It's been quite the rollercoaster ride for Unity Software (U 2.21%) stock since its initial public offering (IPO) in September 2020. The stock price is currently 44.3% off its all-time high of $210, but after Unity's fourth-quarter business update, I'm planning to take advantage of the lower prices to add to one of my largest holdings.
This leading software provider for video game developers and 3D content creators has great momentum heading into 2022. The stock has been volatile, but the business has been very steady in its performance. It's the consistent revenue growth that counts right now; the stock price will take care of itself as Unity continues to report strong growth.
Here are three reasons why I believe it's time to buy more shares of Unity Software.
1. Consistent revenue growth above 30%
Unity has a huge opportunity to onboard more video game developers and other creative experts in non-gaming industries over the long term. Management's stated goal has been to grow revenue above an annualized rate of 30%, yet its recent growth has been pacing well above that target.
Revenue clocked in at 44% year over year in 2021, and guidance calls for top-line growth between 34% and 36% in 2022. About half of all video games -- a $175 billion industry -- are made using Unity's software, and management continues to see momentum in this important space in the near term. Over the last year, Unity supported the launch of over 200,000 game launches.
But what I love about Unity is that it's not just serving the gaming industry. It's seeing even faster adoption for its 3D design tools in other industries, too.
2. Unity serves many industries
Revenue from non-gaming customers grew by over 70% year over year in 2021. The subscription revenue from non-gaming customers is currently less than 10% of Unity's total revenue, but the growing demand from different markets looks very promising.
Management disclosed a few new partnerships in the latest earnings report. Unity now has a partnership with Hyundai Motors to create a digital twin of one of its factories to assist with plant management and improve the manufacturing process. Unity also has a partnership with eBay to power its interactive 360-view of product images uploaded by sellers on the marketplace.
These opportunities are just the tip of the iceberg. Management sees a $45 billion addressable market for its products and services, including opportunities across e-commerce, automotive, architecture, and filmmaking.
3. A future high-margin business
Consistent revenue growth is great, but the most important reason I'm ready to buy more shares is that Unity has a clear path toward sustainable profitability. And it could come as soon as 2023.
Unity's operating loss is moving very quickly toward breakeven. From 2019 through 2021, non-GAAP (generally accepted accounting principles) operating margin improved from negative 16.9% to 4.6%. Management's guidance calls for adjusted operating margin to reach breakeven by next year, and it should only expand over the long term based on its lucrative business model.
Unity's revenue comes from subscriptions and revenue-sharing agreements with customers. These are high-margin sources of cash, whereas it costs very little to sell that additional license to use its software. It invests in making a software tool once and then sells it as a subscription to potentially thousands -- if not millions -- of users over time.
Consistent revenue growth, an expanding addressable market, and a clear path to profitability are good signposts for the stock's long-term return potential.
I'm not concerned about Unity's high valuation, where the stock currently trades at a price-to-sales ratio of 28. At this point, I'm more interested in focusing on the business performance and buying shares when the stock is out of favor with the market -- like now when Unity Software is down 44.3% from its all-time high.
When you're only generating revenue of $1.1 billion in a multi-billion dollar market, the stock can grow into its high valuation over time.