Unity Software Inc. (U) saw its stock plummet by 5.02% during Wednesday's trading session, following Deutsche Bank's initiation of coverage with a Hold rating and a $39 price target. The mixed outlook presented by the bank appears to have dampened investor sentiment, despite acknowledging Unity's potential for growth.
Deutsche Bank's analysis suggests that Unity is poised to resume revenue growth, with improved leadership and enhanced ad technology. The bank expects Unity to meet its 7% compound annual growth rate (CAGR) revenue target for 2024 to 2027. However, they believe the company is unlikely to outperform these projections, even if its Vector product matches the performance of AppLovin's Axon.
While Deutsche Bank expressed positivity regarding Unity's Create segment and Unity 6 adoption, they also highlighted concerns about limited revenue gains. This is attributed to cautious pricing strategies following the recent runtime fee backlash. Additionally, the bank noted that while Unity's engine is used in 70% of top mobile games and offers valuable runtime data, competitor AppLovin currently leads in AI ads and e-commerce. These factors combined seem to have contributed to the stock's significant decline, as investors reassess Unity's growth potential in a competitive market landscape.