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Unity Software, an Epic Games Competitor, Is Going Public This Week

By Nicholas Rossolillo – Sep 14, 2020 at 10:07PM

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Snowflake is getting all the attention, but don't ignore this new video game stock.

This week will be a busy one for tech IPOs. Snowflake, the high-flying cloud data firm, is attracting all sorts of high-profile attention. But a number of other tech companies are set to make their public debuts this week as well.

Unity Software -- a competitor to Fortnite creator Epic Games, which is partly owned by Chinese tech giant Tencent (TCEHY -4.71%) and currently in a legal dispute with Apple (AAPL -1.96%) over the App Store's cut of sales -- will have an IPO on Thursday, Sept. 18, and will begin trading publicly as soon as the next day. 

A woman laying on the floor using a smartphone.

Image source: Getty Images.

A platform for creating content

Unity isn't a video game studio itself. Rather, it's a platform for developers (as Epic is with its Unreal Engine) to create and distribute content -- primarily video games, but also movies, architectural and engineering designs, and automotive tech development. The company's platform allows creators to more easily make content, rather than start from scratch writing code and building all the other necessary pieces required for a successful game launch. Unity boasts having over 1.5 million users in 190 countries.

The financials are impressive. Revenue in 2019 increased 42% to $542 million, and was up another 39% through the first six months of 2020 to $351 million. Free cash flow (basic profits as measured by revenue less cash operating and capital expenses) was negative $34.7 million during the first half of this year.

Unity, which will trade on the Nasdaq under the symbol U, is aiming to sell 25 million shares at $34 to $42, which would generate $850 million to $1.05 billion, excluding the option for underwriters to sell an additional 3.8 million shares.

The creative platform says it will use the proceeds to pay back a $125 million loan it took out during the peak of the COVID-19 lockdown, as well as for general corporate purposes and to potentially make acquisitions to further build out the capabilities it offers developers. As of June 30, Unity already had $453 million in cash and equivalents, so this will be a well-funded software company post-IPO.

Based on initial pricing assumptions, Unity will be valued at a market cap of some $11 billion. Assuming full-year 2020 revenue is about $700 million (using figures through the first half of the year), the stock will go for about 16 times 2020 revenue. Given the growth the company is posting and how important video games have become as an entertainment medium (a trend reinforced by the pandemic's stay-at-home imperatives this year), this IPO is worth watching.

Nicholas Rossolillo owns shares of Apple and Tencent Holdings. His clients may own shares of the companies mentioned. The Motley Fool owns shares of and recommends Apple and Tencent Holdings. The Motley Fool has a disclosure policy.

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