Considering Buying Unity

With the stock at an all-time low, it’s worth considering purchasing some shares.

Ultimately, I decided against it. Here’s my rationale.

Analysts believe three major themes warrant the stock drop.

+----------------------------------------------------------------------------+------------------------------------------------------------------+---------------------------------------+
| Analysts believe end user market headwinds factors will discourage creation | Analysts also believe the business model and leadership are flawed | Analysts believe competition is strong |
+----------------------------------------------------------------------------+------------------------------------------------------------------+---------------------------------------+
| Declining WTP of the End User (players)                                    | Inability to monetize                                            | Epic’s Unreal to overtake Unity       |
| New game low success rate                                                  | Uncertainty on c-suite shakeup and Israel operations             |                                       |
| AR/VR headwinds                                                            |                                                                  |                                       |
+----------------------------------------------------------------------------+------------------------------------------------------------------+---------------------------------------+

What Analysts Miss (Upsides)

Trend of declining WTP of end users 2022-present is likely to reverse and normalize
Compared to other entertainment costs, mobile games are sensible. Movie ticket 9 bucks on average for 2 hours of entertainment, $4.50/hour value. Games are up to 60 bucks for 100+ hours of gameplay, ~$0.50 cents/hour value. Gamers take this into account when buying.

AAA hits are rare, yes, but low-res releases are lower-cost and do break-through to at least profitable phad status
Unity’s sweet spot is on lower-res games, not the highest quality. Dominance of this game type translates better to winning the exploding global gaming market with connectivity constraints, such as in India and Brazil (9.5bn and 5.4bn game downloads respectively, versus US 4.5bn in 2023)

Unity has proven an ability to innovate new revenue streams by offering impactful technical solutions to client pain points, rather than putting a promotional wrapper on top of existing products
For example, their overhaul of Verified Solutions on Asset Store, in which they added middleware to the asset store (AI tools, security plug-ins, things besides “super loaded blast gun”), decreased the developer churn of asset purchases from 80% to 40%. There has since not been a single layoff in that department since 2018.

New CEO from Zynga
King of effective mobile monetization coming in as the new CEO is a reason to believe Unity will be re-orged and cleaned up, for a turnaround story.

What Analysts Correctly See (downsides)

Competition: Epic (Unreal Engine) is rich and private. It can out-last Unity, slowly taking over market share while Unity runs on fumes and eventually crashes, America-Russia Cold War style.

• Unity is Poor: Key competitor Epic is cash-rich from Fortnite cosmetic and battle pass revenue, plus Tencent and Disney capital injections
• Unity is Public: Epic’s private status allows them to patiently build a truly user-centric engine with top engineering talent,

Dead End Investments:

• Reality Bites: Unity made a big bet on Augmented and Virtual Reality. Analysts may have overemphasized the potential of that revenue stream in prior estimates given the AR/VR temperature today (June 20), such as:

• Ironsource: Unity acquired the gaming ad monetization platform that is a worse version of applovin (see my prior post), and it’s not going great

Israel: Unity’s Operating units (versus Creator units) are run out of Tel Aviv. Near term uncertainty and disruption expected on the operating (post-launch game support) side of the business.

Deteriorating Moats

• Unity’s Current Omni-Device Moat: Unity wins on mac and mobile, and touts the ability to create-once-publish-everywhere, while Unreal only plays on PC and console. This is a choice by Fortnite that can be reversed at any time.
• Unity’s Technical Training Credential Moat: Gaming studios historically saught Unity-trained developers on their engineering teams, and the credential had value. With Unreal’s Verse and AI easing the coding barriers, the value of knowing how to code in Unity will decrease for the next generation of game creators.