Video game engine developer Unit (NYSE: U) is a classic case of a company with incredible assets that still ended up in crisis. Unity is one of two major commercial game engines that dominate the market, along with Epic Games’ Unreal Engine. There are plenty of other options, but the path of least resistance is Unity or Unreal.
Despite this dominant position, Unity has made a number of disastrous decisions in recent years that have decimated its stock price. First, the $4.4 billion acquisition of app company ironSource failed to fuel growth in Unity’s advertising business. Grow Solutions, which includes ads and other monetization tools for mobile games, has suffered from declining revenues in recent quarters.
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Second, Unity’s attempt to monetize its customer base through app install fees was a poorly communicated mess. The company’s reputation went up in flames within days, and the ordeal ultimately led to the ouster of former CEO John Riccitiello.
Unity shares are down more than 90% from their all-time high, revenue is down and earnings remain deep in the red. While this may not sound like an attractive investment opportunity, the company is finally taking the right steps to turn itself around.
Shortly after the former CEO left, Unity began large-scale cost cuts, including significant layoffs and scaling back the company’s ambitions. Unity laid off about 25% of its staff earlier this year and began exiting businesses that weren’t considered part of its “strategic portfolio.”
GAAP operating expenses fell 11% year over year in the third quarter of 2024, a step in the right direction. Although Unity is not yet close to profitability, the company is generating positive free cash flow. This gives it the flexibility to invest in its core products and pursue growth opportunities even as it works to increase efficiency.
New CEO Matthew Bromberg took over in May. With cost-cutting already in full swing, Bromberg took the crucial step of completely eliminating the fees that had infuriated developers. Those fees had already been scaled back, but the fact that they existed at all was an albatross around Unity’s neck.
Developer confidence won’t be restored overnight, but Bromberg seems to understand that enriching Unity’s developer base isn’t the right approach. In lieu of the fees, Unity increased subscription prices for its large customers, while making the free tier more generous. Some developers who use the free tier will succeed and move to one of the paid tiers, and Unity will benefit from those customers’ successes.
In addition to winning back developers, Unity is putting a renewed focus on its core products. Unity 6, the latest version of the company’s game engine, is now available and is packed with performance improvements and new features. Artificial intelligence (AI)-based features are emerging and promise to make developer workflows more efficient.
Unity is in full swing with a restart in the advertising industry. The company has appointed new executives, is rebuilding its infrastructure and machine learning capabilities, and has accelerated the pace of product improvements. For Unity’s advertising business to succeed, it must provide a platform that can deliver a solid return on ad spend to its clients. These changes are intended to achieve exactly that.
Unity’s turnaround will take time, and GAAP profitability could be years away. But Unity’s dominant position in the video game industry, and especially the mobile gaming industry, means Unity can thrive in the long run if it can get its act together.
Unity is now valued at just over $7 billion, down from $50 billion at its peak. While the stock may not reach these heights anytime soon, the company’s position in the video game engine market and its potential in the mobile advertising market give it plenty of long-term growth opportunities.
In-game advertising spend is expected to exceed $20 billion by 2032 while growing at double-digit rates. Unity has only just begun to respond to this demand.
A version of Unity that runs efficiently, doesn’t anger the developer base, and provides an effective mobile advertising platform that delivers value to advertisers is likely worth much more than $7 billion. While the turnaround will take time, Unity and its new leadership are finally moving in the right direction.
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Timothy Green has no position in any of the stocks mentioned. The Motley Fool holds and recommends Unity Software. The Motley Fool has a disclosure policy.
Unity Stock Could Rise If Turnaround Gets Started was originally published by The Motley Fool
