Unity Software

Should we knife catch this former high flying darling

Unity Software’s hitting 200+ dollars per share might be the worst thing that ever happened to the company. Since peaking at $200 a share its down 90%. At its low it was close to 95%. While the stock price was ripping the company languished, focusing less on mid and long term growth initives and instead managing short term levers that helped keep the stock elevated.

John Riccitiello, of running Electronic Arts (EA) into the ground fame, was a subpar CEO at the best of times, but during the tech Covid bubble, he let his worst habits get the best of him. Bending over to accept a poor buyout of IronSource to bail out a VC friend of his, ignoring the proposed merger between Unity and AppLovin in 2022 (more on this below), and bidding against himself for Weta Digital in a push to take more market share in Hollywood special effects, right before Hollywood swan dived off a cliff, were all highlights of his that destroyed massive value for Unity Shareholders.

Not that they seemed to care much. The large VC backed shareholders, some of which held board seats, were just as much asleep at the wheel as Johnny boy, choosing only to pay attention to what was going on at Unity once the stock fell more than 50% off its highs, finally forcing him out last year after an 80% draw down and such poor management that Unity saw only a little bounce in 2023 when the rest of the tech stocks were starting to rebound.

It’s hard to overstate what a fall for grace Unity has had. Even excluding the Covid bubble insanity. A few short years ago Unity had a duopoly with Epic for gaming engines. Unity with its free to use tool set and indie friendly business model was growing faster than Epic. It was also easier to develop for if you were creating a mobile game, which was the fastest segment of the gaming market. Add in their ad network development that happened in the later parts of the 2010s it seemed like an easy long term winner, not just for employees but for VCs and eventually stock market investors. The thesis was it was the picks and shovels of video games, so it should be less cyclical.

That was wrong.

In today’s piece we're going to look at their Q3 earnings numbers and figure out if this fallen angel is worth scraping off the dumpster pile of discarded stocks, or if we should ignore it. Lets dive in.