Why This Gaming Company Expects 35% Growth in 2022

Unity Software's (U 3.47%) stock has taken investors on a ride since its IPO. In this clip from "IPO & SPAC Show" on Motley Fool Live, recorded on April 11, Motley Fool contributors Jose Najarro and Jason Hall discuss the game development engine's financials from its IPO date to now, and talk about its aggressive and ambitious scaling model.

Jose Najarro: IPO date was September 17, 2020. I can't believe that was almost a year-and-a-half ago like we mentioned. It started its IPO price at $52 when it started and this was after numerous lifts. I think when they first announced it was somewhere in the low thirties and like every other week, we kept seeing news of stocks keep increasing their IPO price. Eventually, it went from like the mid-low thirties to ending up at $52. I don't believe I have the information of where it actually closed the first day. But for those that are not familiar with Unity, this is a company that deals mainly in the gaming industry as of now. They create game engines. This is, hey, if you're trying to develop a game, you're using Unity. This is also a company that does well if its customers do well. They have some form of revenue sharing to some extent with the creators, with the publishers. If a game does well, it starts to sell more. Unity collects more revenue out of it. At the end of the day, Unity wants to make sure their customers do well, because if their customers do well then Unity does well as well. They have done numerous new acquisitions to increase their toolbox. I believe toolboxes are super important as an investment thesis because it's easier to throw away a tool than to throw away the whole toolbox itself. Unity recently has done numerous acquisitions, Weta, which is to improve its animation products. Parsec is another one that they've acquired that helps with clouding solutions and more of this working from home hybrid mentality. Ziva is one that helps with their artificial intelligence and animation. They continue to add new tools through their toolbox, either from acquisitions or just the engineers developing. Another core highlight that they're doing, they're focusing on real-time 3D simulation. And here, I've mentioned, they're a huge player in gaming but real-time 3D, this is something that can be done in things outside of gaming like robotics, automations, and so much more. Unity shares a yearly report in the gaming market. They call it their Unity Gaming Report. They recently shared one, I believe, last month and they mentioned that publishers on Unity built 93% more games in 2021 versus 2020. Showcasing that, hey, their creators are more likely to build more games on their platform. The second thing that they mentioned is Unity creators are up 31%. Not only are creators making more games, but there's also more creators joining their platform. We can see right now, this was last night, I know this week has been very volatile, just like every other week so this could change, I want to say in the matter of a few days. Right now, Unity has done a little bit better than the S&P. Fourth-quarter results, revenue up nice 43% and their two main markets, Create Solutions up 49%, Operate Solutions, 45%. Another cool metric I wanted to show is net expansion rate is 140%. I want to say this is pretty impressive. Not many software companies with that expansion rate at the moment and we can see they are growing in customers almost, I believe, a 30% year-over-year growth in customers that make over a $100,000 in trailing 12 months revenue. Unfortunately, this company is not positive in free cash flow. At the moment, it's burning about $53 million a quarter. But they do have about $1.1 billion in cash in short-term investments and they also believe that within the next year or the next year-and-a-half, they should be positive in cash flow from operations. Definitely pretty cool where Unity has gone since IPO.

Jason Hall: I think it's one of the really interesting companies. Nick, this is something you and I have talked about before. We have companies that aren't profitable or aren't cash-flow positive just because their business model really can't be and then we have the ones like Unity that are choosing to take an aggressive model of spending on operations to grow their scale and you look at the business and it's evident that it's working like that net expansion rate, the growth of the number of customers, the growth of the number of customers spending large sums of money. All of those things add up and, Jose, the one that was in the middle, that operate segment, I think it's so important because that one to me, aligns Unity with its customers because that's the platform that they are using to operate their games on. Unity gets a cut of that and it gets recurring revenue for that and it's important that they provide great tools to their customers.