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Recent Hot IPO Unity Software Tumbles On Forecast For Slowing Sales

Business

Recent buzzworthy initial public offering Unity Software (U) disappointed investors with its 2021 sales guidance, which forecast slowing growth. The news drove Unity stock sharply lower on Friday.

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The San Francisco-based company late Thursday reported better-than-expected results for the fourth quarter. Its sales in the December quarter rose 39% year over year to $220.3 million, topping the consensus estimate of $204.2 million.

Unity Software lost an adjusted 10 cents a share, which was better than Wall Street’s target of a loss of 14 cents a share. In the year-earlier period, it lost an adjusted 79 cents a share.

But investors focused on its outlook. For full-year 2021, Unity expects revenue of $950 million to $970 million. The midpoint of $960 million would represent growth of 24% and is just above analyst estimates for $956 million. In 2020, sales increased 43% to $772.4 million.

Unity Stock Dives After Fourth-Quarter Report

For the first quarter, the company sees sales of $215 million, up 29% year over year, based on the midpoint of its outlook. That compares with Wall Street views of $204.2 million.

Unity Software makes 3D animation software for video games, advertising and other applications. It also provides tools for creating, running and monetizing games and other content. Games made with Unity Software tools include “Among Us” from InnerSloth, “Magic Tiles 3” from Amanotes, and “Cube Surfer” and “Scribble Rider” from Voodoo.

In afternoon trading on the stock market today, Unity stock sank 9.5%, near 135.55. Earlier in the session, it dropped as much as 14.2% to 128.50.

Unity stock went public last September with its shares priced $52. It notched a record high of 174.94 on Dec. 23. Unity stock lately had been trading around its 50-day moving average line. On Friday, it plunged below that key support level.

“As the leader in creating and operating tools for the world of real-time 3D content, we continue to invest with the intent to capture what we believe is a substantial opportunity ahead in 2021 and years beyond,” Chief Executive John Riccitiello said in a news release.

Analysts Stick With Buy Ratings On Unity Stock

Several Wall Street analysts kept their bullish stances on Unity stock.

Wedbush Securities analyst Michael Pachter reiterated his outperform rating and price target of 175 on Unity stock.

“We expect Unity to deliver significant top-line growth for several years and improve its profitability as it further penetrates gaming and nongaming industries,” Pachter said in a note to clients. “Management has consistently set expectations that the company can grow revenues by 30% annually, and delivered growth of over 42% in 2020. However, company guidance for 2021 fell short of the 30% threshold.”

Credit Suisse maintained its outperform rating on Unity stock with a price target of 170.

Unity Software Faces Two ‘Unusual Events’

The company’s financial results and guidance were impacted by a couple of “unusual events,” Unity Chief Financial Officer Kim Jabal told Investor’s Business Daily.

First, the Covid-19 pandemic spurred higher usage of games in 2020, which drove upside to revenue of about $25 million, or roughly 3% of total sales. Second, the implementation of Apple‘s (AAPL) new advertising privacy rules is likely to trim about $30 million from Unity’s 2021 revenue, or about 3% of total sales, she said.

Follow Patrick Seitz on Twitter at @IBD_PSeitz for more stories on consumer technology, software and semiconductor stocks.

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