Unity Software (U) is an American company based in San Francisco that operates in video game software development.
I am neutral on Unity Software because its significant growth momentum and lengthy growth runway are offset by its current lack of profitability and its need to continue growing rapidly for years to justify its hefty valuation. (See Analysts’ Top Stocks on TipRanks)
Strengths
Unity does business under the trade name Unity Technologies and is best known for its game engine, Unity, used to create video games and apps. The company has grown significantly despite reporting financial losses every year since its inception.
Unity’s software is used to make apps for all platforms and had about 5.5 million registered developers as of 2016. Unity technology is used for most virtual reality experiences and is transitioning into other industries, such as film and automotive.
Recent Results
Unity reported revenue of $273.6 million in the second quarter of 2021, showing an increase of 48% from the same period last year.
The total revenue generated from Create Solutions and Operate Solutions was $72.4 million and $182.9 million, showing an increase of 31% and 63%, respectively. Meanwhile, strategic partnerships and other revenues stood at $18.3 million, increasing 9% compared to the previous year.
The company’s total losses from operations came up to $149.2 million, standing at 55% of total revenue compared to 13% in 2020. Non-GAAP losses stood at $3.2 million, or 1% of revenue, which decreased from its losses totaling 5% of revenue in the previous year. Diluted net loss per share was $0.53, showing a bigger loss than the previous year.
About $100,000 revenue was generated by 888 customers in the trailing 12 months as of June 30, 2021, compared to 716 from last year.
Unity continues to show increasing momentum in non-gaming industries. In the second quarter of 2021, the company added three new automotive manufacturers and started working with consumer product brands.
Additionally, Unity acquired Metaverse Technologies, providers of PIXYZ, and Interactive Data Visualization, which created the SpeedTree environment creation suite.
Valuation Metrics
Unity’s stock is challenging to value at the moment, given that it is running up steep losses. At the same time, it is trading at 40.7x forward EV/sales. Analysts expect revenue to grow by 41% in 2021 and 27.5% in 2022 while also generating positive EBITDA in 2022.
So, suppose the company can sustain a growth rate in that range for several years to come and scale into greater profitability. In that case, it could potentially generate satisfactory returns over time.
Wall Street’s Take
Turning to Wall Street, Unity earns a Moderate Buy consensus rating based on seven Buys and three Hold ratings assigned in the past three months. Additionally, the average Unity Software price target of $168.63 implies 12.1% downside potential.
Summary and Conclusion
Unity is a cutting-edge innovative software company that is poised to continue significantly altering the video game industry and other industries with related technology.
As a result, it should continue to generate strong growth for many years to come and eventually grow into its lofty valuation. Furthermore, Wall Street is generally bullish on the stock, so clearly, there is significant optimism on the company’s long-term outlook.
At the same time, however, investors need to keep in mind that the company is not yet profitable, and the valuation is quite steep. Therefore, any investment today is quite speculative, especially when the consensus price target on the shares indicates that the stock could face downside over the next year.
Disclosure: At the time of publication, Samuel Smith did not have a position in any of the securities mentioned in this article.
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