Celebrations may be in order for Unity Software Inc. (NYSE:U) shareholders, with the analysts delivering a significant upgrade to their statutory estimates for the company. Consensus estimates suggest investors could expect greatly increased statutory revenues and earnings per share, with analysts modelling a real improvement in business performance. The market may be pricing in some blue sky too, with the share price gaining 29% to US$32.52 in the last 7 days. Could this upgrade be enough to drive the stock even higher?
Following the upgrade, the current consensus from Unity Software’s 22 analysts is for revenues of US$2.0b in 2023 which – if met – would reflect a substantial 60% increase on its sales over the past 12 months. Losses are predicted to fall substantially, shrinking 37% to US$1.67. Yet before this consensus update, the analysts had been forecasting revenues of US$1.7b and losses of US$1.89 per share in 2023. We can see there’s definitely been a change in sentiment in this update, with the analysts administering a sizeable upgrade to next year’s revenue estimates, while at the same time reducing their loss estimates.
Yet despite these upgrades, the analysts cut their price target 26% to US$39.64, implicitly signalling that the ongoing losses are likely to weigh negatively on Unity Software’s valuation. It could also be instructive to look at the range of analyst estimates, to evaluate how different the outlier opinions are from the mean. There are some variant perceptions on Unity Software, with the most bullish analyst valuing it at US$71.00 and the most bearish at US$16.00 per share. With such a wide range in price targets, the analysts are almost certainly betting on widely diverse outcomes for the underlying business. As a result it might not be possible to derive much meaning from the consensus price target, which is after all just an average of this wide range of estimates.
One way to get more context on these forecasts is to look at how they compare to both past performance, and how other companies in the same industry are performing. It’s clear from the latest estimates that Unity Software’s rate of growth is expected to accelerate meaningfully, with the forecast 45% annualised revenue growth to the end of 2023 noticeably faster than its historical growth of 32% p.a. over the past three years. Compare this with other companies in the same industry, which are forecast to grow their revenue 13% annually. Factoring in the forecast acceleration in revenue, it’s pretty clear that Unity Software is expected to grow much faster than its industry.
The Bottom Line
The highlight for us was that the consensus reduced its estimated losses next year, perhaps suggesting Unity Software is moving incrementally towards profitability. Fortunately, analysts also upgraded their revenue estimates, and our data indicates sales are expected to perform better than the wider market. The declining price target is a puzzle, but still – with a serious upgrade to next year’s expectations, it might be time to take another look at Unity Software.
Still, the long-term prospects of the business are much more relevant than next year’s earnings. At Simply Wall St, we have a full range of analyst estimates for Unity Software going out to 2024, and you can see them free on our platform here..
Of course, seeing company management invest large sums of money in a stock can be just as useful as knowing whether analysts are upgrading their estimates. So you may also wish to search this free list of stocks that insiders are buying.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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