Unity Software (NYSE:U) shares took a hit after HSBC lowered its rating from buy to hold, citing concerns about the company’s current valuation. The downgrade sparked a sharp drop in the stock price yesterday.

Unity’s share price has had a bumpy ride recently, with the HSBC downgrade following closely after other big moves like the launch of its AI Council and a new global alliance with Globant. These developments have kept attention on Unity, but the recent caution from analysts has led to faded momentum, reflected in its modest 1-year total shareholder return of 0.89% and a share price still below past highs. Still, the company’s focus on innovation and partnerships keeps investors watching for a potential turnaround.

If the shakeup at Unity has you scouting for other promising software and tech names, now’s the perfect time to discover See the full list for free.

With shares under pressure and analyst opinions divided, investors face a crucial question: Is Unity undervalued after its recent drop, or is the market already factoring in all future growth prospects?

Most Popular Narrative: 1.6% Overvalued

Unity’s last close price of $39.10 is slightly above the narrative's fair value estimate of $38.48, suggesting limited upside unless the company can outperform expectations. According to andreas_eliades, this outlook hinges on Unity’s ability to leverage its industry standing and diversify revenue.

Unity’s increasingly diversified revenue streams in non-gaming sectors decrease its riskiness and bolster its long-term growth potential. Significant restructuring progress with the new management addressing past missteps is evident by the rollback of the controversial runtime fee.

Curious how reshaping Unity's business could ignite its next phase of growth? The narrative teases major shifts in revenue mix and leadership strategy. See the full breakdown to uncover the bold assumptions at the heart of this fair value.

Result: Fair Value of $38.48 (OVERVALUED)

However, rising competition in advertising and gaming, along with delayed growth forecasts, could present challenges for Unity's path to unlocking significant upside potential.

Build Your Own Unity Software Narrative

If you see the story differently or want to dig into the numbers yourself, you can build your own Unity narrative from the ground up in just a few minutes, and Do it your way

A great starting point for your Unity Software research is our analysis highlighting 2 important warning signs that could impact your investment decision.

Looking for more investment ideas?

Don’t wait while others move ahead. Supercharge your portfolio by tapping into handpicked trends. These fresh ideas could put you ahead of the curve.

• Boost your income potential by targeting these 19 dividend stocks with yields > 3% that consistently deliver high yields above 3% and help anchor your returns.
• Stay ahead of the AI revolution by uncovering these 24 AI penny stocks at the forefront of automation, data analytics, and intelligent technologies.
• Capitalize on deep value opportunities with these 910 undervalued stocks based on cash flows identified as trading below their true worth thanks to robust cash flow fundamentals.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.