Shares of tech company Unity Software (U 3.47%) have been on a roller coaster the past year. The stock hit a 52-week high of $50.08 last July before sinking to a low of $22.20 in November. Then shares zoomed past $40 toward the end of 2023, only to drop to around $30 at the time of this writing.
These swings might make you wonder if its latest share price drop creates a buy opportunity. The answer is complicated because the company is undergoing substantial changes.
To determine if Unity stock is worth buying, it's necessary to dig into the company in more detail. This helps you understand where Unity is currently and provides insight into whether it will be a good investment over the long run.
Big changes come to Unity
Unity is in the midst of a transition. The company has a new CEO, James Whitehurst, the former head of IBM's successful Red Hat cloud computing platform. He took over Unity's top spot in October on an interim basis.
Along with the CEO changes, Unity's management team announced a "two-phase company reset" in the fourth quarter of 2023. Here's what's involved in both phases.
First, the company is reevaluating its portfolio of offerings. After taking over as CEO, Whitehurst noted Unity was doing too much. "We are not achieving the synergies that exist across our portfolio, and we are not executing to our full potential," he said.
To address this, Unity is cutting back or eliminating some of the products and businesses it's built up over the last few years. This should allow the company to focus on the solutions with the greatest potential for long-term success.
As for the second phase, CFO Luis Visoso stated, "This is about reigniting revenue growth with healthy financials." Unity plans to do this by evolving its digital 3D content creation platform, the company's core product offering.
Customers use this software to make video games and then to market these games online. Unity is also working to grow the platform's use outside of gaming, such as in the automotive and engineering industries. The company will also expand artificial intelligence's use in its platform, such as AI-based workflows to streamline tasks for customers.
Unity's platform gives it a competitive advantage because of its widespread adoption in the mobile gaming industry. Nearly 70% of the top 1,000 mobile games were created using Unity's software, according to the company.
How the changes affect Unity's revenue
Unity stated that the initial phase of its business transformation will be mostly complete in the first quarter of this year. As part of this, the company closed a deal with Capgemini on Feb. 22 to acquire a unit of Unity's professional services division. This helps Unity reduce costs but also means lower income since the associated revenue transitions to Capgemini.
To understand how these changes impact Unity's sales, the company is carving out financial results for its core offerings, such as its 3D content creation platform, from the rest of its business. Unity management refers to these core products as its "strategic portfolio" and stated sales from the remainder of its operations will not be material in 2024.
Let's take a look at what this means going forward. Unity's 2023 revenue of $2.2 billion was an impressive 57% increase from 2022's $1.4 billion. Of that, its strategic portfolio accounted for sales of $1.7 billion.
In 2024, Unity expects its strategic portfolio's revenue to reach at least $1.8 billion. That's a modest increase over 2023's $1.7 billion, but understandable, given that this is a transition year.
That said, according to Visoso, "We expect revenue growth to accelerate in the second half of 2024, and maintain attractive levels of revenue growth after, while maintaining and extending our profitability." Whether that means Unity returns to revenue growth akin to 2023's 57% year-over-year increase is unknown until the third quarter or later.
To buy or not to buy Unity stock
Unity's revenue growth is taking a short-term hit, but its other financials are showing improvement. The company's 2023 net loss of $826.3 million was a decline from 2022's loss of $919.5 million, indicating progress toward profitability.
Unity exited 2023 with a solid balance sheet as well. Assets at the end of the fourth quarter totaled $7.2 billion compared to total liabilities of $3.8 billion. Cash and equivalents alone were $1.6 billion.
Despite the positives, investing in Unity now holds some risk since the results of Unity's transformation efforts are a few quarters away. Also, Whitehurst won't be the CEO for the long term, so there's uncertainty about the company's performance under a new CEO.
These factors mean that buying Unity stock now is not for the faint of heart. The past year's roller coaster in Unity's share price could continue in 2024, given the company's transformation efforts.
However, investors interested in growth stocks may want to keep an eye on Unity. If the firm's revenue growth accelerates later this year, as Visoso predicts, and its path toward profitability continues to improve, you may want to consider buying Unity stock in the future.
