Is it too late to buy Unity software stock?

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3D gaming and creation platform Unit Software ( U -8.10% ) recently reported earnings for the fourth quarter of its fiscal year 2021, ending December 31. The market cheered the results, sending the stock price back over $100 per share after weeks of selling pressure in the market that sent the stock down to $90.

If you look outside, you might be wondering if the “ship sailed” on Unity stock. It’s never fun to feel like you’re running out of hot stock. But fear not, Unity’s potential goes far beyond its last quarter. Here’s why investors should still consider stocks for their portfolio today.

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Under-promise, over-deliver

The rise in share price after Unity’s earnings seems warranted – the company anticipated revenue growth over expectations set just three months prior. Revenue increased 43% year-over-year to $315.9 million, versus guidance of between $285 million and $290 million, beating it by 9%.

Additionally, Unity’s management team continues to demonstrate its ability to exceed analyst estimates. The company has posted six quarters of earnings since its IPO, and it has beaten analysts’ earnings estimates each time. A company that continually overbooks can increase its valuation surprisingly quickly, as these earnings surprises begin to have their own cumulative effect.

Management released its guidance for the first quarter of 2022 and full year 2022, forecasting revenue growth of 34% to 36% for each period. Is Unity a shoo-in to beat these tips? Of course not – but at this point, it shouldn’t surprise anyone if it does.

Flexible technology could bring growth opportunities

Unity’s core technology is a software engine that allows its users to create 3D content for a wide variety of applications, spanning games, movies, industrial models, and more. The company estimates that 2.7 billion people touch Unity-powered content per month.

The two main business segments of the company are “Create” and “Operate”. The Create segment is software sold on a subscription model for creating 2D and 3D content. Meanwhile, the Operate segment involves creative management and monetization, including ads, in-app purchases, data analytics, and more. Operate is Unity’s largest business with 64% of 2021 revenue, and also its fastest growing, up 51% from 2020.

Unity’s core business has traditionally centered on the gaming category, where it enjoys a strong market share; it powers about 71% of the top 1,000 games in the world. But in the coming years, investors are expected to seek the company’s expansion into new applications to drive revenue growth.

Unity can market its platform in several ways; first, it strategically makes its software accessible to students. Establishing a relationship in the earliest stages of a software developer’s apprenticeship increases the likelihood that students will enter the professional world and continue to rely on Unity instead of relearning new software platforms at start from nothing.

Second, the company acquires and associates with new opportunities. It recently acquired Weta Digital for $1.625 billion in cash and stock. Weta Digital is a digital visual effects company, creating on-screen effects for movies and shows like The Lord of the Rings, The Eternals, Avengers: Endgame, game of thronesand more.

Industrial companies like Toyota Use the Unity platform for everything from reviewing work processes to the car builder tool you use to build a car on the company website. These are just two examples, and Unity could benefit more as the world leans more towards digital creation.

The stock remains reasonably valued

Unity’s stock has been a bit of a challenge for investors since its debut in September 2020. Investors have traded the stock at a wide range of valuations, in part due to a volatile market that has seen both frantic buying and frantic selling.

The stock’s current price-to-sales ratio is 26, which is not a good deal considering that the company’s growth rate is strong but not “explosive”, and that the company loses money. Unity ended 2021 with a non-GAAP operating loss of $50.7 million.

Table of U PS ratios

UPS report data by YCharts

However, investors could also argue that the stock’s valuation is reasonable today. The flexibility of Unity’s software could mean years of growth opportunity, potentially making Unity a better stock to buy and hold, rather than expecting big returns in the weeks or months ahead.

The company needs to show investors that it can continue to post solid growth while turning its operating losses into positive revenue. Investors could use an average dollar cost strategy to slowly build a position as the company reports results to address those concerns over the coming quarters and years.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a high-end advice service Motley Fool. We are heterogeneous! Challenging an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and wealthier.

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