Here's Why Unity Stock Dropped 15% Last Month

What happened

Shares of Unity Software (U -4.00%) dropped by 15.3% in September, according to data provided by S&P Global Market Intelligence. In an official blog post on Sept. 12, the company said that it was instituting a new up-front install fee on games when they’re downloaded by users. And this announcement went over like a lead balloon.

Investors need to be careful when using anecdotes to inform their research. After all, a few disgruntled users can drown out the opinion of the majority if they’re loud enough.

However, the uproar in this case was undoubtedly real, widespread, and legitimate. Just five days later, Unity’s blog post was updated with an editor’s note, saying that complaints from the creator community were being heard. Then, 10 days after Unity’s original pricing announcement, a new blog post came out from Marc Whitten, the head of Unity Create, that said, “I want to start with this: I am sorry.”

Until Unity reports its third-quarter results in November, investors can’t begin to get clarity about what kind of damage its unpopular move did to the company’s financials. But investors fear it could be substantial, and that’s why the stock fell in September.

So what

Unity’s software for content creation is primarily used by video game developers. And the change to pricing was specifically for games. The new Unity runtime fee wasn’t for all of its video game customers — only for those that met revenue and download thresholds. 

To be clear, Unity management did not fully revert its pricing structure back to what it was before. The new policy has just been updated based on some of the complaints it received.

Some of the adjustments included only charging the fee to certain customers for games built with the company’s forthcoming software. And Unity’s also giving some of its customers options to either pay with the fee or pay via a revenue-share agreement.

So Unity did backtrack here. But at the end of the day, it’s still charging its clients more. And that remains a risky proposition considering how much it has already riled up its customer base.

Now what

Unity is struggling for growth right now for many reasons. And it seems it was willing to find revenue growth by taking the risk of raising its prices. That plan seems to have backfired. And investors won’t know just how badly it backfired for at least a quarter or two.

Unity was guiding for 2023 revenue in the range of $2.1 billion to $2.2 billion, which would only be up 5% to 9% on a pro forma basis (which accounts for an acquisition). And management was hoping to earn up to $340 million in adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) this year before jumping to $1 billion in adjusted EBITDA in 2024.

I believe it’s fair to wonder if Unity can hit these goals in light of what happened in September. That said, investors don’t know the extent of the damage it did to its business. It’s possible it’s not as bad as feared.

Jon Quast has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Unity Software. The Motley Fool has a disclosure policy.

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