Unity Software Inc. (U) in San Francisco is the world’s top platform for producing and operating interactive, real-time 3D content. Its shares declined 29.3% in extended trading Tuesday after the software company published fiscal first-quarter earnings roughly in line with Wall Street analysts’ expectations but offered weak second-quarter and fiscal year sales predictions.

Furthermore, the stock is down 66.3% in price year-to-date and 46.9% over the past month. In addition, closing its last trading session at $48.13, the stock is currently 77% below its 52-week high of $210, which it hit on Nov.18, 2021.

Also, yesterday Daiwa Capital Markets’ equities analysts reduced the stock’s rating from “outperform” to “neutral” and lowered its price target to $34.

Here is what could shape U’s performance in the near term:

Poor Bottom line Performance

U’s total revenue increased 36.4% year-over-year to $320.13 million for the three months ended March 31, 2021. However, its operating expenses increased 38.5% from their year-ago value to $397.45 million. Its operating loss grew 54.4% from the prior-year quarter to $171.61 million. And the company’s net loss increased 65.2% year-over-year to $177.56 million. Its loss per share came in at $0.60 over this period.

Poor Profitability

U’s 0.3% trailing-12-months asset turnover ratio is 53.2% lower than the 0.63% industry average. Its trailing-12-months cash from operations stood at negative $111.45 million, versus the $82.75 million industry average. Also, its trailing-12-months ROA, net income margin, and ROC are negative 11%, 47.9%, and 9.2%, respectively.

Premium Valuation

In terms of forward Price/Book, the stock is currently trading at 6.69x, which is 75.8% higher than the 3.81x industry average. Also, its 10.05x forward EV/Sales is 269.3% higher than the 2.72x industry average. And  U’s 9.55x forward Price/Sales  is 246.7% higher than the 2.75x industry.

POWR Ratings Reflect Bleak Outlook

U has an overall D rating, which equates to Sell in our proprietary POWR Ratings system. The POWR ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight distinct categories. U has an F grade for Value and a D for Stability. Its higher-than-industry valuation is in sync with the Value grade. The Stability grade highlights the stock’s higher volatility than its peers.

Among the 23 stocks in the C-rated Entertainment – Toys & Video Games industry, U is ranked #18.

Beyond what I have stated above, one  can view U ratings for Growth, Momentum, Quality, and Sentiment here.

Click here to check out our Software Industry Report for 2022

Bottom Line

While U is making several strategic moves to achieve a strong foothold in the industry, its widening losses and poor guidance for the coming quarters is concerning. Also, analysts expect its EPS to decline 100% next quarter (ending June 30, 2022). In addition, it is currently trading significantly below its 50-day and 200-day moving averages of $85.35 and $120.88, respectively, indicating a downtrend. Moreover, considering its lofty valuation and negative profit margins, we think the stock is best avoided now.

How Does Unity Software Inc. (U) Stack Up Against its Peers?

While U has an overall D rating, one might want to consider its industry peers, Playtika Holding Corp. (PLTK), which has an overall A (Strong Buy) rating, and DoubleDown Interactive Co., Ltd. (DDI) and Spin Master Corp. (SNMSF), which have an overall B (Buy) rating.

U shares fell $15.01 (-31.19%) in premarket trading Wednesday. Year-to-date, U has declined -76.05%, versus a -16.21% rise in the benchmark S&P 500 index during the same period.

About the Author: Pragya Pandey

Pragya is an equity research analyst and financial journalist with a passion for investing. In college she majored in finance and is currently pursuing the CFA program and is a Level II candidate. More...

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