Think of it as “kind of like the difference between hiring a venue to put on a show vs. building a venue to put on a show. The venue stays the same, but what you create in that space is unique.”
For me, that is perhaps the easiest-to-understand description of PaaS, or platforms as a service, courtesy of Big Commerce.
Users of PaaS are software and application developers. PaaS vendors provide the hardware and software tools over the internet that allow those developers to do their thing in a cost-effective and time-effective manner.
And PaaS is kind of a big deal. Market research company Statista estimates the global PaaS market at $43.5 billion this year, growing 66% to $72 billion in 2022.
Today’s featured company is one such vendor that recently received a big vote of confidence from one of the most successful tech equity analysts in the business.
— Bob Bogda, Editor
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Earlier this week, I discussed the incredible investing record of Catherine Wood, the tech genius at the helm of ARK Invest, the fund management and equity analyst firm she founded in 2014. With Ms. Wood at the helm, ARK Invest’s flagship product, ARK Innovation ETF (ARKK), is up 107% over the past six months, including 32% this past quarter. Since its October 2014 launch, shares of ARKK are up nearly 340% (four times better than the S&P 500 over the same period).
Wood’s knack for finding the market’s next big leaders is outstanding. For example, she bought shares of Tesla back in the fourth quarter of 2016, and it is currently her largest holding. Wood is up over 570% on those early shares, which now comprise 8.3% of the full portfolio.
Wood’s second and third-largest holdings are Invitae Corp. (NVTA), a medtech company, and Squarespace (SQ), the online payments processor. Both positions were also launched back in the fourth quarter of 2016 – SQ was bought at the IPO launch — and they are currently up over 500% and a massive 1,200%, respectively.
This brings me to Wood’s most recent purchase. On September 22, it was disclosed by HedgeMind.com that Wood had purchased an additional 518,000 shares of Unity Software (U). This brought her total position to nearly 670,000 shares, an aggressive conviction trade for ARK, especially considering that Unity is a new IPO and only began trading on September 18. Obviously, following Wood’s lead into TSLA, SQ, and NVTA would have been the smart thing to do. How about now with Unity Software?
In the interest of full disclosure, I got myself and my clients into shares of U the same day HedgeMind made the announcement. Seeing that Cathie Wood was buying a new IPO in the tech sector was all I needed to know. But the deeper I dug into the details of this trade, the more clearly I could see Wood’s rationale. Granted, finding detailed info on a new IPO is not easy. But what public info there is makes the trade an intriguing one. While I initially considered the buy a short-term “swing trade,” I am now in for the long haul. Here’s why…
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Unity Software (U), a platform-as-a-service (PaaS) company, specializes in 3D applications development. Through its flagship service, Unity Platform, the company serves clients like Disney and Pixar, car makers like Audi and Toyota, and several large gaming companies – especially those with a strong mobile footprint – that use the platform, as the company website states, to allow “artists, designers, and developers to work together to create amazing immersive and interactive experiences.” Last year, Unity was used in more than half (53%) of the top 1,000 mobile games in the Apple App Store and on Google Play.
Unlike that offered by its larger competitor, Take-Two Interactive (TTWO), the Unity Platform is scalable. It allows game developers to work no matter what size their budget. The company is run by the former CEO of Electronic Arts (EA), so he certainly knows the big enterprise side of the business. But by using a tiered subscription model, Unity caters to end-users as large as Disney and as small as independent game developers like Battlestate and Team Cherry.
In 2019, Unity’s revenue grew 42%. In just the first half of 2020, Unity has seen sales growth climb 39%, an annualized rate of 78%, along with an acceleration in year-on-year growth (the first since March last year). According to company data, the past 10 quarters have each seen sales rise, quarter on quarter, at least 35% (excellent) with three out of 10 quarters showing accelerated growth rates. Gross margins have also risen 80% over that time, and the negative operating margins have been narrowing.
While game development is Unity’s main vertical, it also offers its platform to other sectors. Car makers, furniture designers, commercial architects, construction firms, film producers, transport engineers — they all use the Unity Platform. And there are new extensions in development: educational immersion, for example, where students can “travel” back in time to visit an historical era, and 3D imagery of molecules and chemical reactions allowing scientists to do research visually. The applications are virtually endless. Unity estimates the total market opportunity to be nearly $30 billion, with only about a third of that coming from gaming.
Action to Take: For these reasons, and for whatever reasons that led Cathie Wood to load up on Unity shares, I recommend at least a small starter position in U for the growth-oriented investor. Any price under $100 is a good place to start, with additions being made on dips. A hold over the next two to three years should give Unity enough time to flesh out a more seasoned valuation. Unity today closed at $84.56.
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