Unity (U): Buy, Sell, or Hold Post Q2 Earnings?

The recent Q2 2025 earnings report for Unity Software (U) has sparked a nuanced debate among investors and analysts. While the company delivered a 21% Adjusted EBITDA margin of $90 million-surpassing guidance-the 2% year-over-year revenue decline to $441 million and a GAAP net loss of $107 million highlight ongoing challenges. This article evaluates whether earnings consistency and analyst momentum justify a "Buy" recommendation, drawing on Unity's financial performance and post-earnings market reactions.

Earnings Consistency: A Mixed Bag

Unity's Q2 results reflect a bifurcated performance. The Create Solutions segment grew 2% year-over-year to $154 million, driven by a $12 million term license sale and subscription revenue gains, despite cuts to non-strategic services, according to Unity's Q2 press release. Conversely, the Grow Solutions segment fell 4% to $287 million, though the Unity Ad Network-a critical component of this segment-posted 15% sequential growth, contributing 49% of total Grow revenue (per the press release).

The company's profitability metrics tell a more optimistic story. Adjusted EBITDA of $90 million (21% margin) exceeded expectations, and cash reserves rose to $1.7 billion, up $174 million from December 2024, while the GAAP net loss of $0.26 per share, improved from $0.32 in Q2 2024, underscores structural inefficiencies (per the press release).

Analyst Momentum: Caution and Optimism Collide

Post-earnings analyst activity reveals a split in sentiment. Goldman Sachs initiated coverage with a Neutral rating and $38 price target, citing cautious optimism about the Grow segment and potential stabilization in the Create segment. HSBC downgraded Unity to Hold due to valuation concerns, noting its price-to-sales ratio remains elevated compared to peers like AppLovin. Conversely, Morgan Stanley maintained an Overweight recommendation with an average price target of $35.47, reflecting institutional confidence in Unity's long-term growth.

The stock price surged to $45.30 post-earnings, with call options delivering strong returns. This rally suggests retail and institutional investors are betting on Unity's AI-driven initiatives, particularly the Unity Vector platform, which is outperforming internal expectations. However, leadership transitions-such as the departure of Chief Technology Officer Steve Collins-introduce strategic uncertainty.

The Buy Case: Catalysts and Risks

A "Buy" recommendation hinges on two key factors: earnings consistency and analyst momentum. Unity's sequential growth in the Ad Network and improved EBITDA margins demonstrate operational discipline, while the Q3 guidance of $440–450 million revenue suggests management remains optimistic (per the press release). The Ad Network's 15% sequential growth alone could drive long-term monetization, particularly as AI adoption accelerates in gaming and advertising.

Analyst upgrades, such as Morgan Stanley's Overweight rating, signal confidence in Unity's strategic pivot. However, valuation concerns-highlighted by HSBC's downgrade-cannot be ignored. At a price-to-sales ratio of 5.3x (as of October 2025), Unity trades at a discount to its 2023 peak but remains above historical averages, creating a "buy-the-dip" narrative for investors willing to tolerate near-term volatility.

Conclusion: A Cautious Buy

Unity's Q2 results and post-earnings momentum present a compelling case for a Cautious Buy. The company's ability to exceed EBITDA guidance and grow the Ad Network sequentially offsets revenue declines in core segments. Analysts are divided, but the consensus leans toward optimism, particularly for the Grow segment. Investors should monitor Q3 results for signs of sustained momentum and watch for further upgrades from key institutions like Goldman Sachs and Morgan Stanley. For now, Unity's stock appears undervalued relative to its AI-driven growth potential, making it a high-conviction opportunity for those with a medium-term horizon.