Here’s Why Unity Software’s Crash Will Make You Money

Software stocks that trade at high valuations have been hit the hardest in this bear market, so Unit Softwareit is (U 5.26%) the recent slump can mainly be attributed to the market selloff. The company entered 2022 with strong momentum across its businesses, but investors took a dim view of Unity after its disappointing outlook in the latest earnings report in May.

Two analysts recently downgraded the stock. A Benchmark analyst went so far as to issue a sell rating. It comes after Unity lowered its second-quarter revenue guidance after encountering issues with its Audience Pinpointer monetization tool for mobile app developers. Management expects revenue growth to slow to between 6% and 8% in the second quarter, well below what investors are used to with this fast-growing business.

I believe Unity stock is in good shape right now and will resume its previous growth soon enough. Problems contributing to slow growth seem to be related to self-inflicted injuries. Management said so during the earnings call. “We understand the issues and are well on our way to resolving them,” CEO John Riccitiello said.

Once we step back from the focus on quarterly numbers, the company’s long-term focus and the potential for equity returns become more apparent.

Unity’s weak outlook is misleading

The dwindling growth outlook appears to be spooking investors about Unity’s post-pandemic momentum. Benchmark analyst Mike Hickey downgraded the stock to a sell rating, citing concerns that gamers are spending less time playing games this year compared to the shelter-at-home environment. in 2020. But long-term investors need not worry about that. Gaming is still a growing industry that should drive Unity’s business for years to come.

Unity’s monetization software and services are widely used by video game developers, which is why analysts pay close attention to gaming industry trends. The company provides game developers with the tools to create 2D and 3D content. Unity’s Create Solutions segment, which includes subscription revenue from these software tools, is also seeing traction outside of the game in industries such as aerospace, medical and construction.

Additionally, Unity’s Operate Solutions business provides game companies with access to a variety of services to help them monetize players in their games, release content updates, and grow their business.

Despite the gaming industry slowing following the 2020 surge, Unity still saw 44% revenue growth in 2021. This was balanced between Create Solutions, up 41%, and Operate Solutions, up 51%.

In addition, the number of games made with Unity increased by 93% last year. Perhaps most importantly, the number of creators using its software grew by 31%, giving management a new set of customers to sell additional services over time – a key part of its growth strategy. .

Segment revenue 2021 % Increase
Create Solutions $327 million 41%
Operate solutions $709 million 51%
Strategic partnerships and other income $75 million seven%
Total $1.1 billion 44%

Data source: Unity Software.

In Q1 2022, Unity had another strong quarter, driven by Create Solutions’ revenue increase of 65% year-over-year. But the market was more concerned about slowing growth in Operate Solutions, where growth slowed to 26%. But as Riccitiello explained on the earnings call, the slowdown in growth was partly caused by a failure in one of its mobile advertising tools.

More importantly, Riccitiello called Unity’s services market “healthy.” Management does not expect the problems it encountered in the last quarter will not recur in 2023.

Long-term trends suggest Unity is a solid buy

Unity will recover and resume its previous growth over the next few years. It serves a gaming industry that is expected to reach $300 billion by 2027. Newzoo predicts the industry will surpass $200 billion in 2022.

Most analysts view Unity’s obstacles as temporary. According to analysts’ consensus estimate, Unity has more than tripled its annual revenue to $3.7 billion by 2026. This is in line with management’s long-term goal to grow revenue. about 30% per year.

All told, this is a perfect opportunity to buy shares of this software stock which could see new growth opportunities in the metaverse.

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