Unity Software’s (NYSE:U) Volatile Run Masks Deeper Issues

It’s been a strange couple of days for gaming software leaders Unity Software (NYSE:U), as its stock price has been volatile to start the trading week. The latest decline came just after Unity released a new report about the state of multiplayer gaming, and what gamers are looking for therein. The report revealed that 77% of gamers worldwide play multiplayer games. Further, many of those gamers make buying decisions based on “social factors” involved in potentially purchased titles.

The connection between this report and recent stock performances may seem a bit tenuous, but it does prove that Unity is keeping a weather eye on the gaming market as a whole. That makes it more likely to pursue current trends therein.

Yet looking at the whole picture leaves me a bit unnerved. That’s why I’m neutral on Unity right now; the company is clearly making some moves, but these may not be enough to break the company’s downward momentum.

Investor Sentiment is Not in Unity Stock’s Favor

While Unity’s latest report suggests it’s watching the market closely, it’s also clear that the market is likewise doing to Unity, and the market, on the whole, does not like what it sees.

Unity currently has a Smart Score of 1 out of 10 on TipRanks. That’s not only the lowest level of “underperform,” it’s also the lowest level period. That makes it clear that the market expects Unity to lag the broader market.

Insider trading at Unity, meanwhile, will not provide any real relief for worried investors. The picture is largely sell-weighted and has been for some time now. Worse, the aggregate shows that selling was strongest at the company’s height, but continues into the lows of the year.

In the last three months, there were five sell transactions staged at Unity and no buy transactions at all. Informative sales added up strongly against the company, the insiders sold a combined total of $1.2 million worth of shares in that time.

Moreover, the aggregate for the year is not any better. In the last 12 months, Unity insiders staged 28 buy transactions against 68 sell transactions. Certainly, the pace of selling has slowed. However, there hasn’t been a single insider buy since May 2022.

Knowing is Only Half the Battle for Unity Stock

Unity’s report is an excellent development. It shows that Unity is clearly paying attention to developments on the ground, and how it can respond accordingly. As a maker of software development tools, Unity has to understand things like this in order to provide the best product to its customers.

Further, Unity takes its own study seriously. The company recently rolled out new features for Game Server Hosting and Matchmaker tools. Such tools will offer new capabilities for game designers looking to add multiplayer options to their games.

Game developers should be careful, here. While multiplayer options are important, there’s a growing movement designed to preserve the concept of single-player gaming. No less than Bethesda Softworks itself featured such an attempt back in 2017.

Its then-Senior Director for Global Content, Gary Steinman, released a blog post called “Save Player One”. The post revealed reasons why the single-player game needed to survive—and indeed thrive—in an era increasingly marked by multiplayer titles.

Still, Unity is making an important connection here. With 77% of gamers around the world playing multiplayer games, it’s worth having a toolset that can connect with those gamers. It’s even better when those tools can also be used to accommodate the 23% of gamers that don’t play multiplayer games.

Unity tools produce solid results, for both multiplayer and single-player games. This allows Unity products to be attractive to developers, and see their use in several finished products. Each quality game release made with Unity products is one more brick in a wall of marketing possibilities.

Yet there are reasons for concern with Unity. Unity was nearly sold for $17.5 billion to AppLovin (NASDAQ: APP), but Unity’s board was opposed to the deal. Now, with AppLovin’ out of the picture, Unity is looking to spend $4.4 billion to acquire ironSource Ltd (NYSE:IS), one of AppLovin’s competitors.

Macroeconomic issues would also have a hand in all of this, though not to the extent of some other companies. Video games tend to do well in recessionary environments. The 2008 recession demonstrated this resilience as video game systems sold well through the midst of economic disaster.

More current research suggests that games are not recession-proof, but are recession-resistant. A video game falls under discretionary purchasing, and discretionary purchasing takes a hit in a recession. However, video games tend to have long-lived value. A game purchased today might provide weeks or even months of gameplay. That makes it a value that’s hard to pass up.

What is the Price Target for Unity Software Stock?

Turning to Wall Street, Unity has a Moderate Buy consensus rating. That’s based on nine Buys, four Holds, and one Sell assigned in the past three months. The average Unity Software price target of $58.91 implies 66.51% upside potential. Analyst price targets range from a low of $27 per share to a high of $105 per share.

Conclusion: Unity Stock Could Go Either Way

Unity balances fairly evenly on the horns of a dilemma. It’s producing some excellent results, and that’s going to make it attractive to software developers, especially smaller-scale developers. Nonetheless, there’s still a lot that’s kind of up in the air right now about Unity.

Unity is attractive in its current form. It’s trading much closer to its lowest price targets than its average targets. It’s also got a fairly decent roadmap laid out, with an emphasis on multiplayer gaming while also preserving the single-player experience. Throw in the generally recession-resistant nature of the video game industry, and you should see plenty of interested developers turning to Unity.

However, we can only speculate on what Unity would do with ironSource. That’s if the deal even goes through. The nature of the economic downturn—some don’t even believe we’re in a recession yet—is also weighing on the picture.

That leaves me neutral on Unity; there are just too many unanswered questions about it and its involvement in the broader field right now.

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