Morgan Stanley recently hosted a series of meetings with Unity Software Inc. CFO Jarrod Yahes and investors, subsequently issuing a report highlighting positive developments for Unity in artificial intelligence, creator business monetization, and growth in the Chinese market. The firm maintained its Overweight rating and $35 price target on the stock.
Analysts at Morgan Stanley noted that investor confidence in the long-term growth potential of Unity's runtime data has strengthened. As a core differentiator for the company, runtime data has demonstrated significant incremental benefits in testing and is expected to drive above-market-average growth for the company for many years to come.
In its advertising business, Unity is focused on narrowing the gap in ad conversion rates with leading peers. Analysts believe that if Unity can make progress in this area, its advertising revenue could potentially grow by four to five times. However, this would require significant and challenging improvements to the existing advertising model.
The company's Create business segment is performing robustly. Through price increases, minimum commitment terms, and usage-based pricing models, Unity's Create business continues to gain momentum. Notably, performance in the Chinese market is particularly strong, with the Create business achieving growth exceeding 40% in the region. According to previously disclosed company data, China now accounts for approximately 20% of Unity's total revenue, up from 15% in the prior year period.
Regarding AI-related tools, early user feedback has been positive. Unity is leveraging AI technology to empower the entire game development process, from environment building to dialogue generation, significantly compressing development cycles and costs. Morgan Stanley had previously estimated that advanced AI tools could potentially cut video game development costs by nearly half, unlocking approximately $22 billion in potential annual profit for global game developers. In this context, as a core engine provider for the industry, Unity faces a critical "adapt or be disrupted" juncture.
Company management has expressed confidence in Unity's AI strategy and monetization roadmap. With the ongoing expansion of the AI-driven Vector ad engine and the steady progress of the Create business in key markets like China, Unity is advancing towards its goal of achieving GAAP profitability by the fourth quarter of 2026.
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