Vector Doubles Its Growth Guide and Takes Unity Into GAAP Profit
Key Takeaways
- Vector reset Unity’s earnings base. The ad platform grew 40% sequentially against a 19–21% guide. Strategic Grow accounted for nearly all the sequential increase in strategic revenue, and management attributed Vector’s acceleration chiefly to more installs and higher player values.
- Unity delivered the GAAP profit it promised for Q3. Operating income reached $100.6M and adjusted EBITDA hit $256.6M at a 41% margin. The higher revenue base did more for profit than the one-time step down in the cost base after Supersonic’s sale.
- Create cleared the Q3 bar, but its growth outlook is lower. Strategic Create rose 11% year over year, above guidance, with just 4–6% growth expected in Q4. Agent access and Unity Spark could broaden usage, while our estimates now assume high-single-digit Create growth in 2027.
- Rating maintained at Outperform. Our standalone 12-month base value is $61 per share, about 25% above the $48.80 earnings-session close. We hold conviction at 7/10 given greater dependence on Vector and a downside of roughly one-third if growth and margins reset.
U financial model
Income Statement · Dollars in millions, except per share
| Income Statement | ||||||
|---|---|---|---|---|---|---|
| Actual | Estimate | |||||
| FY23 | FY24 | FY25 | FY26E | FY27E | FY28E | |
| Create Solutions Revenue | $859.2 | $614.0 | $621.4 | $654.2 | $714.7 | $779.0 |
| Grow Solutions Revenue | $1,328.1 | $1,199.3 | $1,228.2 | $1,445.0 | $1,635.7 | $1,881.1 |
| Total Revenue | $2,187.3 | $1,813.3 | $1,849.6 | $2,099.2 | $2,350.4 | $2,660.1 |
| Less: Cost of Revenue | ($733.7) | ($480.9) | ($477.7) | ($604.5) | ($367.2) | ($412.3) |
| Gross Profit | $1,453.6 | $1,332.4 | $1,371.9 | $1,494.6 | $1,983.3 | $2,247.8 |
| Less: Research and Development | ($1,053.6) | ($924.8) | ($929.5) | ($966.3) | ($953.9) | ($1,024.1) |
| Less: Sales and Marketing | (834.6) | (752.6) | (652.9) | (702.9) | (684.4) | (731.5) |
| Less: General and Administrative | (398.2) | (410.1) | (268.5) | (199.5) | (194.9) | (207.5) |
| Total Operating Expenses | ($2,286.4) | ($2,087.6) | ($1,851.0) | ($1,868.7) | ($1,833.2) | ($1,963.2) |
| Loss from Operations | ($832.8) | ($755.1) | ($479.1) | ($374.1) | $150.1 | $284.6 |
| Less: Interest Expense | ($24.6) | ($23.5) | ($24.0) | ($24.0) | ($14.0) | ($14.0) |
| Interest Income and Other Income (Expense), Net | 59.5 | 111.6 | 107.9 | 47.5 | 66.0 | 70.0 |
| Loss Before Income Taxes | ($797.8) | ($667.1) | ($395.2) | ($350.6) | $202.1 | $340.6 |
| Less: Provision for (Benefit from) Income Taxes | ($28.5) | $2.8 | ($6.3) | ($7.3) | ($21.2) | ($53.2) |
| Net Loss (incl. NCI) | ($826.3) | ($664.3) | ($401.5) | ($357.9) | $180.9 | $287.4 |
| Less: NI Attributable to NCI and Redeemable NCI | (4.3) | (0.2) | 1.3 | 0.7 | 0.0 | 0.0 |
| Net Loss Attributable to Unity Software Inc. | ($822.0) | ($664.1) | ($402.8) | ($358.6) | $180.9 | $287.4 |
| EPS — Basic and Diluted (as filed) | ($2.16) | ($1.68) | ($0.96) | ($0.82) | $0.40 | $0.62 |
| EPS — Diluted | ($2.16) | ($1.68) | ($0.96) | ($0.82) | $0.40 | $0.62 |
| Shares — Basic (M, weighted avg) | 380.5 | 396.0 | 420.9 | 439.5 | 453.7 | 466.4 |
| Shares — Diluted (M, weighted avg) | 380.5 | 396.0 | 420.9 | 439.5 | 453.7 | 466.4 |
| Ratios & Assumptions | ||||||
| YoY Total Revenue Growth | 57.2% | (17.1%) | 2.0% | 13.5% | 12.0% | 13.2% |
| Gross Margin % | 66.5% | 73.5% | 74.2% | 71.2% | 84.4% | 84.5% |
| Operating Margin | (38.1%) | (41.6%) | (25.9%) | (17.8%) | 6.4% | 10.7% |
| Net Margin (incl. NCI) | (37.8%) | (36.6%) | (21.7%) | (17.0%) | 7.7% | 10.8% |
| Effective Tax Rate | (3.6%) | 0.4% | (1.6%) | (2.1%) | 10.5% | 15.6% |
The full workbook adds 21 historical and 7 projected quarters, plus KPI Drivers · Balance Sheet · Cash Flow Statement — every subtotal a live formula, every projection traced to a driver.
Results vs. Consensus
Unity’s August outlook already called for a substantial acceleration. The size of the beat was most visible in adjusted EBITDA, where the company cleared its own ceiling by $66.6M. Total revenue and adjusted EPS also beat independently tracked expectations.
| Metric | Q3 2026 actual | Consensus | Beat or miss | Magnitude |
|---|---|---|---|---|
| Total revenue | $622.09M | $565.49M | Beat | +10.0% |
| Adjusted EPS | $0.44 | $0.34 | Beat | +29.4% |
| GAAP diluted EPS | $0.25 | n/a | n/a | n/a |
| GAAP gross margin | 82% | n/a | n/a | n/a |
| GAAP operating income | $100.65M | n/a | n/a | n/a |
| Adjusted EBITDA | $256.60M | n/a | n/a | n/a |
| Free cash flow | $219.71M | n/a | n/a | n/a |
Pre-print estimates clustered near $566–567M for revenue and $0.31–$0.35 for adjusted EPS. The beat holds at both ends of those ranges.
Against the August Guide
| Metric | Q3 2026 guide | Q3 2026 actual | Above the guide ceiling |
|---|---|---|---|
| Strategic revenue | $540–550M | $596.57M | $46.57M |
| Strategic Grow revenue | $380–385M | $431.50M | $46.50M |
| Strategic Create revenue | $159–163M | $165.07M | $2.07M |
| Adjusted EBITDA | $185–190M | $256.60M | $66.60M |
| Vector sequential growth | 19–21% | 40% | 19 percentage points |
The segment guide ranges were stated separately and their endpoints need not add to the consolidated range.
Year-over-Year Comparison
| Metric | Q3 2026 | Q3 2025 | YoY change |
|---|---|---|---|
| Total revenue | $622.09M | $470.62M | +32.2% |
| Strategic revenue | $596.57M | $374.89M | +59.1% |
| GAAP gross margin | 82% | 74% | +800 bps |
| Adjusted gross margin | 85% | 82% | +300 bps |
| GAAP operating income (loss) | $100.65M | ($125.86M) | Turned positive |
| GAAP net income (loss), consolidated | $121.59M | ($126.83M) | Turned positive |
| GAAP diluted EPS | $0.25 | ($0.30) | Turned positive |
| Adjusted EPS | $0.44 | $0.20 | +120.0% |
| Adjusted EBITDA | $256.60M | $109.50M | +134.3% |
| Adjusted EBITDA margin | 41% | 23% | +1,800 bps |
| Operating cash flow | $223.96M | $155.40M | +44.1% |
| Free cash flow | $219.71M | $151.29M | +45.2% |
Quarter-over-Quarter Comparison
| Metric | Q3 2026 | Q2 2026 | QoQ change |
|---|---|---|---|
| Total revenue | $622.09M | $546.47M | +13.8% |
| Strategic revenue | $596.57M | $486.41M | +22.6% |
| GAAP gross margin | 82% | 80% | +200 bps |
| Adjusted gross margin | 85% | 83% | +200 bps |
| GAAP operating income (loss) | $100.65M | ($32.22M) | Turned positive |
| GAAP net income (loss), consolidated | $121.59M | ($22.67M) | Turned positive |
| GAAP diluted EPS | $0.25 | ($0.05) | Turned positive |
| Adjusted EPS | $0.44 | $0.28 | +57.1% |
| Adjusted EBITDA | $256.60M | $160.19M | +60.2% |
| Adjusted EBITDA margin | 41% | 29% | +1,200 bps |
| Operating cash flow | $223.96M | $205.62M | +8.9% |
| Free cash flow | $219.71M | $201.96M | +8.8% |
Margin changes use the company’s rounded percentages.
Quality of Beat
- Revenue. Strategic sales rose $110.2M from Q2 while non-strategic sales fell $34.5M. Vector’s stronger quarter outweighed the runoff and was big enough to move both the strategic and reported growth rates higher.
- Margins. Of the $96.4M sequential EBITDA increase, $72.9M came from higher adjusted gross profit and $22.0M from lower adjusted sales and marketing costs. Cloud costs grew more slowly than revenue, and Supersonic’s sale accounted for most of the marketing savings. A full quarter without Supersonic helps Q4, but the next material margin gain depends on Grow volume.
- Earnings and cash. GAAP operating profit was already $100.6M before a $2.7M tax benefit and net non-operating income. Cash conversion lagged the EBITDA increase as a $140.2M use of cash in receivables more than offset a $72.0M contribution from publisher payables. We expect cash conversion to vary with collection and payout timing.
Segment Performance
Unity has one reportable segment. Strategic Grow and Create are revenue categories, with profitability disclosed at the consolidated level.
| Revenue category | Q3 2026 | Q3 2025 | YoY growth | Q2 2026 | QoQ growth |
|---|---|---|---|---|---|
| Strategic Grow | $431.50M | $226.77M | +90.3% | $328.96M | +31.2% |
| Strategic Create | $165.07M | $148.12M | +11.4% | $157.46M | +4.8% |
| Total strategic | $596.57M | $374.89M | +59.1% | $486.41M | +22.6% |
| Non-strategic | $25.52M | $95.72M | −73.3% | $60.06M | −57.5% |
| Total revenue | $622.09M | $470.62M | +32.2% | $546.47M | +13.8% |
Totals use unrounded figures. On the reported category basis, Grow Solutions rose 44% to $457.0M and Create Solutions rose 8% to $165.1M. The prior-year Create comparison includes non-strategic revenue.
Strategic Grow
Vector’s longer measurement window lets publishers bid for players who take time to generate revenue. Better forecasts of that value can bring more installs within an advertiser’s target return and earn Unity more of an existing budget. Management also cited model updates and infrastructure improvements. It attributed the acceleration chiefly to install volume and player value, which reduces the risk that the current growth came at the expense of publisher economics.
"Vector's growth was broad-based across customers, operating systems, campaign types and geographies. Our third quarter Vector outperformance was powered by highly effective model updates, major advancements in infrastructure efficiency and continued robust momentum in our Day 28 ROAS product."
— Jarrod Yahes, CFO
Assessment. Strategic Grow supplied about 93% of sequential strategic revenue growth and rose from 68% to 72% of the mix. The operating gains justify a higher revenue base. That concentration also makes future budget-share losses more consequential for consolidated margin.
Strategic Create
Higher subscriptions drove the reported increase while cloud and hosting revenue fell. In the strategic business, pricing and China remained the sources of strength. Q3 cleared the August guide and avoided the first single-digit quarter in the two-quarter deterioration test set in August. The new guide makes a return to mid-teens growth a less credible base assumption.
"For the full year 2026, Strategic Create is expected to grow by 9% year-over-year, and we expect similar levels of annual growth going forward, driven primarily by improvements in ARPU."
— Jarrod Yahes, CFO
Assessment. A roughly 9% framework supports a recurring earnings contribution from Create. A second source of growth beyond higher revenue per user would require more creators to turn usage into subscriptions, consumption, or meaningful services revenue.
Non-Strategic Runoff
Supersonic closed on August 4, and the filing disclosed $38.0M of net proceeds and a $4.5M gain. The ironSource Ads sunset was substantially complete in Q2. Management expects $5M of residual Grow revenue in Q4 and zero in 2027.
Assessment. The declining runoff narrows the gap between reported and strategic revenue. The smaller expense base is already visible in Q3 and leaves fewer large cost exits to drive the next leg of EBITDA growth.
Key Operating Indicators
| Indicator | Q3 2026 | Q2 2026 | Reading |
|---|---|---|---|
| Vector sequential growth | 40% | ~23% | August guide of 19–21% exceeded |
| Vector YoY growth | 126% | n/a | Growth on a larger base |
| Strategic Grow share of strategic revenue | 72% | 68% | Concentration increased |
| Top 1,000 Vector spenders sharing runtime data | 30% | n/a | New participation measure |
| Newly created project runtime opt-in | Above 90% | n/a | New-project coverage remains high |
| Stock-based compensation as a share of total revenue | 10.1% | 13.8% | Adjusted EBITDA reconciliation basis |
Key Topics & Management Commentary
Overall management tone. Management carried August’s confidence into the November call, but was more concrete about adoption and the expense bridge. It showed more caution when asked to turn individual model improvements or the new creation products into a forecast.
Runtime Data Reaches a Measurable Share of Top Spenders
Q2 established that runtime data had reached the models. Q3 showed how much of the top-spending cohort now shares those data. More behavioral coverage can improve player-value estimates and can eventually help developers tune live games, which could lift the value of an install before the publisher buys it.
"Our opt-in around runtime on newly created projects remains over 90%. Of the top 1,000 spenders on Vector, 30% are now sharing runtime data with us, and we expect this number to grow over time."
— Matt Bromberg, CEO
Assessment. Participation strengthens the data advantage thesis. We underwrite its economics through observable Vector growth because the sharing rate does not establish the incremental return or revenue earned from that data.
Agents Expand Creator Usage Before They Expand Revenue
The August thesis favored Unity as the engine that agents can operate, even if a third party provides the model. Unity’s command line and model-agnostic approach let developers keep their existing workflow and avoid committing to a single model provider.
"Over the past quarter, we've experienced a very sharp increase in the use of coding agents on the Unity platform."
— Matt Bromberg, CEO
Creator daily users increased 25% since early August. This is a platform engagement measure. The call supplied neither paid Unity AI adoption nor a new update on the scheduled Unity 7 beta.
Assessment. More users make the displacement risk easier to contain, while pricing remains exposed if agents substitute for editor seats. The forecast assumes Create grows from ARPU and leaves the contribution of new agent-driven workflows outside the base.
Spark Adds a Distribution Channel and a Compute Bill
Unity Spark pairs browser-based collaborative creation with the Asset Store and the company’s cross-platform engine. The Google partnership offers an upgrade path for casual Playground creators who want to build more sophisticated games.
"Spark will be in closed beta this year with a full launch in 2027, and we're excited about its potential to make a meaningful impact on our platform revenues in the years ahead."
— Matt Bromberg, CEO
Assessment. A nonexclusive route into Google’s audience improves Unity’s reach. The economics depend on how many users create and publish durable games, how much compute free users consume, and how frequently creators buy assets or services. A larger audience by itself can raise costs before it produces revenue.
GAAP Profit Changes the Underwriting
Q3 delivered the profitability milestone a quarter ahead of the original May timetable. The path from $256.6M adjusted EBITDA to GAAP operating income includes $76.7M of intangible amortization and $63.1M of stock compensation. The latter fell to about 10% of sales on the reconciliation basis, below the 15% benchmark carried into Q3.
"In the fourth quarter, we expect amortization expenses to step down to $50 million from the $77 million we recognized in the third quarter. Looking ahead to 2027, we anticipate a further step down of amortization expense to $15 million per quarter."
— Jarrod Yahes, CFO
Assessment. Amortization runoff improves GAAP earnings even at a steady adjusted margin. The $75M quarterly SBC outlook still consumes $300M of annual economic earnings, so the valuation allows for continuing dilution.
Capital Flexibility After the November Maturity
Unrestricted cash of $2.646B exceeded the $2.248B face value of the converts by about $399M at September 30. The November 15 maturity remains a cash repayment plan at this point. The filing also disclosed a conditional $100M AppsFlyer share purchase obligation and a $100M minority investment completed in October whose accounting remains under evaluation.
"We remain disciplined from a capital allocation standpoint and expect to pay off the convertible debt coming due on November 15 with cash on the balance sheet."
— Jarrod Yahes, CFO
Assessment. Paying the note from cash reduces gross obligations and leaves net cash broadly unchanged before other flows. The two investment disclosures narrow the amount of cash we credit in the equity bridge. We assume no buyback and keep the convert risk contained through the November payment and the larger 2027 maturity.
Guidance & Outlook
Unity introduced Q4 guidance at this release. The revenue and EBITDA ranges point to another step up on a larger base, even as the assumed Vector growth rate drops from Q3’s 40%.
| Metric | Q3 2026 actual | Q4 2026 guidance | Q4 midpoint vs. Q3 |
|---|---|---|---|
| Strategic revenue | $596.57M | $683–691M | +15.2% |
| Strategic Grow | $431.50M | $515–520M | +19.9% |
| Strategic Create | $165.07M | $168–171M | +2.7% |
| Non-strategic revenue | $25.52M | $5M | Runoff continues |
| Total revenue (Q4 implied) | $622.09M | $688–696M | +11.2% |
| Adjusted EBITDA | $256.60M | $290–295M | +14.0% |
| Adjusted EBITDA margin | 41% | ~42% | About +100 bps |
| Vector sequential growth | 40% | 21–23% | Deceleration |
Street comparison. At $692M, the implied reported revenue midpoint is about 15% above the roughly $601M pre-print bar. The strategic range implies 65–67% year-over-year growth, with Grow at 105–107% and Create at 4–6%. Adjusted EBITDA growth of 132–136% would keep pace with Q3’s 134% gain.
Guidance style. Q2 and Q3 both saw unexpectedly strong product improvements translate into much larger beats. Management builds the guide from current run rates, seasonality and expected releases. We use its Q4 midpoint and reserve another exceptional Vector quarter for upside. Create’s annual growth commentary and the 2027 expense inputs improve visibility, while consolidated 2027 revenue and margin remain open.
Analyst Q&A Highlights
How Much of Vector’s Acceleration Can Repeat?
The opening question distinguished the immediate drivers from what investors could carry into 2027. Management described daily retraining, better data and product changes, with periodic larger gains.
Q "So just -- I just want to ask about Vector, right, 40% growth sequentially and nearly twice the guide that you provided last quarter. So just digging a little bit more into the drivers of that outperformance. Was there maybe one particularly big unlock that you identified? And I guess as we look ahead to '27, how should we think about the durability of those trends?"
— Benjamin Black, Deutsche Bank
A "Now every quarter is not going to be a 40% quarter, but we're very confident about the healthy levels of growth going forward. And as you all have heard me say many, many times before, the way this business operates is we have incremental solid growth and then occasional step change functions. You probably heard me say that 1,000 times. We know the step change functions are going to happen. We just don't always know exactly when."
— Matt Bromberg, CEO
Assessment. The answer argues for carrying forward the revenue already won. It gives less support for forecasting when the next gain arrives. Our 2027 estimate assumes the Q4 Grow base holds after the holidays and compounds more slowly through the year.
Existing Budgets Versus New Advertiser Demand
Asked what the Q3 result made more predictable, the CEO clarified that he did expect durable growth based on the product roadmap. The CFO then distinguished advertiser onboarding from revenue growth.
Q "I know you mentioned you're not thinking about durability, but can you think about the predictability and visibility you have into the next quarters given the success you just saw?"
— Brent Thill, Jefferies
A "What I'd also add is that 90% of the growth that we experienced in the quarter was from existing advertisers. And so those new advertisers who came on board have just started to spend with us, and we expect that, that's a growth tailwind that we'll get."
— Jarrod Yahes, CFO
Assessment. Management also reported a 27% sequential increase in new advertisers. Existing advertisers drove the vast majority of growth even as more accounts tested the platform. Those new budgets can contribute as campaigns meet return targets, but the number of accounts alone gives little visibility into future spend.
How Management Sets Vector Guidance
The size of the beat prompted a direct question about how the company plans for product improvements.
Q "Jarrod, the magnitude of the beat within Unity Vector was quite big and surprising, I would say. Given that, is there any change to your guidance philosophy? Or was this quarter just some anomaly? Can you help us understand this?"
— Vasily Karasyov, Cannonball Research
A "The philosophy has remained pretty consistent since Matt and I joined. We go into the quarter. We look at a variety of inputs. We look at the run rates, we look at the seasonality. We look at the expected upcoming model enhancements and product releases. In certain quarters, the third quarter being a prime example of that, there are unforeseen step changes in growth."
— Jarrod Yahes, CFO
Assessment. The Q4 range includes expected improvements, so investors would need a stronger-than-expected release, model change or spending response for another beat on this scale. The range supplies a better near-term estimate than an extrapolation of the last two surprises.
Spark’s Compute Costs and Distribution
The question pressed on whether the free tier can support attractive margins at scale and what it takes to distribute what creators build. Management cited cross-platform deployment and outlined what it intends to learn during beta.
Q "One, how should we be thinking about the unit economics of that partnership, especially on the compute side of the equation and what that might mean in terms of incremental margins for your business if it scales beyond closed beta into much wider release. And based on what I read on the closed beta, how are we thinking about some of the frictions that have to be removed from closed beta to something wider in 2027 to broaden out the potential for distribution of creations made through the partnership?"
— Eric Sheridan, Goldman Sachs
A "And -- we haven't announced the pricing and the model of Spark, but it is going to be a mixture of subscription and advertising and some kind of a la carte purchasing. And so I was going to imagine a model in which you begin to play, you begin to build, it's free. And then at some point, you may hit a wall in which we ask you to engage with us in some way. Those -- but that's just a very high-level idea. Those levers will all be tweaked as we're in beta as we see the number of -- the amount of compute that folks need to create great experiences and where are the best and most optimal way is most satisfying way to engage those creators. So we will figure that out over time."
— Matt Bromberg, CEO
The CFO added a daily free allocation, potential consumption fees and ad inventory Unity would own and operate. Using existing Asset Store content and optimizing token costs could help the unit economics.
Assessment. The answer identifies ways to earn revenue and contain compute costs. Beta usage and paid conversion will determine whether those sources can cover the free tier. We carry no separate Spark contribution in our 2027 estimates.
Do More Creators Become Paying Customers?
The question asked whether the 25% increase in creator daily users and the 27% increase in new Vector advertisers could be connected through new creator monetization. Management cautioned against linking the two reported growth rates and described how Unity can remove a step in service adoption.
Q "It's probably too early to tie those 2 together, but maybe of that new daily user cohort, what are you seeing from a propensity to turn on monetization after they've kind of started to toy around with the idea of creation?"
— Dylan Becker, William Blair
A "In the new world, you say, hey, I want to build a game, great. We're going to build it on Unity. All the Unity services, including Vector and others are bound instantly at the moment of creation without you downloading or reading or any of the friction that used to happen in the old model, including, by the way, downloading Unity."
— Matt Bromberg, CEO
Assessment. Bundled setup could reduce the cost of acquiring a customer for the next service. It gives us a reason to watch the share of new projects that publish and spend. The call gave no paid conversion rate for that cohort.
What They’re Not Saying
- Vector dollars and budget retention. Growth rates, new accounts and a runtime participation measure still leave the absolute Vector revenue base and cohort retention undisclosed. That makes it harder to separate gains in advertiser budgets from higher wallet share.
- Creator monetization. There is no paid Unity AI cohort, Spark pricing or cost per active Spark creator. The quarter brought more evidence of usage and less reason to expect mid-teens Create growth, so the missing conversion data matters more.
- Consolidated forward economics. The Create and expense commentary helps with GAAP estimates, but management gave no consolidated full-year revenue or terminal-margin framework. With one growth driver setting the consolidated pace, the absence matters most for 2027 margin sensitivity.
- Partnership economics. The filing closed two of August’s disclosure gaps on Supersonic proceeds and the AppsFlyer commitment. Netflix economics and Unity’s prospective share of the Google-linked revenue remain undisclosed.
Market Reaction
- Pre-print setup. Unity closed November 4 at $42.46. It was down 3.9% year to date and 5.5% over 30 days, and up 0.2% over 12 months. The 52-week closing range was $17.13 to $49.47. The S&P 500 was up 12.3% year to date entering the print.
- November 5 regular session. Shares opened at $48.06, up 13.2%, traded from $44.82 to $49.49, and closed at $48.80, up 14.9%. Volume of 51.0M shares was 5.0 times the 30-day average. The S&P 500 fell 4.4%.
- After the close. Shares extended gains after reported acquisition talks involving a private equity and sovereign wealth consortium. Contemporaneous snapshots showed roughly 4% and later 6.6% gains in extended trading. The report described discussions, with no agreed deal reported.
The stock gave up some of its early premarket jump but finished above its regular-session open on a sharply down market day. The upside to the strategic revenue and EBITDA outlook is the strongest explanation for the session’s relative performance. The takeover story arrived separately, after the closing price used in our valuation.
Street Perspective
Some desks raised targets on stronger advertising estimates and kept positive ratings. Others also lifted their forecasts while retaining a neutral view. The difference is how much durability to credit after a quarter management itself found hard to predict.
Can Vector Keep Taking Advertiser Budget?
Bull view. Better prediction, deeper campaigns and early runtime participation can raise spend per advertiser while the newly onboarded accounts broaden the base.
Bear view. Most growth still comes from existing advertisers, and gains can slow sharply as the base compounds or competing networks match returns.
Our take. Advertisers increasing spend now gives the earnings revision firmer support than a thesis built on future logos. We favor the higher starting point and price a slowdown into the annual growth path.
Does AI Grow the Engine’s Economics?
Bull view. Open agent access and a route into Google’s audience make Unity more accessible to creators, while the engine’s deployment and live services give those creators a reason to stay.
Bear view. Agent-led work can erode the value of editor seats. A free creation tier can also pull compute costs forward well ahead of paid adoption.
Our take. The stronger distribution case reduces the risk of displacement. The Create guide and the unanswered pricing questions still make an ARPU-led high-single-digit revenue forecast the more credible basis for valuing the business today.
How Much of the Margin Gain Is Durable?
Bull view. More gross profit dollars, a smaller sales cost base and amortization runoff make the GAAP inflection repeatable on the current revenue base.
Bear view. Slower ad growth would expose fixed development costs and the cost of building the next set of products. SBC also remains a substantial claim on the value created.
Our take. The realized cost exits justify raising the margin assumption. A 41% full-year adjusted margin next year allows for more spending and less incremental leverage than Q3 delivered.
Our Estimates and Valuation
| Operating driver | August framework | November estimate or assumption | What changed |
|---|---|---|---|
| Strategic revenue growth | Mid-40s in H2 2026 and high-20s in 2027 | About 40% in FY2027 | Higher Grow exit rate with a slower 2027 sequential path |
| Strategic Create growth | Mid-teens underlying, with risk of slowing | About 8% in FY2027 | Q4 guide of 4–6% and roughly 9% annual framework |
| Adjusted EBITDA margin | Mid-30s by late 2026, higher thereafter | About 42% in Q4 and 41% in FY2027 | Higher gross profit and lower sales expense, with 2027 reinvestment |
| GAAP earnings | Profitable in Q3 2026 | About $1.58 diluted EPS in FY2027 | Lower amortization, with continued SBC |
From Q3 Actuals to FY2027
Our FY2026 estimate adds the Q4 guide midpoints to nine-month actuals. That gives $2.37B of reported revenue and $848M of adjusted EBITDA, or a 36% margin. Strategic revenue is about $2.20B, including $1.56B Grow and $646M Create.
For FY2027, we model $2.40B of Grow and $700M of Create, with no legacy revenue. Grow steps from the $517.5M Q4 guide midpoint to $530M, $570M, $620M and $680M through 2027. That allows for a slower start after the holidays and further wallet-share gains as models and products improve. It requires 54% annual Grow growth against a first-half 2026 base well below the Q4 exit rate, while the FY2027 estimate is 16% above the annualized Q4 guide midpoint. Create grows roughly 8%, close to management’s framework, without a separate forecast for Spark or Netflix. We expect a 41% consolidated margin as R&D and cloud investment absorb some incremental gross profit.
At $3.10B in revenue, 41% yields $1.271B of adjusted EBITDA. Subtracting $300M in SBC and $60M in amortization from management’s framework, plus our $35M depreciation and $20M allowance for restructuring and other operating items, gives about $856M of operating profit. With a 7.5% tax rate, roughly neutral net non-operating income on an if-converted basis and 500M diluted shares, we estimate about $1.58 of diluted GAAP EPS. The share assumption starts from the Q3 if-converted share count and allows for ongoing equity issuance.
12-Month Standalone Value
At $48.80, approximately 443.8M common shares and $399M of September net cash imply $21.3B of enterprise value. That is about 9.8 times trailing reported revenue, versus 9.3 times after the Q2 reaction, and about 18.2 times annualized Q4 guided EBITDA. On our FY2027 estimate, the closing enterprise value is 16.7 times EBITDA. Our August framework used a low-to-mid-20s forward EBITDA multiple. We use 22 times FY2027 EBITDA in the base case, within that framework. A 41% margin and roughly 40% strategic growth support the premium to today’s multiple on the same earnings base. Grow concentration and the potential for wider forecasting errors keep us near the low end of the prior band.
| FY2027 standalone scenario | Downside | Base | Upside |
|---|---|---|---|
| Revenue | $2.55B | $3.10B | $3.45B |
| Adjusted EBITDA margin | 35% | 41% | 45% |
| Adjusted EBITDA | $0.893B | $1.271B | $1.553B |
| EV / adjusted EBITDA | 16x | 22x | 24x |
| Diluted shares for equity valuation | 451M | 460M | 470M |
| Implied 12-month value per share | $32 | $61 | $80 |
| Return vs. $48.80, rounded | −34% | +25% | +63% |
We multiply scenario EBITDA by the stated multiple, add $200M of net cash and divide by the scenario share count. The net-cash allowance reserves the two disclosed $100M investment amounts and assumes no incremental cash build. It treats the converts at face value and the scenario share counts allow for equity awards and the value of conversion premiums net of capped calls. Those counts differ from GAAP’s full if-converted EPS denominator. We assume no dividend and assign no value to the reported talks.
The downside assumes Vector loses momentum, limiting Grow to $1.85B, and the smaller revenue base pulls margins back toward the FY2026 average. At 16 times, investors would be paying a lower premium for slower growth. The upside needs $2.75B of Grow and further margin gains from the current cost base. The $61 base value assumes a higher multiple than the market currently pays on our FY2027 estimate. At 20 times, a roughly $56 value still offers 14% upside, which we expect can beat the S&P 500 on a 12-month view. The prospect of a one-third drawdown on a plausible operating miss keeps conviction at 7/10.
Thesis Scorecard Post-Earnings
| Standing thesis point | Q3 test | Status and consequence |
|---|---|---|
| Bull 1 · Vector advertising inflection | Confirmed | ON TRACK. 40% sequential growth doubled the guided midpoint. A higher base enters 2027. |
| Bull 2 · Operating leverage and margin structure | Confirmed | ON TRACK. A 41% adjusted EBITDA margin and positive GAAP operating income exceeded the August setup. |
| Bull 3 · Create stabilization and vertical growth | Mixed | AT RISK. Q3 beat, but the Q4 and annual frameworks point below the former mid-teens case. |
| Bull 4 · Runtime data moat | Confirmed | ON TRACK. Top-spender participation provides a concrete adoption measure. We carry the benefit in Grow. |
| Bear 1 · Single-product growth dependency | Intensified | CONTAINED to EMERGING. Strategic Grow is 72% of strategic sales, with most Vector growth from existing accounts. |
| Bear 2 · Full valuation and multiple reset | Persists | EMERGING. Trailing valuation rose, but higher forward EBITDA sustains upside within the prior multiple framework. |
| Bear 3 · Convertible-heavy balance sheet | Contained | CONTAINED. Cash exceeds face debt and the November repayment is still ahead. The 2027 maturity remains. |
| Bear 4 · World-model AI disruption to Create | Contained | CONTAINED. Agent use supports the engine’s relevance, with paid conversion and seat economics still open. |
| Bear 5 · Governance, disclosure and visibility | Partly eased | EMERGING. Cost and capital disclosure improved. Vector dollars, monetization and consolidated forward guidance remain absent. |
Overall. The two earnings drivers we underwrote in August, Vector and operating leverage, strengthened together. Create’s lower growth framework makes the share of future earnings dependent on Vector larger than we expected.
Action. Maintain Outperform and add on weakness. Q4 delivery against 21–23% Vector growth and $290–295M adjusted EBITDA is the next test. We would revisit the rating if Vector falls below the prior mid-teens threshold as Create puts together two single-digit quarters, or if higher spending takes margins materially below our 41% FY2027 base. Paid creator adoption and stronger visibility into recurring ad spend could support greater conviction.