Why Is Unity (U) Stock Soaring Today

What Happened:

Shares of game engine maker Unity (NYSE:U) jumped 9.6% in the morning session after Morgan Stanley analyst Matthew Cost upgraded the stock's rating from Equal Weight (Hold) to Overweight (Buy) and raised the price target from $22 to $45. 

Cost highlighted the reason for the downgrade, adding "Following the cut to '24 guidance at 2Q results we now view forward estimates for U as derisked." He added, "From a strategic standpoint, we note that despite its customer relations challenges U's game engine has maintained its 70% market share in mobile and (in our view) proven how deep its moats truly are, as competitors have been unable to gain share at U's expense." After the initial pop the shares cooled down to $16.84, up 2.9% from previous close.

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What is the market telling us:

Unity’s shares are very volatile and over the last year have had 31 moves greater than 5%. In context of that, today’s move is indicating the market considers this news meaningful but not something that would fundamentally change its perception of the business. 

The biggest move we wrote about over the last year was 6 months ago, when the stock dropped 19.1% on the news that the company reported fourth-quarter results with full-year 2024 revenue and EPS guidance falling short of analysts' estimates. Although this quarter's headline revenue beat, Unity stated it benefitted from a unique event where one of its customers, Wētā, terminated its service agreement and opted for a perpetual license to access its software. This resulted in a one-time revenue boost of $99 million - without this sale, Unity's revenue would have been $510 million, dropping 2% year on year. 

In its shareholder letter, James Whitehurst, the company's recently appointed CEO (October 2023), also shared Unity's new strategy. The company's reset will be split into two phases, the first being to focus on its core business by narrowing its investments. Unity also intends to right-size its cost structure, as seen in its January 8th layoff of 25% of its workforce. Phase one is expected to finish by the end of Q1, and once Unity's leaner cost base is established, it plans to return to growth initiatives and new product development. Overall, this was a mediocre quarter for Unity, and investors are likely uncomfortable with the company's outlook.

Unity is down 56.6% since the beginning of the year, and at $16.84 per share it is trading 60.6% below its 52-week high of $42.73 from December 2023. Investors who bought $1,000 worth of Unity’s shares at the IPO in September 2020 would now be looking at an investment worth $246.16.

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