Executives at Unity Software Inc. believed they had found a means to dodge the consequences of Apple Inc.'s mobile operating system modifications.
They were mistaken, and Wall Street slammed Unity U, a 15.21% stock, on Wednesday for it.
After the gaming-engine business unveiled what many analysts called a "self-inflicted wound" in its ad-targeting technologies, shares lost more than a third of their value, worth nearly $5 billion in market capitalization, and were heading for their worst day ever. The decline began in the after-hours session on Tuesday when Unity officials forecasted lower quarterly and yearly revenue than Wall Street expectations, as well as comparable first-quarter results.
Following an intraday low of $29.30 in Wednesday's session, shares closed down 37% at $30.30, the stock's lowest day since its September 2020 IPO, when shares sold for $52 each. The stock is now trading at an 85% discount to its all-time high of $201.12 achieved on Nov. 18.
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The major issue disclosed by Unity was that the company's Pinpointer ad solution, which enables creators to monetize their games and content through advertisements, was discovered to be inaccurate, and consumers were paying less as a result of errors. Unity's Operate business was a big driver in August, as it appeared the company had been able to work around Apple Inc.'s AAPL, -1.91 percent opt-out of using Identifier for Advertisers, or IDFA, in its privacy update, a change that has roiled online-advertising companies like Meta Platforms Inc.'s FB, 1.54 percent Facebook.
Unity was apparently employing ad models that didn't rely on Apple data, instead of relying on engagement and platform performance data from end-users. Customers flocked to the tool, but it quickly proved inadequate, according to analysts who slashed price forecasts on Wednesday.
Morgan Stanley analyst Matthew Cost, who has an overweight rating and lowered his price target to $50 from $110, was quick to point out that the Pinpointer tool expanded to account for the bulk of ad spending through Unity's ad network over the last year as a result of the Apple IDFA modifications.
"We believe the most important cause of the guidance reduction was a reduction in advertising spend, as consumers reacted to the ad network's worse performance in 1Q/early 2Q," Cost added. "While the basic flaws have been rectified, retraining the machine learning algorithms and reclaiming ad spend that migrated elsewhere earlier this year will take time."
"We also believe the guidance had a secondary impact," Cost added, "since engineers who were redeployed to correct these issues were compelled to postpone their other projects (many of which would have produced incremental revenue) until later in '22/'23."
"We believe the most important cause of the guidance reduction was a reduction in advertising spend, as consumers reacted to the ad network's worse performance in 1Q/early 2Q," Cost added. "While the basic flaws have been rectified, retraining the machine learning algorithms and reclaiming ad spend that migrated elsewhere earlier this year will take time."
"We also believe the guidance had a secondary impact," Cost added, "since engineers who were redeployed to correct these issues were compelled to postpone their other projects (many of which would have produced incremental revenue) until later in '22/'23."
The "self-inflicted damage" should be repaired by the beginning of the fourth quarter, according to Wedbush analyst Michael Pachter, who has an outperform rating and lowered his price target to $70 from $125.
"While we believe it is certainly feasible, if not probable, that Unity grows far faster than we have predicted," Pachter said, "we believe it is sensible to set the bar relatively low given the size of the company's self-inflicted wound last quarter."
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"Unity's strong positioning in the mobile gaming space and growing set of monetization tools will help the company get back on track in a timely fashion, with revenue growth recovering as the year progresses," says Stifel analyst J. Parker Lane, who has a buy rating and lowered the target price to $100 from $150.
"Overall, we anticipate nongaming verticals will continue to provide a long runway of development potential," Lane added.
According to FactSet data, 14 analysts covering Unity have a buy rating, three have a hold recommendation, and one has a sell rating. On Wednesday, 11 of those analysts lowered their target prices, resulting in an average target price of $79.63, down from $139.31 previously.