Unity Technology Stock Evaluation

When Unity Software went public in September 2020, it drew a rush of bulls. The maker of video game engines priced its initial public offering (IPO) at $52 and started at $75 before surging past $200 in November.

Yet, Unity’s stock is now worth less than $30. Investors became concerned about the previous market darling’s declining growth, heavy losses, and high valuation. Increasing interest rates heightened the selling pressure as well.

About the company

Unity is a cross-platform game engine that was first launched in 2005 by Unity Technologies. Unity’s primary focus is the creation of 2D and 3D games as well as interactive multimedia. Unity now supports over 20 distinct target platforms for deployment, with the PC, Android, and iOS systems being the most popular.

Unity has a complete toolkit for planning and building games, including interfaces for graphics, music, and level-building tools, requiring just the most basic use of additional programs to finish projects.

Unity is a publicly traded company on the New York Stock Exchange (NYSE). In this article, we will look at the stock performance of Unity Technology and its potential as an investment.

Unity’s Financial Performance

In the first quarter of 2022, Unity Software reported revenue of $320 million or more. This means that its annual income will likely exceed $1 billion. Nonetheless, the corporation also reported a negative net income of $177+ million in the first quarter of 2022. The market capitalization, or potential valuation, is just around $12 billion.

Market Position

With a 60% market share, Unity Technologies is the market leader in game creation software. The company’s platform enables game developers to produce games for mobile, Desktop, and console platforms. Unity’s platform is simple to use and suitable for both professional and beginner creators.

The company’s customer base is diverse, comprising both tiny independent developers and huge game studios. This has allowed the organization to maintain a consistent revenue stream while reducing its dependency on a single customer.

Unity Technology’s solutions have also gone outside game creation software. Unity Industrial is a software solution for producing 3D models and simulations for a variety of industries, including automotive, architecture, and engineering.

Will Unity Technology recover ?

The $4.4 billion acquisition of ironSource will greatly boost Unity’s top-line growth in 2023. The biggest difficulty will be integrating that business into Unity Advertising in order to work with Apple’s iOS changes.

Because IronSource is profitable, the acquisition will not reduce Unity’s long-term profits, but the all-stock transaction will dilute its shares. On the plus side, Unity anticipates that its operating cash flow will become positive in the fourth quarter of 2022 as it integrates ironSource and implements other cost-cutting measures. The company’s gaming division may also stabilize as the industry recovers from its post-pandemic slump.

Unity is even more optimistic: it forecasts its adjusted EBITDA to exceed a $1 billion annual run rate by the end of 2024 as it realizes additional synergies from its merger with ironSource. But, during the company’s most recent conference call in November, chief financial officer Luis Visoso warned that “as long as the advertising industry sentiment remains one of recession, we expect to guide revenue growth lower than our sustainable growth target” of 30%.

Even if Unity meets analyst projections and boosts its revenue by another 19% to $3.1 billion in 2025, it will have more than doubled its revenue since 2022. If it continues to trade at a similar price-to-sales ratio by then, it may grow to around $60 per share by the end of that year. That would be a good return from its present price, but it would be well below its all-time high.

But, Unity has the potential to grow into a much larger corporation in the coming decades as its platform attracts more developers and it extends further into the augmented-reality, virtual-reality, and non-gaming markets.

Conclusion

Unity Technologies is a global leader in game development software with substantial growth potential. Long-term investors will find it appealing due to its revenue growth, expanding consumer base, and good cash position.  Nonetheless, investors should be careful.

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