Share of Unity Software Inc. (NYSE:U) climbed Tuesday after the stock was initiated with an Overweight rating at Wells Fargo. Wells Fargo gave the stock a price target of $48, implying upside of 30% from yesterday’s closing price.
Shares moved higher in recent weeks after Apple (NASDAQ:AAPL) mentioned its 3D apps during its Vision Pro presentation at the beginning of June, but the Overweight rating from Wells Fargo wasn’t based on “metaverse hype.’” It was based on analysts' expectations for more consistent execution and market share gains following Unity's acquisition of ironSource.
Wells Fargo analysts explained, “We rate U shares Overweight, given the strength and entrenched nature of its core gaming business -- enhanced by its acquisition of ironSource, which we expect to drive significant top-line synergy and market share gains even amid a soft digital ad market -- and the significant opportunity in non-gaming verticals as Industry adopts RT3D and digital twins across a range of use cases, especially given recent developments in AI (where we believe Unity has a leg up) that will drive innovation and investment in new technology even amid a softening macro.”
Wells Fargo thinks management's near-term guidance is conservative and reflects cation over macro uncertainty and ad market softness. However, consensus estimates already indicate some skepticism, and this presents opportunity over the next few quarters if the company can deliver better-than-expected results.
“Metaverse hype has quickly dissipated amid macro deterioration (multiple contractions from 34x NTM consensus sales in Nov '21 to less than 8x today), but we see U’s utilitarian 'digital twin' applications driving meaningful outcomes in Industry, where it is well positioned to drive adoption,” said the analysts.
Unity shares climbed over 11% following the new buy rating.