The stock chart for video game engine developer Unity (U -5.50%) sure doesn't look pretty. Since peaking in late 2021, shares of Unity are down nearly 90%. Once valued at more than $50 billion, the company's market capitalization has fallen to about $8 billion.

A lot has gone wrong for Unity over the past few years:

  • A highly acquisitive strategy, which saw the company shell out $4.4 billion in stock for app monetization platform ironSource, hasn't delivered the expected benefits.
  • The bungled roll-out of the now-canceled Runtime Fee destroyed developer trust and ultimately led to the ouster of former CEO John Riccitiello.
  • Revenue is in decline as the company resets its portfolio of products. For 2024, the company expects revenue from its strategic portfolio to decline by 2% to 3% from 2023.
  • Profits are still a distant dream. The company posted a GAAP net loss of $126 million on $449 million in revenue in the second quarter of 2024. The profit picture has improved following layoffs and other cost-cutting, but Unity remains deep in the red.

While Unity is struggling, there are some good reasons to bet on a turnaround.

A new CEO with the right goals

Unity appointed former Zynga Chief Operating Officer Matthew Bromberg as CEO on May 1. Much of the dirty work, including laying off 25% of employees and resetting the company's portfolio, had already been carried out by interim CEO Jim Whitehurst.

Bromberg has laid out two core goals: Accelerate product innovation and rebuild trust with its customers. On the product front, Unity is close to launching the next major version of its core game engine, Unity 6. While this was already in the works well before Bromberg took the helm, the new version will feature new AI tools that should appeal to developers.

Unity's advertising business needs the most work, which is why Bromberg makes a lot of sense as the company's pick for CEO. While Unity's game engine is used to create all types of games, it's particularly popular in the mobile game market, where games are often monetized via ads. Unity's Grow Solutions segment, which encompasses the advertising business, suffered a 9% year-over-year decline in strategic portfolio revenue in the second quarter.

Under Bromberg, Unity is revamping the machine learning software and data infrastructure that underlies the advertising business. The company has also brought on a new slate of leaders, including MoPub co-founder Jim Payne as Chief Product Officer. With the right strategy, the advertising business has the potential to be a growth engine for Unity in the long run.

While product innovation is important, developers are hesitant to trust Unity after the Runtime Fee fiasco. Earlier this month, Bromberg took the critical step of completely canceling the Runtime Fee while raising the revenue cap for free users of the Unity engine. While this move doesn't entirely solve the problem, it should go a long way toward convincing customers that there won't be any more unwelcome surprises.

A turnaround will take time

Unity's turnaround won't happen overnight, but the company remains in a dominant position in the video game engine market. For video game companies and developers that don't use their own in-house engines, Unity and Epic Games' Unreal Engine are the two main choices.

After years of missteps, Unity is now doing the right things. The company has downsized its workforce and its cost structure. It's refocusing on improving its core technology and its advertising capabilities, and it's rebuilding relationships with developers.

The global mobile advertising market is worth $150 billion, and Unity has the potential to be a major player if it can get its act together. Outside of gaming, Unity is having some success winning customers across various industries building 3D tools and experiences. It's hard to pin down the exact size of Unity's total addressable market, but it's safe to say that it's much bigger than the $1.685 billion in strategic portfolio revenue the company expects to generate this year.

Unity stock isn't for the faint of heart. The company appears to be on the right path, but turnarounds take time. If Bromberg can deliver on his goals, Unity stock could be in for an epic recovery.