Unity Analysis_2 Comparison

Product

To get a clearer picture of Unity's product market position, I search some software scores from G2 to make a comparison. This kind of data is not easy to find and I found the sample size is small, so maybe this comparison has bias.?

I compared some 3D content creation software with Unity, and Unity ranks 3rd in Total Score and first in Star Rating, similar to Unreal and lower than Blender. From the user scale, Unity, Blender, and 3ds Max are used by more users, and Unity has the largest user feedback compared with other software. I think Unity's software quality and useful functions are similar to main create software, like Blender and Unreal, and Unity has a large user scale as its success in mobile game developers. Currently, mobile device sales are slowing down, and mobile games still have the highest growth in the video game industry, I think Unity has a good foundation and needs to do more to attract developers for the next success. (I attached the functions score for reference.)

Moving to financial, most of Unity's competitors are not listed on the public market, so it's hard to find financial data to make a comparison. Because Unity's main business is 2D&3D content creation software and ad platform for apps, so I chose some listed companies with similar businesses to compare their financial data. The competitors I selected are Adobe, AppLovin, and Autodesk.

Growth

Unity performed well in growth compared with its competitors, revenue growth is much higher than Adobe and Autodesk, and net profit is negative but continuing to improve. The App ad platform competitor AppLovin's growth is better than Unity's, but its net profit growth has been unstable and stuck.?

I think Unity's growth is not very impressive as its financially meaningless expansion on game service did not contribute to the growth and made Unity still in negative profit. Create software and ad platforms was a good combination that could generate cash flow to support growth. I look forward to seeing a better combination of those two sectors after their reorganization. I believe this is beneficial for Unity's valuation.

Profitability

Unity has the worst margins compared with its competitors. Create software has higher margins than ad platforms, but needs high-quality users with spending power and willingness. Unity's more than half of revenue comes from ad services, so its gross margin is similar to AppLovin and much lower than Autodesk and Adobe. As CAD software and productivity software providers, Adobe and Autodesk have more solid quality customers than Unity, and most users of Unity software do not spend on its platform. Unity needs to focus on the core create functions, not un-profitable plug tools, and keep them advanced, which can help improve its value for big clients who may spend more on the platform. Second, Unity must generate more cash flow from the ad platform, I think this is an achievable goal for Unity.

Considering Unity's core product portfolio, I still believe Unity has more growth and profitability potential than AppLovin in the future.

Turnover

I think all four companies are good at cash management. They all have negative cash conversion cycles with stable operating cash flow generation. From the data, I believe Unity has more advantages in the game app ad industry as it has a much negative number of cash conversions. This is impressive and gives Unity enough money to run its business and can use investors' money to invest in expansion. Of course, if this investment has good returns.

Return

Unity is the riskiest compared to its competitors as it has the highest WACC and still has high losses. AppLovin is not good too as all returns do not exceed its WACC, which means AppLovin still does not generate enough margins to cover its investment cost. Considering there is a possibility of the high-interest period persisting longer, I think it is time for Unity to try hard to realize a better combination of growth and profitability. Maybe the current failure of strategy and management change provides an opportunity for Unity to re-focus on core value, and invest in AR, AIGC, and ad platforms that can meet customers' demand and create more value for them.

Capital Structure

Unity may have not as much insolvency risk as it looks like. Unity has a lower financial leverage compared with AppLovin and Autodesk and the highest quick ratio. I think Unity's capital structure is still solid because of its strong cash position, no interest burden, high cash conversion cycle, and positive free cash flow achieved.

Valuation

Because Unity still does not have profit, I selected EV/Revenue and PB ratio for comparison. After the price crashed, Unity's current valuation is more reasonable compared with its history, and better than its competitors. Unity's multiple is still much higher than the software industry medium line. From the data shown, I think Unity's current price is fair compared with peers with many growth catalysts this year.?

Conclusion

I believe Unity is not a great software investment target because it has low-quality and unstable customers compared with other software companies like Adobe, Salesforce, and Microsoft. But if I want to choose a software company in the gaming sector to carry the video game growth opportunities, I think Unity is a special one with its combined product portfolio, which can create value for game developers and potentially compete with software providers in other industries, like Autodesk. Unity faces stronger competition in the future, but it has a high advantage foundation and many catalysts like re-organization, product re-focus, expense cutting, and positive free cash flow this year. I think it is an opportunity at the current price to consider.