Unity Software (U 4.13%) got some of its mojo back this month thanks to the announcement of Apple's (AAPL +0.17%) latest product -- the Vision Pro. Apple says is a "revolutionary spatial computer that seamlessly blends digital content with the physical world, while allowing users to stay present and connected to others."
Revealed at Apple's recent Worldwide Developers Conference, the Vision Pro is a mixed-reality headset that "lets users interact with digital content in a way that feels like it is physically present in their space." Priced at $3,499, Apple's latest product is expected to go on sale in early 2024. Wall Street analysts looked at the announcement and started to speculate that the Vision Pro headset will need a bunch of solid 3D apps to gain traction among customers.
This is where Unity Software comes into play. Apple has decided to tap Unity's expertise in developing real-time 2D and 3D content. More specifically, Apple is working with Unity to help developers make apps for the new visionOS spatial operating system that's going to power the headset. This could open a massive market for Unity and further accelerate the company's already-impressive growth.
Unity Software is growing rapidly
Unity Software released its first-quarter 2023 results on May 10, and the company's solid performance gave the stock a nice boost. Unity's stock price shot up 35% in the past month, which is not surprising as its revenue jumped 56% year over year in Q1 to $500 million. The company exceeded its original guidance of $470 million to $480 million in revenue.
NYSE: U
Key Data Points
It also posted adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) of $32 million. That was a nice improvement over the negative figure of $23 million seen in the year-ago period. More importantly, Unity sees an acceleration in its revenue in the current quarter. The company forecasts second-quarter revenue of $510 million to $520 million, which would be a jump of 72% to 75% over the year-ago period.
It expects adjusted EBITDA to land at $55 million at the midpoint of its guidance range, which would be a huge improvement over the adjusted EBITDA loss of $38 million it posted in the year-ago period. The company attributes its impressive growth to the growing demand for its Unity gaming engine, as well as the increasing adoption of its advertising and monetization services.
The company generated $187 million in revenue from the Create solutions segment last quarter, an improvement of 14% over the prior-year period. This segment includes revenue generated from the Unity gaming engine as well as the company's strategic partnerships with the likes of Apple, Microsoft, Alphabet, and others, which use its platform to develop content and games.
Meanwhile, the company's revenue from the Grow solutions segment, which includes revenue from advertising, doubled year over year to $313 million. This impressive growth was driven by Unity's acquisition of ironSource, an app-monetization company it bought last year for $4.4 billion. The acquisition seems to be bearing fruit, as evident from the company's Q2 guidance, which points toward stronger revenue growth.
It is also worth noting that the company expects to finish 2023 with $2.14 billion in revenue at the midpoint of its guidance range. That would be a 54% jump over last year's top line of $1.39 billion. Analysts also expect Unity to post a profit of $0.36 per share in 2023 as compared to a loss of $0.39 per share last year. And now, Apple could give Unity another opportunity to accelerate its growth.
That's because the global mixed reality market is expected to clock 42% annual growth over the next five years, according to Mordor Intelligence. The growth is driven by the growing application of this technology in educational institutions, entertainment, and healthcare. Apple could eventually become a top player in this nascent space, and Unity could benefit along with the tech giant.
Terrific growth ahead
We have already discussed that Unity is on track to finish 2023 with outstanding growth in its revenue and earnings. The good part is that the company is expected to sustain its momentum over the next couple of years as well.
U Revenue Estimates for Current Fiscal Year data by YCharts.
What's more, analysts forecast Unity's earnings will increase at an annual pace of 150% over the next five years. However, investors should note that Unity stock is trading at 7.5 times sales right now, which is on the expensive side, considering that the S&P 500 averages a price-to-sales ratio of 2.44.
But Unity Software's potential growth and its partnership with Apple could pay off handsomely in the future, which is why its rich valuation seems justified, and investors looking for a growth stock can consider buying it before it soars higher.
