Why did Unity Software stock plunge today? Weak guidance crushes stock

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Unity Software (NYSE:U) stock plunged on Wednesday after the video game development software company said its first-quarter results were weaker than anticipated and said the rest of the year would be weak, largely due to a major impact from its ad monetization tool, Unity Ads.

Credit Suisse analyst Stephen Ju, who rates Unity (U) outperform, lowered the per-share price target to $137 from $160, noting that a $110 million impact on Unity Ads caused the weak guidance, due to reduced targeting efficacy.

“Issues likely began in [fourth-quarter 2021], when Unity noted that it had been ingesting ‘bad data’ from a large customer – on top of which its targeting algorithms were being built,” Ju wrote in an investment note following the report.

“And due to the compounding nature of the issue, ad spend/revenue was not impacted materially until [February/March] following sustained strength in [January] – as advertisers rotated budgets into other channels given performance deterioration,” Ju added.

Unity Software (U) fell more than 37% to $30.30 on Wednesday and have lost more than 78% of their value since the start of the year.

Unity (U) forecast sharply slowing growth for the second quarter, saying it expects sales to be between $290 million and $295 million, compared to estimates of $359.65 million. At the low end, that would represent just 6% year-over-year growth, compared to 36.3% growth in the first quarter.

For the full-year, Unity (U) expects sales to be within a range of $1.35 billion and $1.425 billion, compared to estimates of $1.49 billion, implying revenue will grow between 22% and 28% year-over-year.

For the period ending March 31, Unity (U) said it lost an adjusted 8 cents per share on $320.13 million in revenue. A consensus of analysts was expecting the company to lose an adjusted 8 cents per share on $321.17 million in sales.

Although Unity Ads impacted guidance, Ju noted that Unity’s (U) management discussed “ongoing efforts” to rebuild its data sets to retrain the algorithm, but that is likely to impact revenue “over time” and not be a quick fix.

Citi analyst Jason Bazinet said the $110 million shortfall in Unity Ads is likely to cause “shares to trade lower.”

Going into earnings, Wall Street analysts were mixed on Unity’s (U) revenue prospects, with one analyst raising their estimates, while two cut their estimates.