The case for Unity and the future of real time graphics

Unity Software Inc (U) is an American software company founded in Denmark in 2004 and the world’s leading platform for creating and operating real-time 3D content. Its main product – the Unity game engine powers the vast majority of mobile games and as well as being an easily accessible tool for all developers alike across all platforms. Some of the more prominent Unity based titles include Hearthstone, Cuphead, Escape from Tarkov, Ori & The Blind Forest and Rust along with a slew of mobile games like Subway Surfers, Crossy Roads, Super Mario Run and Monument Valley and many many more…

I have a background in 3D and game development and have been an avid user of the Unity game engine for years – So once Unity announced their Initial Public Offering (IPO) I knew I had to get in on it.

I bought in on September 18th last year – the day following the IPO at an average price of $69 per share. My position as of now is rather small but it is one that I am now certain I will add to in the future. Throughout 2020 the stock took a significant price hike and peaked just above $172 per share forcing me to put my original plan of dollar cost averaging into the stock on hold and instead I have waited for things to calm down.

Unity trended upwards from minute one of its IPO and almost all throughout 2020.

In early February the company delivered its first earnings report since going public and tumbled to a current evaluation of around $121 per share. Although the company reported Q4 revenue of $220 million, up 39% year over year they were met with overall disappointment on their guidance for 2021 setting expectations at a $950-970 million for the full year – a growth rate in the area of 23%. Furthermore all this rides on the back of previous growth of 53% in Q3 of 2020 – a downwards trend for the short term to be sure.

However one thing mentioned in the earnings report gives me great confidence in their management strategy and future of the company:

“Our goal is to build a company that delivers revenue growth of approximately 30% over the long run.”

investors.unity.com – February 4th 2021.

That last part of the sentence is key – A focus on reliable steady growth over the long term. When I invest in technology I am not there to earn a quick buck over the short term. I remain bullish for the long term on Unity and with an extensive understanding of the industry and true hands on experience with their product I understand the potential and future of the platform. Unity is not only market leading in a growing field but also a disrupter in use of real time graphics something not many have caught onto yet. In the following I will break down the most significant opportunities Unity stand before over the next coming years.

Gaming

Gaming is the core of Unity’s business and the most obvious case to tackle first. Being a market leader helps Unity attract new developers as its game engine will likely be the first they hear about or interact with. Competition is present to a limited degree and can be attributed in large to Unreal Engine by from the Tencent (0700.HK)-backed developer Epic Games. However Unity has a very loyal costumer base given its popularity, wide array of features and because of the fact that game development tends to take years. Switching engines mid development is an extremely costly affair and often causes major setbacks. With the recent trend of longer game project lifecycles – both in terms of time in development but also from the industry seeing increased profits in expanding existing titles and offering microtransactions or subscription fees rather than jumping from one new title launch to the next – Unity’s position here grows even stronger.

Rockstar began development of GTA V in 2008 – The Game released in 2013 and have seen various platform re-releases and maintains a very profitable multiplayer component to this day. In contrast in the period of 2001-2008 Rockstar launched four major one time GTA releases.

Unity sees a total addressable market (TAM) of $12 billion leaving it plenty of room to grow with the company’s full 2020 revenue of $772 million representing in the neighborhood of only 15% of that. That is in despite of already being partly responsible for more than half of all video games created for mobile.

Big Data & The Cloud

Unity has long offered a one stop shop for developers working within interactive media – offering any tool they might need during development through the ‘Unity Asset Store’ – but more importantly it has, over the recent years, started offering post-launch tools like ‘Unity Ads’ and ‘Unity In-App Purchases’. These tools open the door for a magnitude of monetization opportunities and data collection not only on Unity’s own costumer base but also its end users – its users users.

In December 2020 Unity partnered with Snap Inc. (SNAP) to extend their advertising reach to Snapchat advertisers.

“We’re building on our commitment of enabling developer success at all stages of the game life cycle, from creation onwards. Snap brings their vast advertiser community to the Unity ecosystem where they will reach highly engaged and valuable player audiences, while the verified elements from Snap used in games made with Unity will allow players to drive social sharing and game discovery.”

Julie Shumaker, Vice President of Revenue, Operate Solutions, Unity from Businesswire – December 17th 2020.

This is only the latest in a huge catalyst of positive aspects for the future of Unity as a business enabling developers reach new audiences and monetize their products via Unity’s cloud infrastructure. While losses are being made right now – typical of a growing tech business – it is interesting that Unity is already reaching break even while growing at its current pace. There is little doubt in my mind that Unity will eventually will become an extremely profitable cloud software platform.

Beyond gaming

A particular focus of Unity’s IPO lies beyond gaming and is one with an even bigger opportunity ahead of it. This market is estimated to be in the area of $17 billion today and has potential to grow even further. But this part of the business case remains the hardest to explain and likely also the most difficult endeavor to overcome for the company.

In my time at Artifact – a company I co-founded in 2017 – I worked exactly within this field. We created virtual reality experiences for the Oculus Rift and HTC Vive through Unity and Unreal Engine. Notice the particular wording here – because that is what we called them: “Experiences” – not just games. These interactive applications where used in museums across the country (Denmark) and delivered a unique and immersive way of conveying information about the past and our culture.

A museum guest participating in our virtual reality ‘Viking blacksmith’ experience built inside the Unity game engine.

VR represents some of these opportunities of this market but I do understand how they in many cases can be hard to disconnect from the overall category of gaming. The same can be said for Augmented Reality applications but its current wider range of use might make for an easier way to understand. Many people’s first experience with AR interestingly came through a Unity made application – Pokémon GO – yet today it is also present in many everyday applications such as video filters like the ones we see in Snapchat or Facebook (FB) Messenger. Even in enterprise and industrials AR is being used to solve a wide range of challenges with innovative solutions like the Microsoft HoloLens in which Unity provides a way to develop custom made software for.

Unity late last year acquired RestAR, a computer vision and deep learning company that enables fashion brands and online retailers to scan and render physical consumer products in 3D. Unity also sees ways of the technology being used in architecture and the massive industry that is construction, creating affordable and quick ways of bringing projects to life before they are built. Absolute prime cases for VR & AR application use.

Something that has caught my eye personally as another opportunity beyond gaming is real time graphics use in filmmaking. Disney‘s (DIS) streaming success ‘The Mandalorian’ uses Unreal Engine to build entire 3D environments for the Star Wars live action series. These 3D scenes are then displayed on large screens surrounding the set allowing for changing the environment and positions in real time as they shoot. The technology also provides vastly superior lighting to a green screen set and makes for a much easier time for the actors and film crew with its immersiveness. The result is remarkable and nothing short of an revolution in filmmaking in my opinion.

This video is definitely worth a watch. Even if you have not yet watched the show.

Anecdotally I have also been told by friends in the VFX industry that they are experimenting with real time graphics in various film projects in order to save on traditional rendering downtime and for iterating rapidly in nailing the final look of a 3D heavy scene.

Ending remarks

Unity presents a huge opportunity to get aboard a fast growing, yet well established player in a large industry on the rise. A unique combination that is not always easy to come by. However it is certainly a long term play and with its rather rich evaluation as of right now it might be good candidate to place on your watchlist and simply keep an eye on for the time being. For now I will absolutely hold onto my current shares. I intend to add to my position should the share price drop to the range of $100 and I will likely top up on my shares several times over the next coming years. Unity is a winner and a truly exciting tech opportunity for any investor with the right mindset for long term growth.

Disclaimer: I am not a financial advisor, the opinions expressed in this article are entirely my own – always invest at your own risk.

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