CHATTANOOGA, Tenn – But thus far, Unity has earned the hype. Revenue accelerated to a 54% year-over-year pace during the third quarter (up from 39% during the first half of 2020) as existing customers increased their spending on the software platform and new content creators signed on. The company is also nearly at free-cash-flow (revenue minus cash operating and capital expenses) breakeven, and its balance sheet was flush with $1.76 billion in cash and equivalents and no debt at the end of September 2020. This positions Unity for years’ worth of further expansion.
And it’s the massive markets Unity is targeting that has me feeling optimistic about the company’s long-term prospects (I’m looking a decade-plus down the road, so the present steep valuation is less of a concern for me). The global video game industry is still in growth mode and worth tens of billions of dollars in spending each year. And thanks in no small part to Unity’s cloud-based creation and collaboration platform, content is easier than ever to make and distribute. Unity’s services range from actual development of interactive 3D content to its new web content delivery network. In total, there were some 2.5 billion end-users of content created with Unity’s software in Q3 2020.
This is more than a bet on the video game industry, though. Unity’s collaborative platform is also being tapped by the movie and TV industry, architects, engineers, and manufacturers. There are plenty of options for Unity as it adds more customers to its platform. This is a small position for me (less than 1% of my portfolio), but I will continue to add more shares in the year ahead — likely on a quarterly basis. The stock won’t be for the faint of heart and is likely to be a volatile ride, but for investors who have their eye on the very long term, this stock is worth some attention.
2. Amwell: Virtual healthcare goes mainstream
Alphabet‘s Google-backed Amwell was another hot IPO in the early autumn months but has since taken a step back. The stock is at nearly 40% off its all-time high as of this writing after the company’s third-quarter report left some investors disappointed.
That isn’t to say it was a poor report, though. Telemedicine — healthcare services provided via phone or video conferencing — has been booming this year. Total visits utilizing the Amwell platform surged 450% higher than a year ago to over 1.41 million during Q3. The reason for pessimism was that revenue “only” increased 80% to $62.6 million, and gross margin on services rendered contracted to 32.7% (compared to 45.1% last year) during the period.
Nevertheless, this is a young company operating in a very young industry. Even after COVID-19 is beaten, I think virtual care has a bright future ahead of it. While Amwell’s recent results aren’t perfect and it is operating at a loss, it’s clear that tech-driven healthcare is picking up steam. Amwell said it had 62,000 providers at the end of September, and it continues to add more as physicians and other medical professionals look for more efficient ways to communicate and share information with each other and with their patients.
And much like Unity, Amwell has plenty of liquidity at its disposal after a successful IPO; it had $1.09 billion in cash and equivalents and no debt. And as of this writing, the company’s $6.2 billion market cap values it at 26 times expected 2020 revenue. Given the massive global healthcare industry that hauls in trillions of dollars a year, there is plenty of room for Amwell to scoop up more market share. Telemedicine looks like a promising trend headed into 2021, and I like Amwell’s chances. Volatility in this small company’s stock will likely be higher than average, so I’d advise any position you might decide to take be kept very small, similar to one in Unity.
3. Jamf: a better play on iOS-based services?
Compared to Unity and Amwell, Jamf is a relative value. Following its Q3 report card and announced the sale of stock from some insider owners (the sale is of existing stock, not the issuance of new stock, and thus doesn’t materially affect shareholders), Jamf trades for just 14 times sales and is also free-cash-flow positive.
Jamf provides management and security software for enterprises that use Apple hardware in their operations. There were 18.6 million devices utilizing Jamf in Q3 (compared to just 17.2 million one quarter ago), and those iPhones and iPads include those at massive global companies to local school districts and hospitals. Growing use among organizations has been an area of strength for Apple’s services segment as actual device sales have plateaued in recent years. Increasing demand for Apple services is what’s propelling Jamf higher, too, as these businesses and organizations look for help in managing their fleets of phones and tablets.
The company’s revenue grew 29% during the third quarter to $70.4 million (or increased 37% to $262 million when revenue is measured on an annualized basis). The surge in new device signups is ongoing, as made evident by the 18.6 million total reported in the last period, so it looks like Jamf is riding some real momentum as it heads into the new year. If you think Apple will become more of a software and services company than a pure hardware sales company, then Jamf is most certainly worth a look, as its fortunes are tied to the same thesis.
Speaking to Jamf stock’s relative value, Apple trades for nearly eight times trailing 12-month sales after reporting sales growth of just 5% over the last year (most of it driven by services). By contrast, Jamf’s far higher rate of growth priced at 14 times trailing 12-month sales looks like a better bargain — and is a more focused bet on Apple services. And with $177 million in cash and equivalents and no debt, this software service provider is in tip-top shape. I think there’s plenty of upside left in 2021 and beyond, and plan on making a small initial purchase before the start of the new year.