occurs in several regions including Taiwan, South Korea, and the US. In fact, the US and Europe have both made it a priority to increase their domestic chip manufacturing capacity. The US has already made some of the investments needed to reach a capacity share of 30% in 2030 up from about 10% today. Europe intends to increase its share from 9% to 20% over the same period.
The capital expenditures behind these plans might explain why a KPMG survey of 151 semiconductor executives shows that “81% expect their company’s revenues to increase in 2023.” Impressively, this growth is expected to occur even as the majority of respondents cited plans to increase spending on capex, workforce, and R&D.
Lastly, semiconductors represent another kind of diversification. Some semiconductor companies are manufacturers because they produce chips. Others are “fabless” meaning that they design and sell hardware devices and outsource the fabrication of the chips to foundries that make the final product. This means that investors can diversify their holdings across different business models within the semiconductor industry.
The Semiconductor Industry is Stabilizing
A semiconductor shortage began as Covid-19 spread. This shortage started when car companies dramatically reduced their orders for semiconductor chips based on the assumption that demand for cars would drop. However, at the same time, other industries that also rely on semiconductors, grew aggressively. People needed more digital solutions and hardware as they spent more time interacting with others virtually.
Later, when the auto industry was ready to increase their orders for semiconductor chips there was less capacity because the chip manufacturers were busy trying to meet demand elsewhere. This shortage was worsened by other circumstances including an ice storm in Texas that interrupted manufacturers like NXP (NASDAQ:NXPI), Samsung (KS:005930), and Infineon, labor shortages in China, and a fire at the Renesas plant in Japan.
These events have prompted the industry to respond with measures that are stabilizing the industry. Currently, there are plans to build 29 new semiconductor factories in places like China, Taiwan, the US, Japan, and Korea. This commitment to strengthening the resilience of the industry is good news for long-term investors.
Investing in the Metaverse
Investing in the metaverse means gaining exposure to the semiconductor industry because these chips are the core of the technology needed to make it all work.
Fortunately, there are easy options for investing in semiconductors while also investing in the other technologies supporting the metaverse like GPUs, telecommunications, and cloud computing.
The L&G Metaverse ESG Exclusions UCITS ETF targets all of these industries. The top 10 holdings include companies in industries like semiconductors, networking, wireless technology, data centers, and of course Meta Platforms. The ETF’s largest exposure is to the US, Taiwan, and Korea.
The Fidelity Metaverse UCITS ETF ACC-USD also aims to invest in metaverse technologies with exposure to video games, e-commerce, search, 3D product design, and biometrics. The majority of the companies in the fund are in the US, Japan, South Korea, and China.
The Global X Metaverse ETF (VR) holds many of the companies found within the L&G and Fidelity UCITS. The two main sectors representing about 90% of the ETF are communication services and information technology. About 85% of the companies are located in the US, Japan, and China.