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$SPOT, $SQ, $BB, $PLTR, $U, $AMD and More: Investing in the Internet 3.0 / Metaverse
There´s a whole range of companies working on dematerializing and digitizing physical reality (or putting it into the internet).
History suggests this dematerialization is going to translate into an explosion of wealth, by making us better at generating economic value. AI and Blockchain will play / are playing a big role, by making the internet smart and trustworthy.
The hypothetical result of this dematerialization is referred to as the Metaverse. I understand it as the place where physical and digital realities meet.
Understanding the value of the metaverse requires understanding where wealth really stems from. This is a highly abstract concept, but I have observed that the universe we live in is basically information. Everything is made up of atoms, arranged in a particular way. The way in which a set of atoms are arranged is an information package. As it refers to investing, in reading plenty of history I have noticed that explosive wealth generation is often preceded by some kind of “information unlocking event”, or a series of them, in which we humans figure out a new blueprint to arrange atoms in a new way that yields some kind of benefit.
My favorite combination of information unlocking events is Faraday + Tesla, after the invention of writing (that arguably catalyzed the Agricultural Revolution). Michael Faraday figured out how to translate mechanical energy into electrical energy and viceversa. Nikola Tesla figured out the alternate current engine. These two information unlocking events birthed/unlocked the 21st century, by electrifying the world. Without them, we would have never been able to translate electrical energy into motion at scale, meaning we would have had a much tougher time fibrillating energy to the endless array of applications that make modern life possible and we would not be as wealthy as a society.
Internet 3.0 / Metaverse: De-Materializing Physical Reality
In retrospect, what we have seen over the last few decades is computation and networks (the internet) setting the stage for the de-materialization of our physical world and what in a few hundred years is going to in hindsight to look like an explosion of wealth. If we can manage to represent a physical asset in a digital form, then there is a lot that we can do with it in the virtual space, in terms of adding value to our lives and hence, to the economy. This is because in digitizing an asset, we can perform computations on it at a lower marginal cost than otherwise. This allows us to unlock new information packages at a lower cost and then allows us to share them with stakeholders more easily, meaningfully accelerating economic development. This is what the internet has been doing since its inception and hence the wealth that it has generated.
With the emergence of neural networks (AI) and blockchain technologies, we can now add a layer of intelligence and trust, respectively, to the internet. Neural networks enable us to perform cheap predictions at super-human performance and blockchain technologies enable us to not have to trust a counterpart at all whenever we trade something. These two technologies are going to make the world much richer, by making us smarter (better at unlocking new information packages) and making trade really easy and almost frictionless (making us better at sharing information packages). With the addition of AI and blockchain, the internet will go from being a network in which we do some computation and we share information, to a network which also makes intelligent decisions and in which we transact value. These last two properties are going to make the internet have a far bigger presence in our lives than it does today, drawing us further into it, yielding some kind of virtual/physical hybrid space.
For instance, the implications for the financial industry are considerable. Whilst it is true that the industry is heavily regulated, the ease and safety with which we can transact value on the blockchain presents a considerable headwind for market incumbents. Over the next 10 to 20 years, I believe the financial industry will suffer the fate of the industries that the internet has disrupted over the last two decades. Further, the health industry is going to go longitudinal. With the rise of AI, we now make sense of long streams of longitudinal data, meaning that we can gather data about our health on a daily and then translate that into insights that make us healthier. This is a big change from today´s model, in which we only get a snapshot of our health every now and then when we go to the doctor and we often end up addressing health issues when it is kind of late.
Further, the amount of computing that is going to get done on the internet will be exponentially higher than today. This is because neural networks and blockchain consensus protocols require far more energy to be put into them than traditional computing. I believe this will drive demand for semiconductors for a long time, with the occasional speedbump that is natural to the semi industry.
Some Companies That are Building the Metaverse
In terms of business, companies that successfully participate in adding these two new properties to the internet are likely to thrive. Many of them are actually silently building the infrastructure to do so, in ways that are not very obvious.
$SPOT (check out my deep dive on it if you haven´t) to most looks like it simply allows users to listen to music, but it is actually becoming a highly intelligent audio network. In a decade´s time, it is likely to be processing much of the world´s information via audio, whilst getting smarter and smarter. $SQ is doing something very similar with finance.
$BB to most is a failed smartphone company, but it is actually digitizing the auto industry, by enabling a whole data value chain to emerge from what is otherwise mostly a hardware value chain (deep dive). Its real time operating system is embedded in 190m+ cars on the road today (out of roughly 1.2bn in total), increasingly serving as the defining component of these automobiles, whilst ensuring safety.
$PLTR is enabling companies to fully digitize their operations, creating a digital twin for its clients. In doing so, it enables companies to generate vast amounts of data on their operations. $PLTR allows companies to then embed AI and blockchain into their workflows, directly leveraging the data the clients´digital twins generate, making their clients smarter and allowing them to increasingly automate their work, leading to better business outcomes (read more).
$U provides the software to generate realistic 3D digital spaces and charges a subscription fee for it, enabling customers in the gaming and real estate industries. $U is actually generating the real estate of the future and is going to be collecting rents on it - places where we are all going to spend a lot of time, even as we make our way through the physical world.
$GPRO (my deep dive on it), is currently on its way to becoming a content generation ecosystem, increasingly enabling content creators to do their best work with minimal friction. Much of the metaverse is going be based on user generated content and $GPRO is going to play a big role here.
$NVDA and $AMD are providing the hardware to enable all the necessary computation, perhaps more obviously.
A hypothetical list of companies building the metaverse would be quite long. Going forward, I will be deepening in this big picture investment thesis, by doing deep dives on stocks that I find particularly attractive versus their peers. Additionally, there are plenty of blockchain projects out there, but I have a tough time figuring out what the fair value for the underlying tokens is, so I do not invest in them.
Prices, Inflation and Returns
As a final observation, I find that all of @ArkInvest ´s portfolio is pointing to the Metaverse. Their investment thesis makes fundamental sense to me, but I would be skeptical about the valuation multiples of some of the companies in there and further, I am cautious about the impact inflation may have on them and I am quite fond of the ones with pricing power. I am not sure buying companies that are pointing to the Metaverse at any price is a good strategy. Unknowingly, the investments I have made over the past year or so do point at the Metaverse, but I believe I have acquired companies that trade at reasonable multiples and hence present asymmetrical trade opportunities ($BB, $SPOT, $GPRO). This is the kind of investment I will be looking for and sharing with you next.
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These are opinions only of the individual author. The contents of this piece do not contain investment advice and the information provided is for educational purposes only and no discussions constitute an offer to sell or the solicitation of an offer to buy any securities of any company. All content is purely subjective and you should do your own due diligence.
Antonio Linares makes no representation, warranty or undertaking, express or implied, as to the accuracy, reliability, completeness or reasonableness of the information contained in the piece. Any assumptions, opinions and estimates expressed in the piece constitute judgments of the author as of the date thereof and are subject to change without notice. Any projections contained in the Information are based on a number of assumptions as to market conditions and there can be no guarantee that any projected outcomes will be achieved. Antonio Linares does not accept any liability for any direct, consequential or other loss arising from reliance on the contents of this presentation. Antonio Linares is not acting as your financial, legal, accounting, tax or other adviser or in any fiduciary capacity.