Unity Software (NYSE:U), which operates a gaming development platform, pulled off a successful IPO. Shares were priced at $52 for the Unity IPO on Friday and shares are currently up more than 20%, trading at $84.
This came after the company raised its price range from $34-$42 to $44-$48, indicating substantial demand. No doubt, the deal capped off a huge week for new offerings, as seen with offerings deals like the Snowflake (NYSE:SNOW).
Keep in mind that Unity is no upstart, as the roots of the company go back to 2004. The founders, which were based in Copenhagen, included David Helgason, Nicholas Francis and Joachim Ante. They initially developed a game, called GooBall, that failed. But through this process, the founders realized there was an opportunity to build a platform to help with game development.
And key driver was the release of the Apple (NASDAQ:AAPL) iPhone in 2007. The founders were smart to go all-in on this opportunity and it has certainly paid off in a big way.
The Platform
At the core of Unity is the ability to easily create immersive 3D virtual objects and environments. The technology is targeted at game developers, designers, artists, architects, filmmakers and auto designers.
The Unity platform has two main parts. First, there is Create Solutions, which is the development environment. It can create content that is rendered up to 120 photorealistic images per second. There is also the ability for live-edit and extensive collaboration.
Then there is Operate Solutions. With this, it is possible for customers to grow and engage their user base. There is also the ability to improve monetization of content and optimize user acquisition.
In terms of the business model, Create Solutions relies on a monthly subscription. And as for Operate Solutions, there is a revenue-share that’s based primarily on usage. Note that about 64% of the revenues come for Operation Solutions.
The Market
Consider that Unity has extensive market penetration, especially in the gaming category. Each month there are more than 3 billion downloads from creators and there are over 1.5 billion unique devices. Unity is deployed across tablets, PCs, consoles and AR (augmented reality)/VR (virtual reality) systems in more than 190 countries. In fact, as of last year, the company’s technology powered about 53% of the top 1,000 mobile games on iTunes and Alphabet’s (NASDAQ:GOOGL,NASDAQ:GOOG) Play.
Building all this has taken more than $450 million in research and development. There has also been a variety of acquisitions, such as for Applifier, deltaDNA, Finger Food, Multiplay, and Vivox.
As for the growth ramp, which is one of the biggest factors for whether to invest in the Unity IPO, it has definitely been robust. For the first half of this year, revenues jumped by 39% to $351.3 million.
It’s true that a majority of the business for Unity comes from the gaming business. But there is also an attractive opportunity in other markets, such as for engineering, architecture, construction, transformation, retail and so on. When taken together, Unity estimates that the total addressable market for its software is $29 billion.
Bottom Line On the Unity IPO
The recent dispute between Epic and Apple is likely to be a catalyst for Unity. Epic operates a large game development platform, but customers may be looking elsewhere because of concerns about the portability to the iTunes platform.
So yes, Unity’s position does look pretty good right now, and so do the long-term prospects. But then again, it is still important for investors to have some caution. The IPO market is looking a bit frothy right now, as valuations appear to be stretched. And, with the upcoming election, there could easily be more volatility. This is why if you are thinking of investing in IPOs, regardless of the quality of the company, the recommended approach is to focus on the speculative portion of your portfolio.
On the date of publication, Tom Taulli did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.
Tom Taulli (@ttaulli) is an advisor/board member for startups and author of various books and online courses about technology, including Artificial Intelligence Basics, The Robotic Process Automation Handbook and Learn Python Super Fast. He is also the founder of WebIPO, which was one of the first platforms for public offerings during the 1990s.
