Unity Software is slated to go public this week. Today we'll take a look into the company
and its financials to help you decide if buying the company’s stock makes sense. And also,
we'll take a look back at how Snowflake performed on its first day of public trading and what
that could mean going forward. If you like investing in hot new IPOs, this video is for
you. Welcome to Healthy, Wealthy, and Wise, the
channel that has evolved to talk about all the big, and not-so big companies going public,
whether it’s by a traditional IPO, a SPAC or a direct listing. As always, I want to
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videos are meant to be informative, they should not be seen as a recommendation for you to
take any action on the companies covered—you should always do your own research or consult
with your own financial advisor when making any investment decision.
So let’s talk Unity Software. The California-based company was actually founded in Denmark as
Over the Edge Entertainment in 2004. In May of 2009, the company reorganized as a Delaware
corporation as Unity Software Inc. The company itself is a leading software platform for
creating and monetizing video games. Their platform provides a comprehensive set of 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.
According to their prospectus, content built on the Unity platform offers end-users a fundamentally
more engaging and immersive experience than traditional static content. Content made with
Unity is interactive, allowing end-users to connect with the content and with other users.
It is also real-time, allowing it to instantly adapt to end-user behavior and feedback. Its
content allows graphics to be expressed with 3 dimensional shape and depth, permitting
multiple viewing angles, and enabling augmented and virtual reality.
Their platform consists of two distinct, but connected sets of solutions. The first one
is a suite named Create Solutions which is offered by monthly subscriptions and is used
by content creators, such as developers, artists, designers, engineers and architects—to create
interactive, real-time 2D and 3D content. The second solution set is named Operate Solutions
and it offers customers the ability to grow and engage their end-user base, as well as
run and monetize their content with the goal of optimizing end-user acquisition and operational
costs while increasing the lifetime value of their end-users. Operate Solutions is offered
primarily through revenue-share and usage-based models.
Unity believes these 2 solution sets allows them to generate revenue from their customers
as the customers using Create Solutions then drive adoption to Operate Solutions. Which
makes sense, because growing their user base and monetizing their content is the next step
from creating the content and Unity wants to make that as easy as possible for the customer
so that they stay with the company as a one stop solution. For the year ended December
31, 2019, 63% of their Operate Solutions revenue that came from customers with over $100,000
in annual revenue was from customers that also used their Create Solutions.
As of June 30, 2020, Unity had approximately 1.5 million monthly active creators in over
190 countries and territories worldwide. The applications developed by these creators were
downloaded over three billion times per month in 2019 on over 1.5 billion unique devices.
Unity is responsible for about 53% of the top 1,000 games in Apple’s app store and
Google Play. As stated in their filing, the dramatic growth
of end-user demand for interactive content is driving industries beyond gaming to embrace
the advantages of real-time 3D content. Today, major companies in industries such as architecture,
engineering, construction, automotive, transportation, manufacturing, film, television and retail
are using Unity across many new use cases, including automobile and building design,
online and augmented reality product configurators, autonomous driving simulation, and augmented
reality workplace safety training. These new forms of content are emerging parts of the
company’s business and represent a significant opportunity for growth.
So that’s a little background of the company. Now we're going to take a look at their financials
starting with revenue. For the years ended December 31, 2018 and 2019, revenue grew from
$380.8 million to $541.8, representing year-over-year growth of 42%. Along with that growth, the
company is also reporting strong gross margins of over 70% over the past 2 years. Now on
the flip side, the company has not been able to show a profit since its inception, and
over the past 2 years have reported net losses of $131.6 million in 2018, and then up to
$163.2 million in 2019. Much of the losses are due to high research
and development costs, including those costs being up 40% from the previous year. Now recently,
they have shown a reduction in the amount of cash used in operations, although in their
filing, Unity does state that can fluctuate. So while the growth looks strong, it is important
to consider that they have to yet to make a profit in effectively 16 years of existence.
So looking ahead, let’s try to see how much more we think the company can grow. From the
company's prospectus, they believe that there is a total market opportunity of approximately
$29 billion across both gaming and other industries. And then according to a 2020 market research
report by ResearchAndMarkets, the global gaming industry is expected to grow at a Compound
Annual Growth rate of 12% from 2020 to 2025. And by the end of 2020, the immersive gaming
segment is expected to generate $4.5 billion. So that’s what’s in front of Unity.
Now, who is in their way? Well, there are 2 sets of competitors, one for their Create
Solutions product and another for the Operate Solutions.
On the Create Solutions side, their primary competitors are considered to be Epic Games
and Chukong Technologies. You might be most familiar with Epic, for 2 reasons, one is
for the very popular Fortnite game, but also for the company’s battle with Apple and
Google about pricing on their app stores. On the Operate Solutions side, they have some
big names that are considered their competition, including Amazon, Facebook, Google, Microsoft
and Tencent. However, the competition on this side of the business isn’t as clear cut
or as direct, as many of these competitors also are customers and partners.
So that’s some information on the company that might help you in getting a better idea
of what the company is about, what kind of numbers they’re producing and what the market
and competition looks like in the near future. The IPO is expected for Thursday, September
17th with trading then beginning on Friday under the ticker U. The initial pricing was
expected to come within a proposed pricing range of $34 to 42 dollars, however, that
has since been revised upwards as the company now looks to price between a range of $44
to $48. At the midpoint of the proposed range, Unity would raise $1.2 billion.
From the money raised, the company intends to use the net proceeds for general corporate
purposes, including working capital, operating expenses, and capital expenditures. And they
also plan to repay the outstanding $125 million of debt that was borrowed in order to provide
liquidity in case of any impact on the financial markets related to the pandemic, but which
they have not yet used to date. If pricing holds, the Unity would be valued
in the 12 billion dollar range. The company was last valued at around 6 billion in the
middle of last year. So now that it’s going public, which will automatically bump up its
valuation some and then reporting a strong year of growth since that last valuation,
at the IPO price, I think that’s a reasonable growth of valuation, at least as compared
to some of the other high-flying tech companies we've seen IPO recently. At the valuation,
when I look at the growth performance of the company, a big market to work in, one of its
main competitors potentially hurting themselves in a legal fight with Apple…and even when
considering it hasn’t posted a profit yet in 16 years, I definitely think it’s a company
to consider. But again, it all comes to the price we could end up getting it for. And
after watching some other IPOs, I don’t know if it’ll trade in a range I’m comfortable
with…we'll have to see what happens. I'm sure that Unity is hoping its IPO performs
as well as Snowflake's or even half as well. Wow, is the only word I can use to describe
that IPO. I expected Snowflake to trade higher than its IPO price, but not at the levels
it did. It opened out of the gate at $245, more than double its IPO pricing of the night
before of $120. It then surged upwards immediately to the $300 range before settling back and
closing at just under $254. If you watched my previous videos on Snowflake,
you know I liked the rate of growth and the potential of high future growth of the company.
And when considering that, along with the hype, the pricing of the offering, and the
stamp of approval from Warren Buffett…there was no question that buying the stock was
going to come at a premium. But I have to admit, that while I didn't really know what
to expect considering the Super Bowl levels of hype the company had, it still came out
hotter than I thought it would. Again, wow, is the only word that describes it. Did any
of you end up buying some shares or did you end up passing for now? Please let me know
in the comments… I'm curious to know. I always say that what people within the market
are willing to pay determines what the stock is worth…so I'm not gonna say that the stock
is overpriced. But for me, even considering the red hot growth potential and future earnings,
the company seems valued too high, too fast for me. So I did not buy in at this time.
That's not to say I won't eventually, I'll just look for an opportunity down the road.
Some of you have heard me say in the past that I look at an IPO as a much longer race
than a one day sprint on that first day of trading. I also look at the quiet period ending,
the first earning reports, and then the lead up to, and then, the expiration of the locked
up shares. A quarterly earning report with projections lower than the super high expectations
the company has out there...or the possible sell off from the insiders of all the locked
up shares that previously couldn’t be traded looking to capture some profits…these are
the times when the stock price could drop to a more reasonable level…although there's
never a guarantee that it actually will. But because it often does play out that way, think
of Beyond Meat last year, that’s one of the reasons I cover the upcoming lock up expiration
dates on each episode of IPO This Week. Okay, let’s call it here…this week has
exhausted me! I’m 99.7% sure this has to be the longest week in video time recorded
I’ve had on the channel. As always, I’ll be back next week, as we cover all the companies
going public, including the company that many people seem to either love or hate, Palantir.
I hope you join me. And also, just a friendly reminder to please like the video if you enjoyed
it, YouTube really likes when you do that. And if you haven’t yet subscribed to the
channel, but are enjoying or finding value in learning more about all of the companies
going public, I hope you consider joining the community…we’re growing fast and we’d
love to have you onboard. And with that, thank you for watching and,
until next time, have a great day!