Unity Stock Is Plunging. Investors Are Losing Faith in the Company’s Strategy.

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Unity Software

investors are throwing up their hands in despair. After a series of questionable decisions, the company’s credibility with shareholders seems to be fading.

On Wednesday,

Unity

(ticker: U) shares tumbled 17% after the game development platform announced a definitive agreement to merge with app monetization company

ironSource

(IS) for $4.4 billion in an all-stock deal. Unity also lowered its full-year revenue financial guidance to a range of $1.300 to $1.350 billion from $1.350 to $1.425 billion, citing the macro environment. The stock is now down roughly 80% this year.

While the guidance revision is likely responsible for most of the stock’s losses on Wednesday, Unity’s deal making is already a sore point for investors. In November, Unity announced a $1.6 billion acquisition of Peter Jackson’s movie visual effects company Weta Digital. At the time, Unity executives declined to give historical revenue, but gushed about the potential market opportunities far off into the future. Coincidently, the timing of the deal turned out to be the exact top for growth stock valuations as the market grew tired of “pie-in-the-sky” ideas without near term profitability. Then in May, Unity disappointed analysts when it reduced its full-year guidance, admitting to technical problems with its ad targeting tools, along with data accuracy issues. Today’s revision is yet another downbeat assessment of the company’s business.

So far, Unity has offered little evidence to show that the Weta deal is paying off, so it isn’t a surprise that investors are skeptical about Unity’s latest billion-dollar-plus deal and whether it can properly integrate the companies.

The lack of deal success might also not come as a surprise to those who have followed the career of Unity CEO John Riccitiello. He joined Unity as a private company in 2014, after serving as the CEO of videogame publisher

Electronic Arts

(EA) from 2007 to 2013. Riccitiello made numerous deals during his tenure there that didn’t work out. EA’s stock also fell by more than 60% during his time as CEO.

One of Riccitiello’s first moves at EA was to buy a $167 million stake in Chinese online game operator

The9
Ltd.
(NCTY). The company’s share price fell by more than 90% in the ensuing years. Riccitiello also made the expensive decision to compete in the online subscription multiplayer market against World of Warcraft, which fizzled. He also acquired numerous gaming studios—including Playfish, PopCap, and Pandemic—all of which were at least partially shut down years later by EA.

Unity did not respond to a request for comment about Riccitiello’s leadership or his record at Electronic Arts.

When Unity went public in 2020, most investors wanted exposure to the company’s leading market position in game creation tools and engines. Along with Epic Games, Unity is a leading player in the gaming engine market that serves as the foundation for future interactive entertainment and virtual world experiences. But the company’s acquisition strategy has arguably diluted its strengths.

Now the company faces a long road back, and acquisitions are unlikely to be the answer. At Wednesday’s close of $32.82, Unity shares are 37% below their IPO price.

Write to Tae Kim at [email protected]