Unity Software, Inc (U)

Unity Software IPO’d September 18, 2020. It is primarily a gaming development company at this time, but it’s future lies in V/R and A/R. They project their TAM for gaming at $12B and for V/R and A/R at $17B.
Their market cap is 26.5B.
Growth rate at Dec. 31, 2019 was 42%, at June 30, 2020 was 39%.
Gross profit is 79%. Not profitable but loss as % of revenue is steadily dropping. Customers with over $100,000 revenue are 74%. Employees in R&D are 56% of headcount.
Dollar based net expansion rate at June 30, 2019 was 129% and at June 30, 2020 was 142%.
The Economist calls them a leading platform for developing real time 3D content. I think the future for V/R and A/R is huge. It may be early to invest in them for that reason but I have taken a 4% position.

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Well, my major concern is in their S1 they said more than 50% of games are already made with unity, how far are they from saturating the market, and they are not even profitable. I may be wrong but I’m not sure they can grow as rapidly as other companies discussed on this board.

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@investserious
Time to buy is when AR/VR takes off.
That segment is early stage in hype cycle. Plenty of interesting use cases but lack of adequate hardware and bandwidth limits possibilities, as of now.
Most AR/VR project conversations invariably end up with a discussion on U.

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Well, my major concern is in their S1 they said more than 50% of games are already made with unity, how far are they from saturating the market, and they are not even profitable. I may be wrong but I’m not sure they can grow as rapidly as other companies discussed on this board

I haven’t looked deeply into Unity but this 50% of games metric is relatively meaningless. A lot of hobby games/indie games are made on Unity, but then again so are a lot of mobile games. I want to know what % of game sales are done on the Unity engine. I don’t know what that answer is, but I think that will be a much more important metric.

This is an interesting list of games made with unity.
https://en.wikipedia.org/wiki/List_of_Unity_games#2020

and this is with Unreal
https://en.wikipedia.org/wiki/List_of_Unreal_Engine_games#Un…

To my eye Unreal has a much larger audience there, even if you take fortnight out. I don’t know mobile games as well though.

I asked my friend who is a Senior game designer and has been in the Industry for 20+ years. He has developed extensively on Unreal as well as Unity. He said the following,
re: unity tech
“As far as I can tell, their tech team is run by absolute morons”

re: unity vs unreal
"So the thing about unreal, is epic actually makes their own games with it. They make plenty of mistakes but at the end of the day, they actually rely on their stuff working and so on.
Unity lives in a totally different universe from actual game developers"

re: the market
"I would probably describe it like this:
Unreal owns the super high end hardcore 120 fps 4k developers that aren’t using an internal engine.
Unity owns mobile games.
Between those two extremes is a gradient
But there are definitely exceptions, mobile games made with unreal and AAA high end graphics games made with Unity."

“The fact of the matter is the UE4 is really, really aggressively targeted at shooters. If you’re not making a shooter, maybe it’s not for you, and I think a lot of people are realizing that. But also, Unity is a god damn dumpster fire, so.”

“What I’d really be more curious about is the revenue split between Unity developer subscriptions and Unity asset store purchases.”

hope that is helpful.

-e

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Unity is not a game development company. They make a game engine and software designed to make game development more approachable and easier to port to multiple platforms (desktop, mobile, console, web).

I’ve already posted why I won’t invest. I have experience in this area. The short version is that Unreal Engine is the winner of this war. I do not see any segment where Unity is the better choice for the applications investors would care about, nor will it become dominant in some future application. Perhaps the numbers will change my mind but I seriously doubt it.

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One thing to keep in mind is that these platforms are also being used in other platforms outside of gaming.

Unity has some marketing material on their website where they did some Disney animation work. I’d be more interested in Unity if they can take their engine out of gaming and explore other markets.

Here are a couple examples with the Unreal engine.

Here they are being used in new electric vehicles:
https://www.theverge.com/2020/10/7/21506572/epic-games-unrea…

And here, where Disney is using Unreal engine as a substitute for green screens:
https://www.unrealengine.com/en-US/blog/forging-new-paths-fo…

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Time to buy is when AR/VR takes off.
That segment is early stage in hype cycle. Plenty of interesting use cases but lack of adequate hardware and bandwidth limits possibilities, as of now.
Most AR/VR project conversations invariably end up with a discussion on U.

My family is buying this one now. I also am very bullish about AR/VR (like Tim Cook!) I daresay that if you want to invest in augmented reality now, the two stocks to buy are Apple and Unity. Unity more than Apple, really, but both stocks should ride this wave hard.

I think 5G will lead to a lot more AR apps.

Nintendo might have a big AR hit on its hands with Mario Kart Live. https://www.youtube.com/watch?v=vnT2yJlzeFk

Right now Unity is an obvious and safe pick, as it’s a huge platform stock. It has a duopoly with the Unreal engine of Epic games.

Epic is currently in a mud fight with Apple and its apps have been kicked out of the App store. Big litigation and we don’t know how this will shake out. Already software developers are (allegedly) avoiding Unreal engine because of fear of this litigation. If you’re a start-up trying to decide between Unity or Unreal, you’ll probably go with the one that’s not at war with Apple right now.

What if Apple wins the litigation? That might be game over for Epic, and potentially very good news for Unity. Particularly if Apple can bar Unreal from the App store. Apple apparently hates Epic right now. Microsoft and others are begging the judge to not allow Apple to ban the Unreal engine from its App store. The judge has issued orders that Apple cannot do so during this litigation.

Probably Unreal will stay in the App store. And of course Epic might win the litigation completely. That would be very bad news for Apple. But for Unity? Pretty much status quo, I think. And the status quo is fine.

Unity is growing at 40% a year right now. They are growing as the gaming industry grows. They have tools that companies use to write gaming software. Unity dominates on the mobile side, where most of the growth is. But Unity also has a huge distribution network in place. If you distribute via Unity, the company takes a percentage of your sales. This platform dominance is what makes them a no-brainer. You have this rock-solid base to invest in right now. Plus you have all the optionality as augmented reality and virtual reality develop (and as their main competitor is fighting a war with Apple).

I see Unity as a very safe platform stock, with potential upside in the short term (Epic litigation) and long term (AR/VR dominance). You can buy this SaaS stock for its gaming platform and its predictable 40% growth. While you also own the fantastic upside in AR/VR. And it’s nice for Apple to hate your enemy. I wish it was a cheaper stock (P/S of 30) but I love this business right now.

Taylor

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