What happened

With investors obsessing over artificial intelligence stocks in 2023, it's starting to feel like the metaverse and virtual reality are all last year's news. Nevertheless, metaverse and virtual reality stocks still exist, and one of them reported earnings yesterday: Unity Software (U -9.51%).

And fingers crossed, but so far so good. Investors seemed to like the news, and as of 10:30 a.m. ET, Unity Software stock is up 11.5%.

So what

So what's driving Unity Software higher today? In two words, it's sales growth.  

In its shareholder letter filed with the Securities and Exchange Commission (SEC) yesterday, Unity reported 56% year-over-year growth in revenue to $500.4 million, which was precisely what analysts had forecast. Profits, however, deemed to disappoint. According to Yahoo! Finance data, Unity was "supposed" to report only a $0.03-per-share loss for the quarter (be aware that this may have been a pro forma figure). Instead, Unity put its per-share loss at $0.67 per share -- 12% worse than a year ago, and so probably not a great reason to buy the stock.    

Arguably, the news is even worse than that, though.

Proceeding through the company's cash-flow statement, it seems Unity flipped entirely from generating strong cash flows in the first quarter of 2022 ($101.3 million) to burning cash in Q1 2023 ($5.1 million). Factor in capital spending, and total free cash flow for the quarter was negative $19.5 million.

Now what

Should investors expect anything different as this year progresses? Well, in its shareholder letter Unity actually predicted accelerating sales growth -- yet another reason investors may be getting excited today -- albeit growth may trail off a bit later in the year. With Q2 sales forecast at somewhere between $510 million and $520 million, Unity is predicting that growth will jump from 56% last quarter to as much as 75% this coming quarter. For all of 2023, Unity sees sales growth running somewhere in the 50% to 58% range, so that the year will end with sales between $2.1 billion and $2.2 billion.

No word yet on whether Unity will be profitable (or generate cash) on that revenue. Management is only forecasting its adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) to be positive $250 million or more. But investors didn't seem to mind the big generally accepted accounting principles (GAAP) loss or the negative free cash flow in Q1. Perhaps they won't mind if Unity keeps losing money and burning cash later in the year as well?