On Thursday, Morgan Stanley (NYSE:MS) maintained its Equalweight rating and $22.00 price target for Unity Software (NYSE:U). The firm highlighted Unity's cancellation of the planned Runtime Fee and the introduction of a new pricing strategy for its game engine subscription services.
Unity Software announced that instead of the Runtime Fee, it would implement a 25% price increase for its largest customers and an 8% increase for smaller ones starting January 1, 2025. These adjustments will affect all customers at the time of their contract renewal and will apply even if they do not upgrade to Unity 6.
The decision to forgo the Runtime Fee in favor of a straightforward price hike was driven by extensive consultations with key customers. Morgan Stanley views this development positively, suggesting that it reflects Unity's new management team's commitment to a sustainable business model that aligns with customer interests. The firm anticipates that the revised pricing could lead to a 5% increase in Unity's EBITDA for the year 2026.
Morgan Stanley also expects Unity to implement annual increases in its Create Solutions pricing. This expectation is based on the company's recent pricing strategy changes and its ongoing discussions with customers. The firm believes that this approach will contribute to Unity's financial growth and stability over the coming years.
Furthermore, the analyst from Morgan Stanley suggests that the cancellation of the Runtime Fee and the new subscription pricing could pave the way for Unity to more effectively monetize its other products. The firm sees this as an opportunity for Unity to enhance its overall revenue streams and strengthen its market position.
Unity Software's updated pricing model is set to take effect on January 1, 2025, and will be applicable to all customers, signaling a significant shift in the company's monetization approach for its game engine services.
InvestingPro Insights
Unity Software's strategic pricing revisions have caught the attention of analysts and investors alike. According to real-time data from InvestingPro, Unity Software currently has a market capitalization of $7.56 billion and has experienced a revenue growth of 14.13% over the last twelve months as of Q2 2024. This growth, however, is juxtaposed with a quarterly revenue decline of 15.79% in Q2 2024, indicating a mixed financial performance. The company's gross profit margin remains strong at 68.36%, reflecting its ability to maintain profitability in core operations despite broader challenges.
InvestingPro Tips suggest that while Unity has not been profitable over the last twelve months, analysts predict the company will turn a profit this year. This aligns with Morgan Stanley's positive outlook on Unity's future EBITDA following the pricing strategy update. Additionally, Unity's liquid assets exceed its short-term obligations, which bodes well for financial stability and operational flexibility. For investors considering Unity's stock, it is important to note that the price has fallen significantly over the last year, but there has been a strong return over the last month, suggesting a potential shift in investor sentiment.
For those seeking more in-depth analysis, there are additional InvestingPro Tips available at https://www.investing.com/pro/U, which provide further guidance on Unity Software's financial health and stock performance.
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