Feb 2024 - Real Real Estate
This month’s Investment Journal is one of a kind: February marked my largest ever stock sale, exiting several positions as well as decreasing my stake in a few major positions significantly - however all for one good reason. I also go over Unity’s recent Digital Twin sale to Capgemini as well as its earnings.
Unlabeled on the chart:
In Consumer: Costco (1.4%)
In Healthcare: Xtrackers Genomic Healthcare Innovation (1.1%) & Novo Nordisk (1.3%)
Moves
On February 14th I purchased a small stake in AppLovin (APP) at an average price of $47.20.
On February 15th I sold my stake in AppLovin at an average price of $53.48 marking a return of 13.31%.
On February 26th I sold my temporary position in American Tower (AMT) at an average price of $189.40 marking a loss of 11.36%.
On February 26th, I sold my temporary position in in VICI Properties (VICI) at a price of $29.89 marking a loss of 5.14%.
On February 26th, I sold my temporary position in in Realty Income (O) at a price of $52.95 marking a loss of 7.09%.
On February 26th, I sold my entire stake in in 3M (MMM) at a price of $92.12 marking a loss of 6.44%.
On February 26th, I sold my entire stake in in Bank of Nova Scotia (BNS) at a price of $63.23 CAD marking a return of 5.88%.
On February 26th, I sold my entire stake in in Starbucks (SBUX) at a price of $95.18 marking a loss of 0.49%.
On February 26th I sold 25% of my position in Amazon (AMZN) at an average price of $175.30 marking a return of 122.29%.
On February 26th I sold around 28% of my position in Tesla (TSLA) at an average price of $196.60 marking a return of 992.22%.
Performance
My portfolio value increased 3.0% in the month of February, right in line with the Dow Jones World Index up exactly the same amount.
Dividend overview
| Name (Ticker) | Received | Amount (USD) |
| American Tower (AMT) | Feb 2nd | $11.93 |
| AbbVie | Feb 16th | $15.59 |
| Realty Income (O) | Feb 16th | $19.35 |
| Costco (COST) | Feb 19th | $3.08 |
| Starbucks (SBUX) | Feb 26th | $8.57 |
| Total | Feb 2024 | $58.52 |
I received a total of $58.52 in dividends before taxes for February 2024, a decrease of 84.28% compared to the same month last year at $372.22.
Commentary & Review
A Decreasing Dividend…
I quickly just want to make a comment on my long-term dividend journey. First I want to apologize for not updating the dividend table for January in previous month’s update - I noticed I had completely skipped over it, as I was updating this one. I have now rectified the mistake and issued the correct numbers in the January update. Secondly, you may have noticed a large discrepancy between dividends received for this February in comparison with last year. The simple explanation is that I in March 2023 exited the Danish index fund that I owned, exactly as I noticed its high yield was far less interesting than first assumed (it was essentially paying out all growth as a dividend). This position was responsible for $303.76 of the dividend I received for the month last year and so, without it, the difference is much less drastic.
But much less of a technicality and in more of a long-term perspective, you will, unfortunately, notice that my dividend will be decreasing likely staying at a lower level for atleast a couple of years. This is related to the large sale I have performed this month, which unfortunately also did “hit” a few good dividend paying/dividend growth stocks. And as I am making a large investment into my first home and taking out a mortgage with it, my ability to purchase stocks will be limited for a while.
Yes, I am Buying a House!
My first “real” Real Estate! My fiancé and I have put down an offer for a brand new house and by the looks of it (fingers crossed) we are expected to close the deal soon. For this large investment in our life, we are making a few sacrifices, such as taking out a bit of what we have invested in the stock market. We are aiming to put down 20% of the value of the house in order to avoid a bank loan. 80% of the home will be mortgaged - the common way of doing it here in Denmark. Interest rates are quite high at the moment, but hopefully we may be able to lower the rate in a couple of years. On top of our down payment are costs related to obtaining the mortgage, registering the house in our name etc. All of that had to come from somewhere. With local tax laws, any realized gain above 61.000 DKK (~$9000) in a single year is taxed at the higher 42% tax bracket, compared to the normal rate of 27%. For this reason it was quite the challenge to figure out which combination of big winners and small losses or gains to sell out of, in order to limit the “damage” as much as possible. After a few days of thinking and a helpful session with Microsoft Copilot I figured out the right balance to strike.
Obviously, what first had to go were my temporary real estate positions in Realty Income, American Tower and VICI Properties. I considered them temporary for this very reason and do not see much reason for further exposure to the real estate market than I will have now through this direct investment. Unfortunately with expectations of a potential interest rate cut pushed from March to May, REITs took a tumble doing this short time I held them. I sold each position for a slight loss, with the dividends issued in the meantime unable to make up for it. This was a small bet I decided on in December, with no real expectation on when we would find the right home to go for. It might has well had ended up being in August as in February - and my gut feeling is still that we will see REITs recover quickly once rates start coming down.
What came next was a little more difficult. I knew it made sense to reduce some of my larger positions to get out a good chunk of what I needed in one go. But as long time readers may remember I made a promise to myself around a year ago to never sell more Microsoft stock unless fundamentals for the company changed. The stock is a beast, reliable and performant all-in-one. And as it is a dividend paying company - with a growing dividend at that - the risk of selling is much higher than the risk of concentration. Over the past decade as a Microsoft investor I have decreased my share count by around half and I am done selling. It is my largest position by a mile now and I am perfectly content with that. What partly triggered this, outside of Microsoft climbing back up to the #1 spot by market capitalization was my reduction of shares in Tesla made in December last year for this same purpose: Maximizing the lower tax bracket.
This time around I sold nearly twice as many shares in the company as last year, lowering my position by almost 30% in my largest ever profit taking. This immediately put me over the lower tax bracket threshold: part of this sale will be taxed at 27% while the rest will be taxed at 42%. This is difference is certainly impactful when selling out a 10x gain. Definitely something to make you pause. Not to sound ungrateful - obviously is it a blessing to be able to - its just something you have to consider when selling off big at all once. I decided to also take a bit off the top on the Amazon position which I have held since 2018, following a great recent run. It is no secret that selling shares of Tesla at sub-$200 is not what I consider the best move (I still believe the company deserves around a 50% higher valuation than currently). I considered exiting Amazon entirely to avoid more of this, but after reflecting on it I ultimately decided that I am a fan of the cash flow optimizing approach that new CEO Andy Jassy has been taking. A dream scenario for me would be for Amazon in the not so distant future, to do after Meta (META) and start issuing a dividend growing it over time.
To find the rest of what was required for this transaction I shamelessly decided to prey on the weak; Small positions that either have not performed well or barely moved. This made optimizing for taxes straight forward - as there were no real gains to be had. This meant that I have exited Starbucks, 3M and Bank of Nova Scotia. Each of them pay a respectable dividend and I will miss owning all three. I hope to one day to be able reacquire stock in their operations, although I still keep some reservations about 3M.
Finally, as I was doing research into expectations for Unity’s Q4 prior to earnings, I took notice of the modest expectations analysts had for its now main competitor in the ads space - AppLovin. You may remember this name from my post on Unity’s messy merger and acquisitions from back in August 2022. In fact, AppLovin attempted a takeover of Unity itself as they lined up to join forces with its direct competitor ironSource, which is now part of Unity. To make a long story short - I identified a great short term trade and put in an order for a few shares of AppLovin 30 minutes prior to close and the release of its earnings report. I made nearly 14% overnight, which could have been more like 25% had I not sold immediately as the market reopened. I am still not the biggest fan of AppLovin’s business, but I have come admit that they have figured out something no one has in the business with its AXON 2 AI model.
If you are Danish speaking (or not, but just REALLY committed) I will be doing my first ever live stream Q&A with Mads Christiansen, investment manager and founder of NewDeal Invest - a Danish technology investment firm and my new employer. We will, among else, have a chat about AppLovin and Unity.
Unity sells its Digital Twin Professional Services division
I spent some time this month investigating the sale of Unity Digital Twin Professional Services to Capgemini - an announcement which first took me by surprise. Prior to giving it a proper look I worried that it could be a potential strategic shift away from my long term thesis. It is not.
There is not much information available about the sale, but it is now clear to me that it is NOT a sign that Unity is giving up on its Digital Twin ambitions. It is rather an expression of the new CEO, Jim Whitehurst's strategy to focus on the core business.
“Going forward, we plan to increase our focus on our core; the Unity Editor and Runtime, and Monetization Solutions as we continue to see significant opportunities for growth in these businesses, including AI. In addition, we aim to sharpen our focus on fewer large and more attractive businesses where our capabilities offer a clear competitive advantage like Digital Twins.”
Here, Digital Twins are highlighted as part of the core business - and I believe this is still the case.
The key to understanding the sale lies in the name Digital Twin Professional Services. Meaning, this is about the team that delivers targeted experiences and specific use cases to customers, not their ambitions to build technology in the area in general. Unity will continue to be the leading technology provider for RT3D Digital Twins, while Capgemini will now overtake execution of client services/building projects. They become a strategic partner for Unity and will initially be the largest provider of this type of service which can now be delivered by any organization, without concern to compete directly with Unity's in-house solution. Unity thus reduces their role in the delivery chain of such solutions and focuses on delivering the underlying technology. It will likely improve their opportunities to deliver a viable product in the future. We don't know what Capgemini is paying for this takeover but we can assume probably a one-time payment in addition to at least future royalties of 2.5% as determined by the newly established revenue share fee model, as well as subscription/license fees per developer seat - on par with any other Unity customer of this type. It is worth noting that Unity now defines these types of professional services (non entertainment) as "Unity Industry" which is its highest tier/most expensive new license variant ($4900 per individual developer seat).
To further illustrate the conclusion I have made for this deal, I add here that Unity in November 2023 shut down its Professional Services arm for Weta Digital, as part of the first round of layoffs. Here the idea was generally the same, although lacking a new set direction: "Unity will retain ownership of the technology it acquired from Wētā in December 2021 and will be evaluating the best way to enhance its offerings with it over time. The technology will also remain fully available to Wētā FX." Wētā FX is the VFX studio of Weta, which is still a seperate company, Unity just has ownership of its tools. A similar strategic move was announced in Q2 2023, in the last round of earnings with John Riccitiello at the helm, where in the report mentioned:
“We continue to reduce our reliance on Professional Services as we build a scalable and profitable business.”
In this instance Professional Services referred to the more general Professional Services branch of Unity, which worked together with enterprise customers to build custom solutions or better leverage the engine, and troubleshooting/problem solving specific client issues. Unity will thus no longer offer ready-made solutions to customers. They remove themselves completely as a potential competitor to organizations that offer RT3D solutions, just as they have never themselves built and released commercial games (unlike competitors AppLovin and Epic Games). The engine should be in the hands of as many organizations as possible, best equipped to offer the most competitive RT3D solutions, while Unity will entirely focus on offering these developers the best possible RT3D engine, receiving license + royalties, when they achieve success.
Unity Q4 Earnings
Unity was down more than 15% after hours following the release of its Q4 earnings report (although it recovered slightly the next day, but has still dipped below $30). It was easy to tell why: Unity posted a negative EPS of $0.66 versus the $0.22 in positive EPS that analysts expected. Revenue would likewise have missed if not for the forementioned one-time Wētā FX transaction of $99 million. Guidance too came in far below expectations with projections for Q1 of $415-420m versus $536m expected. The story remains the same for full year guidance coming in at between $1.76 billion and $1.8 billion, also well below consensus estimates of $2.32 billion. So what gives?
As you may know, under CEO Jim Whitehurst, Unity has been under a major restructuring. They have effectively hit the reset button and claim to be mostly through it by now. Gone are 25%+ of staff, all Professional Services outside of a few select high priority partnerships and general bloat. I have gone over all this in previous posts. As mentioned on the call Professional Services are good examples of high revenue business drivers and yet not Unity's forte. Unity is now... more-or-less... purely a software company. Renewed focus is on Engine, Cloud and Monetization. This is Unity's new "Strategic Portfolio". As concluded above regarding the company's recent sale to Capgemini, this still includes an ambitious focus beyond gaming. This is now defined purely as "Industries" but still includes Digital Twins, XR, visualizations etc. However, simply for the software tool.
Good news is that effects of the "Revenue Fee Crisis" are not affecting numbers. Core subscriptions grew 18% (excluding China) and Industries subscriptions continues to make up an increasing share of total subscriptions. Now 23% to 19% previously. Bad news is that Unity 6 - the next major revision of the Engine has been delayed. This is the version for where the new 2.5% revenue share fee applies and is therefore massively important. Originally announced for January 2024 it is now expected to release sometime mid 2024.
Unity Grow (the Ad business) was a bit of a disappointment as well. Revenue grew 26% YoY, but stayed flat on a pro-forma basis. Management cites increased competition as a major showstopper here. With that, we all know they are referring to AppLovin who are just outright killing the game. AppLovin even came up on the call (although not directly mentioned by name). Their innovations in AI are clearly working and are currently eating Unity's lunch. The integration of ironSource into Unity was named a "distraction" as a reason for why they have fallen behind. At the same time, this business unit presents the most immediate upside for the company short-term and with ironSource now properly integrated, this could turn out an ever bigger opportunity than anticipated, as proven by AppLovin's success.
Any businesses outside of the now "Strategic Portfolio" will no longer contribute materially and revenue of these will decline quickly as a result of the reset. Professional Artistry Tools will be integrated into current AI services and even Luna will cease to exist. With this comes a clear positive however, as operation losses have decreased and will continue to. Naturally this is also an effect of effective layoffs. Another benefit here is a significant slowing down of stock based compensation, which has been over the top for long. I'm really happy with Whitehurst’s big reset. He is not cutting Unity back to a gaming only business, but he is only keeping what outside of it makes sense. The big opportunities, nothing else, to stay lean and effective.
The company's biggest weakness are its board, which let former CEO John Riccitiello run the business over a cliff, and which, after 5 months, still has not made a final decision on whether to appoint Jim Whitehurst as a permanent new CEO or whether to find someone entirely else for the job. I hope Whitehurst stays on permanently.
The short of it is this: Short term pain, long term gain. Unity is finally turning into a healthy business going forward. Being positioned greatly was not quite enough on its own in this current environment, but the the combination sounds like a really good one, though. Had I any funds, I would buy the dip - for now, I am staying long.
Watch List
No changes to the Watch List this month. The reason is that I am too lazy/busy.
My Watch List sorts stock by sector and notes are included for each one, describing my interest and reservations. The status indicates the likelihood of a position being added to my portfolio. ‘Watching’ means I just keep an eye on them, whereas ‘Top Pick’ means they are very likely to find their way into my portfolio at one point - ‘Under consideration' means somewhere in between, with notes offering some elaborating thoughts. Please note my Watch List is based on my own research and goals and is in no way a recommendation of what to buy.
| Sector | Name (Ticker) | Status | Notes |
|---|---|---|---|
| Healthcare | Gubra (GUBRA) | Under consideration | Hidden gem, versatile, familiar, though unprofitable |
| Merck & Co (MRK) | Watching | Casual interest, limited familiarity | |
| Medtronic (MDT) | Watching | Casual interest, limited familiarity, attractive dividend | |
| Industrials/Manufacturing | DSV (DSV) | Watching | Interesting strategic M&A expansion, great execution, automation opportunity |
| Elkem (ELK) | Top Pick | Cyclical industry, but well positioned to break out | |
| Otis (OTIS) | Top Pick | Potential dividend growth play, familiar | |
| Norsk Hydro (NHY) | Watching | Casual interest, limited familiarity, attractive dividend | |
| Lockheed Martin (LMT) | Watching | Ethical concerns, too expensive | |
| Corning (CLW) | Watching | Weakening moat, rising competition, familiar | |
| Consumer | McDonalds (MCD) | Watching | Strong brand, limited optionality |
| LVMH Moët Hennessy Louis Vuitton (MOH) | Under consideration | Strong leadership, performance, too expensive | |
| Coca-Cola (KO) | Under consideration | Strong brand, stable giant, too concentrated, familiar | |
| PepsiCo (PEP) | Under consideration | Strong brand, well diversified, familiar | |
| Tapestry (TPR) | Under Consideration | Interesting recent acquisition, high debt, cheap | |
| Grab (GRAB) | Watching | Great business synergies, interesting market, unprofitable | |
| DoorDash (DASH) | Watching | Automation opportunity, strong marketshare, unprofitable | |
| Energy/Utilities | Ørsted (ORSTED) | Top Pick | Strong positioning, leadership, familiar |
| NextEra energy (NEE) | Watching | Strong position, too concentrated, too expensive | |
| Enphase Energy (ENPH) | Watching | Rising star, limited familiarity | |
| Technology | Embracer (EMBRAC-B) | Under consideration | Incredible acquisitions, not profitable, familiar |
| Sea (SE) | Watching | Core business weakening, innovator, just turned profitable | |
| Palantir (PLTR) | Watching | Amazing tech, highly dilutive, unprofitable, opaque | |
| Meta (META) | Watching | Strong leadership and userbase, undergoing big change | |
| Apple (AAPL) | Watching | Strong brand, loyal userbase, risk of disruption | |
| Mercado Libre (MELI) | Watching | Great execution, growing market, too expensive | |
| Shopify (SHOP) | Watching | Innovator, well positioned, unprofitable | |
| Xiaomi (1810) | Watching | Fast innovator, China risk, previously owned | |
| Nvidia (NVDA) | Watching | Strong brand and leadership, too expensive, previously owned | |
| Finance | Coinbase (COIN) | Under consideration | Strong brand and leadership, unprofitable, previously owned |
| BlackRock (BLK) | Under consideration | Strong execution, exposed to the economy, attractive dividend | |
| SoFi Technologies (SOFI) | Watching | Strong leadership, innovator, unprofitable | |
| NuBank (NU) | Watching | Great execution, interesting market opportunity | |
| JP Morgan Chase (JP) | Watching | Stable giant, overlapping industry with holding | |
| Manulife Financial (MFC) | Watching | Stable giant, attractive dividend, limited familiarity |
Disclaimer: I am not a financial advisor, the opinions expressed in this article are entirely my own – always invest at your own risk.
