Week to date, shares of Unity Software (NYSE: U) are down 7% as of 11:18 a.m. ET on Friday, according to data provided by S&P Global Market Intelligence. The fall seemed mostly correlated with the drop across the market indexes this week. Fears mounted of a pending recession after the Federal Reserve decided to raise the federal funds rate to stem the upward pressure in inflation.
As for Unity, one analyst downgraded the stock this week to a sell rating, which contributed to the stock’s drop. However, the negative sentiment around the shares might be a great buying opportunity for long-term-minded investors.
Unity stock dropped sharply following the first-quarter earnings report. Revenue increased by 36% year over year, consistent with management’s long-term target of 30% annualized growth. But second-quarter guidance called for revenue to increase between 6% and 8% over the year-ago quarter, and that sent the stock crashing to new lows. Management explained during the earnings call that the problems contributing to slower growth in the near term are self-inflicted wounds that it will fix.
That didn’t stop one analyst with Benchmark from issuing a sell rating on Unity this week. Analyst Mike Hickey believes a weak economy and slowing engagement in video games coming out of the pandemic will pressure Unity’s business. Unity makes money from subscriptions to its software engine used by leading game companies. It also provides Unity Gaming Services, which helps companies monetize and grow engagement in their games.
The drop in the stock price is a great opportunity to buy this leading provider of real-time 3D content software on the cheap. Analysts generally make buy and sell calls based on near-term business trends, so it’s not surprising to see negative sentiment for the stock following Unity’s disappointing outlook.
But the stock has already fallen 76% year to date, so the bad news is largely baked in. Unity estimates its long-term growth opportunity at $45 billion based on existing markets where it competes and new use cases for its software beyond gaming.