The metaverse rapidly moved from the fringes of technology and science fiction into common discourse in 2020 and 2021. But 2022 marked a significant reset of expectations and valuations around just what the metaverse is, when it will arrive, how big it will be and the valuation of perceived metaverse leaders.
In 2023, we’ve entered a more muted environment, where companies are optimizing their operations for profitability and long-term investment projects such as the metaverse are getting re-assessed.So what is the outlook for the metaverse and its promise of a multi-trillion dollar economic transformation in 2023 given this more muted operating environment?
The Hype Cycle
Source: Gartner, 2022
The Gartner Hype Cycle can be an imprecise yet efficient tool for analyzing the trajectory of technology trends and the metaverse is just the latest to follow it. As Roblox went public and Facebook changed its name to Meta in 2021, expectations around the metaverse went vertical and everyone was talking about it.
In the two decades prior to 2020, the term “metaverse” was mentioned 19 times in company transcripts, an average of about once per year, based on our analysis of Bloomberg data. In 2020, the number of mentions increased to 7. And then, the Facebook effect…
The term metaverse was mentioned 813 times in 2021 as Facebook changed its name to Meta. And that number climbed to over 1,800 in 2022. It’s clear that this marked the peak of inflated expectations, and the drawdown in valuations for metaverse companies in 2022 likely reflected this reset of expectations.
Source: Bloomberg, Roundhill Investments
The metaverse is no longer some fringe technology dream, it is something that every company is latching on to and thinking about. But now that it’s a known commodity and the hype cycle has been flushed out, where does it go from here?
From Growth at Any Cost to Profitable Investments
As technology companies optimize their organizations to focus on profitable investments in 2023, the pace of metaverse development is slowing down as companies align the cadence of investments with the timing of potential returns from metaverse platforms. Meta CEO Mark Zuckerberg has called 2023 “the year of efficiency.”
For example, companies in the Ball Metaverse Index, the index that powers the Roundhill Ball Metaverse ETF, are expected to grow their research and development spending just 6.2% in 2023 vs. an R&D Compound Annual Growth Rate (CAGR) of 22.1% for 2020 through 2022, based on consensus estimates, as they reign in spending growth. The group’s Ebitda - earnings before interest, taxes, depreciation and amortization - margin is expected to expand 414 basis points (bps, or 1/100th of a percent) in 2023 vs. a decline of 643 bps in 2022 as they focus on efficiencies, cost cuts and optimizing their operations.
Source: Bloomberg, Roundhill Investments
In this environment, where investments are slowing and the focus on margins is a priority over growth, we are seeing a shifting in the timing it takes to reach the vision of the metaverse but many remain committed to this vision. These changes are evidence that the path to get there is not linear, it will be bumpy and fluctuate based on the macro environment but the north star to which companies are building hasn’t changed.
This is also occurring at a time where post-pandemic behaviors are normalizing, as evidenced by the video game market. Video games are serving as the entry point for many into the metaverse - these are real-time 3D-enabled virtual worlds that support large numbers of concurrent users. And these “proto-metaverse gaming platforms” are feeling the impact of macroeconomic pressures.
It’s clear that gamers are spending less time playing games, focusing their time and monetary investment into a smaller subset of large, blockbuster titles amid the impact of global inflation and crimped consumer budgets. For metaverse platforms, this means that the competitive environment has gotten significantly tougher to engage and retain users. This can make it tougher for them to grow monetization and engagement throughout the year, until the macro environment settles down.
For example, Roblox has seen its user base continue to grow, but the daily time spent per user on the platform and the spending per user has trailed off in 2022. Roblox had just 17.6 million daily active users in 2019 but with the pandemic accelerating trends, it ended 2022 with 56 million DAU. Average bookings per DAU reached nearly $60 in 2021 vs. $39.40 in 2019, but slipped back to about $51 in 2022. Similarly, time spent per day per user fell 3% in 2022 after growing 20% from 2019 through 2021.
The Long View
Longer-term, companies will continue to invest in the core technologies, protocols and platforms underpinning the metaverse and the view for a multi-trillion dollar transformation caused by the metaverse hasn’t budged. But the timing of when the metaverse truly arrives and the pacing of investments to get there may now be a bit slower.
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Source: McKinsey, Citi, Goldman Sachs, Morgan Stanley, KPMG, Roundhill Investments
Large investment banks and consulting firms still see a multi-trillion dollar transformation ahead, even as spending on the metaverse gets pared in 2023. KPMG and Citi see as much as $13 trillion of economic value created by the metaverse in a decade, while even the most conservative estimate calls for $4 trillion of value add.
The Roundhill Ball Metaverse ETF consists of companies leveraged to the future development of the metaverse, a potential multi-trillion economic transformation. For information about the fund and how to invest, visit https://www.roundhillinvestments.com/etf/metv/, or find out more in our latest article, How to Invest in the Metaverse.
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