Unity Software has seen strong growth in this key area, and no one has even noticed.
When it comes to the development and monetization of video games, three major players are Unit software (U -6.79%), ironSource (IS -6.67%)and AppLovin (APP -7.04%). So naturally, the merger of ironSource and Unity was huge news in the industry. However, what really sparked controversy was when AppLovin then offered to buy Unity on August 9, 2022.
Since AppLovin made the offer the same day Unity announced its earnings, the proposed merger eclipsed Unity’s earnings report. That caused investors to miss a major piece of the company’s earnings report — something that signals success in a lucrative market for Unity.
What took the limelight
AppLovin’s recent proposal fell on deaf ears after Unity Software officially rejected the company’s offer. AppLovin helps mobile apps monetize and grow their business, while Unity is one of the leading platforms for developers to create and create games. AppLovin has pegged the combined company’s enterprise value at $20 billion in the all-stock deal, hoping to join forces to create a super hub of app and game developers mobiles.
Why did Unity reject AppLovin’s offer? The deal was contingent on Unity terminating its previous merger agreement with ironSource, a direct rival to AppLovin. Given this, it seems the real purpose of the AppLovin deal was to break up what could be a formidable competitor, but it failed. Unity believes the ironSource deal “is compelling and will provide an opportunity to drive long-term value” – which seems like the right move.
While AppLovin’s proposal may have eclipsed Unity’s second-quarter earnings, much of the information in the report is more valuable to shareholders — information that signals impressive execution in an emerging segment of the business. Unity.
The Hidden Gem of Unity
Unity is known for helping developers create video games, and it’s the dominant platform in this space: Unity currently powers over 70% of top mobile games, as well as 72% of top-selling games on the market virtual reality games on Metaplatforms‘ (NASDAQ: META) Oculus Quest at T2 in July.
Unity’s authoring solutions, which help companies develop high-definition virtual three-dimensional content, saw notable expansion across the board in the second quarter, with revenue in this segment jumping 66% year-over-year. another to reach $121 million. However, it wasn’t all from game developers: 40% of that revenue now comes from outside games, up from 25% in 2021.
Other companies use Unity’s authoring solutions to build high-definition virtual worlds. Unity serves multiple industries, from film to construction to retail. For example, a retail store can use Unity to digitally visualize store layouts, optimize product placement, and increase efficiency. Unity can even help retailers create digital replicas of their stores to give consumers a unique online shopping experience.
This is vital for Unity as it opens up an additional opportunity for the business. Businesses are embracing technology to improve efficiency more than ever, so if Unity can solidify itself as a leader, it could capture a big chunk of this emerging market.
The company also saw strength in other parts of its business this quarter. Unity now has 1,085 customers generating over $100,000 in annual revenue on the platform. This is a 22% year-over-year jump, indicating that Unity remains an essential service for many game developers and businesses, given how much they are willing to spend on it. the company’s products, despite the difficult macroeconomic environment.
Unity is not perfect
Despite its progress outside of the game, the company’s second-quarter earnings report wasn’t flawless. The main cause for concern is Unity’s unprofitability. In the second quarter, the company lost over $204 million and burned over $58 million in free cash flow. That said, the company has been positive free cash flow year-to-date and has over $1.7 billion in cash and securities to fuel that loss until the company starts generating steadily. cash.
The shares are also trading around 12 times forward sales, which is close to their lowest price since Unity’s IPO, but is much higher than other companies in this sector.
If concerns still hover around Unity, the company is advancing on prospects that could prove profitable in the long term, which is cause for hope for shareholders.
Randi Zuckerberg, former director of market development and spokesperson for Facebook and sister of Meta Platforms CEO Mark Zuckerberg, is a board member of The Motley Fool. Jamie Louko holds positions at Unity Software Inc. The Motley Fool holds positions and recommends Meta Platforms, Inc. and Unity Software Inc. The Motley Fool has a Disclosure Policy.