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Unity software (NYSE: U) has established itself as a leader in the gaming industry. Its platform enables creators to create and deploy 3D content on a range of platforms, including virtual reality devices. In the years to come, as this technology continues to evolve, Unity’s development engine will likely become a key resource in building the metaverse.
That being said, there are several other reasons why this stock is worth owning. In this Backstage Pass video, which was recorded on 29 november Motley Fool contributor Trevor Jennevine shares his thoughts on Unity, highlighting its strong competitive position and huge market opportunities.
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Trevor Jennevine: I think most people are probably familiar with Unity, but if you’re not, it’s basically a content development engine. Its platform is used by creative professionals such as game developers, architects, designers, filmmakers, to create interactive 2D and 3D content in real time. This content works on a range of devices, cell phones, tablets, game consoles and virtual reality systems.
That’s really the value proposition with Unity. Before Unity was an option, traditionally, in order to build these high-quality graphics applications, engineers first had to create the development tools, and then the application itself had to be recoded for each individual platform. If you wanted your game to work on iOS, Android, PlayStation, etc., that usually meant more work for each additional platform. But with Unity, you build it once and it can be deployed on 20 different platforms.
Then I mentioned that the content is also interactive and in real time. It just means that it responds and adapts instantly to the user’s behavior. You can think of it like a TV show. You can’t change what’s on TV, but in a video game you can change the virtual world. But on the creator side, this real-time interactive technology allows those creators to view and edit content simultaneously. This therefore speeds up the development process.
Unity divides its business into two segments. There are creative solutions and operating solutions. Creating solutions is essentially the engine of software development; it is the product, it is a suite of tools for graphics, animation, audio. And all of these things help developers create and edit these immersive 2D and 3D content experiences. In this segment, Unity earns money on the basis of subscription fees.
On the other side of the business, there are operating solutions. It is a suite of tools that allows customers to run and monetize their games. This includes things like Unity Ads, which is an in-app advertising platform; Unity IAP, which is an in-app shopping platform. Then there are also things like deltaDNA, which are their customer relationship analysis and management tools. The goal is to help developers understand how users interact with their game and then drive user engagement. Unity truly offers a complete end-to-end suite for these content developers, and the enterprise scale gives it a huge advantage.
You can see from the slide there that Unity has really established itself as a leader in the gaming industry: 71% of the top 1000 mobile games were made with Unity, and 94 of the top 100 studios in game development are customers of Unity. This scale allows Unity to capture 50 billion in-app data points every day. Then, its machine learning models make it possible to target ads more effectively, it brings out better information to drive engagement, it helps the company to optimize the performance of the game, so that the competitive advantage becomes stronger.
Just to paint a picture of the company’s competition, on the creative solutions side, Unity competes with Epic Games’ Unreal Engine. There are also other 3D design software providers like Autodesk, Adobe. Then, on the operating solutions side, they compete with other cloud companies like Microsoft, Amazon, [Alphabet‘s] Google, Tencent, and [Meta Platform‘s] Facebook. But like I mentioned, they have a strong position in the gaming industry, but their platform has applications outside of gaming.
I wanted to take a quick look at their market opportunity. In the video game industry, management estimates it at $ 12 billion. One interesting thing they just posted is Unity Gaming Services. This is a new platform that integrates all their old tools of operating solutions. But it also adds new tools that help simplify cross-platform and multiplayer gaming. This is a real hot area in the video game industry right now, so they still have a lot of room to develop within the video game industry. But the opportunity outside of the game is even greater: $ 17 billion there. For example, architects can use Unity to speed up building design. This allows them to collaborate with designers and construction teams. Automakers can use it to model new vehicles more quickly. Filmmakers can use Unity to create and edit scenes faster.
Next, an interesting product that the company just announced: they are going into live entertainment and sports. They released something called Unity Metacast, which is a real-time 3D sports platform. What it does is it uses volumetric technology to capture and create interactive content from sporting events. They’ve already partnered up with the UFC [Ultimate Fighting Championship]. Imagine watching the fight in your own home. The way they describe it, you would be able to watch this event from any angle and any distance. You would be able to have a very unique perspective, and you could theoretically see this technology applied to football, baseball, basketball games. It’s an interesting thing that they do in shows and sports.
They also recently acquired Weta Digital. It’s the visual effects company behind TV shows and movies like Avatar, Game of thrones, The Lord of the Rings. They bring these visual effects tools in-house. As I mentioned, Unity collectively values ​​its market opportunity at $ 29 billion. Management believes that number could be several times higher.
One of the reasons I really love this company is because it has growth opportunities in some interesting areas. Artificial Intelligence: Unity has just released Simulation Pro. Its platform is capable of serving as a simulation engine, a physically accurate simulation engine that can generate synthetic data. This can then be used to train AI models for autonomous vehicles or autonomous robots. So they have a foothold in the AI ​​industry.
The Unity platform is the leading solution for creating content for augmented and virtual reality applications, and virtual reality will eventually merge into the metaverse. I think Unity will be a key player in helping to shape the creation of the Metaverse. Lots of things to like about this business, and I put some financial measures into it just to wrap things up.
In the past year, the company generated $ 1 billion in revenue. It was up 43%. They have negative free cash flow in the last 12 months, but they generated positive free cash flow in the last quarter. More importantly, they have $ 1.3 billion in cash in short-term investments on the balance sheet. There is no long term debt. He has such a strong position in the gaming industry that I think they have money to spend while they grow their business. Then the last data point I put together is their 142% expansion rate in the last quarter. This is a very strong rate of expansion. This indicates that over the past year, the average customer spent 42% more on the Unity platform. So they get their customers to spend more over time, which is always good to see.
Suzanne Frey, an executive at Alphabet, is a member of the board of directors of The Motley Fool. Teresa Kersten, an employee of LinkedIn, a subsidiary of Microsoft, is a member of the board of directors of The Motley Fool. Randi Zuckerberg, former director of market development and Facebook spokesperson and sister of Meta Platforms CEO Mark Zuckerberg, is a member of the board of directors of The Motley Fool. John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of the board of directors of The Motley Fool. Trevor Jennevine owns Adobe Inc. and Amazon. The Motley Fool owns and recommends Alphabet (A-shares), Alphabet (C-shares), Amazon, Autodesk, Meta Platforms, Inc., Microsoft, Tencent Holdings and Unity Software Inc. The Motley Fool recommends Adobe Inc. and recommends the following options: January 2022 long calls at $ 1,920 on Amazon and January 2022 short calls at $ 1,940 on Amazon. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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