Unity Software Stock: Is This Fallen Growth Stock Worth Buying?

Unity Software(U) has been a significant player in the game development industry, but its stock has seen a dramatic decline of over 60% in the past year. Investors have been concerned about Unity's decelerating growth, persistent losses, and unclear future plans. However, with Unity now trading at just 4 times this year's sales and 17 times its adjusted EBITDA, it raises the question: Is Unity Software a good buy as a turnaround stock?

The Rise and Fall of Unity Software

Unity's initial public offering (IPO) in 2020 was met with enthusiasm. The company's freemium game engine was used to develop over half of the world's mobile, console, and PC games. Unity also provided developers with integrated monetization tools, enhancing the stickiness of its ecosystem. Furthermore, Unity promised long-term revenue growth of at least 30% annually.

Initially, Unity delivered on its promises, with revenue growth of 43% in 2020 and 44% in 2021. This rapid expansion, coupled with a surge in growth stock investments, saw its share price soar from the IPO price of $52 to a record high of $201.12 in November 2021. At its peak, Unity's market capitalization reached $57.5 billion, a valuation 41 times its 2022 revenue.

Unity Software's Challenges and Setbacks

However, Unity's sky-high valuation made it vulnerable to a steep decline as its growth slowed. In 2022, revenue growth decelerated to 25% due to a cooling gaming market and disruptions from Apple's privacy-oriented iOS update, which impacted Unity's advertising services. This slowdown prompted Unity to merge with adtech company ironSource to revitalize its advertising business and expand its offerings in AR, VR, and digital twin applications.

Despite these efforts, Unity's revenue rose 57% to $2.19 billion in 2023, primarily driven by its merger with ironSource. On a pro forma basis, which normalizes year-over-year comparisons, Unity's revenue actually stalled. However, the company's adjusted EBITDA margin improved as it cut costs by laying off thousands of employees, shuttering Weta Digital, and trimming other expenses.

Unity Software's Current Financial Position

For the full year, analysts expect Unity's revenue to decline 16% to $1.84 billion, with adjusted EBITDA dipping 8% to $413 million. Unity has not provided an exact revenue outlook but claims its strategic portfolio of game engine, cloud, and monetization products can still generate 2%-4% sales growth for the year.

Unity Software's Murky Future

Unity's future remains uncertain due to questionable business decisions and competitive pressures. The merger with ironSource was controversial, diluting existing investors and raising concerns due to ironSource's past malware issues. Additionally, Unity's introduction of new "runtime fees" for game installations faced severe backlash from developers, leading to a hasty retraction and the resignation of CEO John Riccitiello.

New CEO Matt Bromberg aims to reset Unity's business by downsizing, expanding its strategic portfolio, and trimming non-strategic segments. However, these cost-cutting measures could weaken Unity's competitive edge against rivals like Epic Games' Unreal Engine. Analysts do not expect Unity to achieve GAAP profitability in the near future.

Should You Invest in Unity Software?

Investing in Unity Software presents significant risks. The company is grappling with macroeconomic and competitive challenges, and its recent business decisions have raised concerns about its strategic direction. Although Unity's stock may appear cheap, the potential for continued struggles suggests that it may not be the best investment choice at this time. Investors might consider looking for more promising opportunities in the tech sector.

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