The global gaming industry is growing at a compound annual growth rate of 10.5% and is expected to reach a valuation of $295 billion by 2026. These two gaming companies have benefited from stay-at-home orders, but which stock is a better investment?
Unity (NYSE: U) is a cross-platform game engine with 2.7 billion average monthly users.
Its two primary revenue streams are 'Create' and 'Operate' solutions. Create solutions enables developers to develop real-time 2D and 3D games and applications, while Operate allows developers to grow and monetize users. Management estimates that the opportunity for these revenue streams is $12 billion, growing to $16 billion by 2025. Over 50% of all mobile and PC games have been created using Unity's software and demonstrates the strength of its gaming platform despite intense competition.
Unity is likely to benefit from what could be described as a megatrend with AR/VR development in the coming years. If it can capitalize on this, investors will be rewarded. There is a $17 billion market opportunity in architecture, engineering, and construction. It is being used by Fortune and Global 500 companies such as Volkswagen and Disney and has partnered with Autodesk.
Unity reported revenue of $772.4 million for fiscal 2020, an increase of 43% year-over-year (YoY), with the number of customers spending $100,000 or more growing from 600 in 2019 to 793 in 2020. Its dollar-based net expansion rate was 138%, demonstrating the stickiness of the business.
However, its loss widened to $274.8 million from $150.7 million a year prior due to stock-based compensation and a once-off fee. Unity is trading at a high valuation at roughly 38x price to sales. Management also expects to take a one-time 3% hit to revenue due to Apple's IDFA approach in 2021, but the full extent remains unknown.
Roblox (NYSE: RBLX) is a gaming platform where developers and gamers can make and play 3D games that are user-generated. It has over 31.1 million daily active users according to its S-1 filing.
Roblox is predominantly targeted at children, with its users spread across 180 countries and spending an average of 2.6 hours per day on the platform.
Roblox monetizes its users and developers through an in-game currency called 'Robux', which can be used to upgrade avatars, buy accessories, and more. Robux can also be converted back to regular currency, and Roblox earns a portion of every transaction. Revenue has grown 56% YoY in 2019 and 68% for the first nine months of 2020.
Roblox reported a net loss of $86 million in 2019 and $203.2 million for the first nine months of 2020. It is also trading at a high valuation of roughly 41x sales. Last year it was valued at $4 billion in a private funding round versus approximately $38.4 billion today. As the world re-opens, Roblox may have a tough time engaging users and justifying its valuation.
Due to the nature of the platform and most of its users being children, there is a security risk with over half of the users under 13. Roblox has noted this security risk as any breach, and subsequent reputational damage could have an adverse effect.
At MyWallSt, we prefer to wait for two-quarters of reports before investing, and coupled with its lofty valuation, investors should be wary of buying Roblox stock. Unity appears to be a better investment due to its current position in the gaming space and ability to expand into AR/VR, which should fuel growth.
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MyWallSt operates a full disclosure policy. MyWallSt staff currently holds long positions in companies mentioned above. Read our full disclosure policy here.
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