Who?
Trading in the stock had to be halted.
Apple ( AAPL) had kicked off its Worldwide Developers Conference, and revealed the coming launch (early 2024) of their nearly $3,500 augmented reality headset, the Apple Vision Pro. Apple had named a handful of companies currently developing apps for the new headset. Among the line-up were some of the usual, and large (very large) suspects, such as Adobe ( ADBE) , Cisco Systems ( CSCO) and Microsoft ( MSFT) .
Apple's VP of worldwide developer relations, Susan Prescott went on: "Today, we are excited to share that we've been working with Unity {Software} to bring those apps to Vision Pro, so popular Unity-based games and apps can regain full access to VisionOS features such as passthrough, high-resolution rendering, and native gestures."
Shares of Unity Software ( U) closed up 17.16% on Monday after trading as much as 26% higher intra-day, despite Apple having closed lower on the session.
Unity never let on that they were working with Apple, and only sent CNBC a statement confirming the fact after Apple had already made the collaboration between the two firms public earlier on Monday.
Performance
Unity posted its first-quarter financial results nearly a month ago (May 10) -- a GAAP loss per share of -$0.67, and adjusted EPS of $0.06 on revenue of $500.36M. Those top and bottom-line results both beat Wall Street's expectations. Revenue growth of 56.3% reflected a third consecutive quarter of accelerating sales growth after such growth had been decelerating quite rapidly into mid-2022.
That was the first clue.
The company guided current-quarter revenue to $510M to $520M, which was above consensus and representing potential growth of 72% to 75%. There was talk of flat sales in advertising. No mention that a large client was on board. For the full year, Unity projected sales growth of 50% to 58% and stated a longer-term goal of reaching a $1B EBITDA run-rate by the end of calendar year 2024.
Hmm. Another clue.
Unity is expected to report its second quarter on August 9, after the closing bell. Wall Street is now looking for an adjusted loss per share of -$0.61 on revenue growth of about 74%. Looking over that first quarter, I see operating cash flow of -$5.1M and free cash flow of -$19.5M. This is the closest that the company has come to positive results for these metrics in six quarters.
Unity ended that last quarter with a cash position of $1.594B and current assets of $2.343B. With current liabilities of $980.2M, it stood with a current ratio of 2.39, which is quite healthy. It's even healthier when one realized that $212.9M of those current liabilities are of the unearned revenue variety. The current situation is strong.
Total assets amounted to $7.735B, including $5.025B in goodwill and other intangibles. At 65% of total assets, I find that a tough pill to swallow. Total liabilities less equity comes to $4.043B, including $2.708B in long-term debt.
I am not crazy about this balance sheet longer-term. I don't like how small a percentage of total assets are actually tangible, nor do I like the debt to cash ratio.
My Thoughts
The partnership with Apple is positive. Unity is being managed well in the present. However, cash flows are going to have to go positive in order to fix the balance sheet out in the future.
Will Apple's headset be the big winner that some pundits are seeing it as? I really don't know. I do know that once I saw the iPod, I wanted one and once I saw an iPhone, I wanted one.
I have the AirPods, but I still haven't gone for the Apple Watch; I have this prideful thing about never having spent more than $25 on a watch. I also don't think I am all that attracted to this headset. Maybe if I were younger, or if I end up needing it for work, but as a $3,500 toy? Not a chance.
Readers will see in the chart above that the shares have a long way to go to even get near a 38.2% Fibonacci retracement of the November 2021 through November 2022 selloff. However, the shares have formed a descending triangle in place since August of 2022. This is usually seen as a bearish pattern of continuance where the downtrend resumes upon closing. Here, we have the opposite based on a news event. The triangle closed, and the shares burst higher.
What will be interesting will be to see if Unity can hold the 200-day simple moving average (SMA) ($32), which was retaken on Monday after more than three months spent below that thin red line. The shares are trading down Tuesday morning. I am really tempted to try a bearish play here, but I am not so bold as to get short the equity in this environment.
What I am interested in doing is getting long a $35/$30 bear put spread (long the $35 puts, short a like amount of the $30 puts) expiring on August 18 (after earnings) if I can do so for a net debt of under $2. What am I doing? The idea is to risk $2 in an attempt to win back $5 for a profit of $3.
