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So, let's talk about Unity Software, ticker symbol U. I'll try to keep the jokes to a minimum.
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Unity IPOed on September 18th 2020 at around a $20 billion dollar market cap, closing at around $73
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dollars per share. During its initial rally over the holidays, ARK Invest slowly averaged up until
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Unity represented about 1% percent of all of their actively managed dollars. As its
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price crashed after the first week of February, they began aggressively loading up on the stock.
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Today, Cathie Wood is holding over one and a quarter billion dollars of Unity Software
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across ARKK ARKK, ARKW ARKW, ARKQ ARKQ and ARKX ARKX, making it ARK Invest's 8th biggest
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position overall, out of about one hundred and seventy-fivestocks. Over the last month alone,
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Cathie Wood has increased her position in Unity Software by well over 10% percent,
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while her total assets under management shrank by more than 10% percent over the same period.
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To me, that speaks very highly of Cathie Wood's conviction in Ticker Symbol:
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U. This is going to be a fun episode. (Sorry)
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The thing that I think all of Cathie Wood's biggest positions have in common
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is that most investors are misunderstanding at least part of the bigger picture,
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so I'd like to talk about what Unity Software does today, how it fits into this bigger picture,
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and some of the things that make it a unique competitor and investment. Full disclosure,
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I don't own any Unity stock except through my sizeable position in ARKW, but may pick
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up shares in the very near future as a result of this research. Let's dive right into it.
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Today, Unity Software allows developers to create 2D and 3D interactive experiences for every type
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of platform, including PCs and Macs, gaming consoles, and mobile devices. Their primary
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audience right now is game developers, but I'll show you in a bit that they're extending
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their development ecosystem to support much more than just video games. The thing Unity's
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platform focuses on is lowering the barrier of entry to develop these visual experiences,
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kind of like how Shopify, ARK Invest's 4th biggest position, lowers the barrier of entry to create
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online businesses. Both, Unity and Shopify, remove most of the need to learn how to code
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in order to participate in their respective markets. In Unity's case, that means artists,
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storytellers, and other types of content creators can start bringing their vision to life much
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faster instead of having to learn a skill that's very different from their existing skillset.
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Also, Unity's business model and their software are very scalable. Unity supports everyone from
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huge studios that make multiplayer games requiring powerful computers all the way down to individual
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creators who just want to make a simple mobile game. The way I see it, Unity
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Software's business falls into three categories. The first is called Create Solutions. These are
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the tools that developers, artists, designers, engineers, or architects use to create the actual
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2D or 3D content. Unity's core products are available for free for smaller developers,
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which include the development platform itself and the visual scripting tools that let creators
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start building their content without needing to code. The second category of Unity's features
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is called Operate Solutions. These are all the things related to operating a game that aren't
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necessarily part of the core gameplay loop itself. This includes things like hosting
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services for multi-player games and supporting voice chat between players. This also includes
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tools that help creators monetize their content through advertisements or in-app purchases.
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There are two special things about Unity's Operate Solutions. First, even if a creator isn't using
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Unity's Create Solutions to build their actual game, they can still use Unity's Operate Solutions
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to manage all of these other features around it. In fact, Unity has a service called Unity Ads,
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which is its own mobile advertising platform and auction system that anyone can plug into and
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directly compete with Google's ad services in that space. Second, Unity follows a revenue sharing
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model, where they take something like a 5% percent cut of the client's revenue when it reaches
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a certain threshold. That way, Unity directly scales with the revenue growth of their successful
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clients, which keeps their incentives aligned with their customers. I really like that.
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Speaking of aligning with their customer base, Unity's platform follows
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a develop-once-deploy-everywhere model where creators can deploy their work to Playstation,
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Xbox, Nintendo, MacOS and iOS, and Android and Windows. This is a big selling point.
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That means different operating system and device makers need to enter into long-term partnerships
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with Unity Software, to ensure that creators don't have to learn to write any extra code
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just to get their projects onto one specific platform. As a result,
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Unity's platform has become an industry-standard content creation tool. By their own estimates,
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over half of the top 1,000 mobile games in Apple’s App Store and on Google Play
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have been created using Unity’s solutions. Additionally, its platform has been used to
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develop nearly 60% percent of the AR and VR content, including viral mobile experiences
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like Pokemon Go. In fact, something like 90% percent of the content on emerging AR platforms
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is made using the Unity engine. I'll get back to this 90% percent number later in the episode.
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Going back to the strategic partnerships I mentioned, 94 of the top 100 global game
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development companies are Unity's customers, including Sony, Nintendo, Microsoft,
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Electronic Arts, Tencent, Activision Blizzard. Unity's Create Solutions,
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Operate Solutions, and Platform Partnerships work together to form an end-to-end solution that isn't
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easy to replicate by other visualization engines, making it a pretty big moat.
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There's one more thing I want to say about gaming before I talk about the
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other industries that Unity operates in. It turns out that, over the last decade,
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the gaming industry in general has been growing by about 10% percent per year and mobile gaming
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specifically has been growing by almost 25% percent per year. So, gaming is a huge, rapidly
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growing market that's going to soon surpass $200 billion dollars of revenue per year.
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The reason I'm making a separate callout for mobile gaming is because when Unity started, it
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differentiated itself from its biggest competitor, Unreal engine, by focusing on supporting mac games
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and mobile games. As a result, Unreal engine powers some of the biggest PC and console games,
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like Fortnite and Rocket League, while Unity powers some of the most popular mobile games,
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like Hearthstone and Pokemon Go. Any way you slice the gaming industry,
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it's a winner-take-most market with only a few companies at the top.
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This shift to mobile gaming is actually part of a larger shift to mobile everything. In fact,
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the amount of time people are spending on smartphones has increased by almost 30% percent
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in the last 3 years and time spent on tablets has increased by over 40% percent in that same
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time frame. More people are doing more work from mobile devices more often, including professions
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like architecture, design, engineering, product prototyping, and more. Likewise, Unity’s total
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addressable market extends to industries beyond gaming. They are consistently investing to
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expand their platforms to cater to industries like architecture and engineering 3D designs,
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automotive designs, 3D film and animation creation. Today,
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less than 10% percent of their biggest customers are from industries outside of gaming,
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but I think this is a large opportunity for Unity in the long term. Unity's platform
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is used by 8 out of the top 10 architectecture, engineering, and design companies in the world,
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as well as 9 out of the top 10 automotive companies like Honda, Volvo, and BMW.
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Think about all of the applications for this kind of software outside of
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gaming. Architects and automotive engineers can build digital twins of their buildings and
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cars and start running tests on their digital models. Swapping out parts,
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trying different materials, seeing how different parts and sub-assemblies fit and work together,
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or even simulating the customer experience can all be done in a shared digital workspace
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instead of through physical models and prototypes, which are expensive to build and much harder to
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update. Think about real-estate applications where you want to place furniture in a home
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to stage a virtual walkthrough and can rearrange the house in an infinite number of ways with the
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push of a button, or even randomize the layout of a house altogether. Remember, for all of
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these industries, Unity Software is providing a solution that lets people do most of these
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things with minimal code, so these professionals don't have to learn new, separate skill to start
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implementing these solutions.This idea of low-code creation of virtual environments and digital twins
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brings us right into the vision of Unity Software's future, which I think has two parts.
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The first part is fairly straightforward; they will keep reinvesting into their Create Solutions,
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Operate Solutions, and Strategic Partnerships to scale with the mobile gaming market and continue
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grow their customer base in other industries beyond gaming. I'll talk more about this
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in a separate episode, only because Unity Software reports earnings in less than a week,
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so we see how well they're actually doing with this. Comment below or tweet me at
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ticker symbol you with anything you'd like me to cover in this follow-up episode on
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Unity's financials. Do you want me to talk more about any specific offerings or
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their biggest clients or competitors? I'm excited to hear your thoughts.
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The second part of Unity's future is the more exciting part,
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at least to me. Unity Software is in the pole position to be THE
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development platform for virtual worlds. I really believe that this isn't just a
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pipe dream. Let me set the stage with this short clip from 60 Minutes and Paramount.
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Remember, Unity Software has positioned itself as
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the dominant player in interactive mobile, virtual, and augmented reality experiences.
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Those experiences are ALREADY having huge impacts in surgery, mental health, and industrial design.
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If you're interested in learning more about how VR and AR are already beginning to sweep
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these industries, check out my episode on Virtual Worlds. I'll leave a link to that in
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the top right-hand corner of your screen right now and in the description below as well.
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Okay, I get it, you're probably thinking this whole metaverse thing is a wonky idea that a
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few game companies are pushing as a way to get more people to buy into virtual and augmented
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reality products, which is still decades away from being a reality. Uh, a real reality, not a virtual
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reality. Wait. Since that 60 minute clip claimed that the metaverse will be the new social network,
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don't we turn to the king of current social networks and see whether or not he has anything
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good or bad to say about this technology? Here's a quick clip of Mark Zuckerberg,
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the CEO of Facebook, in an interview with Marques Brownlee last fall.
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So, Facebook is dedicating thousands of people to virtual and augmented reality because they
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see it as the next frontier for computing and the internet. Facebook also owns Oculus, a major
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player in VR headsets, games, and equipment. Here's an interesting fact: Facebook just reported
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earnings and during the call, the word metaverse was mentioned TWENTY TIMES. For reference,
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the word advertising was mentioned twelve times. I've linked the transcript of their call in the
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description below, check it out for yourself. I'm extremely bullish on the metaverse and, actually,
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so is ARK Invest. Since I'm saving the financials for Unity Software's earnings call in less than
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a week, let me wrap up by showing you ARK Invest's stance on this market as a whole.
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If we go back to ARK Invest's Big Ideas report, the third big idea was Virtual Worlds. Virtual
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worlds today are in their infancy, but according to ARK's research, revenues could compound at a
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17% percent compound annual growth rate over the next 5 years. The culmination of these virtual
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worlds will ultimately be this Metaverse. Over the last 10 years, gaming revenue has shifted
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toward in-game purchases. By 2025, 95% percent of global gaming revenue could be coming from in-game
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purchases, according to ARK. Right now, this is happening primarily through microtransactions
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in mobile games, but the obvious implication is that this will also be true for virtual goods,
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services, and assets inside the metaverse. ARK Invest also believes that the average time a
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person spends playing video games will increase by over 30% percent in the next five years, further
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compounding in-game revenue by that amount. More time playing means more time spending. That's
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what's responsible for the exponential growth of virtual gaming revenue in their bull case.
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Market leaders like Snapchat, Apple, and of course Facebook, are investing heavily in augmented
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reality, encouraging widespread use of AR tools on existing mobile devices, as well as consumer-grade
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AR glasses, like Snapchat's Spectacles, which are currently a hardware platform built for creators
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looking to push the limits of immersive augmented reality experiences. As a result of products like
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this, the total AR market could scale from under 1 billion dollars today to 130 billion
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dollars by 2030, a compound annual growth rate of over 60% percent for the next decade.
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Even if you think ARK Invest's projection is off by five years, that would still be an
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almost 40% percent compound annual growth rate for the next 15 years. The next step after AR
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is VR. Based on the declining costs of VR headsets and immersive software, like Facebook's Oculus
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products, ARK Invest predicts that mass-market products offering complete visual immersion could
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hit smartphone-like adoption in 2030. Again, even if they're off by 5 years, we're talking about
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getting in front of an industry the size of smart phones today. In my opinion, eventually, even
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bigger, since AR and VR will eventually be able to simulate phones and tablets, removing the need
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to own real ones, just like Nintendo emulators on computers remove the need to own a real one today.
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When you add all of these factors up – the increased time spent gaming, the increased
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amount of in-game spend, new AR capabilities on smart phones, followed by AR glasses,
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then full immersion with mature VR capabilities at scale – we're looking at a huge compound annual
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growth rate. Remember when I said 90% percent of the content on emerging AR platforms is made
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using the Unity engine? This rapidly growing market is currently Unity Software's to lose.
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Like I mentioned earlier, the other major non-proprietary game engine is the Unreal
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Engine. Unreal is owned by Epic Games, which isn't currently publicly traded,
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but guess who owns 40% percent of it? Tencent, ticker symbol T C E H Y, which ARK Invest is
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aggressively divesting from ever since the start of these Chinese Regulatory crackdowns.
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Tencent was ARK Invest's 26th biggest position at the start of June,
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with almost half a billion dollars in it. Today, ARK Invest has just one tenth of that in Tencent,
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making it their one hundred and twenty eighth biggest position overall.
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Yikes! Apple and Epic are also still in a big legal battle over microtransactions and
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platform fees on the iOS version of Fortnite. By the way, I'm not saying
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Tencent or Epic Games are bad companies or that Unreal engine an inferior product,
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but I do think Unity is currently positioned to be the better and safer long-term investment for
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developing experiences on mobile, augmented reality, and virtual reality platforms.
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Comment below with your thoughts on Unity Software's business today
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and what you think about augmented reality, virtual reality,
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and the metaverse. Do you think it's the next step in computing and social networking, or
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does your vision of the future go in a different direction? I'm excited to hear your thoughts.
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Either way, I hope this episode helped you understand more about Unity Software's business
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today, their potential in markets outside of gaming, and their role in what could be the
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future of the internet and computing. If it did, let me know by investing in the like button and
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subscribing to the channel with all notifications turned on. That way, you'll be the first to know
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when my episode covering Unity's upcoming earnings call comes out AND it's a great way to invest
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in the channel that invests in you. A special shoutout to my patrons on patreon and channel
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members right here on YouTube — I wouldn't have thought to make this episode without you.
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Until next time, this is ticker symbol you,
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my name is Alex, reminding you that the best investment you can make, is in you.