Profitability Predictions and Paramount Punches Back
00:00Profits, who needs profits. You're listening to Motley Fool Money. Welcome, fools. I'm yourhost, Tim Byers, and with me are two of my teammates, Rick Munaras, whom I've served with onRule Breakers for over 20 years now. And longtime full San Mateo, who's with me allocating capitalin the Supernova Odyssey portfolio, and that's been fun and frantic. Hopefully, you're bothfully caffeinated because we got some spicy earnings to get to. Today we're going to be talking aboutFiscal Q-3, 2026 earnings from Sentinel 1, ticker S, and from Snowflake, ticker S-N-O-W.And predicting which of these two will reach gap profitability first and ideally when.So we're going to make some reckless predictions here, and we want your reckless predictions to
01:06leave 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, Sandmeet, I'm going to give you some quick overviews on the Sentinel 1 earnings. There was some good stuff here.There was some strong growth, annual recurring revenue, up 23 percent, 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.So, meaning your device, your iPhones, your computers, they protect those things.
01:49And they do it with some AI here.Non-gap operating margins were decent, 7%.It was a 1,200 basis point improvement.The non-gap 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.
02:17But the gap losses are big, Sandmeet. Gap operating margin for the quarter was negative 28%.And the gap 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 fundamental.you know, cybersecurity, you know, there's a few major players that I think, you know, are reallyramping up. And it's a very important industry that's very much needed. And I don't think it'sgoing to ever be a winner-takes-all kind of area. So, so I would like to see, I can't anticipatethem generating profits soon because it's just an area where they have to invest in their businessand continue to grow, continuing to scale, continue to provide value to their customers.
03:14So profits may come much later down the road.I mean, Rick, let me get your take here, and I'll give you this.So this is another of those companies that issues a lot of stock-based compensation,equivalent to 29% of revenue during the quarter.That worth it?Not worth it?What do you think about this company?I think it's the price of admission of your tech company. You have to pay up with stock-based
03:42compensation. That's how you hire the best programmers and everything else you need to make thecompany run smoothly. And in this case, I think the report was solid. And again, yeah, it's stock-basedcompensation is a big reason why we're talking about non-gap profitability instead of non-gap,which would be gap profitability. But it is the kind of thing where you are seeing improvementsand margin-wise, they are getting better. It's Sentinel 1 a lot like, well, like Snowflake,five, six years ago, these companies were seeing doubling the revenue year after year.And now it's slowed dramatically, both in the 20-plus percent range now a little more than 20 percentfor Snowflake. But it is the kind of thing where I'm comfortable with where they are now,
04:19especially now that they're improving their finances. They are doing things necessary to continueto 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 Senate.No, once is until 2032, which is a long time for that to happen. But I think investors willforgive 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 1 investors.All right. Let's pivot to Snowflake here. So similar story. This is an unprofitable company
04:55that has absolutely throttled the market year-to-date Sandmead. Stock is up beating the market byover 66% so far this year. And the result,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.I'm sorry, $7.88 billion.That's big.
05:21That was up over 37%.And the non-gap operating margin did expand by 450 basis pointsyear over a year and reached 11%.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 business, tough stock,because the business fundamentals just continue to improve quarter after quarter.
05:49They continue to announce strategic partnerships.Their pipeline is growing with RPO.It's surged 37%.So their business fundamental, and they also signed a deal with Anthropicto kind of create a software layer to their data,warehouse, storage, all that.So fundamentally, this business just continues to perform and execute.But it's a very high valuation stock.
06:16And because it's a very high valuation stock,they recently in the quarter reported some slowing guidancefor the next revenue for the next quarter.So that wasn't looked so favorablywhen you have such a high value stockthat isn't executing to perfection.So not too concerned because as a business, this company is performing phenomenally.Rick, let me give you a, I'm going to give you another bit of data here.
06:47Snowflake Intelligence, which is their enterprise AI agent, they've been investing a lot in AI.So 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.So 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.
07:20So how are you feeling about this company and its path to profitability?I like the growth.And again, this investments in AI sort of have to scare you away about profitability specifically,but 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 hard of business model makes me excited in the fact that I see this companyis, yes, Sanmete mentioned growth may be slowing and understandably so, but they have the cows in there.
07:50They 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 the analyst's turning profitable on a gap basis.So again, five, six years from now, it's a very long way.for investors, but I do think that, especially with Snowflake, which has even stronger free cash flowand a stronger free cash flow margin than Sentinel One, 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,it's a very important company that not very well understood and not very even well known.
08:23It's not a household name. You don't go and see mainstream investors say Snowflake,and they just looking out the windows, think, for Snowfall. This is a very legit company and doing a lot ofof things right. Well, I mean, Snowflake is a household name. Just, it's not the company that is the householdname. All right. Let's make a prediction here. And Rick, I'm going to start with you because you brought us theanalyst predictions. And I'm going to summarize here. You said analyst saying Sentinel 1,gap profitability 2032, Snowflake, gap profitability 2031. Agree or disagree, Rick. Where are you?there first to gap profitability.Yeah, so the funny thing about analysts, the further, even sometimes near-term expectations
09:10are out of whack.The further you go, it's more like dropping, you know, trying to land up a parachute intolike a tin cup down to 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.And Sentinel One, they are improving this last quarter notwithstanding as far as a margin front.I do think Sentinel 1 will actually get there faster sooner than Snowflake.But I think both companies will get there eventually.
09:35But I don't think investors are going to punish them.But again, against what I read, I'm going with Sentinel 1.All right, Sammy?I'm going to agree with Rick.I think Sentinel 1 will get there faster.Snowflake is kind of a slow burn that, you know, 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.
09:59investments paying off in cash flow generation that will be sustainable, but they have to build forthat. Yeah. To be fair, we want your predictions, listeners, but I will say, Snowflake has beenaggressively saying, don't look to us for profitability, because it may never come.That's fine right there. That's probably not right, but they are going full Amazon in this area.So it does seem like Sentinel 1 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?
10:44We're going to go armchair critic over the Netflix Warner Brothers deal.You're listening to Motley Full Money.These days, I'm all about quality over quantity, especially in my closet.If it's not well made and versatile, it's just not worth it.That's honestly what I love Quince.The fabrics feel elevated, the cuts are thoughtful, and the pricing actually makes sense.Quince makes high-quality wardrobe staples using premium fabrics like 100% European linen, silk and organic cotton poplin.They work directly with safe ethical factories and cut off the middlemen, so you aren't paying for brand markups or fancy stores, just quality clothing.
11:19Everything they make is built to hold up season after season and is consistently rated 4.5 to 5 stars by thousands of real people like me who wear their clothes every day.The Quince, Mongolian Kashmir Cajmere Cureneck sweatermay be the most comfortable one that I own.It's light, soft, and it was a lot more affordablethan you'd think quality cashmere would be.Stop waiting to build a wardrobe you actually want.Right now, go to quince.com slash motley for free shippingand 365-day returns.
11:45That's a full year to wear it and love it, and you will.Now available in Canada, too.Don't keep settling for clothes that don't last.Go to QINC-E.com slash motley for free shipping and 365-day returns.Quince.com slash mottes.Molly. All right, fools. By now, we've all seen the news that Netflix has agreed to buy WarnerBrothers Discovery, ticker WBD, Netflix's ticker NFLX in a cash and stock deal worth 72 billionwhile also taking on a bit more than 10 billion in Warner Brothers debt. In light of the genre
12:19in which this deal exists, we're talking about big screen entertainment here. We're going to playthe 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 andEbert than Statler and Waldorf. But you know what, Rick? If you want to yell from the rafters thatthis is terrible, I am not going to stop you. So why don't we start with you on what we've seen so farand then we'll update folks on what we saw from Paramount this morning. Yeah, so a very interestingdevelopment of that from. But as far as Netflix, I think I'm going to give it, can I give it two thumbs up? I forgetif two thumbs up was what Cisco and Iber both had their.
12:58I have two hands. I can give it two thumbs up. To me, it's a smart deal. They have the largestinstalled base of premium subscribers. $302 million at the start of this year. Netflix, the longerreports. They're subscribers, but revenue is still growing, so you know the business is stillgrowing. Warner Brothers Discovery was about a third of that. So I do think that this is a businessthat Netflix will be able to take these properties, the properties they keep and make them strongerand find new outlets for them. I don't think they're going to get rid of the HBO Max. They'lljust never name it terribly like HBO Max did with the Max name. But I think that they'll continuebecause I think that's another incremental revenue revenue scene. But not only are you taking your
13:36largest premium price streaming 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 Max and gettingthat much stronger and catching up to Netflix. Netflix is always default cable to me. Now it'seven more default default-de-fault cable. If the deal goes through, sorry. Well, that's a big one. We'regoing to get to that in a minute here, but on the basis of what we know so far, Sandmead,I mean, Rick's giving it two thumbs up. Where are you on this? And remember, it's a $72 billion deal.It's a cash in stock deal. So Netflix may be taking on up to $50 billion in debt to do this deal.There's going to be a complicated spinoff. If this deal goes through, they're going to spin off what
14:21they are calling Discovery Global, which will be some of the legacy media assets of Warner Brothers.What do you think here?Are you with Rick?You know, when the deal was, 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.
14:44I'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 onerous.I mean, they're taking on a ton of debt.They have been relatively, you know, lower debt profile, a leaner, meaner kind of company.You know, I always think of Netflix as that young, lean, mean upstart.They're not really that anymore.
15:19They're more of the dominant play.But, you know, it is a big financial commitment for something, you know, that you can'thave one without the other. So I'm just not, I'm not fond of the financial commitment, but you justkind of have to have it if you want that dominance. All right. Let me, let me give you, I'm going togive you a wrinkle and you tell me whether or not this convinces you to go two thumbs up.What if I tell you that that Warner Brothers or that Discovery Global Business is going to be spun offand it's going to be spun off as a public entity and because of Netflix's interest that100% interest in that entity, that they're going to get a rich payday. Let's say that payday
16:03in the equity they spent out to the market is $15 billion. And now they got an extra bit ofwar, extra bit in the war chest there to decide to maybe pay down that debt early, do some otherthings with it. Does that change your opinion? It definitely helps. And that gets my, my thumb to gokind of sideways and going tohead towards up becauseyou know, and lookI also give it a thumbs up for the management team.You know, this is a seasoned,
16:35very intelligent management teamhas been around with Netflix fora very long time. I can't imaginethey do something like this withouthaving a very clearidea of how they're going to manage it allbecause they know what they havewith Netflix without
16:49Warner Brothers Discovery.they want to make sure it continues on.So I've always been fond of the management team.Yeah.All right.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.
17:10Paramount Skydance 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 Bros.Board. Today, it's an all-cash offer that is a premium over what Netflix has bid. $30 a share,roughly $108.4 billion. Paramount stock is on the rise. As we talked this morning, Rick,I was up more than 6 percent. Warner Brothers stock up more than 7 percent. Paramount isticker PSK-W. P-S-K-Y. Rick, reactions to this? It feels a little, I mean,
17:52It's getting spicy. I hate that Paramount stock went up when Netflix stock went down when theyhad announced a 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's Brothers Discovery Board to look at this.First of all, it's more money. So that right away says, well, hey, you know, you know, shareholder,you know, we got to do right by our shareholders. And also, this is going to have a clear path toto just clearing the regulatory antitrust regulatory barriers. Even though Paramount Skydance just addedParamount just a couple months ago, they're still not this monster that anyone's really scared of.
18:29So I think this is the kind of thing that would definitely put Skydance, Paramount and Warner Bros.All three together in one company would be very, very interesting, very, very competitive.And the money's coming from some, they're not, they don't have the money on their own.They're just turning to sovereign wealth funds, which I know seems like a weird thing.But, you know, electronic arts had the same thing a couple of months ago.We're already used to this by now.Sometimes you're getting international money with these deals,but they're not doing governance to the actual thing.
18:55So that's good.Yeah, I think 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 interestingbecame must-watch TV right now.Okay, yes or no, Sanmeat.
19:13Will there be an ongoing bidding war for Warner Brothers,I don't think so. I think that Paramount's going to try their hardest to get to get this asset,which, you know, rightfully so, they should. But I think that Netflix is going to win out. And I thinkthat even though there's a regulatory concerns, one thing I was reading through is, you know, theargument for, you know, it's just not about, it's not just about streaming dominance. It's,Netflix is going to argue total views, which, you know, you have YouTube in there, 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.And they have their own share of movies and other things.
20:07And 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, as people might think.I got news for you, pal.It's not just the younger generation.It's older folks, too, we're watching a lot of YouTube.All right.Up next, we give you the preview for tomorrow.You're listening to Motley Full Money.
20:32If you're early in your career and looking for insight, inspiration, and honest advice, listen to the Capital Ideas podcast.Hear from Capital Group professionals about leaning into the differences that make you use.unique, making decisions that last, and what it means to lead with purpose.The Capital Ideas Podcast from Capital Group, available wherever you listen, published by CapitalClient Group, Inc.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 Kaplanarlinger.
21:07They're going to go deeper on the merger, what it means for investor, streamers, and how toevaluate.and 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 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,
21:31whether or not it's smart capital allocation and a framework for judging those mega mergers.Again, that's with Emily Flippin, Jason Hall, and Dan Kaplinger.But for today, thanks very much to Rick Munar.and San Mateo. 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 stocksbased solely on what you hear. All personal finance content follows Motley Fool editorial standardsand is not approved by advertisers, advertisements are sponsored content and provided for informationalpurposes only. You'll see our full advertising disclosure. Please check out our show notes.
22:10That's it for today's Motley full money.Thanks again to Rick and Sandmeet, our engineer, as always.It's the incomparable Dan Boyd.Our producer is Anand Chaka Baloo.Your host and buyers, thank you for listening.See you again tomorrow.Cool on, everyone.
There aren't comments yet for this episode. Click any sentence in the transcript to leave one.