Strong Vector Growth Extends Unity's Earnings Upgrade Cycle; Price Target Raised to $50

Overview

The report believes Unity's latest quarterly performance significantly exceeded expectations, with growth drivers spanning both the Grow and Create segments, and the Vector ad model delivering its strongest quarter since launch. The D28 ROAS tool improved advertisers' ability to optimize for long-term customer value, while the benefits of runtime data integration have not yet been fully reflected. Meanwhile, Create is strengthening commercialization through minimum spend commitments, price increases, and usage-based pricing, while Unity AI, the browser-based engine, and the partnership with NFLX further expand the addressable market.

Core views

The core bullish thesis includes three points: first, only about 18 months after launch, Vector's scale is already approaching the level of APP's ad network business when AXON 2.0 was launched, and its growth trajectory is comparable to APP's historically best quarters; second, Create is shifting back toward growth, improving monetization efficiency for small and mid-sized teams through new pricing and fee models, while expanding its user base with Unity AI and browser products; third, mobile game direct payments, in-platform commerce solutions, and the China joint venture business constitute potential growth options beyond the core products. Based on improved performance, guidance, and earnings visibility, Morgan Stanley raised its earnings forecasts and reiterated Overweight.

Analysis framework

The report combines differences between quarterly results and prior forecasts, management guidance, comparisons of Vector and APP growth trajectories, revenue and margin forecasts by business, peer valuation regression, and bull, base, and bear scenario analysis to assess Unity's earnings revision potential and reasonable valuation.

Methodology notes

• Financial forecastingMorgan Stanley ModelWare

  Standardized corporate earnings model

  Unless otherwise stated, the report's metrics are based on the Morgan Stanley ModelWare framework, combined with company actuals, research forecasts, and Refinitiv consensus expectations.

• Relative valuationPeer regression and EV/EBITDA valuation

  Determining enterprise value based on average 2027 and 2028 EBITDA

  The base case uses 21x average 2027 and 2028 EBITDA. This multiple is above peers, but the report believes Unity's advantages in its game development platform, data resources, and advertising customer acquisition are sufficient to support a valuation premium.

• Scenario analysisBull, base, and bear scenarios

  Calculating a price range based on growth, margins, and valuation multiples

  The report uses approximately 26x, 21x, and 12x average forward EBITDA, corresponding to $80, $50, and $18 per share, respectively, to depict the risk-reward under changes in advertising growth, Create commercialization, and the macro environment.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• Unity Software Inc

  Core research subject

  Strengths

  Has a leading cross-platform game engine, the rapidly scaling Vector ad model, unique runtime data, and synergistic capabilities covering game development and commercialization.

  Weaknesses

  Historical profitability has been weak, Create monetization is still in an early stage, and some non-Vector revenue is expected to continue declining as a share of the Grow business.

  Comparison

  Vector's quarterly growth trajectory is comparable to AppLovin Corp's historically best quarters in its advertising business, and its current scale is already close to APP's ad network scale when AXON 2.0 was launched.

  Risks

  Intensifying advertising competition, Create commercialization falling short of expectations, insufficient product-market fit in non-gaming scenarios, macro weakness, and compression of high valuation multiples.

• AppLovin Corp

  Ad tech peer and growth benchmark

  Strengths

  Its ad network and AXON products serve as mature industry growth benchmarks.

  Weaknesses

  The report does not provide a full independent assessment of its fundamentals.

  Comparison

  The report views APP's success as a reference for Vector's development path and believes the success of the two companies' advertising businesses is not mutually exclusive, as low-conversion-rate markets can accommodate growth from both.

  Risks

  If competitors such as APP strengthen their product and data advantages, Unity's advertising business may face greater customer acquisition and market share pressure.

Key data

• Vector growth23% quarter-over-quarter growth, 92% year-over-year growthThe strongest quarter since Vector's launch, with revenue accounting for approximately 50% of Unity's total revenue.
• Latest quarterly results exceeded expectationsRevenue was 7% above the prior forecast, EBITDA was 19% above the prior forecastOverall performance across businesses and products was positive.
• Next-quarter Vector guidance19% to 21% quarter-over-quarter growthCompany guidance continues to support the view of high growth in the advertising business.
• Earnings forecast revisions2026 EBITDA raised by 15%, 2027 raised by 20%Reflects latest results and management guidance that were stronger than expected.
• Price target revision$35 raised to $50Based on 21x average 2027 and 2028 EBITDA.
• Scenario pricesBull case $80; base case $50; bear case $18The reference price used in the relative scenario analysis is approximately $40.
• Revenue forecast2026 $2,228.6 million; 2027 $2,798.7 million; 2028 $3,188.5 millionActual 2025 revenue was $1,849.6 million.
• Adjusted EBITDA forecast2026 $690.9 million; 2027 $886.5 million; 2028 $1,214.4 millionCorresponding margins are 31.0%, 31.7%, and 38.1%, respectively.
• GAAP profitability milestoneExpected to achieve GAAP profitability in the third quarter of 2026The report believes this will provide meaningful GAAP earnings support for the company's valuation for the first time.
• Current share price and potential upside$40.81 and approximately 22.5%The current share price is the August 6, 2026 closing price, and potential upside is calculated based on the $50 price target.

Impact & implications

Vector's rapid growth means the competitiveness of Unity's advertising business has been more fully validated, and the investment thesis is shifting from whether it can build an advertising platform to how long the growth runway can continue. If runtime data enables more precise ad optimization, while Create's upgraded fee model and new products expand the user base, revenue growth can further translate into operating leverage and earnings upgrades. However, the current valuation already embeds high growth expectations, and future share price performance will depend more on Vector's continued delivery, runtime data producing quantifiable contributions, and GAAP profitability being achieved on schedule.

Risks

• Vector or the overall ad network could lose market share amid intensifying competition, or even see an absolute revenue decline.
• Create price increases, minimum spend commitments, and usage-based pricing may fail to effectively improve monetization and profitability.
• Unity engine penetration in the core gaming market may be approaching its ceiling, while non-gaming scenarios may lack product-market fit.
• The effectiveness, scaling speed, or ad return improvement from runtime data integration may fall short of management expectations.
• Macro weakness could simultaneously weigh on game development, mobile app marketing, and advertising budgets.
• Investment in platforms, artificial intelligence, and new products could be higher than expected, causing margin expansion to fall short of forecasts.
• The 21x forward EV/EBITDA multiple is above peers, and downward revisions to growth expectations could trigger valuation multiple compression.
• Morgan Stanley may have business relationships with the companies covered, and investors should use this report as only one factor in their decision-making.

What to watch

• Whether Vector can sustain quarter-over-quarter growth close to 20% or higher over the next several quarters.
• The quantifiable contribution of runtime data integration to ad conversion rates, ROAS, and revenue growth.
• Adoption of the D28 ROAS tool and its impact on advertiser retention and budget expansion.
• Changes in revenue and margins from Create minimum spend commitments, price increases, and usage-based pricing.
• Launch progress of Unity AI and the browser-based game engine, and their effectiveness in expanding users.
• The implementation of the partnership with NFLX and Unity's position in cross-platform content development.
• Whether the company can achieve GAAP profitability in the third quarter of 2026 as planned.
• Progress in increasing the share of mobile game direct payments, in-platform commercialization solutions, and the China joint venture business.