---
title: "U: Vector Soars, Ad Biz Starts to Cash In"
type: "Topics"
locale: "en"
url: "https://longbridge.com/en/dolphin/post/44825244.md"
description: "Hi all, this is Dolphin Research. $Unity Software(U.US) delivered an almost flawless Q3, with core metrics beating and momentum strong.AppLovin also posted solid results. Together this suggests the mobile gaming ad market remains healthy, with leaders consolidating share.Unlike AppLovin, Unity’s beat came despite upbeat channel checks and already-elevated expectations, making the outperformance higher quality. However, in terms of multiple expansion..."
datetime: "2026-11-05T14:51:50.000Z"
locales:
  - [en](https://longbridge.com/en/dolphin/post/44825244.md)
  - [zh-CN](https://longbridge.com/zh-CN/dolphin/post/44825244.md)
  - [zh-HK](https://longbridge.com/zh-HK/dolphin/post/44825244.md)
author: "[Dolphin Research](https://longbridge.com/en/dolphin.md)"
generator: "portal-rs"
---

# U: Vector Soars, Ad Biz Starts to Cash In

Hi everyone. I'm Dolphin.

$Unity Software(U.US) delivered an almost spotless Q3, with all key metrics beating and momentum strong. Together with solid prints from AppLovin, this points to a healthy mobile gaming ad market and a winner-takes-more competitive setup.

Unlike AppLovin, Unity's beat came despite already constructive channel checks and non-trivial buy-side expectations. That makes the surprise higher quality.

That said, on valuation elasticity, AppLovin had been overly punished by sentiment and shorts, trading down to ~12x PE pre-earnings. It therefore has more room for a multiple reset vs. Unity.

**Specifically:**

**1) Ads smashed expectations**

Within Strategic, Grow revenue, driven by ads, rose 90% YoY and 31% QoQ in Q3. Vector grew 40% QoQ, well above the 21%–27% buy/sell-side range, reflecting faster adoption of the new D28 hybrid product launched in May and model lift from Runtime data.

By Q4, the ironSource exit will have been nearly three quarters behind us, offering a cleaner read on Unity's 'true external growth' beyond share capture from ironSource. Q4 guidance calls for Grow revenue of 515–520 mn, implying ~20% QoQ. **Vector typically runs above the segment average and management guides conservatively, so even a cautious setup implies >20% QoQ, reinforcing the high-growth trend.**

**2) Monetization up, profitability flipped to positive**

With Grow at 73% of total revenue, high-margin ads pulled company-wide profitability into the black. **On opex, the divestiture of ironSource and Supersonic reduced headcount costs and game UA spend, driving a sharp contraction.**

Q3 OP turned positive to 100 mn with a 16% OPM, and Adj. EBITDA margin reached 41%. Back-of-the-envelope, Grow's Adj. EBITDA margin likely tops 50%.

This step-up from portfolio reshaping is one-off in nature. Q4 guide implies a slight sequential uptick vs. Q3, effectively flat.

**3) Engine growth was meh, RPO rose QoQ**

If there's a blemish, it's the game engine. Create slightly beat in Q3, but Q4 guide missed, and growth drops back to single digits off a high base linked to the Unity 6 sales cycle.

**That said, RPO inflected up QoQ, with new bookings hitting a near three-year high.** My guess is price increases played a role. While the formal hike was announced early this year, Unity 6 debuted in Q3, so many prior contracts likely came up for renewal then. (To be confirmed on the call.)

The next leg needs a new product cycle, namely Unity 7, now in early beta with a formal release expected in Q1 next year. It also depends on when Spark, developed with Google, starts monetizing.

Still, the engine narrative faces headwinds. World models keep improving and pose AI substitution risk, likely retaining core customers but pressuring the long tail and limiting pricing power, so I am not embedding aggressive expectations and will watch post-launch bookings for Unity 7.

**4) Unity earnings call highlights**

**5) Key metrics at a glance**

**Dolphin's view**

In Q3, investor expectations for gaming ads were neutral at best. Some regions showed softer developer UA demand, and practitioners trimmed H2 ad budgets and kept 2025 growth expectations modest, adding spend mainly to offset rising CAC and support penetration.

Among major intermediaries, Meta and AppLovin lost share in Q3. **By Q4 to date, AppLovin has recovered, but Meta continues to lose share, while Unity has been gaining sequentially through Q3 and Q4.**

This explains why sentiment skewed cautious on AppLovin pre-earnings but more constructive on Unity. Both ultimately beat, but on the margin, AppLovin's case was a sentiment reset, while Unity's was additive.

**Unavoidably, as Vector keeps upgrading, competition between AppLovin and Unity will intensify in 2025. Unity's expansion has clearly provoked AppLovin:**

On Sept 28, AppLovin accused Unity of collecting MAX auction data via the Ad Quality SDK, seeking a temporary injunction and initiating arbitration. On Oct 1, the court denied the injunction and Unity rose 6.5% that day, and arbitration typically takes 6–12 months. **If AppLovin prevails, investors will question the source of Vector's recent outperformance.**

**For now, AppLovin's ROAS remains higher than Unity's, and Unity has work to do to catch up.**

**Another key question: how much of Vector's high growth is still spillover from ironSource?**

Since ironSource fully shut by end-Apr, Q3's 40% QoQ for Vector likely had a small positive boost from that. Most institutions downplay this and attribute growth mainly to D28 and Runtime-driven model lift.

Hence Q4 guidance is the real litmus test. If QoQ growth suddenly slows, it would imply Q3 still benefited meaningfully from ironSource share capture. Seeing Grow guided to +20% QoQ and an implied Vector growth of >25% put those concerns to rest.

**Unity's fundamentals are not flawless. The other leg, the Create engine, despite better new bookings in Q3, remains exposed to the AI substitution narrative in four areas:**

**(1) Frontier world models** that generate interactive scenes from text or images, with Google DeepMind's Genie 3 as a flagship reference.

The substitution risk for Unity's engine lies in gray-box prototyping, non-core scene rendering, and simple physics. We discussed this in detail early this year, and since then more frontier models have turned multimodal, such as World Labs by Fei-Fei Li and Tencent's Hunyuan world model, while yesterday's HY4.0 release already integrates some game editing features.

**(2) Coding agents from the frontier O&A pair building H5 or casual mini-games**, bypassing app engines, which primarily impacts Unity's long-tail indie developers.

**(3) AI asset generation** tools like Meshy and Tripo for 3D models and textures, substituting for some art outsourcing and Asset Store purchases.

**(4) Meta's Horizon Create 3D/VR engine tools** allow users to build 2D/3D games on Meta's engine via AI prompts, letting casual devs bypass Unity for creation and publishing. This is still early, and the ecosystem is not yet established.

**Facing a multi-front challenge, Unity is choosing to compete or partner case-by-case. On world models, the most immediate threat, Unity opted to partner rather than fight** — on Oct 7, Google launched Playground for natural language game creation, and Unity announced Spark, a browser-based creation product to be integrated into Playground this year.

Spark is a key step to broaden the creator base and lower creation barriers, while Google's ecosystem offers a large distribution channel. Initially, Spark will distribute via Playground, with Unity providing the asset store and runtime.

Given uncertainties, we remain cautious on the collaboration's near-term payoff. This is reflected in valuation adjustments focused primarily on lifting assumptions for Grow.

**We keep last quarter's SOTP and switch to 2027 estimates as the base:**

(1) Create to grow 5% to 684 mn and valued at 3x PS, or 2 bn, reflecting AI substitution risk. (2) Grow guided to 525 mn in Q4, +22% QoQ, and to average +5% QoQ through 2027 for 2.4 bn revenue (+50% YoY). With a 50% OP margin, 15% effective tax, and 20–25x P/E (above AppLovin's 15–20x during an inflection), that implies 20–25.5 bn.

<1–2> Sum-of-the-parts at 22–27.5 bn in mkt cap. The stock closed at 18 bn yesterday and opened at 20 bn today, implying 10%–35% upside.

**Dolphin Research on 'Unity':**

**Earnings season (last quarter)**

Aug 7, 2026 Trans: [Unity (Trans): Vector up 23% QoQ, profitability pulled forward](https://longbridge.com/en/dolphin/post/43245637)

Aug 7, 2026 review: [From AI gloom to ad breakout, Unity finally flexes](https://longbridge.com/en/dolphin/post/43252869)

May 8, 2026 Trans: [Unity (Trans): Q2 guide excludes potential Runtime lift](https://longbridge.cn/topics/40529679?channel=SH000001&invite-code=355628&app_id=longbridge&utm_source=longbridge_app_share&locale=zh-CN&share_track_id=93dc3d29-e885-4a99-a965-0fd2ce071484)

May 8, 2026 review: [Under the shadow of AI substitution, Unity is steadily climbing out](https://longbridge.cn/topics/40528998?channel=SH000001&invite-code=355628&app_id=longbridge&utm_source=longbridge_app_share&locale=zh-CN&share_track_id=cc1e058b-1d8b-4f37-9db3-605cc6a1d4a6)

Feb 12, 2026 Trans: [Unity (Trans): Vector up 70% YoY in Jan](https://longbridge.cn/topics/38688635?channel=SH000001&invite-code=355628&app_id=longbridge&utm_source=longbridge_app_share&locale=zh-CN&share_track_id=71d47742-1235-430d-a703-333a932b24f7)

Feb 12, 2026 review: [Down 30% overnight, who crushed Unity?](https://longbridge.cn/topics/38679781?channel=SH000001&invite-code=355628&app_id=longbridge&utm_source=longbridge_app_share&locale=zh-CN&share_track_id=3ab59576-eabd-4ae5-96ff-56abb76bbbb4)

**Hot takes**

Mar 27, 2026: [Unity Q1 pre-announcement review](https://longbridge.cn/en/topics/39567448?channel=SH000001&invite-code=355628&app_id=longbridge&utm_source=longbridge_app_share&locale=zh-CN&share_track_id=69247ab5-3aa0-463e-a84d-8038e519f016)

Jul 17, 2025: [Unity rally recap](https://longportapp.com/en/topics/31898990?invite-code=032064)

**Deep dives**

Jan 10, 2025: [Copycatting its way to cash: can Unity replicate AppLovin's 'money machine'?](https://longportapp.com/en/topics/26553047?invite-code=032064)

**Risk disclosure and disclaimer:** [**Dolphin Research disclaimer and general disclosure**](https://support.longbridge.global/topics/misc/dolphin-disclaimer)

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## Comments (1)

- **ah_head · 2026-11-05T15:30:00.000Z**: Thanks for sharing. I personally think it has great potential for the future.


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> **Disclaimer: This article is for reference only and does not constitute any investment advice.**