Is Unity's Partnership With Apple a Game Changer for the Stock?

After Apple (NASDAQ: AAPL) announced its Vision Pro mixed reality headset, many people were impressed by the technology. However, Apple didn't do this project alone. One of its key partners was Unity Software (U 3.47%), which creates top-notch animation software used in gaming and industry. 

Unity's stock has had a troublesome run lately, and is 75% off its all-time highs. However, since this partnership was announced on June 5, the stock is up 21%. So is this an actual turnaround moment for Unity? Or is the stock still unworthy of an investment? Let's find out.

The Apple partnership wasn't a big deal for Unity's management

For those who follow the industry, it shouldn't be a huge surprise that Apple partnered with Unity to provide content. Unity's platform can create lifelike animations and has applications in gaming and industry. Specifically within gaming, it has tools to develop a game on multiple platforms and get ads on developers' games, which can help them turn a profit.

In industry, Unity can help create digital twins, allowing users to create near-identical digital renderings of real-life products.

Unity's software is incredibly powerful and is used in multiple fields, but its latest Apple partnership may not be as big of a deal as it seems. Following Apple's announcement of the partnership, Unity did not issue a press release discussing its latest agreement with the largest company in the world.

You'd think that news like this would be a reason for celebration at Unity's headquarters, but that wasn't the case.

Unity may generate more revenue from this collaboration, but it probably won't move the needle much for the company. But is this stock still worth investing in?

Unity has odd things going on in its finances

Because Unity is a software-as-a-service business, its net expansion rate is a crucial metric to understand. This details how much customers still on the platform spent this quarter compared to last year. It shouldn't be confused with net retention rate, which measures the same spending but also includes $0 into the equation for those who have left the platform entirely.

This figure was a record-low 107% in Q1, which meant customers only spent $107 for every $100 they spent last year. That marks a significant decline from 2022's 121% and 2021's 142% figures, and should worry investors.

Further muddying the water is Unity's merger with ironSource, an app developer platform, which closed in Q3 of 2022. Fortunately, Unity has provided investors with a revenue growth calculation that includes what Unity and ironSource's growth would have looked like if they were one company starting in 2021.

Using that combined revenue, Unity and ironSource's combined growth has looked terrible, despite total revenue growth accelerating over the past year.

Data source: Unity Software. YOY = year over year.

With Unity's revenue only expected to grow 7% in Q2 when the acquisition is accounted for, its sub-par growth will continue. Because of that, investors will need to ignore the massive total revenue growth Unity is expected to put up in Q3: anywhere from 72% to 75% year-over-year growth.

With the stock trading at 9 times sales, it's not particularly cheap either.

So what should investors do? I think it's wise to steer clear of Unity's stock until we better understand how the ironSource merger is going. Once the deal overlaps a year in Q3, investors should know more about how the combined entity is doing.

Although the partnership with Apple is intriguing, it isn't a needle-mover for Unity, and investors shouldn't see it as a catalyst that will turn the stock around.