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Unity Software Stock Drops After Games Company Issues Soft Guidance—Monitor This Key Level

Key Takeaways

  • Unity Software shares fell sharply in premarket trading Tuesday after the company issued weaker-than-expected current-quarter guidance.
  • The company has recently undergone a portfolio and cost structure reset.
  • Monitor if Unity Software shares find support around $25 near the lower trendline of a multi-year trading range.

Unity Software (U) issued current-quarter guidance well below Wall Street’s estimates as the game development company undergoes a portfolio and cost structure reset, sending its shares tumbling over 14% in pre-market trading ahead of Tuesday’s opening bell.

The company said it expects to generate strategic portfolio revenue in the March quarter between $415 million and $420 million, with the high end of that range falling significantly short of the $534 million analysts had forecast. Strategic portfolio revenue specifically relates to the company’s engine, cloud, and monetization core business units and will be the only revenue metric it reports moving forward.

Unity’s bottom-line current-quarter guidance of $45 million to $50 million also came in significantly below expectations, which Wall Street had pegged at $113 million.

In the fourth quarter, the company posted a 35% year-over-year jump in revenue to $609 million, slightly ahead of the $596 million consensus. The top line received a deferred revenue boost from a license agreement with Weta FX for the use of its tools. However, Unity reported a net loss in the period of $254 million, or 66 cents a share, wider than the 46 cents-per-share-loss modeled by analysts.

In recent months, the company has undergone a portfolio and cost structure reset after a new fee plan unveiled last September turned away some of its customer base.

“We believe that we are making the right interventions to win with customers for many years to come through a more focused portfolio, a leaner cost structure, and innovation that customers value,” the company’s fourth-quarter 2023 shareholder letter said.“We’ve also instituted a much leaner cost structure that provides us a healthy profile,” Unity president and interim CEO James Whitehurst added on the company’s earnings call.

Apart from several minor breaches, the U share price has oscillated within a multi-year trading range stretching back to mid-2022. Over that period, the 50-day moving average has crossed the 200-day moving average multiple times, confirming the stock’s lack of direction. If an earnings-driven sell-off accelerates, monitor if buyers can defend the range’s lower trendline, which sits just below $25. A volume backed breakdown could mark the start of another leg lower, while a reversal from this closely-watched chart level could see range-bound conditions continue.

Unity shares were down 14.3% at $28.33 about three hours before Tuesday’s opening bell.

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As of the date this article was written, the author does not own any of the above securities.