Is Unity Software (U) Offering An Opportunity After Recent Share Price Weakness

• If you are wondering whether Unity Software's share price still reflects its underlying worth, you are not alone. This article is set up to help you frame that question more clearly.
• Unity closed at US$19.58, with a 5.9% move over the last 7 days. The 30 day, year to date and 1 year returns of 52.5%, 55.8% and 25.2% declines highlight how sentiment has shifted over different timeframes.
• Recent news on Unity has focused on ongoing interest in its role as a key platform for real time 3D content creation, and on market debate about how its business model and competitive position might evolve. These themes often feed into how investors think about risk, growth potential and what they are willing to pay for the stock.
• On our valuation framework, Unity currently scores 3 out of 6 checks as being undervalued. Next we will walk through the different valuation approaches behind that number, then finish with a way to put all those methods into a single, clearer view of value.

Find out why Unity Software's -25.2% return over the last year is lagging behind its peers.

Approach 1: Unity Software Discounted Cash Flow (DCF) Analysis

A DCF model takes projected future cash flows, discounts them back to today using a required rate of return, and sums them to estimate what the business might be worth per share right now.

For Unity Software, the model starts with last twelve month Free Cash Flow of about $384.8 million. Analysts have provided explicit forecasts up to 2028, and beyond that Simply Wall St extrapolates cash flows to 2035 using its 2 Stage Free Cash Flow to Equity framework. By 2030, the model is using a projected Free Cash Flow of $1,348 million, or about $1.35 billion.

After discounting these projected cash flows back to today, the DCF output suggests an estimated intrinsic value of roughly $52.67 per share. Compared with a recent share price of about $19.58, this implies an intrinsic discount of 62.8%, which indicates the stock is screened as materially undervalued on this model.

Result: UNDERVALUED

Our Discounted Cash Flow (DCF) analysis suggests Unity Software is undervalued by 62.8%. Track this in your watchlist or portfolio, or discover 54 more high quality undervalued stocks.

Head to the Valuation section of our Company Report for more details on how we arrive at this Fair Value for Unity Software.

Approach 2: Unity Software Price vs Sales (P/S)

For companies where earnings are limited or volatile, the P/S ratio is often more useful because it compares the share price to revenue rather than profit. It lets you ask what investors are currently paying for each dollar of sales.

Expectations for growth and the level of risk usually influence what looks like a normal or fair P/S multiple, as investors may accept a higher ratio if they think revenue can grow strongly and is relatively predictable, and a lower ratio if they see more uncertainty.

Unity Software is trading on a P/S of 4.58x. That sits above the Software industry average of 3.52x and is close to the peer group average of 4.35x. Simply Wall St also calculates a Fair Ratio of 6.51x, which is its estimate of a suitable P/S for Unity given factors such as growth outlook, profit margins, size and risk profile.

This Fair Ratio is more tailored than a simple comparison with peers or the industry because it is built specifically for Unity, rather than relying on broad group averages that may mix very different business models and risk levels.

Comparing Unity's current P/S of 4.58x with the Fair Ratio of 6.51x suggests the shares screen as undervalued on this measure.

Result: UNDERVALUED

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Upgrade Your Decision Making: Choose your Unity Software Narrative

Earlier we mentioned that there is an even better way to understand valuation, so let us introduce you to Narratives, a simple way for you to attach your story about Unity Software to the numbers by linking your assumptions for future revenue, earnings and margins to a Fair Value, then comparing that Fair Value with the current price to help inform your decision.

On Simply Wall St's Community page, Narratives are easy to use and update automatically when new information such as earnings or news is added, so your view does not stay frozen in time.

For Unity, one investor Narrative might assume a Fair Value of about US$20.31 with revenue growing at 5% and a 15% profit margin. Another might see a higher Fair Value of roughly US$47.47 with revenue growth of 14.50% and a 1.02% margin. A third might sit closer to US$18.76 with revenue growth of 11.27% and a margin of 11.36%. This illustrates how different stories and risk views can coexist using the same shared tool.

For Unity Software, here are previews of two leading Unity Software Narratives that aim to make the analysis easier to follow:

🐂 Unity Software Bull Case

Fair Value: US$38.48

Implied discount vs last close: about 49.1%

Assumed annual revenue growth: 15%

• Views Unity as a key player in 2D and 3D content development across gaming and XR, with the share price sitting near the low end of its historical range.
• Sees potential upside if Unity executes on its plan, continues diversifying into non gaming sectors, and benefits from the interaction between its Create and Grow solutions.
• Highlights positive cash flow, no immediate liquidity needs, and recent management actions such as restructuring and rolling back the runtime fee.

🐻 Unity Software Bear Case

Fair Value: US$18.76

Implied premium vs last close: about 4.4%

Assumed annual revenue growth: 11.27%

• Flags the risk that simpler creation tools, open source options, and changing gamer preferences could limit Unity's long term revenue potential and pricing power.
• Points to integration hurdles from past deals, higher regulatory and compliance costs, and rising competition as pressures on margins and earnings quality.
• Anchors on a Fair Value of about US$18.76 that reflects more cautious assumptions for growth, profitability, and the P/E multiple investors might be willing to pay.

These two Narratives show how the same company and data can lead to very different conclusions, depending on what you believe about Unity's markets, business model, and execution over time. If you want to go further than these previews, the full Narratives set out the detailed assumptions behind each Fair Value and let you adjust them to match your own view of the stock.

Do you think there's more to the story for Unity Software? Head over to our Community to see what others are saying!

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

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