Insights

Why Unity Software Got Clobbered 33% in April

What happened
Shares of 3D creation software suite Unity Software (NYSE: U) fell 33% in April, according to data provided by S&P Global Market Intelligence. It was an especially rough month for high-flying software tech stocks as the market overall weighed the Federal Reserve’s impending interest rate hikes (higher interest reduces the present value of risk assets like stocks). For comparison, the S&P 500 was down 8.8% in April.  
So what
After the recent drubbing, Unity is now nearly 70% below its all-time high, and back to where it made its debut in public trading after its initial public offering (IPO) in 2020. Such has been investor sentiment when it comes to high-growth but richly valued tech stocks as of late. Unity’s platform is expanding at a rapid pace, but value stocks in sectors like oil and energy have been in favor instead.  
Image source: Getty Images.

Additionally, many investors have increased their scrutiny of companies that operate at a loss — even those that do so intentionally as they try to maximize their revenue growth. Unity certainly falls into this category as it generated negative $153 million in free cash flow last year on revenue of $1.11 billion.  
The reason? Unity’s platform for the creation of virtual 3D worlds (as well as publishing and advertising services for video game makers) is riding incredible momentum. It’s also finding new use cases outside of video games among engineering, manufacturing, and other design companies. It’s thus spending more cash than it brings in every year on things like product development and marketing. Turning a profit will be a more serious concern later down the road, but in the meantime Unity ended 2021 with $1.74 billion in cash and short-term investments offset by $1.7 billion in convertible debt.  
Now what
Unity Software will provide first-quarter results on May 10. Management has said to expect year-over-year revenue growth of at least 34% in Q1. For full-year 2022, the company also expects at least 34% revenue growth and steady progress toward breakeven.
At this juncture, Unity trades for about 13 times current year expected sales. Given growth stocks are out of favor, it isn’t exactly cheap. However, if you believe 3D content creation and collaboration is a secular growth trend, Unity is still worth a look right now for the long term.
Nicholas Rossolillo and his clients have positions in Unity Software Inc. The Motley Fool has positions in and recommends Unity Software Inc. The Motley Fool has a disclosure policy. –

What happened

Shares of 3D creation software suite Unity Software (NYSE: U) fell 33% in April, according to data provided by S&P Global Market Intelligence. It was an especially rough month for high-flying software tech stocks as the market overall weighed the Federal Reserve’s impending interest rate hikes (higher interest reduces the present value of risk assets like stocks). For comparison, the S&P 500 was down 8.8% in April.  

So what

After the recent drubbing, Unity is now nearly 70% below its all-time high, and back to where it made its debut in public trading after its initial public offering (IPO) in 2020. Such has been investor sentiment when it comes to high-growth but richly valued tech stocks as of late. Unity’s platform is expanding at a rapid pace, but value stocks in sectors like oil and energy have been in favor instead.  

Image source: Getty Images.

Additionally, many investors have increased their scrutiny of companies that operate at a loss — even those that do so intentionally as they try to maximize their revenue growth. Unity certainly falls into this category as it generated negative $153 million in free cash flow last year on revenue of $1.11 billion.  

The reason? Unity’s platform for the creation of virtual 3D worlds (as well as publishing and advertising services for video game makers) is riding incredible momentum. It’s also finding new use cases outside of video games among engineering, manufacturing, and other design companies. It’s thus spending more cash than it brings in every year on things like product development and marketing. Turning a profit will be a more serious concern later down the road, but in the meantime Unity ended 2021 with $1.74 billion in cash and short-term investments offset by $1.7 billion in convertible debt.  

Now what

Unity Software will provide first-quarter results on May 10. Management has said to expect year-over-year revenue growth of at least 34% in Q1. For full-year 2022, the company also expects at least 34% revenue growth and steady progress toward breakeven.

At this juncture, Unity trades for about 13 times current year expected sales. Given growth stocks are out of favor, it isn’t exactly cheap. However, if you believe 3D content creation and collaboration is a secular growth trend, Unity is still worth a look right now for the long term.

Nicholas Rossolillo and his clients have positions in Unity Software Inc. The Motley Fool has positions in and recommends Unity Software Inc. The Motley Fool has a disclosure policy.

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