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Why is Unity Software Such a Lump In Investors’ Throats? – TipRanks

Based out of San Francisco, CA, Unity Software Inc. (NYSE: U) is a video game software development company, which focuses on developing interactive, real-time 3D content. The company was founded in 2004 by David Helgason, Nicholas Francis and Joachim Ante.

IPO Details

Unity completed its initial public offering (IPO) on September 17, 2020, raising between $1.09 billion and $1.25 billion.

Shares of the company got listed on the New York Stock Exchange on September 18, 2020. The stock debuted on the exchange at a price of $75, closing at $68.35. Since then, its shares have declined 46.1%.

Presently, the company commands a market cap of $10.90 billion.

Recent Developments

On March 11, 2022, Unity made its presence felt in the metaverse space by entering into a partnership with a leading live music experience creator, Insomniac Events.

On December 1, 2021, Unity announced the completion of the acquisition of Weta Digital for $1.63 billion. Based in Wellington, New Zealand, Weta Digital is a visual special effects and animation company.

On November 10, 2021, the company announced two new products, Unity Simulation Pro and Unity SystemGraph, to enable cost-effective, efficient and solid simulation performance for developers.  

Financial Performance & Track Record

Since its inception, the company has not seen a single year of profitability.

In its latest results for the first quarter, the company reported an adjusted loss of $0.09 per share, narrower than the previous year’s loss of $0.10 per share. Revenues jumped 36% year-over-year to $320.1 million.

Notably, the company’s liquidity position has improved from the previous year. Cash, cash equivalents, and restricted cash were $1.2 billion as of March 31, 2022, compared to $1.1 billion as of March 31, 2021. Encouragingly, the company reported a free cash flow of $86.4 million for the quarter, compared to the previous year’s figure of a free cash outflow of $100.6 million.

Future Projection & Challenges

According to a Morodor Intelligence report, the gaming market stood at $198.4 billion in 2021, which is likely to reach a value of $340 billion by 2027, representing a CAGR of 8.9%.

Taking this into account, the future of the industry and the company seems to be bright.

However, the company continues to face some challenges. Its Audience Pinpointer tool, which delivers targeted audience campaigns, has witnessed software problems. Consequently, data analysis suffered and the company couldn’t monetize it. This has led to a reduction of almost $110 million in revenue estimates.

Meanwhile, in its latest earnings call, the company reiterated its 30% revenue growth target for the long term, with strong levels of profitability in the future.

Its revenue guidance for the second quarter stands between $290 million and $295 million. Further, the company anticipates a loss of $62 million to $64 million for the second quarter.

For the full year, it foresees revenues between $1.35 billion and $1.42 billion. Losses are predicted in the range of $60 million to $75 million.

Performance on TipRanks

TipRanks’ Stock Investors tool shows that investors currently have a Very Positive stance on Unity Software, as 6.3% of top portfolios tracked by TipRanks increased their exposure to U stock over the past 30 days.

However, TipRanks’ Insider Trading Activity tool shows that the confidence in U is currently Very Negative. Corporate Insiders have sold shares worth $1.9 million over the last three months.

Overall, the Street is cautiously optimistic about the stock and has a Moderate Buy consensus rating based on 11 Buys, three Holds and one Sell. U’s average price target of $59.07 implies that the stock has upside potential of 60.4% from current levels. Shares have declined 65.2% over the past year.

Conclusion

Unity Software’s persistently rising topline, which is backed by innovative product offerings, holds it in good stead. Further, the company is also open to growing through inorganic means like acquisitions and partnerships. However, continuous losses since its inception are a sore spot. As of now, the company needs to find ways to become profitable in a bid to boost the investment appeal of its stock.

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