What happened
Shares of Unity Software (U -1.06%) were up 14.3% in August, according to data provided by S&P Global Market Intelligence. If you're a shareholder hoping for some action, you got what you wanted -- the month was jam-packed with information relevant to an investment thesis. And some of it was positive news, which is why the stock was up.
So what
Unity stock started going up early in August on an exclusive Reuters report (citing anonymous sources) that said the company is looking to spin off its business in China, potentially for $1 billion. As of the second quarter of 2022, Unity had around $1.8 billion in cash, cash equivalents, and marketable securities. So you might think it doesn't need money. But it's embarking on an expensive plan and an extra $1 billion will come in handy if the report is true.
On July 13, Unity announced its plans to merge with ironSource (IS) in a $4.4 billion deal. Granted, it's an all-stock deal technically. But the details are far more complicated. The company is buying back $2.5 billion in stock over the next two years to offset the dilution of the all-stock transaction. And certain investors are loaning $1 billion to help. In short, having $1 billion from its China operations could prove helpful in making this deal work for shareholders.
ironSource is a competitor to Unity in the app-monetization space, which is where Unity has been struggling. On Aug. 9, Unity reported Q2 financial results. And revenue for its "operate" segment was down 13% year over year to $159 million.
In the first quarter, Unity's management said its monetization algorithm was fed bad data, leading to the current underperformance of its largest business segment. However, with the Q2 results, CEO John Riccitiello said, "We have fixed the data challenges." Therefore, it seems that Unity is quickly getting back on track. And the acquisition of ironSource -- a company arguably outperforming Unity in the space -- could help further.
If you're wondering whether Unity is making the right move by acquiring ironSource, perhaps you should ask competitor AppLovin (APP -0.70%) for its opinion. On Aug. 9, it made an unsolicited proposal to combine with Unity, so long as Unity agreed to terminate its deal with ironSource. On Aug. 15, Unity officially rejected AppLovin's bid.
To me, this is a clear third-party vote of confidence from AppLovin -- it signals that Unity and ironSource could be a powerful combination, and AppLovin knows it. And the market responded by sending shares of Unity higher.
Now what
Unity went public in 2020 at a price-to-sales (P/S) valuation of nearly 30 -- an extraordinarily high number for a company this size, reflecting substantial optimism from the market. With its problems in its operate segment, and with macro-economic conditions, that valuation has fallen to a P/S of about 10, as of this writing.
In absolute terms, that's still a high valuation and something for investors to be aware of. Even though Unity stock is down around 80% from its all-time high, it seems the market is still giving it a lot of credit, believing it can get back on track. For that reason, August was an encouraging month for Unity shareholders. But the company still has a long way to go.
