BofA Downgrades Unity Software: 'Most Of Near-Term Upside Is Priced In'

Unity Software Inc U shares are moving to the downside after an analyst at BofA Securities downgraded the stock.

The Unity Software Analyst: Ryan Gee downgraded shares from Neutral to Underperform but hiked the price target from $102 to $127.

The Unity Software Thesis: The twofold bull case thesis on Unity Software: Its pricing power and expanded utility into non-Gaming has been priced into the stock, given that the stock has risen three times since its IPO, Gee said in a note.

With its $40 billion market cap, Unity Software is equal to all public U.S. and EU mobile developers together, and about 40% larger than its current total addressable market.

Related Link: Unity Software Analysts Assign Triple-Digit Price Targets On Gaming Strength, Future Growth Verticals

The company's long-term position, the analyst said, is not a concern because its utility precludes switching and may enable price raises. However, the company faces headwinds to the pace of non-Gaming subscriber growth, given large established peers, higher ASP and the likelihood of immaterial operational expansion.

BofA's long-term valuation model implies an enterprise value of about $38 billion or $127 per share, and assumes about 850,000 subscribers by 2025 from 13,000 in 2020, with 18% CAGR or Gaming and 90% CAGR for non-Gamimg, Gee said.

The upside case, the analyst said, will yield about 22% upside to the stock, but would require greater conviction that the company can double Gaming subscribers and grow non-Gaming to about 40% of Autodesk, Inc. ADSK, as well as sustain strong Ads growth and net revenue expansion trends.

"We feel that at 37x 2022E EV/Sales vs. 25x for High-Growth SaaS peers that most of the N.T. upside is priced in," BofA said in the note.

U Price Action: Unity Software shares traded around $146.75 at publication time after dropping to an intraday low of $142.78.

(Photo: Unity Software)