Stock prices of Unity software (U -1.22%) they have taken off a lot in the last month, increasing by about 60%. Investors appear to be excited about the company’s pending merger with ironSourceas this deal is expected to unlock a lot of long-term value.
Unity, which is known for its video game engine and 3D content creation platform, announced the merger in mid-July. The deal is expected to accelerate Unity’s monetization efforts and grow its advertising business. However, a look at Unity’s latest quarterly results released on August 9 suggests that the stock may have risen too much at a time when it is struggling to grow organically.
Unity Software’s recent results have been mixed
Unity reported second-quarter revenue of $297 million, up 9% from the year-ago period. The company’s adjusted net loss increased to $0.18 per share from $0.01 per share a year ago. Results were mixed from a Wall Street perspective, as analysts were looking for a loss of $0.21 per share on revenue of $298.3 million.
Unity’s poor growth last quarter can be attributed to weakness in the operational solutions segment, which produces 53% of its revenue. The exploitation segment allows creators and developers to monetize their content, but has fallen on hard times thanks to applethe iOS privacy updates, which made Unity’s advertising algorithm game.
Unity executive Ingrid Lestiyo said on the latest earnings call that the problem of bad data is now solved. However, the company has lowered its outlook for the full year, citing “negative macroeconomic factors and the complexity of accurately forecasting the timing of changes in [the] monetization business trajectory”.
Unity now expects annual revenue of $1.3 billion to $1.35 billion, down from its previous forecast of $1.35 billion to $1.45 billion. That would translate to revenue growth of 17% to 22% in 2021. Analysts had expected Unity to post $1.36 billion in revenue this year, but the recent decline in digital ad spending looks set to hurt the company’s performance. company
Unity’s strong valuation is a concern
The muted growth forecast is why Unity stock may take a near-term beating, especially given that it’s trading at 14 times expensive sales. This is substantially higher than S&P 500the price-sales ratio of 2.6.
Additionally, investors should not forget that global ad spending is expected to grow 8% in 2022 compared to the previous forecast of 9.1% growth, according to Zenith Media. If those estimates fall due to headwinds, such as inflation, which could weigh on ad spending, Unity may be forced to adjust its expectations accordingly in the coming months.
All of this indicates that investors may get their hands on Unity stock at a cheaper valuation in the future. So it might not be too late to buy Unity stock. More importantly, investors should consider picking up Unity stock at a more attractive valuation as the company offers fast-growing niches.
Unity has a lot of future growth to tap into
Unity serves multiple industries such as gaming, automotive, architecture, and animation, among others. Demand for real-time content creation in these markets is booming, as evidenced by the 66% year-over-year growth in revenue for Unity’s authoring segment last quarter to $121 million. This segment could continue to see impressive growth in the long term, as the 3D mapping and modeling market could reach $12 billion in revenue by 2028, compared to $4.5 billion last year.
Meanwhile, Unity also signed its largest deal yet to offer digital twin services in the second quarter. This could open the door to another massive opportunity for Unity, as the digital twin market could grow at an annual rate of nearly 35% through 2027, according to Mordor Intelligence.
Overall, analysts are bullish on Unity’s long-term prospects and expect the company’s earnings to grow at an annual rate of 69% over the next five years. That’s why investors should consider taking advantage of any pullback in Unity stock and buy it if it’s available at a cheaper valuation, which could have short-term headwinds.
They drive hard has no position in any of the stocks mentioned. The Motley Fool has positions and recommends Apple and Unity Software Inc. The Motley Fool recommends the following options: long March 2023 $120 Apple calls and short March 2023 $130 Apple calls. The Motley Fool has a disclosure policy.