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1 Growth Stock Down 58% to Buy Right Now

This gaming company can supercharge its growth thanks to the metaverse.

This year has not been kind to stock market investors. The benchmark S&P 500 index is down 8% so far, and the tech-centric Nasdaq 100 has tumbled 15%. But many individual technology stocks are deep in bear market territory, and one in particular warrants some attention.

Unity Software (U -3.27%) is a leading game development platform that is not only growing rapidly right now but faces significant opportunities in new industries like the metaverse. Unity's stock price has fallen nearly 60% from its all-time high amid the tech sell-off, and here's why that's an opportunity for long-term investors.

Image source: Getty Images.

Facilitating digital creations

The gaming industry underwent a major transformation over the past decade amid the soaring popularity of smartphones. Computers used to be the most popular way to play games, competing with high-tech consoles like Sony's PlayStation and Microsoft's Xbox. But mobile games now dominate the market, making up over half of annual gaming revenue globally.

Unity Software offers a suite of low-code tools used by developers to build games, but it doesn't stop there. Its Unity Pro platform is also an end-to-end solution for product management, facilitating in-game purchases, and advertising. In 2021, 50% of all new games across mobile, console, and PC were developed using Unity Software, including 72% of the top 1,000 mobile game titles. 

But Unity's capabilities also stretch beyond gaming. Its tools for film, animation, and cinematics allow creators to collaborate in real time, drastically speeding up time to production. And its industrial segment brings 3D product visualization and rendering to businesses in a range of sectors, adding a new dimension to the design phase. It's facilitated by the Unity Reflect platform, and such 3D creative tools are a gateway to exciting new areas like the metaverse. 

In fact, the company already facilitates both augmented and virtual reality development across its gaming and industrial development platforms. Since the metaverse could be a $30 trillion opportunity over the next decade according to some estimates, Unity is well-positioned to be the go-to resource for creators in the space.

A financial powerhouse

In 2021, 3.9 billion people consumed content that was created using Unity every month. That's almost half of the entire planet, so it's no surprise the company has experienced rapid growth. 

Its revenue growth is driven by its largest customers, those who spend over $100,000 annually. Historically, they've made up over 70% of Unity's sales, and therefore it's important to focus on how many of them Unity is attracting each year. These developers appear to be flocking to the company as their number has more than doubled since 2018.

Metric

2018

2021

CAGR

Revenue

$381 million

$1.1 billion

43%

Top-spending customers*

484

1,052

30%

Data: Unity Software. *Top-spending customers are defined as those spending over $100,000 each year. CAGR = compound annual growth rate. 

The company believes this pace of growth will continue in 2022 with up to $1.5 billion of revenue in the cards. And while Unity is still reporting net losses, it's expected to trend toward profitability in the coming years. After losing $0.56 per share in 2021, analysts expect that figure to narrow to $0.18 in 2022 with a breakeven result possible in 2023.

Why Unity stock is a buy now

94% of game development studios already use Unity Software, so that might lead you to think there's little room for growth. But the company had a dollar-based net expansion rate of 140% in 2021, which means its existing customers spent 40% more with Unity than they did during 2020. That's powerful organic growth. 

Additionally, new opportunities like the metaverse are going to unlock trillions of dollars of value for the developers of virtual experiences, and that might be spread across the gaming industry, social media, and even the corporate world. Many of those entities will need the tools Unity provides, so there could be an entirely new cohort of customers on the horizon. 

Companies as dominant as Unity in their respective industries are rare, and it's not often that you can pick up their stock at a 58% discount to their all-time highs. Now is a great time to buy in with profitability coming around the corner and the scale of new opportunities. Over the long run, today's price will probably seem like a bargain.

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