JPMorgan is picking stocks to benefit if the Metaverse takes off in China

Some parts of China have officially promoted Metaverse development plans. Pictured here is a Metaverse exhibit area at an annual services fair in Beijing on September 1, 2022.

China news service | China news service | Getty Images

BEIJING — When it comes to futuristic concepts like the Metaverse, analysts at JPMorgan believe they’ve found a strategy for picking Chinese stocks.

The Metaverse is roughly defined as the next iteration of the internet, existing as a virtual world where people interact via three-dimensional avatars. The hype surrounding the Metaverse swept through the business industry about a year ago. But, at least in the United States, it’s not progressing as quickly as companies like Facebook had hoped.

The social networking giant even changed its name to Meta last year. However, its shares are down more than 50% this year — far worse than the Nasdaq’s roughly 24% drop.

China faces the same consumer acceptance problems as the United States. But the Asian country’s Metaverse development faces its own challenge of regulatory scrutiny, analysts at JPMorgan pointed out in their Sept. 7 report. Cryptocurrencies, a key element of the metaverse outside of China, are also banned inside the country.

Still, the equity analysts said some Chinese internet companies can make money on certain industry trends driven by the development of the metaverse.

Best Choice

Their top picks in the industry are Tencent, NetEase, and Bilibili. And among non-Internet names in Asia, the likes of Agora, China Mobile and Sony have made it onto the list of potential JPMorgan beneficiaries.

This is based on the companies’ competitive advantage in certain aspects of the metaverse, such as gaming and social media.

“The development of mobile internet and AI over the past 5-10 years suggests that a company’s competitive advantage in one part of the technology ecosystem is often more important in determining long-term value creation for shareholders than in which one Part of the ecosystem the company operates,” said analyst Daniel Chen and his team in the report.

Here are two main ways companies can make money developing the metaverse, the analysts said.

Gambling and Intellectual Property

In JPMorgan’s most optimistic scenario, China’s online gaming market will nearly triple from $44 billion to $131 billion.

Tencent and NetEase both have strong gaming businesses and partnerships with global industry leaders, the analysts said.

For example, Tencent has a stake in Roblox, a virtual world games company, while NetEase has partnered with Warner Bros. for a Harry Potter-themed mobile game, the report highlighted.

Digitization of economy and consumption

“The Metaverse will likely double digital time” from the current average of 6.6 hours, the analysts said. They also expect businesses to be able to generate more revenue per internet user.

JPMorgan estimates that the total addressable market in China for business services and software in the metaverse will be US$27 billion, while the digitization of offline consumption of goods and services will account for a US$4 trillion market in China.

In business services, NetEase already has a virtual meeting room system called Yaotai, while Tencent operates a video conferencing app called Tencent Meeting, according to the report.

Tencent also has “rich experience in managing China’s largest social network Weixin/Mobile QQ” and can benefit from selling virtual items within these platforms, according to analysts.

Similarly, Bilibili’s “high user engagement will allow it to leverage rich monetization potential in [value added service]/Virtual item sales over the long term,” the analysts said.

They noted that the app is the “go-to entertainment platform” for Chinese people aged 35 and under, with each user spending an average of 95 minutes per day on the platform in the first quarter.

“Obstacles to overcome”

However, it remains unclear how practicable such efforts will be from a business perspective.

Without naming companies as stock picks, analysts at JPMorgan detailed a number of other Metaverse projects underway in China, such as Baidu’s XiRang virtual world and virtual reality development by Baidu-backed iQiyi, NetEase and Bilibili .

The analysts said virtual reality devices are currently too heavy to be used for long periods of time, and cloud computing capabilities and Metaverse content remain limited.

“We think it could take decades to reach the ‘perfect shape’ of the metaverse,” the analysts said. “While we believe that [total addressable market] Because the metaverse is vast, we believe there are various technological obstacles to overcome.”

– CNBC’s Michael Bloom contributed to this report.

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