AI Developments And Partnerships With Tencent Will Expand Markets

Key Takeaways

• Rapid innovation in AI-driven products and growing subscription business are driving sustained revenue growth, improved margins, and increased earnings stability.
  
• Expanding partnerships and broadening adoption across industries are diversifying revenue streams and strengthening Unity's long-term market position and competitive advantage.
  
• Aggressive investment in AI and new markets raises costs and execution risks, while regulatory, competitive, and customer concentration challenges could destabilize long-term growth and profitability.

Catalysts

Operates a platform to create and grow games and interactive experiences for mobile phones, PCs, consoles, and extended reality devices in the United States, China, Hong Kong, Taiwan, Europe, the Middle East, Africa, the Asia Pacific, Canada, and Latin America.

• Accelerated product innovation and adoption of new AI-driven technologies (notably the launch and continued improvement of Unity Vector and Unity 6) are creating step-changes in performance and value for Unity's ad and creation platforms, setting the stage for sustained revenue growth and improved net margins as these innovations scale over the next several years.
  
• Unity is rapidly growing its strategic, subscription-based Create business-especially with double-digit growth and high customer adoption rates-which increases recurring revenues, reduces earnings volatility, and further benefits from strong operating leverage and margin expansion.
  
• The expansion of Unity's client base and deepened partnerships with top-tier global gaming and enterprise players (e.g., Tencent, Scopely, Nintendo, BMW), along with unique cross-platform capabilities (including leading presence in China), are unlocking new long-term customer pipelines and diversified revenue streams, supporting both top-line growth and improved earnings stability.
  
• The ongoing mainstream adoption of real-time 3D and immersive content across industries (e.g., automotive, healthcare, architecture) continues to broaden Unity's addressable market, positioning the company to capitalize on secular growth in digital experiences and drive sustained multi-segment revenue acceleration.
  
• Unity's integration of privacy-centric data frameworks and AI/ML capabilities (leveraging its global game engine reach and unique behavioral data assets) is expected to deliver outsized competitive advantage and incremental margin expansion from 2026 onward, as more customer value is unlocked and spend scales, positively impacting future earnings and net margins.

Unity Software Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Unity Software's revenue will grow by 9.3% annually over the next 3 years.
• Analysts are not forecasting that Unity Software will become profitable in next 3 years. To represent the Analyst Price Target as a Future PE Valuation we will estimate Unity Software's profit margin will increase from -24.4% to the average US Software industry of 13.5% in 3 years.
• If Unity Software's profit margin were to converge on the industry average, you could expect earnings to reach $313.8 million (and earnings per share of $0.93) by about August 2028, up from $-433.9 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 44.2x on those 2028 earnings, up from -32.7x today. This future PE is greater than the current PE for the US Software industry at 38.7x.
• Analysts expect the number of shares outstanding to decline by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.92%, as per the Simply Wall St company report.

Unity Software Future Earnings Per Share Growth

Risks

• The company is heavily investing in AI and new product development (e.g., Unity Vector, Unity 6.2, AI-driven enhancements), which entails persistently high R&D and operating expenses and could delay sustained profitability and net margin expansion even as revenues rise.
  
• There are risks around execution and market adoption as Unity moves aggressively into non-gaming verticals (automotive, healthcare, architecture, etc.); if these bets fail to materialize as meaningful revenue streams or add significant complexity, revenue diversification and long-term stability could suffer.
  
• The competitive threat from larger incumbents and in-house engines (such as Unreal Engine, publisher-developed proprietary engines, and changing mediation trends in mobile advertising) could erode Unity's market share, putting pressure on revenue growth and pricing power.
  
• Stricter data privacy regulations and evolving digital content standards globally (highlighted by Unity's new data privacy framework) could increase compliance costs, limit access to valuable data, and constrain the effectiveness of Unity's AI-driven ad products, negatively impacting ad revenues and margins.
  
• Customer concentration risk remains high, as seen by the impact of large, one-off partnership deals (e.g., Tencent, Scopely) and perpetual contracts that may not be recurring; loss or decline in spend from major accounts could create pronounced revenue volatility.

Valuation

• The analysts have a consensus price target of $31.67 for Unity Software based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $44.0, and the most bearish reporting a price target of just $18.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $2.3 billion, earnings will come to $313.8 million, and it would be trading on a PE ratio of 44.2x, assuming you use a discount rate of 8.9%.
  
• Given the current share price of $33.57, the analyst price target of $31.67 is 6.0% lower. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.