An Update on Unity $U
Even though I sold Unity shares in my personal portfolio, @brianferoldi and I continue to hold them in our portfolio here on Commonstock. Here's a review of the company's most recent quarter.

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Overall, topline growth was nice, but I was VERY frustrated to have media NOT factor out the role that IronSource played in that top line growth
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Operating margins were headed in the right direction on a non-GAAP basis, but the company continues to lose money on an accrual (net income) and free cash flow basis
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This was a bright spot: areas outside of gaming continue to adopt Unity Create -- especially digital twins
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But my oh my is Stock based compensation big. Acquisitions play a huge role in this
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Over just two years, shareholders are going to be diluted by about 30% (the inverse of a 43% increase in shares)
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One reason the stock is trending down -- guidance was well short of expectations. Management said they were being prudent in NOT expecting a recovery in in-game advertising during the year
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Here's what we'll be watching moving forward
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What did you think of the quarter?
Joey Hirendernath's avatar
@investor_from_nepal @interrobangbros @parrot what were your thoughts on this Quarter?
Steve Matt's avatar
@joeyhirendernath Woof. About to get on the train and lose service but I agree with Brian. I really trust management anymore. I’d sell if it was worth it but my investment is so far down, I may as well just hold.
Isaac Melin's avatar
@interrobangbros I’m in the same boat. Absolutely no plans to add to my position. Could sell but it’s such a small portion of my portfolio 🤷🏼‍♂️
Joshua Simka's avatar
I wonder if $U, which calls itself the "world’s best real-time development platform" and is used to make more than 50% of the world’s video games, suffers from the same malaise as Twitter did during its life as a public company? A marvelous, meaningful product, but nothing to gain for shareholders.
Benjamin Tan's avatar
Post merger with Ironsource, $U is even more embedded with the state advertising and they cannot outrun industry-wide weakness, which may or may not persist for the rest of 2023. It seems like the only relevant, near-term catalyst is profitability inflection, which is more or less a managed outcome when they pull back on spending and reduce headcount. While non-gaming segment under Create is a bright spot, it is still small ($250mn run rate perhaps) and certainly pales in comparison to advertising ($1.3bn).

The above mentioned 43% dilution is a bit misleading: $U issued shares in Q4 2022 to consummate the Ironsource merger. An apples-to-apples look at dilution should be to look at the share count between Q4 2022 and estimated Q4 2023
Nathan Worden's avatar
I sold all my $U for a 72% loss at $27.16. They're currently at $29.59 (8.9% higher)

Not looking to buy back in though.
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RollerCoasterRide's avatar
Hi, full disclosure: I wasn an employee at Unity from 2018 until last years 2022 layoffs AND I still have about 300 shares (underwater).

Here is my observation: The employees at Unity generally had not come from companies where they had existing stock holdings and savings. They relied on the stock compensation to exist and to meet the insanely skyrocketing costs in San Francisco and Seattle. This is pure speculation based on my own life and the situation I knew some at Unity were in based on conversations before I left Unity. But hear me out, and tell me if stock analysts factor these sort of things in when figuring out what stock rise and fall actually means about stock intrinsic value and perceived trends.

Rather than holding on to stock, like typical investors, people who got the stock as part of their compnesation were more likely to sell it, often as soon as it vested, out of necessity. THEN add on all the people laid off. While they can then sell at any time, if you can't find a new job fast, and you are living paycheck to paycheck, you have to sell your stock.

When I was employed, as someone somewhat naieve about stock ownership, I remember being shocked that you couldn't sell during certain phases. People just wait until the window opens, desperate to sell stock to pay off debt they incurred when it seemed like the sky was the limit.

Example: You might have 300 RSUs (or the original equity grant--with vesting cliffs that will tie in to the day they went public and cause another sell-off that means NOTHING about the actual value of the stock or employee opinions about it).

But anyhow, so, your 300 RSUs seem to be worth 60k because the stock is at 200 (which it was in November 2021) Say you can't cash it in THEN due to all the employee trading rules, so you foolishly use a credit card to update your kitchen for example, thinking that the sky was the limit and the stock is only going to keep going up.

THEN everything crashes, I mean, worst case scenario, as it did this spring. From 200 a share to 35. Your presumed 60k is now worth around $10K.

Now, you have credit card debt. Or you cashed out when you legally could (at say 140 a share), and you owe taxes. Taxes you assumed you could pay in 2023 by cashing out shares, saving on the capital gains tax far more than you calculaed you would spend in interest on credit cards etc.

You can't bear to sell because hey it's going to come back up right? Then you wait. Hey it went up above $40 this Feb. You wait. But you can't sell until the earnings report. Then suddenly you and all the broke hovering Unity folk all had orders in to sell at the same time. Because they need it to pay taxes for the stock they sold the year before. And yes, the wise thing would have been to pay the tax at that time, but some calculated it made sense to wait. Or they need it to pay that credit card or attempt to. So anyhow, my point is, that when stocks go down after the earnings report period, when employees are finally allowed to sell, , it could just be because those employees got their stock for "free" and desperately need to liquidate it any price. And the ones who were laid off still may have had caches of stock they sold to get through the layoff, and now they have to sell the rest of it to make ends meet. Or pay the tax bite on the shares they sold, betting the stock would recover and be worth holding til time to pay tax (a sad and incorrect gamble).

We may have very high opinions of the company, I do, as a former employee. And yet we have enormous financial pressure to sell. All our eggs are in this one basket.

Even though I was laid off! I think it's an excellent company and I am trying to hold on to my small amount of stock as long as I can. However, being laid off has caused some of the spiral I described, I am speculating that this may have happened to others, and thus I think that it is a good buy and that people should not take meaning when stock goes down after partially positive earnings reports.

They should realize that employees who can't wait to cash out their stock for financial reasons, cannot do it until after the earnings report. I am all for employee stock ownership. And I think Unity will do fantastic eventually. (I was there almost 4 years). I have no insider knowledge about the technology, upcoming trends, etc, as I have been out of there for almost a year now, and I don't talk to anyone at the company any more in any relevant way.
Are these new insights?
Brian Stoffel's avatar
@gametech Thanks for the look under the hood at Unity
Nathan Worden's avatar
@gametech Oh wow, this gives great insight into the mechanics of forced employee selling. And for a company like Unity that was offering a lot of stock-based compensation to pay employees, it shows how this can turn into a negative spiral for stock price.
Nathan Worden's avatar
@gametech What was your position at Unity, if you don't mind sharing?



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