Motley Fool Hidden Gems Investing - What Cybersecurity, Shoes, and Homebuilders Tell Us About Change

Starting point is 00:00:00 Today on Motley Fool Money, Palo Alto Networks is bracing investors, homebuilders are sweetening deals, and footwear brands are rewriting the playbook. I'm Emily Flippen, and today I'm joined by analysts Sanmeet Deo and Dave Meyer, and we'll be discussing a few industries and businesses that are being forced to adapt to the changing world around them. To start, of course, we have to talk about cybersecurity. Now, cybersecurity stocks have been on the front lines of both innovation as well as investor scrutiny. The world has moved increasingly to the cloud and the industry has been forced to reimagine what security looks like in this new world. Palo Alto Networks just dropped its fourth quarter results

Starting point is 00:00:49 and based on the headline numbers, it'd be easy to almost forget the checkered history that this company has with this level of innovation. Just last year, the business launched a new platform strategy that involved vendor consolidation, even giving away its product for free. Now, that obviously spooked investors, but here we are just a handful of quarters later, and it seems to be paying off with business accelerating. Dave, this space has been hot, it's been crowded, but Palo Alto Network's report didn't happen in a vacuum. Fortinet, Checkpoint, and even legacy players like Cisco have all tried to find their own niche in security. With a continued move towards these off-premise solutions, how should investors read this quarter?

Starting point is 00:01:26 I think they should take away that bundling works. If you look at the quarter, sales were up higher than expected. Margins are expanding. More and more people are doing what Palo Alto calls platformization. Now we're not going to get into what the details are there, but basically it's folks buying more than one of their products and that's happening. That's actually accelerating and larger businesses, enterprise level businesses are saying, you know what? It's actually great for us to have a one-stop shop because that sales, uh, to large businesses are increasing at higher rates and the deal sizes are going up. So in a, in a fragmented world, basically Palo Alto strategy, which they put in place many years ago to create a platform where you can come and pick

Starting point is 00:02:19 what you want, that's really starting to pay off. And they were kind of late to that game though. I mean, lots of other companies have moved to the same platform-esque strategy. They want to be the one-stop shop. No longer is it just good enough to be like a firewall provider. You have to provide full edge-to-edge security. And send me, when you look at the industry, I mean, do you think this is the industry where you just buy a bucket of companies because the strategy is similar across all of them or is there value in picking the best names? Yeah. For someone not as technically inclined as me when it comes to cybersecurity, for me personally, I would rather own maybe like a basket, two to three stocks. Some of the bigger

Starting point is 00:03:01 players that I know that are doing well, Palo Alto has done well for a long time. They're a very impressive CEO, as we've been discussing offline. But it's an important area that I think with the growing technology needs in AI and cloud computing and all the different technologies that we're using cybersecurity is definitely an important place to have something in your portfolio. Yeah. And along those lines, I think one of the things that we all need to recognize is one is the bad actors are not going away. And in fact, they're innovating very quickly in order to create the threats that companies like Palo Alto and other, you know, other competitors want to negate. And one of the things that, uh, at least if you believe the Palo Alto data, and I don't just have

Starting point is 00:03:47 any reason not to, is the threat vector along the AI lines, meaning the more we interact with agents, the more opportunities there are to create threat vectors. That is actually providing growth on the outside. Internally, the company is bringing AI capabilities across all the services on its platform. Basically, it's an AI race. Who on the outside is going to create the threat vectors and who on the inside is going to protect you against them. Basically, that's built-in demand and built-in growth for the future. Sad to say, but that's actually how it works. Cyber threats are a growing growth industry. So, you know, we can't invest in the cyber threat companies. So you got to, got to invest in the ones that are protecting against those things and

Starting point is 00:04:38 they got to be growing too. Yeah. I think the edge that existed with these cloud native platforms has increasingly gone away because even the legacy players have kind of gotten out here, the cat's out of the bag, they've all made the adjustments. So now it's a matter of proving that you have a product that is simply superior to that of your competitors. It's not a matter of if you need security, it's how you're going to implement it. And I will say this, the one thing that CEO Nikesh Arora said was, it's not about how well you protect, it's about how quickly you can find, identify, and neutralize the threat. That's actually the thing that they're being measured on now. Up next, we're moving from firewalls to footwear. Shoes are having

Starting point is 00:05:17 their own moment with brands stepping into new partnerships, styles, and even new markets. Stick with us. now until December 31st. The shoe industry has seen its own landscape change pretty dramatically in the last few years. Gone are the days of sneakers dominating the market. Things like identities, partnerships, and performance are all taking the spotlight. New brands like On Holdings have taken market share. They just posted yet another quarter of double-digit growth. And at the same time crocs is teaming up with the nfl ahead of earning season and nike is seeking to claw its way back towards growth through a renewed relationship with footlocker sun meets the whole

Starting point is 00:06:20 shoe game feels like it's shifting here what do these moves tell us about how consumers view the industry and who could be the ultimate winner yeah you know shoes have basically all kinds of even athletic shoes have essentially become fashion accessories i mean you know you used should be back in the day we we'd uh you know buy a shoe for running buy a shoe for basketball buy a shoe for utility purposes whatever we needed for walking now the shoes are being used for sometimes all those things but mostly for fashion mostly for casual wear you know the pandemic really shifted things where where we're using shoes for a lifestyle approach and a company like on has really taken that and you know making very fresh clean authentic designs that like are really

Starting point is 00:07:08 resonating with um younger people and also the the athletes but also the leisure athletes the people that might be using them for dual purposes where they might be running with them or might they might be walking with them and then you have also like the the shoe companies like crocs that ugly is in when it comes to crocs so you know um they uh they if you never like crocs they're not going away anytime soon because if you if you have kids you know all the kids are wearing crocs they have multiple pairs you can add gibbous to them you could do all kinds it it's a way to express their identity um especially for kids and younger people that you haven't had in other shoes and and now with crocs recently signing with the nfl to kind of um have a partnership with them to

Starting point is 00:07:52 be able to have your own favorite team crocs um with their own favorite like with your own gibbous for those teams it's it's really become a matter of expressing your identity fashion comfort all wrapped up into one now nike has been a very very popular brand for a very long time the dominant brand when it comes to athletic apparel shoes running shoes is what they kind of grew up on and they were always fashionable as well you know you have your jordans that now are actually being used even more in like fashion sense instead of just basketball but they kind of lost their way They didn't keep up with some of the trends and the cool styles. They shifted a little too hard into the direct-to-consumer channel,

Starting point is 00:08:34 going away from some of their wholesale partnerships with Foot Locker and other companies. Now, they're getting back to that because they did struggle with sales and margins. And then they're also at risk with tariffs and whatnot. But they're making a comeback. they're strengthening their partnerships again focusing on what they need to do with um their their wholesale channels as well as their direct channels and in freshening up their identity and their portfolio of shoes i'm actually surprised crocs didn't do this a while ago yeah because if you think about it like it's it's going to be hard to let's say have a crocs specifically for an

Starting point is 00:09:13 an individual athlete, but across a league, like I'm, I have to wonder if this was in the works and maybe, you know, got bogged down in negotiations or something, but you know, think about, think about this way. What if they did it with the NBA? Because you could, you could imagine, you know, at players on the sidelines, maybe you're out, maybe, uh, you know, maybe you're taking a break, maybe during warmup, like you come out with your Crocs, uh, and you are supporting the team. Like I, I, I'm a little surprised that wasn't done, uh, earlier. And I will also say this, I take a little bit of, uh, uh, umbrage against what you said about, uh, footwear and fashion. It's always been here. I mean, it, it, it, they've always tried to

Starting point is 00:09:58 create a fashion piece of it, but that said, it is amazing how, um, how many different types of lifestyles that, uh, shoes are, uh, in, uh, becoming a part of, for example, my daughter's in residency. Uh, she cannot live without her UFOs, which are Crocs, uh, competitors as well as her hokas. The, it is amazing in the medical world, how being on your feet all day, something, and we'll, I think we'll all in agreement here, the Hoka is an ugly shoe. There is nothing fashion conscious about that, but it performs well. It does what those people need and they're willing to pay for it. And I will say this one last thing. Um, I've had an argument with our, uh, with our colleague, Seth Jason, who's a huge runner. And he keeps telling me, I can't believe,

Starting point is 00:10:44 you know, why do people like on holdings? Why do people like on shoes? I never see them out on the trail when I run. And I'm like, dude, you're like running a hundred miles at a time. Like, like, you know, and finally he said the other day, I saw my first pair out in the wild and I'm like, great. That's awesome. That, that those types of athletes are looking for him because I will say here in Pawleys Island, amongst the older crowd of which I am slowly getting there, on shoes are everywhere. Everybody wears them around. And I think it's because there's a little bit of fashion, a little bit of comfort. And that's the name of the game. If you're a shoe company, you've got to figure out how to address all those things in one product in order

Starting point is 00:11:26 to meet the demand of your demographic. Well, for me, it comes down to what actually is innovation versus reaction. And I rewind to just a handful of years ago when Nike made their decision to largely pull out of third-party retailers and go straight direct-to-consumer with the intention of protecting their brand image to prevent themselves from becoming the next Under Armour, for instance. And at the time, that felt like innovation. That felt really inspired. And it's a little ironic now to see Nike almost walking that decision back, not that direct-to- they're realizing that distribution was always part of their value chain. And at this moment, their market share is being eaten by companies like On Holdings that, for whatever reason,

Starting point is 00:12:09 whether that be brand prestige or performance, seems to be rising in levels of popularity. And I do think that On has pushed forward an actual real innovation with technology, right? Their light spray, which could localize distribution, is something really interesting. And so, for me, when I look at a business like Crocs, kind of tying this all full circle, I cannot for the life of me understand whether or not this deal is innovation or reaction. I mean, I think licensing is smart for Crocs, but it's always been on the fattier side of shoes. And there's some part of me that can't feel like we're just pre 2008 right before the Crocs crash. Well, you know, you got to think of the kids because they love their sports teams. They,

Starting point is 00:12:46 they want to represent those. And so, you know, my son has some Texas Longhorns Crocs. And so I'm sure they, I'm sure they had to strike up a deal with some of the big universities like that to have those. So putting you both on the spot here, unexpectedly, if you have to choose between adding on holdings Crocs or Nike, or let's also add Foot Locker in there as well to your portfolio today, is there one that's standing out to you? Well, I'll go first. I currently own on holdings. So I would, I would continue to add on to on because they're just doing some impressive things with innovation and really capturing the market. I agree. I like on, I think the challenge for nike and we're seeing them throw their weight around a little bit with the um with

Starting point is 00:13:30 getting back into the prominent displays at footlocker that's that in my opinion that comes from the direct relationship that they have strong relationship that they have with dick's sporting goods but they still have you know they still have a long uh row to hoe uh and i think right now uh on has the momentum they have that not only performance uh but it's a there's um there's fashion and it cuts across all demographics. And what I mean is from the youngest to the oldest, they're selling their shoes across that entire range of ages. I'm inclined to agree with you both, but for the sake of playing devil's advocate, I do feel like I need to point out how cheap Nike looks on a relative basis.

Starting point is 00:14:11 If they're able to kind of craft this turnaround that I think management is leaning towards and distribution is a part of that. But I do think this is a brand that has not lost its attractiveness. And so while On might be the up-and-coming exciting new player today, there is something nice and stable about knowing that Nike's brand is still retaining value that probably is going underappreciated by the market today. Up next, we're moving over to housing, an industry that, unlike shoes, is hitting a speed bump. We'll see you after the break. Trade ice skating at Nathan Phillips Square for ice cubes in your umbrella drink. Let Porter Airlines fly you from Toronto Pearson nonstop to 10 top sun destinations in Mexico, the Caribbean, and Costa Rica. Enjoy award-winning Porter service Toronto has loved for 20 years and start your vacation as soon as you're on the plane.

Starting point is 00:15:05 Book your sunny getaway today at flyporter.com and actually enjoy economy. A report out from Reuters yesterday noted that U.S. homebuilder sentiment has dropped to its lowest level in nearly three years. Higher interest rates, lower affordability, and consumer hesitation seem to all be weighing on the sector. Dave, we've seen builders throw in everything but the kitchen sink to try to motivate buyers. After years of it being a seller's market, it seems like buyers now have the cards. But confidence is still sinking. Affordability is at all-time lows. What should investors make of this? I actually think investors should. There's a lot to be made of this. Not only should we think individually about the sector, the home

Starting point is 00:15:45 building sector, if they're still throwing everything out at it, which means typically they don't lower price. That's one place, having bought a few new homes, that's one place that they don't negotiate. But they will give you add-ons. They will give you rate buy-downs and things like that. And if those aren't effective and they actually start reducing prices, which some anecdotal data might suggest that they are, that's bad from a margin standpoint. Because you're already trying to say, hey, in order to get this sale, I'm willing to squeeze margins. And now I'm willing to squeeze margins even further. So I would say there's a little bit of caution in the sector itself. As an investor, be wary. Make sure that you are looking at

Starting point is 00:16:34 the highest quality builders. One that comes to mind is DreamFinder Homes. The ticker symbol is DFH. They do a good job of making sure that the markets that they build in are solid, and they've been able to translate that into good performance, stock notwithstanding right now. The other thing we need to be a little bit careful about is the overall economy. If these homebuilders slow down, they employ a lot of people within the economy. If we see them slow down and they start laying off people, that makes the job numbers difficult. Who knows what can happen from there? There's a lot to be tied into this homebuilder sentiment number because it's really a leading indicator

Starting point is 00:17:21 not only the industry that they play in, but the economy overall. This is one of those industries that I rewind back to just a few years ago, and I would say the same thing then that I'm saying today, which is that whenever I see sentiment like this really low for industries or businesses that have really, in my opinion, a long-term need to exist, the need for housing in the United States, to me, I think to myself, okay, well, this is a short-term headwind, a long-term opportunity, but it's still been a really tough few years for home builders, even despite the fact that I think the skepticism has been around. And of course, a lot of that has to do with interest rates, but send me, I mean, when you look at

Starting point is 00:17:58 this industry, what stands out to you? Because for me, I view opportunity, but at the same time, I viewed opportunity for years now and it has not manifested into shareholder returns. Yeah. And the thing that sticks in my mind, because I do think a lot about the consumer is just the affordability. The affordability of homes just does not seem sustainable. it's just gotten too expensive and even if you lower rates your interest rate will be low but you're still paying that on a very very high mortgage and and those housing prices especially in high demand areas are not really coming down and there's younger people just not buying because they can't afford to coming out of college or coming out of business schools or graduate schools

Starting point is 00:18:39 and they can't buy what's gonna get them to be able to buy so that affordability thing always sticks in my head of how does that problem get solved? The one good thing is that a lot of the home builders, their balance sheets are much, much stronger than when we had, um, the housing crisis. Um, there's, there's not as much leverage in the system. There's not as much leverage on their balance sheets. They're doing a good job of, um, spending capital wisely, trying to have capital, uh, asset asset light businesses where they don't necessarily own the land, but they have rights to it and things like that. So, there might be a little bit of turbulence here, but at some point, the prices of these homebuilders could get to a point where they

Starting point is 00:19:24 become very attractive, even if there's some volatility in the sector overall. And I give a lot of management's credit for playing the game differently based on what happened in the 2005, 2006, 2007 timeframe. I'm not sure who will be the innovative leader here in housing, but one thing is clear to me based off this conversation, they need a little bit of innovation here to prevent their industry from entering some sort of segment down phase here on a more permanent basis. But one thing is clear. I mean, look, whether you're looking at housing or cybersecurity or shoes, the industry changes. And if you don't change along with it, you're probably going to die. Dave, Sammy, thank you both so much for joining. Thank you. Thank you.

Starting point is 00:20:08 As always, people on the program may have interest in the stocks they talked 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 The 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. For Sammy Deo, Dave Meyer, and the entire Motley Fool money team, I'm Emily Flippen. We'll See you tomorrow.

Motley Fool Hidden Gems Investing - What Cybersecurity, Shoes, and Homebuilders Tell Us About Change

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