Morgan Stanley Upgrades Unity Software to Overweight, Cites De-Risked Estimates and Strong Market Position

Morgan Stanley analysts upgraded Unity Software (NYSE:U) to Overweight from Equalweight, setting a new price target of $22 on the stock.

The upgrade comes after a challenging year for Unity, which saw its shares underperform the S&P 500 by approximately 80% due to execution difficulties, management changes, and a major restructuring. Despite these setbacks, the analysts believe the company has now reset expectations, particularly after lowering its 2024 guidance in its second-quarter results.

From a strategic perspective, Unity's game engine has maintained a dominant 70% market share in the mobile sector, highlighting the company's strong competitive moat. Even with customer relations challenges, competitors have struggled to capture market share from Unity.

Although Unity's Grow ad business has faced increased competition, Morgan Stanley believes that the current growth expectations for Unity's ad network, projected at 6% for 2024-2026, are now realistic. These projections assume that Unity will continue to lose some market share, as the broader ad market is expected to grow at 11% during the same period.