Is Unity Software Stock the Best Way to Invest in VR?
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This whole “we’re living in a simulation” theory you hear Mr. Elon Musk talking about should be talked about a whole lot more. Atoms are 99.99% nothing, and everything is made of atoms. Ergo, everything around you is largely nothing. Cognitive psychologist Donald Hoffman believes that our reality today is actually a user interface that hides something far more complex underneath.
What’s even more fascinating to think about is mankind creating our own simulation that’s indistinguishable from reality. That’s called a “nested simulation.” We very well could already be in a nested simulation. Elon thinks there’s a billion in one chance we’re not. Maybe we should spend less time contemplating Kim Kardashian’s divorce rumors and more time thinking about how amazing everything around us is.
If nested simulations are the way forward, we want a piece of that as investors. Perhaps the best way to invest in simulations is with a company called Unity Software (U), the world’s leading platform for creating and operating interactive, real-time 3D content.
About Unity Software Stock
We first came across Unity in an October 2017 article titled Unity Technologies – The World’s Leading Game Engine. In that piece, we noted that “an exit may come in the form of an IPO, something that will allow retail investors to get some exposure to the world’s leading game engine.” Well, that exit is finally here. In September of last year, 25 million shares of Unity Technologies Stock were sold in an IPO that raised about $1.3 billion for the company. That’s $52 a share which quickly became $75 a share on the first day of trading and is now trading at (checks ticker tape) around $150 a share. Even though that may be priced at a lofty valuation, we may start to nibble on some shares because we believe this might be the single best way to invest in virtual reality.
Defining Virtual Reality
In ARK Invest’s recently released Big Ideas deck they talk about “virtual worlds” consisting of video games, augmented reality, and virtual reality. If you think about it, all video games are a “virtual reality.” Anyone who’s ever fulfilled their psychopathic fantasies in Grand Theft Auto knows how extensive virtual worlds are becoming. When the tech world speaks about “virtual reality,” they’re usually talking about headsets that allow people to experience virtual worlds. Well, what if we had a brain-computer-interface that rendered all your sense – everything from vision, to smell, to sight, and to touch? Is that virtual reality then? That’s probably as real as virtual gets, so when we invest in virtual reality, we want to avoid investing in things like headsets that may get deprecated down the line when Mr. Musk plugs us all into The Matrix.
Maybe the best way to invest in virtual reality is by investing in the actual content being displayed as opposed to the hardware used to display it. The platform that’s used to produce more than half the virtual content seen in the world today is made by Unity Software.
Everyone Uses Unity Software
First released in 2004, what started out as a game development platform has turned into much more targeting industry use cases such as automotive, filmmaking, construction, and engineering. As of their S-1 filing, Unity Software segmented the majority of their revenues into two broad areas:
- Create Solutions – subscription fee arrangements for the use of their products and related support services.
- Operate Solutions – revenue-share and usage-based business models that they manage as a portfolio of products and services.
Today, more than half of all mobile games, PC games, and console games combined are built using the Unity Technologies platform. In 2019, nearly 3 billion app downloads a month were developed by creators using Unity. They’re even working with Verizon to render 3D content “at the edge” using 5G.
Build your app once and Unity will deploy and operate it across more than 20 platforms, including Windows, Mac, iOS, Android, PlayStation, Xbox, Nintendo Switch, and of course AR and VR platforms. The company began expanding into industries outside of gaming in 2018, and has made eight acquisitions since the beginning of 2019. More than 1,800 employees – 56% of their workforce – work in R&D which helps them compete against competitors like Improbable.
Improbable vs. Unity
Ninety-three of the top 100 game development studios by global revenue in 2019 were Unity customers, but that doesn’t mean there aren’t any competitors out there. Epic Games, a large private U.S. video game maker, owns the Unreal gaming engine and is listed as a competitor by Unity. One company we’ve come across before, Improbable, is a U.K. firm that’s taken in just over $604 million in funding (Unity took in $1.3 billion before their IPO). A few years back, Unity and Improbable were involved in quite the public squabble which seemed to show that both companies were incapable of working together to rectify their differences instead of airing dirty laundry.
The fact that Unity has achieved such a high level of penetration – 94% of all game development shops – means that unless they royally eff something up, they should be able to maintain their market share and grow it by increasing existing customer spend. Consequently, investors ought to be watching retention rates (currently hovering around 99%) and “dollar-based net expansion rate” which includes the effect of any customer renewals, expansion, contraction, and churn.
To Buy or Not to Buy
We usually don’t like buying IPO shares on IPO day or even the days that follow. We like to give IPOs a cooling-off period, but in this case, we may have let it cool off too long. Four months ago, the company sold shares at a value that institutional investors could all get behind – $52 dollars per share. The market has decided that today, just four months later, the shares are worth +188% more. This premium is nothing more than the market mania you see rampant these days for every stock with a story people can easily get behind. In order to influence our buying decision a bit, we’re going to visit one of our favorite pastimes – a little bit of technical analysis.
Why We Love TA
One tool they won’t teach you in business school is how to read the ticker tape, something also referred to as technical analysis (TA), or what some call “the Chinese fortune teller.” Everyone believes it can predict the future, but nobody can really understand what it’s trying to say. For example, here’s the latest stock price chart for Unity which shows a consistent upward trend with signs of consolidation and a hint of cherry on the nose:
You don’t see it yet? Here’s the latest Point & Figure view for U which makes the consolidation tannins a bit easier to tease out.
That whiff of sandalwood is the P&F chart telling us is that if the price of shares hits $153.96, it’s breaking out. That means we want to buy shares below that price. That’s the sort of incredible value you can get from using technical analysis.
We choose not to use TA because we like the challenge of trying to time the markets without it. If you’d like to learn our TA methods, one of our MBAs will happily walk you through your own charts for the bargain price of $420 an hour. (For Nanalyze Premium subscribers, that price drops to $69 an hour.)
We’re going to buy some shares of Unity and draw a line in the sand, slowly accumulating after our initial purchase. We feel that this would be one company you want to own regardless of how future worlds are rendered to the user. It’s a play on VR, AR, mobile gaming, video gaming, and many other industrial use cases with plenty of room to expand into areas such as synthetic data.
Conclusion
We were initially dismayed to find very few ways for retail investors to get exposure to AR/VR themes. Unity Software may be the one stock to own right now that gives you exposure to AR/VR plus a handful of exciting disruptive themes. The bullish case for gaming and the emergence of capitalism in virtual worlds is the sort of thing we want exposure to as a form of diversification, almost like an alternative asset class. We may look to do a follow-up article digging into the inner workings of this interesting company.
Share
Unity is no 9 in ARK’s holdings (position size: $1.17B – 3.78%). So clearly ARK is very bullish on Unity.
Be wary of “the ARK effect” when they decide to exit that holding: http://nanalyze.donebox.hu/2021/05/ark-invest-appetite-risk/
fear of short-term pressure vs long-term expectations.
Short term pressure driving the price down means buy more. We’re long and buying at (checks notes) $88 per share or under.