Why Unity Software Stock Keeps Going Up

Globe and Mail

6 days ago

Key Points
Four separate analysts have recommended buying Unity Software stock in the last 24 hours.
Morgan Stanley has the most interesting advice, recommending the stock, but seemingly at a price substantially lower than it costs today.
Unity stock really is quite expensive for its growth forecast.
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More and more analysts are unifying behind a bull thesis on Unity Software (NYSE: U). Shares of the graphics software company rocketed 14% yesterday after Jefferies raised its price target to $35.
Today, three more analysts are chiming in on Unity -- and the stock is up 10.8% through 9:55 a.m. ET.
Valuing Unity stock
In a trio of notes this morning, UBS raised its price target on Unity stock to $33, with a neutral rating; Wedbush raised its price target to $39 with an outperform recommendation; and Morgan Stanley ended with a good news/bad news note:
Morgan Stanley analyst Matthew Cost writes today on The Fly that he's seeing "marked improvement" with Unity Ads sales up 15% to 20%. Unity has "produced a fundamentally more competitive ad product," says Cost, that's translating into tremendous sales growth.
Is Unity stock a buy?
But here's the weird part: Cost gives Unity stock an overweight rating, but only a $25 price target, which is below the $38 Unity stock costs today. So what's an investor to make of that?
Morgan Stanley might have made a typo, and meant to value Unity stock higher. Alternatively, what Cost might be trying to say is that Unity would be a buy... at the right price. And that's a sentiment I agree with.
With $308 million in trailing free cash flow and a $15.8 billion market cap, Unity stock now trades at a steep 51 price-to-free-cash-flow ratio. This seems expensive to me given most analysts forecast the company will grow FCF only about 26% annually over the next five years. But if you cut the stock's price 35% or so, to about $25 a share, $10.4 billion, or 33.5 times FCF, the valuation looks more attractive.
At that price, I might even buy some myself.
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