Why Unity (U) Stock Is Falling Today

Anthony Lee /
2024/02/27 12:09 pm EST

What Happened:

Shares of game engine maker Unity (NYSE:U) fell 19.1% in the pre-market session after the company reported fourth-quarter results with full-year 2024 revenue and EPS guidance falling short of analysts' estimates. Although this quarter's headline revenue beat, Unity stated it benefitted from a unique event where one of its customers, Wētā, terminated its service agreement and opted for a perpetual license to access its software. This resulted in a one-time revenue boost of $99 million - without this sale, Unity's revenue would have been $510 million, dropping 2% year on year. 

In its shareholder letter, James Whitehurst, the company's recently appointed CEO (October 2023), also shared Unity's new strategy. The company's reset will be split into two phases, the first being to focus on its core business by narrowing its investments. Unity also intends to right-size its cost structure, as seen in its January 8th layoff of 25% of its workforce. Phase one is expected to finish by the end of Q1, and once Unity's leaner cost base is established, it plans to return to growth initiatives and new product development. Overall, this was a mediocre quarter for Unity, and investors are likely uncomfortable with the company's outlook.

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 44 moves greater than 5%. But moves this big are very rare even for Unity and that is indicating to us that this news had a significant impact on the market's perception of the business. 

The previous big move we wrote about was 14 days ago, when the company dropped 6.2% as yields soared and major indices fell (Nasdaq down -1.1%, S&P down -1.1%) after the Bureau of Labour Statistics reported that the consumer price index (CPI - the gauge of the price consumers pay for goods and services) for January 2024 showed a 3.1% increase from the previous year (above market expectations for a 2.9% increase), indicating inflation is not yet a solved problem. In addition, the data showed that inflation accelerated 0.3% month on month (vs. expectations for a 0.2% m/m increase). The hotter-than-expected inflation print was driven mainly by shelter prices (+0.6% m/m), which account for nearly a third of the CPI index. 

The narrative in the last year has focused on inflation and rates. Markets soared in the second half of 2023 because of data showing that inflation was coming under control. This led to expectations of multiple rate cuts in 2024. Anything going forward that defies this narrative could dent hopes of multiple rate cuts in 2024, which would in turn hurt major indices. 

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.

Unity is down 22.5% since the beginning of the year, and at $30.13 per share it is trading 37.9% 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 $439.67.

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