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