What happened
Shares of Unity Software (U 3.95%) chugged 19.8% higher in October, according to data from S&P Global Market Intelligence. The platform for building and monetizing real-time 3D (RT3D) content (digital worlds and games) made multiple product announcements last month and was helped by the recovery of the broad market.
So what
Unity has two main parts to its business right now. The Creative Solutions segment helps video game and other software developers easily build and deploy software across different hardware platforms like consoles and smartphones. In order to get more developers using its engine, Unity needs to increase the value proposition of using its creative solutions to build RT3D.
The company made progress with this in October, releasing Unity Gaming Services. The service allows developers to get a comprehensive and editable view of their games across all platforms, hopefully saving time and money in the process. While not financially material to the business right now, new products like this show that Unity is working hard to improve the value proposition of outsourcing game development to its game engine.
Image source: Getty Images.
The other segment is Operate Solutions, which is currently the biggest and fastest-growing segment for Unity, growing revenue 61% year over year to $182.9 million last quarter. Operate Solutions help game developers monetize their games through advertising and create interactive experiences for players to keep them engaged and coming back again and again.
In October, Unity announced the rollout of Unity Mediation to the Unity Ads network. The product broadens what advertisement developers within Unity Ads can use, hopefully increasing the value proposition for Unity developers to stay with the platform, and also helping advertisers spend properly across Unity games. Product expansions like this can help Unity maintain the financial momentum it has within its Operate Solutions segment right now.
Now what
Unity is going after a big market opportunity, trying to be a core platform for game development and monetization. With a market cap of approximately $40 billion, the stock trades at a price-to-sales ratio (P/S) of 43 based on its last 12 months' (LTM) revenue. This is very expensive; however, if you believe Unity can continue growing Creative and Operate Solutions at a high rate for many years, this valuation will come down rather quickly. I'm not going to defend buying a stock at a P/S of 43, but Unity stock definitely belongs on all growth investors' watch lists.
