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Why Did Unity Software Shares Drop Almost 25%?

During the extended trading session on May 10, Unity Software Inc. (NYSE: U) shares lost almost a fourth of their market capitalization.

The leading platform for creating and operating interactive, real-time 3D (RT3D) content delivered almost in-line first-quarter results. However, investors were hugely disappointed by the lowered FY2022 revenue guidance, well below the analyst expectations.

Q1 Numbers

The company reported an adjusted loss of $0.08 per share, a cent ahead of the street’s estimated loss of $0.09. The loss was better than the reported loss of $0.10 per share in the prior-year period.

Meanwhile, revenues jumped 36% year-over-year to $320.1 million but modestly lagged consensus estimates of $321.35 million. The increase in revenues reflected a surge in Create Solutions revenue, which increased 65% to $116.4 million.

Lowered FY2022 Outlook

Disappointingly, management reduced the financial guidance for FY2022 based on expected challenges with its monetization products.

The company now forecasts full-year revenues to be in the range of $1.35 billion to $1.425 billion, much below the consensus estimate of $1.5 billion.

For the fiscal second quarter, revenues are projected to be in the range of $290 million to $295 million, versus the consensus estimate of $360 million.

CEO’s Comments

Unity CEO, John Riccitiello, commented, “We remain focused on the massive opportunity we see in front of us long-term. Short-term, we are laser-focused on accelerating growth in Operate.”

Wall Street’s Take

Following the dismal outlook, Oppenheimer analyst Brian Schwartz decreased the price target on Unity Software to $54 from $135 but reiterated a Buy rating.

Giving possible reasons for the lowered outlook, Schwartz stated, “The lowered outlook is due to two separate instances where data-related errors led to deteriorating mobile ad performance for Unity Ads customers. The operating segment is expected to see a $110M negative impact throughout FY22.”

He further pointed out the delay in the launch of revenue-driving features such as Unity Mediation, as the company intends to prioritize its resources to ensure similar errors don’t occur again in the future.

Overall, the stock has a Strong Buy consensus rating based on nine Buys and two Holds. At the time of writing, the average Unity Software stock forecast was $100.36, which implies 196.57% upside potential from current levels.

Conclusion

Shares of Unity are down over 80% over the past six months. The video game software development company is clearly struggling with near term glitches concerning its product fixes and revenue deceleration, especially in its Operate segment.

Likewise, investors may choose to take a more cautious stance on the stock in the coming months due to the ongoing challenges faced by the company.

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