Unity Software's (U 3.15%) stock hit an all-time high of more than $200 last November. But today, it trades below its IPO price of $52. This red-hot tech stock lost its momentum for three simple reasons.
First, revenue growth cooled off significantly after Unity Ads, a core component of the Operate Solutions segment -- which generated 64% of its revenue last year -- ingested "bad data" from a large customer that rendered its advertising algorithms obsolete.
That blunder, which was most likely caused by Apple's privacy changes on iOS, forced it to rebuild the Unity Ads algorithm and buy the controversial Israeli ad tech company ironSource to accelerate those repairs.
Image source: Getty Images.
Second, Unity's stock simply got too expensive. At its peak, it was worth $57.5 billion, or 52 times the revenue it would generate in 2021. And third, it still wasn't profitable.
As a result, Unity's slowing growth, ongoing losses, and nosebleed valuation made it an easy target for the bears as rising rates crushed the market's more speculative stocks. I recently took a deeper dive into Unity's problems and concluded that despite all of its challenges, its business is gradually stabilizing. But today, I'll focus on three lesser-known facts about the company that investors might have overlooked.
NYSE: U
Key Data Points
1. It has a "shovelware" reputation
Unity's video-game engine powers more than half of the world's mobile, console, and PC games. However, a large portion of those games can be considered "shovelware," or software that was hastily made to be "shoveled" to consumers to make some quick cash.
Unity's engine is often used to create shovelware because it's free, easy to use, provides access to pre-made assets, and lets developers easily create cross-platform games for mobile, console, and PC platforms.
That reputation can be a double-edged sword for Unity. On the one hand, it lowers the barriers for game development, makes it easier for small developers to create games, and ensures that it keeps growing. On the other, bad games can tarnish the game engine's reputation, and gamers will naturally start to associate Unity's splash screen with cheaper and lower-quality games.
However, Unity's free users can upgrade to its paid plans -- plus, pro, and enterprise -- to remove that pesky splash screen, which can be perceived as the difference between amateur and professional game developers. That barrier could convince more of Unity's free users to upgrade to paid plans.
2. Its CEO previously led Electronic Arts
Before becoming Unity's CEO in late 2014, John Riccitiello was the CEO of Electronic Arts from April 2007 to March 2013. EA's stock lost nearly two-thirds of its value during those six years as the company struggled with sluggish growth, market share losses to Activision Blizzard, and expensive and misguided acquisitions.
Under Riccitiello's watch, EA was named the "worst company in America" in Consumer Reports' annual Consumerist poll in 2012 and 2013 after several disastrous game releases. But since Riccitiello's departure, EA's stock has soared nearly 650%.
Therefore, Unity's investors might have a gnawing fear that Riccitiello could repeat his previous mistakes. For example, its recent acquisition of Peter Jackson's special-effects studio Weta Digital and its planned takeover of ironSource indicate Riccitiello still relies heavily on acquisitions, and it could struggle to integrate both platforms into its core gaming ecosystem.
3. It's expanding far beyond the gaming market
Lastly, Unity's expansion into nongaming markets could reduce its dependence on the gaming industry. It's already been promoting its use to develop nongaming virtual reality (VR) and augmented reality (AR) applications, while its takeover of Weta -- which created special effects for The Lord of the Rings and Game of Thrones -- expands its reach into the theatrical market. Unity has also been expanding into the "digital twin" market with tools that can help its customers create digital replicas of physical spaces and objects.
These nongaming tools aren't generating enough revenue to offset Unity's dependence on its game engine and Unity Ads yet, but they might eventually transform it into a more diversified cloud-based software company like Adobe or Autodesk. But if these services fail to catch on, they could merely become distractions that erode Unity's defenses against Epic and its other competitors.
Do these lesser-known facts matter?
These facts probably won't mean anything to Unity's near-term growth, which relies on its ability to fix Unity Ads and smoothly integrate ironSource. Nevertheless, Unity's reputation as a shovelware engine, its CEO's spotty track record, and its overly ambitious plans to expand beyond video games could all still affect its long-term growth trajectory.
