could this company be the next shopify stock we don't know but we still think
you should know about it my name is brian ferraldi and my name is brian stoffel
thanks to stockcard.io for sponsoring today's video the company we're talking
about today is unity software a company that specializes in helping game developers to make
mobile games for those that are unfamiliar with our frameworks here is the anti-fragile
framework that brian stovle uses to invest here is the feraldi quality score that i use to invest
brian for those that are unfamiliar tell us about unity unity has a platform that helps creators
design and monetize games virtual augmented reality 3d so gaming is clearly their most
important industry however it can be used by media companies to make illustrations it can be used by
construction and architecture firms and it can be used by automotive companies especially with
the onset of autonomous driving so there are a lot of applications outside of gaming that
this software can be used for yeah very cool unity has its hands in far more industries than i would
have assumed just from the outset but how does the company make money this is the part that i
really love and reminds me so much of shopify so on the one hand they've got create solutions if
you want to use their software and build on their platform you need to pay a subscription so it's
subscription based to use it now this is very much like shopify's subscription services for building
an e-commerce presence this accounts for about 30 percent of sales last year but once you build your
game you need to monetize it and unity can help you do that as well whether it's advertising or
hosting or getting multiplayer games up and running that is usage based so when you do
well as a game developer unity does well because you pay based on data consumption or users and
that accounted for 61 of sales the key difference here so this is like shopify's merchant services
is that unity gets much better margins for this usage-based service than shopify gets for its
merchant services and i know that doesn't add up to 100 we'll get to that in a moment i love that
about this company it has two ways that it makes money from its users primarily the first is that
subscription based dependable recurring revenue the second is that usage based revenue that aligns
this company's incentives with its customers it wants its customers to succeed so it can make more
money all right let's start with your framework what is this company's mission statement to enable
more people to be creators that's simple that's optional that's inspirational it's a little basic
but i don't care it checks all the boxes works for me all right let's talk about the moat do we
think there's a network effect at play here i do it's a weak one and here's where we'll
get to where that other nine percent of revenue came from unity has the unity asset store which
is basically a marketplace now unity designed some of the tools that you can plug into your
subscription but it has a lot of third-party merchants that develop these tools there's over 11
000 five-star tools that they can get with tens of thousands of customers and hundreds of thousands
of forum members to help you learn which tool can help you more for your specific project so
the more users the more third-party app developers which brings in more users again weak but it's
there i love that i love that the bigger this company grows the more that it attracts these
third-party applications and the better it becomes for its customers i agree i think it's there it's
weak but it's there all right switching costs does it have any this is the big one this is the
main one absolutely if we look at the number of customers who are spending over a hundred thousand
dollars a year with unity you see in those blue bars that it's growing quite quickly and
net a dollar based net expansion rate has been over 120 pretty consistently which means that the
companies that are successful are using this more and more and more it would be painful to switch
the only reason they would do so is if the prices became exorbitantly high or if the software all
of a sudden stopped working i agree with you that dollar based net expansion rate clearly indicates
that there are high switching costs here one thing to note about that number is it's a dollar based
net expansion rate that just measures the same customer spending from year to year the term
expansion excludes churn so it does not account for customers that leave or downgrade their
services i prefer dollar based net retention rate that number includes churn so keep that in
mind when you're comparing software as a service stocks to each other expansion and retention are
not the same thing all right do we think there's a low-cost advantage here i don't think so nope yeah
i agree with you any intangibles at play i believe that this company has a strong brand and as my
proof i will point to this in 2020 out of the top 100 global game development studios in the world
94 of them were unity customers additionally out of the top 1 000 mobile games globally at the end
of 2020 71 of them were developed on unity that is some dominant market share for this company so
i like you think that this company does have a brand name working for it it's clearly resonating
with game developers worldwide all right counter positioning and i don't see that one here either
yeah me either let's talk optionality what do you see two ways to look at this you could look at the
products so they have the create solutions and then the operate solutions then the asset store
that's great but the real optionality to me comes from the industries where this can be applied
gaming is obviously there but we've got construction and we've got automotive and
we've got media and those other three those last three they're just getting started so
there's so many different ways that this could be used in the future that's a keen way that we
look at optionality not only can they roll out new products and services can they take their existing
products and services and enter new markets we're clearly seeing that this company is doing that
let's talk financials what do we see as of the most recent quarter for cash they've got about
1.6 billion they've got no long-term debt and they are losing money on a free cash flow basis
120 million but if you compare that to its cash balance this is not a problem to me in fact the
fact that it has no debt and in my opinion could be free cash flow positive on a moment's notice
is an enormous positive this is a company that's rapidly reinvesting into itself to grow grow grow
that explains why the free cash flow is negative to your point if they pulled back on that growth
that free cash flow would definitely soar so there is negative that is a negative for both me and you
but it's not the worst problem in the world all right let's talk concentration none to worry about
no customer accounts for over 10 percent of sales awesome to see let's get to skin of the game what
do we see on glassdoor glassdoor john rickettiello who is not a founder he came onto the company from
other gaming companies and studios gets great marks 95 approval rating 4.4 stars we've looked
at a lot of these those are very solid this is a few hundred ratings too so there is some validity
to those numbers and overall they are excellent how about founders are they still involved yes
uh two out of the three are still involved so joaquim ante is the chief technology officer
and david helgeson was a founder who is now sitting on the board of directors awesome great
to see that they're still in the game ownership when we look at this as of april 2021 we see that
helgeson on the board owns over ten percent of shares rickettiello the ceo owns over three
percent if you take all the insiders and board members combined they own about one-fifth of this
company which as of today's recording is worth about 7.6 billion dollars lots of skin in the
game that's a big number i'm especially impressed with that ceo number that he owns three percent
that's rare to see that big of an ownership position for somebody that's not the founder
before we get to the final scores want to give a special shout out to our channel members thank
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all right brian let's get to your score mission full credit simple inspirational optionable mo i
gave them two points for high switching costs one point for brand value and a half point for that
weak but their network effect three and a half points okay optionality i gave them two and a half
i don't see them getting outside of the software business but again all the applications for the
software gave me an edge up between two and three points financials so i gave them a positive half
point which is rare when a company is free cash flow negative but it they could be positive at a
moment's notice and no debt on the balance sheet is enormously positive to me yeah you might have
gone a little bit positive direction but as long as you're aware of that that's cool concentration
nothing to worry about great glass door plus one founder two of them still involved and ownership
almost twenty percent of shares outstanding you add all that together and you get an
11 and a half not only is that tapping on the door of anti-fragile but once this company becomes free
cash flow positive it's there exactly we know exactly when it can cross that threshold and who
knows maybe the network effect gets even stronger then you're pushing really far into the green area
that's awesome all right let's take it through my score quickly so financially i gave this company
a 9 out of 17. the things that are holding it back are the free cash flow and the earnings per
share both are negative that could swing much higher once they become positive for moat like
you i gave this company a lot of credit i gave it small credit on each of the categories the big one
being the the switching costs but when you add it all together i think this company has a moat
and it's getting wider for potential i gave it a 17 out of 18. i love the optionality of this
business and because it's losing money it has a lot of operating leverage ahead of it customer
quality was very high i gave that a 9 out of 10. revenue quality also stellar i gave that
a 10 out of 10. management and culture fantastic i gave that a 12 out of 14. the stock itself has
not only thumped the market since it came public but the company has a history of blasting past
wall street's estimates that gets a 7 out of 11 and on the gauntlet i did subtract 2 points that
is only for stock-based compensation purposes so the dilution rate here is a little bit high
not all that surprising given the phase of growth this company is in you add all that together and
that gets an 83 for me which is really impressive given how new this company is to the market yep
and when you look at mine an 11 and a half also very high score it should be no surprise i already
own shares of this company i do too so let's put some skin in the game for ourselves and head on
over to stock car. to hold ourselves accountable i am in the anti-fragile portfolio this is your
thumbs up portfolio and we are going to place a new order for unity the ticker symbol there is you
and we're going to do a buy decision today's date we are filming this on monday the 27th
of september we're going to be buying eight shares and this was an 11.5 on your framework
and we're going to head over to my positive scorecard which is my feraldi quality checklist
i'm gonna also place a new order the ticker symbol there is you
i'm gonna do a buy decision we're gonna do today's date eight shares and for me this scored an 83
in total overall i think both you and i agree that there is a lot to like about unity and given
the rise of games not to mention the other areas this company is investing in this company has a
very bright future ahead yeah it's a stack that i'm really excited to own
and also just really excited to see how the story unfolds over the next come next couple of years
because there are so many traits that it has that we love to look for in companies we invest in did
you enjoy this video what stock would you like us to review next let us know in the comments
section below my name is brian feraldi and my mission is to spread financial wellness
my name is brian stouffel my mission is to publish the rules of finance for anyone to see brian's out