Web3 is exciting but there are plenty of tradtech companies that are enabling Web3. With the recent market sell-off, some of these names are looking really interesting value. Gaming is still such a big focus area for me as it is invading every aspect of our lives and I can’t see that stopping. I do feel a little dumb when it comes to how games are created. Just like when crypto first came out, I coded my own blockchain, when AI was first talked about I coded my own self driving virtual go-kart I felt the same need here. So this Christmas I spent quite a lot of hours doing tutorials (1, 2) on how to develop games on different gaming engines.
Unity (Ticker: U) is the largest game engine in the world powering over half the world’s mobile games. You can think of it like Adobe Photoshop but for game developers. Developers love using Unity because it is easy to use, easy to montise and they don’t need to re-write their code for each operating system they want to launch on, just click a button and hey presto it’s available on 20 platforms.
Unity is…
HUGE - 3.4bln players interact with the Unity engine each day, they are collecting 50bln data points on their users.
Gaining share - Their core engine grew 27% YoY in 2021, faster than the overall game market.
A sleeping advertising beast - One of the big issues that Meta faced during their earnings results was the significant impact that IDFA changes had on their business. This is where Apple is asking users permission to allow the app to track them so that advertising can be better targeted. Most users, unsurprisingly, are saying no. Unity is amongst a small group of companies that are actually set to benefit from the changes as they have unique captive datasets on their customers that can be sold to advertisers.
MS thinks that non-gaming ad dollars could double their advertising TAM to $250bln by 2024.Getting Non-gaming companies to use them - In the results they just released, Unity told that market for the first time that 25% of their engine revenues are coming from non-gaming customers such as manufacturing, e-commerce and design and this business was growing at 70%. This was a massive positive shock to the market.
What are people using their engine for? Simulation of the physical real world. For example, telecom companies are creating a “digital twin” of the real world, putting 5G masts on buildings and then simulating signal strength. Design companies are using it to recreate buildings, interiors and even simulate cities for city planners. Surgeons are using it to practise complex surgeriesa sleeping Creator Giant they bought a company Weta (Peter Jackson’s digital company, watch this ) that has been used to create some of the most impressive VFX we have seen in movies ever. This will add another slate of creatives that will become hooked on Unity’s tools and engine
Captive customers & flywheels - Whilst most startups talk about having flywheels, Unity truly does. The more people use their engine, the more money they make from charging for compute storage and data. The more data they have the more they can charge for advertising, which makes developers more money, which encourages more developers to use their engine. That is a real flywheel
Not a cash-burning startup - it will be free cash flow positive next year by street estimates
Addictive for companies - they only lose 1% of their customer base each year and of those that stay, they generally spend almost 40% more on the platform each year.
The company will produce about $1.5bln in revenues this year and has a market cap of $27bln. Sometimes buying the picks and shovels in a gold rush is more profitable than looking for gold itself!
Disclosure: I picked some stock up last week, obviously, none of this is financial advice.