Unity Software's Bright Horizon: BofA Analyst Upgrades To Buy, Highlights $77M Revenue Lift From Runtime Fees

BofA Global Research analyst Michael J. Funk upgraded Unity Software Inc. U to Buy from Neutral, raising the price target to $56 from $46.

The analyst notes that improved monetization of U's industry-leading mobile game creation engine and a stabilizing mobile game advertising market create a compelling risk-reward profile.

Funk projects incremental revenue of $77 million and $93 million in 2025 from U's runtime fees and the retiring of Plus (net of expected churn), respectively.

On September 12, Unity announced plan pricing updates to allow the company to monetize its mobile gaming creation platform. The announced changes are a first step in improving Create segment profitability, notes the analyst.

With well-understood idiosyncratic execution and integration risks abating, Funk expects the stock to re-rate higher.

Effective January 1, 2024, Unity will introduce a new Unity Runtime download fee based on game installs, Funk adds. Runtime is an essential code that enables Unity-created games to work at scale on player devices. The new Runtime fee will have a potential annualized revenue lift of $77 million.

Also Read: Unity Execs Offload Shares Before Controversial Fee Announcement

On the negative side, Funk flags that mobile games for which Unity's proposed install-based fees would be prohibitively expensive (due to poor revenue per install) generate only a minor percentage of broader mobile gaming revenue (making them less valuable monetization customers to U). 

Unity also announced the retirement of Unity Plus effective September 12, 2023. Unity Plus subscribers can upgrade to Unity Pro for one year at the current Unity Plus price ($399/year). After one year, prior Unity Plus subscribers will shift to Unity Pro pricing ($2,040/year).

The analyst estimates a potential annual revenue uplift from Unity Plus plan migration of $93 million in 2025 (with some partial benefit expected in 4Q24), assuming a migration rate of 50%.

The analyst raised FY24 and FY25 revenue estimates by 4.4% and 9.9%, respectively, based primarily on the pricing change analysis and a more constructive view of U's ad business. 

The FY24 revenue estimate now stands at $2.691 billion, up from $2.579 billion. 

FY25's current revenue estimate is $3.320 billion from $3.021 billion before, the analyst added.

Price Action: U shares are trading higher by 1.61% to $36.28 on the last check Friday.