Vector's high-speed growth extends Unity's earnings upgrade cycle; target price raised to $50

Overview

This report reviews Unity Software Inc's quarterly results. The company's businesses performed strongly, with the Vector ad model delivering its best quarter since launch and becoming the core growth engine. Morgan Stanley believes the D28 return-on-ad-spend tool has driven recent performance, while runtime data integration, Unity AI, the browser-based engine, and Create's new pricing model will continue to provide subsequent catalysts. It therefore reiterates its Overweight rating and raises the target price to $50.

Core views

First, only about 18 months after launch, Vector's scale is already close to the level of AppLovin's ad network when AXON 2.0 was launched, and its 23% sequential quarterly growth is comparable to AppLovin's historically best quarters, demonstrating that Unity has built a competitive advertising business. Second, the Create business is shifting back to offense, improving monetization efficiency through minimum spend commitments, price increases, and usage-based billing, while Unity AI and the browser-based engine are expected to expand user coverage. Third, mobile game direct payments, the China joint venture business, and non-game applications represent additional growth options. Fourth, revenue growth, improved cost structure, and operating leverage will drive rapid improvement in EBITDA and GAAP profitability.

Analysis framework

The report analyzes quarterly results and company guidance, segment growth trends, peer comparisons, earnings forecast revisions, and scenario valuation, and derives the target price using average 2027 and 2028 EBITDA and a target EV/EBITDA multiple.

Methodology notes

• Relative valuationEV/EBITDA valuation method

  Multiply average 2027 and 2028 EBITDA by the target enterprise value multiple, then adjust for net cash and divide by the share count.

  The base case uses 21x EV/EBITDA, resulting in $50 per share; this multiple is higher than peers, but the report believes Unity's advantages in game development platforms, data, and advertising monetization can support a valuation premium.

• Peer comparisonPeer regression and comparable company analysis

  Refer to peer valuation regression and compare the development stage and growth rate of Vector with AppLovin's advertising business.

  The report treats AppLovin's AXON 2.0 development trajectory as a reference path for Vector, but believes both companies can grow simultaneously in low-conversion-rate markets.

• Scenario analysisBull, base, and bear scenarios

  Set differentiated assumptions for revenue growth, advertising share, Create penetration, margins, and valuation multiples.

  The bear, base, and bull scenarios correspond to target prices of $18, $50, and $80, respectively, and are used to assess the risk-reward of business execution, competition, and valuation changes.

• Earnings forecastMorgan Stanley ModelWare

  Morgan Stanley's proprietary modeling framework used to form forecasts for revenue, profit, earnings per share, and the balance sheet.

  The report updates forecasts for 2026 to 2028 based on quarterly results and new guidance, and distinguishes between company actuals, Morgan Stanley forecasts, and Refinitiv consensus estimates.

Asset mapping & comparison

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

• Unity Software Inc

  Core research target

  Strengths

  Vector is growing strongly; it owns a leading cross-platform game engine; runtime data, ad models, and go-to-market capabilities create synergies; Create monetization and margins still have room for improvement.

  Weaknesses

  Create monetization is still at an early stage, non-Vector advertising revenue is expected to continue declining as a percentage of total revenue, and the current valuation already embeds high growth expectations.

  Comparison

  About 18 months after Vector's launch, its scale is close to AppLovin's ad network level when AXON 2.0 was launched, and recent sequential growth is comparable to AppLovin's historically strongest quarters.

  Risks

  Intensifying advertising competition, game engine penetration reaching a ceiling, lack of product-market fit in non-game applications, macro weakness, and profitability improvement falling short of expectations.

• AppLovin Corp

  Comparable company for advertising business and reference for growth path

  Strengths

  The development trajectory of its ad network and AXON 2.0 provides a comparable path for Vector's scaling.

  Weaknesses

  The report does not provide a detailed analysis of its standalone operating weaknesses.

  Comparison

  Vector's quarterly growth has approached AppLovin's historically strongest quarters; the report believes the success of the two is not mutually exclusive.

  Risks

  If competitors such as AppLovin further strengthen their model, data, or customer advantages, Unity's advertising business share expansion may be constrained.

Key data

• Vector quarterly growth23% quarter-over-quarter growth, 92% year-over-year growthBest quarter since launch, accounting for approximately 50% of Unity's total revenue.
• Vector next-quarter guidance19% to 21% quarter-over-quarter growthThe main contribution from runtime data integration is still viewed as a future catalyst.
• Results versus prior forecastRevenue 7% higher, EBITDA 19% higherPositive performance across businesses and products.
• EBITDA forecast revision2026 raised by 15%, 2027 raised by 20%Adjusted non-GAAP EBITDA for 2026 and 2027 is approximately $690.9 million and $886.5 million, respectively.
• Revenue forecast2026 $2,228.6 million; 2027 $2,798.7 million; 2028 $3,188.5 millionActual revenue in 2025 was $1,849.6 million.
• Adjusted EBITDA margin2025 22.1%; 2026 31.0%; 2027 31.7%; 2028 38.1%Scale effects and improved cost structure drive the release of operating leverage.
• Target price revisionRaised from $35 to $50Based on a 21x EV/EBITDA valuation using average 2027 and 2028 EBITDA.
• Scenario target pricesBear case $18; base case $50; bull case $80Relative to the approximately $40 reference share price used in the report's risk-reward analysis, these correspond to approximately -55%, 25%, and 100% potential, respectively.
• GAAP profitability expectationAchieve profitability as early as the third quarter of 2026The report believes the company is establishing relatively meaningful GAAP profitability support for the first time.

Impact & implications

Vector's strong performance increases the credibility of Unity's advertising business continuing to gain share and driving upward earnings forecast revisions, while the fact that runtime data has not yet fully contributed means recent outperformance is not entirely dependent on future catalysts. If Create pricing reform, Unity AI, and the browser-based engine are realized in parallel, the company's revenue mix and margins may continue to improve. However, the report estimates the company trades at approximately 38x 2027 GAAP EPS, and the high valuation requires growth and profit delivery to remain strong.

Risks

• Core game engine market penetration is approaching its ceiling, leading to slower engine revenue growth.
• Create lacks product-market fit in non-game areas, and the business may stagnate or decline.
• Create price increases, minimum spend commitments, and usage-based billing fail to effectively improve monetization and profitability.
• Intensifying advertising competition leads to a decline in network share, and non-Vector businesses continue to shrink.
• Runtime data integration effects fall short of management expectations, and Vector growth and earnings upgrades are less than expected.
• A weak macro environment suppresses both the Create and Grow businesses.
• High valuation multiples may trigger a significant pullback if growth slows or profitability delivery is delayed.
• There may be business relationships and potential conflicts of interest between Morgan Stanley and the covered companies, and investors should not make decisions based solely on this report.

What to watch

• Whether Vector can maintain guidance of nearly 19% to 21% quarter-over-quarter growth in future quarters.
• The actual contribution of runtime data integration to ad conversion rates, advertisers' return on ad spend, and market share.
• Adoption rate of the D28 return-on-ad-spend tool and its impact on customer retention and budget expansion.
• The impact of Create's minimum spend commitments, price increases, and usage-based billing on revenue and customer behavior.
• Launch progress of Unity AI and the browser-based game engine, and the scale of new users.
• Whether the Netflix partnership can validate Unity's position as a cross-platform content creation tool.
• Progress toward achieving GAAP profitability in the third quarter of 2026.
• Incremental opportunities from mobile game direct payments, the China joint venture business, and non-game applications.
• The pace of contraction in non-Vector revenue such as ironSource and its impact on overall Grow growth.