Unity (U) Stock Trades Down, Here Is Why
What Happened:
Shares of game engine maker Unity (NYSE:U) fell 5.2% in the morning session after a broader market downturn as the Dow fell for the third straight day amidst surging yields. The decline was influenced by stronger-than-expected December 2023 retail sales, up 0.6% from November 2023 (versus expectations for 0.4% growth), potentially challenging expectations of aggressive Federal Reserve rate cuts in 2024. This marks a shift from the more optimistic market sentiment at the end of 2023, as more market data revealed inflation is cooling. However, recent market pullbacks indicate increased uncertainty in 2024, suggesting caution as stocks might be overbought.
As a reminder, the driver of a stock's value is the sum of its future cash flows discounted back to today. With lower interest rates, investors can apply higher valuations to their stocks. No wonder so many in the investment community are optimistic about 2024. We at StockStory remain cautious, as following the crowd can lead to adverse outcomes. During times like this, it's best to own high-quality, cash-flowing companies that can weather the ups and downs of the market.
The stock market overreacts to news, and big price drops can present good opportunities to buy high-quality stocks. Is now the time to buy Unity? Access our full analysis report here, it's free.
What is the market telling us:
Unity's shares are very volatile and over the last year have had 57 moves greater than 5%. In context of that, today's move is indicating the market considers this news meaningful but not something that would fundamentally change its perception of the business.
The previous big move we wrote about was 6 days ago, when the company dropped 6.7% as major indices retreated after the Bureau of Labor released inflation data for December 2023, which came in hotter than expected at 3.2%, above the market consensus of 3.1%. Similarly, the data showed that inflation rose by 0.3% compared to the previous month instead of the anticipated 0.2%. These differences versus expectations may seem quite small, and make no mistake, they are.
However, recall that there was much enthusiasm in the markets to end 2023 based on the expectation that rate cuts in 2024 are nearly a sure thing. The market move is reflecting a pushback on this narrative and giving back some of the big gains in the last few months of 2023. Said differently, the market move is seriously floating the possibility that the market has gotten ahead of itself.
As a reminder, the driver of a stock's value is the sum of its future cash flows discounted back to today. With lower interest rates, investors can apply higher valuations to their stocks. No wonder so many in the investment community are optimistic about 2024. We at StockStory remain cautious, as following the crowd can lead to adverse outcomes. During times like this, it's best to own high-quality, cash-flowing companies that can weather the ups and downs of the market.
Unity is down 15.4% since the beginning of the year, and at $32.80 per share it is trading 32.4% below its 52-week high of $48.50 from July 2023. Investors who bought $1,000 worth of Unity's shares at the IPO in September 2020 would now be looking at an investment worth $479.94.
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