Shares of video game engine and tools developer Unity Software (NYSE:U) have been under serious pressure in recent weeks, thanks in part to upsetting changes to its pricing structure — including a move to a pay-per-download model — that entail cost increases. Indeed, the extremely negative developer response has pushed management to respond with a (partial) pricing model backtrack to repair its reputation with its developer customers.
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Undoubtedly, Unity seems to have made a questionable and perplexing mistake by trying to make major changes without considering the full extent of pressure placed on its customers. As the firm goes back on many of the changes while continuing to enhance the platform, I think there’s significant value to be had after the latest dip in shares. As such, I’m staying bullish on the stock but do acknowledge that much of the reputational damage will be difficult to win back, even as it responds promptly to developer feedback.
Unity’s Reputation May Have Taken a Hit Over the Past Month
As the Oracle of Omaha, Warren Buffett, once put it, “It takes 20 years to build a reputation and five minutes to ruin it. If you think about that, you’ll do things differently.”
In the case of Unity Software, the company may have lost much of the trust it built over the course of 13 years with its recent pricing changes. The company can go back on its decision, but the sour taste and stresses will probably not be forgotten by many of its developer customers.
Indeed, cost increases have been the new normal amid this high-inflation environment. However, substantial changes to a pricing structure, I believe, are taking it a step too far, especially if the consequences weren’t carefully thought out.
Unity Stock Backtracks on Pricing Changes, but Why Isn’t the Stock Backtracking Higher?
In early September, Unity shifted gears to pay-per-download, a model that I didn’t think made a whole lot of sense, given the financial burden it would have put on certain independent developers. Indeed, the development community has been left disgruntled following the changes that also did no favors to the stock price.
Unfortunately, the move may have damaged the company’s reputation by such a magnitude that even apologies may not be able to stop some customers from considering other options. Unity’s decision to backtrack its pricing has won over some analysts on Wall Street. But until now, the stock has continued to crumble under its own weight.
Shares of Unity Software are now down nearly 40% from their July 2023 highs and more than 85% from their 2021 all-time high, around $210 per share. Even after the catastrophic implosion, shares only seem to want to gravitate lower. And at nearly 55 times forward price-to-earnings (P/E) and 5.9 times price-to-sales (P/S), U stock doesn’t exactly seem cheap quite yet, at least not compared to the software application industry average forward P/E of 29.8 times and its P/S that’s also at 5.9 times.
Morgan Stanley (NYSE:MS) thinks pricing adjustments are a “fundamentally bullish development.” However, the company’s “pricing power” has been thrown into question following the response from customers.
While Unity deserves a “D” for how it handled initial pricing model changes, I think its prompt response deserves a solid “B+.” Only time will tell if Unity can move on from its pricing-induced pains. I think it will, especially if it can offer developers greater fee options and more value for the price they’ll pay. Though the stock probably won’t rebound overnight, I like the risk/reward as the firm learns from its mistakes and looks to generative artificial intelligence (AI) to help empower its developers to do more with less.
Is Unity Stock a Buy, According to Analysts?
On TipRanks, U stock comes in as a Moderate Buy. Out of 20 analyst ratings, there are 11 Buys, eight Holds, and one Sell rating. The average U stock price target is $47.77, implying upside potential of 58.4%.
The Bottom Line on U Stock
Unity stock is sinking like a rock, thanks in no part to moves that I believe are akin to shooting itself in the foot. Looking ahead, though, I expect most developer customers will forgive and forget about the situation as the firm backtracks on some of its most controversial pricing changes while seeking to find a fair middle ground.
