Unity (NYSE: U) | Into The Metaverse

Updated: Sep 15

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Key Points

  • Unity is a software development company mainly serving the gaming and mobile advertising industry

  • The management has a combined total stake of 12.23%, ensuring alignment of interests between the management and shareholders

  • Revenue has grown significantly, increasing at a CQGR of 9.4% from 1Q18 to 1Q21

  • Robust gross margins of 75% and strong current ratio of 4.1

  • MAU ballooned to 3.0 billion as of 1Q21, rising by 11.1% QoQ

  • It is expanding into industries beyond gaming (E.g., Extended reality, automotive, engineering and construction), significantly expanding its total addressable market

  • Rich value proposition to stakeholders promotes positive flywheel effect

  • VR & AR advantage presents significant optionality

  • Highly scalable recurring revenue business with attractive unit economics

Company Overview

Founded in 2004, Unity Software Inc (Unity) is an American software development company. The company is the world’s leading platform for creating and operating interactive, real-time 3D (RT3D) content. The company is popular for its game development and some of the established mobile games created with Unity’s solution include Pokémon GO, Call of Duty: Mobile, Beat Saber and Cuphead. Apart from game developers, its other users range from architects to automotive designers, filmmakers and more.

Revenue Segments

Unity monetises primarily through three segments: Create Solutions, Operate Solutions and Strategic Partnerships & Other Revenue. The business segments complement one another, with the subscriptions for Create Solutions providing upsell opportunities in Operate Solutions.

Create Solutions

The Create Solutions enable creators to easily develop, edit and deploy interactive, real-time 2D and 3D content. Unity also offers professional services to larger enterprise customers, such as assisting them in creating content and applications, which are largely based on fixed-fee contracts.

Unity uses a subscription model to monetise its Create Solutions. Depending on their needs, there are various plans that the customers can choose from (See table below). These solutions are mainly targeted at customers with more than $100,000 in annual revenue or funding. Customers include developers, artists, designers, engineers and architects.

In addition, Create Solutions software enables customers to create their content once and deploy it to over 20+ platforms, eliminating the hassle of writing platform-specific codes.

Operate Solutions

Operate solutions enable customers to grow and engage their end-users and to run and monetise their content. The solutions aim to optimise end-user acquisition and operational costs while increasing the lifetime value of end-users.

Unity’s Operate Solutions have two monetisation routes - revenue-share and usage-based (See table above). Almost all of the Operate Solutions can be utilised regardless of whether the content was created with Create Solutions.

Strategic Partnerships and Other Revenue

Unity enters into strategic contracts with companies such as Apple and Google to customise software licenses to enable interoperability with these platforms. This allows Create Solutions customers to build and publish content on multiple platforms without having to write platform-specific code. For instance, Unity partnered with Google, allowing customers to publish their games on their cloud gaming platform, Google Stadia. Unity earns royalties based on the sales of its products that incorporate or use Unity’s customised software.

In addition, Unity generates other revenue from the share of sales generated from their Asset Store. The Asset Store is a marketplace and aggregator for software, content and tools used in the creation of real-time interactive games and applications.


Unity was founded in 2004 by Chief Executive Officer (CEO) David Helgason, Chief Creative Officer (CCO) Nicholas Francis and Chief Technology Officer (CTO) Joachim Ante. In 2013, CCO Nicholas Francis left the company to pursue game development and in 2014, David Helgasonstepped down from his role as the CEO to be the company’s Executive Vice President in charge of strategy and communications. John Riccitiello, the former CEO of Electronic Arts, took over the role of Unity’s CEO.

Currently, Co-founder Joachim Ante has the highest ownership among the management team with a stake of 10.6%. The combined total ownership of the management is at 12.2%, ensuring that the management and shareholders’ interest are aligned.

Industry Overview

Video Games Industry

Video games are a billion-dollar business, with the global video game market size estimated to be around US$154.6 billion in 2021. According to Statista, the video game industry is projected to grow at a CAGR of 9.1% from 2021 to 2025. The video game industry is poised to benefit from the tailwinds of the pandemic restrictions, with a secular shift in trend as end-users demand home entertainment. In particular, mobile games are the most popular form of video games, making up about ~70% of the video game market. It is expected to continue thriving, growing at a CAGR of nearly 10.0% from 2021 to 2025.

Extended Reality Industry

Extended reality (XR) is an umbrella term to encompass Virtual Reality (VR), Augmented Reality (AR) and mixed reality (MR).

  • Virtual Reality - relies on a special headset to fully immerse users in a computer-simulated reality. Inside the headset, users experience an interactive virtual world through the realistic sounds and images generated.

  • Augmented Reality – relies on a device such as smartphones, using the cameras to overlay digital graphics and sounds into a real-world environment.

  • Mixed Reality – blends real and digital worlds, creating an environment where physical and digital elements can interact in real-time.

Boston Consulting Group and Mordor Intelligence reported that the XR market is predicted to be approximately US$30.7 billion in 2021 and projected to balloon to US$296.9 billion in 2024, growing at an impressive CAGR of 113.1%.

Mobile Advertising

The mobile advertising industry has grown exponentially due to the mass adoption of smartphones, improvements in technology and effectiveness of mobile advertising. With nearly half of the entire population owning a smartphone, this makes mobile advertising a preferred form of expanding audience reach. The global mobile advertising market is forecasted to swell to US$248 billion dollars in 2022.


According to Unity, the company’s game engine primarily competes against proprietary game engines built-in-house by large game studios, Unreal Engine (Epic Games) and Cocos2d (Chukong Technologies). Epic Games could be considered its biggest competitor as they are both serving similar industries (PC Games, mobile games and industries beyond gaming).

DeltaDNA, a subsidiary of Unity, conducted a study in 2020 surveying a broad range of game developers to find out the trends of the mobile gaming industry. From the chart above, it is evident that Unity game engine is the preferred software to develop mobile games, commanding a significant share of 61.0% among the respondents.

As for the mobile advertising industry, Unity competes mainly against Google Admob, Facebook Audience Network and AdColony.

Unity’s mobile advertising platform is the second most preferred provider, having a share of 34.0% among the respondents. This demonstrates the strength of its platform, trumping Facebook Audience network share of 23.0% and not far behind Google Admob share of 42.0%.

Financial Highlights


Unity’s revenue has been consistently growing over the years, clocking a figure of US$234.8 million in 1Q21, representing a growth of 9.4% CQGR from 1Q18 to 1Q21.

The Create Solutions segment has been growing at a CQGR of 8.8% over the past 12 quarters. Growth took a hit in 1Q20 as pandemic restrictions hindered sales cycles, resulting in segment revenue slowing down by 2.8% QoQ to US$46.7 million. However, the impact was short-lived and 2Q20 Create Solutions revenue rose by 18.0% QoQ to US$55.1 million and has been growing steadily since.

The Operate Solutions segment has been growing at a CQGR of 11.3% over the past 12 quarters. Unlike the Create Solutions segment, COVID-19 provided tailwinds for the Operate Solutions segment as end-users engaged more with Unity-built games, resulting in revenue uplift from heightened ad spend and usage-based services.

Operate Solutions contributes the most to the revenue, ostensibly due to the effective monetisation of its huge 3 billion-strong end-user base.


Unity’s gross margins have been consistently strong, hovering at around 75.0% ~ 80.0% from 1Q18 to 1Q21. In spite of the healthy gross margins, the company is still operating at a net loss mainly due to elevated spending on Sales and Marketing (S&M) as well as Research and Development (R&D)

R&D and G&A spiked in 3Q20 mainly due to the restricted stock unit expense recognition associated with the IPO, as well as a one-time charge related to the charity donation of 750,000 shares of common stock. Since then, R&D and G&A margins have slightly recovered but dipped again in 1Q21. This dip was primarily influenced by the increased expenses due to vesting of the Restricted Stock Units coupled with the expanding headcount. Moving forward, operating expenses are likely to remain volatile as they are still in a high-growth stage.

Liquidity Ratio

Unity’s current ratio has been generally healthy, standing at 4.1 as of 31 Dec 2020. The ratio went down from 1.7 in FY18 to 1.0 in FY19 as they are currently still in the growth stage, heavily acquiring customers and expanding the team, resulting in negative operating cash flows for both years. In FY20, Unity completed its IPO, which resulted in an injection of cash that lifted the current ratio to 4.1. With a current ratio of 4.1, this should enable the sustainability of its cash position for the near future.

Cash Flow

Unity’s operating cash flow has been on an uptrend since FY18, turning positive in FY20. The negative operating cash flow in FY18 and FY19 was largely attributable to the huge net loss incurred. In FY20, the positive operating cash flow was primarily influenced by the stock-based compensation and a one-off stock donation expense, which were given out during their IPO.

Investment Thesis

Thesis 1: Strong value proposition to stakeholders promotes positive flywheel effect

Network effects continue to expand customer base

Unity boasts a large community of approximately 1.5 million monthly active creators that developed over 8,000 games and applications per month for its fiscal year 2020. Furthermore, the creators are highly engaged, spending about an average of 5.2 hours per day using the platform.

Unity’s platform is able to attract creators to use their Create Solutions due to its value proposition of convenience, cost and time savings. The platform enables customers to create their content once and deploy it to over 20+ platforms. Going back to around 5 years ago, there were not many good engines available to develop AA or AAA games, resulting in gaming studios building their in-house proprietary engine. As stated by Unity’s CEO John Riccitiello, it could take years for the studio to create their game engine and games, and often result in a negative return on investment for most developers to build their own technology. That being said, Unity provides developers with the tools needed to create gameplay and to deploy the games and content across multiple platforms without having the need to write platform-specific code. Hence, Unity’s software is able to save money and time for developers.

Expanding creators through acquiring small businesses, students and hobbyists

Additionally, Unity is expanding its creator base by acquiring small businesses, students and hobbyists by giving them the license for free. As long as the entities have less than US$100,000.0 of revenue or funds raised in the prior 12 months, they are eligible to use the Unity Personal/Unity Student solution. This benefits Unity as more consumers will be accustomed to Unity’s Create Solutions and over time, customers might upgrade to its paid products and services, generating revenue for the company. Additionally, this enhances Unity’s product stickiness as there is a considerable learning curve to game engines. Apart from that, the free users also serve as ambassadors for the company by creating word-of-mouth advertising for its products and services.