Have you heard of Howard Marks?
His funds manage $148 billion. His clients include 73 of the 100 largest US pension funds. His annual returns after fees have averaged 19% for 26 years.
Howard Marks is a founder and co-Chair of Oaktree Capital, and he has some influential fans. Warren Buffet once said “When I see memos from Howard Marks in my mail, they’re the first thing I open and read. I always learn something…”
Marks has some interesting ideas.
For example, he has stated that while fundamentals are important, they are also available to everyone. That makes it hard to gain an advantage from fundamental analysis.
He believes that understanding investor psychology is a better way to get that advantage.
“Markets are a long term weighing machine and a short term voting machine”, Marks said in a recent interview. “Psychology is what determines the outcome of the voting”.
That’s why it’s important to keep your finger on the pulse of investor sentiment.
Let’s get into this week’s report. Here’s what we found:
- A leading provider of game development software that’s attracting massive support from institutional investors.
- An emerging biotech company on the cutting edge of gene-based therapy development.
Unity Software, Inc.($U)
$106.53 – Share price at the time of writing
- Unity Software operates the world’s leading platform for building and managing real-time interactive 3D and 2D content.
- Unity’s platform is used mainly for game development. The company is expanding its product range to serve other niches, such as 3D product visualization.
- The company’s IPO in Sept. 2020 generated significant attention, with shares rising from $52 to $75 just before the IPO and peaking at nearly $165 in late Dec.
- Shares are now trading at a reasonable valuation and major institutions are holding almost the entire float.
What they do:
Unity Software’s platform enables the development, management, and monetization of content.
The platform serves computers, tablets, mobile phones, consoles, and augmented or virtual reality devices.
The company offers multiple products based on the same platform, offering game development, monetization, and industrial solutions.
The gaming industry has been Unity’s core market. 87% of its revenue comes from game-related products. 71% of the top 1000 mobile games, including smash hits like Pokémon Go and Call of Duty: Mobile, run on Unity’s platform.
Annual revenue growth has been 42% in each of the last 2 years. Non-gaming revenues from sectors like architecture, robotics simulation, and self-driving cars, have grown faster than gaming revenues. They rose from 8% to 13% of total revenue.
What we can learn from interest levels:
Unity Software has shown an interesting pattern of social media interest.
Based on data from marketstream.io, we saw a sudden spike in Reddit mentions in February and March, up 218% from the previous 2 months.
Mentions then plummeted, with the most recent 2 months showing a 71% decline from the peak period.
The $U stock price followed a familiar pattern after its IPO. A surge in momentum-driven buying pushed the stock to almost double its IPO price.
Then common sense set in, and the stock settled back to a realistic valuation.
The spike in mentions coincided with 2 events.
First, management announced that they expected 2021 revenue growth to slow to a range between 26% and 32%.
Second, there was a rapid selloff in the stock, driven by the drop in revenue growth rates and by a general move away from growth tech stocks. That drop drove a great deal of discussion, much of it negative.
So what do we learn from this? Focus on one key data point: institutional investors now hold an astonishing 97.63% of the float.
The conclusion: emotion-driven retail investors bailed on Unity Software when the price slid from its post-IPO peak. Analysis-driven institutional investors held on and increased their holdings.
Notable comments from Reddit:
“Unity growth last year was 43% this year and the following year about the same. These price swings happen but the bigger picture is I known in the next 18-24 months its going to be a lot higher than $113”
“So recently, I started downloading games on the App Store. And most of the games I’m trying are using Unity. Maybe I should buy some shares of $U?”
Signal: High-profile fund managers Cathie Wood and Ken Griffin picked up almost $1 billion in $U shares during the 1st quarter of 2021. – cheaperthanguru.com
Why $U could be valuable:
Unity Software has a dominant position in a huge and growing market.
Management estimates the current addressable market at $29 billion.
Both gaming and non-gaming revenue have shown consistent increases.
Customers contributing over $100,000 in revenue increased 25% in the last year. Annual revenue from repeat customers has increased consistently.
The company is not profitable, but that’s expected in this stage of development when investment in growth is the priority.
Debt is minimal and with $1.65 billion in cash, the company will have no problem funding operations.
Gross profit has consistently increased, indicating that the Company is moving toward profitability.
10 out of 13 analysts covering Unity Software rank it as “Buy” or “Strong Buy”. The average price target is $123.05, 15% above the current value.
As we mentioned earlier, over 97% of the float is currently held by institutional investors. 39 hedge funds now hold long positions, up 22% from the previous quarter.
These positions are not likely to see impulse sales and serve as a cushion against sudden price drops. Any positive news or trends could see a significant gain.
What the risks are:
Unity Software is not profitable, and losses are substantial. There is no assurance that the company will achieve profitability.
Research and development absorb a significant percentage of revenue. But plays a key role in Unity’s competitive advantage. If the company cannot sustain these expenses this leaves room for competitors to develop better technology.
Unity generates a portion of its revenue from mobile ads. Privacy measures requiring companies to ask the user permission before tracking could cut that revenue. Management expects Apple’s ad identifier changes to reduce revenue by 3% and other companies could take similar measures.
Unity’s expansion into non-gaming markets where it currently does not have a dominant position may fall short of expectations.
Bottom line: Unity Software’s post-IPO spike and subsequent losses have left the company trading at a fair valuation with excellent growth prospects. The high concentration of institutional holdings and the favorable analyst ratings indicate strong interest from informed professional investors.
Beam Therapeutics Inc. ($BEAM)
$100.99 – Share price at the time of writing
- Beam Therapeutics is a biotech company developing a revolutionary gene-editing technology called base editing.
- Base editing provides more precise and controllable genetic modification than the CRISPR-Cas9 technology used by most firms exploring gene therapies.
- Beam is developing therapies aimed at treating sickle cell disease, two forms of leukemia, liver disorders and inherited eye and nervous system disorders.
- Beam has an impressive range of research partners and has attracted attention from major institutional investors.
What they do:
Beam Pharmaceuticals has developed a new and proprietary gene-editing technology.
While traditional CRISPR-Cas-9 methods have been likened to a pair of scissors that uses cutting and splicing to edit the genome, base editing has been compared to a pencil and eraser.
Base editing can focus on a single base, the most fundamental element of the genome.
Base editing technology enables multiple therapeutic approaches:
- Correcting disease-causing mutations.
- Creating protective genetic variations.
- Activating or silencing gene expression.
- Editing several sites simultaneously.
Beam is developing therapies for a number of conditions, including:
- Sickle Cell Disease.
- Sickle Cell Disease Beta Thalassemia.
- T-cell Acute Lymphoblastic Leukemia.
- Acute Myeloid Leukemia.
- Glycogen Storage Disorder and other inherited liver diseases.
- Stargardt Disease, a leading cause of early blindness.
Apellis Pharmaceuticals ($APLS) has agreed to pay Beam Therapeutics $75 million for the right to use base editing in its research into immune disorders.
Why they’re spiking in interest:
According to MarketStream.io, the total Reddit mentions of $BEAM in the last month (up to July 9) leapt over 283% from the previous month.
That surge was driven by two developments.
On June 26, Intellia Therapeutics and Regeneron Pharmaceuticals released the results of a key clinical trial showing a major reduction in a disease-causing protein after a single dose of a new CRISPR-based therapy.
That release was the first clinical data showing efficacy and safety of a CRISPR-based therapy directly introduced to the body. It drew immediate attention to the entire gene editing sector of the biotech industry, including Beam.
On June 30, Beam announced its $75 million technology licensing deal with Apellis. That agreement confirmed that BEAM can derive revenues from licensing its technology. Licensing can deliver revenues faster than moving new therapies through clinical trials.
Notable comments from Reddit:
” I did some research and bought into BEAM, EDIT, and NTLA. I thought those companies would give me enough exposure into that technology. I have been dollar cost averaging the last 6 months and was delighted at the recent news. However, I’m not selling. I bought into this for a 10 to 20 year play… It’s like being able to invest in TI and Intel right after the integrated circuit microchip was invented.”
“BEAM is the real genome editing play IMO… Because base editors don’t cut DNA, this approach is theoretically safer and more specific than CRISPR-based cutting.That is why I am long shares of BEAM.”
Signal: Fidelity Investments, ARK Investment Management, Temasek Holdings, and The Vanguard Group hold a total of over $1.5 billion in $BEAM shares. – Yahoo Finance
Why $BEAM could be valuable:
The cell and gene therapy market is one of the fastest growing biotech sectors, with a projected CAGR of over 30% from 2019-2025.
Beam’s proprietary base editing technology and other exclusively licensed technologies offer a significant step forward from traditional gene editing techniques.
This allows for more precise and efficient manipulation and expands the potential of genetic medicine.
Beam’s technology offers two potential revenue streams.
- Beam is developing its own therapies, and will be bringing them through the clinical trial process.
- Beam can license its technology to companies exploring different therapeutic options, as it has with Apellis Pharmaceuticals.
Beam’s research and business partners include the Broad Institute of MIT and Harvard, Boston Children’s Hospital, Magenta Therapeutics ($MGTA), the Institute of Molecular and Clinical Ophthalmology in Basel, Switzerland, and Apellis Pharmaceuticals.
Beam Therapeutics has attracted strong support from institutional investors, with 285 institutions holding over 85% of the float. This limits the potential for reactive or emotion-driven selling and provides a strong base for appreciation.
Beam is not profitable, but with a strong cash position, debt at less than 20% of assets, and the revenue from the Apellis deal there is no cash crisis in sight.
What the risks are:
Beam has never earned a profit and its first significant revenues will come in 2021, from the Apellis agreement. The Company may not achieve profitability.
Beam’s future revenues and profits will depend heavily on the company’s ability to move new therapies through the clinical trial process. This process is difficult and expensive and many drugs are not approved.
Beam is working with entirely new technologies that may experience unanticipated difficulties.
The entire gene therapy sector may be affected by the performance of a single company. Beam’s stock price could be adversely affected by a failed clinical trial or an issue experienced by a different company in the same sector.
The gene therapy sector may face political regulation or opposition driven by groups that oppose gene therapy on ethical or religious grounds.
Bottom line: Beam Therapeutics is exploring the cutting edge of one of the most promising areas of modern medicine. There’s enormous potential but also significant risk. The stock is likely to be volatile but should be viewed as a long-term play.
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