Unity's stock falls as Wall Street wonders if company's reset is 'dubious' or a 'floor'

By Emily Bary

Some analysts question how easy it will be for Unity to reignite growth after business transition

Unity Software Inc. has hit the reset button, but analysts are split on whether the app-monetization software company now has a brighter future ahead.

The company's latest results were "were much worse than expected," noted Jefferies analyst Brent Thill, who pointed to a 2% drop in quarterly pro forma revenue relative to a year earlier. Meanwhile, Unity's (U) fiscal first-quarter outlook implies flat growth.

"We worry that the loss of the ironSource team and lack of a new product in the Grow segment could lead to ongoing share losses," Thill wrote. The management team of ironSource, an Israeli ad-tech company that Unity merged with in late 2022, announced last month that they were leaving the company.

In addition, Thill said the fallout from recent layoffs and Unity's reset of its portfolio "will continue to weigh on growth at least through the first two quarters of 2024," in his estimation. Overall, he and his team "find it difficult to gain conviction in the [revenue] growth trajectory" even though Unity's management may be taking a conservative approach with its bottom-line forecasts.

Thill has a hold rating on Unity's stock and cut his price target to $30 from $35 in his latest note to clients.

Unity shares were falling 13% in premarket trading Tuesday.

Benchmark Company's Mike Hickey also expressed concerns about the impact of disruptions at Unity, as he called the company's reset "dubious" and its latest results "dismal."

"Unity's reset plan focuses on core businesses and cost optimization, promising future growth, but [it] lacks immediate evidence and clear criteria for investment decisions, making its success uncertain," he wrote. "We have concerns about the potential negative impact on the company's culture due to a 25% reduction in staff and the departure of some key founding members."

He rates Unity shares at sell with a $16 price target.

Macquarie's Tim Nollen deemed Unity's stock to still be expensive, trading at about 8 times enterprise value to estimated 2024 sales based on the implied price move from the extended session.

"Fundamental changes like this take time to work through, and Unity faces at least half a year of revenue stagnation before hoped-for improvements in both divisions," he wrote, while sticking with an underperform rating and $20 price target.

Others, including William Blair's Dylan Becker, were more upbeat.

"Overall, we view the pace of the strategic review process as encouraging, enabling the company to shift its focus on doubling down on core platform investments and prioritizing sustainable revenue growth initiatives going forward, supported by 18% core Create subscription growth and record non-gaming industries momentum, as well as a greater integration between Create and Grow solutions," he wrote.

He thinks Unity's recent moves will position it "to drive a healthy combination of durable revenue growth and material free cash flow generation into 2025 and beyond."

Becker has an outperform rating on the stock.

Needham's Bernie McTernan offered that the latest outlook serves as a "firm floor" from which the company can now drive growth.

"We have seen other companies in our coverage make this switch to profitability, which then switches investor focus back to the revenue trajectory of the business," he wrote, while keeping his buy rating but cutting his price target to $31 from $40.

-Emily Bary

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02-27-24 0941ET

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