Since the release of Pong, an arcade version of ping pong, in 1972, the gaming industry has rapidly grown. By 2025, the global gaming market will likely hit $256.97 billion. With such a large market and so much revenue to capture, investors are starting to pay attention to those making a mark, including Unity.
Unity Software Inc. is a gaming software development company based in San Francisco. First founded in Denmark nearly two decades ago, the company has branched out, developing real-time 3D projects for animation, transportation, manufacturing, construction, automotive, film, engineering and of course, gaming.
Unity Software (NYSE:U) is a growth stock, and based on Unity’s current valuation, many are wondering, is it too late to buy?
Unity’s Innovative (and Successful) Business Model
Unity has an interesting business model, empowering company creators to start their journeys. The company then profits as these startups succeed. It costs Unity little to take this approach, yet the company can benefit greatly. Leveraging the usage-based model provides Unity with plenty of upsides as they grow.
Unity is breaking into several industries, which is exciting investors who are analyzing the many optionalities for the business. Presently, Unity is primarily a gaming engine. As of 2021, the company makes most of its money from creative solutions and mobile gaming. In 2019, over 50 percent of the top 1,000 mobile games were created using Unity.
One of Unity’s major moats is its low-code environment. For passionate creators, this code is easy to learn, which is why it’s used in many mobile games. Based on the brand’s licensing model, Unity offers a subscription plan that is free for any creators earning less than $100,000 in revenue. As such, it appeals to students, young creators and developers. Unity’s goal is to capture developers when they first get started.
What is the idea behind this concept? By empowering a developer’s content and enabling them to learn to use Unity’s software, a successful partnership is mutually beneficial.
Unity also has paid options, including its Plus, Pro and Enterprise plans.
Gaming Isn’t All Unity Offers
There is no doubt that Unity is best known for gaming. However, the company is also a leader in virtual reality (VR) and augmented reality (AR). It is based on Unity’s diversity across various industries and offerings that generate interest among investors.
For example, Unity has partnered with Lockheed Martin (LMT) to build virtual products using real-time 3D. This saves Lockheed Martin millions. The technology minimizes product prototyping and testing. Unity’s partnership with Lockheed Martin is just one example of the many real-world business use cases linked to Unity.
Another example is how Unity supports automotive transportation and manufacturing. If a car manufacturer wants to show off a specific car but it’s not on the lot, Unity engineers could design a virtual 3D car. When interested consumers ask about that car, they could put on VR glasses and immerse themselves in a virtual experience.
Following the release of Unity’s most recent earnings report, the company agreed to buy the VFX studio Weta Digital to strengthen its ecosystem, and focus on expanding non-gaming services. This is the visual effects studio founded by Peter Jackson, director of The Lord of the Rings.
What the Future Holds for Unity and Its Stock
At last count, year-over-year (YOY), revenue rose by 43 percent, hitting $286.3 million — and this growth is expected to continue.
Unity makes money with three main businesses:
- Create Solutions segment — Revenue (9M 2021) was $226.7 million, resulting in a 38 percent growth YoY
- Operate Solutions segment — Revenue (9M 2021) was $514.5 million, resulting in 53 percent growth YoY
- Strategic Partnerships and Other — Revenue (9M 2021) was $53.4 million, resulting in a 5 percent growth YoY
Most impressive is that Unity consistently generates over 40 percent revenue growth while increasing its Dollar-Based Net Expansion Rate (DBNER). This is rare for a high-growth company.
Unity’s adjusted operating margin remains unprofitable, even though the company ended its last quarter with $1.28 billion in cash, marketable securities, and cash equivalents. With a debt-to-equity ratio of just 0.4, Unity also has options concerning future investments. These metrics lead to the question, is it too late to buy into Unity stock?
Although valuation is high, this established leader should continue to grow. The gaming market is expected to grow at a compound annual growth rate of 12.9 percent between 2020 and 2027. If Unity follows that growth rate, the company could see around $1.8 billion annual revenue by 2027. Considering this, plus the fact that Unity is expanding into add-on services and non-gaming tools, it’s not too late to buy into its stock. Indeed, the recent selloff is likely an opportunity to buy Unity on the dip.