Could Unity Software Become the Next Apple?

Unity Software (U 0.92%) stock has shot up impressively since Meta Platforms' (META 2.98%) announcement in October 2021 that it would be betting big on the metaverse, a three-dimensional virtual world where people would be able to learn, play, socialize, and collaborate in real-time.

Shares of Unity jumped 35% in the space of just three weeks following Meta's announcement on Oct. 28, 2021, before a sell-off in tech stocks threw its hot rally out of gear. However, savvy investors should focus on the bigger picture. Unity could win big from the metaverse, since it provides a platform for creating and operating interactive, real-time 3D content.

Image source: Getty Images

It wouldn't be surprising to see Unity become the Apple (AAPL 0.64%) of the metaverse world in the long run. That's because Unity provides a critical product that could help the metaverse take off, and it enjoys a dominant position in a lucrative metaverse niche already. These traits can be considered similar to Apple, which controls a nice chunk of the global smartphone market and is driving the adoption of 5G smartphones thanks to its huge installed base.

It is worth noting that Unity stock has outperformed Apple since going public despite the volatility experienced by the former.

U data by YCharts

But will Unity stock be able to appreciate at a faster pace than Apple in the long run and become a tech giant like the iPhone maker? Let's find out.

Unity is expected to grow at a faster pace than Apple

Unity Software reported its 2021 financial results on Feb. 3, revealing a huge jump in its top line. The company's revenue was up 44% during the year to $1.1 billion. Even better, Unity expects its top line to increase 35% in 2022 at the midpoint of its guidance range, indicating that its momentum is here to stay.

Apple, on the other hand, finished fiscal 2021 (for the twelve months ending on Sept. 25, 2021) with a 33% increase in revenue. However, the tech titan's revenue in the first quarter of fiscal 2022 (for the three months ending on Dec. 25, 2021) increased at a slower pace of 11%. Apple's slower growth last quarter can be attributed to supply chain constraints, but a closer look at projections indicates that analysts aren't expecting very high growth rates from the company.

Source: Yahoo! Finance. FY=Fiscal Year.

What's more, Unity Software is expected to clock an annual earnings growth rate of nearly 70% for the next five years. Apple's earnings, on the other hand, are expected to increase at an annual rate of just 15% over the same period. A closer look at the end markets these companies operate in will make it clear why analysts are expecting Unity to grow at a much faster pace.

Comparing the opportunities

The smartphone market is Apple's bread and butter, as the company gets most of its revenue from selling iPhones. The company generated $71.6 billion in iPhone revenue last quarter -- an increase of 9% over the prior-year period -- which was nearly 58% of its top line.

Now, the slower pace of growth of the smartphone market could become a problem for Apple in the future. IDC estimates that the global smartphone market grew 5.7% in 2021 to 1.35 billion units. Apple reportedly controlled 17.4% of this market. The market research firm forecasts slower smartphone shipment growth of 3% this year. IDC also estimates that smartphone shipments over the next five years could grow at a compound annual rate of just 3.5%.

So Apple is now in an entirely different smartphone scenario compared to when the iPhone was first launched in 2007. Annual smartphone sales that year were just 122 million units as per third-party estimates, and they took off big time in the coming years before hitting last year's figure. In simpler words, Apple now operates in a mature market where growth is going to be slow. Unity Software, meanwhile, is currently standing where Apple was 15 years ago.

Third-party research estimates that the virtual reality (VR) content creation market is growing at a compound annual rate of 77%, and it could hit $46.5 billion in revenue by 2026. And Unity is already on its way to making the most of this lucrative opportunity.

Unity is pulling the right strings

The growing demand for interactive, real-time 3D content is already driving terrific growth at Unity Software. More importantly, the company is building a sticky customer base that should help it make the most of the massive revenue opportunity that lies ahead of it.

For instance, the number of customers contributing $100,000 or more in revenue to Unity over the trailing twelve months jumped 33% year-over-year in the fourth quarter of 2021. Additionally, Unity's dollar-based net expansion rate stood at 140% during the quarter, up from 138% in the prior-year period. This indicates that Unity customers are spending more money on its offerings.

It is also worth noting that Unity reportedly controls half of the video game engine market, the space where the company earned its chops by helping game developers create interactive 2D and 3D worlds. The metaverse is expected to unlock another massive opportunity for the company, as its solutions can be applied to this emerging tech trend to create virtual reality content.

This would be in addition to the video game engine market, which is expected to clock nearly $6 billion in revenue by 2027, compared to $2.2 billion in 2019.

In the end, Unity Software is on the verge of a new revolution in technology right now, just like Apple was when the smartphone revolution took off. And given the utility that Unity's solutions will bring to markets such as the metaverse and virtual reality, it wouldn't be surprising to see this tech stock become the next Apple.