Unity Software (U) is piquing the interest of investors far and wide. The video game market is exploding in popularity during the pandemic, helping U reach new heights.

U popped from $68 in September up to $148.88. However, the stock has had a bumpy road to this point as just enough investors took profits off the table every couple of weeks to prevent U from reaching a metaphorical critical mass. This trend finally broke in mid-November when U began a rapid ascension from $110 to $167. Aside from a rise to $172 in mid-December, U has primarily traded sideways in recent weeks.

Is U worthy of a place in your portfolio? Below, we answer this question in an attempt to help investors gauge whether this high-flying video game stock is worthy of its gargantuan hype.

A Brief Look at U’s Business

This San Francisco-based gaming industry trailblazer was founded in Denmark back in 2004. U provides a cutting-edge platform that game developers use to create artificial worlds for gaming enjoyment. U’s technology sets the stage for game development and the subsequent production of video games played on traditional gaming consoles connected to TVs and those played on mobile phones, PCs, tablets, and even devices used for augmented and virtual reality gaming.

The Analysts’ Take on U

As noted above, U has skyrocketed since going public last year. The stock is currently trading about $15 away from its 52-week high of $174.94. Analysts have established an average price target of $122 for U. In other words, analysts believe U is overpriced at its current trading level of $148.88.

If U drops down to the average analyst price target of $122, it will have declined by 17%. However, it must be noted some analysts believe U will move higher. The highest of the ten analyst price targets set for the stock is $175. This figure is a mere six cents above the stock’s 52-week high.

U’s POWR Ratings

Analysts clearly believe U is overpriced at its current trading level. However, there is always the potential for the POWR Ratings to differ from the analysts’ take on a stock. Check out U’s POWR Ratings, and you will find the company has C grades in the Growth, Quality, Stability, and Momentum components. You can find out more about how U grades out in the POWR Ratings components of Value and Sentiment by clicking here.

Potential Catalysts for Change

Some video game industry analysts question whether video games can become significantly more popular in the quarters to come simply because the industry might have reached its short-term potential now that the new Microsoft (MSFT) and Sony (SNE) consoles have been released. Those who were curious about gaming had their opportunity to scoop up consoles and games during the pandemic. However, there is the potential for society to reopen in the months ahead, ultimately setting the stage for the masses to put down the video game controllers and resume life as usual.

Though some hit games such as Among Us were developed using U’s tools, the company’s engine is not credited with churning out one mega-hit after another. Rather, gaming companies are using the Unity engine to make a wide variety of games, many of which are played on mobile devices. The question is whether U’s engine will be leapfrogged by a competing set of potentially superior game-making tools in the near future.

There is also a question as to whether augmented and virtual reality games will finally take off. If AR/VR explodes in popularity in the year or two ahead, U will benefit as the company’s tools are used to make those seemingly futuristic games. However, AR and VR do not appear to be reaching a mainstream tipping point as of February 2021.

Buy, Sell, or Hold?

Hold. It is concerning that U is ranked 18th of 22 stocks in the Entertainment – Toys & Video Games industry. You can find out more about the publicly trading companies in the Toys & Video Games space by clicking here.

U has the potential to soar through the $200, yet it will likely take some time to do so. However, if U pulls back due to profit-taking or disappointing fourth-quarter earnings, it is worth a closer look at a lower price than its current trading level.

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U shares were trading at $132.51 per share on Friday morning, down $17.30 (-11.55%). Year-to-date, U has declined -13.66%, versus a 3.50% rise in the benchmark S&P 500 index during the same period.

About the Author: Patrick Ryan

Patrick Ryan has more than a dozen years of investing experience with a focus on information technology, consumer and entertainment sectors. In addition to working for StockNews, Patrick has also written for Wealth Authority and Fallon Wealth Management. More...

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