Unity (U.S.) shares plummeted after Goldman Sachs Group, Inc. cut its target price to $20.5. Is the value of the dominant mobile game engine overestimated?

Goldman Sachs Group, Inc., a financial giant on Wall Street, recently released a research report stating that Unity Software Inc. saw its stock price soar by over 30% after announcing its performance, highlighting market optimism that the company will continue to achieve strong revenue in the mobile gaming engine sector. However, Goldman Sachs Group, Inc. emphasized that investors need clearer visibility on growth trends - especially in the absence of annual performance guidance and outlook, and strong evidence of revenue sustainability in the advertising business sector. Only then can Unity's valuation possibly surpass last year's overall valuation range. Therefore, Goldman Sachs Group, Inc. lowered Unity's 12-month target stock price from $21.50 to $20.50. In comparison, Unity's current stock price is hovering around $28, indicating that Goldman Sachs Group, Inc.'s analysts believe the market is overestimating Unity's actual value. Goldman Sachs Group, Inc. stated that the recent announcement of Unity's new advertising technology stack Vector may accelerate the turnover rate of this segment market in the second half of 2025 more than expected. However, this may put pressure on Unity's advertising business revenue in the next quarter, as technology migration may require a significant amount of time, such as Unity shifting resources to Vector. Additionally, considering the competitive environment, such as increasing competition with AppLovin and Epic Games, this is an important logic behind Goldman Sachs Group, Inc.'s skepticism about the sustainability of Unity's advertising business growth prospects. Goldman Sachs Group, Inc. commented in the report that in terms of the latest performance, Unity's 2024 Q4 financial report showed that strategic adjustments were beginning to show results. The Create business (i.e., game design engine business, revenue related to Unity game development engine is included in this business unit) saw a 9% year-on-year revenue growth (exceeding market expectation of 7%), while the Grow business (advertising monetization) grew by 2% (in line with market expectations). However, Goldman Sachs Group, Inc. stressed that the migration of the advertising technology stack Vector may put short-term pressure on overall revenue in the next quarter. Goldman Sachs Group, Inc. also stated that Unity's new CEO is refocusing on core business (engine, cloud services, customer monetization - such as through advertising business), strategically controlling new business investments (such as AI, machine learning, and expanding industry solutions), and achieving efficiency through cost structure optimization. Although the management's direction is correct, Goldman Sachs Group, Inc. believes that the effectiveness of strategic execution still needs to be observed, and the monetization capability linked to the advertising business will become a core strategic focus for Unity in the future. It is undeniable that Unity's game development engine technology moat, cross-platform deployment capabilities, and the Unity "development-monetization" closed-loop ecosystem driven by the game engine are its core strengths. However, attention should still be paid to the execution capabilities in the advertising business sector and the sustainability of advertising business revenue, as well as the increasingly fierce market competition from competitors like AppLovin, who focus on mobile advertising delivery systems. The game engine business remains Unity's core DRIVE, but the transformation of the advertising business will take time. Unity is a widely used cross-platform engine for game development, originally released in 2005 with the aim of democratizing game development and reducing development barriers. Over time, Unity has continually expanded its features to support multiple platforms, including mobile devices, desktops, consoles, as well as virtual reality and augmented reality devices. Cross-platform support is one of Unity's core competitive advantages, as it supports iOS, Android, Windows, macOS, PlayStation, Xbox, Nintendo Switch, and many other platforms, allowing developers to develop once and deploy to multiple platforms. Unity also provides powerful graphics rendering capabilities, including high-quality lighting, shadows, particle systems, and supports the development of 2D and 3D games. The built-in physics engine supports collision detection, rigid-body dynamics, etc., helping developers achieve realistic physical effects. The Unity Asset Store provides a large number of prefabricated resources and plugins, allowing developers to quickly access the materials and tools they need. Game engines are the core components of game development, providing basic functions such as graphic rendering, physical simulation, audio processing, input management, etc. They allow developers to focus on game design and logic implementation without having to build the underlying technology from scratch. Modern game engines typically use modular architectures for easy expansion and maintenance. For example, Unity uses a component-based design where game objects are composed of multiple components, each responsible for specific functions. Goldman Sachs Group, Inc. emphasized that as the world's largest mobile game development engine provider, Unity has achieved a closed loop of "development-distribution-monetization" (Create engine users directly use Grow advertising tools), and has also made significant breakthroughs in non-gaming areas. For example, digital twins, industrial design, and other non-gaming businesses grew by 50% year-on-year, with the revenue share of the overall Create business continuing to expand. Therefore, the combination of Create (development tools) and Grow (advertising monetization) forms a complete ecosystem, driving higher user retention rates for Unity (game engine users naturally convert to advertising customers). Regarding Unity's latest stock rating and target price, the report mentioned that Goldman Sachs Group, Inc. has lowered the target price from $21.50 to $20.50.The target price was lowered to $20.50, with a rating of "neutral". Goldman Sachs Group, Inc. stated that the latest target price is based on SOTP valuation, DCF, and acquisition premium, using a SOTP (42.5% weight) + DCF (42.5%) + acquisition premium (15%) model.Goldman Sachs Group, Inc. stated in its research report that although Unity continues to experience significant growth in its Create business, the transformation of its advertising business will take a long time. In addition, integration risks and market competition will lead to short-term downward pressure on the stock price. However, in the long term, the expansion into non-gaming sectors and the application of new technologies may bring growth opportunities. Therefore, the neutral rating is maintained, with a target price lower than the current stock price, reflecting Goldman Sachs Group, Inc.'s cautious stance. Despite the potential long-term synergies from Unity's acquisition of ironSource (a provider of growth tools for app developers and telecom operators), the integration has dispersed Unity's platform optimization resources, resulting in delays in product roadmaps and weakening competitive positions. In addition, the new advertising technology stack Vector is still in the early stages, and while the company has increased investment, the effectiveness of the investments needs to be verified. Goldman Sachs Group, Inc. stated that Unity's announcement to accelerate the transition to the new advertising technology stack Vector may drive further expansion of this business segment in the second half of 2025. However, the process of technology migration may put pressure on next quarter's advertising revenue and operating profit. While the market may appreciate the company's focus on core assets, investors need clearer visibility on the growth trajectory (especially in the absence of annual guidance) and evidence of the sustainability of advertising revenue before breaking through the previous valuation range. Fierce competition in the advertising business Goldman Sachs Group, Inc. pointed out in the research report that the increasing competition from advertising forces such as AppLovin, Epic Games, Facebook, Alphabet Inc. Class C, Microsoft Corporation, and 1st party technology is also an important factor affecting the sustainability of Unity's advertising business. In particular, AppLovin, a company that specializes in advertising marketing and mobile app technology development, has experienced explosive growth in demand for its online advertising marketing software solutions based on generative AI. AppLovin efficiently matches supply and demand in massive advertising auctions with high adaptability. The company provides a one-stop online advertising marketing platform for global enterprises based on AI technology, covering functions such as user outreach, traffic monetization, ad creative design, and marketing data analysis. Financial data shows that AppLovin's Q4 revenue reached $1.37 billion, a year-on-year increase of 44%, with a net profit of $599.2 million, an astonishing 248% increase year-on-year, earning $1.73 per share, well above the market's expected $1.26. According to the financial report, the company's ad-related business revenue in the fourth quarter surged by 73% to nearly $1 billion. AppLovin provides AI-driven advertising software, and the management emphasized that improvements to its advertising AI big models are still in the early stages, aiming to achieve more personalized ad delivery modes in the future. AppLovin's management also has strong performance expectations, projecting first-quarter revenue in 2025 to be between $1.355 billion and $1.385 billion, surpassing the market's expectation of $1.32 billion, with over $1 billion expected to come from its advertising business sector. AppLovin, known as the "AI super bull stock," has shown stunning performance worldwide since 2024, with a staggering 700% increase in stock price for the whole year of 2024 and a further 30% increase since 2025, leading the entire U.S. stock market with a far higher gain than AI chip leader NVIDIA Corporation.