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Should we join Unity's newest partnership with Apple?
With the arrival of the traditional “one more thing” of the Jobs era, $Apple (AAPL.US)$ CEO Tim Cook introduced the highly anticipated VR glasses product Apple Vision Pro at WWDC on Monday.
Although the final market size of this product is still unknown, the current price of around $3,500 may discourage many consumers from buying it.
Apple Vision Pro Headset Apple Vision Pro Headset
However, the technology itself is fascinating. Vision Pro will allow users to see a larger screen through a headset and control it using their eyes, hands, and voice rather than $Meta Platforms (META.US)$ Oculus, it relies on an external hand controller.
Quest 2 mission 2
Currently, the most mature commercial application of virtual reality is gaming. Apple mentioned that it is related to $Unity Software (U.US)$ During the incident, Unity's stock price soared on Monday, and even triggered a suspension of trading, which ended with a 17% increase.
What kind of company is Unity?
Unity is one of the most widely used game engines by mobile game developers around the world. It was founded in 2004 and focuses on the creation and operation of real-time 3D interactive content, providing a foundation for the subsequent construction of various AR and VR interactive experiences. In addition to Apple's iOS, developers can also efficiently and easily develop cross-platform applications on Unity. These apps can be created and deployed on more than 20 platforms such as Windows, Mac, iOS, Android, and PlayStation $Sony (SONY.US)$ , Xbox $Microsoft (MSFT.US)$ ， $Nintendo (ADR) (NTDOY.US)$ Switch, and leading AR and VR platforms.
For example, $TENCENT (00700.HK)$ “Wang Zhe Rongyao” and $Activision Blizzard (ATVI.US)$ The “Hearthstone” clients are all developed using Unity3D. Relying on the Unity3D game engine, these companies have maintained rapid growth in the virtual reality and augmented reality industry, bringing opportunities to Unity. VR applications usually have high requirements for the transmission speed of high-definition 3D scene data. With the advent of the 5G era and the increase in bandwidth throughput, fundamental changes in products have become possible.
Unity's business consists of three parts: operating solutions, creating solutions, and others, mainly focusing on the first two parts.
Operational solutions account for more than half of the company's revenue, with the majority coming from advertising and cloud services. The e-Cloud business mainly uses basic tools to process in-game data, while the advertising business uses accurate targeting to generate revenue through profit sharing. Revenue from targeted advertising largely depends on the number of customers and the ability of algorithms to increase GMV conversion rates.
Creation solutions mainly refer to game engine software that enables creators to easily develop, edit, and iterate interactive 2D and 3D content in real time.
Additionally, Unity provides customers with tiered subscription plans based on their revenue, offers solutions at different prices ($0-1,800) to meet the needs of users at different stages, and tailor-made versions for different industries.
Other business activities include strategic partnerships with hardware/game console/device manufacturers. Despite the current challenging environment across the entertainment and leisure industry, Unity's recent acquisition of Weta and ironSource is expected to bring additional value to the company. Weta's tools are expected to be profitable starting in 2023, and integration with ironSource has brought benefits to Unity and improved the performance of both networks.
What is the financial status of Unity?
In Q1 2023, Unity's revenue reached $500 million, up 56% year over year. However, excluding acquisitions and based on comparable benchmarks, revenue actually declined by 2% rather than increased. Additionally, Q2 revenue is expected to grow 72-75% over the previous year, and 6-8%, taking into account comparable benchmarks. Notably, there were currency monetization issues in the second quarter of 2022, so adjusted revenue is likely to be the same as the previous year.
In Q1 2023, Unity's revenue reached $500 million, up 56% year over year. However, excluding acquisitions and based on comparable benchmarks, revenue actually declined by 2% rather than increased. Additionally, Q2 revenue is expected to grow 72-75% over the previous year, and 6-8%, taking into account comparable benchmarks. Notably, there were currency monetization issues in the second quarter of 2022, so adjusted revenue is likely to be the same as the previous year.
Specifically, create solutions' revenue grew 14% year over year in the first quarter, and after excluding revenue from strategic partners, the growth rate was 17%. The growth rate has slowed compared to before, and Unity attributes this to the company's gradual move away from professional services and increasing reliance on partners to implement projects. The decline in revenue is partly due to the decline in professional services. Unity is reducing the importance of professional services and increasing utilization with partners such as Booz Allen and Capgemini. These partnerships help customers implement digital twins, Boss Allen is more involved in government projects, and Capgemini does business in various industries such as energy. Partnering with these partners helps Unity expand its creative business and continue to benefit from highly profitable cloud revenues. However, the company's customer attrition rate remains low and has improved over time.
The operational services business still faces resistance in a macroeconomic environment where the overall situation is weak, but growth is expected to accelerate in 2023 due to the synergy between Unity and ironSource. For example, ironSource's ad network is moving to a more advanced Unity ML model, while Unity's ad network uses ironSource's bidding model.
Regarding customers, Unity's number of major customers has remained stable or declined in recent quarters. Currently, Unity relies on the acquisition of ironSource to maintain the current situation, which is probably more a result of slowing consumer growth than loss of customers. The company's remaining performance obligation (RPO) is currently $559 million, down from $620 million in the previous quarter. Deferred software revenue also fell to about $300 million from about $320 million in the previous quarter.
In terms of profitability, gross margin continues to decline; however, as Weta's business becomes more rapidly monetized, this situation is expected to reverse. Additionally, the company is undergoing ongoing layoffs, including reducing the number of management teams, in part to absorb recently acquired companies and achieve cost synergies.
Is Unity worth buying right now?
First, whether it's VR, AR, or AI, Unity has a great chance to benefit from it. Generative artificial intelligence will be a huge driver for the gaming industry, making it easier to build 3D experiences and enable new experiences that are currently impossible.
First, whether it's VR, AR, or AI, Unity has a great chance to benefit from it. Generative artificial intelligence will be a huge driver for the gaming industry, making it easier to build 3D experiences and enable new experiences that are currently impossible.
Unity is developing editor tools and plans to open up a generative artificial intelligence marketplace to profit from the progress of the entire ecosystem. This includes the Unity Editor and Unity Runtime.
Additionally, Unity recently raised the prices of some subscription services, but the impact on customer attrition was minimal. This shows the company's strong competitive position and shows that the company has higher pricing power. In the future, growth is expected to come from usage, as Unity believes there is significant potential to increase taxable revenue over time as developers begin using more artificial intelligence tools and building a more advanced world.
In terms of valuation, since positive EBITDA profits have just begun, the company is now better placed to compare with peers based on revenue multiples. Of course, some investment banks use profit expectations after 2024 as a benchmark and discount them to calculate target prices.
Comparing the overall revenue multiplier with the industry, Unity's revenue multiplier (EV/Sales) is 8.7 times, which is 6.6 times higher than the industry average. However, if the valuation is split into two parts based on the potential of the developer's business with a multiple of 9 and a multiple of 3 for operating services, and using Unity's projected market revenue for 2024, the valuation would be $40 per share.
More optimistic investors are likely to value it based on higher income expectations.
So for Unity, the short-term price has reached a position close to the target valuation, so shorting is definitely not economical. In the future, stock prices are likely to change even more as performance exceeds or falls short of expectations. Considering the current cooperation with Apple, there will be more market capital inflows, leading to a certain degree of premium in stock prices.
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QMengColdJoke : Just ask your friends who play games. Meta uses the Unity engine to make VR something. Unity is a relatively slow engine, which is not very effective for VR, which requires a stable high frame rate.
Nox杰 : Yes