Unity Software Inc. (U) recently made Zacks.com’s Most Searched Stock list. Therefore, you might want to consider some of the key factors that could impact the stock’s performance in the near future.
Over the past month, shares of this company have returned -3%, compared to the Zacks S&P 500 composite’s +3.6%. During this time, the Zacks Internet Software industry, which includes Unity Software, lost 0.2%. The key question now is: what could be the future direction of the stock?
Although press releases or rumors about a substantial change in a company’s business prospects typically make the stock “trending” and lead to an immediate price change, there are always some fundamental facts that ultimately dominate the buy-and-hold decision making.
Here at Zacks, we prioritize assessing the change in a company’s future earnings projection above everything else. That’s because we believe that the present value of the future income stream determines the fair value of the stock.
Our analysis is based primarily on how sell-side analysts who cover the stock revise their earnings estimates to take into account the latest business trends. When earnings expectations for a company rise, the fair value of its shares also rises. And when the fair value of a stock is higher than the current market price, investors tend to buy the stock, causing the price to rise. For this reason, empirical studies indicate a strong correlation between earnings estimate revision trends and near-term stock price movements.
Unity Software is expected to post earnings of $0.17 per share for the current quarter, which represents a year-over-year change of +154.8%. Over the past 30 days, the Zacks Consensus Estimate has changed -83.3%.
For the current fiscal year, the consensus earnings estimate of $0.77 indicates a change of +145.8% from the prior year. Over the past 30 days, this estimate has changed by -92.3%.
For the next fiscal year, the consensus earnings estimate of $0.85 indicates a change of +9.3% from what Unity Software is expected to report a year ago. The estimate has remained unchanged over the past month.
With a strong outside-audited track record, our proprietary stock rating tool, the Zacks Rank, provides a more compelling picture of a stock’s near-term price direction because it effectively harnesses the power of earnings estimate revisions. Due to the magnitude of the recent consensus estimate change, along with three other factors related to earnings estimates, Unity Software is rated a Zacks Rank #3 (Hold).
The chart below shows the evolution of the company’s forward twelve-month consensus EPS estimate:
Consensus 12-month earnings per share estimate for the US
While earnings growth is perhaps the most superior indicator of a company’s financial health, nothing happens if a company fails to grow its earnings. After all, it is virtually impossible for a company to increase its revenues for an extended period of time without increasing its earnings. So it is important to know a company’s potential revenue growth.
In the case of Unity Software, the consensus revenue estimate of $447.59 million for the current quarter indicates a year-over-year change of +0.2%. The estimates of $1.8 billion and $1.97 billion for the current and next budget years indicate changes of -0.7% and +9.4%, respectively.
Unity Software reported revenue of $440.94 million in the last reported quarter, representing a year-over-year change of -1.9%. Earnings per share of -$0.26 for the same period, compared to -$0.32 a year ago.
Compared to the Zacks Consensus Estimate of $425.83 million, reported revenues represent a surprise of +3.55%. The EPS surprise was -4%.
Over the last four quarters, Unity Software has surpassed consensus EPS estimates three times. The company exceeded consensus revenue estimates each time during this period.
No investment decision can be efficient without taking into account the valuation of a stock. Whether a stock’s current price accurately reflects the intrinsic value of the underlying company and the company’s growth prospects is a key determinant of its future price performance.
By comparing the current value of a company’s valuation multiples, such as price-to-earnings ratio (P/E), price-to-sales (P/S) and price-to-cash flow (P/CF), against its own historical values, one can determine whether the stock is fairly valued, overvalued or undervalued, while comparing the company against its peers on these parameters gives a good idea of how reasonable the share price is.
As part of the Zacks Style Scores system, the Zacks Value Style Score (which evaluates both traditional and unconventional valuation metrics) organizes stocks into five groups ranging from A to F (A is better than B; B is better than C; and so on), making it useful in identifying whether a stock is overvalued, rightly valued, or temporarily undervalued.
Unity Software is rated F in this area, indicating that it trades more expensively than its peers. Click here to view the values of some of the valuation data that led to this figure.
The facts discussed here and much other information found on Zacks.com can help determine whether the market buzz surrounding Unity Software is worth paying attention to. However, its Zacks Rank #3 suggests it could perform in line with the broader market in the near term.
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Unity Software Inc. (U): Free stock analysis report
This article was originally published on Zacks Investment Research (zacks.com).
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