[IN-DEPTH ANALYSIS] Unity (U): Unifying AI & XR: The Game Giant's Next Masterstroke

Source: TradingView

Key Points

-          Unity is a leading real-time 3D content creation platform but faces challenges in revenue due to past policy missteps such as the failed Runtime Fee policy.

-          The launch of Unity 6 and the AI - driven Vector platform aim to boost its market share and advertising efficiency. However, the company has to overcome technical and financial hurdles during the transition.

-          Financially, Unity's valuation is relatively low, but with the expected recovery of Expansion Rate and the slow progress of AI commercialization, there is potential for a 15 - 20% valuation upside in 2025.

Overview

TradingKey - Unity Software (U) was founded in 2004 and headquartered in San Francisco, California. It is a leading global platform for real-time 3D content creation and operation. By offering cross-platform game engines, toolchains, and cloud services, the company serves over 2.5 million developers across industries including game development, automotive, architecture, and film. As an industry-standard engine, as of March 2025, Unity powers 73% of top mobile games (including iconic titles like Honor of Kings and Genshin Impact), 60% of VR/AR content, and 90% of Microsoft HoloLens applications globally, with monthly downloads exceeding 3 billion. Its ecosystem spans over 20 platforms such as iOS, Android, Windows, and emerging spatial computing devices like Apple Vision Pro. The company’s technical ecosystem deeply integrates AI, VR/AR, and metaverse applications, forming a unique competitive barrier.

Unlike traditional software companies, Unity employs an "engine + ecosystem" dual-driven model to convert technical advantages into developer stickiness and data assets. For example, its AI-powered content generation tools (e.g., Unity Muse) significantly enhance development efficiency, while cloud services (e.g., Unity Runtime) enable real-time content updates and cross-platform deployment. Unity prioritizes ease of use, cross-platform compatibility, and full-industry penetration—especially in mobile gaming and emerging sectors like industrial metavers.

Revenue Sources

1)      Grow Solutions

The Grow Solutions business helps games expand their user base through advertising, user acquisition (UA) tools, and data analytics. In 2023, the company's revenue soared by 424%. The main reasons were the integration of the advertising business after the acquisition of IronSource and the surging demand for user acquisition in the gaming industry during the pandemic. In 2024, the revenue dropped with a decrease of 9.64%. This was due to the failure of the company's Runtime Fee policy. In September 2023, charging based on the number of installations triggered protests from developers, resulting in customer loss. Other reasons are that global mobile game advertising spending declined, and the company's launch of the migration of the advertising platform to the AI-driven new system Unity Vector caused short - term customer wait-and-see attitudes and revenue delays.

2)      Create Solutions

Create Solutions mainly provides developers with tools and platforms for creating real - time 3D content, such as game development engines, automotive, film and television animation, and architectural design. In 2023, the Create Solutions department saw a 47% YoY revenue growth, benefiting from the pandemic dividend. However, in  2024Q4, affected by the Runtime Fee policy and the compatibility issues of Unity versions, the annual revenue of the Create Solutions department decreased by 28.5%.

Source: TradingKey, SEC Filings

The launch of Unity 6 Iteration to Consolidate the Market Share

After Unity introduced the "Runtime Fee" pricing policy (which charged developers a floating fee based on the number of software downloads)  in September 2023, the number of customers (those spending over $100,000 annually) has been continuously declining. During the same period, the dollar-based net expansion rate dropped sharply, indicating a significant decrease in the willingness of existing customers to make additional purchases or renew their subscriptions. This trend is directly related to the protests from developers. The controversial pricing policy has led many independent studios and small and medium-sized manufacturers to switch to alternative engines such as Godot and Unreal Engine to avoid risks.

Source: TradingKey, SEC Filings

In 2024, Unity cancelled the Runtime fee model and plans to adopt a seat-based pricing model for its subscription plans starting from January 2025. The prices of Unity Pro and Unity Enterprise related products in the new model will be increased（8%-25%）. Compared with the previous pricing model, the new pricing model is more fixed and predictable. Therefore, we believe that this move, which focuses on trust restoration, may help the company attract more users back and boost its revenue.

In October, Unity released the upgraded product Unity 6, which includes features such as end-to-end multiplayer game workflows, dynamic AI, enhanced support for mobile Web Runtime, etc., and has stronger stability and faster rendering speed. Since its release, nearly 38% of active users have migrated. Compared with other mainstream game engines in the market (such as Unreal Engine, Cocos, Godot), Unity 6 has a deep accumulation of XR and cloud gaming technologies and has great expansion potential in industrial application scenarios (such as automotive and construction industries). Its AI toolchain may become a differentiating competitive advantage.

Source: Unity, Cocos, Godot, Tradingkey

Betting on the AI and XR Ecosystem: Unity Vector

The game advertising market is approaching the bottom of the industry in 2025, and the iteration of Unity 6 consolidates its market share. According to data from Global Market Insights, the global game engine market is expected to reach a size of $5 billion by 2032, with a compound annual growth rate (CAGR) of 10%. The main growth drivers are as follows: 1) The development of AR and VR technologies; 2) Technological advancements in the gaming industry; 3) The gradual increase in the development of 3D mobile games.

Source: Global Market Insights

Unity Vector utilizes AI to predict user behavior and optimize the efficiency of advertising placement, aiming to increase the advertising return rate by 20%. The platform integrates the data within the Unity ecosystem, enabling dynamic matching between high-value players and advertisers. The company stated that it will fully migrate its advertising business to the new platform by the end of 1Q 2025. Although the project's benefits will be gradually realized and its stability needs to be refined in the initial stage.

In the short term, it needs to bear the migration costs (the profit margin in the first quarter of 2025 may be compressed to 16%), and the AI model requires time for training, and the verification of its effectiveness will not be possible until 3Q 2025. This is a business with an adjusted gross profit margin of over 80%. As the business grows and accelerates, it will become easier to expand the profit margin.

Source: TradingKey, SEC Filings

Unity also provides development support for Meta Quest (70% of its applications are based on Unity) and Google Android XR, targeting the growth of AR/VR hardware (the global shipment volume reached 12 million units in 2024). Unity needs to continuously invest in AI/XR (research and development accounts for 68%), and the net loss in 2025 may remains, and the profitability inflection point may be delayed until 2026.

Unity vs. AppLovin: Why Not Get Acquired？

Unity and AppLovin represent two distinct ways in the game tech ecosystem. Unity dominates game development with its cross-domain real-time 3D engine technology and AI-driven tools. In contrast, AppLovin operates as a data-centric advertising specialist, excelling in mobile ad optimization and building competitive barriers through a closed-loop ecosystem. Its AI-first strategy and high-margin advertising business drive short-term growth momentum.

Source: Unity, Applovin, Tradingkey

AppLovin has become one of the most important companies in the gaming field. However, due to the lack of available user-level data, it is extremely difficult to operate advertising networks. If AppLovin acquires Unity, the merged entity will control the key nodes of the gaming industry chain. It can provide a complete software package, incentivize developers to integrate various tools and products, provide first-party data for AppLovin, optimize the AXON algorithm, and achieve an improvement in advertising ROI. As the revenue and profitability of AppLovin's monetization solutions increase, they can reduce the prices of Unity's game engine and analytics to encourage developers' adoption.

In fact, in 2022, AppLovin proposed an all-stock acquisition of Unity for $17.5 billion, but it was rejected by Unity's board of directors. If Unity had accepted the offer at that time, calculated based on a 55% equity ratio for Unity's shareholders, the current value would exceed $50 billion. However, Unity's current market value is only $8.6 billion, and the prospects for Unity's independent development are not clear enough. If it were to be acquired, it could provide a high-premium exit channel for its shareholders.

Financials and Valuation

Judging from the performance in the latest financial report for 2024, Unity's loss in Q4 began to narrow, with cost optimization achieved, and its annual profit was better than the consensus This was mainly driven by strong seasonal demand and the improvement in product performance. However, the management's guidance forward is relatively cautious, predicting that the revenue in Q1 2025 will decline by 5% YoY, reflecting the cost growth during the advertising transition period.

The management has positioned 2025 as a "transition year for transformation." It aims to restore the company's growth mainly through raising the price of the Unity 6 engine, penetrating industrial scenarios, and implementing the AI advertising platform Vector. Considering the chance that Vector can replicate the growth path of AppLovin's AXON engine, the company still faces a lot of technical difficulties and capital pressure. If merging with Applovin, Unity shareholders can achieve an equity premium of around 100%. However, considering the public statement of the newly appointed management that "technical stability comes first," the company would probably achieve slow growth through internal development to prove its own value.

From the perspective of valuation, since its listing, Unity has had difficulty in making a profit. Its EV/Sales ratio is only 5.4 times, which is much lower than the industry average level, and it is also at an extremely low level compared to its own historical quantile. In 2025, if we predict that the global game advertising business will recover and the company's AI commercialization progress will slowly resume, then Unity's valuation will be just as the pessimistic scenario levels of peers (such as Altair and ANSYS). This means that there is still a upside space of 15-20% in 2025 compared to the current market price ($17 per share).

Source: TradingKey, Refinitiv