Unity Technologies (U 1.16%) went public in 2020 with sky-high expectations, and for good reason. According to the company, more than 70% of mobile video games are developed using its game engine software, giving it a prominent position in the industry.

The company also makes money from advertising services. And because it has so many apps in its ecosystem, it theoretically has an advantage over the competition.

Consider, too, that Unity appears to have a lot of room to expand beyond its core video game application. Its software develops real-time 3D imagery that can be used in movies, virtual reality (VR), manufacturing, and more. Since it’s something that can be used in so many ways, the business would seemingly have incredible upside potential.

Unity’s potential has also been strongly confirmed by third parties. Meta-platforms lost over $8 billion on its VR ambitions in the first half of 2024 alone, so the company clearly wants to win in VR at all costs. And back in 2015, CEO Mark Zuckerberg reportedly wanted to acquire Unity for several billion dollars. That was well above its valuation at the time and suggests that Unity’s products are so special that they are the envy of the tech world.

Unity clearly has great promise. And yet the stock has fallen by around 75% since its IPO. Investors certainly want to know what’s going on.

There are many mistakes by previous management that have contributed to the lackluster earnings. It starts with a track record of overpriced acquisitions that ultimately failed to drive revenue growth. And related to this problem, Unity continues to dilute shareholders with stock-based compensation while regularly incurring large net losses.

To better illustrate the problem with earnings, consider this: Through the end of 2023, management has cumulatively lost $3.1 billion since the company was founded. In addition, the company expects to continue losing money for a while as it invests in research and development, among other things.

However, Unity is now under new management. Has anything changed for the better?

Why it’s a good idea to wait to buy Unity shares

On May 15, Matthew Bromberg took over as CEO of Unity and says he’s there to “implement change.” He also says the focus now is partly on profitable growth, which sounds hopeful. But details are scarce, so it’s hard to be objectively optimistic.

Whatever the details entail, it doesn’t look like anything exciting will happen in 2024. Unity is winding down some non-core businesses, so some numbers need a little more elaboration. However, management expects annual revenue for its strategic portfolio to be nearly $1.7 billion, down 2% to 3% from 2023.

It seems that the growth aspect of Bromberg’s plan still needs some time. As for stock-based compensation, it has declined relatively speaking. But as the chart below shows, it is still high at over $100 million in the second quarter.

U stock-based compensation (quarterly); data from YCharts.

Reducing stock-based compensation expense will take time, but will likely prevent net gains in the meantime. However, this will be reflected in free cash flow, and Unity is free cash flow positive at $80 million in the second quarter.

This is positive for the company at the moment, and free cash flow could increase in the coming quarters. However, investors should keep in mind that the company will likely use this money to pay down its debt.

The company has over $2.2 billion worth of convertible bonds (conversion of the bonds is unlikely as the transactions were completed at much higher share prices). $1.2 billion is due in 2026, with another $1 billion due in 2027.

Unity paid off over $400 million in the second quarter alone, which was more than its cash flow. The company has over $1.2 billion in cash, which is good. But over the next few years, management will likely focus a lot of attention on its convertible bonds.

That’s why I mention this: To create shareholder value, companies usually need to grow, generate profits, and reward shareholders by reducing the number of shares they own. But in Unity’s case, revenues are falling, cash flow is going to paying down debt, and the number of shares is still growing.

Unity is a promising company under new management, so positive changes could be on the way. But with little to show for it right now, I wouldn’t buy the stock today. At the very least, I would wait for a more concrete plan from management. And it would also be a good idea to wait a little longer after that to make sure the new management is up to the challenge.