For several years, Unity (NYSE:U) has been a household name in the video game software development industry, but recently it has diversified. In this segment of “The Gaming Show” on Motley Fool Live, recorded on Feb. 7, Fool contributor Jose Najarro discusses the company’s focus on innovation and expansion into other businesses outside of the gaming world.
Jose Najarro: I do believe Unity is strong, especially because they are heavily focused on innovating. Every quarter they either bought a new company to increase their tools, or they’re focusing on bringing new tools to their platforms, like I have mentioned, they have strong net expansion rates and they are improving their margins. Like we saw, non-cat loss, originally last year was closer to the teens, now is closer to the low single-digits, so margins are improving.
There is huge growth potential for this industry, especially in the non-gaming. The transition from 2D to 3D, from non-real-time to real-time, this is something a lot of autonomous problems are going to be using. Finally, from non-interactive to interactive, we’re talking a lot about digital avatars lately, about how maybe some of these digital avatars are going to come to the consumer market. That’s where you need that non-interactive to interactive.
They’re also hitting numerous markets for gaming. Like I mentioned, e-commerce, automotive, architecture, media, entertainment, and many other sectors. Some of the risks. Obviously, I talked bullish of the company I do own, but there’s always, it’s good to understand what could go wrong.
First, to some extent, this is a high-growth stock. Normally with high-growth stocks, you get a high valuation. In theory, with those high valuations, if there’s a slip up in the quarter, stock price could definitely take quite a hit. At the moment it’s non-profitable. Definitely, something to not overlook. But like I mentioned earlier on, they do have a healthy cash balance sheet and they are expected to be non-GAAP basis profitable by 2023. Still, at the moment, they’re non-profitable.
This is a company that does do numerous acquisitions. Those acquisitions, depending on how big they can be in the future, could probably deteriorate the balance sheet. Most of the acquisitions that they’ve done so far have been very small, they don’t really affect, in my opinion, the balance sheet. But the way they are going, who knows, maybe next year this quarter they might buy something big.
This is also a company that focuses is very high on research and development. This is a very innovative market. You need to put your money in research and development. That’s very dependent. Again, that’s not something that scares me. I enjoy investing in companies that are innovative and usually with companies that are innovating, they’re usually ones that come with that risk of higher research and development.
Finally, if there’s ever a slowdown in the gaming market for, who knows what reasons or outside the gaming market, that can obviously be a slowdown on that growth which can go affect the overall high valuation for the company. Quick highlights, I enjoy Unity, I’m happy with earnings. I’m happy with the expanding, its reach into the non-gaming market and still being a strong player in the gaming market itself.
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Jose Najarro owns Unity Software Inc. The Motley Fool owns and recommends Unity Software Inc. The Motley Fool has a disclosure policy.