Struggling Stock with an 88% Drop That Potentially Surges in 2025 and Beyond
While the major stock indexes have been on a roll recently, Unity Technology's stock (U: 1.44%) has been lagging behind. This video game engine developer has underperformed the market significantly over the past few years.
Investors weren't off-base in punishing the stock. Unity made some costly mistakes, such as spending big on acquisitions that didn't yield results and attempting to nickel-and-dime developers with additional fees based on install counts, which quickly backfired. These errors led to a company reset, major layoffs, and new leadership. As a result, the company's stock is down about 88% from its all-time high.
But all hope isn't lost for the comeback stock. Unity is worth betting on for those willing to stomach some risk. The game engine is popular among video game developers, making a turnaround possible.
Unique Position in the Industry
Unity has an incredible asset that it hasn't fully capitalized on. The Unity game engine is one of two commercial game engines used widely by video game developers, alongside Unreal Engine from Epic Games. Despite its industry position, Unity has been having a tough time.
Mistakes like the pricey acquisitions and the disputed fee rollout tarnished the brand. Ultimately, a CEO change and a major cost-cutting effort involving layoffs ensued. The new leadership killed off the hated additional fees and raised subscription pricing for Unity's biggest clients instead. They're also rebuilding the tech stack behind the advertising business to boost performance for advertisers.
Long-term Potential
Revenue continues to decline despite the company's efforts to exit underperforming lines of business. The $9 billion valuation seems high for the current results. Unity is projected to generate around $1.8 billion in revenue this year, giving it a sky-high price-to-sales ratio of 5.
The rich valuation makes the stock risky, and a further fall is possible if the situation doesn't improve. However, the Unity engine's popularity means there's potential for a significant rebound in the long term.
Unity needs to revitalize its core business and up its subscription fees. Additionally, AI-powered products could add value, providing developers with new tools instead of punishing them with new fees. Unity Muse, priced at $30 per seat per month, is a good start.
Beyond the core game engine, Unity needs to fix its advertising business by revamping the machine learning stack and data infrastructure to satisfy advertisers. The widespread use of the Unity engine in the mobile games industry suggests an enormous opportunity in advertising.
If Unity successfully combines its leading game engine with advertising improvements and mends developer relationships, the stock could be a big winner in the long run.
Enrichment Insights
Unity has been implementing several strategies to turn around its business performance. These strategic moves aim to improve operational efficiency, enhance its advertising capabilities, and leverage its unique position in the game development market:
- Restructuring and layoffs: Unity underwent significant restructuring, including significant layoffs, to streamline operations and focus on the company's key areas.
- Product and engineering optimization: Unity is investing in stability by tackling technical debt and improving the customer experience, making it easier for customers to build and run games while reducing risks tied to outdated technologies.
- Integration of advertising products: Unity plans to integrate Unity Ads, Unity LevelPlay, and the Tapjoy offerwall into the Runtime, allowing a single data set and streamlining data science and ad serving teams.
- AI and machine learning: Unity is leveraging AI innovations like DeepSeek to enhance its platform and developer experience.
- Synergies between Create and Grow segments: Unity's game engine provides unique data advantages that can be leveraged across the ad network, offering an end-to-end solution for developers.
These strategic approaches aim to revitalize Unity's stock by improving operational efficiency, enhancing its advertising capabilities through AI and data integration, and leveraging its unique position in the game development market.
- Despite Unity Technology's challenging past performance, its unique position as one of two widely used game engines in the industry could provide considerable leverage for a comeback.
- The costly mistakes from Unity's previous leadership, including unnecessary acquisitions and disputed fee rollouts, significantly underperformed the market and infuriated investors.
- To capitalize on its industry position, Unity needs to address its financial issues by potentially increasing subscription fees for its biggest clients and focusing on enhancing its advertising business using AI and machine learning.
- The failure of Unity's advertising business to satisfy advertisers has underperformed, but there's an enormous opportunity in mobile gaming advertising, which could significantly boost the company's long-term potential if effectively addressed.
