Unity Software Loses $5 Billion in Market Cap After Apple Changes Lead to ‘Self-Inflicted Wound’

Executives at Unity Software Inc. thought they had found a way to avoid the consequences of changes to Apple Inc’s mobile operating system.

Turns out they were wrong, and Wall Street punished Unity U,
+11.16%
Stock for Wednesday.

The stock lost more than a third of its value, worth about $5 billion in market capitalization, and was headed for its worst day after the game engine company revealed what several analysts called a “wound self-inflicted” in their ad targeting tools. . The slide began in the after-hours session on Tuesday, when Unity executives forecast quarterly and full-year revenue lower than Wall Street estimates along with first-quarter results in line.

The stock 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 September 2020 IPO, when shares sold for $52 each. a. The stock is currently 85% below its all-time closing high of $201.12, set on November 18.

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The big issue Unity revealed was that the company’s Pinpointer advertising product in its Operate Solutions business, which helps developers make money from their games and content through ads, was found to be flawed and customers were spending less due to to inaccuracies. In August, Unity’s Operate business was a big driver as it appeared the company had been able to get around Apple Inc.’s AAPL,
-3.27%
opt out of the use of Identifier for Advertisers, or IDFA, in its privacy update, a change that has affected online ad companies like Meta Platforms Inc.’s FB.
+1.18%
Facebook.

Unity was reportedly using ad models that didn’t rely on data from Apple, but instead used data from an end user’s engagement and platform performance data. Customers flocked to the tool but soon discovered it was not up to the challenge, analysts said Wednesday as they cut price targets.

Morgan Stanley analyst Matthew Cost, who is rated overweight and lowered his price target from $110 to $50, was quick to point out that the Pinpointer tool rose to fame due to Apple’s IDFA changes and “grew to represent the largest share of ad spend through the Unity ad network over the past year.”

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

“We also believe the guidance includes a secondary impact, as the engineers who were relocated to fix these issues were forced to delay their other projects (many of which would have contributed to increased revenue) until later on 22/23.” Cost said.

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In a note titled “Self-Inflicted Wound,” Jefferies analyst Andrew Uerkwitz, who has an expected rating and lowered his price target from $100 to $40, said “incorrect proprietary customer data” was resulting in misguidance. .

“Over the course of February and March, Unity lost share to competitors due to poor performance against competitors,” said Uerkwitz. “To add insult to injury, the lack of system redundancies meant that instead of a hard reset, Unity needs to relearn using the correct data and this will take time.”

Wedbush analyst Michael Pachter, who is rated higher and lowered his price target to $70 from $125, said the “self-inflicted wound should resolve by early Q4 and should allow the company to regain its 30% trajectory.” . 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 magnitude of the company’s self-inflicted wound last quarter,” he said. Patcher. .

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

“Overall, we believe that non-gaming verticals will continue to provide a long-term growth opportunity, and the stabilization of the Operate business will help the company move toward its 30%+ long-term growth outlook.” Lane said.

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

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