(MENAFN- ValueWalk) In an ironic twist, Unity Software (NYSE:U) is showing disunity, with the CEO departing last year and large numbers of staff members being forced to leave the company. Even though Wall Street sometimes lauds layoffs, the market is currently expressing its discontent with Unity Software, and there are valid reasons for this.
Based in San Francisco, Unity Software develops gaming software and other experiences for virtual reality (VR) and the metaverse. It's a risky business to be in, as the much-bigger Meta Platforms (NASDAQ:META) has seen poor results from its foray into VR and the metaverse.
This doesn't necessarily mean Unity Software is bound to fail. However, judicious investors should temper their hopes as the company's near-term growth prospects remain uncertain, and U stock might not make a U-turn for a while.
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Fees, friction and the“company reset”
A much deeper cut for Unity Software
A potential buy price for U stock Fees, friction and the“company reset”
Unity Software's troublesome issues certainly didn't start in 2024. In September 2023, the company announced new fees for game developers. This prompted immediate backlash, and Unity's management acknowledged that the“execution” of the new fees“created friction with our customers and near-term headwinds.”
Some commentators assume the pricing backlash was a contributing factor in Unity Software CEO John Riccitiello's abrupt announcement that he's stepping down from that role. James Whitehurst, former CEO of Red Hat, was tapped to step in as Unity's interim CEO.
Thus, some of Unity Software's recent turmoil stemmed from those issues. Furthermore, in the third quarter, Unity Software posted an earnings loss of 32 cents per share and revenue of $544.2 million, which fell short of the analysts' consensus estimate of $553.7 million in quarterly revenue. Adding to the sense of malaise, Unity Software declined to provide forward financial guidance.
“A lot of people are grumpy about that,” Whitehurst admitted on a conference call.
Next, Unity Software announced its plans to lay off 3.8% of its global workforce, or 265 workers. According to management, this move was part of a“reset” for the company. Unity Software also disclosed plans to shutter offices in 14 locations.
In general, Whitehurst anticipated more changes at Unity to“refocus” the business, saying,“While no additions have been finalized, it's clear that we will reduce the number of things we are doing overall.”
The aforementioned 3.8% workforce-reduction announcement wasn't Unity Software's first. In May, the company revealed plans to slash 600 jobs, amounting to 8% of its workforce. At that time, Unity's management expressed their intention to restructure“specific teams” and assured investors that the layoffs would help the company position itself for“long-term and profitable growth.”
A much deeper cut for Unity Software
If a 3.8% workforce cut is notable and an 8% cut is troubling, then Unity Software's latest round of layoffs is downright unsettling. At the very least, the market was unsettled as U stock slumped nearly 8% on Jan. 9.
Some might call it a “continuation” of Unity's“reset,” but I'd call it an acceleration. In a real stunner of an announcement, Unity Software disclosed plans to dismiss roughly 25% of its workforce, or around 1,800 workers.
Interestingly, some experts on Wall Street lauded this deep cut. For example,
Oppenheimer
analyst Martin Yang opined that it“sets the company well for profitable growth despite weak macro conditions.”
In a similar vein, William Blair analyst Dylan Becker
expects that Unity Software's latest round of layoffs will“set the company up for sustained long-term momentum into 2025 and beyond to drive a healthy combination of durable revenue growth and material free cash flow generation.” Becker assigned U stock an Outperform rating, while Yang gave it a Perform rating.
As one might expect, Unity Software's interim CEO attempted to put a positive spin on this eyebrow-raising development.
“We are... reducing the number of things we are doing in order to focus on our core business and drive our long-term success and profitability,” Whitehurst assured.
A potential buy price for U stock
Yet, the market wasn't reassured by Whitehurst's words. As U stock tanked, investors may have wondered whether Unity Software's multiple rounds of staff cuts could be a sign of a metaverse business in decline.
It's a concern that I, not a Unity Software investor but certainly a concerned onlooker, definitely share. Taking a position in U stock now would be a dangerous proposition as the market will need time to process the full implications of a much smaller company with near-term revenue-generation prospects that remain unclear.
Consequently, I wouldn't touch Unity Software stock with a 10-foot pole until it falls to $25. That's where the stock bounced sharply twice in 2023, and at least the risk-to-reward profile would be better at that reduced price point.
Disclaimer: All investments involve risk. In no way should this article be taken as investment advice or constitute responsibility for investment gains or losses. The information in this report should not be relied upon for investment decisions. All investors must conduct their own due diligence and consult their own investment advisors in making trading decisions.
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