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

The business also makes money with advertising services. And having this many apps in its ecosystem gives it an advantage over its competition, in theory.

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

There also has been strong third-party validation for Unity's potential. Meta Platforms has lost over $8 billion on its VR ambitions in the first half of 2024 alone, so it clearly wants to win in VR at any cost. And way back in 2015, CEO Mark Zuckerberg reportedly wanted to acquire Unity for billions of dollars. That was well above what it was worth at the time and suggests Unity's products are special enough to be the envy of the tech world.

Unity is clearly promising. And yet the stock has dropped roughly 75% from its initial public offering (IPO). Investors surely want to know what gives.

There are plenty of failures from past management that have contributed to its lackluster returns. It starts with a track record of overpriced acquisitions that ultimately didn't stimulate revenue growth. And related to this problem, Unity continues to dilute shareholders with stock-based compensation, while it routinely delivers steep net losses.

To better visualize the issue with profits, consider this: As of the end of 2023, management says that it had cumulatively lost $3.1 billion since the company started. Moreover, it expects to keep losing money for a while as it invests in research and development, among other things.

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

Why it's a good idea to wait to buy Unity stock

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

Whatever the details include, it doesn't seem like anything exciting will happen in 2024. Unity is winding down some noncore businesses, so some numbers need little disclaimers. But management is expecting almost $1.7 billion in full-year revenue for its strategic portfolio, which is a 2% to 3% decline from 2023.

It seems the growth part of Bromberg's plan needs a little time. Regarding stock-based compensation, it has come down on a relative basis. But as the chart below shows, it's still high, at over $100 million in the second quarter.

Lowering stock-based compensation expenses will take time, but in the meantime, it will likely prevent net profits. That said, free cash flow adjusts for this, and Unity is free-cash-flow positive with $80 million in the second quarter.

This is one positive for the business right now, and free cash flow could increase in the coming quarters. However, investors should keep in mind that the company will likely direct that cash to paying down its debt.

It owes over $2.2 billion in convertible-note debt (the debt is unlikely to convert because the deals were struck at much higher stock prices). In 2026, $1.2 billion comes due, and another $1 billion comes due in 2027.

Unity repaid over $400 million in the second quarter alone, which was more than its cash flow. The company does have over $1.2 billion in cash at its disposal, which is good. But for the next couple of years, management will likely be directing significant attention toward its convertible-note debt.

Here's why I'm bringing this up: When it comes to creating shareholder value, businesses typically need to grow, deliver profits, and reward shareholders by lowering the share count. But in Unity's case, revenue is dropping, cash flow is going toward debt, and the share count is still rising.

Unity is a promising business that's under new management, so positive changes could be coming. But with little to go on right now, I wouldn't buy the stock today. At the very least, I'd wait for a more tangible plan from management. And it would also be a good idea to wait a little longer after that to make sure its new management is up to the challenge.

Before you buy stock in Unity Software, consider this: