Motley Fool Hidden Gems Investing - Snowflake Has a Hot New Product

Starting point is 00:00:00 Snowflake has a hot new product. This is Motley Fool Hidden Gems Investing. Welcome to Motley Fool Hidden Gems Investing. I'm Jon Kloss filling in today for Tyler Crowe. That means that Travis Hoyum is filling in for me along with the Fool contributor, Matt Frankel. Musical chairs over here. That's all right. Listen, we have some news here for real estate and some acquisition news we're going to get to. But first, let's talk about Snowflake because this is an $80 billion company and it's up a whopping 37% today. This is, of course, the data management and analytics software company. And this was the hot thing when it first went public. And it is down about 50%

Starting point is 00:00:44 from its all-time high way back in 2021. This company was known for incredible growth rates, but the growth rate was just steadily declining. But here in this quarter, revenue all of a sudden jumped to 33% growth and management raised its guidance for the year. So all of a sudden we see a little bit of, wow, growth is maybe picking back up again for Snowflake. And what is interesting here is that the analysts were really curious, what is driving this surprise growth? And Snowflake's management crediting a new product that it launched during the quarter called Cortex Code or Coco. And that is what is really accelerating things here. So Travis, I just want to throw it to you. What is Coco and why do Snowflake's customers like it so much? Well, this is their

Starting point is 00:01:35 native coding agent. And in artificial intelligence today, coding and using AI for coding is kind of all the rage right now. So it's operating in plain language, gets a request, and then does work for the user. I think what kind of differentiates it for Snowflake is it lives inside Snowflake, so it can access all of the data that a business has on Snowflake. And in theory, that should make life a lot easier for developers, building agents, which is another one of those hot words in the market and other tools. I'll note that this is the kind of thing that almost every cloud company, you know, the big hyperscalers are starting to launch. So I don't know that this is necessarily a long term differentiator, but at least short

Starting point is 00:02:16 term, this is the kind of thing they got to put out. Well, it's interesting that you say that I do want to double down here a little bit with this Coco product. You know, these AI tools from Snowflake, these are what are driving the growth, but these are actually a little bit lower gross margin. Snowflake is known for an incredible gross margin, but these tools a little bit lower on the gross margin side. And what is also interesting is Snowflake doesn't own all of its compute. It relies on this from third parties, the cloud computing providers. And so when you're scaling with these AI tooling that are living in these cloud computing giants, where maybe you don't control the cost, that is kind of an interesting thing. So I know you, Travis, are always talking

Starting point is 00:02:59 about business models. And so when you think about the business models here, where do you want to be? snowflake is such an interesting company to look at because there's the story of the company and then you start to look at the financials and that's where the business model has to show up in the numbers and and i think you look at their their income statement is one of the strangest that i've ever looked at because it's incredibly long because they break out all these non-gap numbers and then gap numbers if you're not familiar with gap gap is generally accepted accounting principles if you're saying that your numbers are you're profitable non-gap god that's great. But the generally accepted accounting principles say that you're very, very unprofitable.

Starting point is 00:03:38 And the reason is they're spending a lot of money on compute. They just signed a $6 billion deal with AWS. They're using Amazon's custom chips. So who has the power in that relationship? It certainly seems like Amazon to me because Snowflake is not profitable, whereas AWS is. It's not only the compute cost, right? It's also the stock-based compensation that's coming in here at $400 million in the most recent quarter, 29% of revenue. So that is definitely something to watch. But Matt, I'm going to let you have the closing thought here.

Starting point is 00:04:07 We're going to loop you into the conversation. Do you agree with Travis here that you'd rather be on more of the hyperscaler side of the equation, or do you really like a company like Snowflake in this situation? Travis makes a really good point on Snowflake's profitability or the lack thereof.

Starting point is 00:04:23 And in full disclosure, I own Amazon in my portfolio, so there's a big case to be made for the hyperscalers. but I really can't deny that Snowflake's numbers look impressive. I mean, net revenue retention at 126% is something that's becoming more and more rare in the software space. The Amazon deal shows that Snowflake is seeing massive and long-term demand for its data products. And most importantly, the numbers are really showing that AI is becoming a tailwind, not a disruptive force for the business. So like I said, there's certainly a good case to be made for buying a hyperscaler, But I think I'd be inclined to take a closer look at Snowflake here. It gives you pure play exposure to the enterprise data space. Its revenue is growing faster than any of the big three, AWS, Azure, and Google Cloud. It's definitely a high risk, high reward play compared with owning any of the hyperscalers. But after these results, I would consider a starter position in my portfolio in Snowflake.

Starting point is 00:05:15 Yeah, I think that Travis's point about the adjusted and the unadjusted numbers for Snowflake are well taken, but I agree with Matt here in the sense that anytime I see an accelerating growth rate, I want to make sure I take a long, hard look. So we'll be taking a look at Snowflake in the weeks and months ahead. But after the break, we are going to talk about a huge component of the economy that's hitting a brick wall. You're listening to Motley Fool Hidden Gems Investing. Welcome back to Motley Fool Hidden Gems Investing. So we got some news today and it has to do with mortgage refinancing. It's actually dropped an incredible 18%. That looks like a lot to me, but Matt here is our more expert when it comes to the mortgage and refinance space. So I wanted to bring him in here and ask, maybe you can contextualize this drop in refinancing for us? And then also kind of talk about the things that it would impact. Yeah, it's a large drop. You're right. But it's not a surprising one. The average 30-year mortgage rate is up to 6.65%. That's up nine basis points since last week. That's up 30 basis points over

Starting point is 00:06:24 the past five weeks. And it's making a big difference in the economics of refinancing. It's just not worth it for as many people anymore. It's important to note, though, that the 18% drop refers to a, compared with last week, compared to a year ago, it's still up 19% refinancing volume. So refinancing, it's only one side of mortgage data, right? So purchase mortgages were actually up 5% year over year and just down very slightly from last week. But these are both from very low starting points. The real estate market in general has been very, very slow for about three years now. Rates dipped briefly below 6% in February, and that really kind of made mortgage activity spike. But the Iran war, the rising inflation we've been seeing are both

Starting point is 00:07:09 causing rates to rise. At the start of the year, it was generally expected that this would be the most robust year in real estate in several years and in the refinance market. But that isn't exactly happening because rates have gone up considerably. I know we're a show about stocks. We're not a stock or we're not a show about refinancing mortgages. But I mean, this does affect stocks, right, Matt? This isn't something that is completely uncorrelated. Yeah, I mean, the short version is that this over the past couple of months has put pressure on any stocks relating to housing or mortgages or refinancing. Homebuilders have more than 500,000 unsold homes in their inventory. That's the most since the financial crisis days. It's really, it's giving them the

Starting point is 00:07:54 reason to use more incentives to sell homes, which hurts margins. They have the added carrying costs of keeping those homes on their balance sheet for longer than expected. Lenders like Rocket Companies, which I mean, refinancing was their bread and butter back in the pandemic days when rates were 3%. They're seeing lower loan volumes than they had expected earlier this year. And Mortgage lending has been a nice catalyst for fintechs like Upstart and SoFi, both of which are focused on the refinancing side, specifically the home equity line of credit side. It's not providing as much of a growth tailwind as it was at the end of 2025 and beginning

Starting point is 00:08:29 of this year. So it's affecting a lot of stocks that are in those industries. Yeah. And this is going to be something that's going to be across a number of different spaces. So we could talk about companies like Zillow or Compass, which are going to be more on the real estate side. That's going to be, you know, purchasing homes, whether it's new homes or existing homes. The headwinds that higher mortgage rates face for the economy is just really, really broad based. And the other thing I think we need to think about, too, is this is a really big piece of the economy.

Starting point is 00:09:02 You know, people, there are a lot of people who work in the construction industry, and higher rates are going to make it harder for people to refinance, to do that, you know, upgrade to your home, maybe upgrade your kitchen or your bathroom. So there's going to be a huge flow through in the economy. And I think that's going to be just a headwind for a number of different industries out even yet. Yes, home builders, yes, mortgage companies, but it's also going to be consumer spending that we're gonna have to watch. Yeah. And I like that you bring up the other industries. I've mentioned companies like Trex that sells decking. Big projects like that are often paid for by refinancing mortgages. People tap into their home equity to do that. Home Depot has been saying this on their conference calls for the past three years that they're seeing people put off big projects. So I like that you brought that up, that it's not just the housing stocks. It's not just the lending stocks. Pretty much anyone who sells things that could be used in homes is feeling the effects of this as well. Yeah, probably some even pent up demand there that eventually when the mortgage-rife

Starting point is 00:10:05 pre-financing economy gets better, might lead to some nice gains for some of these stocks that are depressed right now. After the break, we are looking at some things that are hidden under a massive $12 billion acquisition. You're listening to Motley Fool Hidden Gems Investing. We'll see you next time. Welcome back to Motley Fool Hidden Gems Investing. We do want to make you part of the conversation on this show. So if you have a stock or an investing question for any of us who are regular hosts here, you can email them to us and you can email them to us at podcastatfool.com. We'd love to have your questions. We'd love to read them on air. Just keep them foolish. Keep

Starting point is 00:11:12 them short enough that we can read them. That's always appreciated. That email again is podcast at fool.com, podcast at fool.com. We'd actually normally do a mailbag segment here, but we're going to skip that today because we wanted to talk about Caesars Entertainment. This is the owner of Horseshoe and Harrah's Properties. It has agreed to terms with Fertitta Entertainment to be acquired for about $31 per share or about $12 billion in all. Travis, you followed this company for a long, long time. Let us know how we got here. Yeah, Caesars was the old Harrah's entertainment that was the first time i owned the stock in the early to mid 2000s that was bought out eventually went bankrupt so a really strange history that this company has but i think the real

Starting point is 00:11:57 story here is that the gaming industry has gone from being a very capital intensive high debt industry that was how las vegas was built right you know junk bonds that's where they kind of became popularized that's how you build you know caesar's palace that's how you build the bellagio But now that build out is largely over And so these businesses are now Cash flow machines And that's what Fertitta is buying Caesars generated 3.6 billion dollars

Starting point is 00:12:24 Worth of adjusted EBITDA That's a proxy that we use in the gaming industry For cash flow So if you're getting it at the right price That can be really attractive to have that kind of cash flow I question that this is the right price The final agreement And that's what we're talking about here

Starting point is 00:12:38 This deal was announced a couple of months ago But they've actually come to terms and $11 billion in debt, plus rent obligations, plus the equity that you're buying out, this is a very, very highly leveraged deal. And the last time that Harrah's and Caesar's Palace went through this, they did end up in bankruptcy court, a very convoluted process in bankruptcy court. But the thing that I think that we could potentially take from this is there are companies out there that have really good cash flow businesses that the market is just completely overlooking right now with all the fervor around artificial intelligence and semiconductors and

Starting point is 00:13:18 memory stocks and all of these things. There are really, really good cash flow businesses with really big moats. I mean, nobody's people aren't just building casinos in the Las Vegas Strip willy nilly. So these are really, really good assets that Fertitta is buying. I'll point out a company that I own and have been buying for a while, MGM Resorts. They have a $10 billion market cap, only about $4 billion in net debt and $5 billion in adjusted EBITDA. One of the things their management talks about constantly, and they've been buying back about 15% of their shares annually, but management continues to talk about, hey, look, if you strip out these assets, some of them that are publicly traded, like their assets in Macau or the 50-50 partnership that they have

Starting point is 00:14:01 with Entain for BetMGM. You take those out, our core business trades for three and a half to four times adjusted EBITDA. That is a crazy low multiple for a business that yes, there's some slight declines in Las Vegas, but these are cashflow machines now. I look at the Las Vegas strip in the casino industry right now, more like an ATM than it is like a money sink like it was 20 years ago. So this is really compelling. And if you're looking for takeaway, I think there's going to be what we would call a re-rating of some of these stocks that have really good cash flows that are maybe just overlooked by the market right now. Well, I love that you went there, Travis, that we can kind of take this deal. It's a done deal and there's really not anything

Starting point is 00:14:42 actionable for investors on the Caesars Entertainment side of things because it's basically trading where the buyout offer is. But you're taking that and saying, hey, look at these other resorts that are maybe relatively undervalued based on what this company was just acquired for maybe even higher quality assets i love that you went there um but there's more to this than just what you just pointed out travis as matt was pointing out before the show there may be even some hidden elements here that are in the caesar's deal that we should pay attention to yeah and i love how travis brought up the caesar's bankruptcy and they're not the only one the casino business has historically been a tough one um i mean i never

Starting point is 00:15:22 understood it's a business where people literally walk in and give you their money essentially how it's so hard to be successful. So you won't find any direct play casino stocks in my portfolio, although MGM I would concede is best in breed. But one in particular to watch that I do own is Vici Properties, ticker symbols V-I-C-I. That actually spun out from Caesars after that bankruptcy Travis mentioned a little over a decade ago, specifically to get some of those real estate holdings off the balance sheet and make it a less capital intensive business. It owns Caesars Palace. It owns 17 other Caesars-operated properties.

Starting point is 00:15:57 It owns a lot of MGM assets. It acquired the MGM counterpart, MGM growth properties. It owns the Venetian. It owns the land under the sphere. It owns the ground lease on that. Caesars still is the biggest tenant. It makes up 40% of VG's rent. So this is a deal definitely to pay attention to.

Starting point is 00:16:14 So fortunately, VG structured its leases with change-of-control scenarios in mind. their master leases. So they will just transfer over to the new owner. And although Vici will have an opportunity to review the purchase, Fertitta should easily pass any qualifications test. And if anything, this should be a net positive for Vici. The tenant quality and concentration with Caesars has been literally my biggest drawback of the stock. Fertitta is a much better capitalized, healthier tenant. So given Vici's concentration to those Caesars assets, It's exactly what you want to see, especially if Vegas continues to struggle a bit, which I like Travis said, I think it's going to ebb and flow.

Starting point is 00:16:56 But right now, Vegas tourism is down. There's no real denying that. And when you have an industry that is kind of cyclical like that and a little bit unpredictable, tenant quality matters and Fertitta is better tenant quality. So one potential wildcard over time is that Fertitta has generally preferred to own its own real estate assets, the golden nugget casinos that it owns. it generally owns the buildings that those operate in. So as those leases get closer to maturity over time, it'll be interesting to see how this plays out. But all in all, I think this is a net

Starting point is 00:17:26 positive for the stock and its risk level. And I appreciate that you pointed it out because Vici is not one that I follow personally, but on the Hidden Gems team, we do a lot of AI scoring. We have some databases that our members have access to. And just looking, Vici is a top 10, or excuse me a top 50 in the hidden gems database and it's a top tied in the top 10 when it comes to its five-year financials so i'll have to be taking another look at that especially with a potential catalyst from this caesar's deal but we're out of time for today 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

Starting point is 00:18:09 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. Thanks to our producer, Dan Boyd, and the rest of the Motley Fool team. For Matt, Travis, and myself, thank you for listening, and we'll chat again soon.

Motley Fool Hidden Gems Investing - Snowflake Has a Hot New Product

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