Undervalued shares of Unity Software may rise by 65% ​​in the future

Key points

• Unity Software recently announced generative AI solutions, and Wall Street has responded positively.
• The company is showing impressive growth that is now likely to accelerate in the future.
• Unity stock could generate more revenue than most analysts are expecting from it right now.

Shares of these tech companies could soar after movements in the fast-growing generative AI market.
Shares of Unity Software (U) surged more than 15% on June 27 after the company announced a suite of artificial intelligence (AI) solutions, and some on Wall Street believe the stock still has room to go.

Based on estimates from 20 analysts working with Unity, the stock's median target price is $43, which is where it's currently trading after its last bounce. However, the price target at $66 suggests that Unity stock could rise another 52%.

It wouldn't be surprising if Unity beat that price target, given its impressive growth rate and the catalysts it sits on, especially in AI. Let's take a closer look.

AI can give a good impetus to the development of Unity

The buzz around AI has grown markedly over the past few months, thanks to the popularity of generative AI applications such as ChatGPT, Stable Diffusion, and the new AI-powered search engine Microsoft Bing. The technology is currently in its early stages of development and is expected to reach critical mass in the future.

Specifically, the global generative AI market is expected to grow by 32% over the next decade, generating $126 billion in revenue by 2031. This technology is expected to impact many industries, including video games. According to a study by Market.us, generative artificial intelligence (AI) revenue in games will be $7.1 billion by 2032, up from $922 million last year, with a 23% annual growth rate over the next decade.

This gives the company a good opportunity to accelerate its growth, as its game development engine Unity controls 30% of the market. Unity is known for providing a platform for developers to create real-time 2D and 3D content that can be used on smartphones, tablets, computers, gaming consoles, and augmented/virtual reality devices.

The company is now empowering developers with AI capabilities to create real-time 3D content through its Unity Sentis and Unity Muse platforms. Unity CEO John Riccitello believes these tools will help creators and developers become "10x more productive" and "help them bring their creations to life with interactive intelligence like never before."

Riccitello also adds that he expects AI to "revolutionize gaming," which explains why Unity is busy adding AI tools to its platform. What's more, the company has also launched an AI marketplace that "provides carefully curated solutions to accelerate AI game development and improve the gaming experience." The marketplace was launched with 10 AI-enabled solutions that developers can access to speed up the game development process.

The surge in Unity's stock indicates that the market is responding positively to these launches, and it's not surprising why this is the case given the significant revenue opportunities offered in this niche.

Solid growth could lead to healthy stock growth

While AI could indeed be a good catalyst for Unity's growth, the company has other amazing growth drivers that could help boost the stock. For example, Apple is using the Unity platform to build apps for its recently introduced Vision Pro headset, which will hit the market next year.

In addition, the Unity content development platform is finding use in other lucrative areas such as digital twins, a market that is expected to grow at 36% annually through 2030. A digital twin is a virtual representation of a physical object that is used to run simulations to obtain information. how an object will behave in the real world under different conditions.

This technology is being implemented in many industries such as energy, manufacturing, automotive and mechanical engineering. Unity capitalizes on this fast-growing area with its industry platform Unity, which provides enterprise customers with the tools to create digital twins. Overall, Unity Software has several drivers of growth that should help it sustain high levels of growth going forward. Not surprisingly, the company's revenues will grow rapidly over the next few years.

The chart above shows that Unity's earnings could jump to $1.44 per share at the end of 2025. Unity is currently trading at 117 times its forward earnings. Assuming that in three years the multiple drops to 50 and the company actually hits Wall Street's profit target, which is entirely possible in light of the discussion above, its share price could jump to $72.

This would mean a 65% jump from current levels, suggesting that investors who want to buy AI stock right now may want to consider going long Unity before it shoots up.