In the past few years, Unity Software (U) has rapidly declined, reflected by the shares shedding 82%. The downturn can be attributed to several missteps by the former CEO and his team, including technological issues with the company’s ad monetization engine, a poorly executed merger with ironSource, and a controversial pricing change for its game creation software. However, under the leadership of new CEO Matt Bromberg, the company has taken steps to turn things around. Q3 top-and-bottom-line beats, along with the company’s recent release of Unity 6, a comprehensive set of software solutions for creating and operating interactive, real-time 3D (RT3D) content, have breathed new life into Unity’s stock.
Stay Ahead of the Market:
- Discover outperforming stocks and invest smarter with Top Smart Score Stocks
- Filter, analyze, and streamline your search for investment opportunities using Tipranks' Stock Screener
The stock is up over 60% in the past three months, and the turnaround in progress can potentially unlock further upside, presenting an intriguing opportunity for investors.
Unity Progresses With Turnaround Plans
Unity is best known for its groundbreaking software platform for crafting and managing interactive content. The platform caters to a wide array of software solutions for developing, operating, and monetizing interactive, real-time 2D and 3D content for various devices such as mobile phones, tablets, PCs, consoles, and augmented and virtual reality devices. The company’s diverse clientele includes game developers, automotive designers, architects, filmmakers, and more. It utilizes Unity’s platform to breathe life into its creations.
The company recently announced an end to the Runtime Fee and a return to the existing seat-based subscription model for customers, followed by pricing changes for Unity Pro and Enterprise customers. This is expected to positively impact subscription revenues and promote consistent revenue growth within its core software business.
Unity’s growth strategy also entails an expansion into adjacent markets, such as cross-platform 3D visualization to market segments outside gaming. Growing rapidly, this segment is achieving global scale through partnerships with global system integrators, distributors, and value-added resellers. Notable clients include KLM (KLMR) and Deutsche Bahn, who have utilized Unity for VR cockpit training applications and AR customer guidance. Further investment is being made in Unity’s Ad Quality product, which provides publishers insight into ad engagement. Fundamental work in data infrastructure and machine learning is also underway for a 2025 launch.
Promising New Appointments
The new CEO has taken steps to bolster the leadership team, bringing on board Steve Collins as the new Chief Technology Officer (CTO), known for his extensive experience at King (makers of Candy Crush) and Havok (whose physics engine is used by most games on the market). In addition, Jared Gas is set to join as the new Chief Financial Officer (CFO) in January ‘25, coming from Shutterstock (SSTK), where he served as the CFO for five years. Both leaders are expected to leverage their depth of experience to fuel the company’s continuous long-term growth.
Unity’s Recent Financial Results & Outlook
Unity recently announced third-quarter financial results. Revenue of $446.52 million surpassed analysts’ projections by $18.32 million, yet, representing an 18% year-over-year decrease. The ‘Create Solutions’ revenue from Unity’s strategic portfolio reported an increase of 5% year-over-year, making it $132 million. This growth was primarily fueled by a 12% increase in subscription revenue due to customers renewing and upgrading at higher prices. Meanwhile, ‘Grow Solutions’ revenue was $298 million, falling 5% from the previous year. The Adjusted EBITDA reached $92 million, outperforming its guidance of $75 to $80 million.
However, the company reported a net loss of $125 million, identical to the net loss experienced in the third quarter of 2023 and marginally lower than the $126 million loss from the previous quarter. GAAP earnings per share (EPS of) $0.22 outperformed consensus projections by $0.08.
Looking forward, management anticipates the company’s strategic portfolio revenue will reach between $422 to $427 million for the fourth quarter, with the total company’s Adjusted EBITDA estimated at $79 to $84 million. Due to positive Q3 performance, full-year predictions have been lifted, with strategic portfolio revenue now anticipated to be roughly $1.7 billion — an improvement from the former $1.685 billion figure. Adjusted EBITDA has been revised to $363 to $368 million, a marked increase from the prior estimate of $340 to $350 million.
Is Unity a Buy?
The stock has been volatile (beta of 2.96) as it has cascaded down over the past few years from a high just shy of $200 a share to a recent low of $13.90 a share. Despite the robust rebound over the past few months, the stock is still down 32% year-to-date. However, it demonstrates positive price momentum as it trades above all major moving averages.
Analysts following the company have mixed opinions on the stock. Stifel analyst J. Parker Lane, a four-star analyst according to Tipranks’ ratings, recently raised the price target on the shares to $28 (from $25) while maintaining a Buy rating, citing “tangible avenues for improvement” heading into 2025. Meanwhile, Macquarie’s Tim Nollen, a five-star analyst according to Tipranks’ ratings, reaffirmed a Sell rating on the stock due to concerns about valuation, given its slow revenue growth and flat margin profile projected for 2025.
Unity Software is rated a Moderate Buy overall, based on the recent recommendations of 13 analysts. The average price target for U stock is $24.09, representing a potential -13.10% downside from current levels.
