AI Is Helping Unity Software Now, But Could Cause Big Problems for U Stock Down the Road
Unity Software (U) reported superb third-quarter financial results recently, showing its first GAAP profit as a public company along with tremendous revenue and EBITDA growth. In the wake of the company's strong performance, some prominent Wall Street investment banks have become more bullish on U stock.
However, while artificial intelligence (AI) is proving to be a huge catalyst for Unity right now, AI could also become a major problem for the company in the longer term given its reliance on advertising. Consequently, investors with medium-to-long-term time horizons may want to avoid owning U stock until the impact of AI on advertising becomes clearer.
Excellent Q3 Results, Largely Thanks to AI
Excluding a small business that Unity is winding down, the company's total strategic revenue jumped 59% in Q3 versus the same period a year earlier to $596.6 million. Net income came in at $122 million versus a loss of $127 million in Q3 2025. Adjusted EBITDA also soared to $257 million, up from $109 million during the same period a year earlier.
Sales for the company's Vector business climbed 126% year-over-year (YOY) and 40% from Q2 2026. Utilizing data from games built with Unity's tools and the power of AI, Vector specializes in positioning ads more effectively. Speaking on the company's Q3 earnings call, CEO Matt Bromberg explained that AI was making it easier to create games, causing more games to be launched and in turn increasing demand for Unity's ad business.
The large amounts of data obtained by Vector allow its ad placements to be more effective. In other words, AI is enabling Unity to advertise games to players that they are more likely to purchase.
Could AI Eventually Harm Unity's Business?
Late last month, however, Alphabet (GOOGL) reported results that showed how AI is negatively impacting its traditional search business. Essentially, consumers are utilizing AI to find what they need instead of using the firm's search engine, which is its advertising cash cow.
In the same way that AI chatbots are eating into Google's business, they could also affect Unity's ad business. Similarly, there could be significantly less demand for the in-app purchase tools that Unity sells to game makers as the proliferation of AI agents reduces the need for ads.
Who Is Bullish on U Stock?
Pointing to Unity's strong Q3 results, Wedbush recently noted that the company is benefiting from a flood of new games. The firm believes that both Unity and competitor AppLovin (APP) can grow going forward. Wedbush increased its price target on U stock to $63 from $55 while keeping an “Outperform” rating.
Morgan Stanley, Needham, and Wells Fargo also each raised their price targets while keeping upbeat ratings on U stock. Overall, the optimism has helped shares soar 24% in the past five days, with Unity Software stock reaching a new 52-week high of $54.26 on Nov. 9.
The Bottom Line on U Stock
Unity Software reported excellent Q3 results, and its short-term outlook is quite positive. Nevertheless, because ads generate the vast majority of Unity's revenue, the company may be particularly vulnerable to the AI threat. In my view, that makes it a risky investment at this point.
On the date of publication, Larry Ramer did not directly have a position in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.