Insights

Why Unity Software Tanked 39% This Week

What happened
Unity Software (NYSE: U) is down 38.8% this week, according to S&P Global Market Intelligence. The game engine, monetization, and digital twins platform posted solid growth for the quarter, but investors were not happy with a revenue mishap and poor guidance for the rest of the year. At one point this week, the stock was down 49.3% from last Friday’s close and is now down 75% just this year.
So what
On May 10, Unity Software released its first-quarter earnings results. Revenue grew 36% year over year to $320 million in the quarter, driven by 65% growth from the Create Solutions segment and 26% growth from the Operate Solutions segment. Create Solutions is the game engine that Unity is known for that helps developers easily build new video games for consumers, mainly focused on mobile platforms. The Operate Solutions segment has services focused on helping developers monetize their games through things like advertising.
Image source: Getty Images.

On top of just video games, Unity is seeing strong growth from its digital twins business, according to management commentary on the quarterly conference call. A digital twin is a virtual representation of a real-life three-dimensional object and is helpful for companies in the industrial, architecture, and engineering fields. Unity leverages its 3D engine, which in the past has been mainly used for gaming, to help companies in this regard.
While the first quarter looked solid, Unity disappointed with its second-quarter and full-year guidance. Next quarter and this year, it is expecting $290 million to $295 million and $1.35 to $1.425 billion, respectively, in revenue. This was well short of the average analyst estimates of $360 million in revenue next quarter and $1.5 billion for the full year. Why did Unity miss so badly on guidance? Well, since it got bad data from a large customer and made a mistake with its Audience Pinpointer tool, Unity is going to lose $110 million in revenue than it otherwise would have earned in 2022. This is a huge mistake for a company as large as Unity and is likely why investors were so disappointed with the report.
However, besides this big mistake, Unity’s business seems to be humming along just fine at the moment.
Now what
Right now, Unity has a market cap of $10.4 billion, even after falling 75% so far this year. If it can hit the high end of its revenue guidance, the stock will trade at a price-to-sales ratio (P/S) of 7.3 by the end of this year. This is slightly expensive but seems reasonable for a company with high gross margins and fast revenue growth like Unity.
If you’re confident in Unity’s long-term trajectory with its gaming engine and ancillary products, now could be a good time to pick up some shares of the stock. 
Brett Schafer has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Unity Software Inc. The Motley Fool has a disclosure policy. –

What happened

Unity Software (NYSE: U) is down 38.8% this week, according to S&P Global Market Intelligence. The game engine, monetization, and digital twins platform posted solid growth for the quarter, but investors were not happy with a revenue mishap and poor guidance for the rest of the year. At one point this week, the stock was down 49.3% from last Friday’s close and is now down 75% just this year.

So what

On May 10, Unity Software released its first-quarter earnings results. Revenue grew 36% year over year to $320 million in the quarter, driven by 65% growth from the Create Solutions segment and 26% growth from the Operate Solutions segment. Create Solutions is the game engine that Unity is known for that helps developers easily build new video games for consumers, mainly focused on mobile platforms. The Operate Solutions segment has services focused on helping developers monetize their games through things like advertising.

Image source: Getty Images.

On top of just video games, Unity is seeing strong growth from its digital twins business, according to management commentary on the quarterly conference call. A digital twin is a virtual representation of a real-life three-dimensional object and is helpful for companies in the industrial, architecture, and engineering fields. Unity leverages its 3D engine, which in the past has been mainly used for gaming, to help companies in this regard.

While the first quarter looked solid, Unity disappointed with its second-quarter and full-year guidance. Next quarter and this year, it is expecting $290 million to $295 million and $1.35 to $1.425 billion, respectively, in revenue. This was well short of the average analyst estimates of $360 million in revenue next quarter and $1.5 billion for the full year. Why did Unity miss so badly on guidance? Well, since it got bad data from a large customer and made a mistake with its Audience Pinpointer tool, Unity is going to lose $110 million in revenue than it otherwise would have earned in 2022. This is a huge mistake for a company as large as Unity and is likely why investors were so disappointed with the report.

However, besides this big mistake, Unity’s business seems to be humming along just fine at the moment.

Now what

Right now, Unity has a market cap of $10.4 billion, even after falling 75% so far this year. If it can hit the high end of its revenue guidance, the stock will trade at a price-to-sales ratio (P/S) of 7.3 by the end of this year. This is slightly expensive but seems reasonable for a company with high gross margins and fast revenue growth like Unity.

If you’re confident in Unity’s long-term trajectory with its gaming engine and ancillary products, now could be a good time to pick up some shares of the stock. 

Brett Schafer has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Unity Software Inc. The Motley Fool has a disclosure policy.

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