Based in the United States, Unity is the world’s largest software platform that is used to create video games. The company crossed the $1 billion mark in revenue in 2021 with an impressive growth rate of 43.8% year-on-year. Despite this, the company is not yet profitable. Moreover, there is still no clarity as to when the company will become profitable.
Market leading brand wAll the Great customer base
The gaming industry has grown by double-digit numbers in the past five years and will be worth $214 billion by the end of 2021. Within the mobile game software space, Unity has a strong advantage as a first mover. In fact, in 2021, 70% of the top 1,000 mobile games and 50% of all video games are made with Unity. It has built a strong brand and a loyal giant customer base with a customer retention rate of 99%.
In the past three years, revenue has grown at a 43% CAGR to $1.1 billion in 2021. The strong revenue growth is likely to continue, given the multiple opportunities.
Over the years, Unity has created a one-stop-shop game platform that provides game creation as well as monetization and operational services. Unity will continue to leverage its unique position by continuously building new services on top of its platform and selling them to its loyal customer base.
The unit could be a candidate for acquisition
In August, Unity received an offer to be acquired by competitor AppLovin (Nasdaq: APP). The full stock transaction value of the unit was $58.85 per share (worth $20 billion to the Corporation). However, Unity’s board rejected the offer because the deal required Unity to terminate its deal to acquire IronSource (IS) for $4.4 billion. Instead, the unit proceeded with the synergistic acquisition of the source iron.
It should be noted that in 2015, there was speculation that Meta platforms (Nasdaq: MetaCEO Mark Zuckerberg was in favor of getting a unit.
It’s important to note that Unity is trading at approximately 38% off the bid price AppLoving back in August. The gaming industry is going through a consolidation process, and quite a few mergers and acquisitions have already been done. Trading at low valuations, Unity is an attractive takeover candidate and could receive another bid in the coming months.
In terms of valuation, Unity mostly traded at a premium to its peers. However, the premium is justified given its industry-leading position, diversified revenue stream, and the largest total addressable market, or TAM.
Right now, the company is trading at an average EV/sales ratio of 8.8x, which is higher than the peer group average of 2.7x. However, it trades at much lower levels compared to the average EV/sales value of 30 times in the last 18 months.
What is the target price for Unity Software Stock?
Despite the decline, the Wall Street community remains bullish on Unity Software stock. Overall, the stock has a Strong Buy consensus rating based on nine Buys and three Holds. Unity Software’s average price target of $40.67 indicates an upside potential of 12.5% from current levels.
Conclusion: Consider buying unit shares
Unity Software has already gained 70%+ from lows of $21 in early November to $36 currently. The Street is bullish on the synergies expected from the recently completed IronSource acquisition. The unit is still in the investment stage with a long growth trajectory supported by a diversified business model. He could be an acquisition candidate, at least. Either way it will be a win-win situation. Hence, I think it’s a good time to buy shares of the unit.