Motley Fool Hidden Gems Investing - Are Unity and Zillow Resilient Brands?

Starting point is 00:00:00 What makes for a resilient brand? You're listening to Motley Fool Money. Welcome, Fools. I'm your host, Tim Byers, and with me are two of my Rule Breakers teammates, Alicia Alfieri and Rick Guinaras. Thanks for being here, Fools. We're recording on Thursday, February 12th, since you may be listening to this on the President's Day holiday. We had quite a week of earnings reports, especially for Rule Breakers companies. We're going to get into a couple of them a bit later, but we need to talk about the fifth trait of a Rule Breaker, and that is strong consumer appeal. What does it mean to have strong consumer appeal, and can it help to sustain business and stock performance in volatile markets like the one

Starting point is 00:00:50 we're in right now? I want to talk about this, Fools, and I polled the interbrand data. This is from the 2025 Interbrand Survey, the world's most valuable brands. There are some big names and some big numbers on here. I'm just going to give you top three. Apple, Microsoft, Amazon, no surprises there. But the Apple brand worth just about $471 billion. That was actually down 4% year-over-year. Microsoft, $388.5 billion. That was up 10% year-over-year. Amazon at $319.9 billion, and that was up 7% year-over-year. Let me ask you both. I've got more data on this, but I want to start you guys off. Alicia, I'll start with you. When you think about the fifth trait of a rule breaker, strong consumer appeal, what do you think about in terms of, maybe let's

Starting point is 00:01:44 call it a resilient consumer brand? What defines it for you? Yeah. Well, I think a resilient consumer brand is one that has a clear focus and has been able to build some kind of connection with the consumers through their experiences with the company's products or services. It makes me think of, you know, we used to think of strong brands, a strong consumer appeal with companies that make products, right? Like McDonald's. So it has fast, consistent food experience and your emotional connection with that brand can go back to when you got Happy Meals with your grandma on the weekends. Fair enough. I have a different McDonald's experience, Rick, but let's not talk about that. We don't need to bring up past trauma. But for you, let's talk about resilient consumer

Starting point is 00:02:37 brands. I'll give you another that I'm surprised that Alicia didn't bring it up, but brands where you know people are actually proud to display the brand so like chewy and the boxes that they deliver to porches everywhere across the united states and i see millions of people put pictures on the interwebs of their dog or cat like absolutely going nuts inside the empty box like not only do they love the stuff that's inside but then they like to get into the boxes and go wild yeah that's that's a great example of of a brand that gets free advertising uh just just by their products are out in the wild uh and you see it you see a lot of people with the mac stickers i mean you probably anyone that's gone through a lot of apple products you get

Starting point is 00:03:31 these little stickers and you're like what do i do with them well i'll put them on my macbook put them in my car and it's just free advertising and i think that's speaking specifically to apple I think that's a trait where not only is it that people are proud about it, they're willing to pay more for a product, even when there's a cheaper near-substitute available. Apple's a perfect example, like a Viking Cruises, where, hey, you're paying a lot for a river cruise. You can get a lot cheaper on the mainstream larger mega boats. They're able to do this. Just to backtrack to McDonald's, Tim, if you didn't get a prize in your Happy Meal, just go to the counter. They will give it to you. It does not have to be a lifelong trauma. I told you we didn't have to

Starting point is 00:04:08 bring up my childhood trauma. You got three Chicken McNuggets instead of four. I get it. They miscount sometimes. We're human. Forgive. I know. We can. Let's talk about some others here. It is very interesting to see. This is, again, driving from the Interbrand survey. I wonder, in the era of AI, can AI companies generate resilient brands here. Interbrand is telling me that Nvidia recorded a staggering 116% surge in brand value. That is the biggest in the ranking's 25-year history. I wonder, are there certain types of companies that lend themselves to strong consumer appeal? But when you're looking at rule breakers, maybe there's certain types of companies like, you know what, this fifth trade,

Starting point is 00:04:59 we're never going to be able to check it off because it's like a business to business or company or something like that rick what do you how do you think about that yeah i think the case of nvidia again so just maybe just a couple years ago the reason why i think it's gotten so it's not just because it's a mega cap right now with this monster valuation right now but a couple years ago unless you were like a diehard video gamer you didn't know nvidia and again for most people they still don't see nvidia it's not a consumer facing product that you see in your face Sometimes it's in your computer if you have a very high processing system. But what really has exploded is investors are excited about NVIDIA because it is power.

Starting point is 00:05:35 It's the undisputed AI chip leader in this whole AI revolution. So they're growing at a ridiculous pace for a company its size. And that is getting people excited about the brand and the company, even though most people have probably never bought an NVIDIA product knowingly. Yeah. Alicia, how about for you? When you think about strong consumer appeal, what is it that comes to your mind? Do you think that there are certain sectors that just are never going to have it, or do you look at it in every rule breaker you're evaluating for the service? I try to take a look at it for every rule breaker. There are some industries that are more tricky than others, but I think that you can have a strong brand within your specific

Starting point is 00:06:18 industry and customer group. As Rick said, unless you were a die-hard gamer, you might not have known about NVIDIA. But within die-hard gamers, that was a really strong brand already. And I think that speaks to how different companies can have different brand power. Yeah. I mean, it's a very interesting thing. I will say that in Rule Breakers, when we are looking at strong consumer appeal. We like to look at, and the definition that David gave to us is, is the brand truly valued by its buyer base? We have a couple of companies that are upcoming here in our next segment where we need to ask that question, fools. Up next, we're going to evaluate a couple of earnings reports that were, I don't know, maybe these brands are in a little bit of

Starting point is 00:07:07 a little bit of worry you're listening to motley fool money stay with us stop wasting your nights on a mattress that doesn't get you experience the most comfortable mattress in the world the sleep number smart bed at the touch of a button you can personalize your comfort choose firmer or softer adjust cooler to warmer and right now save up to twenty five hundred dollars during our massive Labor Day event. Hurry into your local Sleep Number store today, because we have your number. All right. Welcome back. You're listening to Motley Fool Money. Let's talk about a couple of earnings reports. These were, I'm going to say, not great. Rick, I'm going to start with one that you have followed for a really long time, and that is Zillow. Zillow had, well,

Starting point is 00:07:59 I don't know. You know what? Let me kick it to you here. What did you think about the earnings report on Tuesday the 10th, because it certainly didn't seem like it was one that the market maybe, I don't know, cheered a little bit. But what do you think here? Yeah, Zillow, I mean, the stock initially started to move higher, and then it just gave up. But I think specifically the Zillow, the report was, it's hard to find a lot of fault in the actual report. Revenue is up 16%. It's bread and butter residential real estate, up about 8%. Most of the growth that picked it up to double digits was strong growth for the rentals, on their mortgage financing business. These smaller parts of the business, even though rental is now almost a

Starting point is 00:08:45 quarter of the revenue. It's smaller business that's starting to pick up. But again, to see any kind of real estate-related company grow at a double-digit pace, which they did, and put out reported profitability, something it doesn't always do. And on an adjusted basis, obviously much better. So I think Zillow had a decent report. I just think sometimes it's not what you report, it's when you report. And Zillow just had that misfortune of reporting on a day when investors were willing to sell on any whiff of bad news. And also the fact that this real estate recovery that we keep saying is going to happen this year, this is going to be our year. We've been saying this for Zillow and the other real estate place for years. But again,

Starting point is 00:09:24 they're still the leader. You're talking about brand. It's hard to find. Zillow is the default setting when you're looking for a real estate play, when you're trying to looking for a home or looking to sell your home and see what your neighbor's houses are selling for. It is clear, it's transparent. There are several portals out there, including one owned by the actual real estate association, but Zillow is still the default. I think it's a great brand. I think the report, to me, and I don't want to say buying opportunity because that always seems like a cop out as if I'll win no matter what. But I think it was an overreaction on Zillow's part. I think the brand is still strong. And I think the business, once people start selling their homes again and

Starting point is 00:09:59 people start buying pre-owned homes again, is going to do pretty well. I mean, Alicia, there are some good numbers here. Rick is not wrong. I mean, the total revenue growth up 16%. That was for the full year. And the broader residential industry apparently only grew 3%. This is from AlphaSense and AlphaSense data. This is the Zillow earnings release. The for-sale revenue grew 11% and rentals revenue, this is relatively new for Zillow, was up 39% year-over-year to $630 million. That is extraordinary, especially since the overall industry grew around 14%. This does seem to be a brand that, despite some of its recent challenges and some of the challenges in the real estate industry. I think Rick might have it right here.

Starting point is 00:10:51 When you think about selling your home, Zillow probably occupies a place in your mind as one of those places you're going to go to first. Yeah, I agree. Zillow is ranked as the most trusted in the real estate category. It has the top-rated app and website for real estate in the and in 2025, there were roughly 9.6 billion visits to Zillow's apps and websites. 80% of the traffic to those apps and websites was direct. That means that people didn't go and research first to figure out where to look for homes. They just went straight to Zillow? They went straight to Zillow. I think that's pretty powerful. While the real estate market isn't the best right now, we can see

Starting point is 00:11:37 the impact of the brand on Zillow's results. You already talked about the fact that their revenue outpaced the overall market. That's pretty impressive. Considering that it's a tricky market, Zillow also reported $23 million in net income for the full year. That represents something like 0.89% margin. That doesn't sound like a lot, but it's an improvement over last year's $112 million loss. I think the ability to outpace the industry's growth and turn a profit in a less-than-ideal real estate market says a lot about Zillow as a brand and what it might be able to do when the housing market does finally turn around. All right. Give me a prediction here. Rick, I'll start with you. Given the strength

Starting point is 00:12:24 of the brand and where it is now as the housing market recovers, is this one an outperformer? Yes or no? You peg this to beat the market as the housing market recovers? Yes. Do you just want a yes? I can elaborate. I can elaborate for eight hours, but I'll just say yes. We got two stocks to do here. Yes is good. I'll say yes, yes and. Yes and. Alicia? Yes. I agree with Rick. Let's move on to Unity Software, ticker U. Incidentally, Zillow has two tickers, but you have ticker Z for Zillow, their primary ticker and unity is ticker just you um david used to like those he used to thought

Starting point is 00:13:05 that was indicative of a company that was so strong they could have a single you know a single letter as their ticker but i would say that unity um alicia did not make people very happy when they reported on wednesday of last week uh the headline numbers did show a beat but it it just doesn't there's something not quite right here. And incidentally, Unity has outperformed the market over the last year by about 34%. But what went wrong here? Yeah. Well, so, Unity's brand power is still there. So, revenues increased 2% in 2025, and that's partially because of their new AI-powered ad tool. Users were also renewing their contract, and there were price increases as well. So, that's potentially a good sign when

Starting point is 00:13:58 consumers like your new tool, they continue to use your platform or your services, and they're willing to pay a higher price. But here's where it kind of gets complicated. When we look deeper at revenues across geographies, we can see that revenues only increased for China and the Asia Pacific region. Revenues actually fell for the U.S. and other part of the Americas, as well as Europe, the Middle East, and Africa. So, we've got uneven growth. At the same time, China is a big market for video games. So it's promising that there's growth here. There's also a question of if this brand is still strong compared to other options out there, right? There are other competition in the form of Epic's Unreal Engine, which has the success of Epic Games' own portfolio

Starting point is 00:14:42 like Fortnite associated with it. And then I think with Unity, there's also another issue with how Wall Street thinks about Unity and its brand, and that's AI. For Unity, the threat of AI and even Google's Genie, which can make virtual worlds, is overblown right now. Remember, Unity can help developers create a whole new game and monetize it as well. AI can't do that yet. But it gives us another thing to really keep in mind. Brands and companies in general can be impacted by outside forces beyond their control, and it can change the perception of a company, at least for now, in the minds of Wall Street. Rick, I look at this company and it does play an important role. It's one of the two big gaming engines here. Management does say that

Starting point is 00:15:35 Unity 6, which is the most recent engine, seeing the fastest adoption rate of any version in company history. That sounds good. It does seem as though this is definitely trending towards more usage. I would also say, as you get more AI, let's call it AI-native gaming, this seems like a perfectly good opportunity for Unity. But where do you land here? The guidance came in at only $480 million to $490 million for Q1 of 2026, and that apparently was just a little too below the $494 million consensus. Is this just a perception problem, or is it a real problem? They said a lot of nice words. They said the whole vector, Unity 6, Create, it's all growing great.

Starting point is 00:16:34 Sounds like that's a wonderful word salad you've put out in front of me there. Yes. But when they say that, and then they say, hey, our guidance is going to come in a little low in the new quarter, to me, that's a reset. And again, in the quarter, I mean, Alicia, it was 2% for the year. It was 10% for the quarter, but revenue had declined 25% the year before. So, it's still far below where it was even two years ago. So, I do like the fact that it's turning around. But Unity, and again, I don't want to say it's a red flag, because I root for any company that fosters and nurtures of cottage industry, which is what they have done, create this whole platform that people are building games on. But to me, I just keep thinking of 2023,

Starting point is 00:17:13 when they rolled out this fee. And I don't even remember this, Tim, when they had this runtime fee and then developers were saying that they'd be charging, I think, $0.20 for everyone that downloads one of their games. And that was a substantial cost for developers, especially on platforms where they have access to a lot of different games. And they revolted. And Unity said, oh, oops, sorry. And so 2024 came around, it was supposed to come out. They retreated on that. They took that back. And to me, that was a sign of weakness. If Netflix said, hey, we're going to increase our prices and people scream and they say, oh, sorry, we're going to quickster this. We're going to go back like they did in 2011, 2012. That would be a problem. And to me, that

Starting point is 00:17:50 just always left a sour taste in my mouth. A company that would say, I love that they're listening to their developers and their customers, but I would have preferred if Unity would have a little more saying, hey, we're going to go through with this because this is our vision and see it through for our company. All right. Same question. Let's make a prediction here. It sounds like the Unity brand value is maybe a little less sturdy compared to Zillow. Alicia, I'll start with you here. Make a prediction. As this Unity 6 engine starts gaining more steam, gaining more traction, do you bet on Unity to outperform or not? Yes or no? I'm not sure. For context, yeah. I mean, I think that Unity's brand, it feels less strong

Starting point is 00:18:37 than Zillow's here. So, I'm going to go not sure to trending no. Okay. I'm going to take it as a no. I'm going to pin you down here. So, Rick, what do you got, yes or no here? I said a few negative things, but I'm going to say yes. I'm going to end this positively because, again, to me, while the stock has been up, and that includes, I mean, it took a big hit on Wednesday. As we're recording this on Thursday, it's also trading lower, so it's not recovering. But I think the fact that its business is improving. And sure, again, it reported at a terrible time, so the stock took a really big hit on Wednesday, and the follow-through, the sell-through continued on Thursday. But I do think that

Starting point is 00:19:15 it's going to be able to recover. So I'm willing to say that it can beat the market, just as it has over the past year. I think it can get back on track. Okay. Up next, preview for Tuesday's earnings. Emily Flippen's going to be back with some more earnings coverage. You're listening to Motley Fool Money. Keep it right here. All right, Fools, for Tuesday's show, we're still in development here, but we're going to have a lot more earnings coverage. Emily, maybe she'll be talking about toast, which is going to be, you know, we're recording on the afternoon of the 12th, so within a few hours, we're going to have some toast earnings, so maybe she'll be back with that. But please stay tuned. We're going to have

Starting point is 00:19:52 a lot more earnings coverage on Motley Fool Money over the next days here as we wrap up this earnings season. Rick, Alicia, thanks for being here. Fools, as always, people on the program may have interest in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. All personal finance content follows Motley Fool editorial standards and is not approved by advertisers. Advertisements are sponsored content and provided for informational purposes only. To see our full advertising disclosure, please check out our show notes. Thank you so much for being here. Thanks to Alicia Alfieri and Rick Benares for their special insights today. Thanks to our producer Anand

Starting point is 00:20:35 Chakraborty and our excellent engineer, Dan Boyd. I'm your host, Tim Byers. We will see you again next time, Fools. Thank you so much for being here and for tuning in about Fool Money. Fool on, everyone.

Motley Fool Hidden Gems Investing - Are Unity and Zillow Resilient Brands?

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