Where will Unity software be in 5 years?

Unit Software (NYSE:U) is one of the most popular metaverse stocks to invest in. With its 3D animation tools, the company is a logical choice for content creators. Additionally, Unity’s augmented reality (AR) and virtual reality (VR) solutions provide the company with exposure to several other industries.

In five years, the effect the metaverse will have on the world and Unity may still be up in the air. Either way, Unity’s solutions make it independent of the success of the metaverse.

Image source: Getty Images.

Many possible futures

Unity Software operates two primary segments within its business: build and operate. The creation segment does exactly what it sounds like — creates content. Although this segment represents only 26% of the turnover, it is the opportunity that attracts the most attention.

A product of Unity’s creative software can turn building plans into a VR space so customers can experience premises before they’re built. Game developers can also use Unity’s tools to create a cross-platform video game and have amazing graphics with built-in options.

Unity’s animation software finds use in metaverse applications, as its users can create 3D content to fill the world. From buildings to people models, Unity has the software to do it all.

The operating segment focuses on the maintenance of existing games. It provides developers with several tools to maximize the popularity and profitability of games.

Unity’s analytics tools can also help creators understand their audience and playtime. While this is the largest component of Unity’s business, several features are in beta testing, which will drive future revenue growth once the tools are released and adopted by customers.

Five years from now, the metaverse could be thriving, still on the horizon, or have faded away like a good idea that never happened. While Unity would benefit from creating massive amounts of metaverse content, its video game development and maintenance tools, as well as its expansion into ancillary markets like architecture and engineering, make it a resilient company.

Future finances

CFO Luis Visoso claimed the company could sustain 30% revenue growth over the long term. While some investors may be used to seeing growth rates of 40%, 50% or more, the effect of continued 30% growth is staggering.

30% revenue growth projection
Metric 2021 turnover Projection 2024 Projection 2026
Income $1.1 billion $2.42 billion $4.08 billion
Growth from Q3 2021 N / A 120% 271%

Source: Unity Software. TTM = last 12 months.

The longer the stock is held, the more impressive the annual revenue growth of 30% becomes. To calculate the potential market capitalization and share price for Unity, a valuation must be applied. While these numbers are educated guesses, it’s impossible to know how the market will value companies five years from now.

5-year market capitalization at future valuation
P/S of 10 P/S of 23 (lowest rating ever) P/S of 27 (Current) P/S of 40
$40.8 billion $93.8 billion $110.2 billion $163.2 billion

Source: Y-Charts. Lowest valuation reached May 5, 2021. Current valuation as of January 25, 2022. P/S = price to sales ratio.

Unity Software currently has a market capitalization of around $31 billion, but if it can deliver on its promise of 30% revenue growth, it will be an incredible stock market winner. Even at its lowest valuation as a public company, the stock would return 203%, or 25% per year.

To achieve this, however, two things must happen. First, investors need to own the stock through good times and bad. Second, the number of shares must remain the same, which Unity has not achieved in its life as a public company.

Chart of outstanding U shares

Outstanding U shares given by Y-Charts

During the fourth quarter, Unity’s stock-based compensation bill reached $98 million, or about 31% of revenue. Its stock count rose 1.2% quarter-over-quarter, which would equate to an increase of almost 5% annually. Like inflation, shareholder dilution decreases a stock’s claim on a company. If Unity continues to price shares at the current rate, a share today will be worth 0.79 five years from now.

Unity is also posting significant quarterly losses. From a generally accepted accounting principles (GAAP) perspective, its net margin was a horrible negative 54%. Even when Unity adjusts stock-based compensation, that number still sits at minus 1%.

Over the next five years, Unity must show some improvement in operational efficiency or dilute its shareholders through stock-based compensation or capital increases. Also, the market tends to beat unprofitable companies at random intervals. If either of these periods occurs five years from now, the business gains may be overshadowed by the unprofitability of the business.

Unity Software has several strong use cases and an optimistic management team. Although he has some expense issues, this should be resolved after some time in the public markets, as employees may want to be compensated in cash rather than stock, especially if the stock price remains depressed.

The metaverse may or may not come, but the use of augmented reality and virtual reality is only increasing, and Unity’s solutions are solving real-world problems. Because Unity looks like a candidate for a big stock five years from now, investors should consider taking advantage now, as the stock is down 50% from its all-time high.

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Keithen Drury owns Unity Software Inc. The Motley Fool owns and recommends Unity Software Inc. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.