WHY is Unity (U) Stock Gaining Today?
Unity, the renowned game engine creator (NYSE:U), experienced a notable 9.6% surge in morning trade upon receiving an upgrade in its stock rating from Equal Weight (Hold) to Overweight (Buy) by Morgan Stanley analyst Matthew Cost, who also lifted the price target from $22 to $45.
The upgrade by Cost was primarily due to a revised outlook after Unity’s Q2 results led to a reduction in ’24 guidance, making forward estimates appear more secure. As Cost pointed out, despite some customer relation issues, Unity’s game engine still holds a dominant 70% market share in mobile, showcasing its formidable competitive advantage, with competitors unable to encroach on Unity’s territory. Despite the initial spike, the shares settled to $16.84, marking a 2.9% increase from the prior close.
Reading the Market:
Unity’s shares have been characterized by volatility, presenting 31 instances of more than 5% movement over the past year. Today’s activity suggests the market sees significance in this news but doesn’t view it as a fundamental game-changer for the company.
It was previously reported on a significant drop in Unity’s shares 6 months ago, when the company’s stock fell 19.1% following Q4 results and 2024 revenue and EPS guidance that didn’t meet expectations. Despite this quarter’s headline revenue outperforming expectations, it was boosted by a unique event – a special $99 million sale to customer Wētā who chose a perpetual licence to access Unity’s software. Without this, revenue would have been a lower $510 million, marking a 2% decline year on year.
In a shareholder letter, recently appointed CEO James Whitehurst (October 2023) outlined Unity’s new strategy. This involves a two-phase approach commencing with a focus on its core business and streamlining investments. As part of this, Unity announced a 25% reduction in workforce on January 8th to realign its cost structure. Once this phase is completed by Q1 end, the company plans to return to growth strategies and new product development. Despite these measures, this was an unconvincing quarter for Unity, leading to investor apprehensions.
Unity’s shares have fallen 56.6% since the start of the year. Trading at $16.84 per share, the stock is at a 60.6% deficit from its 52-week high of $42.73 in December 2023. For context, an investment of $1,000 in Unity’s IPO in September 2020 would be valued at around $246.16 now.
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