Unity Software delivers strong earnings and receives a buy upgrade

Going outside is highly overrated, try the virtual world.

Unity ($U), the software company providing tools to build a virtual world, released its earnings on May 11, receiving a buy upgrade from Stifel on its strong results:

• $234.8m in sales — up 41% compared to the 1st quarter of 2020.
• $110m in net loss — up from $26m in the 1st quarter of 2020.

Powering 50% of all games across platforms

Unity, known for its 3D graphics rendering tools, helps game makers build and monetize 2D, 3D and AR/VR games.

• Rising trends in gaming, 3D modeling applications, and AR/VR adoption powered Unity’s growth.
• $U surged 140% after going public in Sept. 2020, but has fallen 50% in the past 5 months alongside other growth stocks.

In addition, Unity was among the companies expecting to be affected by Apple’s decision to let iPhone users opt-out of app tracking — forecasting a 5% drop in sales. With a 50% market share, Unity’s growth in the gaming market could be constrained…

Luckily, 3D modeling goes beyond gaming

Unity expects the $17b non-gaming market (i.e. construction, filming, automotive, etc) to increase beyond its $12b gaming market size — its software is already being used by partners like:

• Volvo, in the prototype phase of its car design process.
• Disney, in the replication of virtual worlds for the filming of the Lion King.

While the list of industries that stand to benefit from 3D applications could go on, investors aren’t given data on how fast its non-gaming sector is actually growing.

However, given how product expansion into all these industries requires heavy R&D spend, Unity will likely be operating at a loss for some time.

For investors: Looking into the virtual future

Despite the growth in gaming, VR/AR failed to take off in 2020, with VR headset sales falling. The industry was overhyped in 2016, while the tech failed to live up to expectations.

With Unity’s position in the market, it doesn’t matter which specific applications or companies succeed in VR/AR, as long as it gets to play a part in building it out. Meaning, if we hit a virtual gold rush, Unity could be the company handing out the picks and axes during the rush.

The Joe’s Take: Unity expects its sales to grow 30% in 2021 — an impressive number given how big the company is ($23b market cap). At a 50% discount from its all-time high, Unity is looking a lot more attractive.