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Unity Software (NYSE:U) is used to playing games.
That’s not just an expression, but a reality, as the company specializes in «game engine» software that developers use to build their own video games. And if Unity (U) needed to prove its pedigree even further, its chief executive is John Riccitiello, who was a co-founder of media and entertainment investment firm Elevation Partners, and who also spent several years as the CEO of videogame giant Electronic Arts (EA).
But, while gaming may be what Unity (U) is best known for, it is the market for non-gaming uses that presents the biggest opportunity for the company, according to Morgan Stanley analyst Matthew Cost.
Just how big? Cost estimates the total addressable market [TAM] for non-gaming related sales for Unity (U) could be worth $25 billion within five years, as the company is seeing usage for its Create Solutions technology growing in a multitude of industries beyond its core gaming customer base.
Cost estimated that non-gaming-related sales were responsible for 25% of Unity’s (U) $1.1 billion in revenue in 2021, with non-gaming sales growing 70% last year from 2020. By comparison, Create Solutions sales in 2021 rose by 41% from the prior year, to $326.6 million. Cost said the increase in non-gaming business came about «as new types of customers begin to leverage Unity’s (U) interactive 3-D content creation toolset.»
Cost said that Unity’s (U) gaming engine is gaining more «traction» at greater-than-expected rates due to increased use in industries such as digital twins and simulations, manufacturing, architecture and education. Cost noted Volkswagen’s (OTCPK:VWAGY) design process for human-machine interfaces, eBay’s (EBAY) 3-D viewer for sneaker sales, and Paris-based Internet marketing firm Vectuel’s developing of a digital twin of Paris for use in planning the city’s Metro expansion and 2024 Summer Olympics as high-level examples of Unity’s (U) Create platform being used beyond the gaming market.
«The fact that these Create projects are so varied speaks to the flexibility [and] accessibility of Unity’s [gaming] engine,» Cost said, adding that such situations «may suggest that industries outside of gaming are still in the early stages of applying the engine to new use cases.»
Cost said that the $25 billion market opportunity for Unity (U) could actually end up being conservative, as companies with similar software products such as Autodesk (ADSK) and Adobe (ADBE) see their combined TAMs reaching as much as 5 times larger than Unity’s (U). While those companies are larger than Unity (U), Cost said that «there are material areas» where their businesses overlap in the digital content creation market.
When it comes to how Wall Street views Unity (U), the company’s shares currently trade at around $101 each, are down about 4% for the year, and off by more than half from their 52-week-high of $210, which they reached on November 18, 2021.
Still, Cost has an overweight rating and $185-a-share price target on the company’s stock. Cost’s opinion echoed that of Daiwa Capital Markets analyst Jonathan Kees, on earlier in the week started his coverage of Unity (U) with a buy rating and $110-a-share price target due to its technology providing «entre into the metaverse.»
