Morgan Stanley lifts Unity Software stock target to $15

On Friday, Morgan Stanley (NYSE:MS) updated its outlook on Unity Software (ETR:SOWGn) shares (NYSE:U), increasing the price target to $15.00, up from the previous $12.00, while maintaining an Equalweight rating. The adjustment follows Unity Software’s robust performance in the first quarter of the year. The stock, currently trading at $25.55, has shown significant momentum with a 14.5% gain over the past week. According to InvestingPro data, Unity has demonstrated strong price performance, though with notable volatility.

The research firm’s analyst, Matthew Cost, cited several reasons for the revised price target. First, there was an upward revision of the calendar year 2025 and 2026 estimates, reflecting the company’s strong Q1 results. Additionally, Morgan Stanley now forecasts a higher operating margin for Unity Software in the coming years, with expectations set at approximately 20% for calendar year 2025, an increase from the previous estimate of around 18%. For calendar year 2026, the operating margin is projected to be around 21%, also up from the prior estimate of roughly 18%. Currently, Unity maintains a healthy gross profit margin of 74.8%, though InvestingPro analysis shows the company isn’t yet profitable over the last twelve months.

Furthermore, the firm modestly raised its free cash flow (FCF) estimates for Unity Software. Alongside the improved FCF outlook, the analyst also increased the FCF multiple from 14 times to 15 times. These changes collectively contribute to the higher price target set by Morgan Stanley. The company’s financial position appears stable, with InvestingPro data showing liquid assets exceeding short-term obligations with a current ratio of 2.74, while operating with a moderate debt-to-equity ratio of 0.73.

Unity Software’s financial health and growth prospects appear to be the driving force behind the positive adjustment. The company’s recent quarterly performance has provided a solid foundation for the revised estimates, indicating a healthier operational margin and an enhanced ability to generate free cash flow in the near future.

Investors and market watchers will likely keep an eye on Unity Software’s financial developments and operational performance in the upcoming quarters to see if the company continues to align with Morgan Stanley’s projections.

In other recent news, Unity Software reported a significant earnings beat for the first quarter of 2025, with earnings per share (EPS) reaching $0.24, doubling the forecasted $0.12. This strong performance was highlighted by a revenue of $435 million, surpassing the forecast of $417.13 million. Despite the impressive earnings, there were revenue declines in Unity’s Grow and Create segments, which may have contributed to a cautious market reaction. The company’s new product, Vector, has shown promising results, with a 15-20% improvement in installs and in-app purchase value, following its early rollout.

Stifel analysts maintained a Buy rating for Unity Software, though they reduced the price target from $35 to $28, citing conservative guidance for the second quarter. Meanwhile, Macquarie reaffirmed a Neutral rating with a $24 price target, acknowledging Unity’s solid quarterly performance and the successful migration of its ad network to Vector. Unity has provided second-quarter revenue guidance of $415-425 million and an adjusted EBITDA forecast of $70-75 million.

Unity’s subscription revenues saw double-digit growth year-over-year, driven by strong industry demand and the adoption of Unity 6. However, the company remains cautious about potential short-term disruptions as legacy products are phased out. Despite high debt levels, Unity’s free cash flow improved by $22 million year-over-year to $7 million. As Unity continues to innovate and expand its offerings, the company focuses on leveraging first-party data to enhance its advertising business and drive future growth.

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