With the overall tech space bloodbath in recent months, one stock that has taken a massive hit is Unity Software (NYSE:U). Over the past year, the stock has lost 80% of its market capitalization. It is trading far below its high of $200 seen in November 2021. The uncertain macro situation made investors downgrade high-growth, money-losing tech companies like Unity. However, the stock has gained 24% over the past month and is on the verge of a turnaround. Investors should consider buying the stock based on its huge competitive moat and high long-term profitability prospects.
Based in the U.S., Unity is the world’s largest software platform that is used to create video games. The company crossed the $1 billion milestone in revenues in 2021 with an impressive 43.8% year-over-year growth rate. Despite that, the company is not yet profitable. Further, there is still no clarity on when the firm will become profitable.
Market-Leading Brand with an Impressive Customer Base
The gaming industry has grown at double-digit numbers in the past five years and was worth ~$214 billion by the end of 2021. Within the mobile gaming software space, Unity has a strong first-mover advantage. In fact, in 2021, 70% of the top 1,000 mobile games and 50% of all video games were made with Unity. It has built a strong brand and a gigantic, loyal customer base with a 99% customer retention rate.
In the past three years, revenues have grown at a 43% compound annual growth rate (CAGR) to reach $1.1 billion in 2021. Strong revenue growth will likely continue, given multiple opportunities.
Over the years, Unity has created a comprehensive end-to-end gaming platform that provides game creation as well as monetization and operational services. Unity will continue to leverage its unique positioning by continuously building new services on top of its platform and cross-sell them to its loyal customer base.
Unity Could be a Takeover Candidate
In August, Unity received an offer to be acquired by competitor AppLovin (NASDAQ:APP). The all-stock transaction valued Unity at $58.85/share ($20 billion enterprise value). However, Unity’s Board rejected the offer as the deal required Unity to terminate its deal to acquire ironSource (IS) for $4.4 billion. Unity, instead, went ahead with its synergistic acquisition of ironSource.
Important to note, Unity is trading at a ~38% discount to the offer price made by AppLoving back in August. The gaming industry is undergoing consolidation, and a few M&As have already taken place. Trading at low valuations, Unity is an attractive takeover candidate and could receive another offer in the coming months.
In terms of valuation, Unity has mostly traded at a premium to its peers. Nonetheless, the premium is justified given its favorable industry-leading position, diversified revenue stream, and larger total addressable market or TAM.
At present, the company is trading at an EV/sales ratio of 8.8x, higher than the peer group average of 2.7x. Yet, it is trading at much lower levels compared to the 30x average EV/sales valuation in the last 18 months.
What is the Price Target for Unity Software Stock?
Despite the decline, the Wall Street community continues to be optimistic about Unity Software stock. Overall, the stock commands a Strong Buy consensus rating based on nine Buys and three Holds. Unity Software’s average price target of $40.67 implies 12.5% upside potential from current levels.
Conclusion: Consider Buying Unity Stock
Unity Software has already gained 70%+ from its lows of ~$21 in early November to ~$36 currently. The street is bullish on the expected synergies from the recently completed ironSource acquisition. Unity remains in an investment phase with a long runway for growth backed by a diversified business model. It could be a takeover candidate, at minimum. Either case would be a win-win situation. Hence, I believe the time is right to buy Unity stock.