Does Unity Software (U) stock has more room to run?

Last month, the IPO market was in a full swing. IPOs of Snowflake (NYSE: SNOW) and JFROG (NASDAQ: FROG) had an impressive opening day in September, the former creating a record as the most successful software IPO and the latter registering 47% gain on its debut day. Two other companies that got the attention of the stock market were Palantir Technologies (NYSE: PLTR) and Asana (NYSE: ASAN), which became public companies through the unconventional direct listing method.

Unity Software IPO

Let’s analyze the IPO of Unity Software (NYSE: U), a platform developer for designing and operating real-time 3D content, which went public on September 18.

Unity Software offered its 25 million shares of common stock for $52 a share in the IPO. This was higher than its initial price range of $44 to $48 per share. U stock reached a high of $76.79 and ended its first day at $68.35, up 32% from its IPO price.

Overview

Unity was founded in 2004 as Over the Edge Entertainment in Denmark and reorganized as a Delaware corporation in 2009. The San Francisco, California-based company provides software solutions to create, run and monetize interactive, real-time 2D and 3D content for mobile phones, tablets, PCs, consoles, and augmented and virtual reality devices.

Unity operates in the US, Denmark, Belgium, Lithuania, Colombia, Canada, China, Finland, Sweden, Germany, France, Japan, the UK, Ireland, South Korea, and Singapore.

Financials

For the second quarter ended June 30, 2020, Unity reduced its loss to $27.4 million from the loss of $35 million in the year-ago quarter. Revenue rose 43% to $184 million.

The number of customers that generated more than $100,000 of revenue in the trailing 12 months increased sequentially in the recent quarters. The increase was driven by the expanded usage of the company’s solutions by the existing customers.

Also read: Snowflake (SNOW) creates a record as the most successful software IPO ever

Tailwinds

Unity Software hopes to address a total market opportunity of approximately $29 billion across both gaming and other industries. Based on a study conducted by third party strategy consulting firm Altman Vilandrie & Company, Unity had expected market opportunity for its Create Solutions and Operate Solutions to be $12 billion in 2019, growing to over $16 billion in 2025. The company also expects to grow in the industries beyond gaming.

Unity’s close collaboration with Apple (NASDAQ: AAPL) allows its customers to benefit from new functionality and features as well as new platforms and distribution channels, such as iOS, AppleTV and Mac. The company also has got strategic partnerships with Autodesk, Nintendo, Samsung and Sony. Through these strategic partnerships, Unity is expected to benefit in the long run.

Headwinds

Unity Software has experienced net losses in each period since inception. The company experienced a net loss of $163 million and $54 million, for the year ended December 31, 2019, and six months ended June 2020, respectively. The company relies on strategic partnerships with hardware, operating system, device, game console and other technology providers. Any disruption in these collaborations could negatively affect Unity’s customers.

Unity Software competes with Unreal Engine (Epic Games) and Cocos2d (Chukong Technologies), which offer game development tools primarily serving the PC games and mobile games sectors. Outside of gaming, the company competes with other development platforms that offer 2D and 3D design products.

Also read: Palantir Technologies (PLTR) starts trading through direct listing

Stock performance

Shares of Unity Software have advanced 60% so far from its debut price. Last week, D.A. Davidson analyst Franco Granda started the coverage of Unity and set a price target of $100. After their IPOs, the stock prices of the companies will be generally volatile for a certain period of time. Investors can wait for the initial noise to get over and then make a decision.