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Unity Says AI Embrace Will Lead to Growth. One Analyst Has Doubts.

Unity Software
stock was rising sharply Thursday after the company raised full-year guidance and said it was working toward profitability through its embrace of artificial intelligence. But one analyst expressed doubts about the company’s AI efforts.

Late Wednesday,
Unity
(ticker: U) reported a first-quarter loss of 67 cents a share on revenue of $500 million. Analysts surveyed by FactSet were expecting a loss of 73 cents a share on revenue of $480.9 million.

Unity also raised the low end of its 2023 revenue guidance by $30 million, and now expects full-year revenue of between $2.08 billion to $2.2 billion.

Unity also said that it was continuing to work toward profitability through restructuring its teams and reducing offices, and by its adoption of artificial intelligence. The company last week announced that it planned on cutting 8% of its workforce.

Oppenheimer analyst Martin Yang, who rates the stock at Perform without a price target, wrote in a research note Thursday that he likes Unity’s profit outlook, but remains on the sidelines “for clearer signs of growth acceleration.”

In a letter to shareholders, Unity said it embraced AI “years ago” and “sees the adoption of AI tools as an accelerant to our business based on our structural and sustainable competitive advantages.”

Benchmark analyst Mike Hickey wasn’t convinced. He rates Unity stock at Sell with a $16 price target. He wrote in a research note Thursday that he believes “Unity is a loser in an AI World.”

“We appreciate that Unity now believes they’re an AI company, and that the massive disruption from AI and machine learning on game development will only serve to benefit them—we are far less certain,” Hickey said. “We believe AI and machine learning could be destructive to both Unity’s growth and profitability.” He added that it’s possible a startup company can make similar products as Unity at lower expenses, possibly taking market share.

When asked to comment, Unity pointed Barron’s to its commentary on the company’s earnings call. Chief Executive John Riccitiello said on the call late Wednesday that Unity “has sustainable competitive advantages in and around AI,” which he called a “strong tailwind in quarters and years to come.”

“Unity has sustainable competitive advantages in and around AI, not just because of what we’re building in AI, because of the very nature of our platform,” Riccitello said. “The very nature of our platform will benefit from AI tools and content creation, and we’re uniquely able to enable creators to make things where worlds come alive.” 

Shares of Unity jumped 7.7% Thursday to $30.95. The stock has gained 8.3% this year.

Write to Angela Palumbo at [email protected]

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