Unity Software U is slated to report third-quarter 2024 results on Nov. 7.

The company expects third-quarter revenues between $415 million and $420 million, indicating a decline of 4-6% year over year. The Zacks Consensus Estimate is pegged at $428.01 million, indicating a decrease of 21.35% from the year-ago quarter’s reported figure.

The consensus mark for earnings is pegged at a loss of 39 cents per share, which has remained unchanged in the past 30 days.

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Find the latest EPS estimates and surprises on Zacks Earnings Calendar.

Earnings Surprise History

In the last reported quarter, the company delivered an earnings surprise of 27.27%. The company’s earnings beat the Zacks Consensus Estimate in each of the trailing four quarters, the average surprise being 67.08%.

Earnings Whispers

Our proven model does not conclusively predict an earnings beat for Unity Software this time around. The combination of a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) increases the odds of an earnings beat. This is not the case here. You can uncover the best stocks to buy or sell before they are reported with our Earnings ESP Filter.

Untiy Software has an Earnings ESP of 0.00% and carries a Zacks Rank #4 (Sell) at present. 

You can see the complete list of today’s Zacks #1 Rank stocks here.

Factors Shaping Upcoming Results

Unity Software, known for its widely-used game development engine, has been grappling with challenges in its core business segments. The company is restructuring its portfolio to focus on core businesses only. This restructuring is expected to have aided the long-term growth of the company. 

However, the decline of business operation verticals is likely to have affected top-line growth in the to-be-reported quarter.

During the second quarter, revenues from the non-strategic portfolio were $23 million, down 71% year over year as a result of portfolio reset. The company expects revenues from non-strategic businesses to continue to decline in the to-be-reported quarter and be in the single digits by the end of this year.

In the second quarter, the company faced a sequential decline of 2% in Create Solutions segment revenues to $129 million due to reductions in Strategic Partnerships and Professional Services. This trend is expected to have continued in the third quarter. 

The company is also right sizing the cost structure to grow from a healthy financial position. This includes the previously announced reduction of approximately 25% of the workforce. 

Unity Software operates in a competitive landscape within the game development and advertising technology sectors. Its primary rival in the game engine market is Epic Games' Unreal Engine, which is particularly strong in high-end console and PC game development besides Amazon AMZN-owned Lumberyard (now Open 3D Engine). Other competitors include Godot, an open-source alternative gaining popularity, and CryEngine, known for its graphical capabilities. 

In the mobile ad tech space, Unity Software faces competition from companies like AppLovin APP and Alphabet GOOGL-owned Google's AdMob. Additionally, as U expands into non-gaming industries, it will encounter competition from specialized software providers in sectors, such as architecture, automotive and film production. 

Despite these challenges, Unity Software maintains a dominant position in the mobile gaming market. The company powers 70% of the top mobile games globally.

The company's Industries segment, which focuses on non-gaming applications of Unity's technology, is likely to have emerged as a significant growth driver in the quarter under review. In the second quarter, Industries grew 59% year over year, now representing 18% of total Create Solutions revenues, up from 12% in the previous year. This diversification into new markets could open up additional revenue streams and reduce Unity Software's dependence on the gaming sector.

Price Performance & Valuation

Unity Software has been in particularly choppy waters so far in 2024 as the stock has plummeted 50.3% against the Zacks Computer and Technology sector’s 23.5% return, leaving investors wondering whether this represents a sign of deeper troubles ahead.

Year-to-Date Performance

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It is also important to consider whether the stock's current valuation accurately reflects the company's long-term growth potential and ability to navigate the competitive landscape. Unity is trading at a premium with a forward P/S ratio of 4.51X compared with the Zacks Internet - Software industry’s 2.64X, reflecting a stretched valuation.

Unity’s P/S F12M Ratio Depicts Stretched Valuation

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Investment Considerations: Balancing Risk and Reward

Unity Software faces mounting challenges heading into third-quarter 2024 earnings, with significant headwinds from its ongoing restructuring efforts and portfolio reset impacting near-term performance. Despite maintaining leadership in mobile gaming, the company's core Create Solutions segment shows concerning weakness, with sequential revenue declines and heightened competition from Epic Games' Unreal Engine and emerging alternatives like Godot. While the Industries segment shows promise with 59% year-over-year growth, the substantial 71% decline in non-strategic portfolio revenues, coupled with a 25% workforce reduction and uncertain execution in the turnaround strategy, raises questions about Unity Software's valuation and growth trajectory. The competitive landscape remains intense, particularly as the company attempts to diversify beyond gaming while navigating organizational restructuring.

Conclusion

Given Unity Software's ongoing restructuring challenges, declining non-strategic portfolio revenues, and competitive pressures in both gaming and non-gaming segments, investors should maintain a cautious stance and potentially wait for clearer signs of successful execution before initiating new positions. While the company's dominant position in mobile gaming and promising growth in the Industries segment offers long-term potential, the near-term headwinds from workforce reductions, Create Solutions segment weakness, and portfolio reset suggest elevated execution risk heading into third-quarter 2024 earnings. Current shareholders might consider holding positions given the company's strategic refocus and market leadership, but new investors would likely benefit from waiting for concrete evidence of stabilization in core segments and improved financial metrics before establishing positions.

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