What Happened?
Shares of game engine maker Unity (NYSE: U) fell 7.2% in the morning session after the major indices declined, with the Nasdaq down 1.9%, while the S&P fell 1.12% as markets reined in some of the post-election optimism. The decline follows remarks from Federal Reserve Chair Jerome Powell indicating that the Fed's decision-making committee is not in a hurry to cut interest rates. Consequently, investors have reduced their expectations for another 0.25% rate cut in December 2024.
Recent inflation data has renewed the debate of how much more rates need to come down and what the cadence of future cuts should be. Specifically, the Consumer Price Index (CPI) for October 2024 increased by 0.2% month-on-month, while headline inflation stood at 2.6% year-on-year. The latter is getting closer to the Fed's 2% target.
As a reminder, the driver of a stock's value is the sum of its future cash flows discounted back to today. The result of lower interest rates, all else equal, is higher stock valuations. This is especially true for higher-growth stocks, such as those in the technology sector, where the current value depends more on cash flows many years out in the future.
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 34 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 previous big move we wrote about was 7 days ago when the stock dropped 8% on the news that the company reported weak third-quarter earnings. Its full-year revenue guidance was underwhelming and its EBITDA guidance for next quarter fell short of Wall Street's estimates. And while sales came in ahead of expectations during the quarter, it still translated to an 18% year-on-year decline, which is concerning. Given that markets are forward-looking, the weak EBITDA guidance meant investors are likely to overlook the bottom line beat recorded in the quarter. Unity called out market uncertainty, particularly with slower recovery in key growth segments and ongoing caution around customer renewals.
As a reminder, Unity recently updated its pricing plans to a subscription-based model, making it easier for consumers to adopt after a backlash from its user community. The pricing updates are set to take effect on January 1, 2025, which means some customers might delay renewals. These factors likely impacted the company's ability to project stronger future performance. Overall, this quarter could have been better.
Unity is down 55.2% since the beginning of the year, and at $17.38 per share, it is trading 59.3% 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 $254.17.
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