Can Unity Stock Stage make a monstrous comeback?

Stock chart for the video game engine developer Unit (U 2.69%) it sure doesn’t look pretty. Since peaking in late 2021, Unity shares have fallen nearly 90%. Once valued at more than $50 billion, the company’s market capitalization has fallen to about $8 billion.

A lot has gone wrong for Unity in recent years:

• A highly acquisitive strategy that saw the company pay $4.4 billion in stock for app monetization platform ironSource failed to deliver the expected benefits.
• The botched launch of the now-cancelled rolling fee destroyed developer confidence and ultimately led to the ouster of former CEO John Riccitiello.
• Revenue is falling as the company resets its product portfolio. For 2024, the company expects revenue from its strategic portfolio to decline 2% to 3% from 2023.
• 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 following layoffs and other cost-cutting, but Unity remains deep in the red.

While Unity struggles, there are some good reasons to bet on a comeback.

A new CEO with the right goals

Unity named former Zynga COO Matthew Bromberg as CEO on May 1. Much of the dirty work, including laying off 25 percent of employees and resetting the company’s portfolio, had already been done by interim CEO Jim Whitehurst.

Bromberg has set two main goals: Accelerating product innovation and rebuilding trust with its customers. On the product front, Unity is close to releasing the next major version of its main game engine, Unity 6. Although this was already in the works long before Bromberg took over, the new version will feature new AI tools that should to attract developers. .

Unity’s advertising business needs the most work, which is why Bromberg makes a lot of sense as the company’s choice for CEO. While the Unity game engine is used to create all types of games, it is particularly popular in the mobile gaming market, where games are often monetized through advertisements. Unity’s Grow Solutions segment, which includes the advertising business, experienced 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 the advertising business. The company also brought on a new roster 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 growth engine for Unity in the long term.

While product innovation is important, developers are hesitant to trust Unity after the runtime fee fiasco. Earlier this month, Bromberg took the critical step of scrapping the runtime fee entirely, while raising the revenue cap for free users of the Unity engine. While this move doesn’t completely solve the problem, it should go a long way to reassuring customers that there won’t be any more unwanted surprises.

A turnaround will take time

Unity’s comeback won’t happen overnight, but the company remains in a dominant position in 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 options.

After years of missteps, Unity is now doing the right thing. The company reduced its workforce and cost structure. It is focusing on improving its core technology and advertising capabilities and rebuilding relationships with developers.

The global mobile advertising market is worth $150 billion, and Unity has the potential to be a major player if it can get its act together. Outside of gaming, Unity is having some success winning customers in various industries building 3D tools and experiences. It’s hard to pin down the exact size of Unity’s total addressable market, but it’s safe to say it’s much 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 turnarounds take time. If Bromberg can meet his goals, Unity stock could be poised for an epic rally.