To The Moon

Unity $Unity Software Inc.(U)$ stock has dropped 62% year-to-date. It is now trading at $15.54, which is 92% lower than its all-time high of $201.12. Unity damaged its own reputation last year, and the slower top-line revenue growth suggests it could take longer than expected to recover. Unity’s new pricing policy, implemented in October 2023, has drawn significant criticism. Revenue has slowly declined to $449M in Q2 2024 from $533M in Q2 2023, indicating a year-over-year decline of 15.8%. However, Unity might be making the right move now by focusing on reducing its operating losses. Its operating losses have been gradually reduced. The last five quarterly losses were -$129M (Q2 2024), -$374M (Q1 2024), -$259M (Q4 2023), -$127M (Q3 2023), and -$195M (Q2 2023). The latest earnings in Q2 2024 missed already low expectations, while FY 2024 also missed analysts’ expectations. The situation at Unity looks worse as CFO Luis Visoso is leaving the company. Unity stock is underperforming post-COVID, and overall gaming industry growth still appears lackluster. Investors generally expect a company to turn profitable before its revenue growth slows down drastically. Unity has experienced two consecutive years of revenue growth but still has not achieved positive operating income. Conclusion: Unity stock does not look attractive now, given the lack of innovation and product rollouts. Unity is not only competing with AppLovin in mobile advertising but also with Unreal Engine and Godot in game development. For investors looking to gain exposure to game development, Tencent $TENCENT(00700)$ may be a good alternative to Unity. Unreal Engine, Unity’s major competitor, is owned by Epic Games, with Tencent as the major shareholder of Epic Games. I am neutral on Unity as I do not see any near-term catalysts for the company. Bloomberg shows that analysts’ 12-month target price consensus is $20.22, representing an upside potential of 30.1% from the current price of $15.54.