FazzNoth Posted October 13, 2022 Posted October 13, 2022 Unity continues to perform strongly in the gaming segment as it attracts increasing number of creators and brings in customers from large studios to independent freelancers. The company looks set to expand into non-gaming segments as more customers gain awareness of new use cases of its software engine, in sectors like film and automotive. With a strong ecosystem made of multiple partnerships and a large user base, Unity is set to continue to benefit from the competitive advantages that it has built through scale. My 1-year target price for Unity is $49.45, implying an upside potential of about 60% from current levels. At a time when growth companies are currently out of favour, I think that investors can potentially benefit from buying Unity Software (NYSE:U), given that valuations are more reasonable today compared to the sky high valuations during the earlier stock mania. I aim to take a deeper dive into Unity, provide readers with a better understanding of its business, where its competitive strengths lie and what are the key opportunities and risks ahead for the company. Investment thesis Unity has rather promising prospects in the future in both its gaming and non-gaming sector. In the gaming sector, I think that Unity will continue to remain a market leader in the segment, becoming a game engine of choice for game developers around the world as it continues to invest in its capabilities and innovate. For its non-gaming segments, there are signs that other non-gaming companies are increasingly seeing the benefit of incorporating Unity's software engine to create 3D content that suits different industries' needs. Furthermore, I think that the scale that Unity has built over the years through entering into new strategic partnerships with new partners and continuous push for new creator growth, the strong ecosystem that has been created brings stronger engagement levels and a strong network effect that will likely benefit Unity for the years to come, in my view. As such, I think that Unity looks interesting at the current valuation level. Overview Unity started off as a game engine for game developers. It provides a platform for creating as well as operating interactive real-time 2D and 3D content. It software. Its platform comprises of 2 segments, the Create Solutions and the Operate Solutions. As can be seen below, approximately 30% of its revenues comes from Create Solutions, while 64% of its revenues comes from Operate Solutions. While Create Solutions has traditionally started off as more targeted at the gaming industry, it is shifting the focus to other industries other than gaming. On the other hand, Operate Solutions is typically only applicable to the gaming industry. I think it's important to note also that while the 2 segments are distinct, they are connected in that most of the customers that are using Unity's Create Solutions are also using its Operate Solutions and vice versa. As of end 2021, Unity has 1.6 million monthly active creators that uses its platform to develop and design interactive real time 2D and 3D content. The pricing structure varies from a free personal account to 3 other tiered paid subscription plans. The revenues from the segment are derived on a per-seat basis. With Unity plus, the company aims to target smaller businesses as well as independent customers, with a price of $40 per month per seat, while with the Unity pro plan, it targets customers with annual revenues more than $200,000 and provides more tools and services and has a price tag of $150 per month per seat. Lastly, Unity Enterprise focuses on customers with larger times and greater need for customisation, and it costs $200 per month per seat. For both the Unity Personal and Student plans, these plans are meant to support creators that have less than $100,000 in revenues and are verified students, respectively. Unity's software engine helps to simplify as well as accelerate the creation of content and allows developers to port code easily across different devices like iOS, Xbox, and Android, amongst others. Unity's engine was initially designed for developers of video games and it competes with other companies that also have game engines like Epic Games' Unreal Engine, and Chukong Technologies' Cocos2d-x. Epic Games is commonly seen as Unity's rival given its Unreal engine that competes with Unity's own game engine. While Epic game's Unreal Engine has a lower market share than Unity, it is regarded as the key engine competitor for games. Unreal engine is known to have better performance for three dimensions as it has better graphics, there is easier use of 3rd party developer tools and pricing is lower. On the other hand, Unity's engine is known to perform better based on its larger community that uses it, the easier programming on the platform and a faster learning curve. As a result, I am of the view that Unreal engine is typically used for more sophisticated and complex games while Unity is typically used for mobile games and by smaller developers. Furthermore, I think that Unreal Engine's pricing is interesting as it does not charge a fee on its customers unless the lifetime revenue crosses the $1 million mark, and thereafter a 5% fee is imposed on the game's annual revenues. As a result, I continue to think that Unreal Engine's key motive is then to attract creators to create successful games on its platform that eventually becomes big, incentivising customers to potentially use its "free" platform to create new content that may eventually become fee paying if it generates enough revenues. That said, Unity continues to attract large and global customers as its customers, like Electronic Arts (EA),Tencent (OTCPK:TCEHY), Take-Two (TTWO), Nintendo (OTCPK:NTDOY), amongst others. It also attracts other smaller and medium game studios as well as independent publishers to its platform. Some of the big game titles that have been developed on Create Solutions include Tencent's Arena of Valor and Honor of Kings and Niantic's Pokémon GO. As a result of a growing number of use cases for real time 3D content, Create Solutions aims to target other industries outside of gaming like automotive, film and architecture. One of the automotive companies to work with Unity is Hyundai Motor (OTCPK:HYMLF), which is partnering with Unity to create a digital twin factory, while eBay (EBAY) is working with Unity to pilot a new 3D true view technology. Lastly, for the film industry, Unity acquired Weta Digital in 2021 and with this acquisition, Unity bought capabilities needed to expand from game software to film software, further complementing its suite of offerings. As Weta Digital was founded by Peter Jackson, a very well regarded name in the film industry, the company's software tools are also top tier, in my view. This is because they were actually used in many films like Lord of the Rings, Game of Thrones, King Kong and Avatar. Given that these films were all well received and award-winning films, I am of the view that Weta Digital will bring substantial benefit to Unity as it brings a world class film software capability to its business, as well as its film studio customers to Unity. https://seekingalpha.com/article/4546295-unity-software-stock-attractive-risk-reward
Premium
Recommended Posts