I Bought Unity. Here's My Honest Case For It.
And the ways I could be completely wrong.
Let me start with how this actually happened.
I follow Gavin Baker pretty closely. He’s one of the sharpest AI investors I know of, and when I saw Unity show up as his second largest position, I didn’t just nod and move on. I went and did my own work.
This piece is me sharing that work — including the parts that make me nervous.
The GAAP Statement Will Scare You. Good.
Q1 2026: $347 million net loss. A 68% net loss margin. A cost-of-revenue line that somehow consumed 69 cents of every dollar Unity brought in.
If you stopped there, you’d never touch this stock. Which is exactly why the opportunity exists.
That $347 million loss contains $279 million in one-time impairment charges. Management deliberately wrote down the ironSource Ads Network — which they officially killed on April 30th — and the Supersonic publishing business they’re in the process of selling off. This wasn’t an accident. It was a controlled demolition of the legacy garbage that was masking what the real business can do.
Pull that out and you get $138 million of adjusted EBITDA on $508 million in revenue. A 27% margin. Up from 19% a year ago. Free cash flow of $66 million versus $7 million the same quarter last year.
The underlying business is improving fast. The income statement just doesn’t show it yet.
Two Businesses. One Confused Stock Price.
Here’s how I actually think about what I own.
Create Solutions is the game engine. Unity powers roughly 70% of the top 1,000 highest-grossing mobile games on earth. Developers build their games on it, and switching engines mid-project is like gutting the foundation of a building you’re already living in. Nobody does it casually.
Q1 2026 Strategic Create revenue was $154 million, up 15% year-over-year. The subscription base is growing. Unity 6 has hit 6.6 million downloads — up 50% from last quarter. Enterprise customers in automotive, manufacturing, and architecture are adopting it for digital twins and simulation work. This part of the business is steady, sticky, and honestly a little boring. I mean that as a compliment.
Think Autodesk in its early subscription transition years. High gross margins, captive customers, real switching costs. At maturity this is a 30–35% owner earnings business. Not flashy. Just durable.
Grow Solutions is where it gets interesting.
This is the Unity Ad Network, powered by Vector — their AI ad-matching engine. Strategic Grow revenue in Q1 2026: $279 million, up 49% year-over-year. Q2 guidance calls for $302–306 million, another 50–52% jump.
Four consecutive quarters of roughly 15% sequential growth. This is not a product in testing. It is in production and accelerating.
Why Vector Is Different From AppLovin
AppLovin is an incredible business. Genuinely. $835 million in net income in a single quarter. 60% net margins. One of the best-run companies in tech.
But here’s the thing: AXON, their AI engine, sits outside the games it serves. It reads device signals — phone model, battery level, time of day. It’s a brilliant outside observer.
Vector lives inside the game.
Because Unity built the engine that runs the majority of top-grossing mobile games, and because over 90% of developers have opted into Unity’s new data framework, Vector has access to something AXON structurally cannot get to: what’s actually happening inside the game loop in real time.
How many times did a player fail a boss fight before quitting? Do they prefer fast-twitch combat or slow strategy? What’s the exact tap rhythm of someone who spent $200 in another game last month?
Vector maps player psychology from behavioral data, not proxies. Once it runs its learning window on a specific game — roughly 10–12 weeks — it can identify the high-value players that drive the majority of in-game purchase revenue better than anyone else can for that game. On Unity-built games, it has a home court advantage that AppLovin can’t easily replicate.
That’s the moat. And it’s getting stronger with every game that goes through the learning cycle.
The Lottery Ticket Nobody Is Pricing In
This is the part that genuinely excites me beyond the base case.
Physical AI.
The next frontier in AI isn’t just language models — it’s training AI systems to understand and navigate the physical world. Robots, autonomous vehicles, spatial computing. And what do all of those need before they can operate in the real world?
They need to train in simulated environments first.
Unity’s real-time 3D engine is one of the most capable simulation platforms on the planet. NVIDIA is already using Omniverse for this. Apple is building spatial computing on top of engines like Unity’s. The industrial digital twin market — where Unity is already growing — is a direct on-ramp to physical AI infrastructure.
I’m not modeling this in my base case numbers. I’m not extrapolating a revenue line from it. But I own it as a free option that comes with the stock. If physical AI training infrastructure becomes a major market over the next decade, Unity is one of the two or three companies with the foundational technology to serve it. That’s not priced into a $29 stock that the market is still reading as a troubled ad-tech turnaround.
The Asymmetry That Made Me Pull the Trigger
Here’s the thing I keep coming back to.
Unity’s game engine powers 70% of top-grossing mobile games. Their current market share in mobile game advertising? Nowhere close to that.
That gap is the whole thesis.
A company with 70% of the creation market should, over time, capture a meaningful share of the monetization market for those same games. Vector is the mechanism. The data advantage is the fuel. The learning curves are already running.
Most ad networks fight over the same inventory with similar tools. Unity is the only one that owns the engine the games are built on. That’s not a normal competitive position. That’s a structural asymmetry that the market hasn’t fully priced in because Unity spent the last two years self-inflicting wounds — the 2023 runtime fee disaster, the ironSource acquisition mess — that buried the real story under a pile of operational chaos.
The chaos is being cleaned up. Quarter by quarter.
Where I Could Be Wrong
I own this stock, so I have an obligation to be honest about the ways the thesis breaks.
Vector growth decelerates faster than expected. 50% YoY growth is a product in hyper-adoption mode. At some point it mean-reverts. If that happens at $600 million in annual revenue rather than $1.5 billion, the math gets a lot less interesting.
AppLovin doesn’t stand still. They’re printing money and expanding aggressively beyond mobile gaming. The cash they generate funds R&D at a pace Unity can’t match dollar-for-dollar right now. Vector’s home-turf advantage is real — but so is AppLovin’s balance sheet.
Developer trust is still fragile. The 2023 runtime fee debacle left real scars. One more pricing misstep — particularly as Unity looks to monetize its data framework more aggressively — and you could see another developer revolt that sets Create back years.
Stock-based compensation is still too high. $77 million in Q1 2026 — 15% of revenue. This is real dilution. Real cost. Mature software companies run this at 8–10%. Until Unity gets there, the adjusted EBITDA number is flattering the real cash generation. Watch this number every quarter. It’s the single best leading indicator of whether the margin story is real.
My Honest Numbers
I run three scenarios. Here’s what I actually believe about the probabilities:
Bear case (Vector stalls, AppLovin wins): 15% chance. Terminal market cap ~$8.4B. Negative IRR from current prices.
Base case (Vector compounds, Create stabilizes): 55% chance. Terminal market cap ~$21.3B. ~12% IRR from $29.
Bull case (Vector dominates, physical AI optionality kicks in): 30% chance. Terminal market cap ~$44B. 30%+ IRR.
Probability-weighted, the expected entry price for a 15% IRR is around $27 per share.
At $29 I’m slightly above that. I bought my initial position and I’m waiting for a better price to add. Any quarter where the GAAP losses look scary and the stock sells off — which will happen, because most people won’t read past the net loss number — is potentially that opportunity.
Why I’m Staying In
Gavin Baker didn’t make this his second largest position because he read the adjusted EBITDA and liked the number. He saw what I saw: a company with a structural data advantage in mobile game advertising, a durable engine business underneath it, a CEO who has real money on the line at $35, $50, $60, and $75 stock hurdles, and a physical AI optionality that nobody is modeling.
The market is pricing Unity as a troubled ad-tech company with a messy history.
I think it’s a platform business in the early innings of figuring out what it actually is.
One of us is going to be right.
I own shares of Unity ($U). This is not investment advice — do your own work and size your positions accordingly.