Theres’ a lot of speculation about what the metaverse is — and why we should even care. Here’s how I see it. Imagine sitting in a room whose walls, ceiling and floor are lined with LED screens that allow you to customize the room to any configuration imaginable, notes Adam Johnson, editor of Bullseye Brief.
You could make it look like a mountain top, or your kitchen table or the conference room in your office. Now invite others to join you virtually in real-time, as if they were there. Maybe they’re joining you from a 3D Zoom screen, or maybe AI is recreating their likeness as they speak into a phone.
The concept may sound far-fetched, but it’s how digital games are already being played. A gamer in California controls a hockey player who passes the puck to a teammate controlled by a gamer in New York. They are playing in realtime, reacting to one other and talking through a headset thousands of miles apart. The metaverse is here.
Unity Software Inc. (U) ranks #1 globally as the only publicly traded pure-play platform enabling the creation and operation of interactive, real-time 3D content (RT3D). Over 70% of the world’s top 1,000 mobile games are made exclusively using Unity software, and nearly 2.6B people engage monthly within Unity environments.
At the design stage, the company’s unique tools empower game developers, building architects, automotive designers, and filmmakers to bring complex creations to life.
Once operational, Unity’s platform provides a comprehensive set of solutions to implement and monetize immersive content across mobile phones, tablets, PCs, consoles, augmented and virtual reality devices. Revenues are growing 35-40% and will exceed $1B this year, setting the stage for positive EBITDA next year and after-tax profitability in 2023.
While current market capitalization of $40B implies a somewhat elevated valuation of 30 times forward sales, Unity is uniquely positioned to lead the digitization of assets into the metaverse. I am a buyer of Unity on pullbacks, and I outline specific strategies to begin building my position.
Unity’s software creates immersive life-like experiences in three ways:
• Interactivity – Allows end-users from around the world to connect with immersive content as well as with one another. Today’s games take players into seemingly real scenes and landscapes where they can engage with dynamic content. In multiplayer environments, content interaction instantly influences other players’ experience of the game. As one player pushes a button for an object to go right, it enters another player’s point of view instantly, in real-time.
• Real-Time – Enables content to be rendered at up to 120 photorealistic images per second on a digital display. Display pixels can be drawn and redrawn as fast as the human eye can see, rendering content that is instantly responsive to end-user actions and appears lifelike. If for example, you’re walking along a street in a virtual environment and notice how shadows around you change with every step, or that you can see your image reflected in a window as you pass by, that’s thanks to Unity programing (powered by Nvidia’s chips).
• 3D – Ensures graphics are expressed with shape and depth, permitting multiple viewing angles. An end-user can virtually pick up an object, look underneath, move it around and enjoy an entirely new and unique experience, all in the same environment. BMW and Honda use Unity’s platform to create virtual, 3D mock-ups of new cars. The opportunities of augmented and virtual reality are only made possible through 3D.
I see several downside risks, the most noticeable of which is valuation. Unity is expensive at 30 times sales. The stock has declined to $150 from a high of $220… it will bottom at some point and that’s where I want to own it. Second, competitors will inevitably emerge as the metaverse becomes more pervasive.
Third, unanticipated costs to build out as-yet undefined metaverse capability could pressure current high margins. Fourth, management recently soft-pedaled guidance, suggesting metaverse adoption is a long-term concept which may take longer than expected to gain traction (like autonomous vehicles).
I think Unity’s stock could double based on its best-in-class product and strong growth outlook — despite a fairly lofty multiple of 30 times sales currently. Unity has first mover advantage, a moat of hard to replicate IP and its only competition is a private company called Epic Games.
Since Unity operates in a duopoly, but is the only publicly traded RT3D enabler, it’s really in a league by itself. To arrive at my $260 target, I multiply current revenue of $1B by current growth of 40%, then go out five years while tapering growth to 30% and applying a 20 multiple (compared to a 30 multiple today). I discount back to the present at 3% and divide by shares outstanding to arrive at $260.
I like owning Unity in an area of support between $120-130. This is where the stock steadied earlier in the year. It also coincides with an upward-sloping trend line at $135, and the 200-day moving average at $118. While Unity sprinted above $200 in early November on strong earnings, market volatility has knocked it down 30%. There may be more to go amid considerable market volatility. I’m inclined wait patiently for my price.
