Unity Software (NYSE:U) was upgraded to Neutral from Underweight by Piper Sandler as the game developer platform company looks to simplify its business in 2024.
Shares sank 13% in premarket trading on Tuesday as investors were disappointed with its fourth-quarter results and outlook.
"Piper entered 2024 with concerns that investor sentiment and the valuation on U were too optimistic relative to a strategic portfolio overhaul, and the 30% Q4 surge in U share price," noted Piper Sandler analyst Brent Bracelin.
The investment bank also lowered its price target on Unity to $30 from $35.
"The material 2024 growth reset to a mid-point of 3%, versus a 9% consensus, implies that the strategic base growth potential is not as high as expected, which could pressure the valuation multiple until growth reaccelerates," Bracelin said.
Unity has substantially refocused its portfolio on products interim CEO Jim Whitehurst said during Monday's earnings call.
"So first off, even in the aftermath of the pricing change, our core subscription business, excluding China, grew 18% in Q4," Whitehurst said. "Putting it simply, we are essential to the games industry."
"The strategic portfolio overhaul is a welcome sign and yields a few reasons to be a bit more optimistic on an improved margin profile with a leaner model shifting away from hardware and a potential rule of 40 model when the dust settles at the end of 2024," Bracelin noted.
Unity announced plans last month to reduce its workforce by 25%, or 1,800 employees. The downsizing is expected to cost approximately $195M during the first quarter of 2024, according to a Form 8-K filing.
Unity has a HOLD rating by both Seeking Alpha and Wall Street analysts. However, it has a BUY rating from Seeking Alpha's quant system, which regularly beats the market.
More on Unity Software
- Unity Plunges On Guidance Reset (Ratings Upgrade)
- Unity Software Inc. (U) Q4 2023 Earnings Call Transcript
- Unity Software: 2024 Will Be A Show-Me Year (Rating Downgrade)
- Biggest stock movers today: Viking Therapeutics, Zoom Video Communications, Unity Software, and more
- Unity Software slumps after Q4 results, guidance