Shares of Unity Software (U 3.47%) surged more than 15% on June 27 after the company announced a clutch of artificial intelligence (AI) solutions, and some on Wall Street believe the stock still has a lot of room to run.
Based on the estimates of 20 analysts covering Unity, the stock has a median price target of $43, which is where it is trading now following its latest surge. However, the Street-high price target of $66 suggests that Unity stock could surge another 52%.
It wouldn't be surprising to see Unity exceed that price target considering the impressive pace at which it is growing and the catalysts that it is sitting on, especially in AI. Let's take a closer look.
AI could give Unity's growth a nice boost
The craze around AI has grown remarkably over the past few months thanks to the popularity of generative AI applications such as ChatGPT, Stable Diffusion, and the new AI-powered Microsoft Bing search engine. The technology is currently in its early phases of growth, and is expected to gain critical mass going forward.
More specifically, the global generative AI market is expected to clock annual growth of 32% over the next decade, generating $126 billion in revenue in 2031. The technology is expected to impact multiple industries, including video gaming. According to research from Market.us, generative AI in gaming is set to generate $7.1 billion in revenue in 2032 compared to just $922 million last year, growing at an annual pace of 23% over the next decade.
This presents a solid opportunity for the company to accelerate its growth, as its Unity game development engine controls 30% of the market. Unity is known for providing developers with a platform with which they can create real-time content in 2D and 3D that can be consumed on smartphones, tablets, computers, gaming consoles, and augmented reality/virtual reality devices.
The company is now giving developers the power of AI to create real-time 3D content with its Unity Sentis and Unity Muse platforms. Unity CEO John Riccitiello believes that these tools will help creators and developers become "10 times more productive" and "help them bring their creations to life with interactive intelligence in a way never before possible."
Riccitiello also adds that he expects AI to "revolutionize gaming," which explains why Unity is busy adding AI tools to its platform. What's more, the company has also launched an AI marketplace that "features curated solutions to accelerate AI-driven game development and gameplay enhancements." The marketplace has been launched with 10 AI-enabled solutions, which can be accessed by developers to speed up the process of game development.
Unity stock's surge indicates that the market is reacting positively to these launches, and it is not surprising to see why that's the case considering the substantial revenue opportunity on offer in this niche.
Solid growth could lead to healthy stock upside
While AI could indeed turn out to be a nice catalyst for Unity's growth, the company also has other terrific growth drivers that could help the stock surge higher. For instance, Apple is tapping Unity's platform to make apps for its recently revealed Vision Pro headset, which will hit the market next year.
Additionally, Unity's content development platform is finding traction in other lucrative areas such as digital twins, a market that's expected to grow 36% annually through 2030. A digital twin is a virtual representation of a physical object that is used for running simulations to gain insights into how the object would perform in the real world under different conditions.
This technology is being adopted in multiple industries, such as energy, manufacturing, automotive, and engineering, among others. Unity is tapping this fast-growing area with its Unity Industry platform, which gives enterprise customers the tools to build digital twins. In all, Unity Software has multiple growth drivers that should help it sustain high levels of growth in the future. Not surprisingly, the company's earnings are set to grow rapidly over the next couple of years.
U EPS Estimates for Current Fiscal Year data by YCharts
The chart above tells us that Unity's earnings could jump to $1.44 per share at the end of 2025. Unity stock is currently trading at 117 times forward earnings. Assuming that multiple comes down to 50 after three years and the company indeed hits Wall Street's earnings target -- which it could in light of the discussion above -- its stock price could jump to $72.
That would represent a 65% jump from current levels, suggesting that investors who are looking to buy an AI stock right now might want to consider going long Unity before it flies higher.
