Could Unity Software be the Next Shopify? Find out!
Table of Contents
- Introduction
- About Unity Software
- Unity's Revenue Model
- Unity's Moat
- Unity's Switching Costs
- Unity's Financials
- Unity's Management and Culture
- Unity's Stock Performance
- Risks and Challenges
- Conclusion
Could Unity Software Be the Next Shopify?
Unity Software is a company that specializes in helping game developers create mobile games. However, its platform can also be used by media companies, construction and architecture firms, and automotive companies. Unity has two ways of making money from its users: subscription-based revenue and usage-based revenue. The former accounts for about 30% of sales, while the latter accounts for 61% of sales. Unity's revenue model is similar to Shopify's subscription and merchant services.
About Unity Software
Unity Software has a platform that helps creators design and monetize games, virtual and augmented reality, and 3D. Gaming is Unity's most important industry, but the software can also be used for other applications. Unity has its hands in far more industries than one would assume from the outset. Unity's mission statement is to enable more people to be creators.
Unity's Revenue Model
Unity has a subscription-based revenue model, which accounts for about 30% of sales. Once a game is built, Unity can help monetize it through advertising, hosting, or getting multiplayer games up and running. This usage-based revenue accounts for 61% of sales. Unity gets much better margins for this usage-based service than Shopify gets for its merchant services.
Unity's Moat
Unity has a weak network effect at play, but it's there. Unity's asset store is basically a marketplace where third-party merchants develop tools that can be plugged into Unity's subscription. The more users, the more third-party app developers, which brings in more users. Unity has a strong brand, as evidenced by the fact that 94 of the top 100 global game development studios in the world were Unity customers in 2020. Additionally, 71 of the top 1,000 mobile games globally at the end of 2020 were developed on Unity.
Unity's Switching Costs
Unity has high switching costs. The number of customers who are spending over $100,000 a year with Unity is growing quite quickly, and the dollar-based net expansion rate has been over 120 consistently. The companies that are successful are using Unity more and more. It would be painful to switch, and the only reason to do so would be if the prices became exorbitantly high or if the software all of a sudden stopped working.
Unity's Financials
Unity has about $1.6 billion in cash and no long-term debt. It is losing money on a free cash flow basis, but if you compare that to its cash balance, this is not a problem. The fact that it has no debt and could be free cash flow positive on a moment's notice is an enormous positive. Unity is rapidly reinvesting into itself to grow, which explains why the free cash flow is negative.
Unity's Management and Culture
Unity's CEO, John Riccitiello, gets great marks on Glassdoor, with a 95% approval rating and 4.4 stars. Two out of the three founders are still involved in the company. Joachim Ante is the Chief Technology Officer, and David Helgason was a founder who is now sitting on the board of directors. Ownership is almost 20% of shares outstanding.
Unity's Stock Performance
Unity's stock has not only thumped the market since it came public, but the company has a history of blasting past Wall Street's estimates. The dilution rate here is a little bit high, but not all that surprising given the phase of growth this company is in.
Risks and Challenges
Unity's concentration is nothing to worry about, as no customer accounts for over 10% of sales. However, the company is losing money on a free cash flow basis, and its earnings per share are negative. Unity's network effect is weak, and it doesn't have a low-cost advantage.
Conclusion
Unity Software has a lot to like about it, given the rise of games and the other areas this company is investing in. Unity has a very bright future ahead. Its revenue model is similar to Shopify's subscription and merchant services. Unity has a weak network effect, but it's there. Unity has high switching costs, and the only reason to switch would be if the prices became exorbitantly high or if the software all of a sudden stopped working. Unity is rapidly reinvesting into itself to grow, which explains why the free cash flow is negative. Unity's CEO, John Riccitiello, gets great marks on Glassdoor, and two out of the three founders are still involved in the company. Ownership is almost 20% of shares outstanding. Unity's stock has not only thumped the market since it came public, but the company has a history of blasting past Wall Street's estimates.
