Motley Fool Hidden Gems Investing - Profitability Predictions and Paramount Punches Back

Starting point is 00:00:00 Profits? Who needs profits? You're listening to Motley Fool Money. Welcome, Fools. I'm your host, Tim Byers, and with me are two of my teammates, Rick Munarez, whom I have served with on Rule Breakers for over 20 years now, and longtime Fool Sanmideo, who's with me allocating capital in the Supernova Odyssey portfolio, and that's been fun and frantic. Hopefully, you're both fully caffeinated because we got some spicy earnings to get to. Today, we're going to be talking about fiscal Q3, 2026 earnings from SentinelOne, ticker S, and from Snowflake, ticker S-N-O-W, and predicting which of these to, we'll reach gap profitability first, and ideally, when. So we're going to make some

Starting point is 00:01:03 reckless predictions here, and we want your reckless predictions too. Leave them in the comments below. We're also going to provide a Critics' Choice view of the Netflix Warner Brothers Discovery deal, which got a little bit spicier this morning as we are recording this. But let's start with earnings. So Rick Sandmeat, I'm going to give you some quick overviews on the SentinelOne earnings, there was some good stuff here. There was some strong growth, annual recurring revenue up 23% year-over-year to $1.05 billion. This is a company, remember, that competes directly with CrowdStrike. It is CrowdStrike's most direct competitor. They make endpoint security, meaning your device, your iPhones, your computers,

Starting point is 00:01:47 they protect those things. They do it with some AI here. Non-gap operating margins were decent, 7%. It was a 1,200 basis point improvement. The non-GAAP net income margin was 10%. So that was up 1,000 basis points. So some good stuff here. Revenue up 23% to $258.9 million. And emerging products, mostly AI products, now account for 50% of quarterly bookings. But the GAAP losses are big, Sanmeet. GAAP operating margin for the quarter was negative 28%, and the GAAP net loss margin was negative 23%. So, give me your take here. How do you look at this quarter and Sentinel-1 overall? Sounds like a very strong quarter in terms of their current revenue growth and their business fundamentals. Cybersecurity, there's a few major

Starting point is 00:02:44 players that i think you know are are really ramping up and and it's a very important industry that's very much needed and i don't think it's going to ever be a winner takes all kind of area so so um would like to would like to see i i can't anticipate them generating profits soon because it's just an area where they they have to invest in their business um and and continue to grow continuing to scale, continue to provide value to their customers. Profits may come much later down the road. Rick, let me get your take here, and I'll give you this. This is another of those companies that issues a lot of stock-based compensation, equivalent to 29% of revenue during the quarter. Is that worth it? Not worth it?

Starting point is 00:03:36 What do you think about this company? I think it's the price of admission if you're a tech company. You have to pay up with stock-based compensation. That's how you hire the best programmers and everything else you need to make the company run smoothly. And in this case, I think the report was solid. And again, yeah, stock-based compensation is a big reason why we're talking about non-GAAP profitability instead of non-non-GAAP, which would be GAAP profitability. But it is the kind of thing where you are seeing improvements. And margin-wise, they are getting better. It's SentinelOne, a lot like Snowflake. Five, six years ago, these companies were seeing doubling the revenue year after year. And now, it's slowed dramatically,

Starting point is 00:04:11 both in the 20-plus percent range now, a little more than 20% for Snowflake. But it is the kind of thing where I'm comfortable with where they are now, especially now that they're improving their finances. They are doing the things necessary to continue to grow, possibly stabilizing here at this level. As a growth investor, I'd love to see that. But I do think that, yeah, Gap Profitably is still many, many years away. And I did cheat. I did look at it up. Analysts don't see this happening for Sentinel once until 2032, which is a long time for that to happen. But I think investors will forgive that because as long as you're making growth and you're generating healthy free cash flow, which they are, I think everything will work out just fine for Sentinel and investors.

Starting point is 00:04:50 All right, let's pivot to Snowflake here. So similar story. This is an unprofitable company that has absolutely throttled the market year to date, Sanmeet. Stock is up, beating the market by over 66% so far this year. And the results were pretty good. Product revenue growth, 29%. Comes in at $1.16 billion. The remaining performance obligations, if you don't know what that is, think of it as backlog, $7.88 billion. That's big. That was up over 37%. percent. And the non-GAAP operating margin did expand by 450 basis points year over year and reached 11 percent. Give me your take here, and then I'll bring in some other stats here. But you follow this company, so tell me where you're at. Yeah, this is a classic case of fantastic

Starting point is 00:05:41 business, tough stock, because the business fundamentals just continue to improve quarter after quarter. They're continuing to announce strategic partnerships. Their pipeline is growing with RPO. It's surged 37%. So their business fundamentally... And they also signed a deal with Anthropic to create a software layer to their data, warehousing, storage, all that. So fundamentally, this business just continues to perform and execute. But it's a very high valuation stock. And because it's a very high valuation stock, they recently in the quarter reported some slowing guidance for revenue for the next quarter. So that doesn't look so favorably when you have such a high value stock that isn't executing to perfection. So

Starting point is 00:06:35 not too concerned because as a business, this company is performing phenomenally. Rick, I'm going to give you another bit of data here. Snowflake Intelligence, which is their enterprise AI agent, they've been investing a lot in AI. For those who don't know how Snowflake works, it's like Sandmeet said, it is an archival storage environment. They get paid more when customers put more data into the system and do stuff in the system. Snowflake Intelligence is the gateway to do more stuff with AI inside Snowflake. And Rick, being used by 1,200 customers, this is what Snowflake says, and it is now 50% of new bookings. So, how are you feeling about this company and its path to profitability? I like the growth. And again, investments in AI

Starting point is 00:07:27 sort of have to scare you away about profitability specifically, because these are heavy investments now for payoff long into the future. But I think it's the right move. I think you're seeing that kind of growth is impressive. The fact that it's so much part of a business model makes me excited in the fact that I see this company is, yes, Sandmeet mentioned growth may be slowing, and understandably so, but they have the cows in there. They are a leader in this whole data mining thing. And I do think that this is a company that will continue. As far as profitability goes, I also cheated. 2031 is when analysts see it turning profitable on a gap basis. Again, five, six years from now, it's a very long wait for investors. But I do think that especially

Starting point is 00:08:06 with Snowflake, which has even stronger free cash flow and a stronger free cash flow margin than SentinelOne, I do think that it's positioned well. And yeah, again, the company has not been the best of stocks sometimes, but I do think that it's a very important company that's not very well understood and not very even well known. It's not a household name. You don't go and see mainstream investors say Snowflake and they just looking out the window saying for Snowfall. This is a very legit company and doing a lot of things right well i mean snowflake is a household name just it's not the company that is the household name all right let's make a prediction here and rick i'm going to start with you because you brought us the the analyst predictions and i'm

Starting point is 00:08:48 going to summarize here you said analyst saying sentinel one gap profitability 2032 snowflake Gap Profitability 2031. Agree or disagree, Rick, where are you? Who gets there first to Gap Profitability? Yeah. So, the funny thing about analysts, even sometimes near-term expectations are out of whack. The further you go, it's more like trying to land a parachute into a tin cup down at the ground level. And so, I take no faith in that the numbers, the companies will change a lot. I think cybersecurity is going to continue to be a very important field uh and sentinel when they are improving uh this last quarter notwithstanding as far as a margin front i do think sentinel one will actually get there faster sooner uh than

Starting point is 00:09:33 snowflake but i think both companies will get there eventually but i don't think investors are going to punish them but again i against what i read i'm going with sentinel one all right i'm gonna agree with rick i think uh sentinel one will get there faster snowflake is kind of a um a slow burn that you know lately is gonna have like rick had said too you know this is one of those companies that they're going to make some big investments now. And then you're going to see way down the road, those investments paying off in cashflow generation that will be sustainable, but they have to build for that. Yeah. To be fair, we want your predictions, listeners, but I will say Snowflake has been aggressively saying, don't look to us for

Starting point is 00:10:19 profitability because it may never come. That's fine right there. That's, that's probably not right, but they are going full Amazon in this area. So it does seem like Sentinel one is likely to get there first. So if that matters to you, maybe that's one for your watch list. All right. Up next, is it Siskel and Ebert or Statler and Waldorf? We're going to go armchair critic over the netflix warner brothers deal you're listening to motley fool money all right fools by now we've uh we've all seen the news that netflix has agreed to buy warner brothers discovery uh ticker wbd netflix's ticker nflx in a cash and stock deal worth 72 billion by uh while also taking on a bit more than 10 billion in warner brothers debt um in light of the genre in which

Starting point is 00:11:13 this deal exists. We're talking about big screen entertainment here. We're going to play the role of critics and give a thumbs up or thumbs down on what we've seen so far and no promises, but we will try to be a bit more Siskel and Ebert than Statler and Waldorf. But you know what, Rick, if you want to yell from the rafters that this is terrible, I am not going to stop you. So why don't we start with you on what we've seen so far, and then we'll update folks on what we saw from Paramount this morning. Yeah. So, a very interesting development on that front. But as far as Netflix, I think I'm going to give it – can I give it two thumbs up? I forget if two thumbs up was what Cisco and Ebert both had there. I have two hands. I can give it two thumbs

Starting point is 00:11:53 up. To me, it's a smart deal. They have the largest installed base of premium subscribers, $302 million at the start of this year. Netflix no longer reports their subscribers, but revenue is still growing, so you know the business is still growing. Warner Brothers Discovery was about a third of that so i do think that this is a business that netflix will be able to take these properties the properties they keep uh and make them stronger and find new outlets for them i don't think they're going to get rid of the the hbo hbo max they'll just never name it terribly like hbo max did with the max name uh but i i think that they'll continue because i think that's another incremental revenue stream but not only are you taking your largest premium price streaming

Starting point is 00:12:30 service competitor at that pricing cat range in the mid-teens a month but you're also doing this in a case where you're prohibiting anyone else from buying Macs and getting that much stronger and catching up to Netflix. Netflix was always default cable to me. Now it's even more default default cable. If the deal goes through, sorry. Well, that's a big one. We're going to get to that in a minute here. But on the basis of what we know so far, Sandmeet, I mean, Rick's given it two thumbs up. Where are you on this? And remember, it's a $72 billion deal. It's a cash stock deal so netflix may be taking on up to 50 billion dollars in debt to do this deal there's going to be a complicated spin-off you know if this deal goes through they're going to

Starting point is 00:13:13 spin off what they are calling discovery global which will be some of the legacy media assets of warner brothers um what do you think here are you with rick you know when the deal was for when it was rumored i wasn't so hot on it you know i am a netflix shareholder it's been one of my biggest and best holdings i wasn't too hot on it as i started to think about it the announcement came out i'm going to say i'm going to give it one thumb up one thumb down and the one thumb up is more for the strategic reasons i think this puts them as the streaming media powerhouse like disney who at this point and down the thumb for just the fact that the financial burden is is onerous i They're taking on a ton of debt.

Starting point is 00:14:00 They have a relatively lower debt profile, a leaner, meaner kind of company. I always think of Netflix as that young, lean, mean upstart. They're not really that anymore. They're more of the dominant play. But it is a big financial commitment for something that you can't have one without the other. So I'm just not, I'm not fond of the financial commitment, but you just kind of, you kind of have to have it if you want that dominance. All right. Let me, let me give you, I'm going to give you a wrinkle and you tell me whether or not this convinces you to go two thumbs up. What if I tell

Starting point is 00:14:37 you that that Warner brothers or that discovery global business is going to be spun off and it's going to be spun off as a public entity. And because of Netflix's interest, that a hundred interest in that entity that they're going to get a rich payday let's say that payday in the equity they spin out to the market is 15 billion dollars and now they got a an extra bit of war with extra bit in the war chest there to decide to maybe pay down that debt early do some other things with it does that change your opinion it definitely helps and that gets my my thumb to go kind of sideways and go sideways okay heading towards up because um you know and look i i i also give it a thumbs up for the management team you know this is a seasoned very intelligent management team has

Starting point is 00:15:30 been around with netflix for a very long time i can't imagine they do something like this without having a very clear idea of how they're going to manage it all because they know what they have with netflix without warner brothers discovery they want to make sure it continues on so i i've always been fond of the management team yeah all right we got we got a two thumbs up and we got one and a half thumbs up let's talk about what happened this morning rick and then we're going to move on to close out today's show uh paramount sky sky dance announced a hostile bid they previously bid. They bid at least twice for Warner Brothers Discovery. Both those bids were turned down by the Warner Brothers board. Today, it's an all-cash offer that is a premium over what

Starting point is 00:16:19 Netflix has bid. $30 a share, roughly $108.4 billion. Paramount stock is on the rise. As we talked this morning, Rick, it was up more than 6%. Warner Brothers stock up more than 7%. percent. Paramount is ticker PSKY. Rick, reactions to this? It feels a little, I mean, it's getting spicy. I hate that Paramount stock went up when Netflix stock went down when they announced the deal last week. To me, this was like, well, there's no fairness here. But yeah, I think I see why Paramount's doing this. And again, it's an easy, not only is it more money, it's going to be very tempting for the Warner Brothers Discovery Board to look at this. First all, it's more money. So, that right away says, well, hey, you know, shareholder, you know,

Starting point is 00:17:08 we got to do right by our shareholders. And also, this is going to have a clear path to just clearing the regulatory, antitrust regulatory barriers. Even though Paramount Skydance just added Paramount just a couple of months ago, they're still not this monster that anyone's really scared of. So, I think this is the kind of thing that would definitely put Skydance, Paramount, and Warner Brothers, all three together in one company, would be very, very interesting, very very competitive uh and the money's coming from some uh they're not they don't have the money on their own they're getting just turning to sovereign wealth funds which i know seems like a weird thing but you know electronic arts had the same thing uh a couple months ago so we're

Starting point is 00:17:42 already used to this by now that sometimes you're getting international money with these deals uh but they're not doing governance uh you know to the actual thing so that's good uh yeah i i think it's it's an interesting thing i don't think this is the last word i hope this doesn't become a bidding war because then whoever wins will be a loser whether it's paramount or netflix but i'm really curious how this yeah definitely a story that was already interesting became much must watch tv right now okay yes or no sand meat will there be an ongoing bidding war for warner brothers discovery i don't think so i think that um paramount's going to try their hardest to to to get to get this asset which you know rightfully so they should but i think that netflix is going

Starting point is 00:18:25 to win out. And I think that even though there's a regulatory concerns, one thing I was reading through is, you know, the, the argument for, you know, it's just not about, it's not just about streaming dominance. It's Netflix is going to argue total, um, views, which, you know, you have YouTube in there and, or screen time views, I should say. And you have YouTube in there which is a dominant dominant eyeball generator i guess you could say for screen time so and they have their own share of movies and other things and a lot of the younger generation watches more of youtube in short form than they do of streaming so they might be able to win an argument there with the regulators in terms of that this isn't as monopolistic as they might

Starting point is 00:19:13 as people might think i got news for you pal it's not just the younger generation it's it's older folks, too, who are watching a lot of YouTube. All right. Up next, we give you the preview for tomorrow. You're listening to Motley Fool Money. All right, fools. On tomorrow's show, we've got a bit more on the Netflix strategy shift. They're going to go a little deeper, I am sure, on the Paramount bid. That'll be Emily Flippen, who has Jason Hall and Dan Kaplinger. They're going to go deeper on the merger, what it means for investor streamers, and how to evaluate. I think this is the thing you're not going to want to miss, listener, is how to evaluate mega mergers to determine whether they're accretive or dilutive. That's a big thing. A lot of big mergers do a lot

Starting point is 00:19:56 of damage and don't create a lot of value. So you're going to want to listen to that. They're going to be talking about what Netflix is actually buying, whether or not it's smart capital allocation and a framework for judging those mega mergers. Again, that's with Emily Flippen, Jason Hall, and Dan Kaplinger. But for today, thanks very much to Rick Munarez and Sam Miteo. 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 provided for informational

Starting point is 00:20:35 purposes only. To see our full advertising disclosure, please check out our show notes. That's it for today's Motley Fool Money. Thanks again to Rick and Sam Mead, our engineer as always. It's the incomparable Dan Boyd. Our producer is Anand Chakrabarty. I'm your host, Tim Byers. Thank you for listening. See you again tomorrow. Fool on, everyone. Thank you.

Motley Fool Hidden Gems Investing - Profitability Predictions and Paramount Punches Back

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