Unity Software (U  ) has been one of the best-performing stocks in the past couple of months as it's up nearly 70% since mid-May. Following its Q2 earnings, the stock jumped 13% higher and then added on another 4% in the next session However, the stock price declined by 10% as investors looked to take some profits during the market sell-off during the middle of the week.

Overall, Unity is in a strong position as the leading animation and video game development engine. Its business has impressive momentum as the company topped analysts' expectations on the top and bottom-line and also issued guidance above forecasts.

Inside the Numbers

In Q2, Unity Software reported a loss of $0.02 per share which was substantially better than expectations of a loss of $0.11 per share. Revenue also beat expectations with a 48% increase to $273 million vs consensus expectations of $242 million. Last year in Q2, it lost $0.09 per share and generated $184 million in revenue.

Basically, the company is much closer to becoming profitable and cash-flow positive than believed a few weeks ago. In terms of operating income, Unity reported a loss of $3 million while expectations were for a loss of $28 million. Analysts estimates that the company would break-even at around $315 million in quarterly revenue, and the company is on pace to easily cross this threshold in coming quarters. Further, based on this quarter's results, they are already hiking forecasts for 2022 and 2023 in terms of revenue and EPS.

In fact, many analysts are projecting more than 30% revenue growth over the next few years even as revenues should climb above $1 billion on a trailing basis sometime next year. Part of this optimism is the company has been successful at penetrating into other forms of non-gaming content. Another positive is that the company reported no adverse effect from Apple's decision to curb apps' ability to target users with ads.

Stock Price Outlook

Unity Software is the leading video game engine on the world. Over 50% of games in the top 100 on the Apple App Store (AAPL  ) and Google Play (GOOGL  ) store are built on top of its software. Further, it's expanding into other forms of interactive, real-time 3D content that can be used for other purposes beyond gaming like education, entertainment, project rendering, etc.

Thus, the company has a large scope for growth given that these areas are all compounding at a double-digit rate. Further, there is increased focus on the 'metaverse' especially following the Facebook (FB  ) conference call when CEO Mark Zuckerberg said that it is going to become a 'metaverse company'.

This is essentially a place where people's digital avatars can interact in a 3D world. Right now, Unity would be the leading choice for any developer who wants to help build the metaverse given that its game engine is one of the top choices to generate 3D worlds.

Given the steady growth of the video game industry and these potential upside catalysts, investors should look to buy Unity on weakness.