Unity Technologies landed a fresh ‘buy’ rating and a $126 price target from Goldman Sachs on Monday.
Analysts led by Christopher D. Merwin, CFA, initiated coverage on the San Francisco-based software developer with a positive outlook based on the ongoing “democratization” of the gaming industry.
The analysts called Unity’s software a “design platform for the masses” and argued there has been a “structural shift in the way that video games are created.”
In the past, it was difficult for third-party game developers to bring a quality product to market in order to compete with bigger developers, according to Goldman analysts. Now though, companies like Unity are offering game engines that allow third-party developers to compete with industry competition.
“The primary barriers to entry in the space were the costs associated with wide-range distribution, customer acquisition, and the development of advanced game engines,” said Christopher Merwin, CFA in a Monday note to clients.
Unity’s platform offers a third-party game engine as well as a customer acquisition and monetization platform which allows smaller studios to capture significant industry revenues.
Evidence of the success of Unity’s third-party development model can be seen in its dominance of the mobile gaming industry.
Goldman analysts said Unity holds 50% market share in mobile gaming, and according to Unity’s 2021 gaming report, 61% of free-to-play mobile developers created their game with Unity’s engine in 2020.
Goldman analysts were bullish on the potential of mobile gaming in particular because of the sector’s growth rate. According to data from Newzoo, mobile gaming growth is expected to hit a compound annual growth rate of 12% from 2019 to 2023, the highest rate for any gaming sector over the next few years.
Unity has a $29 billion market for its software, and analysts note the company is still in the “very early days of extending its platform into non-gaming verticals, adding more option value for long-term growth.”
Unity reported $772.4 million in revenues in 2020, but the company lost $0.39 per share as it continued to spend on research and development.
The stock trades at a premium of 38x sales, but analysts remain bullish on the name. Unity boasts 12 “buy” ratings, one “neutral” rating, and zero “sell” ratings from analysts.