Short selling data can help investors avoid catastrophic losses. Short sellers tend to be sophisticated, high-conviction traders. If they’re shorting a stock, there’s usually a good reason they are doing so.
In this report, we are going to look at the short selling data on Unity Software Inc (U:US). Unity is a video gaming company based in San Francisco. Founded in Denmark in 2004, it offers a platform for the creation of interactive, real-time 3D creation. The company is listed on the New York Stock Exchange and currently has a market capitalization of $12.53 billion.
Unity Software Inc: Short Selling Data
Looking at the short selling data on Unity, we see two major red flags.
The first is that the number of shares on loan is rising rapidly. Back at the start of April, just 7.4 million shares were on loan. Today, however, the figure stands at 26.01 million. That represents an increase of 254% in a little over three months. This tells us that short sellers are ramping up their downside bets here. The substantial increase in the number of shares on loan is concerning, in our view. Quite often, sharp rises in short selling activity are followed by downward share price movements.
The second red flag is that short interest is now quite high. Our data shows that the 26.01 million shares on loan represent about 15.69% of the free float. This high level of short interest indicates that there are a lot of sophisticated investors with a bearish view on Unity stock at the moment.
Why Are Short Sellers Targeting Unity Software?
It’s not hard to see why short sellers are targeting Unity Software right now.
For starters, recent guidance was weak. In the company’s Q1 results, it said that it expects Q2 revenue of $290 million to $295 million. This was well below the consensus forecast of $321.5 million. The company also lowered its full-year earnings forecast due to challenges with monetization products.
"We believe that the most significant driver of the guidance cut was a pullback in advertising spend as customers reacted to the weaker performance of the ad network in 1Q/early 2Q", said analysts at Morgan Stanley in relation to the weak guidance.
Secondly, broker sentiment has deteriorated recently. In June, for example, analysts at Benchmark initiated coverage of the stock with a ‘sell’ rating and a price target of $27. That implies downside of around 30% from current levels.
Finally, the company’s valuation is still eye-wateringly high, even after a big fall in the share price this year. Unity is not expected to generate a profit this year. However, for 2023, Wall Street expects the group to generate earnings per share of $0.13. At the current share price, that equates to a forward-looking P/E ratio of about 282.
Given the rising level of short interest here, we think caution is warranted towards Unity Software stock right now.