I Ignored My Own Advice With This Pick (Here’s How We Can Still Profit…)
I got caught up in the moment, and it cost me (us) dearly.
The thing is… I know better. I not only ignored my basic investing principles, but I ignored history (more on this in a moment).
I’m talking about my recommendation of Unity (NYSE: U) — the gaming platform that allows for creating and operating interactive, real-time 3D content.
Over at Capital Wealth Letter, I boldly claimed that this could be a trillion-dollar company (which I still believe). But I made a couple of mistakes with this investment. And while I’m proud of our track record, the truth of the matter is that we won’t always be right. And I want to be honest about that.
So, in the interest of transparency, I want to go over a couple of things I got wrong about this one — so that you won’t make the same mistakes.
Let’s dive in…
The first is that I should have booked our profits when we were sitting on them. Of course, hindsight is 20/20, and this is a common statement every investor has said at least once in their lifetime. But when a more speculative stock (which Unity was/is) doubles in just six months, it’s probably a good idea to at least pull some of your money off the table.
Here’s what happened…
The stock went public in September 2020. I liked the company. But I refrain from investing in new stocks until at least six months after they’ve gone public — mainly because that’s when insiders can begin offloading shares, and the stock typically falls.
(I talked about the perils of investing in IPOs way back in September 2014 in StreetAuthority Insider. I touched on it again in my March 2017 issue. And I’ve talked about it numerous times in our free content, most recently here.)
Shares of Unity took off shortly after its IPO. But it was short-lived. The stock peaked in December 2020 and then tumbled over 50% — eight months post-IPO. That’s when I recommended the stock. We darn near nailed the exact bottom (we were off by 7 days). And the stock took off…
We hit an inside-the-park home run… but then forgot to touch home plate.
Of course, I’m not saying we could have sold at the exact top, but I should have pulled some profits off the table. Mistake number one.
The Price You Pay Matters
I’m not sure how many times I’ve said it, but “I’d rather buy a great company at a fair price, than a fair company at a great price.”
Of course, I’m quoting Warren Buffett there. But the nuts and bolts of it is that I ignored that advice.
First, let’s take a little walk down memory lane… back to the dot-com bubble.
In the lead-up to the dot-com bubble, these little internet companies were making people rich overnight. Valuations soared, but it didn’t seem to matter. People were willing to pay more and more for these stocks.
To see what I mean, I am going to be using the price-to-sales (P/S) multiple. This ratio is one of the simplest measures of valuation. While the price-to-earnings (P/E) ratio indicates how much investors are paying per dollar of a company’s earnings (profits), the P/S ratio indicates how much they’re paying per dollar of sales, or revenue.
The P/S ratio is a useful tool for valuing early-stage or high-growth companies that don’t have earnings (like Unity).
Average P/S ratios vary by industry, but anything over 15x-20x is considered extremely overvalued.
At the peak of the Internet frenzy, many notable blue-chip stocks were trading for ridiculously high P/S multiples. For example, Intel was trading at a P/S ratio of 16, Qualcomm (25), Microsoft (26), Oracle (44), and Cisco Systems (60).
As we now know, the good times were fleeting. Over the next few years, the broad market plunged more than 50%. Nothing was spared. Some of these blue-chip darlings lost 50%-90% of their value. Lots of one-time hot stocks vanished altogether.
The tech bust decimated the savings of an entire generation of overeager investors… who got too excited and paid too much.
Two decades later, I became that overeager investor…
When I recommended Unity, the stock traded at a P/S multiple of around 32. At its peak (when we were up triple digits), it traded for 60.
That’s too expensive and doesn’t set us up well for long-term success. It exposes a fundamental truth of investing: the price you pay matters. Even the best businesses will likely be terrible investments if you pay too much for them.
I paid too much for Unity. Mistake number two.
My Case For Unity Today
I’ve made mistakes with Unity. But I remain bullish on the stock, especially with the release of Apple’s Vision Pro — the augmented reality headset.
Source: Apple, Macworld
Remember, Unity is the world’s leading platform for creating and operating interactive content. The exact content that creators will be making for the Apple Vision Pro.
Apple’s entrance into the virtual reality/augmented reality market is a big deal. The company has made a number of calculated bets that have paid off big (think iTunes, iPod, iPhone, iPad, etc.). I don’t expect Apple’s Vision Pro to fly off the shelves (the price tag is $3,500), but I do expect it to boost the “spatial computing” market as Apple calls it. And that should benefit Unity in a big way.
Plus, Unity is on track to turn a profit this year (estimating $191 million). Sales continue to grow at a nice clip (25% growth last year). And it’s expected to do over $2.1 billion this year, a nearly 55% growth. More importantly, the company is expected to generate nearly $170 million in operating cash flow and $112 million in free cash flow.
Oh, and the company is no longer trading at a ridiculous valuation. Its P/S ratio is now less than 10.
The bottom line is that I still think Unity could be a trillion-dollar company. It won’t be this year or next, but I wouldn’t be surprised if it tops that figure in the next five years. And if it does, we will hardly remember that we were once down pretty big on the stock. We will be glad we held tight.
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