Unity Software Looks Poised to See a Very Strong IPO

Unity can pitch itself as both as a gaming play and a high-growth software play.

With Wall Street currently in love with both high-growth gaming companies and high-growth software companies, investor sentiment would really have to take a turn for the worse for Unity Software not to see a strong debut.

Unity, which offers a widely-used game engine/development platform that bears the company's name, is going public on the NYSE under the symbol U. The company asserts in its IPO prospectus that 93 of the 100 biggest game studios are its clients, and that over half of all mobile, PC and console games were made using its platform. The platform is sold on a subscription basis, as are a slew of complementary products.

Unity has expanded into offering tools meant to help various non-gaming firms -- everyone from automakers, to movie/animation studios, to architecture, engineering and construction (AEC) firms, to AR/VR app developers -- create 3D content.

And notably, the company offers game developers that use its platform tools for supporting multiplayer gaming, engaging with a game's users and monetizing games via ads and in-app purchases (it refers to these things as "Operate Solutions"). Electronic Arts (EA) , Take-Two Interactive (TTWO) , Ubisoft and Tencent are among Unity's Operate Solutions clients.

Revenue rose 42% in 2019 to $541.8 million, and was up 39% during the first half of 2020 to $351.3 million. Operate Solutions made up 62% of 1H20 revenue and was up 58% annually, while game and content-creation tools (referred to as Create Solutions) made up 29% of revenue and were up 31%.

All of that Operate Solutions growth helped Unity's dollar-based net expansion rate -- a closely-watched metric among SaaS investors that tracks how much revenue a company got in a period from all the customers that were around a year earlier -- clock in at an impressive 142%. It also helped Unity grow the number of customers generating more than $100,000 in annual revenue by 39% to 716.

Put all of this together, and Unity has a story to sell on its IPO roadshow that's almost tailor-made for the current environment. It's a mobile, PC and console gaming play with a blue-chip customer base; it's a SaaS play with an impressive net expansion rate; and it can also claim exposure to fields such as mobile ads, 3D animation and AR/VR content.

Perhaps the only way Unity would be more tailor-made to whet the appetites of growth tech investors and Robinhood traders was if it also owned an electric car factory and sold furniture online.

There are still admittedly a few things that might dampen enthusiasm for Unity's IPO a bit. Specifically:

1. It's still generating losses, thanks in part to massive R&D investments. Unity posted a $54.1 million net loss during the first half of 2020, and its free cash flow was negative $34.7 million.
2. The rival Unreal Engine (owned by Fortnite developer Epic Games) is also registering healthy growth. In May, Epic showed off an impressive demo for the next-gen version of Unreal Engine (UE5), and it stepped up its efforts to win over smaller game developers by announcing that developers won't have to pay game royalties on their first $1 million in gross revenue.
3. As Unity cautions in its prospectus, Apple's (AAPL)  efforts to make it easier for users to keep their activity from being tracked across mobile apps could hurt Unity's mobile ad business.

Nonetheless, at a time when gaming activity has inflected and investors have been all-too-eager to bid up the IPOs of high-growth SaaS firms such as BigCommerce  ( BIGC) and Agora ( API) , Unity looks poised to get some very rich post-IPO multiples.