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Unity Software (U) went public in September 2020 at an IPO price of $52. The stock then touched a record high of $210 in November 2021 and is now trading at $41.50 at the time of writing. The tech stock has taken investors on a roller-coaster ride but continues to trade below its listed price.
Valued at a market cap of $15.5 billion, let's see if this new-age company can deliver outsized gains to investors over time.
What Does Unity Software Do?
Unity Software operates a platform that provides real-time 3D development tools and services to create and grow interactive experiences across major platforms and device endpoints. The platform is used by developers, artists, and designers to build content for industries such as gaming, film, automotive, architecture, retail, engineering, and construction. Its Grow Solutions business segment then allows customers to monetize their content by engaging the user base.
Several of Unity’s customers create games and applications on the Unity platform with the aim of building a profitable business. Unity, in turn, helps its customers grow their business across the marketing funnel, which typically ranges from pre-launch to retention.
For instance, mobile app developers can monetize their apps via multiple ad formats by leveraging Unity’s ad network. Moreover, Unity’s marketing solutions enable developers to scale their user base by promoting apps across devices, platforms, and ad networks. The company also offers analytics and optimization tools that can be used to make business decisions ranging from product development to profit margin optimization.
The Bull Case for Unity Stock
Unity has expanded its top line at a stellar pace. Its sales have risen from $541 million in 2019 to $1.4 billion in 2022. In Q1 of 2023, the company reported revenue of $500 million, an increase of 56% year over year, above estimates of $475 million.
Unity reported an adjusted EBITDA (earnings before interest, tax, depreciation, and amortization) of $32 million, higher than estimates of $10 million. In the last year, it reported an EBITDA loss of $23 million.
In Q2 of 2023, Unity forecasts sales between $510 million and $520 million, indicating a year-over-year growth rate of over 72%. Its adjusted EBITDA is also forecast at $55 million in the June quarter compared to the year-ago loss of $38 million.
Unity emphasized that robust demand for its gaming engine and the adoption of its monetization services drove sales in Q1. Sales from its Grow Solutions business doubled year over year to $313 million due to Unity’s acquisition of ironSource, an app monetization company. ironSource was acquired for a hefty sum of $4.4 billion and will help Unity to end 2023 with sales of $2.15 billion, according to Wall Street.
Further, analysts expect Unity to report adjusted earnings of $0.36 per share, compared to a loss of $0.39 per share in the year-ago quarter. Its earnings are then forecast to widen to $0.89 per share in 2024.
Unity Stock Has Surged 40% in the Last Month
Unity stock is up almost 40% in the last month, partially due to its revenue and earnings beat in Q1. However, a majority of these gains can be attributed to Unity’s partnership with Apple (AAPL).
10 days ago, on June 5th, Apple announced it is working with Unity as part of the launch of the Apple Vision Pro headset. The tech giant is focused on building an ecosystem of third-party apps, allowing people to use the headset priced at $3,499.
Apple’s Vice President of worldwide developer relations stated, “We are excited to share that we’ve been working with Unity to bring those apps to Vision Pro, so popular Unity-based games and apps can gain full access to VisionOS features such as Passthrough, high-resolution rendering and native gestures.”
Apple has successfully disrupted several segments, such as wearables, online music, and smartphones. If Vision Pro can gain traction in the upcoming decade, ancillary partners such as Unity are well poised to benefit.
Is Unity stock a buy or a sell?
Unity is part of a rapidly expanding market, and its tools are used to create over 50% of the games played on mobiles, PCs, and gaming consoles. It has effectively created and operates a platform that simplifies the game creation process.
After reaching $210 a year and a half ago, Unity stock plummeted as investors were worried about its slowing revenue growth, reopening of economies, Apple’s privacy update, and its steep valuation. However, this new partnership with Apple for their Vision Pro headset has once again put the stock in the limelight.
Out of the 15 analysts covering Unity Software stock, 6 rate it a “strong buy”, 1 rates it a “buy”, 6 rate it a “hold,” 1 rates it a “moderate sell," and 1 rates it a “strong sell.” Taking this into account, their mean target price for Unity stock is $39.64, which is about 5% lower than where the stock is currently trading.
However, I am bullish on Unity due to its focus on cost optimization this year, its widening margins, and its partnership with Apple.
Currently Unity stock is priced at 46 times 2024 earnings and 6.5x forward sales. Yet, growth stocks command a premium valuation. Unity’s top line could surpass $3 billion in 2025 with an adjusted EBITDA of $1.2 billion. If the stock is valued at 30 times forward EBITDA in the next 24 months, Unity’s share price could double in this period.
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