Gaming and 3D creation platform Unity Software (U +0.24%) recently reported earnings for the fourth quarter of its fiscal 2021, ending Dec. 31. The market applauded the results, sending the stock price back over $100 per share after weeks of selling pressure across the market brought the stock down to the $90s.
If you're on the outside looking in, you might be wondering if the "ship has sailed" on Unity stock. It's never fun feeling like you're missing out on a hot stock. But fear not, Unity's potential reaches far beyond its most recent quarter. Here's why investors should still consider the stock for their portfolio today.
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Under-promise, over-deliver
Unity's post-earnings share price bump seems justified -- the company put up revenue growth ahead of guidance laid out just three months prior. Revenue grew 43% year over year to $315.9 million, versus guidance for between $285 million and $290 million, beating it by a solid 9%.
What's more, Unity's management team continues to show an ability to exceed analyst estimates. The company has reported six earnings quarters since going public, and it has beaten analyst revenue estimates every time. A company that continually "over-delivers" can grow into its valuation surprisingly quickly as these earnings surprises begin to have a compounding effect of their own.
Management unveiled guidance for Q1 of 2022 and the entire 2022 year, expecting revenue growth of 34% to 36% for each time frame. Is Unity a shoo-in to beat this guidance? Of course not -- but at this point, it shouldn't surprise anyone if it does.
Flexible technology could bring growth opportunities
Unity's core technology is a software engine that enables its users to create 3D content for a wide variety of applications, spanning games, film, industrial models, and more. The company estimates that 2.7 billion people per month touch Unity-powered content.
The company's two primary business segments are "Create" and "Operate." The Create segment is software sold on a subscription model to create 2D and 3D content. Meanwhile, the Operate segment involves managing and monetizing creations, including ads, in-app purchasing, data analytics, and more. Operate is Unity's largest business at 64% of 2021 revenue, and also its fastest-growing, up 51% over 2020.
Unity's core business has traditionally centered around the gaming category, where it enjoys a strong market share; it powers roughly 71% of the world's top 1,000 games. But moving forward in the years ahead, investors should look for the company's expansion into new applications to drive revenue growth.
Unity can spread its platform in multiple ways; first, it strategically makes its software accessible to students. Building a relationship at a software developer's earliest learning stages makes it more likely that students will enter the professional world and continue building on Unity instead of relearning new software platforms from scratch.
Secondly, the company is acquiring and partnering its way into new opportunities. It recently acquired Weta Digital for $1.625 billion in cash and stock. Weta Digital is a digital visual effects company, creating on-screen effects for films and shows like The Lord of the Rings, The Eternals, Avengers: Endgame, Game of Thrones, and more.
Industrial companies like Toyota use Unity's platform for everything ranging from reviewing work processes to the car configuration tool you use to build a car on the company's website. These are just two examples, and Unity could enjoy more as the world leans further into digital creation.
The stock remains reasonably valued
Unity's stock has been a bit of a ride for investors since debuting in September 2020. Investors have traded the stock at a wide range of valuations, partly due to a volatile market that's had both frantic buying and panic-filled sell-offs.
The stock's current price-to-sales ratio is 26, which isn't an obvious bargain if you consider that the company's growth rate is strong but not "explosive," and the business is losing money. Unity finished 2021 with a non-GAAP $50.7 million operating loss.
U PS Ratio data by YCharts
However, investors could also argue that the stock's valuation is reasonable today. The flexibility of Unity's software could mean years of growth opportunities, potentially making Unity a better stock to buy and hold, rather than expecting significant returns in the weeks or months ahead.
The company needs to show investors that it can continue putting up solid growth numbers while turning its operating losses into positive income. Investors could utilize a dollar-cost average strategy to build a position slowly while the company puts up the results to address these concerns over the quarters and years to come.
