Has the turning point for Unity (U.US) advertising business arrived? Morgan Stanley is Bullish on three major engines driving valuation reassessment.

According to Zhitong Finance APP, Morgan Stanley has released a Research Report stating a Bullish outlook on the advertising business prospects of Unity Software (U.US). The firm believes that Unity’s strategic restructuring and technological investments over the past 18 months have significantly enhanced the competitiveness of its advertising products, which may indicate that the business is approaching a critical turning point.

Morgan Stanley pointed out that Unity’s advertising clients have recently reported significant improvements in their campaign performance, with installation and purchase conversion rates generally achieving an increase of 15%-20%, consistent with management’s statements in the second quarter Earnings Reports. Given that advertising clients are highly focused on the ROI, Morgan Stanley anticipates that if Unity continues to provide efficient technological solutions, advertising budgets will further tilt towards its platform.

The firm emphasized three major driving forces supporting this trend, which are still in the early stages. First, after nearly a year of development and testing, Unity’s new Vector advertising model was fully launched in May, demonstrating technical strength within just two months. With Unity’s scale, coverage, and leading position in the gaming engine space, the performance of Vector is expected to continue improving as advertising spending increases and model training accelerates.

Second, as a leading global mobile game engine, Unity has unique user behavior data and only started using this data for advertising targeting in the past 2-3 weeks, which aligns with the improvements reported by clients. As more real-time gaming data is input, the performance of Vector will further enhance.

Third, the adoption rate of Unity 6 is rapidly increasing, nearing 50% in the second quarter, with 80% of clients planning to upgrade. This not only could lead to subscription revenue growth for the Create department in the second half of the year but also provide richer data sources for Unity Ads, thereby enhancing the ROAS for advertising clients.

Regarding the competitor AppLovin (APP.US), Morgan Stanley noted that the company has recently seen strong growth in its advertising business, but at the same time believes that Unity’s recovery indicates that the market can accommodate a multi-win situation. If the Vector model can provide differentiated insights, the overall scale of the advertising market may expand rather than engage in zero-sum competition.

Overall, Morgan Stanley remains Bullish on Unity’s investment in its highly profitable advertising network Business and the utilization of its unique data Assets. Currently, the market is generally skeptical about Unity’s competitiveness in the advertising sector, which indicates a significant potential for growth in expectations and valuations. The firm maintains a Shareholding rating for Unity with a Target Price of $25, and suggests that under bullish scenarios, valuations could reach $40, corresponding to a 10% annual growth rate in the advertising Business.