Thread by @mystockvault

1/ $U
Unity Software thread.
Enterprise Value: $26.8 Billion
Mission Statement: Democratize game development and enable everyone to create rich interactive content.
Investor Relations: investors.unity.com

2/ Unity ($U) is the world’s leading platform for creating and operating interactive real-time 2D and 3D content.

3/ They believe the world is a better place with more creators in it, giving creators the tools to easily build what they want through mobile, PC, Consoles, and Virtual Reality devices.

4/ Their platform is used by game developers, artists, architects, filmmakers, and others, ultimately touching a variety of industries with significant potential.

5/ Right now, Unity Software is primarily a mobile gaming software developer; 71% of the top 1,000 mobile games were made with Unity as of 4Q20.

6/ Unity developers not only make games but profit from them. It operates within two business segments: Create Solutions and Operate Solutions.

7/ Create Solutions works on a monthly subscription basis and offers a wide range of tools for developers, artists, and designers. Contracts typically run 1-3 years and span from large studios to independent designers...

8/ ...They have a free tier moving up to enterprise versions at $2,400 a year per seat.
Operate Solutions is the “expand” part of their land-and-expand business model.

9/ It offers a portfolio of products and services aimed at advertising, in-app purchases, and other tools for growing and engaging user bases while monetizing content.

10/ Operate Solutions accounts for around 60% of revenue but is fairly variable because it relies on the rising or falling popularity of customers’ games.

11/ Unity is basically one part of a duopoly market shared with EPIC gaming's UNREAL engine. If you want a breakdown of how both platforms compare and contrast, here is a good link:
gamedesigning.org/engines/unity-…

12/ The main point I got was: “With Unity, you can harness the power of a smaller team. The unreal engine seems to have been tailor-made for more triple-A studios cranking out games like Gears 5 and other classic blockbuster titles.”

13/ The Leadership Team:
The CEO is John Riccitiello, who was previously chief executive of Electronic Arts (2007-2013), who has become a controversial figure. I urge you to watch a few YouTube interviews with him.

14/ Personally, he rubs be a little the wrong way but there is no doubt the success he had at EA joining the company first in 1997 at COO. Electronic arts is in an elite class of 100 bagger stocks. Riccitiello has a 92% approval rating on Glassdoor with 352 ratings.

14/From Wikipedia: On 5 June 2019, Anne Evans, formerly vice-president in human resources for Unity Technologies, filed a sexual harassment and wrongful termination lawsuit against the company...

15/ alleging that she had been harassed by Riccitiello and another co-worker, and was then terminated over the dispute with the latter.

16/ Riccitiello and controversy aside, Unity has a boatload of talent, and their real strength is the team of 3300+ employees, many of which are regarded as the best software engineers in the world.

17/ John Riccitiello owns 3.4% of the company; total ownership for all Directors and Named Executive Officers is 34%

18/ The Financials & Valuation:

Currently, Gross Margin is 78%
Fortress Balance Sheet with $1.75B in cash and only $123M in debt.
Revenue estimate for FY2021 is $955M (+24%)
Enterprise value is $26.4B so company is trading at 27.6x sales.

19/ Unity estimates its addressable market within the gaming industry is $12 billion. Given its trailing 12 month revenue of $775M, that leaves a lot of room for growth even though they already have a lot of market share, but, the real opportunity might lie outside of gaming.

20/ Unity thinks there is an additional $17 billion in addressable market within industries looking to utilize augmented/virtual reality platforms such as automotive, architecture, engineering, film, TV, and retail.

21/ ABout 9% of Unity’s enterprise clients are outside of gaming leaving a lot of potential growth within this space.
$U recently added a new collaborative tool to help marketing teams and their creative agencies download engineering data to accelerate the creation of ad media

22/ Risks:
In 2020, $U experienced tailwinds in its operating solutions segment due to more people staying home. There is hope that most of the economy will reopen in 2021 and life will go back to normal. Unity could see less demand from creators leading to a revenue slowdown

23/ As you can see from the 2021 estimates, Revenue growth is supposed to slow from +43% in 2020 to only +24% in 2021.

24/ On the flip side, Work from home and in general people sheltering at home more is probably a more durable trend than we think. People are more accustomed to home entertainment now.

25/ Unity's high market penetration means a significant part of the growth will have to come from cross-selling to existing customers.

26/ Optionality and what gets me excited:
VR and AR are just getting started and will grow massively in the next 5-10 years. $U expertise in this area and their tech/platform is positioned to grab a large piece of this addressable market; especially outside of gaming.

27/ Takeaway:

Right now, I don’t have a strong desire to go out and buy a large position in Unity. Valuation is high and revenue growth for FY2021 seems to be slowing a little.

28/ Unity has a lot of optionality outside of gaming but it’s still yet to be proven. I have some questions about Riccitiello. Unity is a recent IPO so I would like to see 2-3 more quarters of earnings. I have a small position just to keep me interested and following along.

@BornInvestor

@jablamsky