Shares of popular video-game development platform Unity Software (NYSE: U) received a major upgrade courtesy of Morgan Stanley analyst Matthew Cost. Cost upgraded shares of U to a Buy, with a rich price target of $185.
Indeed, the big vote of confidence comes at a time when Unity stock is fresh off a nasty pullback. Though the name has bounced back modestly in recent weeks, the stock is off around 31% from its all-time high of $210 per share. Virtually flat on a year-to-date basis, Unity seems like one of the better dip buys as high-multiple tech names continue rolling over into year’s end.
Even after a steep decline, Unity stock is anything but cheap, at around 42 times sales, with nothing in the way of earnings.
The company has reported narrower-than-expected per share losses through the year. Still, the company isn’t all too far away from making a sustained move into the green compared to many other high-multiple growth stocks. For that reason, Unity stock may not deserve to fall nearly as hard amid continued weakness in high-multiple names.
Although the valuation was and probably still is incredibly stretched for most investors. I am neutral on the stock, primarily due to the steep valuation.
That said, I am eager to change my position on a continued pullback, given the unfathomable growth potential that the metaverse could bring forth.
Metaverse Trend Could Fuel Incredible Growth
Unity has an enviable front-row seat to an emerging trend that could take off far sooner than many analysts expect.
For gamers, Unity is a well-known engine powering many of the mobile and desktop titles we all know and love.
The video-gaming market is growing at a staggering pace, but the emergence of the metaverse could bring Unity’s growth prospects to another level. Indeed, Unity’s Total Addressable Market (TAM) is already high, but it could get even higher once the metaverse is ready to take the world by storm.
Despite the excessive valuation on U stock today, metaverse catalysts may yet to be fully baked into the share price if next-generation VR and AR worlds go mainstream faster than expected.
Sure, there’s already a form of the metaverse today, with ample games and immersive experiences offered by VR headsets like Valve’s Steam Index and Meta Platform’s (FB) Oculus.
That said, virtual and augmented worlds are not quite ready for the average consumer yet, given the limited uptake of headsets and goggles to date.
With FAANG firms like (MSFT) hard at work to pull the curtain on their own offerings sometime soon, though, the metaverse trend could get a massive boost that investors are hoping for.
Although the metaverse may still be a few years away from delivering jaw-dropping numbers, the potential growth remains quite unfathomable, especially for a company like Unity.
The company can get a significant slice of many metaverses created by others. Undoubtedly, gaming in the metaverse will continue to be Unity’s hottest application, but it’s non-gaming uses (think work, productivity, social and other experiences) that could raise the bar on Unity’s already encouraging growth profile.
Further, Unity has already rubbed shoulders with many gaming and non-gaming firms over the years. Such connections are a major advantage for Unity as firms look for an onramp into the metaverse.
Many satisfied customers (big and small) are likely to continue using Unity’s services once the time comes to take spending on digital worlds into overdrive.
Wall Street’s Take
According to TipRanks’ analyst rating consensus, U stock comes in as a Strong Buy. Out of nine analyst ratings, there are seven Buy recommendations and two Hold recommendations.
The average Unity price target is $178.86. Analyst price targets range from a low of $162 per share to a high of $185 per share.
Bottom Line
With Meta committing $10 billion on metaverse initiatives, one has to think that other firms will follow suit, as hefty investments in such next-generation innovations goes from novelty to necessity.
Unity will be there to profit from such a broader adoption of virtual worlds.
Disclosure: Joey Frenette doesn’t own shares of any mentioned companies at the time of publication.
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