What happened
Shares of Unity Software (U 3.47%) skyrocketed 46.1% in June, according to data provided by S&P Global Market Intelligence. The month started off with fireworks from Apple that are relevant to Unity shareholders. And it ended with a bang related to artificial intelligence (AI), Wall Street's favorite subject at the moment.
So what
To give this story some context, I want to point out that the market had lost a lot of confidence in Unity Software stock. When they first went public, shares regularly traded above a price-to-sales (P/S) ratio of 30. By comparison, they traded below a P/S of 7 at the start of June. That's still high in absolute terms. But in relative terms, this valuation was more than 80% below where it had routinely traded.
Unity's own revenue growth was ample reason for the market's pessimism. And even though its growth has since rebounded, as the chart below shows, this is largely due to an acquisition. Its organic growth is still challenged.
U Revenue (quarterly YoY growth) data by YCharts; YoY = year over year.
But on June 5, Apple announced its upcoming Vision Pro headset, and this has reinvigorated investors' excitement for Unity's potential. Apple is looking for apps to be built for the headset between now and its launch in 2024. And for this, the company has partnered with Unity.
Developers use Unity for building top-notch video games. And Apple has created a software development kit that will allow Unity users to modify their creations for the Vision Pro.
Then on June 27, Unity announced a marketplace for AI applications. The marketplace has 10 apps available at launch that can be used in the video game space. And when the company announced this new focus on AI, the market celebrated by pushing the stock higher.
So the stock started June with low expectations, but Apple and AI have investors rethinking the long-term potential.
Now what
When it comes to the AI space, I'm inclined to disregard most news as overhyped clickbait. But with Unity Software stock, I do believe that AI -- specifically generative AI -- could play an important role for the business.
Many investors like Unity's potential in virtual reality and the metaverse. Its software creates realistic 3D images, and realism is needed to make these experiences something that consumers actually want.
When building digital worlds, the problem is how big these need to be -- it's labor intensive for developers. And the workload is probably too much to physically handle at scale, which is where generative AI can help.
Much of what Unity is doing involves generative AI, which I believe is just what the space needs. So as virtual reality and the metaverse grow -- perhaps thanks to Apple's Vision Pro headset -- the use cases for Unity Software could open up as well. That's good reason for optimism for a stock that's still down almost 80% from its all-time high.
