Unity Software (NYSE:U) is the business behind the popular Unity gaming engine. Following a tough period in 2024 and early 2025, Unity is finally beginning to turn itself around, a fact that has brought investors back to the stock. Shares of U are up 80 percent on a trailing 12-month basis, reflecting much-improved investor sentiment around the business. Is it time to buy Unity, or is the stock still a risky investment in the current market?
Unity’s Turnaround and Gains
Unity’s business has undergone significant changes over the last year, including a restructuring late in 2024 that resulted in about 1,700 layoffs. The restructuring followed a disastrous attempt to change its fee structure at the beginning of 2024 that would have levied a $0.20 download fee per install on game creators. The attempted change was eventually walked back, but it left Unity with severe reputational damage among independent game creators.
The biggest growth initiative at Unity recently has been the introduction of Vector, Unity’s AI-powered ad platform. Using AI, Vector matches advertisements to users to enhance ad performance. This move has been compared to the extremely successful transition fellow gaming business AppLovin made to become an AI ad platform, though Unity has retained a much tighter focus on its core gaming business than AppLovin has.
Recently, Unity’s performance has been showing the success of its new strategy. In Q3, total revenue rose 5 percent to $471 million. While not a massive gain, this was a major win for Unity, as it broke a streak of six consecutive quarters of declining revenues. Of particular note was the 6 percent gain Unity saw in its Grow Solutions segment, which includes Unity’s Vector ad network. Subscription revenue growth in the Create Solutions segment was also strong, with Create overall delivering 3 percent revenue growth on a YoY basis.
Even though revenue is finally starting to turn around, improvements in net income have remained elusive. Q3’s net loss totaled $127 million, a slight increase from the loss of $125 million Unity posted in the year-ago quarter. With that said, net cash from operating activities did improve significantly from $122 million to $155 million over the same period. Free cash flow improved similarly from $115 million a year ago to $151 million. On a non-GAAP basis, Unity reported earnings of $0.20 per share, up from $0.19 last year.
Unity is also in a relatively good position to deal with its net losses due to its strong balance sheet. The business’s assets total $6.8 billion, including about $1.9 billion in cash and cash equivalents. Liabilities, by contrast, total $3.3 billion, of which about $2.3 billion is long-term debt. This puts Unity in a solid position to keep investing in growth initiatives.
All together, Unity appears to be making solid progress toward turning its business around, though it’s important to acknowledge that revenues are still well below the peak they reached in late 2023. Vector is still relatively new and could keep driving Unity’s growth for the foreseeable future, creating a highly attractive new business line in advertising. Encouragingly, Unity expects to see further revenue gains in Q4 with an expected top-line range of $480 million to $490 million.
What About Unity’s Valuation?
One of the challenges that Unity may present for investors is its rather high valuation. At 9.2 times trailing 12-month sales and 42.5 times operating cash flows with no positive GAAP earnings to date, Unity has a significant growth premium baked into its price. This is particularly true considering the fact that revenue growth is currently in the single-digit range, though it’s worth noting that growth could accelerate with the ongoing performance of Unity’s ad network.
With that said, Unity is already sitting at $40.03 per share, which is 2.6 percent above the consensus analyst price target of $39.76. The consensus rating for U stock is a hold, though its worth mentioning that nine of the 22 analysts covering the stock are still rating it as a buy.
Another factor investors may want to keep in mind is the steady increase of Unity’s share count, a trend that could significantly dilute long-term shareholders’ ownership over time. In each of the last three quarters, year-over-year growth in the number of outstanding shares has exceeded 6 percent. Though not as high a rate as Unity was posting earlier in its history, this gradual upward drift in the number of outstanding shares could be a negative for investors who are already being asked to pay a fairly high price for the stock.
So, Is Unity a Buy?
Unity has made some impressive progress on its turnaround, reviving revenue growth and improving its cash flows. More importantly, its ad network business, combined with organic growth from its game engine, could set the business on a long-term positive trajectory. With that said, it’s still early in Unity’s turnaround story and revenue remains well below what Unity was once able to deliver. This, combined with the fact that revenue growth is still in single-digits, may introduce risks of overpaying at today’s lofty prices.
On a shorter-term basis, it’s also worth taking into account the market’s growing skepticism of high-flying tech stocks whose valuations have run up during the AI boom. Just last week, the NASDAQ Composite declined by 3 percent on concerns around overvalued AI stocks, led by the likes of NVIDIA, Oracle and Palantir. While Unity doesn’t carry the kind of extreme valuation that defines these AI majors, it’s far from impossible that U could get caught up in a broader selloff if tech stock valuations begin to seriously deflate.
With these dynamics in mind, Unity may be a better stock to hold now than to actively buy. The business is showing some encouraging signs of improvement, but significant risks remain. With that said, investors may want to watch Unity, as ongoing acceleration of revenue growth or an eventual contraction in its valuation could create more attractive entry points in the future.
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