Unity Software (U) is up 113% since its IPO in the middle of September. U’s strong performance was foreshadowed on its first day of trading, as it opened at $68 which was almost twice its pre-IPO price of $35. Given the company’s dominant position in the video game market, it has a great chance to be one of the leading stocks of this bull market. 

Unity is a platform for game developers. Its software tools help creators create, run, and monetize games in 2D and 3D. The company believes that its rendering engine for 3D, immersive worlds has many applications beyond video games and will be used by other industries such as movies, construction, education, etc.

Currently, U is the leading game engine, especially for independent developers. In 2019, more than 50% of the top 100 games on the Apple App and Google Play store were built using Unity’s engine. This year, more than 50% of console games will be built with Unity as well. 

Unity has 1.5 million developers on its platform. The company’s software tools are free which helps it attract developers. The company only makes money, when the games reach a certain number of users or generate a certain amount of revenue. This structure ensures that Unity and its developers’ incentives are aligned.  

Video Games Are a Big Deal

Until platforms like Unity emerged, video game developers had to create the tools and software to build and render games in addition to the actual task of making and marketing their games. U has removed one element of this process. In turn, many video game developers have shifted entirely to Unity’s platform due to the power and capability of its software. 

Additionally, the company has democratized video game creation, so developers even with limited resources can create games. In that sense, the company has many similarities to Shopify (SHOP), another big winner of this bull market, which has created tools to help small businesses build their online stores. 

Investors are always interested in growth opportunities. Even before the pandemic, video games were booming. It’s estimated that there are 2.7 billion people who play more than 5 hours a week of video games. In 2019, they spent a total of $159.8 billion on games, and this is expected to grow 9.8% annually over the next decade. 

The coronavirus accelerated this trend as gaming was one of the few activities not impacted by the pandemic. From March to September of this year, spending on video games was 23% higher than last year. And, spending on mobile games increased by 40%. 

Recent Results

These positive factors were reflected in Unity’s recent earnings report. Revenue increased 53% to $200.8 million from $130.9 million in the same quarter in 2019. The company is losing money as it’s focusing on growth especially in new areas like automotive, construction, and education that could utilize Unity’s platform to develop life-like, 3D, immersive simulations. 

Therefore, U will continue growing along with the video game industry, but it also has growth potential as its tools are used for purposes beyond gaming. Additionally, the company is working on building tools to create augmented reality and virtual reality-based games and experiences. 

Unity’s guidance for the full-year was above expectation at between $752 million and $756 million which implies year-over-year growth of 40%. Overall, the results validated investors’ belief in the stock as its video-game business continues to grow, while its making inroads into new markets. Additionally, the company reported that 94 out of the top 100 game studios are using some of Unity’s tools. 

What’s Next?

Investors are always hungry for growing companies with expanding total addressable markets (TAM) that have a moat. Unity fits this description. The company expects to grow revenue by 40% next year, which puts it in the top decile of stocks. 

Additionally, the video game market continues to expand. Monetization efforts are in the early stages but video game companies are discovering new ways to generate revenue from their games whether it’s with in-game purchases, digital tokens, or premium features. In recent technology history, companies that can get people on their platform engaging with their product have eventually been able to figure out ways to increase revenue per user. 

Finally, the company has a strong moat. Once, developers are on its platform and have become familiar with Unity’s software, they are unlikely to switch. Additionally, Unity gives sophisticated tools to developers that they wouldn’t be able to create on their own. Further, unlike its main competitor – Epic Games – Unity doesn’t produce its games, so there’s no conflict of interest with developers.

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U shares were trading at $146.77 per share on Monday afternoon, down $5.73 (-3.76%). Year-to-date, U has gained 114.73%, versus a 15.16% rise in the benchmark S&P 500 index during the same period.

About the Author: Jaimini Desai

Jaimini Desai has been a financial writer and reporter for nearly a decade. His goal is to help readers identify risks and opportunities in the markets. He is the Chief Growth Strategist for StockNews.com and the editor of the POWR Growth and POWR Stocks Under $10 newsletters. Learn more about Jaimini’s background, along with links to his most recent articles. More...

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