Thesis - Unity Software is the maker of a leading game engine for 3D, virtual reality and augmented reality games. As mentioned before in this newsletter, gaming continues to be a large and growing market globally. Unity Software provides an interesting agnostic play on the industry, as they build software for game makers, rather than being a game publisher themselves. The business is broken into two main sections. The first they call Create Solutions. Think of this as a suite of tools that help game developers more easily and quickly create common parts of 3D games. This business operates on a Saas business model, with customers paying a monthly recurring fee. The second main business unit is called Operate Solutions. These tools help game studios manage, market and monetise their games. This half of the business works on a revenue-share model. As games perform and make money, so does Unity. The business also make a smaller amount of revenue (<10%) from partnerships and services. Unity’s engine is dominant in mobile games, the fastest growing part of the gaming market, with 71% of the top 1,000 mobile games using the software. The management team are keen to point out that the software has use-cases across a number of other industries. They are investing heavily in sectors such as architecture, engineering, manufacturing and cinematic video. To underline this, they recently acquired Visual Live, a company in the architecture and construction space. Unity was one of a number of hot IPOs last summer, having jumped 31% on its opening day. In the course of 12 months, the company’s value increased from $16bn to almost $40bn at the turn of the year before heading back down to ~$30bn. This is a volatile stock, with high expectations. At almost 40% off its all-time highs, it might become interesting for investors who want exposure to the gaming industry.
Financials & Performance - For the full year 2020, Unity announced revenue of $772 million, up 43% YoY. They have strong gross margins of 79%. They have dollar-based net expansion of 138%, showing they increase revenues from existing customers. They have 793 customers which are generating more than $100,000 in revenues and 121 that generate more than $1m. The management team have stated 30% revenue growth as a steady long-term target.
Risks - Valuation continues to be a risk. As with many of the technology stocks, this is still richly valued even after its recent drop. The market cap reflects a large amount of optimism in its ability to grow into adjacent markets. Whilst this is definitely a target, new markets do not yet make any meaningful dent in revenues, so this is something to look for in future earnings reports.