Unity Software Inc. (U) in San Francisco is the world’s leading platform for the production and exploitation of real-time interactive 3D content. Its shares fell 29.3% in extended trading on Tuesday after the software company released fiscal first-quarter results roughly in line with Wall Street analysts’ expectations, but offered weak sales guidance for the second. quarter and fiscal year.

Additionally, the stock price is down 66.3% year-to-date and 46.9% over the past month. Additionally, closing its last trading session at $48.13, the stock is currently 77% below its 52-week high of $210, which it reached on November 18, 2021.

In addition, yesterday, equity analysts at Daiwa Capital Markets downgraded the stock’s rating from “outperform” to “neutral” and lowered its price target to $34.

Here’s what could shape U’s performance in the short term:

Poor bottom line performance

U’s total revenue increased 36.4% year-over-year to $320.13 million for the quarter ended March 31, 2021. However, its operating expenses increased by 38.5% from their value a year ago to $397.45 million. Its operating loss rose 54.4% from the year-ago quarter to $171.61 million. And the company’s net loss rose 65.2% year over year to $177.56 million. Its loss per share was $0.60 over this period.

Low profitability

U is 0.3% over 12 months asset turnover rate is 53.2% below the industry average of 0.63%. Its trailing 12-month operating cash flow was negative $111.45 million, versus the industry average of $82.75 million. Additionally, its trailing 12-month ROA, net profit margin, and ROC are negative at 11%, 47.9%, and 9.2%, respectively.

Premium Assessment

In terms of price/pound futures, the stock is currently trading at 6.69x, 75.8% higher than the industry average of 3.81x. Additionally, its 10.05x EV/Futures is 269.3% higher than the 2.72x industry average. And U’s 9.55x futures price/sales is 246.7% higher than the industry’s 2.75x.

POWR ratings reflect bleak outlook

U has an overall D rating, which is equivalent to Sell in our proprietary POWR rating system. POWR ratings are calculated by considering 118 separate factors, with each factor weighted to an optimal degree.

Our proprietary scoring system also rates each stock against eight distinct categories. U has an F rating for value and a D for stability. Its higher valuation than the industry is in line with the Value rating. The Stability rating highlights the stock’s higher volatility than its peers.

Of the 23 C-rated stocks in the Entertainment – ​​Toys & Video Games sector, U is ranked #18.

Beyond what I said above, U ratings for growth, momentum, quality, and sentiment can be seen here.

Click here to view our Software Industry Report for 2022

Conclusion

While U is taking several strategic steps to establish a firm foothold in the industry, its mounting losses and poor forecasts for the coming quarters are cause for concern. Additionally, analysts expect its EPS to drop 100% in the next quarter (ending June 30, 2022). Furthermore, it is currently trading significantly below its 50-day and 200-day moving averages of $85.35 and $120.88, respectively, indicating a downtrend. Additionally, given its high valuation and negative profit margins, we think the stock is best avoided now.

How does Unity Software Inc. (U) compare to its peers?

Although U has an overall D rating, one might consider its industry peers, Playtika Holding Corp. (PLTK), which has an overall A (Strong Buy) rating, and DoubleDown Interactive Co., Ltd. (DDI) and Spin Master Corp. (SNMSF), which have an overall rating of B (buy).


U shares fell $15.01 (-31.19%) in premarket trading on Wednesday. Year-to-date, U is down -76.05%, compared to a -16.21% rise in the benchmark S&P 500 over the same period.

About the Author: Pragya Pandey

Pragya is an equity research analyst and financial journalist with a passion for investing. In college, she majored in finance and is currently pursuing the CFA program and is a Level II candidate. After…

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