What happened
Unity Software's (U 6.89%) stock price has bounced around over the last few months. Shares initially took off toward the $200 level after a better-than-expected earnings report in November, when the company announced the acquisition of Weta Digital for $1.6 billion.
But rising interest rates are causing investors to flee growth stocks in favor of value. The share price was down 15.1% in the week to date as of 1:46 p.m. ET on Thursday, according to data provided by S&P Global Market Intelligence.
Image source: Getty Images.
So what
The Federal Reserve recently signaled its intent to begin raising interest rates to curb inflation in the new year. That is putting pressure on richly valued growth stocks, since higher interest rates lower the present value of future cash flows -- the basis of a company's intrinsic value.
This is causing volatility for Unity's share price because it hasn't yet reported a profit. At a price-to-sales ratio of 33, investors are placing a high value on the company's future profitability, which makes the stock sensitive to higher interest rates. After briefly touching $200 toward the end of 2021, Unity's stock price has been cut nearly in half.
Now what
The sell-off could be a good buying opportunity. Unity expects to report revenue growth between 29% and 32% year over year for the fourth quarter.
The company is considered a top metaverse stock, but that far-off opportunity is not needed to justify buying the stock today. There is plenty of opportunity to expand penetration with existing customers in the growing video game industry, where Unity's software is the engine that powers half of all video games.
Moreover, the recent acquisition of Weta Digital's industry-leading VFX tools, featured in the Lord of the Rings trilogy, can allow Unity to expand into markets outside of gaming, such as automotive, architecture, and e-commerce.
