The Stock Chart for Video Game Engine Developers Unit (NYSE: U) certainly doesn’t look good. Since peaking in late 2021, Unity’s shares have fallen nearly 90%. The company’s market cap, once valued at more than $50 billion, has fallen to around $8 billion.
A lot has gone wrong for Unity in recent years:
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An acquisition-heavy strategy that saw the company invest $4.4 billion in equity in app monetization platform ironSource has failed to deliver the expected benefits.
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The failed implementation of the now-cancelled Runtime Fee damaged developer confidence and ultimately led to the resignation of former CEO John Riccitiello.
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Revenue is down as the company restructures its product portfolio. For 2024, the company expects revenue from its strategic portfolio to decline by 2% to 3% compared to 2023.
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Profits are still a distant dream. The company posted a GAAP net loss of $126 million on revenue of $449 million in the second quarter of 2024. The profit picture has improved after layoffs and other cost-cutting, but Unity remains deep in the red.
While Unity is struggling, there are good reasons to bet on a turnaround.
A new CEO with the right goals
Unity named former Zynga Chief Operating Officer Matthew Bromberg as CEO on May 1. Much of the dirty work, including laying off 25% of the workforce and reshaping the company’s portfolio, had already been done by interim CEO Jim Whitehurst.
Bromberg has outlined two core goals: accelerate product innovation and rebuild trust with its customers. On the product front, Unity is about to launch the next major version of its core game engine, Unity 6. While it was in the works before Bromberg took the helm, the new version will include new AI tools that should appeal to developers.
Unity’s advertising business is where the most work is needed, making Bromberg a natural choice for the company’s CEO. While Unity’s game engine is used to create all sorts of games, it’s especially popular in the mobile gaming market, where games are often monetized through advertising. Unity’s Grow Solutions segment, which includes its advertising business, suffered a 9% year-over-year decline in strategic portfolio revenue in the second quarter.
Under Bromberg, Unity is revamping the machine learning software and data infrastructure that underpins its advertising business. The company has also brought on a new group of leaders, including MoPub co-founder Jim Payne as chief product officer. With the right strategy, the advertising business has the potential to be a long-term growth engine for Unity.
While product innovation is important, developers are hesitant to trust Unity after the Runtime Fee debacle. Earlier this month, Bromberg took the crucial step of eliminating the Runtime Fee altogether, while simultaneously increasing the revenue cap for free users of the Unity engine. While this move doesn’t entirely solve the problem, it should go a long way toward reassuring customers that there will be no more nasty surprises.
A turnaround will take time
Unity’s turnaround won’t happen overnight, but the company will continue to dominate the video game engine market. For video game companies and developers who don’t use their own in-house engines, Unity and Epic Games’ Unreal Engine are the two main choices.
After years of missteps, Unity is doing the right things. It has reduced its workforce and cost structure. It is refocusing on improving its core technology and advertising capabilities, and it is rebuilding relationships with developers.
The global mobile advertising market is worth $150 billion, and Unity has the potential to become a major player if it can get its act together. Outside of gaming, Unity has had some success winning customers across a variety of industries by building 3D tools and experiences. It’s difficult to pin down the exact size of Unity’s total addressable market, but it’s safe to say it’s far larger than the $1.685 billion in strategic portfolio revenue the company expects to generate this year.
Unity stock is not for the faint of heart. The company appears to be on the right track, but turnaround will take time. If Bromberg can deliver on his goals, Unity stock could be in for an epic recovery.
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Timothy Green has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Unity Software. The Motley Fool has a disclosure policy.
Can Unity Stock Stage a Monster Rebound? was originally published by The Motley Fool
