Vector drives acceleration in Grow business; target price raised to USD 50 but Neutral maintained

Overview

Unity’s second-quarter 2026 results reflect continued strengthening in operating momentum: combined revenue from the Grow and Create businesses and company margins were both better than expected, with the Vector platform becoming the primary incremental growth driver. The integration of Runtime data has begun to deliver tangible results, and the strategic flywheel between Create and Grow around content creation, distribution, and monetization has been further reinforced. Management continues to emphasize balancing growth, margin expansion, and long-term innovation investment. Based on this, Goldman Sachs raised its revenue, adjusted EBITDA, and EPS forecasts and increased the 12-month target price from USD 34 to USD 50, but maintained a Neutral rating because the share price has already risen significantly recently and sustained outperformance still needs to be validated.

Core views

First, the growth quality and speed of the Grow business both exceeded prior market expectations, with the Vector platform growing 23% quarter over quarter in the second quarter and reaching an annualized revenue run-rate of more than USD 1 billion ahead of schedule. Second, the combination of Runtime data and Vector infrastructure could constitute a long-term competitive advantage and support Unity AI, Unity 7, and broader full-stack gaming opportunities. Third, a contribution margin of about 82% to 83% provides room for the company to both reinvest and improve margins, with operating leverage beginning to emerge. Fourth, near-term growth in the Create business has slowed, and the third quarter may see further deceleration, while stock-based compensation also remains elevated. Fifth, there may be upside to medium-term forecasts, but after the share price rose about 40% in one month, Goldman Sachs prefers to confirm the sustainability of growth through subsequent industry channel checks rather than immediately upgrade the rating.

Analysis framework

The report starts from the gap between actual second-quarter results and third-quarter management guidance versus Goldman Sachs’ and the market’s prior forecasts, then analyzes the Grow and Create businesses separately, focusing on Vector growth, Runtime data integration, AI product positioning, and operating leverage. It then updates financial forecasts for 2026 to 2028 and calculates the 12-month target price using equal-weighted EV/Sales relative valuation and modified DCF valuation, before forming a Neutral rating based on recent share price performance, the competitive landscape, and earnings delivery risks.

Methodology notes

• Results AnalysisActual Results versus Expectations Analysis

  Compares quarterly actual revenue, profit, and subsequent guidance with Goldman Sachs’ and the market’s prior forecasts.

  Second-quarter total revenue and adjusted EBITDA, as well as third-quarter guidance, were all above prior expectations, with the outperformance mainly coming from the Strategic Grow business.

• Segment AnalysisBusiness Segment and Growth Driver Breakdown

  Separately evaluates the growth, product momentum, and profit contribution of the Grow and Create businesses.

  The Grow business was driven by rapid Vector expansion and the use of Runtime data; Create revenue was broadly in line with expectations, but year-over-year growth excluding last year’s one-off benefit slowed sequentially.

• Relative ValuationEV/Sales Valuation

  Applies an enterprise value-to-sales multiple to the revenue forecast for the year after the next twelve months.

  The report uses 7.25x EV/Sales, up from 6.0x previously, while maintaining a 0.32x EV/Sales-to-growth ratio to reflect the upgraded growth forecast.

• Absolute ValuationModified DCF Valuation

  Applies an exit multiple to GAAP EBITDA four years after the next twelve months and discounts it back to current value.

  The report uses a 23.0x EV/GAAP EBITDA exit multiple and discounts it over three years at a 12% discount rate; discount-rate assumptions include a 3% risk-free rate, an average beta of about 1.3, and a 7% equity risk premium.

• Blended ValuationEqual-Weighted Blended Target Price Method

  Assigns 50% weight each to relative valuation and modified DCF results.

  The equal-weighted result of the two valuation methods supports a 12-month target price of USD 50, a significant increase from the prior USD 34.

Asset mapping & comparison

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

• Unity Software Inc. (U.US)

  Directly covered company in the report

  Strengths

  Vector platform growth has accelerated significantly; Runtime data is beginning to form a differentiated advantage; Create and Grow businesses have strategic synergies; AI product positioning expands the potential market; high contribution margins support profit improvement and continued investment.

  Weaknesses

  Near-term growth in the Create business is slowing; stock-based compensation accounts for about 14% of revenue; GAAP profitability remains in the early delivery stage; results are relatively sensitive to advertising, gaming markets, and the pace of model iteration.

  Comparison

  Compared with Goldman Sachs’ prior forecasts, expectations for third-quarter and 2026 revenue, adjusted EBITDA, and EPS were all raised; the target price was increased from USD 34 to USD 50, but the rating remains Neutral.

  Risks

  Vector growth falling short of expectations, intensifying competition among advertising monetization platforms, weak spending on games and in-app purchases, growth investments weighing on profitability, and recent valuation already pricing in substantial optimism.

Key data

• 12-month target priceUSD 50.00Previously USD 34.00
• Reference share price in the reportUSD 40.81Corresponds to 22.5% potential upside to the target price
• Vector second-quarter sequential growth23%Growth reaccelerated
• Vector annualized revenue run-rateOver USD 1 billionReached two quarters ahead of prior expectations
• Vector third-quarter growth outlookAbout 20% quarter over quarterBased on management’s forward-looking commentary
• 2026 revenue forecastUSD 2.22 billionPreviously USD 2.15 billion
• 2026 adjusted EBITDA forecastUSD 694 millionPreviously USD 596 million
• 2026 GAAP EPS forecast-USD 0.63Previously -USD 0.69
• Third-quarter revenue forecastUSD 564 millionPreviously USD 539 million
• Third-quarter adjusted EBITDA forecastUSD 187 millionPreviously USD 144 million
• Third-quarter GAAP EPS forecastUSD 0.05Previously around breakeven
• Timing for GAAP net income profitabilityThird quarter of 2026One quarter earlier than previously expected
• Contribution marginAbout 82% to 83%Provides room for reinvestment and margin improvement
• Stock-based compensation as a percentage of revenueAbout 14%Down year over year but still at a relatively high level
• Recent share price performanceUp about 40% over the past monthSome future growth may already be reflected in valuation

Impact & implications

This quarter’s results strengthened market confidence in Unity’s operating recovery and share gains in the Grow business, especially as the synergy among Vector growth, Runtime data integration, and AI infrastructure provides a clearer path for revenue acceleration and margin expansion. The earlier profitability timeline and forecast upgrades also help reduce prior concerns around the business model and cash generation capability. However, the target price increase mainly comes from higher operating forecasts and a higher EV/Sales multiple, while the recent sharp rise in the share price has compressed the margin of safety. The next key considerations for the investment view are whether Vector can maintain roughly 20% quarter-over-quarter growth, whether the Create business can stabilize, and whether margin improvement can continue to be delivered without weakening long-term product investment.

Risks

• The growth outlook for the Grow business is highly dependent on continued Vector expansion, and competition from other advertising monetization platforms may weaken growth and market share.
• There remains uncertainty over whether the potential market size of the Create and Grow businesses can be fully realized.
• Changes in the global macro environment may affect gaming, in-app purchases, and advertising spending.
• The timing and effectiveness of underlying model improvements are difficult to predict, which may make quarterly performance less linear.
• Continued investment in AI, Unity 7, and other growth projects may limit near-term profitability.
• If cost savings or business synergies are weaker than expected, the path of margin improvement may be delayed.
• Continued deceleration in Create business growth may offset part of the strong performance of the Grow business.
• Stock-based compensation still accounts for about 14% of revenue, which may create ongoing shareholder dilution pressure.
• The share price has risen about 40% over the past month; if subsequent growth does not continue to exceed expectations, valuation may face a pullback.
• Overall risk appetite for growth stocks and global market volatility may amplify share price fluctuations.

What to watch

• Whether Vector can achieve the roughly 20% quarter-over-quarter growth cited by management in the third quarter.
• After Vector surpasses a USD 1 billion annualized revenue run-rate, whether incremental customers, usage, and monetization efficiency can continue to improve.
• The actual contribution of Runtime data integration to advertising model performance and Grow business market share.
• The extent of the third-quarter slowdown in Create business growth and the credibility of the long-term double-digit compound growth target.
• Delivery against the forecasts of USD 564 million in third-quarter revenue and USD 187 million in adjusted EBITDA.
• Whether the company can achieve GAAP net income profitability in the third quarter of 2026 as scheduled.
• Whether the roughly 82% to 83% contribution margin can translate into sustained company-level margin expansion.
• Product rollout, developer adoption, and commercialization progress for Unity AI and Unity 7.
• Whether subsequent industry channel checks can validate continued outperformance and market share gains in the Grow business.
• Whether stock-based compensation as a percentage of revenue can decline further.