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Unity Software (NYSE:U) Reports Earnings; AppLovin Offers to Buy Company

Story Highlights

Unity Software saw decent revenue growth in the second quarter. However, rising costs impacted margins, leading to shares falling slightly in after-hours trading. In addition, rival AppLovin has offered to acquire Unity.

Unity Software (U) recently reported earnings for its second quarter of Fiscal Year 2022. Adjusted earnings per share came in at -$0.18, which beat analysts’ consensus estimate of -$0.21. In the past nine quarters, the company has met or beat estimates each time. Nevertheless, shares are slightly down in after-hours trading.

In addition, sales increased 9% year-over-year, with revenue hitting $297 million compared to $273.6 million. The revenue increase was primarily driven by an increase in customers that generated over $100,000 in revenue. In the last 12 months, 1,085 customers met this benchmark compared to 888 in Q2 2021.

However, gross profit decreased by 7.2%, which means that the company did not demonstrate any operating leverage. Indeed, the gross margin contracted from 78.9% to 67.4%. This, along with an increase in operating expenses, caused the company’s operating loss to increase dramatically from $149.2 million in the comparable period to $197.7 million now.

AppLovin Offers to Acquire Unity Software for $17B

AppLovin Corp (APP) announced on Tuesday that it had made an offer to acquire Unity Software. The offer is comprised of an all-stock deal worth $17.54 billion, which equates to $58.85 per each share of Unity. This might be a good combination if management’s projections are correct. Indeed, APP’s CEO claims that the combined company could produce $3 billion in adjusted operating profit by the end of 2024.

This comes after Unity made an offer to acquire ironSource (IS) for $4.4 billion. As part of the AppLovin deal, Unity would have to terminate the ironSource transaction.

What’s interesting about the proposal is that both companies are similar in size, although Unity now has a larger market cap as AppLovin’s stock declined 10% following the announcement. It’ll be interesting to see if this deal goes through as it will create a lot of dilution for existing APP shareholders.

Is Unity Software Stock a Buy, Sell, or Hold?

Unity Software has a Moderate Buy consensus rating based on 11 Buys, five Holds, and one Sell assigned in the past three months. The average Unity Software price target of $54.21 implies 8.6% upside potential.

Final Thoughts – Unity Software Had an Underwhelming Quarter

Unity saw decent growth in the quarter, as revenue increased by 9% while adjusted earnings came in better than expected. However, the contracting margins and the widening losses are not what investors want to see, especially in the current market environment. As a result, the share price fell slightly after the announcement.

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