‘Huge potential’ for this popular stock beyond its primary playing field

For more years, Unity (NYSE:U) has been a household name in the video game software development industry, but recently it’s branched out. In this segment of “The Gaming Show” on Motley Fool live, recorded on February 7Fool contributor Jose Najarro discusses the company’s focus on innovation and expansion into other businesses outside of gaming.

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Jose Najarro: I believe Unity is strong, mostly because they have a strong focus on innovation. Every quarter they either buy a new business to increase their tools or they focus on bringing new tools to their platforms as I mentioned they have strong net expansion rates and they improve their margins. As we’ve seen, the non-cat loss, originally last year was closer to the teens, is now closer to the low single digits, so the margins are improving.

There is huge growth potential for this industry, especially in non-gaming. The transition from 2D to 3D, from non-realtime to realtime, is something that a lot of standalone problems will use. Finally, from non-interactive to interactive, we’ve been talking a lot about digital avatars lately, how some of these digital avatars are going to hit the mainstream market. This is where you need that non-interactive to interactive.

They also hit many markets for games. As I mentioned, e-commerce, automotive, architecture, media, entertainment and many more sectors. Some of the risks. Obviously I’ve talked upwards about the business I own, but there’s always, it’s good to understand what could go wrong.

First, to some extent it is a high growth stock. Normally with high growth stocks you get a high valuation. In theory, with these high valuations, if there is a slippage during the quarter, the stock price could certainly suffer. So far, it’s not profitable. Certainly, something not to overlook. But as I mentioned earlier, they have a healthy cash balance sheet and they should be profitable on a non-GAAP basis by 2023. Yet, at the moment, they are not profitable.

It is a company that makes many acquisitions. These acquisitions, depending on their future size, could probably deteriorate the balance sheet. Most of the acquisitions they’ve made so far have been very small, not really affecting the balance sheet in my opinion. But the way they are doing, who knows, maybe next year this quarter they might buy something big.

It is also a company that focuses very heavily on research and development. It is a very innovative market. You have to invest your money in research and development. It is very dependent. Again, this is not something that scares me. I like to invest in innovative companies and generally with companies that are innovating, they are usually the ones that have this higher research and development risk.

Finally, if there is a slowdown in the games market for who knows what reasons or outside of the games market, it obviously can be a slowdown in that growth which can affect the company’s high overall valuation. Quick highlights, I’m enjoying Unity, I’m happy with the gains. I’m happy with the expansion, its reach into the non-gaming market, and still being a big player in the gaming market itself.

Jose Najarro owns Unity Software Inc. The Motley Fool owns and recommends Unity Software Inc. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

Margie D. Carlisle