(Unity Software) (U)

Overview of the Company - Unity software creates interactive realities and games in the 2-d and 3-d sectors. It also offers augmented and virtual reality simulations.

Fundamental Analysis - With the huge potential that is the metaverse, Unity software is poised to be one of the biggest beneficiaries of the transition from reality to virtual reality. As one of the leaders in virtual and augmented reality situations it will undoubtedly lead the way into the metaverse much like Facebook will do with its acquisition of Oculus and its name change to Meta. The rotation and evolution of these companies are important to note because it further shows that this will be the next frontier for technology in the next few years. Nvidia, AMD, Facebook have already started to shift their business model and Unity will be a lead competitor or be a key acquisition for other companies to obtain a foothold in this space.

How (U) Stacks Up to Competitors - I will be comparing Unity to another game developer focussing on changing the main industry making it more interactive than ever, Roblox (RBLX). Also I will be comparing these companies with Nvidia (NVDA). Roblox and Unity are in the very early stages of their development and thus their fundamentals will not look quite as attractive as Nvidia. RBLX and U are not profitable and have negative EBITA. However, it is clear that these companies will continue to grow revenue and eventually turn profitable as Unity’s revenue is up over 40% year over year and Roblox is up over 100%. I believe that Roblox is more risky and its whole business model really relies on preteen and middle schoolers along with some adults, but the vast majority of its consumer base is unemployed which, obviously, presents some problems. With schools returning to in person RBLX has seen misses on earnings 3 of the last four quarters and it is clear that Unity stands in a better position with beats on all of the last four quarters, almost reaching profitability during Q2 of 2021.

Bull Case - I think the best case for U is for it to continue to be amongst the leaders in the transition to the Metaverse. Additionally, it stands to be bought out at a large pramusim related to its current share price when companies get desperate to own exposure to the metaverse. I believe the Oculus acquisition was a steal for Facebook and Unity management will likely be receiving top dollar offers. Unity is growing at a steady pace, with revenue up over 40% year over year, it will only be a matter of time before reaching profitability.

Bear Case - Unity is grossly overvalued. With high inflation, interest rates will continue to rise and lending money to these companies will become less and less lucrative. Banks and other institutions will be charging more for loans and the future value and how lucrative Unity is in the future will continue to wane. When companies are evaluating early business like Unity in determining their fundamental value, interest rates are used in determining whether the risk of giving the company money is worth the benefit compared to bonds and other assets. When interest rates rise, bonds look more attractive and Unity will have trouble securing funding which can choke off its growth.

The Verdict

Unity is a tough company to value and a lot of their potential is directly tied to the expansion of the metaverse. Any negative news or slowing growth in this sector will be unfavorable for Unity software. Additionally, higher yields means that debt will be more expensive and harder to come by for Unity software and the pandemic growth of easy money will likely come to an end. Unity has an incredibly long road ahead for them, but will stand to benefit when the Metaverse is a critical part of everyone's lives.

*all data provided by yahoo finance and nasdaq.com