1 Turnaround Stock I Own Just Jumped 14% Even As the Nasdaq Plunged. Here’s Why I’d Still Buy More.

Shares of Unity Software (NYSE:U) jumped about 14% on Nov. 5 (as of noon ET) after the company reported third-quarter results. This is in sharp contrast to the Nasdaq's roughly 4% plunge, and it took the stock to a new 52-week high. I've followed Unity since it went public, and this was the strongest report I've seen from the company in a long time.

A faster-growing business that is getting more profitable

Unity's revenue grew 32% year over year to $622.1 million, well above the $567.3 million analysts expected. That's a big step up from the 24% growth it reported in the second quarter and represents continued progress in the company's turnaround. In fact, Unity's revenue growth rate has now accelerated for seven consecutive quarters.

Image source: Getty Images.

The key driver of the strong results is Vector, the artificial intelligence (AI)-powered platform that helps game developers find new players through advertising. Vector's revenue grew 126% from a year ago and 40% from the second quarter alone. CEO Matt Bromberg called it Unity's "strongest ever" quarter, and in many ways, he's not wrong. Unity's strategic Grow revenue, which excludes the ironSource products it's moving away from, rose 90%.

Profits are following the revenue growth. Adjusted EBITDA more than doubled to $256.6 million, a 41% margin, and Unity generated about $220 million of free cash flow. It also earned $121.6 million on a GAAP basis, compared with a loss of $126.8 million a year ago.

Unity's guidance was even better

Management expects strategic revenue of $683 million to $691 million in the fourth quarter, representing growth of 65% to 67%. Strategic Grow revenue is expected to roughly double. Adjusted EBITDA guidance of $290 million to $295 million is about 40% above the roughly $209 million analysts expected.

On a total revenue basis, Unity expects to deliver 37%-38% growth in the fourth quarter, likely marking the eighth consecutive quarter of acceleration. But to be fair, this figure understates how well the business is doing. The company is intentionally shedding non-strategic revenue, so the much faster-growing strategic revenue number is a better indicator of how fast the business is actually growing.

Bromberg described the two halves of the business as a flywheel. As he put it, "more creators make more games on our platform," and "more games fuel the need for more discovery through advertising." That's the case I've been making for owning Unity, especially as we've seen its turnaround working. Its game engine attracts developers, and its ad business helps them make money.

What I'm watching

To be sure, not everything is working for Unity. The Create segment, which sells Unity's game engine and development tools, grew just 8%, and management expects only 4% to 6% growth in the fourth quarter. Unity's legacy ironSource business continues to shrink. And mobile-game advertising is a competitive market, with AppLovin (NASDAQ:APP) as a formidable rival.

Valuation is also worth keeping in mind. After the jump, Unity's enterprise value of roughly $23 billion is about 8 times its annualized fourth-quarter revenue guidance, by my estimate. That's not expensive for a company growing this fast, but it does mean investors now expect Vector to keep delivering. In other words, there's quite a bit of continued growth priced in.

Having said all that, this is the company's strongest quarter, at least of Bromberg's tenure. Growth is accelerating and now over 30%; the company is profitable on a GAAP basis; and management's outlook suggests the momentum isn't slowing. I don't plan to sell any of my shares, and there's a solid case that Unity is still a good value at the current price.

Matt Frankel, CFP® has positions in Unity Software. The Motley Fool has positions in and recommends Unity Software. The Motley Fool has a disclosure policy.