Shares of Unity Software jumped about 15% on Thursday after Morgan Stanley noted that the company's ad customers are reporting rapidly improving returns.

The firm has an Overweight rating and a $25 price target on Unity's stock.

Analysts led by Matthew Cost said the company's customers are reporting rapidly improving returns and this leads them to believe that Unity's investments and restructuring over the past 18 months have produced a fundamentally more competitive ad product.

The analysts added that in recent weeks they have seen a marked improvement in the commentary from Unity's advertising customers and they believe that Unity Ads is delivering no less than 15% to 20% uplift on installs and purchases, i.e. the figures that management referred to at second quarter results.

"We would also reiterate that these advertisers are laser focused on ROAS [Return on Ad Spend] and we expect that U's ad customers will continue to move quickly to increase their ad budgets, as long as U's technology continues delivering stronger results," said the analysts.

The analysts highlighted three reasons why this could still be the early innings of Unity's ad inflection.

Firstly, Cost and his team said that after nearly a year of development and testing, Unity's new Vector ad model fully launched in May and after just two months we may be seeing the power of this technology shine through. Unity's scale, reach, and game engine leadership are unique assets that Vector is designed to fully leverage. As with all machine learning AI models, the analysts said they expect Vector's performance to only improve as the flywheel of more ad spend and faster training continues to spin up.

Secondly, Unity Ads just started using game engine data in July. Vector model is only as good as the data that drives its decision making. Unity's position as the leading mobile game engine in the world gives it access to data on consumer behavior that no other company can replicate and the analysts believe the company only started leveraging that data to target ads in the past two to three weeks.

The analysts noted that this seems to align closely with the improvement in customer commentary and they would expect Vector to continue improving, as it processes more and more runtime-level game data.

Lastly, Cost and his team said they believe Unity 6 adoption continues to grow strongly, as the company was already nearing 50% adoption at the second quarter results, and management noted that 80% of customers intend to upgrade. While this has the potential to drive a subscription revenue tailwind in the second half for the Create segment, it also has implications for Grow/advertising, according to the analysts.

Unity 6 brings new potential to integrate the data and sales motions across both segments. "In other words, more Unity 6 adoption likely also means more data for Unity Ads and stronger ROAS for U's advertiser customers," said the analysts.

The analysts said they remain fundamentally bullish on Unity's efforts to invest in its high-margin ad network business and leverage its unique data assets.

The analysts noted that there is still broad investor skepticism on Unity's ability to compete in advertising, "meaning there is significant potential upside to expectations and to the multiple the market will pay for U shares. To that point, we would point to our $40 bull case valuation as the potential next place for the market to focus."