Unity | A Worthy Contender?

The recent market environment has urged me to seek portfolio contenders with sturdy growth endurance. I’ve maintained Unity on my watchlist for a while, but I believe its recent results show enough promise to make it at least a worthy contender. Muji and Noserider posted a great introduction to the company [1], so the focus on this post will be on what has changed since then which particularly peaked my interest.

Unity recently posted its Q4 results, which were positively received by the market (+10%) before wiping the surge over the past couple of days. On the surface, they may look like mediocre results compared to some widely held companies here, but let me explain why it may be rosier than it seems.

(1) Revenue of $316M, an increase of 43% YoY

What stands out to me is an impressive, Cloudflare-like consistency in revenue growth [2]:

	Q1	Q2	Q3	Q4
2019	54.1%	45.4%	37.5%	35.7%
2020	35.3%	42.5%	53.3%	39.4%
2021	40.6%	48.4%	42.6%	43.4%

(2) Create Solutions (i.e., recurring revenue) was $100M, an increase of 49%

What stands out to me is accelerating traction here. YoY compares are particularly lumpy due to Covid, but this represented a 19% QoQ growth after growing 16% QoQ the previous quarter. This was particularly addressed by management during the earnings call: “we’ve finally gotten to some scale on nongaming applications, digital twins and verticals. And so we talked a lot about how we’re getting early product traction…the other part is I think we’ve done a really nice job under Mark Whitten’s leadership to help simplify and clarify our go to market. And then lastly, we’ve seen, I’d say, an increase in productivity out of R&D and producing products and features that hit the product market fit that you want to see.

(3) Dollar-based net expansion rate (DBNER) was 140%…and 1,052 customers generated >$100k

Both land and expand strategies seem to be really succeeding – DBNER was above 140% all year, and the absolute adds in enterprise customers were 44 → 51 → 85 → 79 (33% YoY growth).

(4) Non-GAAP loss from operations was $12.0 million, or 4% of revenue, compared to a non-GAAP loss from operations of $20.1 million, or 9% of revenue, in the fourth quarter of 2020.

Gross margins fluctuated between 78%-81% over the past two years, but operating leverage is kicking in, and management hinted at upcoming profitability. So if you think about what we’ve done since 2019, so between 2019 and 2021, we doubled our revenue, right? In the same – during that same period of time, we improved our non-GAAP operating margins from minus 16.9% to minus 4.6%. So a significant improvement. And obviously, we made similar progress on free cash flow. We are – we expect to improve our margins by 200 basis points in 2022 to breakeven in 2023. And obviously, we’ll continue to make progress to become profitable thereafter. And I would expect free cash flow to follow very much in line with our non-GAAP operating margin improvements.

(5) Expanding TAM

Management indicated that at the time of IPO, they estimated their addressable market to be $29B, and it now stands at $45B. I don’t tend to pay attention to TAM but there is valid evidence of Unity’s applicability across industries. More than 50% of games on Itch are created on Unity now [5]. Management highlighted how their nongaming business grew 70% YoY, and now represents 25% of revenue.

Now, I can start to hear Saul typing… ”Why would I be interested in a company growing at 43% if all of my companies are growing much higher?” And well, that very well may be true – but wsm007 [3] and Bear [4] recently underlined the importance of revenue durability, and here is where it starts to get more compelling.

Unity guided for $1,505M growth at the top end, which would represent 36% YoY. Assuming a similar beat than last year’s full-year forecast (+14.5%) that would lead to ~$1,723M, which would represent 55% YoY growth. Using our implied 2022 revenue, we can derive Unity’s current valuation at EV/NTMR of ~17x. As always, we don’t know what the market will want to pay for Unity tomorrow or the month after.

Unity's YoY growth
2019: 42%
2020: 43%
2021: 44%
2022E: 55%

So, going back to the purpose of this post, I see plenty of evidence of positive momentum in Unity’s execution since IPO. At a $1.2B run rate, that puts Unity’s revenue roughly equal to Monday, SentinelOne and Cloudflare combined – while it accelerates its top-line, nears profitability and succeeds with its land and expand. I think that at least merits a discussion here.

Friendly reminder to all of us to treat this board with the respect that it deserves https://discussion.fool.com/if-you-care-about-this-board-3497584…

[1] https://discussion.fool.com/a-look-at-unity-u-34731772.aspx?sort…
[2] Understand that there have been some acquisitions along the way but it doesn’t seem like any were material revenue contributors (please correct me if I’m wrong)
[3] https://discussion.fool.com/i39m-expecting-very-similar-numbers-…
[4] https://discussion.fool.com/i-was-curious-as-to-why-there39s-so-…
[5] https://itch.io/game-development/engines/most-projects


I know Beth Kindig, respected tech analyst and CEO of the I/O fund, has been a big fan of Unity. The numbers you presented have attracted my interest. Thanks for the post.


Here’s a brief counterargument on Unity. I haven’t thought it through as much as you, clearly, but it’s a stock I previously owned so I know a bit about it. I cut Unity when I realized that “SaaS” is a much more profitable segment than “innovation”.

I am not going to argue that Unity is a bad company. It’s a thriving business. The only question is whether it rises to the level of a “Saul Stock”. My three concerns are:

  • You already stipulate that Unity is not growing as fast as many of our other hypergrowth stocks. But you say that Unity can make that up in durability. But I dispute that. Unity is growing fast, but a lot of that can be attributed to the success of its latest product generation. The overall gaming market is growing fast, but not at all close to the levels of growth we expect. And if Unity is already in a duopoly with Unreal, how much longer can it grow at these rates? I realize that the answer is “a while yet”, but the ceiling seems much lower than for many of our other stocks that are defining new categories. I feel like there is an inherent limit to growth.
  • Similarly, I worry about sustainability. Yes, it’s latest platform is doing well, but this is a very competitive category. What’s to say Unreal won’t be able to counter. That other mobile specific platforms might emerge? Even if they have a current edge Unity must “re-win” their edge with every product generation.
  • While, in theory, Unity has subscription based pricing, I’m not really convinced that it’s recurring revenue. Games come and go, even most game studios come and go. At some point, my game will be done and my checks to Unity (at least for that game) will stop. Yes, there is some stickiness to Unity for my next project, but choosing Unity for that next project is a conscious decision that someone will make. It’s not just a simple renewal.

Again, I’m not saying Unity is a bad company. But, for me, I came to the conclusion that Unity just reach the bar of what I’m looking for in hypergrowth.



There is definitely a lot of recent speculation about the metaverse and investors like us are keen to find the best places to put our money to work.

Unity (~2M developer community) and Epic Games (~8M developer community) have long been cited as the two companies with the best software to build games and digital experiences. The former is a public company and the latter is still private. Unity’s business performance has been decent, however not as good as other high growth companies that we own. And it has been difficult to compare Unity to a true peer due to the lack of publicly available data on Epic Games. But that changed with Nvidia’s recent Q4 earnings report.

We got a clearer picture of how Nvidia’s Professional Visualization segment has been ramping up - see some numbers below.

                                            U           NVDA-ProfVis     NVDA
Rev Gr YOY (Rev$)                          44% ($316M)  109% ($643M)      53%       
Rev Gr FWD                                 36%                            46%
Rev Gr QOQ avg (past 3 qtrs+next qtr est)   8%           21%              10%
Gross margins avg (past 4 qtrs)            78%                            65%
EBITDA trend (# of incr in past 4 qtrs)     1                              4
Cust incr. QOQ avg (past 4 qtrs)            7%      
Cash on hand                             $1.7B                           $21B
Oper CF trend (# of incr in past 4 qtrs)    2                              2
Free CF trend (# of incr in past 4 qtrs)    2                              2
Debt to cash ratio                       1.05                           0.52
RPO/Def Rev QOQ avg (past 4 qtrs)           5% 

They recently released their Omniverse software platform to enterprise customers and the developer community. Nvidia sells the best graphics chips in the business. They mastered the digital rendition of light, movement and physics with the RTX chip set. Now their software sits on top of their hardware to help customers create highly realistic and customized virtual experiences. Their ProfVis solutions are used in a variety of industries - manufacturing, media, entertainment, architecture, construction etc.

In fact, Unity and Epic Games are both clients of Nvidia!

To be clear, you do not have to use Nvidia’s hardware along with their software, however if you use them together, you get the best of both worlds (according to the company). Why would you not do so?

I prefer investing in Nvidia (rather than Unity or bored apes or virtual terra) because:

  1. Nvidia’s ProfVis division is already larger than U (revenue) and growing faster too. It had triple digit YOY growth for 3 quarters straight

  2. Nvidia, the parent company, is doing exceedingly well - revenue growth, margins, profitability, cashflow etc. It is backed by three secular tailwinds - Cloud migration (data center buildout), metaverse (or omniverse) and next generation automobiles (self driving and other in-built services).

  3. It is still not clear who will be the ultimate winners of the metaverse. What is clearer is that Nvidia is powering a lot of it behind the scenes with its chips. If it’s software starts getting more widely used, it could develop into a highly sustainable and profitable flywheel, irrespective of the games and digital experiences that come and go.

I have a 6.3% position in Nvidia.

Beachman (twitter.com/Iwannabeontheb2)



I haven’t followed Unity very closely after owning it briefly at the start of 2021, then rejecting it after I gained more knowledge about the structure of the company. So I appreciate your post, as it made me look up the last 2 earnings for the general numbers. (I’ve been meaning to revisit it.)

I think it’s important to note the acquisitive nature of the company. Their platform is a hodge-podge of bolt-on products. Glancing at their site today, it’s much better now than it was a year ago, in that at least they have standardized the pricing to USD and have a unified payment system across the products. But it is still a lot of individual products to hunt through.

Their Create segment is per-user subscription revenue, based on the number of designers using the system. This has been typically growing in the 30%s, with some occasional spurts to 50%. This is where you’ll see both the gaming and non-gaming adoption of their platform show up. Look at how much it jumps though… YOY growth for last 5Qs is 39% → 51% → 31% → 33% → 49%. The last 2Qs have seen an impressive acceleration (+16% and +19% QoQ). However, this segment alone isn’t that exciting to me, as the number of designers isn’t going to scale like other companies we invest in (even those with per-user pricing).

The Operate segment (ads, hosting, gaming services, etc), however, is the side of the business that can greatly scale with usage – the side of the business that is gaming-related services. They land the sub rev in Create from the game developers, then as the game succeeds, they could continue to profit in Observe from ancillary services. This was the side of the company that was most interesting to me at the time… the side of the company with the ability to scale with the usage of the platform (and the success of the games being developed).

Observe grew from 53% → 72% YoY when I was evaluating it, from the strong performance of their gaming segment. Since then, it has fallen off a cliff. After topping at 72% YoY, it has then gone +57% → +41% → +62% → +54% → 45%. Looking at QoQ, it went +12% → +9% → +25% → +1% → +5%. Not ideal! (How can it be growing +1% QoQ?! The worst QoQ growth this segment has seen in over 2yr.)

They have had a huge focus on adding more non-gaming clientele, which IMHO was not as appealing as gaming. They don’t “double benefit” from non-gaming designers, as it doesn’t feed into the full flywheel of this company (Observe segment). So it’s great to see the reacceleration in their Create segment, but if that success (as it occasionally bumps against 50%) is from the non-gaming segment, it may not be that durable. Observe is now growing slower than Create!

Anyhow, this heavy focus on non-gaming and how those users don’t feed the flywheel is ultimately why I didn’t like the company.

  • muji