My Top Tech IPO to buy in March

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2020 has been fast and furious for IPO stocks, and 2021 is off to a similar start. Technology is transforming the economy at an unprecedented rate, and many of these companies are far more profitable than the old incumbents they are replacing.

Of all the IPO and SPAC who debuted in the last six months, however, I think Unity software (NYSE: U) is the one to focus on in the long term. Here’s why I think it’s a March buy.

Difficult dials and upcoming iOS updates

Unity has already reported a solid finish until 2020 – its first year as a public concern. Revenue increased 43% from 2019 to reach $ 772.4 million, and free movement of capital was negative by $ 20.2 million (although it turned into positive free cash flow in the fourth quarter, generating $ 3.6 million). However, this is a growing business. Unity no longer needing to use cash on its balance sheet is an important step, but the trajectory of its expansion is of most concern in this chapter of its history.

Image source: Getty Images.

And this is where things start to look a bit risky in the short term. Management reiterated its long-term forecast of approximately 30% annual revenue growth. But in 2021, forecasts indicate that revenues will increase “only” by 23% to 26% from a range of $ 950 million to $ 970 million. For a company that is expected to make little profit for a while and trade more than 50 times 12-month sales at the end of 2020, Unity stock was priced to perfection before the Q4 update. Perfection was not in the near-term outlook, so stocks are down 45% from all-time highs at the time of writing.

What explains the below average income outlook? On the one hand, Unity will achieve an estimated turnover of 25 million dollars advantage it came out of the pandemic last year because it saw an acceleration in the use of its development platform. Along with that, he also expects an estimated drag of $ 30 million in 2021 from Apple launch of iOS 14, which will include user registration for application activity tracking. This will impact digital marketing, making it harder for app developers and publishers using Unity to reach mobile users.

In total, the impact of $ 55 million ($ 25 million in withdrawal last year plus $ 30 million headwind from Apple this year) is equivalent to about 5% to 6% of expected revenue. from Unity in 2021. If you add that number to the full-year outlook, the long-term growth forecast of 30% is intact. Plus, let’s not forget the habit of cloud software vendors of under-promising and over-delivering. In its brief history as a state-owned company, Unity has done just that so far, and the year-end result could be higher than initial outlook anyway.

Expensive but not that unreasonable considering the long term potential

Either way, I think Unity deserves serious consideration right now. Yes, even after the stock has fallen in recent months, its price remains above 27 times the expected earnings of 2021. But given the long-term potential of the company (and an enviable war chest of 1.75 billion dollars in cash and zero debt), it’s expensive for a reason.

The nature of the software development platform itself is powerful. Unity enables the development of real-time 3D content in the cloud. The first use case was for video games, but Unity has no shortage of utility beyond that. We already know of NVIDIA how high-end video games can drive innovation elsewhere. I believe something similar is happening with Unity. Of course, the video game industry is quickly becoming an entertainment staple these days and still has a lot of growth in the tank, but Unity software is also applied to architectural and engineering design, manufacturing, robotics, marketing and filmmaking, to name a few.

Simply put, it’s not just a video game business anymore. An increasingly digital world needs a better software platform to blur the lines between real and virtual, and Unity looks like it can be. Additionally, while Apple’s privacy updates are going to be a headwind in 2021, it could leave the door open for Unity to disrupt the status quo in the mobile app delivery ecosystem in the following years. Apple making it harder for developers to monetize their work means they will turn to another partner for help. The Unity platform is independent and includes marketing and distribution tools as a value-added service. Management believes there is an opportunity there.

The sum of these elements means that Unity is in control of its destiny, relative to a company that relies on the growth of the industry in which it operates. The use cases for this cloud computing platform are limitless and the company is constantly adding new features to deepen its relationship with existing users and attract new ones. It’s not a value, but it’s premium priced stock for good reason. Assuming you plan to hold for at least a few years, I think the recent pullback in stock prices presents a great buying opportunity.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are motley! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.