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Unity Software Inc(U-N)

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The Growth Stock Rout Isn't Over for These 2 Companies

Motley Fool - Fri Nov 10, 2023

One thing that the current earnings season has shown is that it sometimes doesn't matter if companies meet the expectations that investors say they have about their financial results. In the current market environment, if a company can't show that it will grow its business quickly even despite the macroeconomic pressures across the globe, the stock price is vulnerable to steep declines.

That dynamic played out for a couple of companies on Friday morning. Even as major market index futures moved higher in the premarket session, shares of The Trade Desk (NASDAQ: TTD) and Unity Software (NYSE: U) plunged. Below, you'll learn more about what caused shareholders in these two tech-oriented companies to lose confidence and what the future might bring for them.

The Trade Desk points to a possible slowdown

Shares of The Trade Desk plummeted 24% in premarket trading early Friday. The programmatic advertising-tech company reported third-quarter financial results that were generally better than many had expected, but its guidance for the remainder of the year raised serious doubts about the sustainability of its past growth rates.

The third quarter was a strong one for The Trade Desk. Revenue of $493 million grew 25% year over year, and adjusted net income climbed 29% to $167 million. Adjusted earnings of $0.33 per share came in ahead of expectations. The Trade Desk also pointed to strong customer retention numbers.

Fundamentally, The Trade Desk is achieving many of its goals. Its Unified ID 2.0 standard is gaining traction across the industry, and its OpenPath premium publisher marketplace is connecting advertisers to more than 11,000 connected TV, mobile, display, and audio ad destinations.

Yet investors reacted negatively to The Trade Desk's guidance for fourth-quarter revenue of $580 million, which suggested a slowdown in annual growth to just 18%. Given the trillion-dollar opportunity in programmatic advertising, shareholders expected The Trade Desk's hypergrowth path to last longer, and signs that it might not were highly disappointing.

Unity keeps losing ground

Elsewhere, shares of Unity Software were down 12% early Friday. The maker of the Unity Engine video game development platform reported third-quarter financial results that failed to build confidence after a tough period for the company.

Unity's numbers were mixed. Revenue of $544 million was up 69% year over year, but most of those gains came from its acquisition of ironSource, without which pro forma sales were up just 8%. Adjusted pre-tax operating earnings climbed 24% from year-ago levels, though, and free cash flow came in at $104 million.

Unity's game-creation segment was relatively weak, as restrictions by the Chinese government weighed on that side of the business. However, the growth-solutions segment, which helps game developers monetize the video games they create, saw continued sharp revenue gains. Despite the introduction of runtime fees that generated so much controversy recently, Unity said that the revenue softness resulting from that move "is now mostly behind us."

Yet Unity shareholders are feeling even more uncertain about the future because the company is still working on its internal assessment of its products and services. Unity believes it will be able to act quickly to align opportunities with a viable cost structure and implement a plan by early 2024. In the interim, though, Unity chose not to offer any guidance for the fourth quarter or for the 2023 year as a whole. Investors don't like being in the dark, and until Unity shares more details about its plans, the stock could have trouble rebounding.

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Dan Caplinger has positions in The Trade Desk. The Motley Fool has positions in and recommends The Trade Desk and Unity Software. The Motley Fool has a disclosure policy.

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