We came across a bullish thesis on Unity Software Inc. (NYSE:U) on ValueInvestorsClub by wfc. In this article, we will summarize the bulls’ thesis on U. The company’s shares were trading at $23.75 when this thesis was published, vs. the closing price of $25.64 on Feb 28.
A close up of a person’s hands using a home console gaming device.
U is an international company that operates a platform to create and grow games and interactive experiences for mobile phones, PCs, consoles, and extended reality devices. While it is often classified as a gaming engine, U also has an ad tech business with a wide array of products.
A series of poor strategic decisions is the reason why U has been losing market share since 2021-2022. To begin with, a number of expensive M&A deals like IronSource at $4.4 billion bore no result. U also applied retrospective pricing on existing games based on royalty was not well received by the developers. The mobile ad market revenue was also impacted by changes made by Apple that allowed companies to track users and gain insights into their activities. This prompted many iPhone users to drop out.
With the appointment of Matt Bromberg as CEO, the pricing was made favorable for studios enabling U to monetize from large developers that generated large revenue. The platform was made free to new and small users. This will enable U to maintain its dominance in the mobile gaming market in which 70% of the top 1,000 games are developed on its engine. Unity 6, a superior technology, offering a better and faster interface is also gaining popularity and along with the new pricing strategy, could drive double-digit growth.
U is in a turnaround phase with its Grow Solutions segment reporting a 5% decline in Y-o-Y Q3-24 revenue even though it grew 1% on a sequential basis. The business is expected to benefit from an improved AI model. On the other hand, revenue for Create Solutions was up 5% Y-o-Y due to a 12% increase in subscription base.
The valuation based on current EBITDA can be misleading as there is enough scope for cost cuts. U enjoys a gross margin of 75% and can achieve a 25% EBITDA margin in a few years if costs are checked. U appears to have a reasonable valuation based on 6x EV/Sales and 20x EV/EBITDA if it manages to sustain a 25% normalized EBITDA margin.
While we acknowledge the potential of U as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns, and doing so within a shorter time frame. If you are looking for an AI stock that is more promising than U but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article was originally published at Insider Monkey.
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