On Tuesday, Wells Fargo (NYSE:WFC) initiated coverage on Unity Software (NYSE:NYSE:U), assigning the stock an Equal Weight rating and setting a price target of $20.00. The new coverage comes with an analysis of the company's recent management efforts to revitalize its business model, including trimming its portfolio and addressing the controversial runtime fee issue.
The analyst acknowledged the strides made by Unity Software's new management in turning the company around but expressed concerns over the execution needed to fix Unity Ads. While the elimination of runtime fees was seen positively, the analyst pointed out the challenges of trading a company at approximately 20 times its EBITDA. The initiation of an Equal Weight rating and a $20 price target reflects a cautious optimism about the company's future performance.
In September 2023, Unity Software made a significant change by eliminating its low-priced Unity Plus SKU. A year later, in September 2024, the company made another strategic move by canceling its criticized 'runtime fee.' Instead, Unity Software introduced an 8% and 25% per-seat price increase for its Unity Pro and Enterprise offerings, respectively. These adjustments are expected to have a meaningful impact on the revenue growth of the Create segment in the years 2025 and 2026.
Wells Fargo is constructive on the outcome of these changes and anticipates that they will contribute approximately 8% annually to the Create segment's revenue growth in 2025 and 2026. This expectation is based on the cumulative effect of the pricing strategy changes implemented by Unity Software. The analyst's commentary highlights the potential for these modifications to enhance the company's financial performance in the near term.
In other recent news, Unity Software has reported a 16% year-over-year decrease in Q2 revenue to $449 million, but strategic revenue growth and improved profitability are expected later in the year. The company has also launched Unity 6, a new version featuring enhanced performance and features aimed at improving game development speed and efficiency. Unity Software has seen a series of analyst updates following major changes in its pricing model.
HSBC raised its price target for Unity to $21.80, maintaining a Hold rating, while Macquarie increased Unity's price target to $15.00, despite keeping an Underperform rating. Stifel raised its price target for Unity to $25, maintaining a Buy rating, and Oppenheimer held steady with its Perform rating. Morgan Stanley (NYSE:MS) maintained its Equalweight rating and a $22 price target for Unity Software. These are among the recent developments for Unity Software.
InvestingPro Insights
Recent InvestingPro data provides additional context to Wells Fargo's analysis of Unity Software (NYSE:U). The company's market capitalization stands at $8.14 billion, reflecting its significant presence in the software industry. Unity's revenue for the last twelve months as of Q2 2024 was $2.06 billion, with a notable revenue growth of 14.13% over the same period. This growth aligns with Wells Fargo's expectations for potential improvements in the Create segment's revenue.
However, Unity's financial health presents a mixed picture. An InvestingPro Tip indicates that the company has not been profitable over the last twelve months, which is corroborated by the negative operating income of -$820.33 million. This underscores the challenges mentioned by Wells Fargo regarding the execution needed to fix Unity Ads and improve overall profitability.
On a positive note, another InvestingPro Tip suggests that Unity has experienced a strong return over the last three months, with data showing a 25.5% price total return over that period. This recent performance could be indicative of market optimism surrounding the company's strategic changes, including the elimination of runtime fees and price increases for Unity Pro and Enterprise offerings.
For investors seeking a more comprehensive analysis, InvestingPro offers additional tips and insights. Currently, there are 5 more InvestingPro Tips available for Unity Software, which could provide valuable perspective on the company's financial outlook and market position.
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