Is Unity Software Stock Buy It Now?

Unit softwareit is (NYSE:U) the stock price jumped 10% on Aug. 10 after the video game engine developer released its second-quarter report. Its revenue rose 9% year-over-year to $297 million, missing analysts’ estimates of $2 million. Its adjusted net loss fell from $1.3 million to $53.1 million, or $0.18 per share, but still exceeded Wall Street expectations in $0.03.

Unity expects revenue to grow 10% to 17% year-over-year in the third quarter, missing analysts’ expectations for 21% growth. For the full year, it expects its revenue to grow 18% to 23%, compared to its earlier outlook for growth of 23% to 30% and the consensus forecast of 24% growth.

Image source: Getty Images.

These numbers were low, but they indicated that Unity continued to grow year after year. Unity also reaffirmed its intention to acquire ironSource (NYSE: EAST) to stabilize its advertising activity. This announcement indicates that Unity will likely reject AppLovinit is (NASDAQ: APP) unsolicited offer for a merger, which is conditional on Unity pulling out of ironSource. So, are Unity shares finally safe to buy after falling more than 70% from their all-time high last November?

What were Unity’s biggest problems?

Last year, Unity generated 30% of its revenue from its Create Solutions business, which hosts its eponymous game development engine. Another 64% came from its Operate Solutions business, which provides additional multiplayer, monetization and advertising features to developers. The rest of its revenue came from its Strategic Partnerships and Others division. The Create Solutions segment continues to grow like a weed, but the growth of its Operate Solutions business has hit a brick wall this year.

Period

2020

2021

Q1 2022

Q2 2022

Create solution revenue growth (YOY)

37%

41%

65%

66%

Operating Solutions Revenue Growth (YOY)

61%

51%

26%

(13%)

Strategic partnerships and other revenue growth (YOY)

(12%)

seven%

11%

(2%)

Total revenue growth (YOY)

43%

44%

36%

9%

Data source: Unit. Table by author. YOY = year after year.

This slowdown was caused by problems with Unity Ads’ algorithms, which began ingesting “bad data from a large customer” in the first quarter. This setback, probably caused by AppleiOS’s privacy update forced Unity to rebuild its entire advertising algorithm and lower its estimates for the year. The weakness of the broader advertising market has exacerbated this pain.

Unity then laid off some of its artificial intelligence (AI) and software engineers and agreed to buy ironSource – an Israeli ad tech company with a controversial past – to bolster Unity Ads. This planned acquisition caught the eye of ironSource rival AppLovin, which offered to merge with Unity instead. Unity CEO John Riccitiello declined to comment on AppLovin’s offer during the conference call. However, head of investor relations Richard Davis said ironSource’s deal was still on track to close in the fourth quarter.

Regarding Unity Ads, Ingrid Lestiyo, Head of Operate Solutions, said that the platform was able to “remove bad data that was inadvertently ingested while interacting with one of our models.” Lestiyo also said he had “enhanced” his monitoring observability and machine learning capabilities to mitigate these “rare types of events” in the future and that his acquisition of ironSource would allow him to “leapfrog.” its own roadmap and to accelerate its long-term strategy. growth.

Better days could be ahead

Unity guidance suggests the storm has passed. In addition to his median revenue growth target of 14% year-over-year in the third quarter, CFO Luis Visoso expects revenue growth to “accelerate to 21%” in fourth quarter as the Operate Solutions business recovers.

Unlike previous quarters, Unity did not reiterate its long-term goal of over 30% revenue growth. However, it reiterated its goal of achieving profitability on a non-GAAP (generally accepted accounting principles) basis by the fourth quarter of 2022. Its plan to spin off its China operations into a new joint venture – in which it will retain a majority stake – could also help it achieve this goal by reducing its operating expenses.

It might finally be time to buy Unity

The first half of 2022 was tough for Unity, and it was hard to recommend the title as storm clouds gathered over Unity Ads. However, Unity finally cleared the air with its second quarter report – and its forecast suggests that its business will stabilize by the end of the year.

Unity stock still isn’t cheap at 13x this year’s sales, but I think it’s finally worth snacking on again. Its stock will remain volatile for the foreseeable future, but it could rise in the long term as its core game engine continues to grow, expands into more non-gaming markets (such as augmented reality, reality virtual and films) and that it develops. its toolkit of advertising and monetization tools for developers.

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Leo Sun has positions in Apple and Unity Software Inc. The Motley Fool has positions and recommends Apple and Unity Software Inc. The Motley Fool recommends the following options: $120 long calls in March 2023 on Apple and $130 short calls in March 2023 on Apple. The Motley Fool has a disclosure policy.

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