Today,
@brianferoldi and I announced the fifth stock in our portfolio.
That said, let's dive into this week's pick.
Unity's mission is "enable more people to be creators."
Gaming is the primary industry it plays in. But the company's platform is allowing creators to build world's in the meta verse in a number of different areas -- which is something we're very excited about.
It's important to understand the business model.
CREATE SOLUTIONS: subscription-based. This is where the games or applications are built.
OPERATE SOLUTIONS: usage-based. This is where (primarily games) are monetized.
Overall, we're big fans of this two-pronged business model (technically, there are also strategic partnerships that bring in money)
And, overall, results have been very solid.
We also like the moat surrounding the company. The network effect is strengthened by all the data Unity can serve it's AI/ML in the operate sphere to place ads (that was, however, an area with huge snafus in the most recent quarter).
Beyond that, switching costs are very high, and this is essentially a duopoly in its niche (with Epic)
Revenue growth has been solid, but net income isn't great. Stock-Based compensation is a huge reason for that. In part, that's annoying -- since it was management mis-steps that led to a significant downward revision (more on that below). But it's also partly understandable, as it was due to the acquisition of Weta Digital (which is also why net cash is basically even today)
While the founders (board member and CTO) are still involved, John Riccitiello is at the helm. he's on the hot seat right now to fix the problems in Operate. But we love the reviews employees give and the level of insider ownership.
There's HUGE optionality -- especially outside of gaming. We're starting to see evidence of adoption well outside of the industry, which is a great sign long-term.
The stock, however, has been a stinker in it's short life as a publicly-traded company. We aren't too concerned, as we don't have enough time to really judge how the stock (and company) have done.
No surprises here: we already mentioned the duopoly status and high level of stock-based compensation.
While certainly not cheap on an absolute basis, it is cheaper than it has ever been
As for that near-term snafu, the way we understand it:
- Management realized in February that Operate revenue wasn't great
- When it checked under the hood, it realized its algorithm had ingested bad data
- To fix it, the company needs to go back -- check all the data manually -- and re-train the ML
- This will cost roughly $110M in revenue for the year
That shortfall explains the HUGE divergence between management's and Wall Street's expectations, and why the stock fell so much.
Here's what really matters to us moving forward
Finally, with all of these things being taken into consideration, here's how the stock scores on our frameworks.
But enough about what we think. What do YOU think of Unity?