Unity Software (NYSE:U)

In a research note sent to clients on Friday, analysts at Piper Sandler raised shares of Unity Software (NYSE:U) to the Overweight category from the Neutral category. However, the company lowered its price target on the Unity stock to $38 from $42.

The analysts highlighted that a significant execution risk for a business model with gaming and ad exposure going into recession is accounted for by the 45% sell-off since Unity’s report from the previous quarter and the 80% loss that has occurred year-to-date.

“Having said that, Unity continues to be an essential strategic 3D creation platform with a subscriber base that has the potential to surpass $1 billion by 2025. We are increasing our weighting in the Unity stock from Neutral to Overweight in anticipation of a large buyback in November (at least $2 billion) and the impending merger with IS, both of which have the potential to help buoy shares, which are currently valued at 5.9 times CY23E EV/S on a post-merger basis “the analysts had written.

The analysts said that the company sees a way to reach a revenue of $1 billion from subscriptions, “assuming the doubling of 3D developers, designers, and artists to around 540K paid users with a 9% ASP uplift.”

According to their observations, “industry weakness in gaming and advertisements has masked the excellent growth potential inside 3D software.” “Patience growth investors with a two to three-year perspective have the potential to gain earnings and multiple expansion moving ahead for a generational 3D creative platform with strong hurdles to entry.”

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Piper Sandler predicted that the subscription base may reach over $1 billion by 2025, which caused Unity stock to surge.

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