Unity Software (U) PT Lowered to $41 at BTIG

BTIG analyst Jake Fuller lowered the price target on Unity Software (NYSE: U) to $41.00 (from $60.00) while maintaining a Buy rating.

The analyst comments "Earlier this morning, Unity reported 4Q strategic Revenue results that were in-line with our above guidance expectations, and EBITDA that exceeded our/consensus estimates. The focus for investors heading into the print was on Vector/Unity Ads, and we believe the early stock reaction is a function of ~15% q/ q growth falling shy of ~20%+ buy-side expectations. Despite the 4Q delta, our Vector forecasts for '26+ move higher post-print as a result of more robust forward guidance. For Q1, Unity expects ~10% q/q Vector growth (BTIGe ~12%-13% on a days-adjusted basis) and the 4Q26 exit rate is expected to comfortably surpass $250M (BTIGe $262M with >50% top line growth for the full year). Mitigating the Vector improvements in '26+, Unity management appears to be taking the long-expected step of shutting down the ironSource ad operation. While we believe this is only one piece of the enterprise and the remaining businesses are growing (per Q&A, non-Vector ops were +10% q/ q), mix datapoints suggest ironSource will be a substantial headwind to '26 revenue growth (BTIGe >$150M), but will also be a tailwind to profitability and margins for the year. Taking a step back and looking at numbers on a go-forward basis, our total revenue moves ~3% lower to reflect exclusion of ironSource UA contributions in '27+ net of mitigation from healthier Vector growth (stable 10% sequential growth through 2026) and stronger Create performance (double-digit growth still a function of Jan '25 pricing adjustments, due to 1-2Y contract duration). As it relates to margins, ironSource is currently a lower gross/contribution margin business relative to Vector, and should see natural improvements to flow-through alongside meaningful fixed cost pullouts. Guidance for 300bps of EBITDA margin improvement implies a sharper EBITDA revision relative to revenue (~10% to '27), and we believe that's a function of R&D investments around Vector/AI initiatives, and conservative opex assumptions (ex: S&M ex-1x items in Q4 was ~$96M; our model incorporates $25M of growth vs. the 4Q baseline to stay in-line with guidance). Assessing the setup post-print, at $21 with de minimis value ascribed to the Create operation, per current concerns around Gen AI disruption, the implied Grow valuation sits at 11x-12x our '27 EBITDA estimate. Post-print, we believe the stock has now been fully reset to account for generative AI concerns, Meta (META; Not Rated) related competition overhangs, and now the phase out of the legacy ironSource business. As a result, we believe new growth initiatives should have a more direct impact on numbers and the share price (D28 ROAS, Runtime, and the Commerce offering are all teed up for 1H26) and the cleaner setup going forward is much cleaner. To reflect broader multiple compression dynamics across our coverage and broader TMT, we're reducing our PT to $41 from $60, which implies a ~22.5x multiple for Grow (in-line with the medium-term profit CAGR we forecast) and just ~8x for Create, given low risk appetite for Gen AI-exposed businesses."

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