META - METV: Artificial Intelligence Could Greatly Enhance The Metaverse With Time

2023-05-06 11:53:21 ET

Summary

• METV invests in companies that are well-positioned to benefit from growth in the Metaverse.
• The concept of the Metaverse may be hard to grasp now, but this ETF still has some of the more prominent and potentially profitable names in the technology scene.
• With artificial intelligence advancements in the next few years, the Metaverse could offer a more immersive and realistic experience that could attract many investors.
• I give this ETF a Hold as METV has potential for growth in the long term, but its innovative and currently uncapturable nature subject it to speculation and overhype, which could shake up the price down the road.

The Metaverse was announced not even two years ago, and since then has lost some attention from the community. However, this doesn't necessarily imply that development is not occurring behind the scenes. Despite challenges, developers are continuing to find solutions and generally working to materialize this highly-anticipated virtual reality project. In the long term, I think the Metaverse could become an integral part of many people's lives without actually replacing their reality as some think . All this being said, I also think it's quite hard to grasp the full potential of the Metaverse, as it's still very much an evolving concept. For these reasons, I rate the Roundhill Ball Metaverse ETF ( METV ) a Hold.

The Metaverse could gain some serious momentum in the next few years, and recent performance by Meta Platforms ( META ) could be a positive prospect. Though Meta is not the primary holding within METV, the Metaverse is still ultimately a product of Meta. With this in mind, Meta's growth during Mark Zuckerburg's " year of efficiency " could attract more aspiring Metaverse users and enthusiasts in the near future. Meta already delivered strong Q1 earnings which beat analysts' estimates.

Though the Metaverse prospect has been looking up recently, vague but innovative concepts like the Metaverse are prone to speculation and irrational optimism by investors, which could create bubbles down the road. This ETF is also slightly overvalued, a condition that could continue or worsen as certain big tech and AI stocks gain more traction. That being said, the medium term for this ETF could be quite volatile as more investors ponder over these potentially profitable, but treacherous industries.

Strategy

METV tracks the Ball Metaverse TR USD Index and uses a full replication technique. The designated index consists of companies that fuel the metaverse through providing products, technologies, services, or technological capabilities to this future extension of the internet. To be included in this benchmark, companies must have a market capitalization of at least $250mm as well as a $2 million average daily traded value over the trailing 6-month period. Companies included cover a variety of services which include but are not limited to hardware, networking, virtual platforms, and payments. Companies are further categorized based on their level of association with the Metaverse. In this regard, qualifying names are then ranked from "Pure-Play" companies down to "Non-Core" companies.

Holdings Analysis

This ETF invests mainly in technology and communication companies, sparing just 10% to stocks not affiliated with those sectors.

More specifically, METV's holdings are focused primarily on computing components and gaming platforms, as seen in the diagram below.

METV mainly dabbles in United States markets, with non-U.S. regions like China, South Korea, and Japan accounting for just under a quarter of geographical composition. Furthermore, the top 10 holdings in METV account for just over half of the total ETF, which consists of 55 total holdings. This ETF could be considered somewhat top-heavy, which investors might want to consider, as the top holdings are also often prone to the effects of investor sentiment. Alternatively, this could also appeal to many investors as it provides greater transparency and makes it easier to know exactly which stocks you're tracking. METV's top holdings are NVIDIA (NVDA), Apple (AAPL), and Meta, which altogether account for roughly a quarter of the fund.

What Is Next For The MetaVerse

Growth Forecast

The growth forecast for the Metaverse is decently strong, and I believe rapid technological advancements could serve this virtual space well in the long term. At a CAGR of 45%, the global Metaverse market could grow to over $1.3T by 2030.

Strong growth forecasts have led to the emergence of new ETFs similar to METV in 2023. Namely, the iShares Future Metaverse Tech and Communications ETF ( IVRS ) by Blackrock emerged in February. Similar to Blackrock, more portfolio managers could begin to capitalize on the expanding Metaverse with time. This could evidently drive up the price of METV in the long term.

Artificial Intelligence And The Metaverse

Growth and innovation in artificial intelligence ((AI)) could enhance the metaverse experience and ultimately make it a more attractive and profitable investment. Specifically, AI's increasingly uncanny resemblance to humans could allow for more personable and meaningful interactions with Metaverse non-playable characters ((NPC)) at a certain point. Furthermore, AI could also enhance the visual aspect of the Metaverse by making virtual environments highly resemblant of those in real life. This possibility has recently become quite salient, just based on how much AI has already shocked the visual arts industry.

Finding Momentum At The Front Of METV

METV's top-heavy design puts NVIDIA and Apple up to moving the needle in the long-term. Given the current trends and forecasts , these two stocks could provide this ETF with the right momentum down the road.

NVIDIA

NVIDIA has gained significant traction recently, and I think this momentum could move METV in the right direction as both the Metaverse and AI become more distinguished in the tech scene. In specific, NVIDIA recently disclosed new AI cloud services and new open-source safety measures for generative AI. These new measures are referred to as " Nemo guardrails ". With time, I think NVIDIA could become somewhat of a backbone to the AI wave. As AI becomes more sophisticated, the metaverse could ultimately provide users with an overall better experience, which could drive up the price of this ETF.

Apple

Apple could provide METV with stability and momentum down the road, for this technology juggernaut is likely to be at the forefront of most technological innovations and trends. Apple's ability to outperform was just recently reinforced after Apple's earnings beat estimates, and iPhone sales came out unexpectedly high. As the Metaverse becomes a more graspable and lucrative concept, I would not doubt Apple's ability to fully embrace this trend. Therefore, METV's prominent Apple stake is likely to be a fundamental strength of this ETF for time to come.

What Could Go Wrong

Speculation And Overvaluation

Emerging technologies like artificial intelligence can pose significant opportunities for profit, but are also often highly susceptible to irrational speculation and hype. As a result, stocks like NVIDIA and Apple are prone to overvaluation. For example, amid all of the current AI and tech hype, NVIDIA and Apple have recently been trading well above what investors perceive to be their intrinsic values. As the market often eventually corrects such overvaluations, this could cause the price of METV to oscillate heavily in the long term as tech innovations become even more enticing and seemingly profitable. This case may also explain this ETF's high volatility, as depicted below.

Scrutiny Towards AI

AI's abilities to benefit humanity and the Metaverse are seemingly endless, as are its abilities to hurt these same parties. The detrimental capabilities of AI include but are not limited to perpetuating existing biases as well as disrupting the economy and the labor market . The most recent instances of this change appeared in Adobe ( ADBE ) and Chegg (CHGG), whose stock prices plummeted after concerns that AI would put these names out of business. For this reason, AI could receive greater scrutiny, ranging from simple lawsuits to regulation by the federal government . Such regulation could create barriers to development and profitability for the Metaverse in the event that this virtual reality chose to capitalize on AI integrations.

Conclusion

With time, I think the Metaverse could become a hotter investment opportunity as it becomes more of a reality and less of a vision. Before companies in METV even profit from these specific developments, these same stocks could still rake in plenty of cash from ongoing innovations in the tech space like AI. That being said, before the Metaverse momentum really kicks in, I generally don't believe METV will have a significantly hard time staying afloat. For these reasons, I rate this ETF a long-term Hold.

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