What happened
Shares of Unity Software (NYSE: U) were down 11.8% as of 2:31 p.m. ET on Tuesday. On Monday, AppLovin said it was backing away from its Aug. 9 proposal to merge with Unity in what would have been a deal valued at $20 billion.
Unity shares tanked on Tuesday after more bad news about the economy and inflation sent the broader market down. The company's shares popped as much as 50% in early August around its second-quarter earnings release and the AppLovin proposal. But after Unity's board formerly rejected the offer on Aug. 15, the stock has been in a downward slide. Year to date, Unity is down 74%.
So what
Unity remains committed to its pending merger with ironSource. This should position the company as a leading platform to help game creators run, grow, and monetize live games and real-time 3D content.
However, the main concern for Wall Street right now is news that the Consumer Price Index (CPI), a key measure of inflation in the economy, rose by more than expected in August. This raises the likelihood of further interest-rate hikes by the Federal Reserve in the near term. Higher interest rates are bad for stocks that trade at high valuations since it means a lower present value for future profits when estimating the long-term value of a business.
Now what
It's been a challenging year for Unity. The company experienced some self-inflicted wounds earlier this year over problems with one of its advertising tools. Management's latest guidance calls for revenue to increase between 17% to 22% for the full year, which is lower than previous years.
The weak guidance, along with management pursuing acquisitions for growth, doesn't sit well with Wall Street, which would prefer Unity to generate its growth organically. Still, the market is overlooking the profits ironSource will bring to Unity, which should increase the value of the combined business upon closing. Shareholders will vote on whether to approve the ironSource deal on Oct. 7.
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John Ballard has positions in Unity Software Inc. The Motley Fool has positions in and recommends Unity Software Inc. The Motley Fool has a disclosure policy.
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