What Happened:
Shares of game engine maker Unity (NYSE:U) jumped 5.12% in the morning session after analyst Brian Fitzgerald of Wells Fargo initiated coverage on the company, giving it an Overweight (Buy) rating and a price target of $48. Additionally, Unity unveiled an AI marketplace in the Unity Asset Store, providing developers with access to a wide range of AI solutions for game development. The company also launched Unity Sentis and Unity Muse, two AI platforms aimed at enhancing productivity and interactivity in real-time 3D (RT3D) content creation. Unity Sentis enables the deployment of AI models across Unity projects, while Unity Muse offers tools for accelerating RT3D content creation. The market has been upbeat about artificial intelligence breakthroughs since Q1 2023, and these developments should continue to raise investors' optimism.
What is the market telling us:
Unity's shares are very volatile and over the last year have had 84 moves greater than 5%. In context of that, today's move is indicating the market considers this news meaningful but not something that would fundamentally change its perception of the business. The previous big move was about 2 months ago, when the stock gained 11% on the news that the company reported a "beat and raise" quarter. First quarter results exceeded analysts' revenue, adjusted EBITDA, and earnings per share estimates. However, the company continued to burn cash, and gross margin deteriorated. Revenue guidance for the next quarter came in above Consensus, and the full year guidance was lifted. Adjusted EBITDA guidance also exceeded estimates for the next quarter and the full year. Management added more color to the guidance, noting that "for the balance of 2023, we expect revenue to grow faster than the markets in which we compete, with steady and meaningful continued progress on profitability." This is bullish as it signals market share gains while also achieving operating leverage on expenses. Also the strong guidance should give investors additional reason to be optimistic.
Unity is up 53.8% since the beginning of the year, but at $41.38 per share it is still trading 29.2% below its 52-week high of $58.47 from August 2022. Investors who bought $1,000 worth of Unity's shares at the IPO in September 2020 would now be looking at an investment worth $605.56.
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