What Happened: Shares of game engine maker Unity (NYSE:U) fell 5.5% in the morning session after Piper Sandler analyst Brent Bracelin downgraded the stock's rating from Neutral (Hold) to Underweight (Sell). Despite the downgrade, the analyst remained positive about the outlook for the software sector and highlighted names such as Workday (NASDAQ:WDAY), Snowflake (NYSE:SNOW), and monday.com, which have been added to the Top Ideas list.
Separately, the major indices continued to retreat. Interest rates rebounded a bit, and investors may be continuing to take profits after a strong calendar 2023. Other than that, we found nothing more specific for the broad move downward. As a reminder, 2023 was a stellar year for the markets, with the S&P 500 surging by almost 25% and the NASDAQ Composite up over 40%. The final month of 2023 was notably strong, marked by a rally in equities and bonds.
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? Find out by reading the original article on StockStory.
What is the market telling us: Unity's shares are very volatile and over the last year have had 58 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 4 days ago, when the stock dropped 5.5% as the market took a breather with no obvious reason behind the broad-based weakness. Investors likely took profits following a strong finish to the year. 2023 was a splendid for the market, with the S&P 500 up nearly 25%. The year began with a surge in technological advancements, propelling the tech sector to new heights. Companies pioneering in artificial intelligence experienced a renaissance, capturing the attention of investors and driving substantial gains. Not all sectors, however, flourished equally. Traditional industries like consumer durables faced headwinds as consumers reeled in large expenditures, prompting a wave of restructuring and strategic realignment.
More recently, the market has surged over the last two months. Inflation has come in below expectations, prompting the Federal Reserve to pivot from a hawkish to a dovish stance--it is now projecting interest rate cuts in 2024, a tailwind for stocks as it lowers the discount rate applied to future cash flows.
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 5.5% since the beginning of the year, but at $38.64 per share it is still trading 20.3% 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 $564.96.