Unity Software Inc.

U Details

Unity Software Inc. (NYSE: U) is a leading software platform that offers various software solutions to create, run and monetize interactive, real-time (RT) 2D and 3D content for PCs, mobile phones, consoles, and other augmented and virtual reality devices. It generates revenue from 3 segments, viz. 1) Create Solutions, used by content creators to develop interactive, RT2D and RT3D content; 2) Operate Solutions, enabling customers to run their content and also increase and engage with their end-users; and 3) Strategic Partnerships & Other, focused on earning revenue from contracts with hardware, operating system, device, game consoles and technology providers.

Acquiring SpeedTree Creators: On July 14, 2021, Unity closed the acquisition of Interactive Data Visualization, Inc. (IDV), which created SpeedTree, a leading vegetation modeling and environment suite for games, visual effects, and RT simulations. The transaction integrates SpeedTree into the Unity ecosystem and increases the environment creation capabilities of the platform users. SpeedTree environment creation has been used by many hit games such as Call of Duty: War Zone, The Witcher 3, Assassin's Creed: Valhalla, etc.

New Offering to Cut Costs & AI Training Time: On April 19, 2021, Unity launched new customizable computer vision datasets that help reduce the app development costs to its users and also enables quicker AI training time for the Manufacturing, Retail, and Security industries. These datasets maintain strict privacy and regulatory standards, and their marketing is aimed at computer vision solutions providers.

Q1FY21 Results: During Q1FY21 (ended March 31, 2021), the company reported a 40.59% increase in revenue to USD 234.77 million vs. USD 166.99 million in Q1FY20, with sales generated from the Create Solutions segment registering a 50.73% growth YoY to USD 70.39 million mainly attributable to an increase of new customers, as well as expansion of existing customers. Net loss for the quarter was USD 107.46 million, compared to net loss of USD 26.74 million in Q1FY20.

Key Risks: 61% of Unity's revenue in FY20 was generated from its Operate Solutions segment, which operates majorly under a revenue-share model. The remaining revenue under the segment is generated as usage-based sales for various cloud-based products. Hence, if it fails to retain/attract new customers, its business could be adversely affected. In addition, the company heavily relies on the success of its customers (content creators) in the gaming market, and any downfall in their performance or financial condition could impact Unity's business.

Outlook:

Q2FY21 & FY21 Guidance (Source: Q1FY21 Earnings Release, May 11, 2021)

Valuation Methodology: EV/Sales Value Multiple Based Relative Valuation

(Analysis by Kalkine Group)

• % Premium/(Discount) is based on our assessment of the company's FY21E trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.

U Daily Technical Chart (Source: REFINITIV)

Stock Recommendation: U stock declined 26.45% in the past six months and is currently leaning toward the lower-band of the 52-week range of USD 65.11 to USD 174.94. The stock is currently trading between its 50 and 200 DMA levels, and its RSI Index is 57.03. We have valued the stock using the EV/Sales Value-based relative valuation methodology and arrived at a target price of USD 125.98. Considering the correction in the stock price, robust balance sheet, new product offerings, the current loss-making status, and associated risks, we recommend a "Speculative Buy" rating on the stock at the current price of USD 109.09, up 3.70% as of August 04, 2021, 1:34 PM ET.

* The reference data in this report has been partly sourced from REFINITIV.

* All forecasted figures and industry information have been taken from REFINITIV.

* Depending upon the risk tolerance, investors may consider unwinding their positions in a respective stock once the estimated target price is reached.

Del Taco Restaurants, Inc.

TACO Details

Del Taco Restaurants, Inc. (NASDAQ: TACO) franchises, owns, and operates Del Taco quick-service Mexican-American restaurants. As of June 15, 2021, the company operated 601 restaurants in the U.S, most of which are concentrated in the Pacific Southwest region. As of August 04, 2021, the company's market capitalization stood at USD 305.33 million.

Geographical Expansion: On July 22, 2021, TACO inaugurated its second restaurant in Roseville, marking its tenth location in the Greater Sacramento area. The new restaurant increases its market presence in Northern California. This news follows the earlier franchise deal with Consolidated Taco Holdings (CTH) announced on July 20, 2021, which will add 12 new locations to TACO's portfolio across the Florida panhandle.

Q2FY21 Results: The company reported a growth of 19.51% in total revenue to USD 124.97 million in Q2FY21 (ended June 15, 2021) compared to USD 104.57 million in Q2FY20 (ended June 16, 2020), attributable to an 18.63% YoY increase in sales from company restaurants. TACO reported a 39.46% improvement in adjusted EBITDA to USD 16.86 million in Q2FY21 vs. USD 12.09 million in Q2FY20. Net income was USD 6.00 million in Q2FY21, in contrast to a net loss of USD 0.58 million in Q2FY20. During the quarter, TACO repurchased 210,401 common shares at an average price of USD 10.07 per share, for a total consideration of USD 2.1 million. As of June 15, 2021, the company had cash and cash equivalents of USD 6.58 million and total debt of USD 109.61 million.

Key Risks: TACO operates in the restaurant industry, which suffered a massive hit due to the outbreak of the COVID-19 pandemic. The imposition of lockdowns and travel restrictions to prevent its spread led to a sharp decline in the global commercial activity across the industry. If this declining trend continues, it will impact the discretionary spending of consumers on leisure activities, which could harm the company's financials. In addition, restaurants in Southern California accounted for 74% of the TACO's revenue in FY20 (ended December 29, 2020). As a result, any unfavorable changes in the economic environment of this market could significantly affect TACO's financial performance.

Outlook: In FY21, TACO estimates its capital expenditure to be in the low USD 30 million range, and its general & administrative expenses are expected to be 9.0% of total revenue. It also plans to add four company-operated and nine franchised restaurants during the year.

Valuation Methodology:  EV/ Sales Multiple Based Relative Valuation

(Analysis by Kalkine Group)

• % Premium/(Discount) is based on our assessment of the company's NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.

TACO Daily Technical Chart (Source: REFINITIV)

Stock Recommendation: TACO stock price has decreased by 24.66% past three months and is currently leaning towards the lower-band of its 52-week range of USD 7.23 to USD 11.99. The stock is currently trading below its 50 and 200 DMA levels, and its RSI Index is at 29.58. We have valued the stock using the EV/Sales-based relative valuation methodology and arrived at a target price of USD 10.32. Considering the correction in the stock price, geographical expansion, decent financials, and associated risks, we recommend a "Speculative Buy" rating on the stock at the closing price of USD 8.40, up 0.12% as of August 04, 2021.

* The reference data in this report has been partly sourced from REFINITIV.

* All forecasted figures and industry information have been taken from REFINITIV.

*Depending upon the risk tolerance, investors may consider unwinding their positions in a respective stock once the estimated target price is reached.

Disclaimer

The advice given by Kalkine Canada Advisory Services Inc. and provided on this website is general information only and it does not take into account your investment objectives, financial situation and the particular needs of any particular person. You should therefore consider whether the advice is appropriate to your investment objectives, financial situation and needs before acting upon it. You should seek advice from a financial adviser, stockbroker or other professional (including taxation and legal advice) as necessary before acting on any advice. Not all investments are appropriate for all people. The website www.kalkine.ca is published by Kalkine Canada Advisory Services Inc. The link to our Terms & Conditions has been provided please go through them. On the date of publishing this report (mentioned on the website), employees and/or associates of Kalkine do not hold positions in any of the stocks covered on the website. These stocks can change any time and readers of the reports should not consider these stocks as advice or recommendations later.