John Crateau (4:45)

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Ann Barry (4:54)

Learn more@schwab.com trading well, let's talk about Unity. You may not know this company by its name, but it is, this is according to its website, so self described, quote the world's most popular development platform for creating 2D and 3D multi platform games and interactive experiences. Well, this is basically the video game engine behind some of the biggest titles in PC console and mobile, including Pokemon Go, Temple Run and some of Hasbro's big hits. We're going to come back to that in just a moment. Well, this morning's earnings report sent the stock down over 30% at points during the day. Just like we were thinking of a video game analogy here. I was going to have, you know, Mario falling into a hole or something. But none of us on the team frankly are our avid games. You couldn't quite find the right metaphor. But reflected in the stock drop that we saw today are challenges in its advertising segment and of course the overhang of growing AI competition from tech giants. So we're going to go into it. John, let's start with some background for exactly what this gaming engine does.

John Crateau (6:00)

Right, so it's Unity Ticker U on the New York Stock Exchange market cap of $8 billion. The company was founded in 2004 in Denmark under the name over the Edge Entertainment and rebranding to unity Technologies in 2007. Ipoing in September of 2020 and looking at their investor relations website, the company highlights these stats. Just to get a sense of the breadth of the their participation in gaming. More than 70% of the top 1000 mobile games are made with Unity. More than 70% of top selling VR games on the Meta Store are made with unity. And over 28% of top 1000 PC games on Steam are made with Unity. So quite a reach there in the gaming community.

Ann Barry (6:42)

So that's on the they call it the create solution side of the business.

John Crateau (6:46)

Yes.

Ann Barry (6:46)

And to your point, when you hear a series of 70% penetration statistics, even 28%, this is a business that does have significant market penetration. And the question around this is whether the first mover advantage, the scale that it has today, whether that will continue for Unity and the stock drop is signaling the market saying we're not so sure that that big market share is going to be around for much longer. So just a little bit more about the financial profile of unity. P.S. john, you said that originally the company was called over the Edge Entertainment. Just my own view. I like that name better than Unity. I think over the Edge Entertainment is slightly more interesting but earning things. Let's talk about what they just came out with. Earnings per share $0.24 a beat by $0.03. Revenue $503 million beating estimates and up 10 year over year. And within that Create Solutions which you just described, that revenue was $165 million, up 8% year over year, driven by strong growth in that Beautiful stream of revenue the market likes, which is subscription, I. E. Sticky and recurring revenue. So what's the market's problem? Right. Well, guidance came in below analysts expectations. We're going to hear that a lot over the course of today's show. And that was in part because the other side of the business, this is the second division we're about to dig into for Unity. It's called Grow Solutions and it's their integrated advertising arm. So the way in which these two parts of Unity's business come together is you go to Unity to create the game and then you go to Unity to grow the ads within it. So this is interesting and sort of unfortunate. I sort of feel for the management team that had to state this in its earnings release. They said that when it comes to the Grow division, quote, we expect revenue to be flat on a sequential basis that is not growing. So sort of ironic when they actually talk about their own business.

John Crateau (8:35)

Right? That's tough. And the company has been trying to find its footing on the advertising side, the grow side. In 2022, Unity acquired Ion Source with the goal of bringing in ad mediation, mobile ad network infrastructure, data science, all these things. But from the accounts that I read, the integration did not, both internally with culture clashes and externally with unhappy clients. I read lots of accounts on Reddit and other forums. Folks were met with errors and general technical instability when they brought these two together.

Ann Barry (9:05)

So this is an interesting moment where you've got Unity buying a company and buying a capability in Iron Source. Ultimately, as you know, I'm hearing you say, John, integration not going well. So last year, Unity decided to try and build it and build it better. They rolled out Vector, which was a brand new, built from the ground up native AI advertising platform. And Unity CEO John Matthew Bromberg spent time on the call highlighting this change, saying, quote, by the end of 2026, we expect the quarterly revenue run rate for Vector to be comfortably more than a billion dollars a year. And he went on to say, my sense is that investors are overly focused on the performance of Iron Source, which is a legacy business for us that will get smaller and smaller over time and won't be material to our overall picture. So he's basically saying, everyone's got to chill out. We've got a path to a billion dollars entity here, that's Vector, and it's going to more than offset, in his opinion, what Iron Source was contributing to the business.

John Crateau (10:01)

Yes, he's banging the drum that the bad headlines are in their path.

Ann Barry (10:05)

Right.

John Crateau (10:05)

And last year, when Vector was Introduced shares in Unity rose nearly doubling. In fact, even with today's drop, shares are down 50% so far this year. But they're nearly flat to where they were 12 months ago. So just over the past year there was a big up and a big down and they're sort of ticking along.

Ann Barry (10:21)

Yes, yeah, ticking along. But it has been a roller coaster. So nearly flat to where they were 12 months ago, meaning it's sort of given back. Right. A whole bunch of. A bunch of gains. So we've got to talk now about Project genie and what the impact of that has been on Unity and others like it. Investors fled from game development stocks like Unity last month and that's because Google announced the availability of its AI virtual world creation tool, Project genie. Now that platform remains in its infancy. But like so much we're seeing in AI, John, just the mere threat of what generative AI can do and may one day sort of kick incumbents out is really what's going on here with Unity. Folks are worried that generative AI tools may someday lessen the need for complex game development software that people will pony up and pay subscription revenue for. That really is why Unity at the time of Project Genie's announcement saw its stock drop 21% and that was sort of the beginning of this real sell off and I think part of the catalyst momentum that we saw coming in today's drop.

John Crateau (11:26)

Right. And during COVID 19 I bought some Roblox stock even though I don't know much about it or I'm not a user. But at that time when this Project Genie came out, the shares of Roblox were down and lots of concern across the game industry for that reason. Well, I've read different analysis view of Project genie. Some said as it is right now in its infancy, it can only create two minutes of simplistic world or one minute, something like that. And Unity CEO fielded several questions about that topic on today's call. Analysts wanted to know about it. He said in general he sees AI as a tailwind to the video game development, removing, as he said, the drudgery.

Ann Barry (12:04)

Good use of drudgery. What a good word. It was excellent, excellent.

John Crateau (12:08)

Remove the drudgery of creating the baseline systems of a game. He also pointed out that something like Project GENIE could create a world, but game developers will still seek out Unity to build those worlds out into structured, networked, monetized, live operating systems. So it's one thing to create a world, but Unity argues that they're going.

Ann Barry (12:25)

To create the whole game, which is interesting. I find that sort of compelling. And you're seeing a lot of software companies come out and say that at the moment, right, John, they're saying, yeah, sure, ChatGPT can go and do X or Gemini can do Y or Claude can do Z. But if you want something that's really bells and whistles, it can really deal with complexity and add value that the complexity drives their arguments, software companies argument is people are going to pony up and pay for the ability to do that. And so, so you're sort of seeing in the coverage of this company, John, the analysts can't quite make up their mind. They really can't decide which way it's going to fall for Unity. As recently as yesterday, Unity's stock was upgraded by Oppenheimer, Wells Fargo upgraded. Last week you had a couple of these analysts saying, look, it's already had punishment in its stock price enough already. We think that there is a moat at least for some period of time around Unity to justify a higher price than it's experiencing today. Two weeks ago though, Barclays downgraded in light of today's earnings, are probably feeling like heroes at the moment. It feels like they sort of saw it, saw it coming. But it just goes to show that this one. Again, let's just go back to those market share numbers that we shared at the top. More than 70% of the top thousand mobile games today made with Unity. More than 70% of top selling VR games on metastore, even 28, which isn't 70, but that's pretty chunky of the top 1000 PC games on Steam made with Unity. And yet here we are, the market trying to decide is all of that going to be at risk?

John Crateau (13:55)

And I wonder if you play any mobile games.

Ann Barry (13:57)

I don't. Oh, actually that's true. Is word or count? Sure, sure. Okay, well, does it count for these.

John Crateau (14:02)

Purposes and I will point out to the sake of this discussion why that counts. Because sometimes New York Times games are included in a subscription. Sometimes there's an advertisement that comes up that can be kind of annoying. And so when I was thinking even about wordle, if you're thinking about Unity trying to engage their advertising arm, it would make sense because this is the whole key to mobile is is that ad going to come up at the right time? Is it going to push consumers off? I have the same experience. There's one game that I play from time to time and the advertising part is a big part of the gameplay.

Ann Barry (14:34)

Yeah, there's just a lot going on in this gaming space. You raise Roblox that company has had an absolute rollercoaster in terms of its share price performance. It is down actually in sort of the teens, I think year to date, roughly flat over a long longer term period. So this isn't, this isn't going to stop. Roblox is going to keep bouncing around. Unity is going to keep bouncing around. We're going to keep watching to see where it all ultimately shuffles out. But before we leave this topic, let's talk about Hasbro. Because yesterday we talked about earnings for Hasbro, the toy giant. It is in the midst of a turnaround and very interestingly we saw its stock hit a four year high off the back of earnings, the strength of which was created in part by a record 45 growth in one of its segments. It's got a long name. The segment is the Wizards of the coast and Digital Gaming segment. Now that segment includes Magic the Gathering arena and Monopoly Go, both of which were developed on Unity's platform. It just goes to show because this is one of the things that Hasbro called out and the analyst called out. These digital games are very high margin for Hasbro which tells you if a product is high margin it means that there is the ability to pay your supplier, your vendor partner, in this case Unity, a decent amount and still make a pretty healthy profit it on the actual end product. So it just goes to show Unity's value proposition had its light, had the light shone on it yesterday just from that one particular sets of great results from Hasbro. Well, we'll take a break and when we come back we'll take a spin through the headlines moving the markets today. It's both big day for macro and for some earnings as well. Well, it's 4:00pm on the east Coast. The markets have closed. We don't have a ticker tape so let's throw it over to our human ticker chart.

John Crateau (16:19)

That's right. The S&P 500 finished flat today. The NASDAQ and the Dow both finished down just over a tenth of a percent. Some market headlines. New jobs data came out from the Labor Department. US employers added 130,000 jobs in January, far more than economists had anticipated. And the unemployment rate ticked down to 4.3% from 4.4. There was narrow growth. Health care accounted for more than half of the job gains in January, adding 82,000 of those positions. Construction gained 33,000 and most other sectors were flat. The federal government shed another 35,000 positions as part of that overall purge of government employees.

Ann Barry (16:58)

Manufacturing, interesting. Did add 5,000 jobs last month. That was after a slide in 2025. We're going to keep following that number and I'll just sort of highlight why a little bit more. John. There has been this debate over whether or not manufacturing has been in a recession. And so that debate is still ongoing. And it continues to fuel this concern that a performance of different sectors within the US Economy, rather like we talk about this K shaped economy more broadly, there is some question mark as to whether certain sectors are falling at the upper end of the equivalent of the K or the lower end, manufacturing being the one that's getting a ton of attention. Also, just given that the tariff program was designed to prompt reshoring, meaning bringing manufacturing back to the United States. And lots of folks have said, look, it's going to take a really long time. We are coming up to a year to an anniversary of those Liberation Day tariffs. And so we should start seeing data come in in the back half of this year either supporting or negating the suggestion that that would be an effective tool to prompt that reshoring. While the stronger than expected jobs numbers may encourage the Fed to hold interest rates steady for the time being or perhaps to expedite a rate cut when we see that new Fed chair coming in in May. Well, we'll move on now to Mattel. Just to go back to the topic of games and toys. That stock dropped over 20% today after slow US sales during the holiday season. Which of a key one when it comes to toy sales, we did see that it was forced to cut prices for its toys and games. Operating profit also decreased by 11% in the fourth quarter. Analysts had in contrast, been expecting, excuse me, an increase so extremely disappointed in that. Now, just like the competitor Hasbro, Mattel encountered as anticipated delays in retail orders until late in 2025. And the reason for that was uncertainty over the impact of tariffs meant that retailers were pushing out their order time. But when those sales, when those orders from retailers did finally come through, turns out they fell significantly short of expectations. Unlike Hasbro, which saw its stock yesterday, as we said, soaring on the back of strong growth from the higher margin digital games, card games and collectibles. Mattel, though, did not find a way to plug that specific gap.

John Crateau (19:12)

The Barbie owner's full year guidance for 2026 was also disappointing, forecasting earnings per share of up to $1.30, considerably lower than the $1.76 Wall street analysts were targeting ahead of its earnings.

Ann Barry (19:24)

Finally, investors were also disappointed in Lyft's earnings. Shares dropped today around 15% revenue did come in around expectations, but the problem was rider growth metrics, which missed relative to what the street was expecting.

John Crateau (19:39)

And this is interesting timing. I saw a story this morning on wnyc. So this is local to New York, perhaps. And they reported on a new ride hailing app called Empowerment, where The driver pays $50 flat monthly fee and then takes home 100% of the fares, which the driver sets the price themselves. The app is considered illegal by New York's Taxi and Limo Commission, and it currently facilitates only tens of thousands of rides a week, compared to 4 million through Uber and Lyft. But, Ann, I understand the safety, the regulatory, the insurance issues at play, but I remember when Uber first disrupted the taxi business here in New York City, pushing regulatory boundaries at the time. So it's going to be interesting to see how this new player comes in.

Ann Barry (20:21)

Yeah, I think that's really interesting point, John, because the way in which Uber ultimately managed to push the regulatory boundaries and get what they want, they made the calculated bet that consumers would want the product, Uber products so much that ultimately the consumers would riot if the app was taken away. And I suspect, I look, I think it was a clever play and I think it panned out out in a variation of the way that they expected. So the idea that a driver pays 100, you know, to take 100% of the fare home, is this the moment where Uber the disruptor is disrupted? I don't know. It depends, I guess, on what the drivers and the consumers have to say about how compelling that model is. Well, it is still the thick of earnings season. There's a lot more coming in the next 24, 48 hours going into this holiday weekend that's coming up for those of you who get the Monday off. So we're about to go and brew another strong pot of coffee to keep up with it all. After the bell today. That's it for today's Brew Markets Daily.

John Crateau (21:17)

Brew Markets Daily is hosted by Anne Barry, produced by John Crateau, Tarka Belleteef and Emily Millar. Our technical director is Yuchena Wagu. Jim Morizo is our audio engineer. The president of Morning Brew Inc. Is Devin Emery. If you have any feedback or a company you'd like us to COVID leave a comment or send an email to.

Ann Barry (21:32)

Brewmarketshoworningbrew.Com Wake up tomorrow with the Morning Brew newsletter and tune in to Neil and Toby on Morning Brew Daily. We'll see you back here tomorrow, same time, same place, foreign.

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