Unity's Shares Potentially Surge as Company's Transformation Gains Momentum
Video game engine developer Unity (-6.43%) serves as a prime example of a company with substantial resources yet found itself in a crisis. Alongside Epic Games' Unreal Engine, Unity is one of the two main commercially successful game engines controlling the market. While other alternatives exist, the most straightforward route often leads to Unity or Unreal.
Despite this stronghold, Unity has made significant missteps in recent years that negatively impacted its stock value. First, the $4.4 billion acquisition of app monetization company ironSource failed to stimulate growth in Unity's adector business. Grow Solutions, encompassing advertisements and other monetization tools for mobile games, has struggled with decreasing revenue in recent quarters.
Second, Unity's effort to monetize its customer base through fees associated with app installs unfurled into a chaos of miscommunication. The company's reputation quickly deteriorated, eventually leading to the departure of former CEO John Riccitiello.
Unity's stock has plummeted more than 90% from its all-time high, revenue is in decline, and the financial situation remains dire. Nevertheless, the company is making key moves to reverse its fortunes.
Controlling expenses
Following the former CEO's departure, Unity embarked on extensive cost-cutting measures including layoffs and scaling back its endeavors. Unity let go of approximately 25% of its workforce earlier this year and abandoned non-strategic sectors.
GAAP operating expenses decreased by 11% year over year in the third quarter of 2024, marking a step in the right direction. While Unity remains in the red, it generates positive free cash flow, granting it flexibility to foster its core products and pursue growth opportunities.
Rebuilding trust
New CEO Matthew Bromberg assumed the role in May. Although the cost-cutting plan was already underway, Bromberg made the strategic decision to abolish the divisive fees that had stirred up developers' ire. Though the fees were already scaled back, the mere existence of these charges proved to be an obstacle.
Rebuilding developer trust is a lengthy process, but Bromberg has shown an understanding that exploiting Unity's developer base isn't an effective approach. In exchange for removing the fees, Unity increased its subscription pricing for large clients while boosting the generosity of its free tier. Fostering development using the free tier and transitioning some of these users to the paid tiers will ultimately contribute to Unity's growth.
Emphasizing the core
In addition to targeting developers, Unity is focusing more intently on its core products. Unity 6, the most recent version of the engine, has improved performance and features, as well as AI-driven capabilities intended to enhance developers' workflows.
Regarding the advertisement sector, Unity is fully committed to rebuilding its foundation. The company has welcomed fresh leadership, overhauled its infrastructure and machine learning capabilities, and accelerated the rate of product advancements. If Unity's advertisement platform is to prosper, it must deliver reliable return-on-advertising-spend for clients. These modifications aim to meet this objective.
A promising turnaround stock
Unity's renaissance is a gradual process, and GAAP profitability may be years away. However, Unity's dominant status within the video game industry and particularly the mobile gaming sector could lead it to flourish in the long run, given it can rectify its mistakes.
Unity now holds a market valuation of over $7 billion, down from over $50 billion at its peak. Although the stock may not approach those levels soon, Unity's position in the video game engine market and its potential in the mobile advertising market offer ample long-term growth prospects.
Advertising spending in-game is projected to surpass $20 billion by 2032 as it grows at a double-digit pace. Unity has yet to fully tap into this demand.
Unity, now streamlined and no longer aggravating its developer base, along with an effective mobile advertising platform that delivers favorable results for advertisers, could be worth significantly more than $7 billion. Stages of the turnaround may take time, but Unity and its new leadership are moving in the right direction.
Unity's financial strategy to turn things around includes focusing on controlling expenses, as shown by the 11% year-over-year decrease in GAAP operating expenses in the third quarter of 2024. This cost-cutting, coupled with generating positive free cash flow, provides Unity with the flexibility to invest in its core products and pursue growth opportunities.
Recognizing the importance of developer trust, the new CEO, Matthew Bromberg, has abolished the controversial fees that had negatively impacted Unity's reputation. By offering a more generous free tier and increasing subscription pricing for large clients, Unity aims to foster development on its platform and ultimately drive growth.
