Unity seen 'traversing a perilous path' as stock slides
By Emily Bary
'The announced aggressive restructuring paints a dire picture,' analyst writes
Benchmark Research analyst Mike Hickey didn't mince words in assessing Unity Software Inc.'s decision to yank its prior forecast as it reviews its business and deals with developer backlash to a since-walked-back controversial fee plan.
Don't miss: Unity has lost developer trust, but Wall Street thinks CEO's exit can help rebuild goodwill
"The announced aggressive restructuring paints a dire picture," Hickey wrote early Friday in the wake of Unity's (U) third-quarter earnings.
The app-monetization company "is in the throes of a drastic cost-cutting initiative, likely to include significant layoffs and office closures," he continued, as he maintained a sell rating and $16 target price on the stock. "Unity's forward path is clouded with uncertainty, as they forego fourth-quarter guidance and focus on a desperate scramble to reorient themselves. it's clear that Unity is traversing a perilous path, with the specter of failure looming large."
Unity shares were off 13% in Friday's premarket trading.
Opinion: Unity Software has a fleeting moment to win back developers -- and investors
Macquarie's Tim Nollen was similarly considered as he lowered his rating on Unity shares to neutral from outperform.
"If the company is asking fundamental questions of the business, its products and prospects, we have to assume there are no easy answers," Nollen wrote in a note to clients.
He's worried about trends for the company moving forward.
"We therefore have to assume revenue in Q4 and 2024 may be lackluster, with Create underperforming -- whether due to the downdraft in managed services or China, or to lost game developer business due to ongoing backlash at the new runtime fees, even as Unity has eased up on some of the terms and tried harder to engage with customers in a business that is probably pretty sticky," Nollen said. "We also note Grow grew at half the rate of AppLovin in Q3, and that only thanks to ironSource."
See also: Applovin's stock rockets as earnings easily exceed expectations
Jefferies analyst Andrew Uerkwitz chimed in that the review was "validation of our year-long negative view," and he said he welcomed "a more honest discussion of the path forward."
Uerkwitz rates the stock at hold and he cut his price target to $23 from $27 in his latest report.
Read: Lions Gate shares rise on surprise profit, Plug Power stock plunges on supply warning and more moving stocks
Others were more optimistic.
"While we acknowledge the potential uncertainty tied to near-term business metrics, we believe the swiftness in action and implementation of these initiatives (changes expected to be implemented within the quarter and completed by the end of the first quarter in 2024) will enable the enterprise to accelerate its emphasis on core products," William Blair's Dylan Becker wrote.
Further, "these steps will better position the business for long-term revenue growth acceleration, better integration and synergies between the Create and Grow businesses, and healthy free-cash-flow generation given the sizable opportunity ahead for real-time interactive content creation and monetization across both gaming and non-gaming verticals," Becker wrote as he stuck with his outperform call on the stock.
And while Wedbush analyst Michael Pachter adopted more "conservative" estimates, he offered that "Unity is the best positioned tech company to capitalize on emerging trends in the use of digital twins and the best positioned ad tech company to deliver brand advertisers to a 3.5 billion strong gaming audience."
Pachter titled his note to clients "One Step Back/Two Steps Forward," as he maintained an outperform rating on the stock but slashed his price target to $31 from $55.
-Emily Bary
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