The stock market has performed poorly so far this year, with major indices losing significant value on account of several headwinds including surging inflation, potential interest rate hikes by the Federal Reserve, and the geopolitical instability in Europe.
The tech-heavy Nasdaq-100 Technology Sector index has lost nearly 13.7% of its value this year, with many big names in tech slipping substantially. Unity Software (U -2.80%) is one of them, losing 26% of its value so far this year. But Unity's products and services are likely to remain in solid demand for years to come, which is why it should be able to sustain its outstanding pace of growth in the long run.
Let's look at the reasons why Unity Software stock is a solid bet right now following its sharp pullback in 2022.
Image source: Getty Images
Unity Software is growing at a terrific pace
Unity Software is benefiting big time from the growing demand for real-time 2D and 3D content. Primarily known for its Unity gaming engine, which controls a 48% share of the video game engine market -- which is expected to hit $3.65 billion in value by 2024 -- Unity Software is already operating in a lucrative space.
This is evident from the company's 2021 financial results, which revealed a 44% increase in revenue to $1.1 billion. Unity had also reduced its non-GAAP net loss for the year to $0.22 per share from $0.39 per share in the prior year. Unity's guidance suggests that it is on track to clock another year of terrific growth.
The company sees its revenue increasing 35% this year to $1.5 billion. What's more, analysts expect Unity's revenue to increase nearly 30% in 2023, and the company is also expected to turn profitable on a non-GAAP basis next year. All of this isn't surprising given the growing size of the video game engine market. But this is just one of the reasons why investors should consider buying Unity for the long run.
The metaverse provides the perfect opportunity for Unity Software to go supersonic. That's because Unity's real-time 3D content development and operation platform can be deployed across several industries, such as automotive and transportation, architecture and engineering, aerospace and manufacturing, and retail, among others.
The metaverse will bring the physical world into a three-dimensional virtual world that can be accessed in real-time by an unlimited number of users, where they can work, play, socialize, and learn, among other things. Unity can play an important role in making the metaverse a reality, as the company is in the business of creating real-time 3D content already.
This explains why it is witnessing a sharp increase in revenue from non-gaming applications. Unity's non-gaming business jumped more than 70% in 2021, producing 25% of the company's revenue from the Create segment, compared to 20% in 2020. The Create business generated $327 million in revenue last year, growing 41% from 2020, indicating that the demand for Unity's non-gaming applications is gaining traction.
Unity management pointed out on the company's February 2021 earnings conference call that Hyundai Motors is using the company's solutions to create a digital twin of an actual factory in a bid to enhance plant productivity and improve the manufacturing process. Meanwhile, eBay is also using Unity's offerings to help sellers showcase items in an immersive format using an interactive 360-degree view.
Management also points out that car companies in Japan, China, and Germany are using its real-time 3D content capabilities. All this indicates that Unity is on its way to tap the massive end-market opportunity that lies ahead of it. Management forecasts that the company is sitting on an addressable market worth $45 billion, which is a big increase from the $29 billion market opportunity management was anticipating at the time of its initial public offering in September 2020.
Given that Unity generated just over $1 billion in revenue last year, the company is scratching the surface of a tremendous opportunity. This makes Unity Software an enticing growth stock to buy right now, especially considering its relatively cheap valuation.
Why now is a good time to buy the stock
Unity Software stock is trading at 26 times sales. While that's rich, investors should note that the stock was trading at 58 times sales in 2020 and 40 times sales last year. So investors with a higher risk appetite who are looking to buy a growth stock should consider buying Unity right now given its relatively cheap sales multiple and the huge growth opportunity that lies ahead of it.
After all, Unity's earnings are expected to increase at a compound annual growth rate of nearly 70% for the next five years as per analysts, which is why it would make sense to use the pullbacks in the company's stock price as buying opportunities.
