BofA Global Research analyst Michael J. Funk has upgraded Unity Software Inc. (ticker: U) from Neutral to Buy, raising the price target to $56 from $46.
According to the analyst, Unity’s improved monetization of its mobile game creation engine and the stabilization of the mobile game advertising market create a compelling risk-reward profile.
Funk projects incremental revenue of $77 million and $93 million in 2025 from Unity’s runtime fees and the retirement of Unity Plus (net of expected churn), respectively.
Unity recently announced plan pricing updates to monetize its mobile gaming creation platform, which Funk believes will improve the profitability of its Create segment.
With a reduction in execution and integration risks, Funk expects the stock price to increase.
Starting January 1, 2024, Unity will introduce a new Unity Runtime download fee based on game installs. This fee has the potential to generate an annual revenue increase of $77 million.
Also Read: Unity Execs Offload Shares Before Controversial Fee Announcement
On the downside, Funk notes that the proposed install-based fees for mobile games may be too expensive for some games with poor revenue per install. However, these games only generate a minor percentage of broader mobile gaming revenue, making them less valuable for monetization.
Unity has also announced the retirement of Unity Plus, with existing subscribers having the option to upgrade to Unity Pro for one year at the current Unity Plus price. After one year, they will shift to Unity Pro pricing.
Funk estimates a potential annual revenue increase of $93 million in 2025 from Unity Plus plan migration, assuming a migration rate of 50%.
The analyst has raised revenue estimates for FY24 and FY25 by 4.4% and 9.9% respectively, primarily based on the pricing change analysis and a more positive view of Unity’s ad business.
The updated revenue estimates are $2.691 billion for FY24 and $3.320 billion for FY25.
Price Action: Shares of Unity Software (U) are currently trading at $36.28, up 1.61% on the last check Friday.