Unity Stock: Buy, Sell, or Hold?

Unity's stock has surged 97% in the past three months, driven by optimism around its innovative ad-tech platform and the strength of the broader macroeconomic environment. The company's new AI platform, Unity Vector, is enhancing ad performance in games and apps, a key revenue stream. While the stock has gained significantly in value, it's still in transition toward sustainable growth.

Unity Software (U) has seen its stock surge 97% over the past three months, driven by growing optimism around its innovative ad-tech platform and the strength of the broader macroeconomic environment. The company's new AI platform, Unity Vector, is enhancing ad performance in games and apps, a key revenue stream for Unity.

The stock's impressive run can be attributed to several positive developments. Unity Vector, the company's latest AI-powered ad platform, has shown strong performance gains compared to its legacy ad products. Early results indicate higher install rates and better in-app purchase values on Apple's iOS platform, with Android rollout trends pointing in a similar direction. This has already translated to a stronger-than-expected result in Unity's first-quarter Grow segment revenue, which came in at $285 million, down 4% year-over-year but ahead of management's guidance.

Jefferies analyst Brent Thill recently upgraded Unity's price target to a Street-high $35, citing improvements in Return on Ad Spend (ROAS) and increased brand intent surveys. Thill highlighted a 10-20% ROAS lift in Q2, up from 5-7% in Q1, alongside increased brand intent surveys. The Vector migration's completion ahead of schedule and Unity 6's 50% adoption rate in the Create segment further fueled confidence. These catalysts, paired with revised 2025 Grow segment growth estimates, drove the stock to its highest level since 2023.

Unity's stock has gained significantly in value, but it is still in transition toward sustainable growth. The company is modernizing its core ad business, strengthening relationships with developers, and making real inroads into high-value industries outside of gaming. While not all analysts are endorsing the stock due to the recent run, Unity's long-term potential remains solid.

Unity's Create segment, which provides tools for game and interactive content development, has also been gaining traction. Subscription revenue is showing double-digit year-over-year growth, even as the company transitions away from its lower-margin professional services. Unity 6 has surpassed 4.4 million downloads, with 43% of active users already upgraded.

The company's operational improvements are evident, with adjusted EBITDA margins growing 200 basis points year-over-year in Q1. Unity expects second-quarter revenue to be between $415 million and $425 million, with adjusted EBITDA likely to be in the range of $70 million to $75 million. The company is confident that improved ad performance will help return the Grow segment to revenue growth, while Create continues to benefit from rising subscription momentum.

While some caution is warranted after the recent price surge, Unity appears well-positioned for the future. Investors may want to keep Unity on their radar, especially as a pullback offers a more attractive entry point.

References:
[1] https://www.ainvest.com/news/unity-surges-52-week-high-analyst-upgrades-2507/
[2] https://www.barchart.com/story/news/33469461/unity-stock-has-ben-red-hot-should-you-buy-sell-or-hold-u-shares-here
[3] https://ih.advfn.com/market-news/article/12803/unity-software-shares-jump-after-jefferies-boosts-price-target