Unity: Back To Its May 2021 Lows And Back In The Buy Zone

Unity: Back To Its May 2021 Lows And Back In The Buy Zone

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Unity Software Inc. ( U ) stock has been battered over the last three months. Since it notched its all-time high of $210 in November 2021, it has dropped an astonishing 60%. Even a better-than-expected earnings card in FQ4 couldn’t stop the rot ( we discussed it in a previous article ). The stock has also declined to a critical support level it last visited in May 2021. It was also the level that saw the stock stage a robust reversal as it raced towards its November highs.

Therefore, we are back there again. And, we think investors who have been biding their time patiently can take the opportunity to add more exposure. Why Did U Stock Drop To Its May 2021 Lows?

U stock price chart (TradingView) U stock EV/NTM Revenue valuation trend (TIKR) We can observe from the above chart and determine that Unity stock is highly volatile. It also doesn’t have a discernible long-term uptrend bias and has significant mean-reversion tendencies. It also means that we can find the right opportunities to capitalize on potentially oversold or bear trap price action to add exposure.

Notably, the stock has fallen near to its May 2021 lows. The recent Russia-Ukraine conflict, coupled with the tech bear market, has driven fearful investors to bail out of Unity stock. However, despite its steep value compression, U stock is still trading well above the median valuation of its high-growth SaaS peers (12x). Furthermore, the company has not been calibrated for FCF profitability. As a result, we were not surprised that investors took the opportunity to rotate out to lower multiple stocks with proven FCF margins.

Nevertheless, Unity has continued to post robust topline growth over the past year. Investors should be reminded that Unity notched a 43.4% YoY revenue growth in FQ4. It also capped a remarkable quarter to end a highly consistent FY21, where its revenue increased by 43.8% YoY.

Consequently, its NTM revenue multiple has continued to improve compared to May 2021’s metrics. Even though its price is still above its May 2021 lows, its NTM revenue multiple has improved to 17.4x (May 2021 lows: 19.7x).

Hence, investors are getting an even better deal now for Unity than investors who added at its May 2021 bottom. U Stock Forecast: +30% Growth

Unity mean consensus estimates (S&P Capital IQ) Unity investors should be assuaged to know that the consensus estimates over its revenue growth have moved higher since our last update. Notably, the company is expected to deliver revenue growth above 30% in FY22. In addition, its adjusted EBIT margin is also estimated to improve to -2.7%. However, some investors may point out that it seems like its topline growth could decelerate moving forward.

We don’t see anything unusual. We believe a 30+% growth rate is highly respectable. Furthermore, Unity has a clear line of sight in attaining adjusted EBIT profitability.

Moreover, it’s critical to note that Unity telegraphed revenue growth of 23-26% for FY21 in its initial guidance. Thus, U management has outperformed markedly. The company highlighted previously that it was concerned with the impact of Apple’s ( AAPL ) IDFA changes. Therefore, it needed to be more prudent with its guidance. But, the company’s monetization platform has proven to be much more resilient than we expected. Therefore, it managed to deliver results far ahead of what it has guided.

In addition, Unity has continued introducing more analytical capabilities to help its developers monetize better. Recently, it also launched two features, Funnels and SQL Data Explorer. With Funnels, developers can ” easily visualize the user flow and progression through [their] game.” Unity’s developer customers also use it to optimize the player experience, “like onboarding or conversion from non-payer to payer. [Unity] also see it used as a way to diagnose an issue like level difficulty or player churn.” Given Unity’s massive reach across 3B devices, we believe its data analytics and scale will continue to offer developers a critical edge in their monetization strategies.

In addition, the company’s SQL Data Explorer also further enhanced its developers’ data mining capabilities. Unity emphasized (edited): SQL Data Explorer is a rebuild of SQL Data Mining from deltaDNA in Analytics. This feature allows you to build and execute queries, plot results into different types of visualizations, and export your data to programs like Microsoft Excel, Tableau, or OpenOffice. It delivers the power and flexibility you need to more deeply understand your gameplay , combine your data with other important data sets, and create custom views […]

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