Unity Software has had a tough few years, but a turnaround appears to be underway -- and the stock could have big upside.
Kenvue is a consumer health giant poised to start delivering on its promise.
A third of the year is now over, and the stock market has seen incredible levels of volatility across the stretch. The S&P 500 index is down roughly 9.5% from its high as of this writing, and the Nasdaq Composite index has fallen 13.5%.
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This turnaround story is worth betting on
Keith Noonan (Unity): Unity Software(NYSE: U) is a provider of software tools that help developers create video games and other forms of digital content. The company also provides digital advertising tools and access to a built-in digital ads network that helps users monetize their creations. Despite occupying a leading position in the game-engine services space, Unity's business and stock performance have been underwhelming in recent years.
Even though its stock has traded roughly flat this year despite the broader market's sell-off, Unity Software is still down roughly 89% from the lifetime high that it reached shortly after going public in 2020.
At the time of its initial public offering (IPO), the company was benefiting from elevated demand for video games and gaming services created by lockdowns and other pandemic-related conditions. Valuations for growth stocks were also broadly inflated across the market due to the low-interest-rate environment. Those early valuation tailwinds have evaporated, and the business has struggled with monetization -- but I think there's a turnaround here worth betting on.
Admittedly, a surface-level look at Unity's recent business performance might not suggest much to be excited about. Sales in the fourth quarter declined 25% year over year to land at roughly $457 million, and the business posted a net loss of $127 million in the period. But it's worth keeping in mind that Unity is going through a restructuring and strategic shift.
Backing out areas of the business that the company is no longer focusing on, revenue for Unity's core strategic portfolio actually increased 4% year over year to $442 million. Sales performance will continue to be under pressure in the near term as the company makes big changes to its digital advertising network and rolls out its new Vector AI platform for ads. Its new suite of artificial intelligence tools has the potential to be a major performance driver and help the company tap into elements of the mobile applications market that have been driving stellar growth for AppLovin and other digital ad players.
Unity's comeback story could be reaching a turning point, and I think shares are a worthwhile buy ahead of the company's first-quarter earnings release on May 7.
A favorable risk/reward calculation
LeeSamaha: It's fair to say that the Johnson & Johnson spinoff Kenvue (NYSE: KVUE) hasn't had the ideal start to life as a stand-alone company. Despite the market's rotation into more defensive stocks in 2025 (Coca-Cola being a great example), Kenvue stock is still down more than 15% from its all-time high.
Management and investors did not expect that kind of performance when the company spun off in 2023. They expected that, as a stand-alone consumer health company, management could devote time, resources, and capital to extracting full value from the company's powerful list of well-known consumer brands.
Unfortunately, performance has been mixed. Kenvue ended 2024 reporting 1.9% organic sales growth in its self-care segment (Tylenol, Zyrtec, etc.) and a more impressive 4.1% growth rate in essential health (Listerine, Johnson's, Band-Aid). The problems lie with the third segment, skin health and beauty (Neutrogena, Aveeno, etc.), whose organic sales declined by 1.9%.
Despite increasing its marketing budget to 10.6% of sales in 2024 compared to 8.7% in 2023, Kenvue's recovery is taking longer than anticipated by management's admission. That said, there are signs of improvement (organic sales in skin health and beauty rose 2.6% in the fourth quarter of 2024), and based on Wall Street estimates, Kenvue trades on just below 21 times estimated free cash flow (FCF) for 2025.
That's close to fair value for a mature consumer staple with low-single-digit growth prospects, but there's upside potential if management can turn its problematic segment around. Kenvue isn't a stock that will shoot to the moon, but its 3.6% dividend yield is useful, and the risk/reward calculation is favorable for value investors.
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Keith Noonan has positions in Unity Software. Lee Samaha has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends AppLovin, Kenvue, and Unity Software. The Motley Fool recommends Johnson & Johnson and recommends the following options: long January 2026 $13 calls on Kenvue. The Motley Fool has a disclosure policy.
