Update - February 8, 2022

Unity Software Jumps 17% in a Day

Oh boy… our latest play is off to the races.

Last Tuesday, we released our February issue. By Friday, Unity Software (U) was making big headlines for flat-out crushing its profit guidance.

Shares rose 17%.

But let me tell you… this is only the beginning for the video and animation dominator.

Sales during last year’s final quarter came in at $316 million, well above Wall Street’s expectations of $300 million. The good news flowed right to the bottom line, where profits beat expectations by more than 40%.

The growth will continue. Unity says to expect full-year sales of $1.5 billion.

If that happens, it will mean the company grew another 35% last year. And it would come on top of sales growing 44%.

Digging through the figures, one of the most interesting stats I uncovered has to do with the company’s customer growth. Yes, it’s great that sales are increasing. But it’s always important to see the number of buyers increasing at a near-equal pace.

In this case, that’s what we’re getting. The number of customers who wrote a check to Unity for more than $100,000 went from 793 in 2020 to 1,052 in 2021.

That’s good. It’s a sign of healthy growth.

Let these figures be a lesson to all the pundits saying that the tech sector is dead and it’s time to replace growth stocks with value stocks. That’s not the case. But as the tech sector’s earnings reports over the last two weeks have shown… it is time to be selective.

Unity’s leadership continues to pound the table about the immense opportunity in the metaverse. It’s a tech trend – perhaps the most revolutionary one of our time (and that’s saying something!) – that is just getting started.

Watch the Super Bowl this weekend… The metaverse will be a big theme in the ads. Those ads are always a sign of what lies ahead.

Unity will have a shot at partnering with every entrant to the metaverse.

If you don’t own shares… grab them now.

Buybacks Remain Hot

Zooming out to take a look at the macro picture, we see a clear trend. Interest rates are on the rise, and investors are worried about (but not quite sure) what it means.

As the 10-year Treasury flirts with the 2% level, the important figure to watch is the real yield. Stripping out the market’s expectations for inflation, the 10-year Treasury now yields -0.48%.

That figure, of course, has risen a good amount. But is a 10-degree day all that much better than a 5-degree day? No. It’s still quite cold.

Monetary policy is still – and will remain – quite loose.

That idea is so important because the price of money dictates what companies, investors and everyday consumers do with their money. For example, I’ve focused on buybacks a lot (you’re welcome). With money dirt cheap, they’ve been the No. 1 driver of stock market returns for several years now.

But as rates rise, the fear is that the trend will stop.

It hasn’t showed any signs of slowing yet. With rates still negative, why would it?

Take the action from oil giant BP (BP). Just yesterday, it announced it will repurchase yet another $1.5 billion worth of shares… thanks to its excess cash flow from 2021.

How do companies get “excess” cash flow? Simple. They sit on their cash instead of paying off their debt. When debt is this cheap, it makes little sense to pay it off.

It’s not just oil giants taking advantage of high oil prices, either.

The press hardly picked up on it last week, but Amazon (AMZN) included something quite distinctive in its earnings report. For the first time in more than a decade, the company went into the open market and bought some of its own shares.

It spent nearly a billion bucks on 5.3 million shares.

Shares of the company went up 15%… buoyed by the good news. Again, tech and growth aren’t dead. The rumors aren’t true.

Yes, rates are rising. They’re likely not done rising.

But money remains cheap. Until real rates go positive, we will continue with our current strategy – focusing on tech, buyback stocks… and everything else that does well when money is cheap.

Clearly, it’s working.