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On Thursday, Stifel analysts adjusted their outlook on Unity Software (NYSE:U), reducing the price target to $28 from the previous $35, while reaffirming a Buy rating on the company’s shares. Currently trading at $20.71, InvestingPro analysis suggests Unity is undervalued, with analyst targets ranging from $19 to $34.45. The analysts noted that Unity Software’s first-quarter performance exceeded conservative guidance, particularly within its Grow business, which is currently undergoing changes.
The company’s recent financial call and print were generally strong, according to Stifel, with most of the outperformance coming from the Grow business segment. With revenue of $1.81 billion and a robust gross margin of 74.32%, Unity maintains strong operational efficiency despite current challenges. The analysts pointed out that the conservative guidance for the second quarter and some uncertainties in the growth algorithm for the remainder of the year seemed to overshadow the positive aspects of the call.
The analysts had anticipated that the discussion around the rollout of Unity’s new product, Vector, would be the focal point of the earnings call. To their surprise, Vector’s rollout timeline and performance metrics surpassed expectations. Despite the positive developments with Vector, which is now on the market, the analysts believe that the market’s reaction to the earnings report was largely influenced by the cautious outlook for the upcoming quarter.
Stifel remains optimistic about Unity Software’s potential to improve its core business performance and regain market share in the mobile advertising space with Vector now available. The maintained Buy rating reflects the analysts’ confidence in the company’s ability to navigate through the current changes and drive growth moving forward.
In other recent news, Unity Software reported first-quarter earnings that exceeded expectations, with an adjusted EBITDA of $84 million, marking a 7% increase year-over-year. This performance surpassed both guidance and consensus estimates by 29%. The company also reported a significant earnings surprise for Q1 2025, with EPS reaching $0.24 compared to the forecasted $0.12. Revenue for the quarter was $435 million, surpassing the forecast of $417.13 million. Despite these positive financial results, Unity’s revenue in its Grow and Create segments experienced declines year-over-year.
Unity Software has been making strides in its product offerings, with the launch of Unity 6 and the Vector AI platform. The transition of Unity’s ad network to Vector was completed ahead of schedule, showing a 15-20% improvement in installs and in-app purchase value. However, Macquarie maintains a Neutral rating on Unity Software, citing the early phase of Vector’s deployment and potential short-term disruptions as legacy products are phased out. Unity has provided second-quarter revenue guidance of $415-425 million, with an adjusted EBITDA forecast of $70-75 million.
Despite high debt levels, Unity’s cash flow has improved, with free cash flow increasing by $22 million year-over-year to $7 million. The company holds $1.5 billion in cash against $2.2 billion in debt. Unity’s strategic focus remains on leveraging first-party data across its ecosystem, with expectations that its Grow business will return to revenue growth. The firm is also optimistic about the potential of its Vector AI platform, which is expected to enhance performance and deliver better returns on investment for its customers.
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