Unity (U)

Interactive software platform Unity (NYSE:U) reported Q4 CY2025 results exceeding the market’s revenue expectations, with sales up 10.1% year on year to $503.1 million. On the other hand, next quarter’s revenue guidance of $485 million was less impressive, coming in 0.8% below analysts’ estimates. Its non-GAAP profit of $0.24 per share was 15.5% above analysts’ consensus estimates.

Company Overview

Powering over half of the world's mobile games and expanding into industries from automotive to architecture, Unity (NYSE:U) provides software tools and services that allow developers to create, run, and monetize interactive 2D and 3D content across multiple platforms.

The demand for rich, interactive 2D, 3D, VR and AR experiences is growing, and while the ubiquitous metaverse might still be more of a buzzword than a real thing, what is real is the demand for the tools to create these experiences, whether they are games, 3D tours or interactive movies.

Unity competes with Epic Games' Unreal Engine in the game development space, proprietary in-house engines at large game studios, and open-source alternatives like Godot. In the monetization sector, Unity faces competition from AppLovin (NYSE:APP), Digital Turbine (NASDAQ:APPS), and divisions of tech giants like Google (NASDAQ:GOOGL), Meta (NASDAQ:META), and Amazon (NASDAQ:AMZN).

A company’s long-term performance is an indicator of its overall quality. Any business can put up a good quarter or two, but many enduring ones grow for years. Over the last five years, Unity grew its sales at a decent 19.1% compounded annual growth rate. Its growth was slightly above the average software company and shows its offerings resonate with customers.

Long-term growth is the most important, but within software, a half-decade historical view may miss new innovations or demand cycles. Unity’s recent performance marks a sharp pivot from its five-year trend as its revenue has shown annualized declines of 8% over the last two years.

This quarter, Unity reported year-on-year revenue growth of 10.1%, and its $503.1 million of revenue exceeded Wall Street’s estimates by 2.2%. Company management is currently guiding for a 11.5% year-on-year increase in sales next quarter.

Looking further ahead, sell-side analysts expect revenue to grow 13% over the next 12 months. While this projection indicates its newer products and services will spur better top-line performance, it is still below the sector average.

The customer acquisition cost (CAC) payback period measures the months a company needs to recoup the money spent on acquiring a new customer. This metric helps assess how quickly a business can break even on its sales and marketing investments.

Unity is quite efficient at acquiring new customers, and its CAC payback period checked in at 30.4 months this quarter. The company’s rapid recovery of its customer acquisition costs means it can attempt to spur growth by increasing its sales and marketing investments.

For software companies like Unity, gross profit tells us how much money remains after paying for the base cost of products and services (typically servers, licenses, and certain personnel). These costs are usually low as a percentage of revenue, explaining why software is more lucrative than other sectors.

Unity’s gross margin is better than the broader software industry and signals it has solid unit economics and competitive products. As you can see below, it averaged a decent 74.2% gross margin over the last year. That means for every $100 in revenue, roughly $74.21 was left to spend on selling, marketing, and R&D.

The market not only cares about gross margin levels but also how they change over time because expansion creates firepower for profitability and free cash generation. Unity has seen gross margins improve by 7 percentage points over the last 2 year, which is elite in the software space.

Unity’s gross profit margin came in at 74.3% this quarter, in line with the same quarter last year. Zooming out, the company’s full-year margin has remained steady over the past 12 months, suggesting its input costs have been stable and it isn’t under pressure to lower prices.

Unity’s expensive cost structure has contributed to an average operating margin of negative 25.9% over the last year. Unprofitable, high-growth software companies require extra attention because they spend heaps of money to capture market share. As seen in its fast historical revenue growth, this strategy seems to have worked so far, but it’s unclear what would happen if Unity reeled back its investments. Wall Street seems to think it will face some obstacles, and we tend to agree.

Over the last two years, Unity’s expanding sales gave it operating leverage as its margin rose by 15.7 percentage points. Still, it will take much more for the company to reach long-term profitability.

In Q4, Unity generated a negative 21.2% operating margin.

If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.

Unity has shown impressive cash profitability, driven by its cost-effective customer acquisition strategy that gives it the option to invest in new products and services rather than sales and marketing. The company’s free cash flow margin averaged 21.8% over the last year, better than the broader software sector. The divergence from its underwhelming operating margin stems from the add-back of non-cash charges like depreciation and stock-based compensation. GAAP operating profit expenses these line items, but free cash flow does not.

Unity’s free cash flow clocked in at $118.7 million in Q4, equivalent to a 23.6% margin. This cash profitability was in line with the comparable period last year and above its one-year average.

Over the next year, analysts predict Unity’s cash conversion will improve. Their consensus estimates imply its free cash flow margin of 21.8% for the last 12 months will increase to 25.5%, giving it more flexibility for investments, share buybacks, and dividends.

Unity reported $2.06 billion of cash and $2.24 billion of debt on its balance sheet in the most recent quarter. As investors in high-quality companies, we primarily focus on two things: 1) that a company’s debt level isn’t too high and 2) that its interest payments are not excessively burdening the business.

With $408.8 million of EBITDA over the last 12 months, we view Unity’s 0.4× net-debt-to-EBITDA ratio as safe. We also see its $25.65 million of annual interest expenses as appropriate. The company’s profits give it plenty of breathing room, allowing it to continue investing in growth initiatives.

We enjoyed seeing Unity beat analysts’ EBITDA expectations this quarter. We were also happy its revenue outperformed Wall Street’s estimates. On the other hand, its revenue and EBITDA guidance for next quarter both missed, and this is weighing heavily on shares. Overall, this was a weaker quarter. The stock traded down 24.1% to $22.15 immediately after reporting.

Updated: February 11, 2026 at 7:20 AM EST

When considering an investment in Unity, investors should account for its valuation and business qualities as well as what’s happened in the latest quarter.

Unity isn’t a terrible business, but it isn’t one of our picks. Although its revenue growth was solid over the last five years, it’s expected to deteriorate over the next 12 months and its operating margins reveal poor profitability compared to other software companies.

Unity’s price-to-sales ratio based on the next 12 months is 6x. Investors with a higher risk tolerance might like the company, but we don’t really see a big opportunity at the moment. We're pretty confident there are more exciting stocks to buy at the moment.

Wall Street analysts have a consensus one-year price target of $45.74 on the company (compared to the current share price of $22.15).

Although the price target is bullish, readers should exercise caution because analysts tend to be overly optimistic. The firms they work for, often big banks, have relationships with companies that extend into fundraising, M&A advisory, and other rewarding business lines. As a result, they typically hesitate to say bad things for fear they will lose out. We at StockStory do not suffer from such conflicts of interest, so we’ll always tell it like it is.