Unity Software U shares have lost 9.3% since the company released its fourth-quarter 2024 earnings, creating what appears to be an attractive entry point for long-term investors. The stock has plummeted 48.2% in the past year against the Zacks Computer and Technology sector’s 23.4% return. Despite the market's negative reaction, a deeper analysis of U's financial performance and strategic initiatives reveals promising future growth potential.
1-Year Performance
Zacks Investment Research
Image Source: Zacks Investment Research
Mixed Q4 Results Mask Underlying Strengths
Unity reported fourth-quarter revenues of $457 million, exceeding analyst expectations of $433.47 million, while adjusted EBITDA came in at $106 million (23% margin), significantly above the high end of guidance. While total revenues declined 25% year over year, this was largely due to the company's strategic portfolio reset, with its core strategic portfolio actually growing 4% compared to the same period last year.
The Create Solutions segment showed resilience with subscription revenues growing 15% year over year, while Industry strategic revenues surged 50%. This growth is particularly impressive considering it doesn't yet reflect the positive impact of recently announced price increases, which will roll out gradually throughout 2025 and 2026.
Under new CFO Jarrod Yahes, Unity Software has demonstrated improved financial discipline. Free cash flow in the fourth quarter was $106 million, up 74% from $61 million in the prior year. For 2024, free cash flow reached $286 million, up 60% from 2023.
The company maintains a strong balance sheet with $1.5 billion in cash and has been strategically delivering by repurchasing $415 million of debt. Additionally, stock-based compensation dilution has decreased from 3% in 2023 to under 2% in 2024, with expectations for further reductions in 2025.
The Zacks Consensus Estimate for U’s 2025 revenues is pegged at $1.78 billion, indicating year-over-year decline of 1.8%. The consensus mark is pegged at a loss of $1.22 per share, narrower than a loss of $1.68 cents per share reported in the year-ago period.
Zacks Investment Research
Image Source: Zacks Investment Research
Find the latest EPS estimates and surprises on Zacks Earnings Calendar.
However, Unity Software’s primary rival in the game engine market is Epic Games' Unreal Engine, which is particularly strong in high-end console and PC game development besides Amazon AMZN-owned Lumberyard (now Open 3D Engine). Other competitors include Godot, an open-source alternative gaining popularity, and CryEngine, known for its graphical capabilities. In the mobile ad tech space, U faces competition from companies like AppLovin APP and Alphabet GOOGL-owned Google's AdMob.
Vector: Transforming Unity Software's Advertising Business
Unity Software's announcement of Vector, its new AI-powered advertising platform, represents a significant competitive advancement. CEO Matt Bromberg explained that Vector will leverage data from across U's ecosystem, integrating self-learning AI models to provide deeper insights and optimize performance.
The platform enhances targeting precision through sharper analysis of richer data sets and can adapt in real-time, helping customers navigate an increasingly competitive mobile marketing landscape. While the first-quarter guidance reflects some prudence regarding this transition, Vector positions Unity to become a fundamentally stronger competitor in the digital advertising space over time.
Unity Software continues to expand beyond gaming with significant wins in industries like automotive and manufacturing. The company recently announced that Toyota has selected U to power all its next-generation human machine interface, enhancing the in-dash driving experience. Similarly, Raytheon is now using Unity to create 3D simulations for facilities planning and factory layouts.
These high-profile partnerships highlight Unity's versatility and growing presence in lucrative enterprise markets. The Industry segment showed stellar performance with 50% year-over-year revenue growth, making it the company's fastest-growing subscription business.
Here’s Why Investors Should Consider Buying U Stock
Despite trading at a premium with a forward P/S ratio of 5.37X compared to the Zacks Internet - Software industry average of 4.33X, Unity Software presents a compelling investment opportunity.
Unity Software’s P/S F12M Ratio
Zacks Investment Research
Image Source: Zacks Investment Research
The company's Unity 6 platform is seeing robust adoption, with nearly 38% of active users already upgraded and 2.8 million downloads since launch. This rapid adoption rate exceeds previous releases and demonstrates strong customer acceptance following the cancellation of the controversial runtime fee.
Unity Software continues to maintain its dominant position in the global game development ecosystem, powering approximately 70% of the top 1,000 mobile games worldwide and 30% of the top PC games on Steam. This entrenched market position provides a stable foundation for recurring revenue growth.
The company is also establishing leadership in emerging technologies like mixed reality and spatial computing, with seven out of the top 10 AR games in 2024 being made with Unity Software. Its partnership with Google for Android XR support further strengthens U's position in this high-growth segment. As extended reality technologies continue to evolve, Unity Software stands to benefit significantly from this expanding market.
U's new Vector platform represents a transformative opportunity to capture a larger share of the digital advertising market. By leveraging its unique dataset from nearly five billion daily active users, Unity Software can deliver superior targeting and conversion rates for advertisers, potentially unlocking substantial revenue growth in its Grow Solutions segment.
Conclusion: Short-Term Pain, Long-Term Gain
While near-term volatility may persist as Unity Software transitions to its new advertising platform, the company's strong market position, expanding enterprise relationships, and improved financial discipline create a compelling long-term investment case. The post-earnings dip presents a strategic buying opportunity for investors willing to look beyond temporary challenges to the substantial growth potential ahead. Unity Software currently sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
