Unity Software's (U -2.31%) game development engine has been used to create over half of the world's mobile, console, and PC games. It streamlines the development process by unifying tools for creating graphics, physics, sound, user interfaces, and other features on a single platform.
With the help of Unity's software, developers can create a game once and launch it across multiple gaming platforms, instead of rewriting the code each time. This time-saving approach makes it much easier to create cross-platform games.
Image source: Getty Images.
Unity also provides tools for integrating ads, in-app purchases, multiplayer features, communication services, and analytics tools into games -- which makes it a "one-stop-shop" for the development and monetization of modern video games. It's also expanding into non-gaming markets like augmented reality, virtual reality, and the production of special effects for TV shows and movies -- which might make it more similar to Adobe (ADBE -1.73%) or Autodesk (ADSK 2.79%) in the future.
With a market cap of $24 billion, Unity is still much smaller than Adobe and Autodesk. But over the next two decades, could Unity's valuation jump more than 40 times and hit $1 trillion? Let's review its growth rates to find out.
Ambitious long-term targets
Unity's revenue rose 44% to $1.1 billion in 2021, and it expects to generate more than 30% annual revenue growth "over the long term." That robust growth will likely be driven by the growth of the video game market, new augmented and virtual reality (AR/VR) technologies and metaverse platforms, and its expansion into the adjacent professional visualization and 3D rendering markets.
The global video game market could expand at a compound annual growth rate (CAGR) of 9.6% between 2022 and 2027, according to Mordor Intelligence. However, the combined AR/VR markets might expand at a stunning CAGR of 40.7% between 2022 and 2030, according to Report Ocean, as more companies develop immersive "metaverse" experiences.
On its own, the metaverse market might grow at a CAGR of 37.1% between 2020 and 2026, according to Research and Markets, as companies like Meta Platforms (META -4.13%) sell more VR headsets and expand their VR worlds. Many VR applications, including the hit Oculus game Beat Saber, were created with Unity.
Meanwhile, the global visualization and 3D rendering software market -- which is also served by Adobe and Autodesk -- could grow at a CAGR of 12.7% between 2021 and 2027, according to Valuates Reports. The firm expects that growth to be driven by the advertising, animation, videography, research and training, and gaming markets.
We should take those long-term estimates with a grain of salt, but Unity might outgrow all of those markets if it maintains or expands its 50% share of the gaming market. It will also likely acquire smaller companies to expand its ecosystem, widen its moat, and maintain its momentum. If Unity grows its revenue at a CAGR of 30% between 2021 and 2030, its annual revenue could nearly hit $12 billion by the end of the decade.
Can Unity keep growing until 2040?
If Unity hits that target and grows at a more modest CAGR of 15% between 2030 and 2040, it could generate $50 billion in annual revenue by the final year. If the stock trades at 20 times sales, its valuation could hit $1 trillion.
However, that price-to-sales ratio would arguably be too high for a maturing tech company with mid-teens revenue growth. For example, Adobe -- which is expected to generate 14% revenue growth this year -- trades at 12 times that estimate. Analysts expect Autodesk's revenue to rise 16% this year, but its stock looks even cheaper at nine times this year's sales.
Granted, rising interest rates, inflation, and the Russian-Ukrainian war have recently compressed those valuations. But even if we assign Unity a price-to-sales ratio of 15 -- which would be more reasonable for a company with 15% annual sales growth -- Unity's market cap would come in at $750 billion. That would fall short of the 12-zero club, but it would still represent a 31-bagger return from its current price.
Look beyond the market caps
Unity might not become a trillion-dollar company within the next two decades, but it still has a great recipe for growth. It dominates the fragmented gaming engine market, and it's expanding its sticky, subscription-based ecosystem with fresh features. It also expects to narrow its losses and break even on a non-generally accepted accounting principles (non-GAAP) basis by 2023.
If Unity leverages its early mover's advantage in the cross-platform game engine space and locks in more AR/VR, metaverse, and professional visualization developers, it could evolve into a software juggernaut by 2040.
