With the traditional "Just one more thing" moment in the Jobs era,$AAPL CEO Tim Cook introduced Apple Vision Pro, a highly anticipated new VR glasses product, at WWDC on Monday.

Apple Vision Pro headset

Although it is not known how big the market for this product will eventually be, and the pricing of nearly $3,500 may make many consumers give up buying, this technology is really interesting. Vision Pro will allow users to see a larger screen through headphones and will be controlled by eyes, hands and voice, unlike $META The Oculus uses an external hand controller like that.

Quest 2-Etopia

At present, the most mature commercial direction of virtual reality is games, because Apple mentioned at the meeting that it is related to $U Cooperation, the latter's share price rose from the ground on Monday, and even blew once, closing up 17%.

What kind of company is Unity?

Unity is one of the most widely used game engines among mobile game developers in the world. It was established earlier. Since 2004, it has aimed at the creation and operation of real-time 3D interactive content, which provides a foundation for the later construction of various AR and VR interactive experience content. In addition to Apple's iOS, developers can also develop efficiently and conveniently across platforms on Unity, and can create and deploy on more than 20 platforms at one time, including Windows, Mac, iOS, Android and PlayStation $SONY, Xbox $MSFT,$NTDOY Switch and leading AR enhanced and VR virtual reality platforms.

For example,Tencent Holdings The glory of the king was developed in Unity3D.Activision Blizzard The "Hearthstone Legend" client is also developed with Unity3D. These enterprises can maintain rapid development, and the development of virtual reality and augmented reality industries all need Unity3D game engine, which also brings opportunities to Unity.

VR applications usually require high transmission speed for high-definition 3D scene data. With the advent of 5G era, the bandwidth throughput has increased, which also provides the possibility for fundamental changes in products.

What does Unity's business include?

Unity's business has three parts, including Operate Solutions, Create Solutions, and Others, among which the first two parts are mainly.

Among them, Operate Solutions accounts for more than half of the company's revenue, and most of them come from advertising and cloud service revenue. Cloud business mainly uses basic tools to process in-game data, while advertising business adopts the form of accurate push, and the profit method is revenue sharing. The amount of revenue from this accurate delivery mainly depends on the number of customers and the improvement of GMV conversion rate by algorithms.

Developer solutions are mainly game engine software, and Create Solutions is mainly for creators to easily develop, edit and iterate interactive 2D and 3D content in real time.

In addition, Unity provides customers with hierarchical subscription plans (packages are divided according to customer income, solutions at different price points (0-1800 US dollars) meet the needs of users at different stages, and different versions meet the needs of various industries), aiming at meeting the needs of different types of customers.

Other businesses include strategic cooperation with other hardware/gaming machine/equipment manufacturers. Although the overall entertainment and leisure industry environment is currently challenged, for Unity, the recent acquisition of Weta and ironSource is expected to generate additional value for the company, and Weta's tools are expected to start making profits in 2023; In combination with ironSource, Unity has made some gains in mediation and improved the performance of both networks.

How is Unity financially?

Unity's revenue in the past 2023 Q1 was US $500 million, an increase of 56% year-on-year. Excluding the acquisition part, it actually decreased by 2% on a comparable basis, and there was no increase. At the same time, it is estimated that Q2 revenue will increase by 72-75% year-on-year, and increase by 6-8% on a comparable basis. It should be noted that there is a monetization problem in the second quarter of 2022, and the adjusted income may be the same as last year.

Among them, the revenue of developer solutions increased by 14% year-on-year in the first quarter, and the growth rate was 17% excluding the revenue of strategic partners. Unity attributed the slowdown to a shift away from professional services and increased reliance on partners for project implementation. Unity is partly due to a decline in professional services. Unity is reducing the importance of professional services and increasing utilization with partners such as Booz Allen and Capgemini. These partners help customers implement digital twins, Booz is more involved in government projects, and Capgemini works in various industries such as energy. Working with partners will help Unity expand its creative business and enable the company to continue to benefit from high-profit cloud revenue. However, the company's customer churn rate is still low and has improved over time.

The operational service business still faces resistance in the weak macro environment, but it is expected that with the realization of synergy between Unity and ironSource, the growth will accelerate in 2023. For example, the ironSource advertising network is moving to the more advanced Unity ML model, while Unity advertising network adopts ironSource bidding model.

On the customer side, the number of major customers of Unity has been flat or declining in recent quarters. At present, it relies on ironSource to maintain the status quo, which may be more the result of slowing consumption growth than customer loss. At present, the company's residual performance value (RPO) is US $559 million, down from US $620 million last quarter. Software deferred revenue also dropped to about $300 million from $320 million in the previous quarter.

On the profit side, gross margins continue to decline, but this should be reversed as Weta monetizes its business faster. At the same time, the company continues to lay off employees, including reducing the number of management levels, partly because of digesting recent acquisitions and realizing cost synergies.

Is Unity worth buying now?

First of all, whether it is VR, AR or AI, Unity has great opportunities to benefit from it. Generative artificial intelligence will become a great boost to the game industry. Artificial intelligence will make the construction of 3D experience simpler and realize new experiences that cannot be realized at present.

Unity is developing editor tools and plans to open up a market for generative artificial intelligence so that it can benefit from the progress of the whole ecosystem. This includes the Unity Editor and the Unity Runtime.

In addition, Unity has recently raised the price of some subscription services, and the impact of customer churn is really small, which shows that the company has a strong competitive position and high pricing power. In the future, growth is expected to come from usage, because Unity believes that as developers start to use more AI tools and build a more advanced world, there is great potential to increase assessable revenue over time.

From the valuation point of view, because EBITDA has just started to make profits, the company is more suitable to compare with its peers by multiple of income. Of course, some investment banks take the profit expectation after 2024 as the benchmark and discount it to the present to calculate the target price.

When compared with the industry in terms of overall income multiple, Unity's income multiple (EV/Sales) is 8.7 times, which is higher than the industry average of 6.6 times. However, if the current two businesses are valued separately, the developer business with great potential will be valued at 9 times and the operation service at 3 times, and the expected market revenue of Unity2024 will be valued at 40 US dollars per share.

Relatively optimistic investors may also value with higher income expectations.

Therefore, for Unity, the short-term price has risen to a position close to the valuation target, and shorting is definitely not cost-effective. In the future, it is very likely that with the performance exceeding or falling short of expectations, it will bring greater stock price changes.Considering the current cooperation with Apple, there will be more market capital inflow and the stock price will have a certain premium.