What Happened?

Shares of game engine maker Unity (NYSE:U) fell 5.6% in the morning session after the major indices tumbled (Nasdaq down 1.9%, S&P 500 down 1.7%), marking a volatile ending to an otherwise good year for stocks. This marks the second straight day of broad-based declines with similar downturns (Nasdaq down 1.5%, S&P 500 down 1.1%) recorded on the previous trading day, Friday, December 27, 2024. This suggests that perhaps investors are locking in gains and positioning portfolios for 2025.

The stock market overreacts to news, and big price drops can present good opportunities to buy high-quality stocks. Is now the time to buy Unity? Access our full analysis report here, it’s free.

What The Market Is Telling Us

Unity’s shares are extremely volatile and have had 36 moves greater than 5% over the last year. In that context, today’s move indicates 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 10 months ago when the stock dropped 19.1% on the news that the company reported weak 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 benefited 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 8 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 43% since the beginning of the year, and at $22.11 per share, it is trading 43.3% below its 52-week high of $38.98 from January 2024. Investors who bought $1,000 worth of Unity’s shares at the IPO in September 2020 would now be looking at an investment worth $323.41.

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