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Unity Software: Why I'm Buying The 40% Correction

May 04, 2021 1:50 PM ETUnity Software Inc. (U)60 Comments


  • Unity Software has fallen 40% over the past few months.
  • This move makes sense as the whole group of speculative software stocks have been getting pounded.
  • However, Unity is much higher-quality than many of its peers and should find buyers at these levels.
  • Investors viewing this purely as a gaming play are missing its multiple other shots on goal in 3D graphics.
  • Looking for more investing ideas like this one? Get them exclusively at Ian's Insider Corner. Learn More »

Sede de Unity Software en San Francisco
Photo by Sundry Photography/iStock Editorial via Getty Images

While the stock market is making new all-time highs, not all companies are participating equally. Specifically, after dominating in 2020, tech stocks have been a slump. The mega-cap tech stocks are still doing alright, however anything that

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This article was written by

Ian Bezek profile picture

Ian worked for Kerrisdale, a New York activist hedge fund, for three years, before moving to Latin America to pursue entrepreneurial opportunities there. His Ian's Insider Corner service provides live chat, model portfolios, full access and updates to his "IMF" portfolio, along with a weekly newsletter which expands on these topics.

Analyst’s Disclosure: I am/we are long U, AI, BLI, FB. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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Comments (60)

Ian Bezek profile picture
Facebook is making the full pivot to the metaverse now. The 3D reality asset they wanted to buy that got away -- Unity -- is still hanging out there independent for the time being.

Valuation has gotten even steeper since this article but the company is executing well and a flood of hot money is going to be coming at this sector now.
six-oh profile picture
@Ian Bezek

Ian, since you wrote this "strong buy" recommendation on Unity, the stock price has cratered 65% (versus 8% for SPY). Perhaps Meta will buy the company now?

Please comment.
Ian Bezek profile picture
@six-oh Stock doubled since I wrote this article, and I advised my members that I was selling at $180. That said, I bought again at $90 when it dropped in early 2022, so that's not been so great.
six-oh profile picture
@Ian Bezek

Got it. Do you think that Unity will be acquired now that the valuation is where it is now?
Unity stock is vastly overpriced - The engine technology is several years behind the cutting edge of unreal, custom game engines etc. The pace of development at unity is woeful, its just one bad tech decision after another. At this point, unity is pretty much just an average cross platform mesh rendering system with a bunch of other off the shelf middleware holding it together. Features are often deprecated before they even really go fully live. This stock will tank below $50 soon.
six-oh profile picture
Revenue growth is slowing. From 40% the last couple of years to 30% guidance from the CFO on last night’s call. Is that “hypergrowth”?
Vondagreat profile picture
They just beat their earnings top and bottom
AreaMan profile picture
I work in a non-gaming industry and have used Unity to develop industrial AR applications. The potential of AR is incredible and once the hardware catches up it will explode, and the hardware is getting pretty good. I don't fan-boy over many growth stocks, but any strong AR play (unity or epic) are buys in my book. Waiting for better prices and will average in as it drops
When do you project they will have positive cash flow?
Ian Bezek profile picture
Last two quarters were already positive.
anomaly1 profile picture
$55 is still overpriced
A interesting pick and somewhat out of character for you based on previous articles. Combining a "extremely expensive stock" with poor technicals and a market that is not even receptive to good earnings from this sector of tech could spell trouble. Earnings next week (5/11) and $90 support is very close. Own ADBE and I think that is expensive. Good luck, don't think I would buy before earnings. Nice price action after excellent earnings is hard to come by recently.
Ian Bezek profile picture
@kgerickson I own so few pure growth stocks (as you know from my past picks) that I'm willing to compromise a bit on valuation to get a position. Past attempts to do this (such as Spotify and Avalara) have now doubled for me. Perhaps this time the tech stocks don't bounce and I end up buying more U stock at $60 next quarter. Not optimal starting my position here in that case, but I can live with it if that's how it goes.
CT Programmer profile picture
Interesting article. I was in a company called HIMAX for years waiting for the whole AR/VR thing to pan out, and that was about a decade ago. They spiked on work with Google Glass, which then flopped and was dumped. My point is you can be waiting a LONG time for this stuff.

Also, as an indie developer myself, I don't develop in Unity although I do buy game assets from their store often. It is a good and robust marketplace. But the whole ads in gaming thing is really not that lucrative. I've looked at the stats and if you have a VERY popular game, putting a banner ad in it can make you about $15K per year. Really peanuts to annoy all your users and likely promote similar games by others that will take your users away. The whole billions of dollars in ads in apps just boggles my mind. I've personally NEVER clicked on a banner ad (except by accident), and seeing one is more likely to make me irritated at a company than prefer them. How this whole ecosystem of "free" software supported by ads stays afloat I just don't get. We've now seen that usher in a whole generation of software where you pay nothing up front and they nickel and dime you on the back end. That's because users have gotten used to "free" and balk at paying upfront for a game. That has increased the size of the gaming market, but brought down the margins. Google and FB can be making billions off ads that annoy everyone, but everyone else is getting peanuts for ads.

And Adobe has gotten to the point where a subscription to Adobe Acrobat to create PDF's runs about $200 per year last I checked. Obviously, they have cornered that market and can charge outrageous fees, so I don't think you can really compare to them.
Ian Bezek profile picture
@CT Programmer You're right that the ads are very annoying. I'd never play a game funded by ads... much happier to plunk down the $40 upfront.

Unity does own the ad distribution so margins may be better than you think, they're not just trying to get a few scraps from Google.

In an ideal world, ad-driven games would shrink and the market would go to normal paid ones, which Unity does fine on too, but I'm not sure that will happen as long as the smartphone is how most casual folks prefer to game.
Mometic profile picture
@Ian Bezek Look at the demographics of who clicks on ads in games. I'd say 80% are kids and remaining are accidental. It's an exploited dark pattern in the industry.
thanks for the writeup... curious what you make of the insider selling?
Ian Bezek profile picture
Not surprising when insiders sell some right after an IPO and they finally have liquidity. If they keep selling going forward, I'd take it more seriously.
This stock will go below 50 this year
TheDividendKing profile picture
@chucklacasa I can only hope so. I use unity as a developer as well... it has won mind share for gaming and digital goods (gaming assets).
Tulip hoard profile picture
Ian thank you for a well written piece. This type of investment isn't typically my cup of tea, however you do have my attention. I have owned eman for many years as an at/vr play much further upstream as far as the technology and hardware and is a company that will eventually be bought out by a big boy like Apple or Google or a major defense contractor like Lockheed or Raytheon. Thanks again.
dmaroz profile picture
@Ian Bezek

Nice article (as always). I like Unity and am glad I resisted the temptation to jump on the bandwagon earlier. I have 2 concerns:

1. Price volatility when SPAC craziness starts to unwind. Similar to Viacom/Archegos but with ARKK and maybe others.
2. Valuation and uncertainty about future revenue growth drivers. I understand conceptually that VR is going to grow substantially over next decade but at this point it is hard to predict to what extent it will cannibalize their existing PC/Mobile gaming revenue.

I am going to monitor it for a couple of weeks with a plan to open 1/2 position. Curious if you share the concerns above.
Very rare to see you buying growth .
Ian Bezek profile picture
@imeldo marcos There haven't been many high-quality growth stocks dropping 50% in recent years. I'm happy to buy more if prices improve.
@Ian Bezek Great article, Ian. I've been building a small position in BLI but will have to look into Unity. The story sounds compelling. Thanks for the article, as always.

Also, nice movement on CAAP lately. I unloaded some of the shares I bought near the nadir but am hoping to hold the rest for the long haul. Think we'll see $8-10 in the future?
Ian Bezek profile picture
@Steelkilt81 I'm still bullish on CAAP though the risk/reward is more reasonable now instead of being hugely lopsided to the upside.
Omer Altay profile picture
Unity is a great business but the price is insane. They already own 70% of the mobile gaming industry and huge swaths of PC gaming too, but their take rates are dismally low. Mobile is the biggest platform for gaming and being the dominant engine here means they've already tapped almost the entire TAM. They need to increase their take rate, which they can't do without losing business to Unreal, which is why they're desperately trying to increase TAM by going after 3D / Movies / other nonsense outside their core market.

The only real growth here is the continued growth of gaming IMO, but growth is going to massively slow down from here IMO. They already are dominant in their core biz with little room for growth. They need to do something to increase take rates.
Ian Bezek profile picture
Why do you see the other efforts as "nonsense"?
Omer Altay profile picture
@Ian Bezek They're very good at their core business, which is their game engine. Competing for 3D animations/movies/tv is a whole different business and not their core competency. The P/S multiple makes no sense. Why assign a cloud saas multiple to a company that already owns the market? Where is growth going to come from? The core biz should be valued at 35-40 P/E (mature businesses command a lot less, but gaming is growing leaps and bounds, so a high P/E is warranted).

Dismissing other efforts as nonsense is hyperbolic, but they should focus on increasing take rates by adding more value in their core business rather than chasing distractions. Unreal is a strong competitor and they could easily fall behind.

I like ADBE's P/S and P/E multiples a lot better than Unity. At another 50% discount, I'd be interested in Unity as I'm bullish on the gaming sector as a whole and Unity powers much of the space.
@Omer Altay why own something that already owns the market? Fair point. But consider this: the market (the pie) continues to expand, and they continue to capture the expanding market.
Yeah Cool article mate. I like Unity a lot and have a position despite it's present over-valuation. I'm focused on buying Alibaba while it's in the $220's but I do love Unity so the Lower it goes the more I'll pick up I think.
Great work!
could not agree more. I am buying every few months for 2-3k$ U stocks.

Valuation is rich but considering Unity has a full Monopol in Mobile Gaming and a Duopol in VR/AR, the risk is quite low.

Look at Amazon Lumberyard, it's very hard to build an attractive game engine
@James Sunny I agree the risk is low. Worst case scenario is there is a general tech correction, and the shares are dead money until the company grows into its valuation.
Ian Bezek profile picture
@Qichar Yep, the valuation is certainly steep so it's not hard to imagine Unity stock trading sideways or down for awhile while it grows into the price.
This is a great article. Thank you for sharing your thoughts on Unity Software.
SamsSuperCereal profile picture
If you look at Epic Games and the path they went through with the Unreal engine and the royalties off of the engine license, Unity is pretty much a no-brainer if it goes into the 80's and under. While this isn't exactly the same business model as Epic atm as they don't have the same titles, it's only a matter of time with how much money some of these games make, think Pokemon Go.

I completely agree with Ian on how Valheim is the big example of the impact of Unity's engine, which is only going to attract even more hopeful and creative small teams of developers wanting to make their game. U got down to 92 today, it's not out of the question it could drop into the 80's, which just IMHO would be a gift.
Ian Bezek profile picture
@Sam Matthews Will be interesting to see how Epic does if it goes public. And yes, I expect Valheim's unexpected success to be a big boon for Unity... will be interesting to see how much more share it gains in PC games in coming year or two as other developers give it a try.
@Ian Bezek Epic Games is 40% owned by Tencent (TCEHY), and apparently more than 50% owned by its CEO, Tim Sweeny. I don't know if they can go public like this.
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