Shares of Unity Software (U -1.90%) are still down by more than 75% in 2022, but the company's third-quarter results brought a sense of relief to investors. From a starting point that was near its all-time low, the stock surged by 29% on Nov. 10 as Wall Street cheered the strong quarterly report the company released after the close on Nov. 9.
Unity, which owns the leading design engine and platform used by developers to design video games and other 3D digital content, witnessed an uptick in its growth last quarter. More importantly, management's outlook was solid, and indicates that demand for its 3D content-creation services is gaining traction in industries beyond gaming, which could unlock massive growth opportunities for the company.
Unity Software has regained its mojo
Unity Software's revenue increased by 13% year over year in Q3 to $323 million, coming up short of analysts' consensus estimate of $326 million. But its top-line growth accelerated compared to the second quarter, when its revenue was up 9% year over year, suggesting that its business is shifting into a higher gear. The company's adjusted net loss of $0.14 per share, though wider than the prior-year figure of $0.03 per share, was a shade narrower than the loss of $0.15 per share that Wall Street had expected.
Unity's "Create Solutions" business segment, which comprises the tools and services that help content creators, developers, architects, and engineers to make interactive real-time 2D and 3D content, did the heavy lifting last quarter. The segment's revenue increased by an impressive 54% over the prior-year period to $128.6 million, accounting for nearly 40% of Unity's top line.
On the earnings conference call, CEO John Riccitiello said that Unity saw healthy demand for its content creation solutions in fast-growing niches such as "digital twins" -- 3D virtual models that precisely mirror real-world physical spaces or objects. The company is pushing the envelope further in the digital twin space with its cloud-based solution that will allow users across multiple industries to create real-time 3D solutions. Its platform is currently in the testing phase, but it could become a big money spinner for the company: The digital twin market is expected to grow at an annualized rate of nearly 34% through 2027.
Meanwhile, Unity says that the problems it was facing in its "Operate Solutions" segment are now behind it. That segment's revenue was down 7% year over year in Q3 to $171.7 million, but its 8% sequential revenue growth suggests that things are getting better. The Operate business is focused on services that allow users to monetize their content through advertisements. The good news is that Unity is witnessing higher spending by customers in the Operate Solutions segment and the adoption of its offerings by new publishers.
And now that Unity has completed its merger with app monetization company ironSource, the Operate Solutions business could get a nice boost. The impact of that merger, which closed this month, will be evident in Unity's financial performance from the current quarter. Its revenue is expected to increase by between 35% and 41% year over year to $425 million to $445 million, including the contribution from ironSource. For the full year, management forecasts approximately 24% revenue growth to $1.38 billion.
The new year could bring a big turnaround for the stock
Unity Software's stock has experienced a brutal sell-off in 2022, but 2023 could be a different story. Analysts expect Unity's growth to accelerate next year, with its top line jumping by roughly 57% to $2.16 billion. They also expect the company to swing to a profit of $0.15 per share from an estimated loss of $0.39 per share in 2022.
More importantly, analysts expect that Unity will sustain that momentum in 2024.
U Revenue Estimates for 2 Fiscal Years Ahead data by YCharts
Even better, analysts anticipate nearly 150% annualized earnings growth from Unity over the next five years, which isn't surprising given the lucrative markets the company could win business from. Yet it is trading at 7.8 times sales as compared to last year's expensive sales multiple of 40. Investors may want to act before the price heads higher, because all of this makes Unity Software a top tech stock to buy right now.
