Unity Stock: Business Model Breakdown

Unity Software stock is one of the most exciting new gaming stocks on the market. I’m going to break down Unity’s business model and see how it makes money.

Oct. 2, 2020

What does Unity Software do?

Unity enables developers to create games for all platforms, including the App Store, the Play Store, console, and PC through its interactive, real-time 3D content rendering service. Users range from those who make games as a hobby to big names like Activision Blizzard and Sea Limited. However, it’s content rendering software is not just for gaming. The company has stated that its technology is used by companies for augmented reality (AR) and virtual reality (VR) purposes in industries as diverse as architecture, manufacturing, retail, TV and much more. 

While Unity is primarily known for its gaming engine right now, this might not always be the case. The company has stated that its market opportunity is actually larger in the sectors beyond gaming where it will provide AR and VR capabilities to the industries mentioned above. 

How does Unity make money?

Unity has two primary lines of revenue:

  1. Create Solutions: these are the tools developers use to develop and render 2D and 3D content. Revenue is generated from subscriptions which can range from 1 to 3 years depending on the size of the contract. While primarily used by game developers at the moment, the number of creators on the platform from other industries is growing. 
  2. Operate Solutions: these are tools that allow users to operate and monetize apps created on the Unity platform through ads and in-app purchases. It also encompasses tools for analytics, content delivery, and communication between players. Revenue is generated from a revenue share model with its developers through Unity Ads and Unity IAP (In-App Purchases). 

Unity also takes in a significant amount of revenue from its strategic partnerships. These comprise of larger deals with big companies from a number of different industries and as such are harder to define. 

Here is the breakdown of Unity’s revenue from its S1 document for the six months ended June 30, compared with the same time period last year. 

2019 2020 $ Change % Change
Create Solutions $77,570,000 $101,787,000 $24,217,000 31%
Operate Solutions $137,082,000 $216,881,000 $79,799,000 58%
Strategic Partnerships and Other $38,113,000 $31,657,000 ($5,456,000) (14%)
Total Revenue $252,765,000 $351,325,000 $98,560,000 39%

Should I buy Unity stock?

Unity is a really interesting business that has a growing total addressable market in two distinct future-relevant industries. While there may be a considerable amount of speculation around its AR and VR market opportunity, it remains a leader in the gaming sector. I think as a gaming stock alone it’s an exciting company with a lot of runway, and if it can capture even a tiny fraction of the rapidly growing AR & VR markets, then we may be on to a winner. Having just gone public there is sure to be a lot of volatility around the stock for now, but this one is definitely on my watchlist.

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