Chit Chat Stocks - Chris Seifel | Unity (U)

Episode Date: December 16, 2020

On the 16th day of Christmas Chris Seifel gives to you, Unity the video game software company. However, since creation Unity has moved from just video games to other industries including film and automotive manufacturing. Visit our website: https://www.chitchatmoney.com/ Subscribe to 7 Investing with the code "CCM": https://7investing.com/subscribe/ Follow Chit Chat Money on Twitter: https://twitter.com/chitchatmoney Learn more about your ad choices. Visit megaphone.fm/adchoices Learn more about your ad choices. Visit megaphone.fm/adchoices

Welcome to 25 Stocks of Christmas, presented by Chit Chat Money. Today, we have an interview with Chris Seifel, and we're talking Unity. It was a lot of fun. Chris really knows Unity well, and he's written a long-form piece on his sub-stack that covers it, and we've been following him on Twitter, so we decided we've got to get him on. And, I mean, any highlights for you? Yeah, I mean, it's just great when someone knows, you know, company well. And if you're into Unity at all, or if it's crossed your radar,

and you're like, all right, I need to learn about this business, this will be a perfect episode for you. Now, he does mention that Unity is trading at a premium valuation currently and that people need to be aware of that. So think about that going in. But overall, fantastic episode. And before we get to that, we have our sales pitch with 7investing. So I'm going to let you hit that.

All right. Well, we say it every episode. You get $10 off with our code CCM. that means it's only seven bucks to try out seven investing. They have seven lead advisors. As you can see, they like the number seven, but they give out great recommendations and they're very personable. You have access to all their, the research they do, their calls, they're able to communicate with you. It's a very personal service and it's at an affordable price. You can try it out for a month for seven bucks. It's $17 after that. And you can help us out as well by using

our code CCM. Yep. All right, let's get to it. Welcome to Chit Chat Money. On this show, host Ryan Henderson and Brett Schaefer interview industry experts and riff on the world of investment. As a quick reminder, Chit Chat Money is a CCM Media Group podcast. Ryan and Brett are not financial advisors. Anything discussed on Chit Chat Money by Ryan or Brett or any other podcast guest is not formal advice or a recommendation. Now, please enjoy this episode. Today we are welcomed by Chris Seifel. I'm going to let Chris sort of introduce himself, but this is Chris's first time on the show. So Chris, welcome to Chit Chat Money.

Hey guys, thanks. Really appreciate it. I'm excited to be here. You know, I've been able to make a few podcast appearances, but I'm really excited about this one, especially. I had some background on myself. I started my investing, did that for about five or six years, really developed a fundamental analysis skill set and cut my teeth in learning how to be a true owner of a business and a true investor. This year, I transitioned over to the public markets, just bringing my private market skill set to the public markets. And my plan in the long run is to start a fund with a future business partner. In the interim, I'm pursuing some different paths in the public market. So I'm also very active on Twitter. You can find me at

at Cypher Capital. And I have a newsletter, the Cypher Capital newsletter, where I just produce some deep dive company research and also some thematic deep dive as well, currently doing one artificial intelligence. And the company that you wrote about, I think two months ago is the one talking about today unity correct that's right yeah one of unity probably right around its ipo actually uh yeah so about two months ago a month ago how'd you come across them just when they ipo'd or no so the way that i approach investing is very much in first principles so i try to really eliminate any additional assumptions to get to a theme of what i think will really drive value creation into the future and in the present as well and you know one of them is ai like i said

i'm writing about and that really dives into a lot of the bull cases behind some other companies that i follow but for unity you know the theme that i really got into was gaming and i'm not sure when i got into it exactly probably a few months ago you know i'd listened to a podcast with Matthew Ball and Patrick O'Shaughnessy and had this really big Eureka moment. And then I followed Gavin Baker as well, who also knows gaming almost better than anybody. And the two of them together, I really realized that the future of entertainment consumption, if you will, is in gaming. It's not in video. It's not in audio. It is gaming. And it's really becoming prevalent. And I haven't, I didn't even realize the growth in gaming until I came across their

work. So understanding that framework, I was trying to think about the best way to position that thesis and that idea. And instead of trying to bet on the individual game studios, you know, I, I follow the IPO market and things that are in the pipeline and Unity popped up. And I did know that unity and unreal were really the only two game engines uh that were out there so when unity went public you know i thought it was appropriate for me to do a deep dive and i liked a lot of what i saw uh but also was very cognizant of some of the the hurdles if you will all right and people hear like game engines they hear unity uh unless you know the gaming industry you probably don't know what that is can you explain what unity does and how they fit into the gaming industry

Yeah, of course. And, you know, full disclosure, I had no clue either when I came across Unity in the gaming industry. You know, a lot of the time when I'm exploring a company or an industry, I really don't know anything going in, you know, so I develop or I take a Feynman algorithm approach to learning about a company industry, meaning I try to break it down as simple as, you know, you can explain it to a 10-year-old. So a game engine is essentially a platform by which you can create a game, right? And what you need to be able to do is use code, so computer code, to take objects, to create people, whatever it may be, and essentially tell it what to do. So Unity and Epic Games' Unreal Engine, they both allow this. They use two

different types of programming code. The one that Unity uses, and I don't need to get into technical details, but the one that Unity uses is a lot more simplified. It's something that is easier to gain expertise in. And so you see that because of that, that actually informs the target markets of each of these two companies. So what Unity does and what the real product is, if you think about the engine, is it's a single platform that enables its customers. If you think about just program developers, I think in the future, really anybody, you and I will be using Unity, I think at some point, if my thesis plays out. And what they can do is build, they can create, operate, and then monetize their applications. We can talk about games. They

monetize their games. And the great thing about Unity and a problem they solved, the friction that was in the market when they were first developed is that you can create a game on Unity with just one set of code and then deploy it to 20 different platforms. You know, before you had to custom make your games for a certain platform, but Unity solved that problem. And so I can get into kind of you know what unity really is as a company and kind of start getting into the bull case if you guys want me to yeah that's fine yeah yeah i was gonna ask a follow-up there it's so when i think about they're sort of supplying the tools and the supplies to build the games it's maybe not as easy to build it as like a roblox or it's not as easy if we're making a

comparison to like shopify how they make it really easy for anyone any retailer to set up shop it's not necessarily that easy they're just giving the tools to the developers to make their life a little easier right correct right it's all about removing the frictions of game development and you know one of the things that unity has is like their unity ad store where as an example instead of a developer having to create like a spooky forest there's a spooky forest object already in the ad store so all you have to do is drag and drop it into your into your user face, and it's ready to go. And so everything they've done is really it revolves around making the creation process easier for the developer. And their mission is actually to make content creation accessible and easy for

anybody. So and I could get into this deeper, you know, down in the podcast. But if you think about, you know, e-commerce and shopping in Asia, right? There's a lot of these live shopping type of applications and events. And so what Unity is trying to do is at some point in the future, be able to have a interactive virtual reality experience with somebody at a store whereby you can be shopping in that virtual reality and they would be unity would be the platform to be able to create that so it's a little bit it's a little bit different than and i can give them the difference with the roblox as well uh but really they they want to be the platform for any of us to be able to create content and in the future not not only do i think so but mark zuckerberg and a lot of

others think so, that AR and VR is going to be that platform of the future. Sure. Yeah. And I think Brett has a counterpoint about AR and VR, but we'll get into that in the back half. Do you want to touch more on your full thesis? I mean, you already mentioned a lot of the positives, but anything you haven't mentioned, why you like it as an investment? Yeah, sure. So I think that understanding that it's interactive, real-time 2D and 3D content that they're allowing and enabling through their through their platform is really important i think because if you think about what a let's just think about an industry outside of gaming uh film right if you're creating a scene uh for a movie what a what can happen is the director in real time

can change lighting. They can change the position of certain things in the screen. They can do everything all at once so that you're really reducing the time to finish a product. And I'll get into the use cases and applications to the industries outside of gaming in a bit. But if you think about Unity on the gaming side, and I think there are two ways you should think about Unity, gaming and non-gaming. On the gaming side, they are the most popular game engine for mobile, which is important because, you know, they, they, I think, uh, over 50% of the top thousand games, uh, mobile games were built with unity. And then also unity has been used for 60% of all the AR and VR, uh, experiences that are out there today. So if you think about a market

dominance, uh, unity is really there. Uh, and then it also plays actually into the bear case as well. but you know I think that the no code and low code nature of Unity is exactly why they are going to be the winner into the future so I'll break apart my both thesis really quickly into three different time frames in the short term it's gaming in the intermediate term it is AR and VR applications within not only gaming but really outside of gaming and in the long term it's the metaverse uh which is something that map all gets into and and it's more of a lower probability uh type of end game but if that eventuality plays out then uh unity is the name you want to own so let's talk about the short term really quickly uh in the short term they're really saturated in

terms of the customers they can acquire and if you think about the developers themselves of games Once you start creating a game on an engine, you're not moving anywhere else because it's way too difficult. So all of the market share they already have, they're good to go. And they already have most of the mobile market. So that's set in stone. Where their opportunity is, is actually on the monetization side. And Gavin Baker talks about this.

If you compare the monetization per hour of, let's say, television to gaming, and then you juxtapose that to the engagement levels of the users of a television or a game, it's really inverted. And so there's a big runway for monetization on the gaming side to catch up to television, to internet, all these other mediums. That's really going to be a massive tailwind for Unity itself. So that's the short term. Sorry, I'm sorry to interrupt you there. But is there any concern for you? Because you said you mentioned that a lot of their business comes from mobile gaming. And I know with iOS, they're going to have that new restriction around the IDFA changes.

Yep. Does that concern you or is there ways to monetize it other than just ads? You know, it's interesting because, and I've been doing more homework into this, and I'm going to tell you candidly that I'm not sure, because I've read both cases, that one, it wouldn't really impact Unity that much because all the data is in a closed ecosystem. So it's not really being shared in the first place. But with that being said, there are other arguments out there that it's going to impact the industry as a whole. And the example was, I think Facebook was the example where Zuckerberg talked about that their advertisers saw, I think it was a 40% drop in revenue from a very similar type of change. So there is definitely, and that is part of the bear case, that this IDFA change will have an impact on Unity's ad business. We're not going to know, unfortunately, until I think it's Q1 of this year, of 2021, that Apple's plan on rolling it out. And that's one of the catalyst events that I'm looking at in terms of if I'm going to stay in the name in the short term. okay and then yeah so sorry do you want to get to that intermediate um sorry for interrupting

no no it's important so you know just so you guys know the the bear case is just as important to my overall investment process as the bull case you know i don't think that you can own a name if you don't know the bear case or the other side of the trade as well as a person that genuinely holds that position right so it's really helpful to talk through these things uh yeah so in the short term i mentioned gaming and and just the growth of gaming is is truly remarkable especially on the mobile side you know gaming has uh doubled in size uh since i think it's 2007 and 80 of that's mobile so that's that's really great opportunity there and then you have a lot of demographic tailwinds uh especially with the amount of uh younger people that are using

roblox you know like we talked about and and really the engagement there's amazing and they're going to move up into Unity at some point once Roblox's programming capabilities are no longer good enough for them. But in the intermediate term, it is the AR and VR creation platform for not only gaming, which can be very helpful on the ad side as well as the gaming creation side, but when it comes to industries outside of gaming, that's really where the exciting opportunity is. And if you think about, once again, market penetration, right, they already have the top 10 auto companies in the world in terms of revenue as customers. And that's really exciting because not only is the adoption of industries outside of gaming

not really taking off yet, but when you understand the use case and the value that Unity is creating for these companies, you can see a runway towards a lot of value creation. So as an example, right, Toyota, they're a customer. They use Unity's platform to build a model of a car. And in that model, what they had to use to do is manually tag 200,000 different data points of cost, specs, etc. That took, I don't know the number off the top of my head, but it took a certain number of, I think it was like 200 hours, something crazy like that. With Unity, that time was cut by over 400%. So the frictions that they're solving, that Unity is solving is twofold. One is on the cost side. You no longer have to build actual physical models of things and then tag them manually with

all these man hours so you're saving on the customer is saving on cost but then also you're reducing time to market so you're actually increasing productivity as well so unity is actually really well positioned to be that main player for these industries outside of gaming and what's interesting too is that if you think about just unity and unreal as the two potential platforms to solve this problem. What's interesting is that Unity actually benefits from Unreal doing well and spreading the awareness of these engines providing this type of service because the market is big enough for both of them. But the problem that Unity is having right now with adoption is simply just a lack of education throughout these industries

of Unity's capabilities. So if Unreal does well, it actually helps Unity, which is interesting. So that's the intermediate term. And then the longer term, like I mentioned, is the metaverse. And, you know, really simply, Mark Zuckerberg talks about the intermediate term as, you know, Unity being the must-have. Like, they wanted to acquire Unity a couple years ago as the must-have platform for developing AR and VR. what Tim Sweeney says who's the CEO of Epic Games for Unreal Engine Tim Sweeney is adamant that Unity is going to be a foundational player of the metaverse if it ever comes to fruition and the reason why he believes so is because the metaverse is going to have to start on the mobile side and

Unreal is not used for mobile Unity is so he is and I think you know of anyone that I've you know read about and did my research with it's math all on tim sweeney are really my go-tos for the metaverse concept so if his belief and he's a competitor is that unity is a foundational player of metaverse which is going to be a multiples of trillions of dollars um ecosystem if you will then i think there's a pretty good chance he's right the only thing is it's a question of probabilities of if the metaverse actually ever occurs because there are a lot of things that kind of have to happen in terms of interoperability and different companies working together for it to happen. But if it does, Unity is going to be the name to own. And so if it does happen,

the overarching thesis is that they're going to be one of the most important technology companies in the world. All right. Yeah, we want to get to the second half here eventually, but what about Roblox? Where would they fit into that? I know this is off the topic of Unity, but. No, no, no. It's a good question. So Roblox is different, right? Roblox is more of a no-code type of platform, so they don't have the capabilities that Unity does. And the way that you can think about it is this, right? so unreal is used for uh by more of like the film studios and more of the uh the higher level higher quality games because using the c plus plus programming is more dynamic uh the programmer himself is able to make more changes uh than you could with the c sharp program which is the programming language for unity so understanding that dynamic right unity isn't really going to be

the uh the platform of choice necessarily for higher level type of applications although they have developed a uh what they call dots which actually enables you to do almost everything you can with c++ but besides the point it's think about that juxtaposition and then compare it to roblox where roblox is just a much more i guess you could say simplified um you know programming language that kids can use to actually learn the basics of programming but for roblox to move up the stack and try to take some of unity's market share it would be too difficult for them to roll out so they're not really a competitor and if anything roblox is more of a feeder to unity okay so the one of the bold cases is that unity has such a strong competitive advantage with these

you know higher more complex development tools that roblox is going to have such a tough time you know, trying to develop something similar. Right. And I don't, I don't think Roblox needs to compete with Unity. So if you think about Roblox, we don't need to go into too much detail on the company. You know, their engagement levels are absolutely staggering. But, and so that's why they're going to be able to kind of maintain their niche of this younger generation of, you know, let's say up to 15, 18 years old. Sure. Where Roblox is coming into an issue is that they're really uh mature and saturated from a monetization standpoint so it's almost it's almost the flip side right from unity where unity actually is fully saturated in terms of the the quantity i

guess you could say of developers that they can get on the platform for gaming but their opportunities monetization roblox is the opposite so uh exactly right i don't see them as competitors really okay any other questions uh management uh who runs the company what do you think of them Sure. So John Riccitello is, he's a industry veteran. You know, he used to be the CEO and COO and president of EA. And what I like is that he has skin in the game, right? He, I think last time I checked, he had about 11% or he owned 11% of the outstanding float or outstanding shares rather.

And it doesn't show up necessarily just in the, in the regular filing to dig in because he has a lot of those shares and trusts. So for John, if you look at his experience at EA, you could call it a failure. He did a lot of M&A. He tried to acquire Take-Two, which failed. And a lot of people think that it was a good thing for Take-Two. And he resigned. The first time, I forget the reason why, but when he came back to be CEO, he resigned over performance. So that alone is an issue. And a lot of what he did was M&A and they had a tough time really integrating some of those companies that they went after and acquired. But what I do like about John is that he was responsible for pivoting Unity

away from just gaming and understanding the opportunity outside of gaming and into industries. So when he joined the company, then he joined the board in 2013, became CEO in 2014. He made the pivot from just focusing on gaming to spending R&D and hiring developers to focus on those other industries. So, and it came along with a higher expense structure, but I think that it was the right move long-term, without a doubt. But like I said, the difficulty is his track record. He hasn't necessarily been successful, even though he is an industry veteran. I do like the fact that he is very aware of of the company and its opportunity meaning so unity only has about 0.4 of the take rate of all of gaming and john has a has a vision for the future like i mentioned

where he wants to enable everyone to be a creator and he thinks that the reason that they should not become a revenue share or royalty type model because it impedes content creation. So he's going to stick to his guns, I think, and maintain the current freemium pay-per-seat type model and really stick true to the strategy of just getting as many developers onto the platform as possible

and then allowing those developers to grow with unity. So I think it's going to be difficult in the short term for the company, But long term, it's the right decision. But, you know, there are also some other rumors out there. And there were some issues with sexual harassment lawsuit. I don't think it was too valid. But, you know, between his lack of a of a good track record at EA and some kind of controversial things that I've seen in my research, I'm not a huge fan, but he seemed to be making the right decisions at Unity. So I want to give him a second chance. And one thing I want to add to in terms of just not just the management team,

the executives. But, you know, Fidelity Contra Fund and Will Danoff, you know, they have a position in Unity, which is something that I look at, you know, what funds are actually buying these companies. And Danoff's performance is obviously legendary. And, you know, he's up 30 plus percent this year. So it gives me another kind of data point that it might be a good long term bull case for me. Do you know if there's any venture capital firms that are still in it or has the lockup period ended? I forget how long they've been public for. No, I don't think the lockup period has ended yet. And then in terms of who stayed in the name after they went public, I'm not recalling off the top of my head. And if I threw out names,

it would be just me having a deal merge. I don't want to drop any names that aren't true. I'm like thinking about Snowflake because, you know, a friend of mine works for a VC firm that was in Snowflake. So I would probably, I'd probably butcher that. So I'm not going to go there. All right. No worries. No worries. All right. Well, I think that's all the questions we have for the first half.

We're going to hit a quick break and then we'll try to poke some holes in your thesis. Cox Panoramic Wi-Fi includes advanced security to help protect all your connected devices. You'll get real-time alerts. Oh, like this one, so you don't have to worry about malware. Or when your kid downloads a song from a shady link. And now all your computer can play is... Red color, red color, where are you?

All blocked, thanks to Advanced Security, included with Cox Panoramic Wi-Fi. Advanced Security must be enabled in the Panoramic Wi-Fi app. Restrictions apply. welcome back in next up we have devil's advocate most of our listeners know how this goes but if you don't we have brett and i both have a counterpoint um and it was a little difficult to come up with some of these because we like unity as a business which is usually a good sign but nonetheless we still have our counterpoints i will go first um disney chose the unreal engine

and not unity to help create a 3d environment for the mandalorian and that's obviously only one use case or one example but there has been a lot of talk about how unreal is sort of uh level up in terms of uh technology uh compared to unity does this show that perhaps unreal is more applicable to use cases outside of gaming so let me start by saying i completely agree with sorry about that i completely agree with uh your take in terms of the technology difference like i mentioned the new dots technology that uh that unity rolled out does kind of level the playing field but it almost to me is like once you that the two different engines have their target markets already so i do see unreal being used more for filmmakers uh and i could be wrong on that of

course but you know when you look at uh the industries outside of gaming currently i think I mentioned the Toyota example and the fact that they already have 10 out of the 10 top automakers as customers for industries outside of gaming. And then if you think about the low code and no code market, so there are 37,000 programmers out there, I believe, that Unity said, all different and varying skill sets. So when you think about what companies are going to do when it comes to this new AR, VR paradigm is they're going to have to hire these programmers. The majority of programmers are probably going to be trained on Unity because it is easier for them to learn. So the companies that are going to be utilizing and rolling out these AR and VR

capabilities are going to be hiring probably mostly from Unity and then using Unity as their platform because their developers were trained on it so it's almost just thinking about you know what part of the market are they going after and i do think that unity is actually better suited and the intermediate term uh to really take a good grasp of the industries outside of gaming and then if you think about just unity's development of the company uh and i'm gonna not remember all the details exactly but really the way that uh unity was developed was it was focused on the indie devs, the individual developers that were focused on creating games for actually Apple products at first. And this was a market that was completely underserved.

If you were in a big gaming studio, it was very hard for you to make a game. And it took a lot of costs and it would have taken a lot of time. Unity completely changed that paradigm and allowed indie devs to really become at least able to make games with Apple. And then what Unity did from there was just scaled up vertically so that once the iPhone and the app store started really taking hold, that's why Unity is actually used for 50, 53% of the different mobile applications out there. So I think it's actually a good thing that they don't have as complex a programming language as Unreal does, because it actually gives them more of an opportunity. And then, you know, I think that if you think about what they are doing currently today, they're already

giving developers this capability of using their platform to come up with solutions for these other industries, they just released this part of their platform called Forma, which is really like a drag and drop, really easy to use 3D interactive application that they developed, which allows a developer to import an already 3D object and then manipulate that and do things with it. So they're already doing things, I think, that are going to allow them to have a very sticky solution for the market. And then if you take that a step further and go to my long-term thesis for the metaverse, it's actually, once again, a better thing that they don't have this really complex, complex, relatively programming language, because it's going to allow people like me and

you, I don't know if you guys have a lot of programming experience. I'm just starting to learn Python, but it's going to allow us to use that platform, use Unity as our CMS, as our content um uh creation system right so i think that they're doing the right thing actually by and it's actually more of a bull case for them to have a different and more simplistic uh technology based on unreal okay that's interesting and you said they have a freemium model too right freemium right so if the game that a developer or a team develops it does not generate over a hundred thousand dollars of revenue then it's free the platform is free for them on the create side right so they have their create solutions which is mostly the engine

and then they have their operate solutions which is really how the developers are able to grow and then with the users the end users and then monetize their games so on the create side uh exactly right you know it's it's really just right now uh they have this this 3d system that allows them to um yeah really really create these games right okay i'll hit my counterpoint uh so facebook and apple are both investing a lot in ar um apple more ar facebook more vr with oculus um does this worry you that they're going to create a closed ecosystem um kind of maybe kick unity out uh i know these companies both like to have their walls gardens does that does that concern you at all it's tough you know right now apple's actually a strategic partner of unity's

so apple pays unity to ensure that the the games and the applications made on unity's platform platform is interoperable with Apple's ecosystem. So in reality, Apple's more reliant on Unity. And I think you can think about it this way. And actually, let me talk about Facebook too. I may have mentioned that Mark Zuckerberg wanted to acquire Unity. So there was this internal memo from Facebook that was floated around, I forget when it was, but it was from 2015, where Zuckerberg just is raving about Unity. And it's really interesting to read these company memos because it really shows you how smart this guy is.

You know, Facebook missed mobile. Flat out, they missed mobile. And Zuckerberg was aware that AR and VR was going to be the next platform after mobile. And so he knew that Unity was going to be in this really powerful position to be the key platform to create AR and VR applications and content, and then distribute it across different operating systems. So Zuckerberg saw

Unity as a way for them to really get ahead and almost require Google, Apple, these other companies to work with Facebook. And so it was his way of creating this moat for Facebook. But since they didn't acquire Unity, that's still Unity's moat. And so you can think about it this way is that Unity allows the developer to create the actual application, but it would then sit on top of whatever, either your Facebook or your Apple. So, Facebook, I don't believe, has the capabilities or not planning to have the capabilities of actually creating the applications, but they will be kind of the end user of that application. And that'd be through Oculus, correct? Right, right. So exactly. So, and I think there's already a kit that Unity, I believe I saw this when I was doing my research, a kit that is specific for Oculus and creating applications for Oculus. So they're already using Unity, which is really fascinating. Yeah, it sounds like a lot of the parts where you would have guessed, oh, these are going to compete with them, have formed into strategic partnerships instead.

exactly and you know it's funny because so i do these threads on twitter right and my threads i do pretty early on in my research process before i really know everything about the company and it's funny because what i said in my thread was i don't i couldn't identify a moat i just couldn't see it at face value and map all actually got tagged in the thread and i basically got ridiculed if you will, because the moat is actually really obvious if you understand the business truly. And I definitely didn't, right? So exactly right. Like you said, the moat is twofold. One is once you start, once the developer starts making a game on Unity or even on Unreal, right, the odds of that developer leaving the platform is really negligible, right? Probably zero. And so you have

that inherent moat there. And then if you juxtapose that to what is the next platform that of content creation, it's AR and VR. Unity is really a requirement. It's a foundational player in that paradigm. So exactly right there. I don't see how you penetrate that moat. Okay. Let's flip the script to the other side then. What would cause you to sell? Because obviously it sounds like you're very optimistic about the business. What could be sort of a motivating factor for a sell decision sure so i do want to see them uh better monetized especially on the gaming side so what i'm going to keep watching is let's think about their customer cohort right so they have over a hundred thousand customers on the gaming side but i think it's

716 of them like 716 uh are the ones that generate where their games their applications generate over $100,000 of revenue, and that consists of 74% of the company's revenue. So there's a massive opportunity for Unity to monetize the rest of their customer base. And so I want to see if they do do that. I think that would provide a nice tailwind. I don't think they have to do anything crazy to really impede their mission of allowing content creation. So I'm going to keep watching that on the gaming side. And then on the industries outside of gaming, when you look up and you do your research into that part of the business, you see kind of the same use cases, the same stories over and over again. And I think that tells you that they're

having a hard time gaining traction there. So I want to see one, if they're able to get more customers for those industries outside of gaming. And two, if there are more applications and use cases that they can talk about. And this is somewhat more of a qualitative thing. But I think it's more, it's unique, right, to figure out, is this, is this application, is this use case really gaining traction in the market or not? And that's going to be really important. And it ties into the second thing that, that I'm looking at, which is their return on investment capital. So really, the main thing for me for a business is do they have a sustainable competitive advantage, right? Do they have a financial system where their growth is going to be accretive to value and

not diluted to value, right? Because the way I look at it is if your return on incremental invested capital is less than your cost of capital, which we can just say is 10%, then you're going to be actually diluting value when you grow. Alternatively, if you have a positive return on invested capital relative to your cost capital, then growing is a value accretive to the firm. So what I'm looking at is if they can start improving their return on invested capital, specifically on their R&D, right? Because they've had to, like I mentioned, once John came into the fold in 2014, they started focusing more

on these industries outside of gaming, but you're not really seeing the revenue pickup on that side. So I'm going to have to really start seeing that at least some point soon in the next couple of years in order for the investment to make sense. Otherwise, they're really just going to be burning cash. And then you're going to get to a point where, you know, they have like, I think it's one and a half billion dollars of cash on the balance sheet. But if they start just burning cash, then they might have to do a secondary raise and you're diluting shareholders. So that's another thing that I'm looking at in terms of like selling, right? Because the other, the intermediate case or the longer term case of the metaverse, we're not going to know for a while.

What about valuation? Oh, God. Yeah. So I didn't want to bash the name or come on here and make people think that I wasn't bullish long term, but I wouldn't touch the stock right now. So, you know, the stock right now is if you look at a technical standpoint, it's 30 percent above their over 30 percent above their 50 day moving average. That's one. You know, so it's very extended. And usually what you see just anecdotally or empirically, rather, excuse me, is that stocks usually come back to their, you know, 10 week or 50 day moving average lines over time. So that I'd expect to happen at some point. You know, the names like Unity, Corsair Gaming, even like Jumia, Palantir, they've had these just insane vertical moves lately. so I just don't think it's a high risk reward intermediate short-term investment right now and then I'm forgetting exactly what the multiple is that they're trading at but I think it's about 50 55 times they're trailing revenue is that right I think so the issue is this right

and they're actually pretty smart the way that they frame their s1 so if you kind of follow the tracker to the company right they used to report in three different verticals it was create operate, and then monetize. What they did before they released their S1 and went public is they rolled up, monetized, and then operate. So it's really hard to figure out exactly what are the different revenue streams of the company, but you can almost intuit to what percent of the entire revenue base is from advertising. And it's somewhere north of 30%. So they're not a true software as a service company, right? They're Create Solutions, which is the SaaS base. it's only 31% of revenue at the Q3, right? So the issue there is that, and I'm not sure if the

market is unaware, if there's some sort of irrational exuberance, I don't know. But once the market, I think, really realizes this, there should be a multiple re-rating. I mean, at least you would think so, right? Where it shouldn't command these multiples that, you know, not even CrowdStrike is at. You know, CrowdStrike, which, I mean, I could go on for another two hours on CrowdStrike, CrowdStrike's trading only at, I think it's 40 times, you know, trailing 12 months revenue. So I think there should be a multiple re-rating at some point in the future. And especially too, right? Like, listen, Unity has a lot of long-term potential, but they only grew at 53% this latest quarter, which is solid. And especially it's an increase in acceleration from

recent quarters, but they're also, they're operating income negative, right? You know, they still have, I think it's a 9% operating loss. So there's a lot of things that they need to do from not only a unit economic standpoint, but also just a free cashflow standpoint to get to a place where the multiple they're currently at is right for them, right? And so I think you should expect a re-rating at least some point in the near future and for the stock to come back down. Okay. And we have one more question. We only got a few minutes left, so this will have to be quick. Like, is there any changes that you'd like to see Unity make? So, you know, this might be on the margin.

Let me start with this. I think they're doing all the right things, right? I think that they are on the right track. They understand the opportunity to really be that major platform, you know, into the future, like I mentioned. I think that they have this opportunity with their current gaming base to actually drive more monetization. Not that they're doing poorly because they have 144% dollar-based net expansion, but you can still charge for these developers that aren't generating more than $100,000 of revenue for their games, the $100,000 plus. If I was one of them, I would pay $10 a month to be part of the platform. And so if you extrapolate that out, that's going to be another $13 million a year.

So that's, that's, you know, that's pretty meaningful once you get down to it and that's all pure margin as well. So I think that there are things that they should explore on the monetization side in gaming that wouldn't affect their mission or their base and that's probably it. Okay. All right. Yeah, I think that's all the questions we have. One more time for the listeners, where can they find you? So on Twitter at Seifel Capital, S-E-I-F-E-L. And then I have a Substack that's SeifelCapital.Substack.com. And I'm actually working on rolling out a website right now, which is just going to be SeifelCapital.com. And then you can also find me on LinkedIn, Christopher Seifel, but I'm very active on Twitter, you know, and I always say this to, for the podcast that I'm on, feel free to reach out on Twitter anytime that you'd like advice, just to talk investing, because, you know, I've had a lot of people help me out in my very unorthodox path to the public markets. And so I love doing the same for other people.

Perfect. Yeah, we want to remind our listeners that we are not financial advisors. Anything we say or discuss here on Chit Chat Money is not formal advice or recommendation. Thank you guys for listening. We'll see you next time.