Why is Unity Software such a lump in investors’ throats?
Based in San Francisco, California, Unity Software Inc. (NYSE:U) is a video game software development company, which focuses on real-time interactive 3D content development. The company was founded in 2004 by David Helgason, Nicholas Francis and Joachim Ante.
Unity completed its initial public offering (IPO) on September 17, 2020, raising between $1.09 billion and $1.25 billion.
The company’s shares listed on the New York Stock Exchange on September 18, 2020. The stock debuted at a price of $75, closing at $68.35. Since then, its shares have fallen 46.1%.
Currently, the company has a market capitalization of $10.90 billion.
On March 11, 2022, Unity made its presence felt in the metaverse space by entering into a partnership with one of the leading creators of live music experiences, 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 empower developers with cost-effective, efficient, and robust simulation performance.
Financial performance and balance sheet
Since its creation, the company has not had a single year of profitability.
In its latest first-quarter results, the company reported an adjusted loss of $0.09 per share, lower than the year-ago loss of $0.10 per share. Revenue jumped 36% year over year to $320.1 million.
Notably, the company’s liquidity position has improved compared to 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 free cash flow of $86.4 million for the quarter, compared to the previous year. free cash outflow figure of $100.6 million.
Future projection and challenges
According to a Intelligence Morodor report, the games market was worth $198.4 billion in 2021, which is expected to reach a value of $340 billion by 2027, representing a CAGR of 8.9%.
Given this, the future of the industry and the company looks bright.
However, the company continues to face some challenges. Its Audience Pinpointer tool, which offers targeted audience campaigns, has experienced software issues. As a result, data analytics suffered and the business was unable to monetize it. This resulted in a nearly $110 million reduction in revenue estimates.
Meanwhile, in its latest earnings call, the company reiterated its goal of 30% long-term revenue growth, with strong levels of profitability going forward.
Its revenue forecast for the second quarter is between $290 million and $295 million. Additionally, the company is forecasting a loss of $62 million to $64 million for the second quarter.
For the full year, it forecast revenue between $1.35 billion and $1.42 billion. Losses are expected to be between $60 million and $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 have increased their exposure to U shares in the past 30 days.
However, TipRanks’ insider trading activity tool shows that trust in U is currently very negative. Corporate Insiders has sold shares worth $1.9 million in the past three months.
Overall, the street is cautiously bullish on 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 60.4% upside potential from current levels. Shares are down 65.2% over the past year.
Unity Software’s steadily growing revenue, backed by innovative product offerings, keeps it in good stead. Moreover, the company is also open to growth through inorganic means such as acquisitions and partnerships. However, the continuous losses since its inception are a sore point. Going forward, the company must find ways to become profitable in an effort to enhance the investment appeal of its shares.
Read full disclosure