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2021-12-15
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Unity Software: Best Way To Play The Meta Platforms Announcement
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{"i18n":{"language":"zh_CN"},"detailType":1,"isChannel":false,"data":{"magic":2,"id":607224298,"tweetId":"607224298","gmtCreate":1639550604449,"gmtModify":1639550604670,"author":{"id":3582026975439494,"idStr":"3582026975439494","authorId":3582026975439494,"authorIdStr":"3582026975439494","name":"Cchan","avatar":"https://static.tigerbbs.com/4a866dff4a9f27b822761607b3a41725","vip":1,"userType":1,"introduction":"","boolIsFan":false,"boolIsHead":false,"crmLevel":2,"crmLevelSwitch":0,"individualDisplayBadges":[],"fanSize":23,"starInvestorFlag":false},"themes":[],"images":[],"coverImages":[],"extraTitle":"","html":"<html><head></head><body><p>v</p></body></html>","htmlText":"<html><head></head><body><p>v</p></body></html>","text":"v","highlighted":1,"essential":1,"paper":1,"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"link":"https://laohu8.com/post/607224298","repostId":1139959073,"repostType":4,"repost":{"id":"1139959073","kind":"news","pubTimestamp":1639548134,"share":"https://www.laohu8.com/m/news/1139959073?lang=&edition=full","pubTime":"2021-12-15 14:02","market":"us","language":"en","title":"Unity Software: Best Way To Play The Meta Platforms Announcement","url":"https://stock-news.laohu8.com/highlight/detail?id=1139959073","media":"Seeking Alpha","summary":"Summary\n\nUnity Software has essentially flatlined YTD in 2021, likely due to the stock being somewha","content":"<p><b>Summary</b></p>\n<ul>\n <li>Unity Software has essentially flatlined YTD in 2021, likely due to the stock being somewhat speculative in a time the market doesn't favor speculative stocks.</li>\n <li>The company's high valuation is based upon investors speculating on newer technologies such as RT3D, VR/AR and the Metaverse growing rapidly in upcoming years.</li>\n <li>Investors are already increasingly interested in companies that might be involved in the build-out of the metaverse and Unity is likely to be a major player.</li>\n <li>Total Q3 revenues were up 43% year-over-year to $286.3 million, exceeding company expectations, and the company raised full year guidance.</li>\n <li>Unity is a buy today but only for investors that are intent on being investors over at least a 5-year time frame. Short-term investors could be disappointed in Unity.</li>\n</ul>\n<p class=\"t-img-caption\"><img src=\"https://static.tigerbbs.com/eb000e942dc4b466fc45e2c1073f83b3\" tg-width=\"1536\" tg-height=\"1024\" width=\"100%\" height=\"auto\"><span>Sundry Photography/iStock Editorial via Getty Images</span></p>\n<p>Unity Software's (NYSE:U) stock has essentially flatlined YTD in 2021. A good portion of the reason the stock has essentially gone nowhere over the course of the year is that the company is both speculative and sells at a relatively high valuation during an environment in which the market has been punishing many highly valued, speculative companies.</p>\n<p class=\"t-img-caption\"><img src=\"https://static.tigerbbs.com/bfc4a368e7f8ca30e3472d6bf1737558\" tg-width=\"601\" tg-height=\"558\" width=\"100%\" height=\"auto\"><span>Source: YTD Return.com</span></p>\n<p>Unity Software's relatively high valuation is based upon investors speculating on newer technologies such as RT3D, VR/AR and the metaverse growing rapidly in upcoming years. Essentially, Unity Software investors are betting that newer technologies will give Unity massive upside beyond the company's gaming development platform.</p>\n<p>As I write this, Unity currently sells at sales multiple of approximately 38, which is above the median valuation of 31.06 but below the maximum valuation of 54 since Unity came public.</p>\n<p class=\"t-img-caption\"><img src=\"https://static.tigerbbs.com/04691b759cae09ac0f6da791af42af5d\" tg-width=\"635\" tg-height=\"417\" width=\"100%\" height=\"auto\"><span>Data by YCharts</span></p>\n<p>The current market is in a mostly \"Risk-Off\" state because of worries over supply chain disruptions, inflation and a bearish Federal Reserve and Unity doesn't have the profile of a stock that will do well when the market wants to avoid more speculative investments.</p>\n<p>Unity currently doesn't have any near-term catalysts to send the stock substantially higher over the next year, while at the same time the company is investing heavily in R&D and taking operating losses. Consistent profitability for Unity is more likely to take place 3 to 5 years out, rather than over the next year.</p>\n<p><b>Why Buy Unity?</b></p>\n<p>The world appears to be in the beginning stages of adoption of technologies such as AR/VR, RT3D, Digital Twins, and the metaverse, which are all technologies that are related and overlap with each other. All of the above opportunities are potentially massive opportunities. The metaverse has been estimated by Morgan Stanley (NYSE:MS) to be an $8 trillion opportunity, while Matthew Ball, CEO of Venture Capital firm Epyllion, believes that the metaverse economy could value between $10-30 trillion in the next 10 to 15 years. Nvidia's (NASDAQ:NVDA) CEO Jensen Huang thinks that the metaverse economy could one day even be far bigger than that of the real-world economy.</p>\n<p>Recently, Facebook renamed itself to Meta Platforms (NASDAQ:FB), which could be a signal that the era of the metaverse is at the beginning stages. Through both the Facebook and Instagram platform, Mark Zuckerberg likely has enough data on consumer preferences to accurately gauge possible consumer adoption of such concepts as the metaverse. I don't think the decision to rebrand Facebook into Meta Platforms was made lightly. Zuckerberg has likely seen enough data indicating that the world is ready for VR platforms like Oculus and is also ready for concepts such as the metaverse.</p>\n<p>What makes many investors very excited is that while competition like the Unreal Engine provides fairly stiff competition in gaming, Unity is already beginning to dominate the content on emerging AR platforms with 90% share on Microsoft's (NASDAQ:MSFT) HoloLens and 90% of Samsung (Grey Market:OTC:SSNLF) Gear VR content. This gives Unity an excellent start at becoming a major player in the buildout of many of the economies that will grow around the metaverse and many other VR/AR applications.</p>\n<p>Investors are already increasingly interested in companies that might be involved in the build-out of the metaverse and Unity is no exception. After the Facebook rebranding announcement on October 28, Unity received a temporary bump in stock price over the next several weeks, rising from a closing price of $144.08 on October 28 to a November 18 closing price of $201.12. So, investors need to be aware that the stock price can move on any type of news concerning the buildout or adoption of the metaverse.</p>\n<p>However, concepts like the metaverse and AR/VR, might take at least ten years to play out. While positive mentions of the metaverse might temporarily goose the company's stock, back in the real-world investors are very concerned about things like inflation and it didn't take long for the metaverse balloon to pop, as today the stock trades below where it was trading before the Meta Platforms announcement was first made. Investors need to realize that it might take at least 3 to 5 years before the metaverse and AR/VR really begins to move the needle in positively affecting Unity Software's fundamentals. Therefore, only long-term investors should buy Unity Software's stock.</p>\n<p><b>Why Investors Should Avoid Unity</b></p>\n<p>Investors looking for short-term gains over the next year should probably avoid Unity Software's stock, as there is substantial downside risk in the near term because of poor investor sentiment toward stocks like Unity. The market is most definitely in a \"Risk-Off\" mood and has little patience for highly valued stocks that are producing an operating loss. The stock is likely to be extremely volatile over the next year. Unity could soar on some analyst positive commentary of the Metaverse and just as easily the next day sink on news of an interest rate hike. Investors that are risk-averse and are overly worried by volatility should avoid buying Unity.</p>\n<p>Secondarily, while the TAM of things like the metaverse and AR/VR might be enormous, adoption could be slow and not be accomplished very easily. According to Morgan Stanley Analyst Brian Nowak, actually getting people to use a metaverse could be a major hurdle. This Business Insider article highlights the numerous problems that the metaverse could encounter such as privacy and whether the metaverse could actually provide value-add solutions for consumer pain points. So, investors can't expect a lot of bang for the buck in the near term from concepts like the metaverse, despite all of the hype in the news media about it.</p>\n<p><b>Unity Software Q3 2021 Earnings Results</b></p>\n<p>Unity Software announced earnings after the bell on November 9th and in a knee-jerk reaction the stock dropped sharply after hours,down at least 9%, likely for the reason that the stock had a huge runup into earnings on the back of Facebook's Meta Platforms announcement and some investors likely wanted to take profits.</p>\n<p>Unity opened on November 10th down 7% from the previous day's close but rapidly ran up after investors really began assessing the company's \"beat and raise\" quarter and the company's acquisition of Weta Digital. Unity's stock actually ended up 3% over the previous day's close. Investors could not really ignore that Unity really had a great quarter.</p>\n<p>Unity total Q3 revenues were up 43% year-over-year to $286.3 million, exceeding company expectations of revenues in the $260 to $265 million range. Unity's revenues also beat consensus analyst expectations of $266 million.</p>\n<p class=\"t-img-caption\"><img src=\"https://static.tigerbbs.com/9de611046290b8f49af74bbedb256558\" tg-width=\"635\" tg-height=\"433\" width=\"100%\" height=\"auto\"><span>Data by YCharts</span></p>\n<p>Unity Software has three revenue sources named Create, Operate and Strategic Partnerships in which I explained what each segment does in my last article on Unity. Create Solutions and Operate Solutions revenue were $83.7 million and $185.0 million, respectively, an increase of 34% and 54%, respectively, from Q3 2020. Strategic Partnerships and Other revenue came in at $17.6 million, a decrease of 3% from Q3 2020.</p>\n<p>Create Solutions and Operate Solutions came out to be 29% and 65% of revenue, respectively. So, Unity's largest revenue contributor, Operate, continues to be the fastest-growing part of the company.</p>\n<p class=\"t-img-caption\"><img src=\"https://static.tigerbbs.com/fad425cba495be9798d090c89a6fd68a\" tg-width=\"640\" tg-height=\"189\" width=\"100%\" height=\"auto\"><span>Source: Unity Software Q3 2021 Earnings Announcement</span></p>\n<p>Unity Q3 GAAP gross profit came in at 222.81 million with gross margins of 78%, up from 76% last year. Unity Q3 non-GAAP gross profit came in at $231.56 million with gross margins of 81%, up from 79% last year. CFO Luis Visoso indicated last quarter that the company has confidence that gross margins can be sustained above 70% over the long term.</p>\n<p class=\"t-img-caption\"><img src=\"https://static.tigerbbs.com/92d493a9cd9c53b5cedce2dcaddb00c1\" tg-width=\"635\" tg-height=\"417\" width=\"100%\" height=\"auto\"><span>Data by YCharts</span></p>\n<p>Last quarter, Unity's management mentioned on the earnings call that the company will continue to invest heavily on R&D and that can be seen this quarter with GAAP R&D expenses coming in at $178.41, up 53% over the year-ago period. GAAP R&D as a percentage of revenues was 62% opposed to 58% in the year-ago period. Non-GAAP R&D was $118.18 million, up 47% over the year-ago period. Non-GAAP R&D as a percentage of revenue was 41% opposed to 40% over the year-ago period.</p>\n<p class=\"t-img-caption\"><img src=\"https://static.tigerbbs.com/2d6ba117f06cc0e2aae0ea40114ce73b\" tg-width=\"635\" tg-height=\"433\" width=\"100%\" height=\"auto\"><span>Data by YCharts</span></p>\n<p class=\"t-img-caption\"><img src=\"https://static.tigerbbs.com/87da53ec6ad75e2595a88296801d3b86\" tg-width=\"635\" tg-height=\"467\" width=\"100%\" height=\"auto\"><span>Data by YCharts</span></p>\n<p>Part of the reason that investors can sometimes act skittish toward Unity Software is that the company, in the near term, is in heavy investment mode, while at the same time, the company's ability to generate excess returns on invested capital is more over the long-term. During times when investment sentiment is \"Risk Off\", the market is not very often kind to stocks that fit this profile, which is why the company has essentially flatlined this year, despite \"beat & raise\" quarters and the excitement of the metaverse ahead.</p>\n<p>Currently, Unity is producing an operating loss both on a GAAP and non-GAAP basis. Unity Q3 GAAP loss from operations was $126.75 million with operating margins of -44%.</p>\n<p>Unity Q3 non-GAAP loss from operations was $12 million with operating margins of -4%.</p>\n<p class=\"t-img-caption\"><img src=\"https://static.tigerbbs.com/24ffaf2e45b47a3204d19936190808cd\" tg-width=\"635\" tg-height=\"433\" width=\"100%\" height=\"auto\"><span>Data by YCharts</span></p>\n<p>Unity Q3 non-GAAP EPS of -$0.06 beat analyst estimates by $0.01; GAAP EPS of -$0.41 missed analyst estimates by $0.05.</p>\n<p><b>Unity's Recent Business Performance</b></p>\n<p>Dollar-Based Net Expansion Rate (DBNER): This is a critical metric to track for software companies that operate in the cloud. In an article titled,Why I Like High DBNERs, it mentions that companies that have consistently high DBNERs will grow revenues faster than similar businesses with a lower DBNERs, while also experiencing significant stock price appreciation.</p>\n<p>The DBNER metric can also help investors analyze a company's competitive moat, its pricing power, the quality of the product/service and the stickiness of the company's business. The Why I Like High DBNERs article also mentions that the author considers a DBNER over 120% as very good and a number over 130% as outstanding.</p>\n<p>Here is Unity's DBNER history:</p>\n<p class=\"t-img-caption\"><img src=\"https://static.tigerbbs.com/107d3d57fbdee98676c4cd07ffe5a5ed\" tg-width=\"640\" tg-height=\"327\" width=\"100%\" height=\"auto\"><span>Source: Unity Software 10-Q | Quarterly Report</span></p>\n<p>Unity has put up a DBNER of above 130% since Q3 2019. In Q3 2021, Unity put up a Dollar-based net expansion rate of 142%. This is in comparison to last year's Dollar-based net expansion rate of 144%, in the same period.</p>\n<p>Unity software has been putting up excellent DBNER over a relatively long period of time and my experience with companies that consistently put up such high DBNER numbers is that they eventually have a stock price that outperforms.</p>\n<p>Customers contributing more than $100K to revenue: This metric represents a measure of Unity's penetration of larger enterprises, which include AAA gaming studios and large organizations in industries other than gaming.</p>\n<p>Unity Software strongly focuses on this metric because it represents the segment of the company's customer base where the majority of the revenue and revenue growth comes from. No one customer accounts for more than 10% of the revenue, so Unity does not have customer concentration risks at this time. In fact, the company could be considered widely diversified.</p>\n<p>Unity has 973 customers generating more than $100,000 of revenue TTM in Q3 2021, up from 739 a year earlier, which represents 32% YoY growth. This number is also up from 888 in Q2 2021. This strong growth is a trend that Unity management expects to continue moving forward.</p>\n<p><b>Balance Sheet</b></p>\n<p class=\"t-img-caption\"><img src=\"https://static.tigerbbs.com/728fa1793eee219403e86af2d187549a\" tg-width=\"635\" tg-height=\"450\" width=\"100%\" height=\"auto\"><span>Data by YCharts</span></p>\n<p>Unity ended Q3 with approximately $1.28 billion in cash, cash equivalents, restricted cash and short-term investments. Unity has no long-term debt and 357.70 million in payables and accrued expenses. Unity has a very good balance sheet and can support all of its growth initiatives.</p>\n<p class=\"t-img-caption\"><img src=\"https://static.tigerbbs.com/00bb6a0f470c1d00ea4db96579bb8b8d\" tg-width=\"635\" tg-height=\"417\" width=\"100%\" height=\"auto\"><span>Data by YCharts</span></p>\n<p>Free cash flow in Q3 was $34 million, which brought the total free cash flow through the first 9 months of 2021 to -$100 million. This number includes around $50 million in charges from a lease dispute that was recorded in Q2. Management expects Unity to break even on a free cash flow basis sometime within FY2023.</p>\n<p><b>Company Guidance</b></p>\n<p class=\"t-img-caption\"><img src=\"https://static.tigerbbs.com/6b75634c25128559eed14279e65f6166\" tg-width=\"640\" tg-height=\"113\" width=\"100%\" height=\"auto\"><span>Source: Unity Software Q3 2021 Earnings Announcement</span></p>\n<p>Unity Software CFO Luis Felipe Visoso stated during the conference call that Unity entered Q4 with very good momentum in the business. He projected Q4 revenues of $285 to $290 million, representing 29% to 32% year-on-year growth.</p>\n<p>The company is raising full year guidance for the second time this year to $1.08 billion to $1.085 billion, representing 40% year-over-year growth. This represents an increase of $25 million on the high side of the range from previous guidance in Q2. The original revenue guidance given in Q1 was for $1.000 billion to $1.015 billion.</p>\n<p>Unity Q4 non-GAAP operating loss from operations is projected to be between $20 million to $25 million and between $59 million to $64 million for the full year.</p>\n<p><b>The Weta Digital Acquisition</b></p>\n<p>On November 09, after the bell, Unity surprised investors by announcing the very interesting acquisition of Weta Digital's tools, pipeline, and engineering talent for $1.62 billion. The tools being purchased were responsible for things like bringing Gollum to life in <i>The Lord of the Rings</i> films among many other movies. Anyone that has ever seen the visual effects in movies like Avatar understands that Weta's tools are very top of the line.</p>\n<p>But what is the reason behind Unity making this acquisition?</p>\n<p>Well, this acquisition is a bid by Unity to close the VFX quality gap with the Unreal Engine from Epic Games (Private). Unity has always been known as creating a very versatile engine that is relatively easy to use and this might be the reason it has become a favorite among mobile developers. However, the Unreal engine is perceived to have better visual effects which might be the reason that developers making more expensive Triple-A games, tend to gravitate towards Unreal. With the Weta Digital tools acquisition, Unity should become a lot more competitive with Unreal in gaining developers producing Triple-A gaming titles.</p>\n<p>Until this acquisition, Weta's 3D tools were used exclusively in-house at division within the company called Weta VFX, which consists of 1,700 visual artists that are directly responsible for creating the visual effects in many different popular movies. Weta VFX will eventually be renamed WetaFX and will become an independent studio that will license its tools from Unity.</p>\n<p>Weta Digital will become part of Unity Create Solutions and Create Solutions will gain around 275 engineers, a cloud-based platform and a collection of tools that are able to create all different types of special 3D effects. Unity will take Weta's tools and begin making them available to a wide variety of artists and creators throughout the film industry, the gaming industry, the internet, and also into other industries such as automotive, architecture and e-commerce.</p>\n<p>On the earnings call, Unity management indicated that they plan on making a cloud-based version of Weta Digital to widen the access for millions of consumers who will be able to generate high-quality 3D content every day on different social media, gaming platforms and ultimately in \"metaverse\" worlds. The best explanation of why this acquisition took place is in the following article titled <i>Unity, Weta, and Faceless Platforms</i>.</p>\n<p><b>Analyst Price Targets</b></p>\n<p class=\"t-img-caption\"><img src=\"https://static.tigerbbs.com/d730fdc4485ba9a624ac53c105dae1e8\" tg-width=\"481\" tg-height=\"406\" width=\"100%\" height=\"auto\"><span>Source: Yahoo Finance</span></p>\n<p>The above is based on 14 Wall Street analysts offering 12-month price targets for Unity in the last 3 months. The average price target is $166.76 with a high forecast of $194.00 and a low forecast of $85.00. The average price target representsa 24% increase from the last price of $134.82.</p>\n<p class=\"t-img-caption\"><img src=\"https://static.tigerbbs.com/43e6370f3afa287a3b71a69a9eb4422b\" tg-width=\"635\" tg-height=\"433\" width=\"100%\" height=\"auto\"><span>Data by YCharts</span></p>\n<p>Unity Software is selling at a relatively high valuation, especially considering the sentiment in the current market with investors worrying about inflation and the Fed possibly becoming aggressive in raising interest rates.</p>\n<p><b>Conclusion</b></p>\n<p>Unity Software is a buy today but only for investors that are intent on being investors over at least a 5-year time frame, as it could possibly take five to ten years for the marketplace to adopt such concepts as VR/AR and the metaverse. Investors with short time horizons should probably avoid the stock as it is likely to have large downside risk in the current environment, be volatile and possibly not make major moves upwards for several years.</p>","collect":0,"html":"<!DOCTYPE html>\n<html>\n<head>\n<meta http-equiv=\"Content-Type\" content=\"text/html; charset=utf-8\" />\n<meta name=\"viewport\" content=\"width=device-width,initial-scale=1.0,minimum-scale=1.0,maximum-scale=1.0,user-scalable=no\"/>\n<meta name=\"format-detection\" content=\"telephone=no,email=no,address=no\" />\n<title>Unity Software: Best Way To Play The Meta Platforms Announcement</title>\n<style type=\"text/css\">\na,abbr,acronym,address,applet,article,aside,audio,b,big,blockquote,body,canvas,caption,center,cite,code,dd,del,details,dfn,div,dl,dt,\nem,embed,fieldset,figcaption,figure,footer,form,h1,h2,h3,h4,h5,h6,header,hgroup,html,i,iframe,img,ins,kbd,label,legend,li,mark,menu,nav,\nobject,ol,output,p,pre,q,ruby,s,samp,section,small,span,strike,strong,sub,summary,sup,table,tbody,td,tfoot,th,thead,time,tr,tt,u,ul,var,video{ font:inherit;margin:0;padding:0;vertical-align:baseline;border:0 }\nbody{ font-size:16px; line-height:1.5; color:#999; background:transparent; }\n.wrapper{ overflow:hidden;word-break:break-all;padding:10px; }\nh1,h2{ font-weight:normal; line-height:1.35; margin-bottom:.6em; }\nh3,h4,h5,h6{ line-height:1.35; margin-bottom:1em; }\nh1{ font-size:24px; }\nh2{ font-size:20px; }\nh3{ font-size:18px; }\nh4{ font-size:16px; }\nh5{ font-size:14px; }\nh6{ font-size:12px; }\np,ul,ol,blockquote,dl,table{ margin:1.2em 0; }\nul,ol{ margin-left:2em; }\nul{ list-style:disc; }\nol{ list-style:decimal; }\nli,li p{ margin:10px 0;}\nimg{ max-width:100%;display:block;margin:0 auto 1em; }\nblockquote{ color:#B5B2B1; border-left:3px solid #aaa; padding:1em; }\nstrong,b{font-weight:bold;}\nem,i{font-style:italic;}\ntable{ width:100%;border-collapse:collapse;border-spacing:1px;margin:1em 0;font-size:.9em; }\nth,td{ padding:5px;text-align:left;border:1px solid #aaa; }\nth{ font-weight:bold;background:#5d5d5d; }\n.symbol-link{font-weight:bold;}\n/* header{ border-bottom:1px solid #494756; } */\n.title{ margin:0 0 8px;line-height:1.3;color:#ddd; }\n.meta {color:#5e5c6d;font-size:13px;margin:0 0 .5em; }\na{text-decoration:none; color:#2a4b87;}\n.meta .head { display: inline-block; overflow: hidden}\n.head .h-thumb { width: 30px; height: 30px; margin: 0; padding: 0; border-radius: 50%; float: left;}\n.head .h-content { margin: 0; padding: 0 0 0 9px; float: left;}\n.head .h-name {font-size: 13px; color: #eee; margin: 0;}\n.head .h-time {font-size: 11px; color: #7E829C; margin: 0;line-height: 11px;}\n.small {font-size: 12.5px; display: inline-block; transform: scale(0.9); -webkit-transform: scale(0.9); transform-origin: left; -webkit-transform-origin: left;}\n.smaller {font-size: 12.5px; display: inline-block; transform: scale(0.8); -webkit-transform: scale(0.8); transform-origin: left; -webkit-transform-origin: left;}\n.bt-text {font-size: 12px;margin: 1.5em 0 0 0}\n.bt-text p {margin: 0}\n</style>\n</head>\n<body>\n<div class=\"wrapper\">\n<header>\n<h2 class=\"title\">\nUnity Software: Best Way To Play The Meta Platforms Announcement\n</h2>\n\n<h4 class=\"meta\">\n\n\n2021-12-15 14:02 GMT+8 <a href=https://seekingalpha.com/article/4475232-unity-software-best-way-to-play-meta-platforms><strong>Seeking Alpha</strong></a>\n\n\n</h4>\n\n</header>\n<article>\n<div>\n<p>Summary\n\nUnity Software has essentially flatlined YTD in 2021, likely due to the stock being somewhat speculative in a time the market doesn't favor speculative stocks.\nThe company's high valuation is...</p>\n\n<a href=\"https://seekingalpha.com/article/4475232-unity-software-best-way-to-play-meta-platforms\">Web Link</a>\n\n</div>\n\n\n</article>\n</div>\n</body>\n</html>\n","type":0,"thumbnail":"","relate_stocks":{"U":"Unity Software Inc."},"source_url":"https://seekingalpha.com/article/4475232-unity-software-best-way-to-play-meta-platforms","is_english":true,"share_image_url":"https://static.laohu8.com/e9f99090a1c2ed51c021029395664489","article_id":"1139959073","content_text":"Summary\n\nUnity Software has essentially flatlined YTD in 2021, likely due to the stock being somewhat speculative in a time the market doesn't favor speculative stocks.\nThe company's high valuation is based upon investors speculating on newer technologies such as RT3D, VR/AR and the Metaverse growing rapidly in upcoming years.\nInvestors are already increasingly interested in companies that might be involved in the build-out of the metaverse and Unity is likely to be a major player.\nTotal Q3 revenues were up 43% year-over-year to $286.3 million, exceeding company expectations, and the company raised full year guidance.\nUnity is a buy today but only for investors that are intent on being investors over at least a 5-year time frame. Short-term investors could be disappointed in Unity.\n\nSundry Photography/iStock Editorial via Getty Images\nUnity Software's (NYSE:U) stock has essentially flatlined YTD in 2021. A good portion of the reason the stock has essentially gone nowhere over the course of the year is that the company is both speculative and sells at a relatively high valuation during an environment in which the market has been punishing many highly valued, speculative companies.\nSource: YTD Return.com\nUnity Software's relatively high valuation is based upon investors speculating on newer technologies such as RT3D, VR/AR and the metaverse growing rapidly in upcoming years. Essentially, Unity Software investors are betting that newer technologies will give Unity massive upside beyond the company's gaming development platform.\nAs I write this, Unity currently sells at sales multiple of approximately 38, which is above the median valuation of 31.06 but below the maximum valuation of 54 since Unity came public.\nData by YCharts\nThe current market is in a mostly \"Risk-Off\" state because of worries over supply chain disruptions, inflation and a bearish Federal Reserve and Unity doesn't have the profile of a stock that will do well when the market wants to avoid more speculative investments.\nUnity currently doesn't have any near-term catalysts to send the stock substantially higher over the next year, while at the same time the company is investing heavily in R&D and taking operating losses. Consistent profitability for Unity is more likely to take place 3 to 5 years out, rather than over the next year.\nWhy Buy Unity?\nThe world appears to be in the beginning stages of adoption of technologies such as AR/VR, RT3D, Digital Twins, and the metaverse, which are all technologies that are related and overlap with each other. All of the above opportunities are potentially massive opportunities. The metaverse has been estimated by Morgan Stanley (NYSE:MS) to be an $8 trillion opportunity, while Matthew Ball, CEO of Venture Capital firm Epyllion, believes that the metaverse economy could value between $10-30 trillion in the next 10 to 15 years. Nvidia's (NASDAQ:NVDA) CEO Jensen Huang thinks that the metaverse economy could one day even be far bigger than that of the real-world economy.\nRecently, Facebook renamed itself to Meta Platforms (NASDAQ:FB), which could be a signal that the era of the metaverse is at the beginning stages. Through both the Facebook and Instagram platform, Mark Zuckerberg likely has enough data on consumer preferences to accurately gauge possible consumer adoption of such concepts as the metaverse. I don't think the decision to rebrand Facebook into Meta Platforms was made lightly. Zuckerberg has likely seen enough data indicating that the world is ready for VR platforms like Oculus and is also ready for concepts such as the metaverse.\nWhat makes many investors very excited is that while competition like the Unreal Engine provides fairly stiff competition in gaming, Unity is already beginning to dominate the content on emerging AR platforms with 90% share on Microsoft's (NASDAQ:MSFT) HoloLens and 90% of Samsung (Grey Market:OTC:SSNLF) Gear VR content. This gives Unity an excellent start at becoming a major player in the buildout of many of the economies that will grow around the metaverse and many other VR/AR applications.\nInvestors are already increasingly interested in companies that might be involved in the build-out of the metaverse and Unity is no exception. After the Facebook rebranding announcement on October 28, Unity received a temporary bump in stock price over the next several weeks, rising from a closing price of $144.08 on October 28 to a November 18 closing price of $201.12. So, investors need to be aware that the stock price can move on any type of news concerning the buildout or adoption of the metaverse.\nHowever, concepts like the metaverse and AR/VR, might take at least ten years to play out. While positive mentions of the metaverse might temporarily goose the company's stock, back in the real-world investors are very concerned about things like inflation and it didn't take long for the metaverse balloon to pop, as today the stock trades below where it was trading before the Meta Platforms announcement was first made. Investors need to realize that it might take at least 3 to 5 years before the metaverse and AR/VR really begins to move the needle in positively affecting Unity Software's fundamentals. Therefore, only long-term investors should buy Unity Software's stock.\nWhy Investors Should Avoid Unity\nInvestors looking for short-term gains over the next year should probably avoid Unity Software's stock, as there is substantial downside risk in the near term because of poor investor sentiment toward stocks like Unity. The market is most definitely in a \"Risk-Off\" mood and has little patience for highly valued stocks that are producing an operating loss. The stock is likely to be extremely volatile over the next year. Unity could soar on some analyst positive commentary of the Metaverse and just as easily the next day sink on news of an interest rate hike. Investors that are risk-averse and are overly worried by volatility should avoid buying Unity.\nSecondarily, while the TAM of things like the metaverse and AR/VR might be enormous, adoption could be slow and not be accomplished very easily. According to Morgan Stanley Analyst Brian Nowak, actually getting people to use a metaverse could be a major hurdle. This Business Insider article highlights the numerous problems that the metaverse could encounter such as privacy and whether the metaverse could actually provide value-add solutions for consumer pain points. So, investors can't expect a lot of bang for the buck in the near term from concepts like the metaverse, despite all of the hype in the news media about it.\nUnity Software Q3 2021 Earnings Results\nUnity Software announced earnings after the bell on November 9th and in a knee-jerk reaction the stock dropped sharply after hours,down at least 9%, likely for the reason that the stock had a huge runup into earnings on the back of Facebook's Meta Platforms announcement and some investors likely wanted to take profits.\nUnity opened on November 10th down 7% from the previous day's close but rapidly ran up after investors really began assessing the company's \"beat and raise\" quarter and the company's acquisition of Weta Digital. Unity's stock actually ended up 3% over the previous day's close. Investors could not really ignore that Unity really had a great quarter.\nUnity total Q3 revenues were up 43% year-over-year to $286.3 million, exceeding company expectations of revenues in the $260 to $265 million range. Unity's revenues also beat consensus analyst expectations of $266 million.\nData by YCharts\nUnity Software has three revenue sources named Create, Operate and Strategic Partnerships in which I explained what each segment does in my last article on Unity. Create Solutions and Operate Solutions revenue were $83.7 million and $185.0 million, respectively, an increase of 34% and 54%, respectively, from Q3 2020. Strategic Partnerships and Other revenue came in at $17.6 million, a decrease of 3% from Q3 2020.\nCreate Solutions and Operate Solutions came out to be 29% and 65% of revenue, respectively. So, Unity's largest revenue contributor, Operate, continues to be the fastest-growing part of the company.\nSource: Unity Software Q3 2021 Earnings Announcement\nUnity Q3 GAAP gross profit came in at 222.81 million with gross margins of 78%, up from 76% last year. Unity Q3 non-GAAP gross profit came in at $231.56 million with gross margins of 81%, up from 79% last year. CFO Luis Visoso indicated last quarter that the company has confidence that gross margins can be sustained above 70% over the long term.\nData by YCharts\nLast quarter, Unity's management mentioned on the earnings call that the company will continue to invest heavily on R&D and that can be seen this quarter with GAAP R&D expenses coming in at $178.41, up 53% over the year-ago period. GAAP R&D as a percentage of revenues was 62% opposed to 58% in the year-ago period. Non-GAAP R&D was $118.18 million, up 47% over the year-ago period. Non-GAAP R&D as a percentage of revenue was 41% opposed to 40% over the year-ago period.\nData by YCharts\nData by YCharts\nPart of the reason that investors can sometimes act skittish toward Unity Software is that the company, in the near term, is in heavy investment mode, while at the same time, the company's ability to generate excess returns on invested capital is more over the long-term. During times when investment sentiment is \"Risk Off\", the market is not very often kind to stocks that fit this profile, which is why the company has essentially flatlined this year, despite \"beat & raise\" quarters and the excitement of the metaverse ahead.\nCurrently, Unity is producing an operating loss both on a GAAP and non-GAAP basis. Unity Q3 GAAP loss from operations was $126.75 million with operating margins of -44%.\nUnity Q3 non-GAAP loss from operations was $12 million with operating margins of -4%.\nData by YCharts\nUnity Q3 non-GAAP EPS of -$0.06 beat analyst estimates by $0.01; GAAP EPS of -$0.41 missed analyst estimates by $0.05.\nUnity's Recent Business Performance\nDollar-Based Net Expansion Rate (DBNER): This is a critical metric to track for software companies that operate in the cloud. In an article titled,Why I Like High DBNERs, it mentions that companies that have consistently high DBNERs will grow revenues faster than similar businesses with a lower DBNERs, while also experiencing significant stock price appreciation.\nThe DBNER metric can also help investors analyze a company's competitive moat, its pricing power, the quality of the product/service and the stickiness of the company's business. The Why I Like High DBNERs article also mentions that the author considers a DBNER over 120% as very good and a number over 130% as outstanding.\nHere is Unity's DBNER history:\nSource: Unity Software 10-Q | Quarterly Report\nUnity has put up a DBNER of above 130% since Q3 2019. In Q3 2021, Unity put up a Dollar-based net expansion rate of 142%. This is in comparison to last year's Dollar-based net expansion rate of 144%, in the same period.\nUnity software has been putting up excellent DBNER over a relatively long period of time and my experience with companies that consistently put up such high DBNER numbers is that they eventually have a stock price that outperforms.\nCustomers contributing more than $100K to revenue: This metric represents a measure of Unity's penetration of larger enterprises, which include AAA gaming studios and large organizations in industries other than gaming.\nUnity Software strongly focuses on this metric because it represents the segment of the company's customer base where the majority of the revenue and revenue growth comes from. No one customer accounts for more than 10% of the revenue, so Unity does not have customer concentration risks at this time. In fact, the company could be considered widely diversified.\nUnity has 973 customers generating more than $100,000 of revenue TTM in Q3 2021, up from 739 a year earlier, which represents 32% YoY growth. This number is also up from 888 in Q2 2021. This strong growth is a trend that Unity management expects to continue moving forward.\nBalance Sheet\nData by YCharts\nUnity ended Q3 with approximately $1.28 billion in cash, cash equivalents, restricted cash and short-term investments. Unity has no long-term debt and 357.70 million in payables and accrued expenses. Unity has a very good balance sheet and can support all of its growth initiatives.\nData by YCharts\nFree cash flow in Q3 was $34 million, which brought the total free cash flow through the first 9 months of 2021 to -$100 million. This number includes around $50 million in charges from a lease dispute that was recorded in Q2. Management expects Unity to break even on a free cash flow basis sometime within FY2023.\nCompany Guidance\nSource: Unity Software Q3 2021 Earnings Announcement\nUnity Software CFO Luis Felipe Visoso stated during the conference call that Unity entered Q4 with very good momentum in the business. He projected Q4 revenues of $285 to $290 million, representing 29% to 32% year-on-year growth.\nThe company is raising full year guidance for the second time this year to $1.08 billion to $1.085 billion, representing 40% year-over-year growth. This represents an increase of $25 million on the high side of the range from previous guidance in Q2. The original revenue guidance given in Q1 was for $1.000 billion to $1.015 billion.\nUnity Q4 non-GAAP operating loss from operations is projected to be between $20 million to $25 million and between $59 million to $64 million for the full year.\nThe Weta Digital Acquisition\nOn November 09, after the bell, Unity surprised investors by announcing the very interesting acquisition of Weta Digital's tools, pipeline, and engineering talent for $1.62 billion. The tools being purchased were responsible for things like bringing Gollum to life in The Lord of the Rings films among many other movies. Anyone that has ever seen the visual effects in movies like Avatar understands that Weta's tools are very top of the line.\nBut what is the reason behind Unity making this acquisition?\nWell, this acquisition is a bid by Unity to close the VFX quality gap with the Unreal Engine from Epic Games (Private). Unity has always been known as creating a very versatile engine that is relatively easy to use and this might be the reason it has become a favorite among mobile developers. However, the Unreal engine is perceived to have better visual effects which might be the reason that developers making more expensive Triple-A games, tend to gravitate towards Unreal. With the Weta Digital tools acquisition, Unity should become a lot more competitive with Unreal in gaining developers producing Triple-A gaming titles.\nUntil this acquisition, Weta's 3D tools were used exclusively in-house at division within the company called Weta VFX, which consists of 1,700 visual artists that are directly responsible for creating the visual effects in many different popular movies. Weta VFX will eventually be renamed WetaFX and will become an independent studio that will license its tools from Unity.\nWeta Digital will become part of Unity Create Solutions and Create Solutions will gain around 275 engineers, a cloud-based platform and a collection of tools that are able to create all different types of special 3D effects. Unity will take Weta's tools and begin making them available to a wide variety of artists and creators throughout the film industry, the gaming industry, the internet, and also into other industries such as automotive, architecture and e-commerce.\nOn the earnings call, Unity management indicated that they plan on making a cloud-based version of Weta Digital to widen the access for millions of consumers who will be able to generate high-quality 3D content every day on different social media, gaming platforms and ultimately in \"metaverse\" worlds. The best explanation of why this acquisition took place is in the following article titled Unity, Weta, and Faceless Platforms.\nAnalyst Price Targets\nSource: Yahoo Finance\nThe above is based on 14 Wall Street analysts offering 12-month price targets for Unity in the last 3 months. The average price target is $166.76 with a high forecast of $194.00 and a low forecast of $85.00. The average price target representsa 24% increase from the last price of $134.82.\nData by YCharts\nUnity Software is selling at a relatively high valuation, especially considering the sentiment in the current market with investors worrying about inflation and the Fed possibly becoming aggressive in raising interest rates.\nConclusion\nUnity Software is a buy today but only for investors that are intent on being investors over at least a 5-year time frame, as it could possibly take five to ten years for the marketplace to adopt such concepts as VR/AR and the metaverse. Investors with short time horizons should probably avoid the stock as it is likely to have large downside risk in the current environment, be volatile and possibly not make major moves upwards for several years.","news_type":1},"isVote":1,"tweetType":1,"viewCount":1068,"commentLimit":10,"likeStatus":false,"favoriteStatus":false,"reportStatus":false,"symbols":[],"verified":2,"subType":0,"readableState":1,"langContent":"CN","currentLanguage":"CN","warmUpFlag":false,"orderFlag":false,"shareable":true,"causeOfNotShareable":"","featuresForAnalytics":[],"commentAndTweetFlag":false,"andRepostAutoSelectedFlag":false,"upFlag":false,"length":1,"xxTargetLangEnum":"ZH_CN"},"commentList":[],"isCommentEnd":true,"isTiger":false,"isWeiXinMini":false,"url":"/m/post/607224298"}
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