A few weeks ago, I said Unity softwarein (NYSE: U) the stock price would be volatile. Case in point: the shares fell nearly 20% from historical records after the company’s fourth quarter 2020 report and initial prospects for 2021, released late last week. However, there was a lot to like about the quarterly update – including Unity providing some guidance on how to Applein (NASDAQ: AAPL) privacy updates (due for release this spring) will affect your business in the long term.
I think this is the downturn in Unity shares that some investors may be waiting for before making a purchase.
2020 by the numbers
Unity’s revenue grew 39% year-over-year in the fourth quarter to $ 220 million, and free cash flow improved to a positive $ 3.6 million compared to a negative $ 9.7 million in the same period last year . The company now has 793 customers spending more than $ 100,000 with Unity last year, compared to just 600 in 2019. Also noteworthy: although Unity’s platform has historically been for creating 3D video games, 13% of 793 key customers were using the platform for non-video game development (such as movies, TV, engineering and manufacturing), compared to just 8% just a few quarters – illustrating the enormous potential that this company has in the digital economy.
Image source: Getty Images.
Overall, it was a great year for Unity. It successfully completed its IPO, ended 2020 with $ 1.75 billion in cash and cash equivalents and zero debt, and expects to increase revenue by at least 23% in 2021 (to at least $ 950 million). The slowdown in expansion is a result of the initial effects of the pandemic (Unity achieved a $ 25 million revenue benefit in 2020 due to the pandemic) and the handling of Apple’s iOS privacy updates.
|
Metric |
2020 |
2019 |
change |
|---|---|---|---|
|
Recipe |
$ 772 million |
$ 542 million |
42% |
|
Adjusted net income (loss) |
($ 65.6 million) |
($ 113 million) |
N / D |
|
Free cash flow (including acquisitions) |
($ 72.7 million) |
($ 287 million) |
N / D |
Data source: Unity Software.
Apple flexes its muscles, but Unity flexes back
But what about Apple’s iOS privacy updates, which will alert users of Apple devices if they want to cancel tracking app activity? Unity estimates it will have revenue of $ 30 million (3% of its forecasted sales) in 2021, assuming that Apple will make the changes sometime in the spring.
To be sure, Apple’s move will force app developers to rethink how they monetize their content. In truth, Facebook (NASDAQ: FB) CEO Mark Zuckerberg was combative with Apple on his company’s recent earnings conference call, stating that “we are also seeing Apple’s business increasingly dependent on gaining share in applications and services against us and other developers, so Apple has everyone the incentives to use their dominant position platform to interfere with the way our apps and other apps work, which they do regularly to give preference to their own. ”
Unity did not highlight Apple’s potentially self-service activity, but it did shed some light on the distribution and advertising branches of its business that will need to deal with how applications traditionally find their way into mobile users. Unity CEO John Riccitiello said this in the conference call about the $ 30 million effect that iOS could have in 2021:
We cannot get all the nuances out of this, nor can we understand exactly what our market share compensation will be, but we are sure that we are growing our advertising business with the growth in market share that has been going on for many years on the basis of strong data insights. So net-net is an estimate, but we are not guessing. We have a very detailed model and we think we understand where we are going.
And where exactly is Unity going? It is building its ecosystem of services to help developers advertise, deliver and monetize content on mobile devices and beyond with new AI-based analytics and content delivery tools. Apple did not attack Unity with these privacy changes. In fact, Unity anticipated that this would happen a long time ago and thinks could gain market share in the advertising and app monetization industry over time, if you can help users of your platform overcome the new hurdles that the iPhone maker is planning.
Unity can really benefit in a world where tracking device activity disappears (or at least becomes more difficult to perform) – not to mention growing in importance as the creation of digital content transitions to a 3D model and virtual collaboration in real time. This is an end-to-end platform that covers the creation of digital content until management, once the end user has downloaded it and is interacting with the application.
Unity’s initial forecast for 2021 implies some short-term headwinds, but the expected growth of no less than 23% in the year (and a long-term estimate of at least 30% annual average growth) is nothing against it. The shares are traded for 35 times the expected revenue for 2021, still a heavy premium even after the recent downturn. But I think it is a reasonable deal, assuming an investor plans to buy and hold for the next decade.