Why Unity Software Stock Skyrocketed This Week

What happened

Week to date, shares of Unity Software (NYSE:U) were up 23% through Thursday's closing price, according to data provided by S&P Global Market Intelligence.

The provider of real-time 3D software for gaming and other markets surprised investors with its first-quarter earnings report. Unity's revenue soared 56% year over year, boosted by the recent acquisition of ironSource, an Israel-based company that helps mobile developers grow and monetize their apps.

However, even after accounting for the additional ironSource revenue, Unity still beat the consensus analyst estimate of $481 million by reporting $500 million in total revenue for the quarter.

Investors are seeing accelerating momentum in Unity's business that bodes well for the rest of the year. After a crushing fall in 2022 over slowing growth, the stock is up 13% year to date.

So what

Unity saw its revenue growth slow to as low as 9% in the second quarter last year. That was not enough to justify the stock's high price-to-sales valuation. Entering 2022, the stock traded around 30 times the company's annual revenue, which is expensive even for a fast-growing software company.

Unity is starting to show signs of building momentum. Even with headwinds in the economy pressuring Unity's mobile monetization business, the Create Solutions segment, which includes subscription revenue from the Unity Pro platform, grew 14% year over year. That offset revenue declines from its Grow Solutions segment, reflecting weakness in the mobile advertising market.

What got investors most enthusiastic over the company's quarter was management's guidance that revenue across the business should accelerate through the rest of the year. For the second quarter, guidance calls for total revenue to increase by at least 72% over the year-ago quarter.

Now what

With the stock well off its all-time highs and the business starting to regain momentum, this might be a good buying opportunity. The stock will likely remain volatile in the near term, but Unity is clearly heading in the right direction and still has a large addressable market to capture.

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John Ballard 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.