Unity Software Inc. (NYSE: U)
Unity's eponymous game engine powers more than half of the world's mobile, console, and PC games. It also provides additional advertising, multiplayer, and analytics tools. Unity also provides digital twin services for a broader range of architecture, manufacturing, automotive, aerospace, and retail customers. Having recently announced its merger with ironSource in a $4.4 billion deal, the company has seen an increase in mentions by 87% over the last day, encouraging investors to look into Unity Software. Shares currently trade at $52.25.
Positive Hype
One of the major reasons that Unity’s been gaining hype over the last few days is the merger with ironSource, however, there are a few others. Let’s take a look at them.
Although Unity has seen quite a tough streak and faces a lengthy process to fix its software, it may be trying to fast-track its recovery by merging with ironSource, a company excelling at app discovery and monetization.
In addition to its midpoint target of 14% year-over-year revenue growth in the third quarter, CFO Luis Visoso expects its revenue growth to "accelerate to 21%" in the fourth quarter as the Operate Solutions business recovers.
The company reiterated its target of achieving profitability on a non-GAAP basis by the fourth quarter of 2022. followed by its first full year of non-GAAP profits in 2023.
Unity could still profit from the secular expansion of the digital twin market, which could grow at a compound annual growth rate (CAGR) of 39% from 2022 to 2030, according to Grand View Research.
Unity has just come out of a storm with their last earnings report suggesting that things were going very poorly. However, the problems with Unity Ads' algorithms, which started ingesting "bad data from a large customer" in the first quarter have been removed and the company is on its road to recovery. It would be wise to take advantage of prices still more than 70% off its high.
Negative Hype
Although the company seems to have bright prospects, there are drawbacks to purchasing the stock right now. Here are some of them.
Unity is paying a 74% premium to acquire ironSource in an all-stock deal, which indicates that the company might be overpaying by a fair bit.
Unity's stock declined more than 60% this year as the growth of its advertising business, a key component of the Operate Solutions segment which generated 64% of its revenue last year, stalled out.
It only expects its revenue to rise 18% to 23% this year. That would represent a significant slowdown from its 44% revenue growth in 2021. However, this seems like the lowest it will be if the ironSource merger pans out as it should.
Conclusion
The first half of 2022 was challenging for Unity, and it was tough to recommend the stock as there were so many issues with Unity Ads. However, Unity has finally cleared the air with its second-quarter report, and its guidance suggests that its business will stabilize by the end of the year.
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