Why Unity (U) Shares Are Getting Obliterated Today

Anthony Lee /
2024/01/11 11:58 am EST

What Happened:

Shares of game engine maker Unity (NYSE:U) fell 6.7% in the morning session as major indices retreated after the Bureau of Labor released inflation data for December 2023, which came in hotter than expected at 3.2%, above the market consensus of 3.1%. Similarly, the data showed that inflation rose by 0.3% compared to the previous month instead of the anticipated 0.2%. These differences versus expectations may seem quite small, and make no mistake, they are. However, recall that there was much enthusiasm in the markets to end 2023 based on the expectation that rate cuts in 2024 are nearly a sure thing. Today's market move is reflecting a pushback on this narrative and giving back some of the big gains in the last few months of 2023. Said differently, today's market move is seriously floating the possibility that the market has gotten ahead of itself. As a reminder, the driver of a stock's value is the sum of its future cash flows discounted back to today. With lower interest rates, investors can apply higher valuations to their stocks. No wonder so many in the investment community are optimistic about 2024. We at StockStory remain cautious, as following the crowd can lead to adverse outcomes. During times like this, it's best to own high-quality, cash-flowing companies that can weather the ups and downs of the market.

The stock market overreacts to news, and big price drops can present good opportunities to buy high-quality stocks. Is now the time to buy Unity? Access our full analysis report here, it's free.

What is the market telling us:

Unity's shares are very volatile and over the last year have had 56 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 we wrote about was 3 days ago, when the stock dropped 7.3% on the news that the company announced plans to cut around 25% of its workforce, or approximately 1,800 jobs, as part of a restructuring effort to refocus on its core business and drive long-term profitability. Unity expects the business to incur costs related to employee transition, severance payments, and benefits, with the majority expected in the first quarter of 2024. The stock was likely down as investors try to reassess the business's path forward, with the restructuring efforts adding an element of uncertainty to near-term growth projections.

Unity is down 9.8% since the beginning of the year, and at $34.96 per share it is trading 27.9% below its 52-week high of $48.50 from July 2023. Investors who bought $1,000 worth of Unity's shares at the IPO in September 2020 would now be looking at an investment worth $511.65.

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