$U Unity Software - Fundamental Analysis

DISCLOSURE - LONG $U, LONG TERM OUTLOOK Underpinning $U stock price potential is improving revenue growth and gross margins. We think the company can sustain growth at around these levels and that alone can deliver let's say 40-50% stock price appreciation in the coming year - if you assume, as we do, that nothing much will happen to market revenue multiples paid for high growth software names. It's worth pointing out though that there may be earnings surprises along the way - more so than for the general cloud cohort. $U has little in the way of deferred (prepaid, yet to be recognized) revenue or even remaining performance obligation (the total forward contract book). Its revenue model is much more contingent than you'll find at say Crowdstrike $CRWD or ZScaler $ZS; there's more revenue for the sales team to win each quarter and that means more revenue risk. Long run we're confident; quarter to quarter we expect both big beats and big misses, and the dislocations this can cause in the stock price is there to be taken advantage of. Operating margins and cashflow margins are poor. There's plenty of cash on the balance sheet so there's no particular solvency risk here but improved margins would help the stock price in our view. You can run software companies at this level of growth and still deliver 10-20%+ unlevered pretax FCF margins - you just have to decide to do this if you're the CEO. $U is yet to run that way; we hope the company focuses on cashflow as well as growth going forward. Here's the numbers. Source: Company SEC filings, YCharts.com, Cestrian Analysis ​ Source: Company SEC filings, YCharts.com, Cestrian Analysis Additional disclosures - long $CRWD, long $ZS. Cestrian Capital Research, Inc - 24 Sep 2021.

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CestrianCapResearch

Sep 27, 2021

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$U Unity Software - Fundamental Analysis

bullish

DISCLOSURE - LONG $U, LONG TERM OUTLOOK

Underpinning $U stock price potential is improving revenue growth and gross margins. We think the company can sustain growth at around these levels and that alone can deliver let's say 40-50% stock price appreciation in the coming year - if you assume, as we do, that nothing much will happen to market revenue multiples paid for high growth software names. It's worth pointing out though that there may be earnings surprises along the way - more so than for the general cloud cohort. $U has little in the way of deferred (prepaid, yet to be recognized) revenue or even remaining performance obligation (the total forward contract book). Its revenue model is much more contingent than you'll find at say Crowdstrike $CRWD or ZScaler $ZS; there's more revenue for the sales team to win each quarter and that means more revenue risk. Long run we're confident; quarter to quarter we expect both big beats and big misses, and the dislocations this can cause in the stock price is there to be taken advantage of.

Operating margins and cashflow margins are poor. There's plenty of cash on the balance sheet so there's no particular solvency risk here but improved margins would help the stock price in our view. You can run software companies at this level of growth and still deliver 10-20%+ unlevered pretax FCF margins - you just have to decide to do this if you're the CEO. $U is yet to run that way; we hope the company focuses on cashflow as well as growth going forward.

Here's the numbers.

Source: Company SEC filings, YCharts.com, Cestrian Analysis

Source: Company SEC filings, YCharts.com, Cestrian Analysis

Additional disclosures - long $CRWD, long $ZS.

Cestrian Capital Research, Inc - 24 Sep 2021.

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read-time
1 min

155.10

Target Price

9/ 10

Confidence

6-12 Months

Timeframe
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