Unity

March 14, 2021

Thesis - Unity Software is the maker of a leading game engine for 3D, virtual reality and augmented reality games. As mentioned before in this newsletter, gaming continues to be a large and growing market globally. Unity Software provides an interesting agnostic play on the industry, as they build software for game makers, rather than being a game publisher themselves. The business is broken into two main sections. The first they call Create Solutions. Think of this as a suite of tools that help game developers more easily and quickly create common parts of 3D games. This business operates on a Saas business model, with customers paying a monthly recurring fee. The second main business unit is called Operate Solutions. These tools help game studios manage, market and monetise their games. This half of the business works on a revenue-share model. As games perform and make money, so does Unity. The business also make a smaller amount of revenue (<10%) from partnerships and services. Unity’s engine is dominant in mobile games, the fastest growing part of the gaming market, with 71% of the top 1,000 mobile games using the software. The management team are keen to point out that the software has use-cases across a number of other industries. They are investing heavily in sectors such as architecture, engineering, manufacturing and cinematic video. To underline this, they recently acquired Visual Live, a company in the architecture and construction space. Unity was one of a number of hot IPOs last summer, having jumped 31% on its opening day. In the course of 12 months, the company’s value increased from $16bn to almost $40bn at the turn of the year before heading back down to ~$30bn. This is a volatile stock, with high expectations. At almost 40% off its all-time highs, it might become interesting for investors who want exposure to the gaming industry.

Financials & Performance - For the full year 2020, Unity announced revenue of $772 million, up 43% YoY. They have strong gross margins of 79%. They have dollar-based net expansion of 138%, showing they increase revenues from existing customers. They have 793 customers which are generating more than $100,000 in revenues and 121 that generate more than $1m. The management team have stated 30% revenue growth as a steady long-term target.

Risks - Valuation continues to be a risk. As with many of the technology stocks, this is still richly valued even after its recent drop. The market cap reflects a large amount of optimism in its ability to grow into adjacent markets. Whilst this is definitely a target, new markets do not yet make any meaningful dent in revenues, so this is something to look for in future earnings reports.

unity revenue growth


Written by Stevan Popovic, growth investor, web developer and founder of this site.