Unity Software, new CEO to turn dominant gaming engine into profit engine
Plenty of levers for this company
The CAD (computer aided design) software space has been a great place for investors over the last decades. The combination of solid top line growth and high margins resulted in compounding share prices. Barriers to entry are high, as the software tends to be pretty advanced and engineers have been trained on it for years, making switching costs.
Unity is usually not mentioned as a member of this space as it is more commonly referred to as a gaming engine. However, it is a CAD tool nonetheless as you can design the entire virtual world of your video game in this tool. You can also run simulation on the fly, i.e. playing and testing the videogame as you’re developing it. All the code that’s needed to run the game you can write within the Unity platform as well. And the engine can compile your game to run any device, from Apple iOS, to Android, Nintendo, PlayStation, Xbox, Windows, and Meta’s and Apple’s VR headsets. So Unity’s software is basically a complete production environment for video games.
Also the market positioning is good, whereas Epic Games’ Unreal engine is dominant in high-end gaming, Unity is by far the strongest player in mobile gaming development, a market which should continue to be an attractive area for investment exposure. At IPO, Unity disclosed that 53 percent of the top 1,000 games in Apple App Store and Google Play were built on their engine, with 93 of the top 100 game development studios being customers. The company also highlighted some high profile titles which were developed on the Unity engine, such as Tencent flagship titles ‘Arena of Valor’ and ‘Honor of Kings’, as well as the popular ‘Pokemon Go’ from Niantic and Nintendo — pokemon are everywhere apparently:
Overall, Unity has over 1,300 organizations generating over $100,000 in annual revenues as customers:
Also designed art and other models from popular CAD tools — such as those from Autodesk — can be easily imported into Unity’s engine. This makes it possible to do advanced design in specialized tools, and use them afterwards in your game via Unity’s engine.
When comparing Unity to the CAD space, the stock trades on a strong discount, although that isn’t due to a lack of growth. You can see that Unity is expected to generate double-digit top line growth rates, similar to other CAD names:
By far the biggest reason for this discount is that the previous CEO John Riccitiello made a number of questionable decisions which we’ll get into. Riccitiello has a very mixed track-record to say the least, but he’s gone now and replaced with Jim Whitehurst, who built Red Hat into a fantastic machine and subsequently sold it to IBM at a high price tag. But first, let’s have a better look at the product..
Unity’s developer conference
Unity held its developer conference in November of last year, which was quite impressive. The company showcased the latest upgrade of its software, Unity 6, and all of the accompanying performance improvements. These were showcased in the Unity engine and a series of virtual worlds they had built with it, one of which I’ve linked here. Unity 6 will also allow more games to be played inside of a browser, making gaming even more accessible.
An example of how you can develop a gaming world in the Unity editor is illustrated below. You can design each object, assign physics to it how it should behave — e.g. this object should float in the air and the other should fall to the ground — as well as write code for each element. You can code both in C# and Javascript in Unity, so that’s good news as I’m a bit of a Javascript fan.
It has become clear that LLMs can massively speed up game development and Unity has been putting a lot of effort into this. You can use the built-in AI models to get instructions on how to implement your ideas in the software. The LLMs can obviously write code, and they can also design objects and worlds for your game. You could even describe how characters should behave and the AI will generate a behavioral tree for each character in the editor, which you can then adapt.
You could also insert an externally trained AI model within your videogame, for example, so that the AI can play as your adversary, or take on the role of characters within your game. So that you can conversate with them like you would with ChatGPT, giving a totally unique user experience. These LLMs run on your local device’s compute, so that should be good news for the demand for neural processing units (NPUs) within CPUs. Companies such as Arm, Qualcomm, Intel, AMD, and TSMC have all been talking up these opportunities in recent months.
Here’s Unity’s previous CEO discussing how their AI can generate virtual objects and worlds, saving creators a lot of time:
“And what will you do if you want an environment with a river, maybe a stream coming off the side of it, a mountain, clouds, et cetera? That could take somebody weeks, if not months, to create in a real-time 3D digital asset collection. Guess what? You can use the words I just used to describe that, and it will show up, this is hugely valuable to them.”
He also explained how the co-pilot should expand usage of the engine:
“We get several thousand people per day that download Unity, they look at the editor and say ‘wow, this looks like a 747 control panel’, it is complicated. Where they need art assets, or lighting assets, or other things to advance into the game or scripts, they can just ask for them. It radically will simplify and bring new users onto the platform. Over time, we’ll capture a much larger portion of the people that hit the top of the funnel for us and begin their journey on real-time 3D creation.”
Once these AI models are in their release version — they are currently still in beta — pricing will be based both on monthly subscriptions and used compute. So the increased usage of generative AI within games development should become a tailwind for Unity in the coming years. This opportunity is somehwat similar to what we discussed for Cadence and Synopsys in advanced semi design.
For premium subscribers, we’ll review in-depth:
The mobile gaming market
Unity’s new pricing model and the large upside this should bring for shareholders in the coming years
Unity’s opportunities in the corporate market (‘industries’)
The company’s CEO change
The IronSource acquisition
A financial analysis of Unity and thoughts on valuation