On Tuesday, Piper Sandler shifted its stance on Unity Software (NYSE:U), moving from an Underweight to a Neutral rating, while also adjusting the price target for the shares to $30.00 from the previous $35.00.
The revision comes after recognizing a significant downturn in the company’s year-to-date performance, with shares falling by 35%, in contrast to the S&P 500's 6% rise.
The analyst noted that entering 2024, there was a concern that Unity Software's investor sentiment and valuation were overly optimistic, given the company's strategic portfolio changes and the 30% fourth-quarter surge in its share price. This surge had inflated the forward-looking enterprise value to EBITDA multiple to 26 times.
However, the company's growth expectations for 2024 have been recalibrated to a mid-point of 3%, which is lower than the 9% consensus. This adjustment suggests that Unity's strategic base growth potential may not meet initial expectations, potentially affecting its valuation multiple until growth picks up again.
The upgrade to a Neutral rating is based on a more balanced risk-reward outlook, considering the recent share price drop and the recalibrated growth and valuation expectations.
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