Unity Software Downgraded On Heels Of Portfolio Reset, 5 Analysts Provide Key Takeaways

Shares of Unity Software Inc U tanked in early trading on Tuesday, after the company reported a higher-than-expected loss for the fourth quarter.

The results came amid an exciting earnings season. Here are some key analyst takeaways from the release.

• Piper Sandler analyst Brent Bracelin upgraded the rating from Underweight to Neutral, while raising the price target from $30 to $35.
• Needham analyst Bernie McTernan reiterated a Buy rating, while cutting the price target from $40 to $31.
• Wedbush analyst Michael Pachter reaffirmed an Outperform rating, while trimming the price target from $50.00 to $35.50.
• Oppenheimer analyst Martin Yang maintained a Perform rating on the stock.
• Goldman Sachs analyst Kash Rangan reiterated a Neutral rating, while reducing the price target from $32 to $29.

Check out other analyst stock ratings.

Piper Sandler: Unity Software’s fourth-quarter revenues grew 35% year-on-year to $609 million, but was down by 2% at $510 million excluding a one-time revenue gain from the termination of the service agreement with Weta FX, Bracelin said.

“The top-line continued to be pressured by the ongoing portfolio reset, as well as competitive pressure within the Grow segment,” the analyst stated. “The material 2024 growth reset to a mid-point of 3% (vs. 9% consensus) implies that the strategic base growth potential is not as high as expected."

Needham: Unity Software announced a strategic reset that triggered a selloff in the stock in the aftermarket, McTernan said.

“We suspect investor attention will now return to the revenue growth outlook for the company, which was significantly lowered by a number of headwinds U has been dealing with over the last year,” the analyst wrote.

These headwinds included declines in the casual gaming market, run-time fee impacting customer relationships, challenges in China, competition with APP and integrating IronSource, he added.

Wedbush: “We believe that interim CEO Jim Whitehurst has fully cleared the decks of all excess baggage, positioning Unity to easily exceed expectations over the remainder of the year,” Pachter wrote in a note. He added, however, that there is little evidence of this and that the company will likely remain a “show me” story for at least another quarter.

Management guided to first-quarter revenue of $415-$420 million, lower than the prior consensus of $531 million, the analyst stated.

Oppenheimer: “The 4Q23 report was the first time management admitted its Grow segment performance was hurt by competition,” Yang said. “Management also committed to fill gaps in its ad products and fully integrate data between Unity and ironSource."

“While we like the idea of a complete reset and management focus on its strategic portfolio, we are surprised by adj. EBITDA guidance of 25% exiting 2024” which implies that the Grow segment’s margin will be “meaningfully” below ironSouce's historical levels, the analyst stated.

Goldman Sachs: Unity Software's fourth-quarter growth was pressured "across Grow (flat YoY) and Create (-4% YoY), highlighting the ongoing challenges amid its strategy review," Rangan said in a note

There are "lingering questions about U's rebound trajectory, which is underpinned by its ability to execute on its product roadmap and monetization strategies," he added.

U Price Action: Shares of Unity Software declined by 12.77% to $28.82 in the premarket session on Tuesday.

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