Jefferies analysts lowered their price target for Unity Software Inc. (U) to $16 from $24 per share in a note Wednesday, citing expectations of a guidance cut for FY24.
This move comes in response to a recent survey of mobile ad tech that suggests continued weakness in Unity's Grow business, leading to caution about the company's financial outlook.
Jefferies noted, "We remain cautious on U as our Mobile Ad Tech survey suggests another FY24 guide cut is likely with the Grow business driving weakness."
The analysts are particularly interested in hearing from new CEO Matt Bromberg about his vision for the Create segment and strategies to improve the Grow segment through anticipated data targeting improvements.
With Unity's stock trading at a premium valuation of 14x FY25 EBITDA compared to competitor AppLovin (APP) at 10x, Jefferies has revised its price target downward.
The decision is based on the belief that Unity's current guidance implies a steep acceleration in the second half of the year, which is not supported by the latest survey results.
"The 2Q rev guide of -6%/-7% seems reasonable. However, a FY24 guide cut seems likely given that the original FY guide implied a steep accel in 2H," Jefferies stated.
The analysts also highlighted the impact of additional cloud server investments on the 2Q EBITDA guidance, which was $33 million below expectations. They remain cautious about the Grow business, particularly in light of competitive pressures from Google, Meta, and AppLovin. However, there is some optimism regarding the Unity engine, with 47% of survey respondents planning to upgrade to Unity 6, up from 42% last quarter.
Jefferies concluded, "We believe lowering guidance and thus providing achievable targets in 2H for incoming CEO Matt Bromberg would be a prudent move," underscoring the need for realistic financial targets as Unity navigates its current challenges.