The returns of exchange-traded funds or ETFs provided by Cathie Wood-led Ark Investment generated outsized gains in 2020, but have cooled-off considerably this year. However, Wood remains one of the most followed investors on Wall Street and you need to keep a close eye on the stocks purchased by Ark Investment.
One tech stock part of the Cathie Wood portfolio is Unity Software (NYSE: U). Currently valued at a market cap of $41.8 billion, Unity Software operates a real-time 3D development platform that provides software solutions to create, run, and monetize content across multiple devices. These solutions are offered through Unity’s online store as well as via field sales operations in North America, Europe, and Asia.
Unity stock has more than doubled since IPO
Unity Software went public last October and has more than doubled in market value in the last 12-months. The user engagement for video games in among the highest in the entertainment space and this trend accelerated amid the ongoing pandemic. Over the years, gaming companies have managed to enthrall audiences across platform and devices, creating a multi-billion-dollar industry in the process.
Unity Software has gained popularity as it provides a platform to build video games, in addition to various assets that developers can integrate into their games. Its software can also be leveraged to create experiences outside the gaming ecosystem.
Unity Software’s suite of solutions are poised to gain massive traction as technology trends including virtual and augmented reality will make the digital shopping experience extremely interactive and game-like.
So, a retail company that aims to launch an AR or VR shopping experience can use Unity’s platform instead of creating a solution from ground zero. Unity’s portfolio of products in fact has use cases in several other industries that include construction and automobile as well as animation and film-making.
The total addressable market for Unity is expected to touch $33 billion by 2025. The gaming industry will account for $16 billion of this market while the rest will be from other use cases.
Stellar revenue growth
In the last 12-months, Unity reported revenue of $929.5 million, indicating a year over year growth of 41%. In Q2, its sales were up 48% year over year and it was the 11th consecutive quarter where the company’s sales rose by at least 30%.
While Unity continues to report a GAAP loss, its free cash flow was also a negative $120 million in the last few quarters. Like most other growth stocks, Unity is focused on capturing market share and deploying resources to expand aggressively, thereby sacrificing profit margins.
Unity is well poised to benefit from increased engagement in the gaming industry. Its subscription sales rose 31% year over year to $72.4 million in the June quarter. Unity also has a revenue-sharing agreement with mobile game developers to monetize their apps by advertisements. The company also generates revenue from cloud-hosting services including voice chats used in multiplayer games. These solutions are part of the operate solutions business, which grew by 63% to $183 million in Q2.
What next for Unity stock?
Unity sales are forecast to rise by 37.5% to $1.06 billion in 2021 and by 25.7% to $1.33 billion in 2022. Comparatively, its loss per share might narrow from $0.39 in 2020 to $0.13 in 2022. We can see that Unity stock is trading at a premium but its growth estimates are also robust.
Its subscription-based business model allows the company to generate steady cash flows compared to other gaming developers. The company also enjoys a dollar-based retention rate of 142% which indicates a significant increase in customer spending in the last year.
In Q2, Unity had 888 customers that generated over $100,000 in annual revenue, compared to 716 in the year-ago period.
Company CEO John Riccitiello explained, “We're growing faster than the industries in which we compete, and we're gaining share on our key markets."
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