While the stock market has been in something of a recovery mode so far this year, the S&P 500 is still off 13% from its all-time high -- and for stocks in the tech sector, it's been even more painful.
Consider two relatively smaller players like 3D software company Unity Technologies (U 0.32%) and mobile-app business Digital Turbine (APPS 7.52%). Both are down more than 80% from their respective highs. But these companies aren't standing still. In November, Unity completed a $4.4 billion merger with ironSource, an Israel-based company with business segments that are completely new to Unity, including its mobile-app discovery business Aura.
This now puts Unity in direct competition with Digital Turbine, which claims to have a "moat" -- a defensible, competitive advantage. Considering these two are now in direct competition, which is the better bear-market buy? Let's find out.
The app economy
Most mobile apps are downloaded from either Apple's App Store and Alphabet's Google Play store. But apps aren't necessarily discovered in app stores. Perhaps they're discovered via an ad placed in another app. Other times, people browse the web looking for a particular service.
App developers are aware that any installation friction could mean the difference between a download and a lost opportunity. That's where Digital Turbine comes in. If a mobile device has the company's SingleTap software, people can click to have the app downloaded and installed without the friction of being taken to the app store.
Moreover, Digital Turbine's software comes preinstalled on many mobile devices. Upon device setup, the software will analyze the user and download a curated set of apps. App developers pay Digital Turbine for this service -- Walmart is a customer, for example. And mobile carriers are happy to partner as well. In theory, this app recommendation platform can provide users with more relevant apps to increase device engagement, which is a win for carriers.
Through multi-year deals with mobile carriers, Digital Turbine's software is preinstalled on devices. Consider that there are only so many mobile carriers out there and the company already works with Verizon, AT&T, and T-Mobile. And at the Roth Conference in March, CEO Bill Stone said this business has a moat precisely because deals are long term and potential customers are limited.
Unity's Aura software does much the same thing as Digital Turbine's does. For its part, when it was still an independent company, ironSource reported that Aura had deals with smaller carriers, including Boost Mobile, now owned by Dish Network.
As you can imagine, losing just a single one of these customers is a huge deal -- there is a limited number of carriers (and device manufacturers). However, the upside is that these deals tend to be sticky and long term, and they insulate Digital Turbine and Unity's Aura from competition.
Image source: Getty Images.
The better buy?
I own shares of Unity and Digital Turbine. Therefore, I obviously like both companies. But Unity may have particular upside in the on-device space if things go right.
Since merging with ironSource, Unity's management has talked about having an "end-to-end platform," and I believe this is more than corporate jargon. In 2022, 64% of the company's revenue came from its Grow Solutions business segment. And a big part of Grow Solutions is helping monetize apps through advertising.
To display the best ads to users, Unity needs good data. And it's had data from its app-monetization business. But with Aura, Unity is privy to on-device user behavior as well, theoretically enhancing its ability to display relevant ads. You could say its information is now more complete because it goes "end-to-end."
Moreover, this could theoretically go both ways. Aura's capabilities could be enhanced from the data Unity has at the "other end" with its app-monetization business.
In the fourth quarter of 2022, Unity CEO John Riccitiello said, "Our offering, we believe, is well differentiated from the principal competitor in this space, Digital Turbine." And regarding market share, he also said, "We are confident that we're gaining here."
The problem is, as Riccitiello pointed out, that market share here isn't won gradually. Winning a mobile carrier customer from a competitor will be an infrequent occurrence. But it would result in an instantaneously massive jump in market share. Given the greater breadth of Unity's offering now, I like it better than Digital Turbine as a stock to buy today.
However, because market share changes are infrequent, it's presently hard for investors to know exactly how well Unity is competing with Digital Turbine. For this reason, I'd recommend watching growth in its Grow Solutions segment. High revenue growth here suggests its ad business is doing well, boding well for potentially winning new customers in its app-discovery business in the future.
