Difficult times that could lead to better opportunities

Key Takeaways

• Unity is one of the top 3 tools to develop games and real time 3D prototyping and interactive data visualisation for many industries
• It has become the default game engine for Indie developers
• It has the ability to create VR games and apps
• AI enabled that allows prompt based game creation. It can also access AI models at runtime
• 3.6B made by unity downloads (mobile + Steam)
• Games can be exported to 20+ Platforms
• Unity is the only game engine company (that I know of) that can be traded in the stock market.

Catalysts

Positives

• Hard exit barrier.
• Unity v6 launched not too long ago
  • Several performance improvement
    • Reduces CPU workload on 30% to 50%,
    • Up to 50% CPU frame-time reduction for game objects
• Free Cash Flow is positive since Sept 2023 and has remained this way. Mostly due to large asset depreciation and stock based comp. but also due to large employee count reductions, (25% workforce) and several offices closed across the world.

Negatives

• Stock price has been in declined since Q4 2021 due to concerns about future profitability and poor performance
• In 2023 it fell 15% after $1 billion sale of convertible senior notes (raise funds from investors) plus a disappointing Q3 performance
• Change in fees model to a runtime-fee (retroactively) created a turmoil across the community and eroded trust
  • A "good amount" of users started to look for better options (Unreal Engine and Godot). They pulled back with an apology letter and made some improvements but the real effect is yet to be seen.
  • Godot donors increased by 170%, and monthly donations surged by 40%.
  • Matthew Bromberg was appointed the new CEO after John Riccitiello resignation just after runtime-fee
• P/S ration is 3.1x indicates a expectation of a slow growth

Assumptions

• Unity finds a subscription model that allows them to improve quarterly performance and to become profitable in 5 years.
• They keep reducing their expenses and improve the profit margin
• The drop a number of other project and focus on their main product which is the game engine.

• Where do you think revenue will be in 5 years time? and why?
  • If they find a good fee model embraced by customers, revenue could increase to 5% p.a and set revenue to $2.7b /y
• Where do you think earnings will be in 5 years time? and why?
  • After all the expenses cuts done so far, earnings could reach $411.1m /y with a profit margin of 15%
• The above assumptions yield a fair value of 20.31% which makes the company 16.7% undervalued.

Risks

• The trust in Unity by the community is not restored as expected
• A good amount of Unity game devs could choose another engine/framework for the next project
• Competitors can take advantage of increased user base.
• Godot open source dev team and engine improvement will increase in the future thanks to the boost in donations.