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Unity Software Posts a Solid Close to 2020 and Plans for Apple's "Privacy" Updates in 2021

By Nicholas Rossolillo - Feb 10, 2021 at 10:40AM

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Unity's stock price is down nearly 20% post-Q4 report, presenting a buy opportunity for long-term shareholders.

A couple of weeks ago, I said Unity Software's (U 7.19%) share price would be volatile. Case in point: The stock is down nearly 20% from all-time highs following the company's fourth-quarter 2020 report card and initial outlook for 2021, which was released late last week. However, there was plenty to like in the quarterly update -- including Unity providing some guidance on how Apple's (AAPL 3.59%) privacy updates (expected to roll out this spring) will affect its business long-term. 

I think this is the pullback in Unity's stock some investors may have been waiting for before making a buy.

2020 by the numbers

Unity grew its revenue 39% year over year in Q4 to $220 million, and free cash flow improved to positive $3.6 million compared to negative $9.7 million for the same period a year ago. The company now has 793 customers spending over $100,000 with Unity over the last year, compared with just 600 in 2019. Also of note: While Unity's platform has historically been for creation of 3D video games, 13% of those top 793 customers were using the platform for non-video game development (like movies, TV, engineering, and manufacturing), compared to only 8% just a couple of quarters ago -- illustrating the massive potential this company has in the greater digital economy.  

Four people standing against a wall using smartphones.

Image source: Getty Images.

All told, it was a great year for Unity. It successfully completed its IPO, ended 2020 with $1.75 billion in cash and equivalents and zero debt, and expects to grow revenue at least 23% in 2021 (to at least $950 million). The slowdown in expansion is a result of lapping initial effects of the pandemic (Unity got a $25 million revenue benefit in 2020 due to the pandemic) and dealing with Apple's iOS privacy updates.






$772 million

$542 million


Adjusted net income (loss)

($65.6 million)

($113 million)


Free cash flow (including acquisitions)

($72.7 million)

($287 million)


Data source: Unity Software.  

Apple flexes its muscles, but Unity flexes back

But what about Apple's iOS privacy updates, which will prompt Apple device users if they want to opt out of application activity tracking? Unity estimates it will take a $30 million revenue hit (3% of its forecasted sales) in 2021, assuming Apple goes through with the changes sometime in the spring. 

To be sure, Apple's move will force app developers to rethink how they monetize their content. In fact, Facebook (FB 1.41%) CEO Mark Zuckerberg was combative with Apple on his company's recent earnings call, stating that "we are also seeing Apple's business depend more and more on gaining share in apps and services against us and other developers, so Apple has every incentive to use their dominant platform position to interfere with how our apps and other apps work, which they regularly do to preference their own."  

Unity didn't call out Apple's potentially self-serving activity, but did shed some light on the distribution and advertising arms of its business that will need to deal with how apps have traditionally found their way to mobile users. Unity CEO John Riccitiello had this to say on the earnings call regarding the $30 million effect iOS could have in 2021:

We can't quite get every last nuance from this, nor can we understand precisely what our market share offset will be, but we feel confident that we're growing our advertising business with market share growth that's been going on for many years on the basis of strong data insights. So net-net, it's an estimate, but we're not guessing. We've got a very detailed model in place and we think we understand where we're going.  

And where exactly is Unity going? It's been building out its ecosystem of services to help developers advertise, deliver, and monetize content on mobile devices and beyond with new AI-based analytical tools and content distribution. Apple did not blindside Unity with these privacy changes. In fact, Unity has anticipated this was coming for a long time, and thinks it could gain market share in the app ad and monetization industry over time if it can help users of its platform navigate the new obstacles the iPhone maker is planning.  

Unity could actually benefit in a world where device activity tracking disappears (or at the very least gets harder to pull off) -- not to mention grow in importance as digital content creation transitions to a 3D and real-time virtual collaboration model. This is an end-to-end platform spanning digital content creation to management once the end-user has made a download and is interacting with the app.

Unity's initial outlook for 2021 implies some short-term headwinds, but expected growth of no less than 23% on the year (and a long-term estimate of at least 30% average annual growth) is nothing to balk at. Shares trade for 35 times expected 2021 revenue, still a hefty premium even after the recent pullback. But I think it's a reasonable deal, assuming an investor plans on buying and holding for the next decade.

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Unity Software Inc. Stock Quote
Unity Software Inc.
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