Why Unity Software Is Down More Than 12% on Tuesday

What happened

Shares of Unity Software (NYSE: U) are down 12.5% as of 1:35 p.m. ET today, upended by broad-market weakness and steep sell-offs from a pair of closely related peers.

So what

Blame Roblox (NYSE: RBLX) and Snap (NYSE: SNAP), mostly. Roblox stock is 8.7% lower today in response to a downgrade from Atlantic Equities, while Snap — the name behind the social media app Snapchat — cautioned its shareholders that it wouldn’t meet its initial second-quarter earnings estimates, sending its shares down more than 40%. Although distinct companies, all three organizations are working on metaverse-based products. If one or more of them is struggling, investors are willing to bet that others operating in the same arena are running into the same headwind.

Person watching a falling chart on a computer monitor.

Image source: Getty Images.

Of course, it bears mentioning that stocks in general are getting clobbered on Tuesday, making any and all tickers more vulnerable to guilt by mere association than they’d normally be. That is to say, Snap’s earnings woes have little to do with its metaverse plans, while Atlantic Equities’ beef with Roblox is waning engagement at its own gaming platform. Third parties are still tapping Roblox to create sponsored virtual worlds outside of Roblox’s own virtual video game worlds. When panicking, though, investors tend to connect proverbial dots that wouldn’t otherwise be connected. Unity Software helps create the virtual worlds for what will eventually become the metaverse, prompting investors to sell those shares side by side with Roblox and Snap stock.

Now what

In most cases, single-stock sell-offs stemming from being in the wrong industry at the wrong time are short-lived. Such pullbacks are even buying opportunities, as the market tends to catch these panic-induced mistakes pretty quickly.

In the current environment, though, fear is begetting even more fear, making investors less rationale rather than more rationale the more the market sinks. The weakness is largely self-fueling now, making it likely that continued weakness from any metaverse-related stock will help drive other metaverse-related stocks lower.

This weakness will eventually exhaust itself, at which point many of these names will be great, undervalued additions to a portfolio. For the time being, however, the smartest move to make is stepping aside and letting the pullback run its full course even if the selling isn’t entirely rational.

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James Brumley has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Roblox Corporation and Unity Software Inc. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.