Unity Core Thesis - $U
With all this metaverse talk recently, I thought it would be a good time to revisit my thesis for Unity.
- VR/AR is set to explode in use-cases over the next decade - $U acts as the building blocks, with the majority of VR games/experiences having been made in the Unity engine.
- Gaming, in general, is morphing into a new model resembling SaaS - recurring revenue, season-long subscriptions, in-game content etc. $U will benefit from the uptick and continuation of this trend.
- Similarly, ‘social gaming’ which includes things like Fortnite and GTA will be the new places to 'hang out' with friends - we're seeing more and more examples of this in recent years such as Roblox and Minecraft.
- Could a game built on the $U engine be the next social platform of the metaverse?
So many use-cases outside of gaming…
- 3D workflow for design/architecture/construction
- Virtual training
- Model simulation
- ...much more
Risks to note:
- Rich SaaS valuation
- Negative profitability due to high R&D spending
- Strong competition leading to pressure on FCF
Gaming/the Unity game engine, is core to $U’s business model.
Being a market leader with between 45% and 50% market share compared to Unreal’s 10% to 15% share gives Unity a good head-start as the ‘go-to’.
Competition is, however, very real.
Developer opinion seems relatively split on the better engine. This mainly comes down to preference and the type of games you are developing.
That being said, Unity has a loyal customer base and a wide array of features.
Additionally the trend towards longer game/product life-cycles works in Unity’s favour for the foreseeable future as switching costs are high.
Gaming TAM is large (and growing)
Advertising, data & cloud
Over and above the tools offered to developers via the Unity asset store, Unity has started exploring ads and in-app purchases. This opens many monetization opportunities as well as robust data collection via Unity’s customers (as well as Unity’s customer’s customers - i.e. the end user).
Symbiotic relationships with companies like Snapchat help to extend their advertising and data reach.
Additionally, the underlying cloud infrastructure is key to achieving the above.
VR, AR & real-time graphics
When talking about VR & AR, it’s important to note we are not exclusively talking about gaming. It can include many broader experiences, focused on a variety of industries.
This relatively old twitter thread gives a good outline of the opportunity for $U in VR/AR outside of gaming. https://twitter.com/_inpractise/status/1298237588147523584?s=20
As an example, earlier this year Unity acquired VisualLive - an AR construction platform. And prior to that, they acquired RestAR - a computer vision and deep-learning company specializing in physical rendering within the fashion space.
Another potentially large use-case is the use of real-time graphics in TV & film. Disney’s ‘The Mandalorian’ has famously used Unreal Engine to help with filming. The video below does a far better job than I could at explaining how this tech works.
There remains a huge opportunity for Unity to establish themselves as the go-to for many of the current and future use-cases surrounding gaming, AR/VR, and real-time graphics. This goal will be even more important now the idea of the metaverse is starting to gain some traction.
I believe Unity to be a long-term play, and may be one to stick on the watchlist for the time-being considering its rich valuation.
I will be keen to hear others opinions on the company.
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With each passing day, my conviction for this name grows. So much so, that I'll pitching it in the next The Market contest. I think the company has fantastic application possibilities, just as you've so rightly highlighted.