The Unity Software booth at the Game Developers Conference in San Francisco.
David Paul Morris/Bloomberg
Unity Software has now reported three quarters as a public company. After debuting at $52, its stock has touched more than triple its initial-public-offering price.
After it reported its first-quarter results late Tuesday, some of Wall Street is beginning to warm to the name. Others say it’s still too expensive.
Unity shares (ticker: U) were down 1.6%, at $83.20, in afternoon trading Wednesday. U.S. indexes were sharply lower Wednesday after the highest reading on inflation in roughly 13 years.
Unity had a strong quarter. The software company reported narrower-than-expected adjusted losses of 10 cents a share. Revenue also topped expectations, rising 41% to $234.8 million.
Stifel analyst Tom Roderick upgraded shares to Buy from Hold Tuesday after the company reported. Unity closed at $84.54 Tuesday, roughly 51% off its 52-week high of $172.29. Shares have fallen 46% this year, as the S&P 500 index rose 11%.
“We have heard and seen enough,” wrote Roderick, who then set a target price of $125.
Roderick described the stock as richly valued. But when the analyst compared it with names such as Snowflake (SNOW), Okta (OKTA), Datadog (DDOG), and others, Unity shares look much more reasonable. Given where other stocks are trading, Roderick wrote, “we are entirely comfortable paying a midteens revenue multiple.”
Unity is mainly known for its videogame developer tools that power a large number of mobile apps. Part of the company’s pitch to investors when it went public last year was selling its tools to more industries such as construction and automotive companies.
Barclays analyst Mario Lu has a positive view of Unity’s business and its growth. But at its current price and multiple, Lu rates the stock Equal Weight, Barclays ‘ equivalent of a Hold. For Lu, Unity needs to demonstrate it is growing its nonvideogame business fast to warrant a change in his view of the stock. Lu cut his target price to $90 from $130.
“While we continue to view Unity as one of the leading innovative companies in our coverage, it is currently trading at 22x FY22 revenue, and therefore we would need to see a stronger inflection in these new verticals before we can become more constructive,” he wrote.
Wedbush analyst Michael Pachter also lowered his target price. In a note, he dropped the target to $125 from $175 and wrote that his lower expectations reflected the company’s later-than-expected profitability target of 2023. Unity’s ability to grow isn’t in question, however, and Pachter wrote that despite a tracking change that Apple (AAPL) implemented and the Covid-19 pandemic, his estimates for 2022 and 2023 revenue remain unchanged.
For Unity, the need for revenue growth is a priority at the moment. “We have enough cash to run the company,” Unity Chief Financial Officer Luis Felipe Visoso told Barron’s. Visoso noted Unity has a billion dollars in the bank and said that the company planned to keep revenue growing at least 30% “The day we stop growing at 30%-plus, I think we will all be concerned,” he said.
Visoso acknowledged that still the company does need to improve on its ability to turn a profit. “We need to make sure we can improve other muscles,” he said. “The muscle of margin improvements, the muscle of free cash flow generation. How do we turn revenue to profit to cash, that still needs a little bit more work. Obviously a lot of that comes with scale.”
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