Down more than 60% year-to-date, can Unity Software stock rally?

In its first earnings report under Matt Bromberg, the new CEO of Unity software (U 6.84%) cut the company’s guidance for the year and sought to reset expectations. It’s the next step in a bid to turn around a company that has seen its shares fall more than 60% in 2024.

Let’s take a closer look at Unity’s latest earnings report and potential for a turnaround.

Cut guidance

Things started to go south for Unity last fall when the company tried to introduce a new pricing structure that included an “Execution Fee” based on the number of users who install games built using its development engine. Customers revolted and the company eventually had to withdraw its plan, but the episode left many game developers angry and unwilling to trust the company.

Unity then tried to restructure, cutting about 25 percent of its workforce as it exited money-losing businesses. After that, he set out to refocus on the business segments that would create the most value for his customers while being profitable.

The recent reduction in the Unity guide marks yet another business reset.

Turning to the company’s Q2 results, its revenue fell 16% year-over-year to $449 million. It said revenue from its core strategic businesses fell 6 percent to $426 million.

Revenue from the Create Solutions segment, which is the platform developers use to create games and other applications, rose 4% to $128 million. Within the segment, the company’s industrials business performed best, growing revenues by 59%. This business targets non-gaming customers who want to create augmented and virtual reality experiences and applications. Meanwhile, gaming subscriptions grew by 14%.

Meanwhile, its Growth Solutions segment saw revenue decline 9%. This is an advertising business that helps game app operators get and monetize customers.

Looking ahead, the company lowered its full-year revenue estimate to a range of $1.68 million to $1.69 million, down from a previous forecast of $1.76 million to $1.8 million. It cut its adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) to a range of $340 million to $350 million, compared with $400 million to $425 million previously . It said the reduced guidance stems from a more cautious outlook in turning around its Grow Solutions business.

Image source: Getty Images.

Can the company execute a turnaround?

New CEO Matt Bromberg cleared the decks with Unity’s guidance review, which should give it time to implement its plan to improve products and win over customers. However, this will not be an easy task. Unity’s game engine (Create Solutions) has proven to be durable, although the company pissed off its customers with last year’s “Runtime Fee” disaster.

Perhaps the biggest problem, however, is with its advertising business (Grow Solutions), which really makes its lunch. AppLovin (APP 6.73%). AppLovin has seen huge growth in its competing software platform business over the past year, in stark contrast to the weakening of Unity’s business. While AppLovin has helped boost gaming spending, it also appears to be taking stock from Unity.

Trading at a forward price-to-earnings (P/E) ratio of 19, Unity stock isn’t too expensive if the company can make a turnaround. However, AppLovin trades at a cheaper valuation and projects about 30% revenue growth next quarter — compared to the 4%-6% decline in core business revenue in the third quarter estimated by Unity.

U PE Report (before) data by YCharts

Setting a low bar and jumping above it can help boost the stock in the near to medium term, so Unity could have an advantage if it can continue to beat low expectations. But right now, I’d prefer AppLovin in the space given its recent strong growth, execution and cheaper valuation.