Today we have an extremely speculative idea.: take shares in Danish gaming software maker Unity Software (NYSE: U), to cash in on their rebound.
Growth potential and validity: 21,5% behind 14 Months; 35,5% behind 2 of the year; 10% per annum during 15 years.
Why stocks can go up: recently they fell hard, and the demand for the company's software is great.
How do we act: take now 149,00 $.
When creating the material, sources were used, inaccessible to users from the Russian Federation. We hope, Do you know, what to do.
No guarantees
Our reflections are based on the analysis of the company's business and the personal experience of our investors, but remember: not a fact, that the investment idea will work like this, as we expect. Everything, what we write, are forecasts and hypotheses, not a call to action. To rely on our reflections or not – it's up to you.
And what is there with the author's forecasts
Research, like this and this, talk about, that the accuracy of target price predictions is low. And that's ok: there are always too many surprises on the stock exchange and accurate forecasts are rarely realized. If the situation were reversed, then funds based on computer algorithms would show results better than people, but alas, they work worse.
So we're not trying to build complex models.. The profitability forecast in the article is the author's expectations. We specify this forecast for the landmark. As with the investment idea in general, readers decide for themselves, it is worth trusting the author and focusing on the forecast or not.
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Investment editorial office
What the company makes money on
Unity is a Danish company, which made the game engine of the same name. But in general, the company's software is used for a bunch of different things.: for 3D modeling in architecture, automotive and film industry. The company recently bought part of New Zealand's Weta Digital, which dealt with visual effects for cinema, for example for "Avatar" by James Cameron.
According to Unity's annual report, its revenue is divided as follows:
- Solutions for creators - 39%. Software, needed for content production. Here the revenue goes to Unity on a subscription model.
- Operational Solutions - 61%. Content management software, including its further monetization. Here, customers pay Unity based on the use of the company's software..
Revenue by country and region:
- USA - 25,27%.
- China and Taiwan 14,26%.
- Europe, Middle East and Africa - 36%.
- Other countries in the Asia-Pacific region - 19,27%.
- Other countries in the Western Hemisphere − 5,2%.
The company is defiantly unprofitable: her negative margin is almost 45% from its revenue.
Arguments in favor of the company
Fell down. Since November, the company's shares have tumbled from 201 to 148,01 $. So we can pick up stocks in anticipation of a rebound.
Games and more. Coronacrisis, probably, will last much longer, than people originally thought. So,, the demand for games will grow along with the profitability of game development - and the demand for Unity software. A separate plus - the Unity engine is very convenient for the production of mobile games, and, as we remember the idea with Activision Blizzard, this segment of the gaming market is the fastest growing and most promising.
Well, the acquisition of Weta technologies will bring Unity much closer to that., so that it can compete with the Unreal engine of its competitors for the attention of developers of "big" games.
Looking wider, then the current severe restrictions on mass events will stimulate the development of the performing arts towards greater “graphic intensity”. Various graphic solutions will be more in demand: in the cinema for real large filming offline now you need not only money, but also compliance with a bunch of complex epidemiological protocols. Now even in fights without rules, the use of Unity technology is being tested.
So in general Unity can count, that its revenue will continue to grow, — i, may be, someday we will see a profit from this company.
Recognizability. Among youth and retail investors, the Unity brand is recognizable and popular. Considering, that this category of investors is becoming more and more active on the stock exchange, I think, that the shares of the company will have significant support from some newcomers, who bought these shares literally because, that “well, this is Unity, they make cool games on their engine”.
Certainly, because, that the capitalization of Unity is slightly less than $ 45 billion, the potential for pumping its shares is very limited. But the company's popularity among the most active part of the investor community will be a big plus for quotes..
What can get in the way
This price, this monster. The company's valuation is completely insane: her P / S above 35 and at the same time it is profitable. The company's capitalization is very, very big: 43,25 billion dollars. That is, the company is unrealistically expensive, not only in relative, but also in absolute numbers - which means, the possibility of its purchase by someone with a significant premium to the current price is close to zero. It will also reduce the potential for equity pumping by retail investors.. Now, if she was worth once in 4 cheaper, then we could hope for a serious effect from pumping.
"Where's the money, Lebowski?» The company is unprofitable, and that, by definition, makes its stock volatile. Think, this will motivate Unity to issue additional shares - and the company's popularity among investors can create sufficient demand on the exchange for new shares, and then the quotes will not fall. Or maybe not create.
There are also risks of bankruptcy. Although I think, that they are not so high in case of Unity: probably, the company will cost an additional issue of shares. Worst case scenario would be a fivefold drop in stocks, after which they with a not very large premium in 20% some Microsoft will buy to the new price. And this option is quite likely..
What's the bottom line?
You can take shares now by 149,00 $. And then there are three options.:
- wait 180 $. Think, we will reach this level in the next 14 Months;
- wait 201 $. Here, I think, prepare to wait two years;
- keep shares next 15 years, to see, how the company will conquer the world or sink into oblivion.
But remember, that this idea is highly speculative, and don't take these shares, if you are not ready to tolerate volatility.
