Unity Hits An Inflection Point? Analysts Highlight Accelerated Innovation In Gaming And Advertising

Wall Street analysts rerated Unity Software Inc U after the company reported an upbeat quarterly result Thursday amid an exciting earnings season.

Unity’s fourth-quarter revenue decreased 25% to $457.1 million, which beat the consensus estimate of $433.17 million.

The quarterly loss of 30 cents per share beat the analyst loss estimate of 37 cents per share.

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Benchmark analyst Mike Hickey upgraded Unity Software from Sell to Hold.

Citizens Capital Markets analyst Andrew Boone reiterated Unity Software with a Market Perform.

Needham analyst Bernie McTernan maintained Unity Software with a Buy and raised the price target from $26 to $33.

Benchmark: Many of Hickey’s concerns have either materialized or appear to be longer-term potential realizations.

The transition to Vector adds uncertainty in Grow, but AI-driven improvements could help ad performance over time. In Create, Unity 6 adoption and industry growth show promise, though the path to sustained recovery remains unclear.

The shift could cause short-term revenue disruption, and its ability to drive sustainable revenue growth remains uncertain. The incremental cloud costs needed for AI model training may weigh on margins. While Unity expects Vector to position itself as a stronger competitor in mobile advertising, the timeline for material financial benefits remains unclear.

The analyst noted secular challenges in game development from AI remain a significant concern, and emerging as a real competitor in the mobile game market will be exceedingly difficult, given AppLovin Corp’s continued success and notable lead.

Unity continues to generate cash flow through cost optimization and significant headcount reductions. While the balance sheet remains leveraged, its ability to sustain positive free cash flow despite operational struggles offers some stability. Hickey projected first-quarter revenue of $414 million and EBITDA of $65 million.

Citizens Capital Markets: Unity reported better-than-expected fourth-quarter 2024 results, and while first-quarter 2025 guidance was below expectations, commentary was positive as early adoption of Unity 6 is healthy, Unity is rolling out its next-generation ad platform in the first half of 2025 (ahead of schedule), and margins will likely expand going forward.

Simply put, it feels like it is on the verge of an inflection point in the business under new management as execution is catching up to the quality of the underlying asset as Unity continues to be the creation platform for 70% of the top 1,000 mobile games and 30% of top 1,000 PC games on Steam.

While Boone returned from the call incrementally positive, with shares up 25-30% intra-day, he remained valuation sensitive and awaited a better entry point to move his rating. Boone noted that Vector better utilizes Unity’s player data from its game engine, which has ~5 billion DAU, while newer models should be more performant as Unity’s pace of innovation on its ad stack seems to have accelerated.

While the analyst projected Grow Strategic revenue to decline 10% year over year, Unity is obviously only moving to a more performant model. He noted that the revenue stepdown will likely prove conservative and temporary. Interestingly, Unity noted that it believes a broader opportunity exists beyond core gaming user acquisition as it works on programmatic brand-focused capabilities, while eCommerce is a long-term opportunity, the analyst highlighted. Boone projected first-quarter revenue of $414.9 million and EBITDA of $64.3 million.

Needham: McTernan arrived at the valuation using a higher target multiple on lower estimates, reflecting a better understanding of the path to improving the Grow business with the launch of Vector. The analyst expects the first quarter of 2025 to be the year’s low point, with integrations and algo improvements driving the Grow business back to low-single-digit growth in the second half of 2025.

Ultimately, algo performance will drive the Grow business, and there remains a high level of uncertainty, but he noted that he is setting a conservative bar at this point. McTernan projected first-quarter revenue of $410.2 million and EBITDA of $60.3 million.

U Price Action: U stock is up 1.57% at $28.44 at last check Friday.

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