HSBC upgrades Unity shares after earnings beat, calls for more than 20% upside ahead

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HSBC upgrades Unity shares after earnings beat, calls for more than 20% upside ahead

Unity Software shares may have even more room to run after its recent post-earnings gain, according to HSBC. The firm upgraded the stock to buy from hold and hiked its price target to $34 from $20.70. That updated target implies 21.4% upside from Thursday’s close. “We upgrade Unity to Buy as we foresee further strong momentum ahead for its game engine and a fair chance of success for its revamped AdTech offering,” analyst Mohammed Khallouf wrote in a Friday note. “We also believe Unity’s unparalleled mobile gaming footprint and access to valuable 1st party user data mean it remains attractive for M & A.” The upgrade follows Unity shares soaring 30.4% during Thursday’s session on the heels of its fourth-quarter results topping Wall Street estimates. Unity posted adjusted EBITDA of $106 million on revenue of $457 million, above the $84.7 million and $432.5 million that analysts polled by FactSet had anticipated. That move higher put the stock’s year-to-date gains at 24.6% and its week-to-date gains at about 30.2%. U YTD mountain U, year-to-date Khallouf pointed to Unity’s launch of its new artificial intelligence-driven ad platform known as Vector and its plans to migrate all of its customers by the end of 2025. While the firm believes Unity will “have its work cut out to catch up with AppLovin given the latter’s sizable head start and much larger market share across the AdTech value chain,” its chances have improved. The analyst also noted that Unity’s game engine posted strong performance in the fourth quarter, with its strategic create segment revenues being up 9% year over year and 6% quarter over quarter. With that, he believes that the “stickiness” of its user base “bodes well” for a possibly seamless introduction of planned subscription pricing hikes in fiscal 2025. “We believe this accelerating momentum is a reflection of management’s successful efforts to repair relationships with game publishers after the ‘run-time fees’ rupture and increased traction with non-game segments,” Khallouf said in the note. The stock is buy-rated among analysts covering it on the Street. According to LSEG data, 12 out of 28 analysts have a strong buy or buy rating, while 15 have taken a neutral stance with a hold rating. Shares were more than 2% higher in the premarket Friday following Khallouf’s upgrade.

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