While the major stock indexes have surged over the past few years, some stocks have been left far behind. Video game engine developer Unity (NYSE: U) has underperformed the market by a mile over the past few years.
Investors weren’t wrong in punishing the stock. Unity spent big on acquisitions that didn’t pay off, and a bone-headed attempt to nickel-and-dime developers was a disaster. These mistakes ultimately led to a company reset, major layoffs, and new leadership, and the company’s stock is down about 88% from its all-time high.
While a turnaround will take time, Unity is a comeback stock worth betting on for investors willing to stomach some risk.
Unity is an example of a company with an incredible asset that has utterly failed to build a viable business around it. The Unity game engine is one of two commercial game engines, along with Unreal Engine from Epic Games, that have emerged as go-to options for video game developers. There are plenty of alternatives, including commercial and open-source projects, but the path of least resistance is choosing one of the big two.
Despite this position in the industry, Unity has been struggling. The expensive acquisition of ironSource, meant to bolster the mobile advertising business, hasn’t produced results. Worse, the bungled rollout of additional fees for developers, based on the number of installs, infuriated Unity’s developer base and severely tarnished the brand.
That second error ultimately led the company to replace its CEO and embark on a vast cost-cutting effort that involved major layoffs. New CEO Matthew Bromberg took the step of killing off the hated additional fees entirely, instead raising subscription pricing for Unity’s largest customers. The company is also rebuilding the tech stack behind its advertising business in an effort to deliver better results for advertisers and ultimately put the business on the right track.
Revenue is still in decline, even after excluding the lines of business Unity has exited as part of its reset, and the bottom line is deep in the red. The company is valued at roughly $9 billion, which is tough to justify based on the current results. Unity should generate around $1.8 billion in revenue this year, putting the price-to-sales ratio at around 5.
That rich valuation makes the stock risky, and it could sink much further if the situation at the company doesn’t improve. However, with the Unity engine as popular as it is, it’s not hard to imagine a future where Unity is worth far more than its current market capitalization.
