It’s no secret that companies involved in cloud computing, virtual direct-to-consumer sales, artificial intelligence (AI), and augmented reality (AR) are onto something big. Two exciting stocks come to mind when we start on the topic. Ontrak (NASDAQ:OTRK) stock is up 327% from a year ago, and yet the company is still pretty small, with a market cap of a little over $1 billion. The company competes with Livongo in the virtual healthcare space, helping people manage mental health issues and chronic physical conditions.
Unity Software (NYSE:U) IPO’d in September, an event which was overshadowed by the big Snowflake splash. Unity is already a very large company with a market cap of almost $23 billion. In my hunt for 10-baggers, I usually look to smaller companies to deliver. Unity, however, has a vast market opportunity ahead. Unity’s software is one of the two major platforms upon which video games are built (Epic Games’ Unreal Engine is the other). But what’s really exciting about Unity is the company’s platform for AR apps.
Here’s my case for buying these two stocks now, before they go even higher.
Using artificial intelligence to find medical issues before they become serious
Ontrak is working to provide virtual aid to people with anxiety, depression, or substance abuse issues, which can exacerbate other chronic diseases including diabetes, hypertension, coronary artery disease, COPD, and congestive heart failure. Ontrak, called “Catasys” before a name change this summer, operates an anti-treatment center platform, which aims to keep its treatment-avoidant patient population healthy enough to keep from checking into expensive in-person rehab facilities. In short, Ontrak contracts with health insurance carriers to reduce medical costs for its members and collects a portion of cost-savings as revenue. Sending patients to rehab facilities is a very expensive proposition for health insurers.
To give investors an idea of how much this can save insurance companies: For every $6,700 that Humana spent providing Ontrak to its subscribers, the insurance company saved $32,400. That’s a spectacular return on investment (ROI) of 5 to 1.
Ontrak’s value proposition is that its AI solution will find a pool of insured who might benefit from its programs. With its early intervention in a hard-to-reach class, Ontrak can help people before they reach a more severe and critical stage in their physical and mental health. Ontrak’s AI works by predicting members whose diseases may improve with behavior change, recommends effective personalized care, and organizes human engagements for patients who aren’t getting the care they need.
Ontrak had $35 million in revenue in 2019. The company’s estimate for 2020 is $90 million. So far the company is on track to surpass its numbers. While Ontrak has not officially raised its estimate for the year, on the last conference call, CFO Brandon LaVerne suggested that by the end of 2020, the annualized run rate would be $120 million. And that estimate doesn’t include any revenues from Ontrak’s Cigna contract, which initiates in the fourth quarter.
Ontrak’s revenue in its most recent quarter grew 124% from the prior-year period. While this fast-growing company is currently unprofitable, CEO Terren Peizer projects that the company will achieve positive earnings before interest, taxes, depreciation, and amortization (EBITDA) positive by March at the latest.
Unity Software will be instrumental in an augmented reality universe
Unity Software is already a huge force in gaming. More than half of all video games are created on Unity’s platform. Every month, 3 billion apps created on the Unity system are downloaded into computers and smartphones. And yet, gaming is only the tip of the iceberg. Unity’s 3D platform is now being used in many industries, including film, animation, advertising, automotive, manufacturing, architecture, engineering, and construction.
Unity’s gaming platform can be divided into two sets of solutions. People developing a game can pay to subscribe to Unity’s Create Solutions, a set of tools to create a game. Once a game is ready, the creators can use Unity’s Operate Solutions to deploy the game across multiple platforms, including Windows, Mac, iOS, Android, PlayStation, Xbox, Nintendo Switch, and the leading augmented and virtual reality (VR) platforms. If a company uses Unity’s vast distribution network, Unity Software earns a percentage of its sales.
Unity enjoys a strong duopoly in the marketplace, sharing space with the Unreal Engine, which is owned by Epic Games. While the Unreal Engine is considered more useful for high-end graphics, Unity has an advantage on the mobile side. Right now, Epic is involved in serious litigation with Apple (NASDAQ:AAPL) over payments to the App Store. The judge in the case has issued an order restraining Apple from retaliating against the Unreal Engine. Nonetheless, nervous third parties might jump ship to the Unity platform instead.
Unity has already taken the lead in augmented and virtual reality. In 2019, the company said that about 90% of the applications created for the Microsoft (NASDAQ:MSFT) HoloLens were created on the Unity platform. Perhaps one of the most commonly known examples of AR, Pokemon Go, was made using the Unity engine.
While we don’t know how big AR will be, some very smart people — like Apple’s Tim Cook — think it’s going to be an incredibly large opportunity. “In a few years, we’re not going to be able to imagine our lives without (AR),” Cook said in an HBO documentary. “It’s that profound a platform.” Unity’s software platform is well-poised to be a beneficiary of this worldwide trend.