Short interest data shouldn’t be ignored. Rich with institutional sentiment, this data can provide valuable insights for investors.

In this report, we are going to look at the short interest 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 approximately $12.62 billion.

Unity Software Has High Short Interest

Looking at the data on Unity, we see two red flags.

The first is that short interest is high. Currently, 58.50 million Unity shares are on loan. That represents around 24% of the free float.

The second red flag is that the number of shares on loan has surged in the last two months, from around 18 million shares to 58.50 million shares. That is a significant increase and it tells us that the short sellers have been growing more confident and ramping up their downside bets here.

High Valuation

It’s not hard to see why the short sellers are targeting Unity Software right now.

For a start, the company’s growth has slowed dramatically. For the third quarter of 2022, year on year revenue growth was just 13%. A year earlier, top-line growth was 43%.

Secondly, losses are widening. For Q3 2022, loss from operations was $239.6 million (74% of revenue). A year earlier, it was $126.8 million (44% of revenue).

Third, the company's valuation remains very high. Currently, analysts expect Unity to generate earnings per share of just $0.25 for 2023. That gives the stock a price-to-earnings (P/E) ratio of around 121.

Finally, broker sentiment is deteriorating. Recently, Jefferies cut Unity to "underperform" from "hold", citing a high valuation and a slowing digital ad environment.

Overall, Unity is a classic example of a stock that worked in the era of easy money, but is not working now that financial conditions have tightened.

Given the high level of short interest here, we think caution is warranted towards the stock in the near term.

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