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On Tuesday, Morgan Stanley raised its rating on Unity Software (NYSE:U) stock from Equalweight to Overweight, setting a new price target of $22.00. The adjustment follows a period of underperformance for Unity Software's shares, which lagged behind the S&P 500 by approximately 80% over the past year.
This underperformance was attributed to execution challenges, management changes, and a major restructuring, which necessitated a significant reset of expectations.
The firm's analyst pointed out that the revised guidance for 2024, announced with the second quarter results, now reflects more realistic expectations for Unity Software's financial performance. The analyst believes that the current forward estimates for the company are now derisked, considering the challenges faced in the past year.
Unity Software has managed to retain a strong position in the gaming industry despite customer relations issues, maintaining a 70% market share in mobile game engines. The analyst noted that Unity's game engine has demonstrated the depth of its competitive moats, as rivals have not been able to capture market share from Unity.
Despite facing increased competition in the advertising business, Morgan Stanley anticipates that the consensus growth expectations for Unity's ad network are achievable.
The forecast for 6% growth from 2024 to 2026 for the ad business is seen as realistic, even as it suggests that Unity may continue to lose market share in a market growing at 11%. The analyst's comments reflect a belief in the company's potential to meet these moderated growth targets.
In other recent news, Unity Software has experienced several significant changes. Citi has adjusted the company's price target to $24 while maintaining a Buy rating, reflecting a change in the valuation multiple and factoring in additional risks related to the company's business strategy.
Similarly, Benchmark and Piper Sandler have adjusted Unity Software's price target to $10 and $17 respectively due to recent developments, with Stifel maintaining a Buy rating despite a revised outlook for 2024 EBITDA.
Unity Software reported a decrease in Q2 revenue by 16% year-over-year to $449 million, prompting a downward revision of its full-year forecast. However, the company also reported strategic revenue growth and improved profitability in Q1 2024, with expectations for further improvement later in the year.
The company is undergoing management changes, with the introduction of new leadership and the upcoming release of Unity 6, which is expected to positively impact the company's performance. In addition to these developments, Unity Software is planning to reduce its workforce by a quarter. These are recent developments that investors should take note of.
InvestingPro Insights
In light of Morgan Stanley's upgrade of Unity Software (NYSE:U), current InvestingPro data and tips provide additional context for investors. The company's market cap stands at $6.5 billion, indicating a significant presence in the sector despite recent challenges. Notably, Unity's gross profit margin remains robust at 68.36% for the last twelve months as of Q2 2024, suggesting that the company retains a strong ability to monetize its offerings.
InvestingPro Tips highlight that Unity's stock price has been volatile, with a 6-month price total return of -43.38% as of the current date. This aligns with Morgan Stanley's observation of the stock's underperformance. Additionally, while the company has been unprofitable over the last twelve months, analysts predict that Unity will turn profitable this year, which could indicate a potential turning point for investors considering the stock.
For those looking to delve deeper, there are more InvestingPro Tips available, offering insights that could further inform investment decisions regarding Unity Software. With an InvestingPro fair value estimate of $20.26, slightly above the current price, investors may find it worthwhile to explore the comprehensive analysis provided by InvestingPro.
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