- The telecoms and infrastructure sectors will benefit from the metaverse, predicts Credit Suisse.
- But analysts cautioned that many of these rewards are longer-term and won’t be realized soon.
- The bank’s head of global sector research shared his 10 top stocks to buy from this category.
Many have compared the current metaverse fervor to the dot-com rush — and subsequent bubble — of the late 1990s.
According to Crunchbase, as of last November venture capitalists poured an estimated $10 billion into the flourishing metaverse space in 2021 alone, and those in the industry say that was just the tip of the iceberg. Of that $10 billion, a reported $7.5 billion was funneled into gaming, $2.5 billion into online games, $2.1 billion into augmented reality, and $62.8 million into virtual worlds.
Nigel Bolton, BlackRock’s co-head of equities, believes that this momentum is unlikely to decelerate anytime soon.
In fact, he says that 2022 will be remembered as a “gamechanger” for the metaverse, as many big tech firms are expected to follow in Facebook’s footsteps as it dives into the metaverse head-first. But so far, investors don’t seem very convinced by CEO Mark Zuckerberg’s vision — Meta shares plummeted over 25% earlier this month when the company disclosed a $10 billion loss by its metaverse business in the fourth quarter of 2021.
But whether or not investors are enthralled by the metaverse’s allure, there are plenty of companies that are helping to build out this new technology. The only question is, which of these companies will be among the lucky few to profit as the metaverse gains wider acceptance?
That’s exactly what a team of analysts at Credit Suisse, led by Global Sector Research Head Manish Nigam, set out to answer in a note from February 8.
In the report, Nigam and his team identified three main categories of subsectors that would benefit from the metaverse’s expansion, with the first focusing on content creators and the second on hardware and semiconductor companies. The third and final category focuses on telecommunications and infrastructure firms, including telephone service providers, data centers, and cloud IT infrastructure businesses.
“The metaverse has enormous potential to further expand or divert screen time and drive more bandwidth consumption,” wrote Nigam.
While internet traffic is already currently growing at a 30% compound annual growth rate (CAGR), Nigam projects that “even modest metaverse usage could drive a further 37% CAGR the next decade to 20x current data usage.”
“This will support the value of the best-constructed networks in each region, while also demanding upgrades to data centers and network equipment,” he added.
Telecoms to reap rewards later
While it’s impossible to pinpoint the exact timeline of metaverse adoption, Nigam said the goal is clear: to significantly increase the utility of everyday actions like remote work, education, entertainment, and shopping by making these experiences “much more rich and sensory.”
But to realize this vision, he explained that it “would be a significant challenge for access networks, well beyond what networks are delivering today, with radically greater bandwidth requirements at consistently low latency.”
In addition, networks will also face the problem of figuring out how to allow metaverse access from less expensive end-user devices, which Nigam called “arguably the key component necessary to push the metaverse to mass market affordability.”
In any given location, there will most likely be only a few “well-constructed” networks to choose from between FTTH (fiber to the home) and DOCSIS (hybrid fiber coax) systems, wrote Nigam, who believes that these two systems would not only provide better metaverse experiences for consumers, but also monetize utility by raising prices or adding extra service tiers. He also predicts that wireline providers will “predominantly benefit over” their wireless counterparts, although wireless providers should “benefit from AR expansion along the way.”
Yet Nigam cautioned that “delivering a metaverse-capable network would not be inexpensive, and should benefit those with scale, capital, and advanced networking engineering — essentially, the largest telco and cable companies.”
But for dominant industry players, the potential rewards will be well worth the pain, assured Nigam, who expects the metaverse to “drive durable secular growth for high quality wireline telecom companies” in the second half of the decade.
Cloud infrastructure is the metaverse’s “backbone”
Likewise, Nigam believes that the cloud IT infrastructure sector will benefit from metaverse take-off as it serves “as the backbone of realization for the virtual universe.”
Specifically, he believes that the associated cloud and edge solutions will help in “the handling of faster data generation from expanding connected end-points, processing, storage, and analytics.”
Overall, the International Data Corporation forecasts that the total cloud market will grow at a 17% CAGR from 2020 to reach $1.3 trillion in 2025 for the US alone, wrote Nigam, who sees “further upsides to this estimate, especially if the metaverse could be enabled at an earlier timeline for faster computing technology advancement.”
Nigam does not foresee the metaverse as a key earnings driver in the near-term, still calling the potential opportunity “premature.” But in the long-term, he expects the companies that have hyperscalers, better resources for research and development, and technology leadership in the 5G and edge computing fields to be better positioned for capitalizing on the metaverse opportunity.
Likewise, Nigam forecasts great potential for telecom operators as 5G spectrums mature. But first, these operators will be forced to change how wireless spectrums have traditionally been deployed in previous generations of 3G and 4G.
Currently, macro towers “provide the infrastructure for the majority of the world’s wireless spectrum deployment, especially in the US,” said Nigam. But in the future, he believes that small cells will likely benefit more from the metaverse.
“In essence, small cells enable telecom operators to densify their networks (less consumers pinging one antenna) while limiting latency issues as they can be placed much closer to end-users than traditional macro towers,” Nigam wrote. Fortunately, he said that global telecom companies have already started solving this problem by “prioritizing high mid-band spectrum in their 5G deployment plans.”
More tailwinds will also result from the “significant data center capacity influx” expected to begin this year, added Nigam, as corporations like Meta will likely be required to partner with network core builders to upgrade data center infrastructures to achieve their metaverse visions.
If gains for these corporations take as long to realize as Nigam predicts, it’s even more crucial to find the key beneficiaries today in order to maximize profits. Below are 10 stocks that he and his team identified as their top picks in the telecommunication and infrastructure category, each listed along with its company’s ticker, market capitalization, price target, and metaverse theme.