Motley Fool Hidden Gems Investing - Unity Soars and Airlines Could Be in Trouble

Episode Date: November 6, 2025

Matt Frankel, Tyler Crowe, and Jon Quast discuss: - Unity Software's strong progress toward a turnaround - Cancelled flights expected at 40 airports - Stocks on our radar Companies discussed: U, PINS, RCL, WM, AGM Host: Matt Frankel Guests: Tyler Crowe, Jon Quast Producer: Anand Chokkavelu Engineer: Dan Boyd Learn more about your ad choices. Visit megaphone.fm/adchoices

Tyler Crowe, Jr.: Unity software soars just before airlines get grounded. This is Motley Fool Money. Welcome to Motley Fool Money. I'm Tyler Crowe. Today, I'm joined by longtime Fool contributors, Matt Frankel and John Quast. Today, we're going to talk about airlines, or at least a little bit, because there's something that could be happening to airlines in the coming weeks that isn't exactly good news, basically, mostly tied to the government shutdown. We'll do stocks on our radar, as we always do on Thursdays. But first, we're going to talk about Unity Software, because yesterday, shares of Unity Software were up 18% after reporting third-quarter earnings that solidly beat Wall Street expectations and ended the company's

not-so-great streak of six consecutive quarters of year-over-year revenue declines. Now, it's been a little over a year since Matthew Bromberg took over as the CEO at Unity Software, and I think it's fair to say that at the time Bromberg came in, Unity wasn't exactly in great shape. Again, six straight quarters of declining revenues. Matt, I want to turn to you to start here, but it appears that the inflection point that Bromberg mentioned in the prior quarter on the earnings call, saying, we think everything's fixed and we're going to get back to it, it appears that inflection point actually came when he said it was going to. Yeah. Just a quick background on the turnaround. Unity, it was one of the most hyped stocks in

that 2021 pandemic era, when there were all these IPOs, they were all soaring. Then it came crashing down to earth, like a lot of them did. To be fair, it wasn't just market conditions. There were some poor decisions made by management regarding a new fee structure that was very unpopular. Ultimately, the company decided to make a change. It couldn't have made a better hire. It hired a guy named Matt Bromberg. He was formerly Zynga's chief operating officer, the mobile gaming company. He led that company's turnaround. Who better to lead a gaming company's turnaround. And so far, he's been making all the right moves when it comes to product innovation and providing excellent perceived value for customers, which is what former management

was missing. He had said in the second quarter that Unity is at an inflection point, like you mentioned. And the third quarter results do show that it's on schedule. Not only did it reverse its streak of year-over-year revenue declines, but they exceeded management's own expectations by a pretty big margin. Revenue grew by 5% year-over-year. As you mentioned, it had been declining. Adjusted earnings per share also grew by 5%. Free cash flow grew by 31% year-over-year. Management says that now, according to their guidance, they expect $485 million in revenue in the fourth quarter, which would represent a further acceleration to a 6% year-over-year growth rate. I'm a big fan of Unity right now, especially after these earnings. It's the clear

leader in game development and monetization tools. This is a rapidly growing market. Think about 20 years ago, who made video games? Nintendo, Electronic Arts, probably like five companies. Now, there's hundreds of thousands of people who could create their own video games. Big market, expected to double in size by 2030. Unity has a lot of potential in adjacent areas. It's already seeing traction in automotive applications. Toyota just partnered with Unity to develop its new interface. And its platform has a lot of potential robotics applications, just to name a couple. The numbers might not look fantastic at first glance. It's not profitable yet on a gap basis anyway. It's got single-digit revenue growth. But this

quarter represents excellent progress. With turnarounds like this, progress over perfection all day. That's what we're seeing here. In our pre-show meeting, we were yucking it up a little bit about Unity. John, you said that you had been an investor in Unity under the previous leadership and sold. I'm going to guess probably a little bit of the pandemic hype that didn't quite pan out. Now, considering how former CEO John Riccatello was unceremoniously shown the door and the precipitous decline in sales that came in the 2023 period, I think your decision certainly made sense at the time. But I do want to ask, with the changes that Bromberg has made and addressed in the past year, because he's been

in the CEO for a little over a year now. Do you think it's addressed the concerns you had at the time of your sale decision? How has your opinion on this company changed? Tyler, I am willing to change my opinion of Unity stock now. Yes. I want to start this answer with a high-level thought. Just a generality is that stocks that outperform over a long time period, generally, that's a good place to look for stocks that will outperform and vice versa, stocks that are underperforming over a long period of time. That's a good place to consider stocks that are going to underperform. Usually, there's a fundamental business reason that's driving that long-term outperformance or underperformance. Some of those fundamental business drivers are unlikely to change

unless there's a catalyst for change. When a new management team comes in, That is a good period that could result in a change in how they're doing business. And so, it's a good time to reconsider maybe your assumptions about the company and its outlook going forward. Now, specifically with Unity, and one of the reasons why I am willing to change my opinion here, its core competency, what it offers, as Matt was talking about, it's not just video games. This is 3D visual creation across multiple industries and applications, and by and large,

people do consider what it offers as a top-notch software product, and that's always been the case. It's always been right there, maybe not always considered by everyone the very top option, but among the top options always. So the product has been fine. It's just been a mismanaged business, and so new management coming in, that's a good thing. Specifically, Tyler, one of my top concerns with Unity was its liberal use of stock-based

compensation. I know that's a little bit not a gripping radio topic here, but just to high level, it peaked out around $650 million in stock-based compensation in a single year when its revenue was about $2 billion. That's just way too much. If you look over the last five years, Unity's revenue is up over 130%, but revenue per share only up about 50%. Now, some of that is due to acquisitions that it made along the way. But simply put, stock-based compensation needed to come down. Under Bromberg, it is heading in the right direction. I wouldn't say it's there yet. As Matt said, progress over perfection. It still has some ways to go, but it is going in the right direction. And I do appreciate that. And it could change the outlook of the company.

I think if we were to do a show just for us, it would be a whole show just on the good and bad of stock-based compensation. But I think we might put everyone to sleep if we were to do that. So, maybe for another time. Coming up next, airlines and what's going to happen with the shutdown. I think this is one of the rare instances where I hope that by the time you're listening to this podcast, the topic we're about to discuss is old news and you can actually skip the segment. But earlier this week, the Federal Aviation Administration announced it was going to reduce flights by 10% across the United States at 40 metro markets. This move comes as the impact of the government shutdown is sending larger ripples through our everyday lives, most notably through TSA agents and air traffic controllers. Cutting back on flights on both passenger and cargo airports is really never a good thing.

but it seems to cut extra deep right now because we're a few weeks away from America's busiest travel week with Thanksgiving. Of course, I think everyone's knee-jerk reaction is that this is lousy for airlines, right? I mean, everyone's going to move, and airlines are the obvious culprit. But Matt, when we were talking pre-show, you were like, yeah, there's way more we need to be considering about this. Yeah. Well, at first, this might not sound too bad to listeners. I mean, After all, there are nearly 500 international airports in the United States, and a lot more like the one I'm at next to, Columbia, South Carolina, which isn't an international airport, but is still pretty high traffic. This is only going to affect 40. It's largely going to hit

the major airports. It could set off a big ripple effect throughout the system. It's not just that 40 airports are affected. It'll affect me if I'm trying to connect through a major airport to get somewhere. It'll affect all kinds of smaller regional flights. And 10% of capacity might not sound like a lot, but many planes are already flying full these days. And especially as we head into the holiday season, like Tyler mentioned, it could cause a big disruption. So the airlines are an obvious industry to watch, but it could have a big impact on adjacent industries. So that is industries that are reliant on consumers' ability to travel. So cruise lines are one big example. Royal Caribbean, Norwegian just reported earnings this last week. They're expecting

significant cancellations if this drags on, because the boat isn't going to wait for you. You have to be able to fly to your destination to get on a ship. Hotels are another big one. The gaming industry, people have to fly into Vegas. If they can't do that, it hurts the gaming industry. Companies like Airbnb are things to watch as people have trouble making it to their destination. As you said, Tyler, hopefully this is old news by the time people are watching this. I thought the shutdown would have been old news a little while ago. I didn't think we would get to this point. And whatever side of the political spectrum you're on, I hope for everybody's sake the government gets their act together and decides to reopen sometime very, very soon.

Yeah, it is interesting. Here's what caught my eye, is Transportation Secretary Sean Duffy said that this actually hasn't ever happened before, that we haven't reduced flights due to an air traffic control thing. So that's kind of interesting. Anytime you hear, this hasn't happened before. And look, we're already at the longest government shutdown. So conventional wisdom says that we're closer to the end than the beginning. So maybe it doesn't go on very much longer and we go back to regular schedule program, but it is hard if you're an airline trying to, to manage what flights we have available, what we're selling, all that kind of stuff. It is very confusing if we have to reduce and then we go back to normal. It's,

it's a tough place to be for me more than anything else. And look, aside from the topic du jour, I think the leisure market is already an economically sensitive one that, you know, it's bound to have the ups and downs. I think that's, we all acknowledge that, but I don't think I'm saying anything too controversial here, but it, I think it's really another example of like why airline stocks in general are like lousy investments. Like it's a capital intense cyclical industry. It doesn't really have great margins because it's extremely competitive. and it seems to be beset by one disaster after another i feel like every few years we read like the industry's in a much better place because you know reasons xyz pricing you know algorithms and

things like that or you know what it like capacity is in a better place and that you know they're cheap stocks and it's got to be worth it because it's a better it's a better industry now i mean even warren buffett and his lieutenants at berkshire hathaway believed it in 2018 i think they bought half the industry. But right before that, then the pandemic happened. And it always seems to be something like that that cripples the industry, whether it was economic downturns, pandemics, terrorist activity, or in this case, air traffic controls and government shutdowns. There's always externalities that really throw a wrench in this industry. And I almost feel like your brokerage should have a... Are you sure you want to do this when you try to buy airline stocks

just for the simple reason that this has been the case for going on 20 years now. And to me, it's just another example of why airlines, at least for me, are not worth most investors' time. Tyler, you're hitting on some of the key reasons why I personally don't own any airline stocks. And listen, I know that here we are motley, so there are some very smart people who do own airline stocks, and I respect them. But when you think about the things that create shareholder value over time. Revenue growth is a big one, not a whole lot of opportunity for outsized growth in the airline industry. You look at profit margin improvement, it is a tough business to have a high-margin airline. Then on top of that, can we return excess capital to shareholders?

It becomes difficult when there are these recurring things that all of a sudden suck down on some capital. It's hard for me personally to identify an airline stock winner for the long term. It's also been a hard industry to disrupt. A lot of companies have said, I'm going to do this differently. Think of the Jet Blues of the world, the Spirit Airlines of the world. Some of those can work as investments until they don't. Look at Southwest. It was a great investment for a while. Then the model really stopped working. Like Tyler said, one disaster after another. There's one reason after another that airline profits just crash. I've never owned an airline stock. It's one of the few industries I've never invested in,

and I probably never will. Congratulations for Matt Frankel for one of the worst puns about talking airline stocks crashing. After the break, we'll do stocks on our radar. Okay. We didn't exactly have the most uplifting segment talking about airlines and government shutdowns, this last one. So, we're going to end on a little bit more positive note as we end our Thursday show here, and we'll do stocks on our radar. John, let's start with you. Yeah, thanks, Tyler. Today, I'm looking at Waste Management, ticker WM. This is a trash company, and I mean that in a nice way. I really like this company. It has some competitive advantages. When you look at what it does, it collects trash, it moves trash,

it recycles trash, it stores trash at its landfills. And specifically with landfills, over 260 landfill sites, that's more than anybody in the U.S., has 339 transfer stations. These are as of the end of 2024. And so, these are a lot of sites that it has. And really, it's a competitive advantage because if you want to compete with waste management and you want to open up your own landfill site, good luck. It's not an easy thing to get all the permits that you need and in the right place. It has all these sites, 99% customer retention rate. Why? Because trash needs to be moved, and there's only a couple of outfits that can do that. It recently acquired a company called Stericycle to do medical waste. You look at the aging population

in the U.S., that's a good thing. It's harvesting natural gas from its landfills. I really think that's a very interesting component of this business. You look over the last decade, this is a market beater over the last 10 years. It's only pulled back 20% once. That was briefly during the 2020 market crash. Right now, it's down 17%. Outside of the pandemic crash, this is the biggest pullback in a decade, what we're seeing right now. If you've been waiting for a pullback on one of the most dependable, recession-resistant, competitively advantaged businesses in the world, this pullback for waste management is historically about as good as it gets. any other week, you'd get the gold medal for puns. But Matt took it from the last segment.

But we'll get from there. I was going to say, Tyler's called a lot of my picks hot garbage. So, I'm going to jump into mine, which obviously me, I'm a little bit more niche. I'm going to go with Federal Agricultural Mortgage Corporation, more colloquially known as Farmer Mac, ticker AGM. This is basically the Freddie Mac or Fannie Mae of the rural development agricultural farm and ranch market. It's a business that hasn't exactly seen a lot of good news. We've seen a lot of talk about farmers struggling with exports to China, Argentina opening up and taking a little bit of market share in places like that. But despite all of that, Farmer Mac actually had It just reported its earnings this week, and it was surprisingly good. Net income was up 10%.

Its tier one capital ratios, because it has to report similar to a bank, is in great shape at 13.9%. Just announced a dividend at $1.50 a share. It hasn't changed it yet, but it has been growing its dividend about 10% annually over the past 10 years. I don't think that's going to change anytime soon. It's an incredibly well-run business for the simple fact that it has to be run in one exact way. It's a government mandate to run it that way. And because of that, it's a business I like a lot. 3.5% dividend yield and trading at nine times earnings. There's a lot for me to like about this one. Matt, what do you got? There have been several stocks this week that have just gotten absolutely hammered after earnings that are on my radar now. But one that I'm

Seriously considering adding to, even though it's one of my larger investments already, is Pinterest. Unlike some of the other earnings losers on my radar, Pinterest is suffering more from temporary issues, specifically the impact of tariffs on international advertising. Not any fundamental problem with its business. A lot of people don't realize how international Pinterest is. Over 80% of its users are outside of North America. That's a crucial part of the business. Tariffs are really affecting the ad market. The company ended the third quarter with really strong monetization and more active users than it's ever had before, and now trades for less than 14 times forward earnings despite a double-digit growth rate still. So, to put it mildly,

I don't think it deserved the 22% haircut the stock got, and I'm a buyer at these levels. All right. So, we got Pinterest, Farmer Mac, and Waste Management as we end our Thursday show. That's all the time we have for today. Matt, John, thanks for sharing your thoughts. As always, people on the program may have interests 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 provide for informational purposes only. To see our full advertising disclosure,

please check out our show notes. Thanks to producer Dan Poi for keeping us in line. For Matt, John, myself, thanks for listening, and we'll chat again soon.