Unity Software Inc Sees Stock Surge After Upgrade

Investing.com — Shares of Unity Software Inc (NYSE:U) jumped in pre-market trading on Tuesday after Morgan Stanley upgraded its rating on the company to “overweight” from “equal-weight.”

At 8:52 am (1252 GMT), Unity Software Inc. was trading 7.3% higher in pre-open trade.

The brokerage’s revision was driven by a combination of derisked growth expectations and potential upside opportunities in Unity’s core business segments, sparking renewed investor interest.

“We now see clear potential for upward revisions in Create and greater stability in Grow,” said analysts at Morgan Stanley.

The company faced challenges, including underperformance relative to the S&P 500, significant management turnover, and a major restructuring effort. These issues reset market expectations.

The brokerage believes that Unity’s forward estimates are now more achievable, stating, “But following the cut to ’24 guidance at 2Q results we now view forward estimates for U as derisked.”

A key factor in this increased confidence is Unity’s resilience in sustaining its 70% market share in the mobile sector, achieved despite substantial competition and internal challenges.

This success underscores the strength of Unity’s competitive position and enduring appeal in the gaming industry.

Additionally, Morgan Stanley identified several growth drivers for Unity in the coming years, such as increased pricing power, the introduction of a runtime fee, and the ongoing rebuild of Unity’s advertising algorithm. These developments could lead to upward revisions in Unity’s earnings projections for 2026 and beyond, positioning the company for stronger long-term performance.

From a valuation perspective, Morgan Stanley maintained its price target for Unity at $22, which represents a 32% upside from current trading levels. The brokerage also presented a bullish scenario where the stock could reach as high as $45, emphasizing the attractive risk-reward profile at this moment.

With shares currently trading near all-time lows, both in terms of price and valuation multiples, Morgan Stanley sees this as a compelling entry point for investors.