With earnings season in full swing, Unity Software (U 0.95%) reported its fourth-quarter financial results after the market closed on Monday. Revenue exceeded expectations but investors were underwhelmed by management's 2024 guidance for the tech company.
One analyst was so disappointed in what he saw and heard in the report that he slashed his price target on the software specialist's stock from $50 to $33.50, representing a 33% decrease from what he had previously forecast.
NYSE: U
Key Data Points
This software stock needs to deliver results
Michael Pachter, an analyst at Wedbush Securities, will say that Unity Software has moved in the right direction. For one, Unity is focusing on its bread-and-butter business: developing its game engine. This stems from the company's commitment to improving its game engine, cloud hosting, and monetization efforts. Secondly, it plans on building out its real-time 3D capabilities for non-gaming customers.
Pachter said these initiatives position the company to surpass expectations in 2024, and it is well-positioned to prosper. Now it has to execute on its proposed plans. No longer will the market be satisfied with potential, investors now want to see real financial improvements.
Small steps of financial improvements can translate to big strides in the stock price
Share prices are down about 24% since the start of the year as many bulls have moved on from the stock, eschewing Unity for growth stocks that show clearer progress on both the top and bottom lines. Unity achieved impressive revenue growth, but it appears to have, simultaneously, sacrificed the effective management of its costs.
U Revenue (Annual) data by YCharts.
Unity management expects to eventually see benefits from its cost reduction initiatives, including a 25% reduction in its workforce. If it's right, and it makes progress toward achieving its first quarter 2024 adjusted earnings before, interest, taxes, depreciation, and amortization guidance (EBITDA) of $45 million to $50 million (and in subsequent quarters toward the 2024 outlook of $400 million to $425 million), it certainly seems feasible that investors will reward the company and drive the stock higher -- even surpassing Pachter's price target.
