On Wednesday, Morgan Stanley (NYSE:MS) reiterated its Overweight rating and $24.00 price target for Unity Software (ETR:SOWGn) (NYSE:U), following investor meetings with CEO Matt Bromberg. The firm remains optimistic about the company's growth prospects, particularly in its advertising and Create segments.
During the meetings on November 19, Bromberg discussed the anticipated 2025 launch of a new advertising model, which is expected to significantly impact the company's Grow business. Unity Software is developing a state-of-the-art neural network that aims to capitalize on the company's scale and data. Preliminary results from live tests show promise, and management is confident that this could lead to a positive shift in growth trajectory next year. Additionally, Unity Software plans to integrate its various advertising technology assets into one stack, potentially leading to further operational expense (OpEx) efficiencies.
The company's management also highlighted Unity's unique position in the market, with its game engine software being used to build 3.5 billion apps downloaded monthly. This extensive reach provides Unity with unparalleled data access, which could enhance its competitiveness in the advertising space. The firm expressed increased confidence in Unity's asset strength and its potential to accelerate advertising growth in 2025.
In the Create division, Unity Software has recently implemented a 25% price increase for its largest customers and introduced the next-generation Unity 6 engine. The company expects continued double-digit growth in subscription revenue, despite a stable number of subscribers, indicating strong pricing power in the mobile gaming market. Unity's dominant position, powering approximately 70% of the industry with less than a 1% take rate, suggests significant room for value extraction over time.
Looking ahead, Unity Software sees opportunities for further OpEx efficiency and operating leverage as it scales its revenue on a lower cost base, following restructuring efforts in 2023 and early 2024. While the company has a history of acquisitions, the current focus is on executing with existing assets, as the new advertising model is deployed within the Grow business.
In other recent news, Unity Technologies has reported strong Q3 results, leading to an upward revision of its full-year guidance. The company posted Q3 revenue of $429 million, surpassing the projected range of $415 million to $420 million. Despite a slight year-over-year decrease, Unity saw a 1% sequential increase in revenue. The company's adjusted EBITDA reached $92 million, exceeding the expected $75 million to $80 million.
Unity also announced strategic changes, including the cancellation of the runtime fee and a return to a subscription model with the launch of Unity 6. This move aims to foster innovation and enhance customer engagement. In addition to these changes, Unity has welcomed new executives Steve Collins and Jared Gas, set to start as CTO and CFO respectively in January 2025.
The company's full-year revenue guidance has been increased to between $1.73 billion and $1.78 billion, with adjusted EBITDA guidance also rising to $363 million to $368 million. These developments underline Unity's confidence in its growth trajectory and its commitment to expanding its presence in both gaming and non-gaming sectors.
InvestingPro Insights
Recent InvestingPro data and tips provide additional context to Unity Software's current market position and financial health. Despite the optimistic outlook presented by Morgan Stanley, Unity's financials show some mixed signals. The company's market cap stands at $8.81 billion, reflecting its significant presence in the software industry. However, Unity is not currently profitable, with a negative P/E ratio of -12.05 over the last twelve months as of Q3 2024.
On a positive note, InvestingPro Tips highlight that 6 analysts have revised their earnings upwards for the upcoming period, aligning with Morgan Stanley's optimistic stance. This could be related to the anticipated launch of Unity's new advertising model in 2025 and the potential growth in the Create segment. Additionally, analysts predict that the company will be profitable this year, which could mark a turning point for Unity's financial performance.
The company's revenue for the last twelve months as of Q3 2024 was $1.97 billion, with a gross profit margin of 69.55%. This robust gross margin suggests that Unity maintains strong pricing power in its core offerings, consistent with the article's mention of recent price increases for large customers.
For investors seeking more comprehensive analysis, InvestingPro offers additional tips and insights beyond those mentioned here. The platform currently lists 8 more tips for Unity Software, providing a deeper understanding of the company's financial health and market position.
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