Hope everyone had a nice weekend!
I wanted to drop a quick note about Unity as my next earnings premium blog is coming out later this week and this is probably one you should hear from me on sooner rather than later.
You can expect more detailed analysis on Voyager Digital by Tuesday. As you can imagine, we go through many stocks before we find ones that we like, so the process can be a bit involved when recommending new momentum names.
Regarding QCOM, I’m not worried about supply issues as I continue to see this as the best way to invest in 5G along with Marvell. However, I’ll elaborate more by the end of the week in a more detailed write-up.
Next week, you’ll get my H1 2021 cloud report. This is one of my favorite reports because it can bring a lot of clarity to the space. Plus, cloud has taken a back seat so a good time to make sure we are well-positioned.
Also, we are getting close on the new website. Definitely February for ETA and could be as soon as end of next week for the live demo.
Here are my thoughts on Unity:
Unity was hit hard following the Q4 2020 earnings report with the stock down nearly 15%. This company is bound to polarize investors as it has a valuation on the higher side and is now guiding low for fiscal 2021 for full year revenue of $950 million to $970 million, or 23% to 26%, compared to growth of 43% in fiscal 2020.
We have a 1% allocation to Unity and are very comfortable with this allocation. Primarily, we think Unity will exit this year with the XR story out in front and we are not as concerned with any impact from the IDFA changes in the short-term. This isn’t a stock that I care to time as the company has a near monopoly on XR development across all verticals.
So, why is Unity guiding lower? I think the company needs to sort through quite a few things and is being cautious while doing so. First, covid created a pull forward for gaming companies. Second, IDFA is taking effect in the spring. Third, the market for AR/VR development has not taken off yet (keyword yet).
Unity is in a similar position as Nvidia or AMD a few years ago – gaming is a nice foundation but the real story is that gaming has placed Unity in a unique position for the next wave of app development.
Unity Ads must navigate changes from Apple on the IDFA – however, I don’t think they’ll have any trouble doing so. The IDFA changes from Apple are aimed at companies that essentially perform surveillance on the mobile device under the guise of behavioral ad targeting, such as Facebook and Google.
I’ve maintained that I think the demand side will get hit harder here than the supply side as they do not own the relationship with the publisher. Unity is on the supply side and owns this relationship. Per Unity management, they will see about a $30 million hit from IDFA changes.
Gaming is primarily contextual advertising rather than behavioral targeting. By contextual, I am referring to the fact that advertisers buy gaming audiences based on the fact the gaming content is enough to target the audience. Advertisers can target adult men by certain games, adult women by certain games and children by certain games. Contextual advertising does not require IDFA.
As far as contextual advertising goes, gaming is a leading category for this type of advertising. Finance is a good one too because advertisers can target based on content (Fidelity doesn’t need to know your behavior to target you inside of finance content – you’ve already qualified yourself as a target customer by reading stock news). This is why Unity’s exclusive focus on gaming should do well relative to their peers.
Unity has 2.7 billion monthly active users (MAU) across its platform. This is A LOT of data (the MAU rivals Facebook). They are allowed to package this data into publisher segments without violating privacy. Net retention rate is 138%.
We don’t have a larger position (2-3%) in Unity because the real thesis is not fully baked yet. I’m guessing that in the next 2-3 quarters, we will be increasing our position size as Unity will likely navigate IDFA better than its ad-tech peers and the XR development story should start to reveal itself.
The management said they see the company being FCF positive by 2023 – so we should be fully allocated by 2022 at the latest, I would imagine.
The lock-up for Unity expires mid-March. Unity employees have been able to sell 15% of their vested shares since the company began trading.
I’ll send this out as a blog update to make sure everyone sees it.
Thanks! Beth