Unity Software vs. Roblox: Which Metaverse Stock is a Better Buy for 2022?

A metaverse is a network of 3D virtual environments that combines multiple elements of technology such as virtual reality, augmented reality, and video, allowing users to interact with each other via avatars. 

According to Emergen Research, the global metaverse market is expected to reach $828.95 billion by 2028, growing at a CAGR of 43.3% during the forecast period. Increasing focus on the converging digital and physical world and the rising popularity of Mixed Reality (MR) should support the industry's growth in the long term. 

With this in mind, today, today I’ll analyze and compare two metaverse stocks, Unity Software Inc. (U) and Roblox Corporation (RBLX), to determine which one is a better buy. 

Unity Software provides its real-time 3D development platform that enables software developers to create and monetize 2D and 3D content for PCs, tablets, smartphones, and other devices. Roblox is a California-based metaverse company that offers various software solutions for 3D digital experience, including Roblox Client, Roblox Studio, and Roblox Cloud.

Over the past month, U stock has fallen about 22%, and RBLX has decreased 32%. ‌ 

Recent Developments 

On January 6th, Unity announced that it had partnered up with Hyundai Motor to cooperatively design and build a metaverse-based digital-twin factory known as Meta-Factory. Under the terms of the deal, companies will be engaged in smart manufacturing, AI training and study, and autonomous driving simulation. Hyundai Motor aims to implement the Meta-Factory concept to the Hyundai Motor Global Innovation Center in Singapore.

On January 19th, Brian Nowak, an analyst from Morgan Stanley, lowered Roblox's price target from $150 to $115. However, the firm kept its “Overweight” rating on Roblox shares. The downgrade was related to models update and forward valuations adjustment among Nowak's Internet stocks coverage. 

Recent Quarterly Performance & Analysts Estimates

For its fiscal third quarter, ended September 30th, 2021, Unity Software's revenue increased 42.6% year-over-year to $286.33 million, beating the Wall Street revenue estimates by $19.96 million. This growth was primarily driven by a 54% year-over-year increase in Operate Solutions revenue to $185.02 million. Besides, the company's Create Solutions segment registered a 34% year-over-year increase in revenues to $83.74 million. 

In Q3, the company expanded its gross margin by 200 bps to 78%. Moreover, Unity's third-quarter net loss decreased to $115.15 million compared to $144.72 million in a year-ago quarter. Consequently, the company reported a Non-GAAP EPS of ($0.06), topping analysts' consensus by $0.01.

Currently, Wall Street expects U's EPS to be ($0.07) in the fourth quarter of 2021, representing a 32.52% increase. Moreover, a $295.70 million average revenue projection for the current quarter implies 34.21% year-over-year growth. 

On November 8th, Roblox announced an earnings report for the third quarter of 2021. In Q3, Roblox revenue rose 102.2% year-over-year to $509.3 million, driven by the expansion of the company's daily paying users, which increased 22% to 676,000 during the quarter. However, the company failed to beat Wall Street consensus estimates by $127.17 million. Besides, RBLX reported a GAAP EPS of ($0.13), beating Wall Street projections by $0.01.

Despite lower-than-expected top-line numbers, the company improved its main operations metrics. For example, bookings came in 28% higher year-over-year at $637.8 million. Average Daily Active Users (DAUs) have been reported at 47.3 million, representing an increase of 31% YoY. Finally, Hours Engaged showed a 28% YoY growth to 11.2 billion, reflecting the rising value of the company's Platform.

For the next quarter, analysts expect Roblox's bottom line to be ($0.14) per share, compared to its year-ago EPS of ($0.11). However, analysts see its fourth-quarter revenue at $765.58 million, implying a 147.00% year-over-year increase.

Comparing Options Market Sentiment

Looking at the March 18th, 2022 option chain for both U and RBLX, we can define options market sentiment by analyzing the open interest levels. In Unity Software's case, the open calls/open puts ratio at the $110.00 strike price comes in at 4.74x, showing a strong bullish options market sentiment. When it comes to RBLX, the open calls/open puts ratio at the $70.00 strike price stands at 1.83x, indicating a relatively weaker bullish market sentiment.  

The Bottom Line

In my opinion, Unity Software is currently a better long-term buy. Although both companies should capitalize on the industry's growth in the long term, Unity's higher-than-expected top and bottom-line growth look more convincing. In addition, Unity Software’s growth is expected to continue in the fourth quarter, compared to Roblox's mixed performance. Finally, Unity Software has superior options market sentiment at the moment.

U shares were trading at $107.84 per share on Tuesday morning, up $2.69 (+2.56%). Year-to-date, U has declined -24.58%, versus a -5.12% rise in the benchmark S&P 500 index during the same period.

Oleksandr Pylypenko has more than 5 years of experience as an investment analyst and financial journalist. He has previously been a contributing writer for Seeking Alpha, Talks Market, and Market Realist.

More...