Unity Software shares jump pre-market on Morgan Stanley upgrade

Investing.com -- Shares of Unity Software Inc (NYSE:U ) jumped in pre-market trading on Tuesday after Morgan Stanley upgraded its rating on the company to "overweight" from "equal-weight." 

At 8:52 am (1252 GMT), Unity Software Inc. was trading 7.3% higher in pre-open trade. 

The brokerage’s revision was driven by a combination of derisked growth expectations and potential upside opportunities in Unity's core business segments, sparking renewed investor interest.

“We now see clear potential for upward revisions in Create and greater stability in Grow,” said analysts at Morgan Stanley.

The company encountered a series of challenges, including underperformance relative to the S&P 500 , significant management turnover, and a major restructuring effort. These factors led to a substantial reset in market expectations. 

The brokerage believes that Unity’s forward estimates are now more achievable, “But following the cut to '24 guidance at 2Q results we now view forward estimates for U as derisked,” the analysts said.

One of the key elements that bolstered this confidence is Unity's resilience in maintaining its 70% market share in the mobile sector, a feat achieved even in the face of considerable competition and internal challenges. 

This retention underscores the strength of Unity’s competitive moat and its enduring appeal in the gaming industry.

In addition to this stability, Morgan Stanley identified several factors that could drive Unity's growth in the coming years. 

Among these are the potential for increased pricing power, the introduction of a runtime fee, and the ongoing rebuild of Unity’s advertising algorithm. These developments could lead to upward revisions in Unity's earnings projections for 2026 and beyond, positioning the company for stronger performance in the long term.

From a valuation perspective, Morgan Stanley maintained its price target for Unity at $22, which represents a 32% upside from the current trading levels. The brokerage also presented a bullish scenario where the stock could reach as high as $45, emphasizing the attractive risk-reward profile of Unity at this juncture. 

With shares currently trading near all-time lows, both in terms of price and valuation multiples, Morgan Stanley sees this as a compelling entry point for investors.

Source: Investing.com