Unity Software Inc.

U Details

Unity Software Inc. (NYSE: U) is a leading software platform that offers various software solutions to create, run and monetize interactive, real-time (RT) 2D and 3D content for PCs, mobile phones, consoles, and other augmented and virtual reality devices. It generates revenue from 3 segments, viz. 1) Create Solutions, used by content creators to develop interactive, RT2D, and RT3D content; 2) Operate Solutions, enabling customers to run their content and engage with end-users; and 3) Strategic Partnerships & Other, where it generates revenue from contracts with hardware, operating system, device, game consoles and technology providers.

Acquiring OTO: On August 12, 2021, Unity closed the acquisition of OTO, an AI-driven intelligence platform for building safe gaming environments with voice and text chat options. The OTO platform will now be incorporated into Unity's Vivox platform to curb toxic gaming behavior.

Expanding the Scope of Cloud Infrastructure: On August 10, 2021, the company signed an agreement to acquire Parsec, a remote desktop and streaming technology company, for a cash payment of USD 320 million. The transaction expands its cloud vision where content creators can access smooth and powerful tools and glitch-free cloud infrastructure to deliver real-time 3D experiences on any device, from anywhere.

Q2FY21 Results: During Q2FY21 (ended June 30, 2021), the company reported a 48.41% increase in revenue to USD 273.56 million vs. USD 184.33 million in Q2FY20, resulting from the addition of new customers and the expansion of existing business. Net loss for the quarter was USD 148.34 million, compared to USD 27.35 million in Q2FY20, owing to a 116.32% increase in operating expenses. The company exited the quarter with a cash balance of USD 1.59 billion and no outstanding debt.

Key Risks: Unity is dependent mainly on the success of its customers (primarily content creators) in the gaming market, and any downfall in their performance, financial condition, commercially feasible creative input or demand for their products, among others, could harm Unity's financials. Further, 65% of its revenue in H1FY21 was generated from its Operate Solutions segment, which operates majorly under a revenue-share model. The remaining revenue under the segment is generated as usage-based sales. Hence, if it fails to retain/attract new customers, its business could be adversely affected.

Outlook: Unity expects its revenue for Q3FY21 to range between USD 260 – 265 million, with a non-GAAP operating loss of USD 15 – 20 million. Revenue estimates for FY21 are USD 1.045 – 1.06 billion, with non-GAAP operating loss ranging from USD 55 – 65 million.

Valuation Methodology: EV/Sales Value Multiple Based Relative Valuation

(Analysis by Kalkine Group)

• % Premium/(Discount) is based on our assessment of the company's NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.

U Daily Technical Chart (Source: REFINITIV)

Stock Recommendation: U stock surged 43.36% in the past three months and is currently leaning towards the higher band of the 52-week range of USD 65.11 to USD 174.94. The stock is currently trading above its 50 and 200 DMA levels, and its RSI Index is 67.87. We have valued the stock using the EV/Sales Value-based relative valuation methodology and arrived at a target price of USD 120.14. Considering the significant surge in the stock price, we believe the business fundamentals are adequately reflected at the current trading levels. Hence, we recommend a "Sell" rating on the stock at the current price of USD 133.47, up 5.51% as of September 02, 2021, 1:05 PM ET.

* The reference data in this report has been partly sourced from REFINITIV.

*All forecasted figures and industry information have been taken from REFINITIV.  

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