Unity Software Inc. (YOU – Free Report) recently made Zacks.com’s Most Searched Stocks 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 -12.2%, compared to the +3.1% gain of the Zacks S&P 500 composite. During this time, the Zacks Internet Software industry, which includes Unity Software, is up 4%. The key question now is: what could be the future direction of the stock?
Although media reports or rumors about a significant change in a company’s business prospects usually cause stock prices to rise and lead to an immediate price change, there are always certain fundamental factors that ultimately influence the buy-and-hold decision determine.
Earnings estimate revisions
Rather than focusing on anything else, we at Zacks prioritize evaluating the change in a company’s earnings projection. This is because we believe that the fair value of the shares is determined by the present value of the future income stream.
Essentially, we’re looking at how the sell-side analysts covering the stock are revising their earnings estimates to reflect the impact of the latest business trends. And when earnings expectations for a company rise, the fair value of its shares also rises. A higher fair value than the current market price stimulates investors’ interest in purchasing the stock, causing the price to rise. This is why empirical research shows a strong correlation between trends in earnings estimate revisions and near-term stock price movements.
For the current quarter, Unity Software is expected to post a loss of $0.40 per share, marking a change of -273.9% from the prior-year quarter. The Zacks Consensus Estimate has changed +1.5% over the past 30 days.
The consensus earnings estimate of -$1.79 for the current fiscal year indicates a year-over-year change of -536.6%. This estimate has changed by +3.6% over the past 30 days.
For the next fiscal year, the consensus earnings estimate of -$1.41 indicates a change of +21.1% from what Unity Software is expected to report a year ago. Over the past month, the estimate has changed by +14.8%.
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:
12 month EPS
Expected sales growth
While a company’s earnings growth may be the best indicator of its financial health, not much will happen if it can’t grow its revenue. It is almost impossible for a company to grow its profits without growing its sales over long periods of time. That’s why it’s crucial to know a company’s potential revenue growth.
In the case of Unity Software, the consensus revenue estimate of $431.91 million for the current quarter indicates a year-over-year change of -29.1%. The estimates of $1.79 billion and $1.8 billion for the current and next budget years indicate changes of -18.3% and +0.5%, respectively.
Last reported results and surprise history
Unity Software reported revenue of $446.52 million in the last reported quarter, marking a year-over-year change of -18%. Earnings per share of -$0.31 for the same period, compared to $0.18 a year ago.
Compared to the Zacks Consensus Estimate of $428.01 million, reported revenues represent a surprise of +4.33%. The EPS surprise was +20.51%.
The company beat consensus EPS estimates in each of the trailing four quarters. The company exceeded consensus revenue estimates each time during this period.
Valuation
Without taking into account the valuation of a stock, no investment decision can be efficient. When predicting the future price movement of a stock, it is crucial to determine whether the current price accurately reflects the intrinsic value of the underlying company and the company’s growth prospects.
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), with its own historical values helps determine whether the stock is fairly valued, overvalued or undervalued, while comparing the company to its peers based on these parameters gives a good idea of how fair the stock 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.
Conclusion
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.
