A few weeks ago, I said Unity software‘s (NYSE: U) stock price would be volatile. Case in point: The stock is down nearly 20% from all-time highs following the company’s Q4 2020 report and its first 2021 outlook released late last week. However, there was plenty to see in the quarterly update, including Unity providing some guidance on how Apple‘s (NASDAQ: AAPL) privacy updates (expected to roll out this spring) will have a long-term impact.
I think this is the pullback in Unity’s stock that some investors have been waiting for before making a purchase.
2020 in numbers
Unity grew its revenue 39% year over year in the fourth quarter to $ 220 million, and free cash flow improved to $ 3.6 million positive from $ 9.7 million negative for the same period a year ago. The company now has 793 customers who spent more than $ 100,000 with Unity in the past year, compared to just 600 in 2019. Also noteworthy: While Unity’s platform was traditionally intended for creating 3D video games, 13% of the customers used Those top 793 customers provide the platform for the development of non-video games (such as movies, TV, engineering and production), compared to just 8% just a few quarters ago – illustrating this company’s tremendous potential in the greater digital economy.
Image Source: Getty Images.
All in all, it was a great year for Unity. It successfully completed its IPO, closed 2020 with $ 1.75 billion in cash and equivalents and zero debt, and expects revenue growth of at least 23% by 2021 (to at least $ 950 million). The slowdown in expansion is a result of the initial effects of the pandemic (Unity received a $ 25 million revenue benefit in 2020 due to the pandemic) and dealing with Apple’s iOS privacy updates.
|
Metric |
2020 |
2019 |
Change |
|---|---|---|---|
|
Revenue |
$ 772 million |
$ 542 million |
42% |
|
Adjusted net income (loss) |
($ 65.6 million) |
($ 113 million) |
N / A |
|
Free cash flow (including acquisitions) |
($ 72.7 million) |
($ 287 million) |
N / A |
Data source: Unity Software.
Apple flexes its muscles, but Unity flexes back
But what about Apple’s iOS privacy updates, which will prompt users of Apple devices to opt out of application activity tracking? Unity estimates it will cost a $ 30 million increase in sales by 2021 (3% of projected sales), assuming Apple goes through the changes sometime in the spring.
To be sure, Apple’s move will force app developers to rethink how they monetize their content. Actually, Facebook (NASDAQ: FB) CEO Mark Zuckerberg was belligerent with Apple on his company’s recent earnings call, stating that “We are also seeing Apple’s business increasingly reliant on winning share of apps and services against us and other developers, so Apple has every reason. to use their dominant platform position to interfere with how our apps and other apps work, which they do regularly to give their own preference. ”
Unity didn’t mention Apple’s potentially self-sustaining business, but it did shed some light on its company’s distribution and advertising activities, which will have to do with how apps have traditionally made their way to mobile users. Unity CEO John Riccitiello said of the earnings call regarding the $ 30 million effect iOS could have in 2021:
We can’t quite get every nuance out of this, nor can we understand exactly what will offset our market share, but we are confident that we will grow our advertising business with market share growth that has been going on for many years. based on strong data insights. So net-net, it’s an estimate, but we’re not guessing. We’ve put together a very detailed model and we think we understand where we’re going.
And where exactly is Unity going? It has built its ecosystem of services to help developers advertise, deliver and monetize on mobile devices and beyond with new AI-based analytic tools and content distribution. Apple hasn’t blinded Unity with these privacy changes. In fact, Unity has long anticipated this was coming, and thinks it could gain market share in the app ad and monetization over time if it can help users of its platform navigate the new obstacles the iPhone maker is planning.
Unity could really benefit in a world where device activity tracking is disappearing (or at least getting harder) – not to mention its growing importance as digital content creation moves to a 3D and real-time virtual collaboration model . This is an end-to-end platform that includes digital content creation and management once the end user has made a download and interacts with the app.
Unity’s initial outlook for 2021 implies some short-term headwinds, but its projected growth of no less than 23% year-on-year (and a long-term forecast of at least 30% average annual growth) is undeniable. The stock traded 35 times for expected 2021 sales, still a hefty premium even after the recent downturn. But I think it’s a fair deal, assuming an investor plans to buy and hold for the next decade.