Unity Software's (U) better-than-expected Q2 earnings were driven by a 15% sequential growth in Unity Ads, Morgan Stanley said in a Thursday note.

"U posted a 2Q beat and 15% q/q growth in Unity Ads made it clear that the ad inflection has begun," the report said.

"We come away significantly more confident in earnings revisions ahead, as we raise '26/'27 EBITDA by 8%/19% and our price target to $40," the note added.

The report also said a similar inflection is possible in the Grow business in the coming quarter, with further catalysts ahead in 2026. It added that the optionality is only "partially reflected" in its Q3 forecast for the Grow segment.

"We are buyers of any tactical weakness," Morgan Stanley said.

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