Unity Files for IPO

Unity Files for their IPO

This week, Unity Technologies filed their S-1 for their upcoming IPO (NYSE:U). They are likely to raise between $600M-$1B at a $10-15B valuation. Their last round in 2019 valued the company at $6B.  

If you’re unfamiliar with Unity, they are a game development platform for the creation of interactive and real-time 3-D content, primarily in video games. Software built with Unity now runs on more than 1.5 billion devices worldwide and is one of the most significant technologies in video gaming. They make money through developer subscriptions and subsequent revenue sharing on games built with Unity. For Unity, 62% of their revenue is through Operate Solutions (Unity Ads, IAPs, Multiplay, Vivox, etc)

Unity Stats:  

• 1.5 million monthly active creators
• 8,000 games and applications are created each month
• Creators spend 5.1 hours per day actively using the Unity platform
• 3,379 employees (56% in R&D) across 44 offices in 16 countries
• 53% of the top 1,000 mobile games are built with Unity

Financials: Unity generated $640M in LTM revenue (+38% y/y), which is more than other tech companies like MongoDB ($463M), Cloudflare ($349M), SurveyMonkey ($343M) or Yext ($315M). Their y/y quarterly revenue growth has been between 35-42% and their LTM gross margin is 80%. Like many tech companies, their operating margin is at -22%. Unity has a net lifetime burn of $569M since inception of the company in 2004.  

Valuation: Looking ahead at the IPO, below is a chart that shows where SaaS multiples are trading at today (bucketed by growth). Unity’s 38% LTM revenue growth sits best in the “mid-growth” category. Therefore (assuming their NTM growth mimics their LTM), this IPO will likely trade between 12-16x NTM revenue. This would price the IPO at a $10-15B valuation (see sensitivity chart further below):

A few reflections:

Unity (strong position): this is a healthy business with an extremely strong market position. In the past two years, they have doubled revenue, kept costs under control, and decreased net loss from 42% to 15%. Today, they sit on $453M in cash with ~$210M in quarterly expenses. Their revenue is also geographically diversified: EMEA (34%), US (28%), APAC (20%), China (12%), Canada/LATAM (5%). Given the macro environment, minimal exposure to China is a good thing for Unity.  

Epic Games (#1 competitor): Unity’s IPO filing is occurring at the same time that Epic Games is in a legal battle with Apple. Epic Games owns Unreal Engine, which is Unity’s main competitor in the video game engine space. Two takeaways: 1) Unity has remained silent amidst this controversy between Epic and Apple, which is unlikely to change given that they support >50% of the mobile games (a lot more to lose than Unreal Engine), and 2) the pricing and interest level of Unity’s IPO will be key to the timing and pricing of Epic Games’ IPO (likely in 2021).  

Apple buys Unity: given the strife with Epic Games, some in the industry are pontificating on whether Apple will make an offer to buy Unity before it completes its IPO. Given the flurry of antitrust issues that this would spawn, I don’t think this is a realistic expectation.