Shares of video game software developer Unity Software (NYSE:U) have been under pressure this month. The stock corrected by as much as 15% on November 10, after Unity disclosed a $1 billion sale of 2% convertible senior notes due 2027. The company had a total outstanding convertible debt of $2.71 billion at the end of September.
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Additionally, its recent third-quarter performance failed to impress investors after revenue fell short of expectations, and the company did not provide any financial outlook. While narrowing losses for the quarter meant some relief, the game engine maker is still reeling from gaming restrictions in China.
Unity is now moving to streamline its business, lower its office footprint, and is mulling a headcount reduction. Further, the company’s move to change its pricing structure to a per-installation model drew criticism from creators and a not-so-enthusiastic reaction from investors and analysts.
Is Unity a Buy, Sell, or a Hold?
Despite this litany of challenges, the stock has recovered by about 15% since its November 10 lows, and analysts are cautiously optimistic about the company’s prospects with a Moderate Buy consensus rating. JMP Securities’ Andrew Boone and Goldman Sachs’ Kash Rangan have reiterated Hold ratings on Unity without assigning the stock a price target.
Wells Fargo’s Brian Fitzgerald is more optimistic with a Buy rating and a $40 price target on Unity. Overall, the Street has an average price target of $31.34 on U, implying a modest 9.6% potential upside.
Earlier this month, interim CEO Jim Whitehurst put the company’s steps and missteps succinctly as, “We have a significant opportunity to accelerate revenue growth, improve profitability metrics, and increase free cash flow generation going forward. However, we are currently doing too much, we are not achieving the synergies that exist across our portfolio, and we are not executing to our full potential.”
Consequently, it could be a while before Unity shares make up for the nearly 14% price decline over the past year, and investor caution in Unity stock may be warranted.
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