$U just posted its best quarter since the ironSource merger. Revenue beat. EPS beat. EBITDA beat. The stock dropped 34%.
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Welcome to the Unity paradox.
What Actually Happened
Unity reported Q4 2025 on February 11. The numbers were genuinely good:
| Metric | Q4 2025 | YoY Change |
|---|---|---|
| Revenue | $503M | +10.1% |
| Adjusted EBITDA | $124.9M | — |
| EBITDA Margin | 25% | Improving |
| EPS | $0.24 | Beat $0.21 est. |
| FCF Margin | 23.6% | — |
| Stock Comp | Down 19% | — |
| Cash | $2B+ | $690M notes refinanced |
Beat on revenue. Beat on EPS. Margin expanding. Stock comp shrinking. So why did the market nuke it?
The Guidance Problem
Q1 2026 outlook: $480-490M revenue and $105-110M adjusted EBITDA. Wall Street wanted $494M revenue and $112M EBITDA. Not a massive miss — but when you've already rallied 40% into earnings, "roughly in line" isn't enough.
The market wasn't pricing in a beat. It was pricing in acceleration. Unity delivered a solid quarter and a cautious outlook. That gap between expectation and delivery cost shareholders a third of their position overnight.
Vector Is the Real Story
Forget the headline crash for a second. Vector, Unity's AI-powered ad platform, is quietly becoming a monster:
- Up 53% since launch
- Three straight quarters of mid-teens sequential growth
- January revenue hit +72% YoY — a new all-time high
- Already 56% of Grow segment revenue
- On track for a $1B run-rate in 2026
This is the business that competes with AppLovin, Meta, and Google on mobile ad monetization. And it's winning market share. The ironSource legacy network is being wound down — that creates a ~$150M revenue headwind — but Vector is more than absorbing it at far better margins.
Create Is Stabilizing
The engine business that made Unity famous stopped bleeding:
- Create revenue: $165M, up 8% YoY
- Excluding non-strategic revenue: +16% YoY
- China surging +50% YoY
- Unity 6 seeing fastest adoption of any Unity version
The GDC reveal showed natural-language prompts generating full casual game prototypes. Combined with browser-based authoring, Unity is trying to expand from professional studios to millions of casual creators.
The AI Bear Case
Google's "Project Genie" launch spooked investors. The fear: if AI can generate game worlds from text prompts, does anyone need a traditional engine?
CEO Matt Bromberg's counter-argument is that AI world-builders lack the "determinism" professional games require. Fair point — for now. But the market is forward-looking, and the scenario where hyperscalers bypass traditional engines entirely isn't zero probability.
Unity powers roughly 70% of mobile game titles. If that moat erodes, the entire valuation framework breaks. The counter: Unity is embedding AI into its own tools faster than anyone else in the engine space. The question is whether that's enough.
Value Trap or Opportunity?
The bull case writes itself. P/S ratio around 6.7x on a business growing revenue double-digits with expanding margins. Vector on a rocketship trajectory. Stock comp dropping. $2B cash cushion.
The bear case is structural. Free cash flow margin dropped from 32% to 24%. Operating losses are still real (-21% margin). The ironSource shutdown creates near-term headwinds. And AI disruption isn't a theoretical risk — Google is building it right now.
Here's what makes this tricky: Unity's Q4 was genuinely strong. This wasn't a "beat on lowered expectations" quarter. Vector is a real product competing in a real market. But the stock was already up 40% heading in, and soft Q1 guidance gave sellers all the excuse they needed.
Bottom Line
Unity is executing on its turnaround. The product portfolio is stronger than it's been in two years. But executing and being investable aren't the same thing — not when AI disruption fears dominate every tech multiple and the company still can't post a GAAP profit.
If you believe Vector can hit $1B and AI authoring tools expand Unity's creator base, this is a gift. If you think AI engines will eat traditional game development within 3-5 years, this is a value trap catching falling knives. We lean toward the former, but we wouldn't rush in. Wait for Q1 numbers to confirm Vector's trajectory before sizing up.
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