Unity Software loses $5 billion in market cap after Apple changes lead to ‘self-inflicted wound’

Unity Software loses $5 billion in market cap after Apple changes lead to ‘self-inflicted wound’

Unity Software loses $5 billion in market cap after Apple changes lead to 'self-inflicted wound'

Unity Software Inc. executives thought they had found a way to avoid the fallout from changes to Apple Inc.’s mobile operating system.

Turns out they were wrong, and Wall Street punished Unity U,
-37.05%
stock for Wednesday.

Shares lost more than a third of their value, worth around $5 billion in market capitalization, and were heading for their worst day ever after the game engine company revealed what several analysts have said. referred to as a “self-inflicted wound” in its ad targeting tools. . The decline began in Tuesday’s after-hours session, when Unity executives forecast quarterly and annual revenue below Wall Street estimates as well as first-quarter results online.

Shares ended down 37% at $30.30 after an intraday low of $29.30 in Wednesday’s session for the stock’s worst day since its IPO in September 2020, when shares are sold for $52 each. The stock is currently 85% off its all-time high close of $201.12, set on Nov. 18.

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The big issue Unity revealed was that the company’s Pinpointer ad product in its Operate Solutions business, which helps developers make money on their games and content through ads, was found to be flawed and customers spent less due to inaccuracies. In August, Unity’s Operate business was a big driver as it appeared the company was able to circumvent Apple Inc.’s AAPL,
-5.18%
disable the use of Identifier for Advertisers, or IDFA, in its privacy update, a change that has upset online advertising companies like Meta Platforms Inc.’s FB,
-4.51%
Facebook.

Unity reportedly used ad models that did not rely on Apple data, but instead relied on end-user engagement data and platform performance. Customers flocked to the tool but quickly discovered it wasn’t up to the challenge, analysts said Wednesday while chopping price targets.

Morgan Stanley analyst Matthew Cost, who has an overweight rating and cut his price target to $50 from $110, was quick to note that the Pinpointer tool has grown in prominence. due to Apple’s IDFA changes and “grew to account for the majority of ad spend through Unity’s ad network over the past year.”

“We believe the most significant driver of the forecast reduction was a pullback in ad spend as customers reacted to the decline in ad network performance in Q1/early Q2,” Cost said. “While the major issues are now resolved, it will take time to retrain machine learning algorithms and recoup the ad spend that migrated earlier this year.”

“We also believe the guidelines include a secondary impact, as engineers were redeployed to address these issues and were forced to delay their other projects (many of which would have contributed additional revenue) until later in 22/23 “Cost said.

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In a note titled “Self-Inflicted Injury,” Jefferies analyst Andrew Uerkwitz, who has a holding rating and cut his price target from $100 to $40, said “poor proprietary customer data” resulted in poor targeting.

“During the months of February and March, Unity lost share to competitors due to underperformance relative to competitors,” Uerkwitz said. “To add insult to injury, a lack of system redundancies meant, instead of a hard reset, Unity has to relearn using the correct data and that will take time.”

Wedbush analyst Michael Pachter, who has an outperform rating and cut his price target to $70 from $125, said “the self-inflicted wound should be resolved by the start of the fourth quarter and expected to return the company to its trajectory of 30% or higher annual revenue growth.

“While we think it’s entirely possible, and even likely, that Unity will grow much faster than we’ve modeled, we think it’s prudent to set the bar relatively low given the current situation. extent of the company’s self-inflicted hurt in the last quarter,” Pachter said. .

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Stifel analyst J. Parker Lane, who has a buy rating and lowered the target price from $150 to $100, expects “Unity’s strong positioning in the gaming space mobile and the growing set of monetization tools will help the business get back on track in a timely manner. , with revenue growth picking up as the year progresses.

“Overall, we believe verticals other than gaming will continue to offer a long streak of growth opportunity, and the stabilization of the Operate business will help the company achieve its long-term growth prospects. over 30%,” Lane said.

Of the 18 analysts covering Unity, 14 have buy ratings, three have hold ratings and one has a sell rating, according to FactSet data. Of those analysts, 11 slashed their price targets on Wednesday, resulting in an average target of $79.63, down from $139.31 previously.

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