Unity Software (U 14.21%), a 3D graphics software specialist, rocketed 12.7% through 1:05 p.m. ET on Wednesday, and it's not hard to figure out why.
This morning, StreetInsider.com reported that Jefferies analyst Brent Thill raised his price target on Unity by more than 20% to $35 and reiterated his buy recommendation on the stock.
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What Jefferies says about Unity
Citing data from his company's 2Q mobile game ad tech survey, Thill said "overall 2025 ad spend expectations improved off of April" and are now on course for nearly 4% year-over-year growth. Unity's share of this market is growing and "incrementally positive," leading the analyst to raise his earnings estimates for the stock -- and accordingly, his price target.
Is Unity stock a buy?
Is this price target justified? Perhaps.
Unprofitable as calculated according to generally accepted accounting principles (GAAP), Unity does generate substantial positive free cash flow -- $308 million over the last 12 months. On a $14 billion stock, that works out to a 45x price-to-free-cash-flow valuation on the stock.
Expensive? Absolutely. And yet, the growth estimates for Unity stock are terrific and potentially terrific enough to make this stock a buy. Analysts polled by S&P Global Market Intelligence forecast Unity will more than triple its free cash flow (FCF) over the next five years to nearly $1 billion in 2030. If that's how things play out, the stock's seemingly excessive valuation could conceivably be justified.
Still, going from $308 million to just under $1 billion in five years works out to only a 26% annualized FCF growth rate. I'd prefer to see that go higher to justify the stock's 45x FCF valuation -- or for the stock to pull back a bit before buying any Unity stock myself.
