Send me real-time posts from this site at my email
Motley Fool

Unity Software's Video Game Platform Is Booming Since Its IPO


Key Points

  • Q3 2020 revenue growth accelerated to 53% year over year.
  • Unity Software said end-users of applications built with its platform were some 2.5 billion in the last quarter.
  • The company had $1.76 billion in cash on its balance sheets at the end of September 2020.

Our experts issued a rare "Double Down" Buy alert on this one stock... Learn more.


Shares of Unity Software (NYSE: U) have been off to the races since the company's IPO in September. As of this writing, the stock is up nearly 60% from its debut just a couple months ago. But an acceleration in its growth during the summer months demonstrates why this video game and digital content creation platform is flying so high.

Image source: Getty Images.

Q3 by the numbers

Unity was going strong through the first half of 2020 leading up to its IPO, with 39% revenue growth over the same period in 2019. The company was operating in free cash flow negative territory (basic profitability measured as revenue less cash operating and capital expenses), but that was by design, as expansion is being prioritized before profits. Besides, with gross profit margin on services rendered nearing 80%, there's no reason to doubt that this will be a highly profitable concern further down the road.

However, I still haven't made a purchase of the stock -- yet. I typically wait at least a quarter or two before beginning to nibble on fresh IPO stocks. But Unity just went a long way toward convincing me to start sooner than later. Revenue growth accelerated to 53% year over year during the three months ended Sept. 30, 2020. Besides adding plenty of new customers, one key to the company's recent success was a dollar-based net expansion rate of 144%, up from 132% a year ago and implying existing users of the platform increased spending by an average of 44%.

All told, Q3 was a resounding success for Unity -- it grew at a fast rate and started to show signs of turning a corner on the bottom line.

Metric

Q3 2020

Q3 2019

Change

Revenue

$200.8 million

$130.9 million

53%

Gross profit margin

76.3%

79.8%

(3.5 pp)

Adjusted net income (loss)

($12.96 million)

($35.21 million)

N/A

Free cash flow (including acquisitions)

($744,000)

($92.53 million)

N/A

Pp = percentage point. Data source: Unity Software.

A platform that transcends video games

Unity has become a top destination for video game creators of all sizes. The cloud-based software platform provides all the tools necessary, from game design to monetization -- including a content delivery network (or CDN, similar to the likes of Fastly and Cloudflare) it just launched at the very end of Q3 to help its users seamlessly manage updates to their games in real time.

The platform has lots of optionality outside of video games, too. We live in a new digital era, and plenty of other professions are in regular need of content creation, management, and collaboration tools. Besides gaming, Unity is also finding an audience among architects and engineers, auto designers, and TV and movie producers, to name a few. If 3D visualization is part of the job, Unity can help.

Unity did say it expects revenue to grow "only" 27% to 29% in Q4 2020 -- an outlook I think is likely to be conservative -- but this should nonetheless be a high-growth business for years to come given how large its potential end markets are. $1.76 billion in cash and equivalents and zero debt on balance after its successful IPO certainly help as well. Shares currently trade for a rich 39 times expected full-year 2020 sales, but for those looking years down the road the price tag is of less concern. Just remember to keep an initial purchase very small (I usually start with less than 1% of my total portfolio value) so you have room to purchase more (perhaps on a monthly or quarterly basis) if you decide to buy now.

10 stocks we like better than Unity Software Inc.
When investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has tripled the market.*

David and Tom just revealed what they believe are the ten best stocks for investors to buy right now... and Unity Software Inc. wasn't one of them! That's right -- they think these 10 stocks are even better buys.

See the 10 stocks

*Stock Advisor returns as of October 20, 2020

Nicholas Rossolillo owns shares of Cloudflare, Inc. and Fastly. His clients may own shares of the companies mentioned. The Motley Fool owns shares of and recommends Fastly. The Motley Fool recommends Cloudflare, Inc. and Unity Software Inc. The Motley Fool has a disclosure policy.


Source

Popular posts

Welcome! Is it your First time here?

What are you looking for? Select your points of interest to improve your first-time experience:

Apply & Continue