Headquartered in San Francisco, Unity Software (U) operates an interactive 3D content platform. I am bullish on the stock.
Are you a true contrarian investor? This question requires some soul-searching and reflection. It’s easy to call yourself a contrarian, but when a stock plunges and analysts are slashing their price targets, your instincts might tell you to sell, not buy.
Unity Software is a go-to platform for many video game developers seeking to build immersive 3D gaming experiences. If you’re a believer in the build-out of the metaverse, then U stock should definitely be on your radar.
However, as we’ll discover, not every expert on Wall Street envisions a strong future for U stock. Indeed, some price-target cuts will test your resolve as a contrarian investors.
On the other hand, you don’t have to let price-target reductions shake you out of the trade. Armed with persuasive fiscal data, you can choose to go against the crowd and the negativity, and take a chance on Unity Software.
The Big Smackdown
Sometimes, folks who buy stocks near the top get severely punished. That’s why “buy low, sell high” contrarian principles can often save investors from heartache and financial losses.
Sentiment was running hot in November of 2021, when U stock was flirting with the $200 level. The stock had doubled in half a year’s time, and it surely seemed as if the good times would never end.
However, it’s when traders start asking, “What could possibly go wrong?” that things typically start to go wrong. U stock rolled over after topping out near $200, and recently sank into the $30s.
So, is U stock a terrific value, or just a value trap? As usual, the answer depends on whom you’re asking. Judging by their price targets, at least two prominent Wall Street experts seem to lean bearish against Unity Software.
First of all, Jefferies analyst Andrew Uerkwitz reduced his price objective on U stock from $100 to $40. The Jefferies analyst cited “bad proprietary customer data” as a problem and cautioned that Unity Software “needs to relearn using the correct data and this will take time.”
Meanwhile, Stifel analyst J. Parker Lane chopped his price target on U stock down from $150 to $100. The odd thing about all of this, though, is that Uerkwitz gave Unity Software an Outperform rating (which is similar to a Buy rating), and Lane gave U stock a “Buy” rating. So apparently, these two analysts aren’t entirely bearish on Unity Software.
Lane even went so far as to express high hopes for Unity Software, saying, “Unity’s strong positioning in the mobile gaming space and growing set of monetization tools will help the company get back on track in a timely fashion, with revenue growth recovering as the year progresses.”
Focused on the Massive Opportunity
So, Unity Software has suffered from a major share-price smackdown and at least two price-target chop jobs. Does this mean that the company is actually falling apart, though?
The answer lies not within our emotions, but in the hard data. Fortunately, Unity Software’s investors have powerful ammunition on their side as the company recently released its first-quarter 2022 financial results.
First things first: It must be acknowledged that Unity Software is still working to become a profitable business. In other words, the company’s investors should prepare for Unity Software to post net earnings losses for a while.
On the other hand, the bulls can celebrate Unity Software’s impressive revenue growth. As it turned out, the company generated Q1 2022 revenue of $320.1 million, representing an increase of 36% versus the first quarter of 2021.
Certain segments proved to be particularly strong outperformers during the quarter. Specifically, Unity Software’s Create Solutions revenue totaled $116.4 million, up 65% year-over-year, while the company’s Operate Solutions revenue of $184 million marked a 26% year-over-year improvement.
It’s also worth noting that Unity Software’s customer base appears to be expanding. Notably, 1,083 Unity Software customers each generated over $100,000 of revenue during the trailing 12 months as of March 31, 2022. This shows improvement over the customer count of 837 recorded as of March 31, 2021.
Armed with these encouraging stats, Unity Software President and CEO John Riccitiello certainly seems ready to tackle any future challenges and deliver, hopefully, another outstanding quarter. “We remain focused on the massive opportunity we see in front of us long-term,” Riccitiello assured.
Wall Street’s Take
According to TipRanks’ analyst rating consensus, U is a Strong Buy, based on 11 Buy and three Hold ratings. The average Unity Software price target is $76, implying a 94.37% upside potential.
The Takeaway
Given the downward long-term trajectory of U stock, it might be tempting to conclude that it’s a toxic asset. The two aforementioned price-target cuts might also dissuade some prospective Unity Software investors.
However, it’s important to delve into the data before making a final decision on Unity Software. There’s no denying that the company is growing its revenue and making strides in expanding its customer base.
All in all, U stock looks like a “buy low, sell high” opportunity for risk-tolerant investors. So, don’t be afraid to flex your contrarian muscles and take a chance on Unity Software.
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