Trade Alert: A Must-Own Virtual Reality And Gaming Platform

I like to buy platforms, as I’ve explained many times over the years. Buying platforms enables you to bet on the success on all the companies and ideas and concepts that get built upon the original platform. Which leads me to a company I want to invest in called Unity Software that provides software solutions to create, run and monetize interactive, real-time 2D and 3D content for mobile phones, tablets, PCs, consoles, and augmented and virtual reality devices. Go to their website to understand better just how they enable game developers to create.

The company enables other companies to build one game an the Unity platform and then deploy it across all the other platforms that people play games on — from their mobile phones, to gaming consoles and most importantly for the future — virtual reality platforms like Facebook’s Oculus.

The financial fundamentals are impressive though the stock is not “cheap”. Growing the topline at 30% per year and with gross margins increasing over the last few years to nearly 80% last quarter, I like the profitability potential in years ahead as more games and ideas for 3D virtual reality get built, with probably tens of thousands of those games will be built using Unity in years ahead. From their 2020 S1 filing, Unity estimates that in 2019, on a global basis, 53% of the top 1000 games on Apple App Store and Google Play were made with Unity software.  In earnings release on a couple weeks ago, Unity said that their market share has increased to 71% off the top 1000 games in fourth quarter of 2020.

But it’s not just gaming: From the last quarterly earnings call, it seems to me that management believes that their growth opportunities are not just from gaming. They are aggressively going after non-gaming segments such as retailers and designers. Volkswagen has recently used Unity’s Forma app to design a virtual e-commerce 3D showroom.

CEO John Riccitiello, on where he sees the company going “Now we believe we’re in the early phases of a once-in-a-generation technology transition, in this case, a world in which the majority of digital content is 2-dimensional and moving to real-time 3D. Those of you who have followed history of technology understand that revolutions don’t happen organically. You need change agents. For real-time 3D, we’re seeing a virtuous cycle of software and hardware innovation change agents. For example, faster GPUs, 5G bandwidth, 4K displays, and new XR devices are making real-time 3D from any endpoint a reality.”

On the other hand, the stock is quite expensive trading at 30x next year’s revenue estimates and they aren’t quite profitable though they will likely start turning a profit in the next two or three quarters and then the earnings per share can really start to grow in 2022 and 2023.

I like the fact that the stock has come down after the company tamped down expectations because of Apple’s new privacy policies will impact many of Unity’s game-making customers. I don’t think these new policies will impact the rate of new games and the long-term revenue potential for the other gaming platforms that Unity enables these games to be played on. And the Oculus/VR reality business that is so important to Unity’s future growth obviously isn’t impacted by Apple’s moves at all.

I think the stock looks like it could be ready to pop back towards its recent and all-time highs again over the near-term. And more importantly, I think this looks like a reasonable valuation and time to build a long-term position in this name. I’m buying about 1/3 to 1/2 as much of U stock as I eventually want to own and will probably buy the next tranche at the first part of next week. Then I’ll look to buy more if the stock were to pull back for us. Which I’m not sure it will.

If I want to buy the best positioned and most Revolutionary companies when we find the next trillion dollar marker place and I’ve found a dominant platform play for The Virtual Reality Revolution that’s about to become a trillion dollar market place — well, I must own this name when the stock is down.