B (3:56)

I mean, it's both. I think we say it's both. The short squeeze is probably a recognition that the business is improving faster than bearish investors expected. And so they fled and now they're probably going to reestablish short positions again. And that could, you know, over the short term, I mean, Jason, you're right. That could push down the stock price. In the short term, I think you can expect continued volatility. I think it would be naive to say don't expect volatility, it's just going to go up and to the right. That's, that's just unlikely to happen. And there is still improvement needed. I mean, let's be clear about that too. MongoDB is still unprofitable, but the trajectory is looking really good. And something that Rick, you could speak to, but something we really value at rule breakers is this maximum? Maximum, not maximum or maybe maximum in this case, I hope. But the maxim is acceleration tends to lead to more acceleration. Or as David Gardner likes to put it, winners keep on winning. So most investors can buy slowly as they follow the story because this will be so volatile, Jason. But yeah, I think it's a fair criticism for me. It's one that I would like to build upon, but I like building slowly in these sorts of situations. Perfect.

A (5:19)

So you won't see it in a lot of Wall street manuals, but buy high, buy higher might be the best four words of market advice for long term investors. Coming up next, Can Lightning crowd strike twice? The cybersecurity specialist is a compounder in more ways than just his corporate moniker, but Jason thinks a smaller rival bears watching. Stay close. We're going to play ball with CrowdStrike.

B (5:41)

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C (5:50)

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A (6:00)

Shop NFL by Abercrombie in the app, online and in store Friday, July 19, 2024 CrowdStrike didn't die that day, but it did skip a beat. A faulty update to its Falcon sensor security software shut down millions of windows fueled systems. Airports, offices, hospitals were in limbo for for more than an hour before CrowdStrike.

B (6:26)

Put in the fix.

A (6:27)

But the damage was already done to CrowdStrike's reputation and to its stock price. Shares of CrowdStrike would go on to plunge 23% over two trading days. It was a rough time to be a CrowdStrike shareholder, but history is kind. The shares are up 24% in the nearly 14 months since the day before the outage, up more than 60% since where the stock closed two days later. Is chaos a ladder or a bladder? Jason, you think CrowdStrike is doing well, but another player might be the better investment in the growing market for cybersecurity solutions. Let's talk about it.

C (6:56)

Yeah. So just to kind of build on what's happened since CrowdStrike reported or since that outage in the quarters that it's reported for business that happened after the outage happened, there's been issues. The company clearly has had to work harder to regain trust with existing customers and had to fight harder to win new business. Its margins took a hit. They're still down. Cash flows have weakened and some of its growth focused metrics shrank. One in particular Net new ARR. The measures the dollar value of net new business on an annual basis came in lower in the quarters that it's reported since after the outage. Now, sure, the company is still growing, but weaker margins slowing growth, they don't lie. This is especially true if we look at Sentinel One, which is CrowdStrike's much, much smaller pure play competitor in the AI powered endpoint security space. We can get some context. Security One reported strong and accelerating growth and higher growth rates than CrowdStrike. Some indication that again, the end market's certainly healthy and growing. And further supporting that CrowdStrike is not exactly struggling. Certainly having to work a lot harder to win and having to sacrifice some profitability in some cases. Now, this past quarter just we got, just last week, CrowdStrike showed a little more life. That net new ARR number came in higher year over year. It's the first time that's happened since the outage. It was a record level. And it does look like its margins have at least stabilized. On an. On an adjusted basis, they're pretty exceptional margins, not a gap basis. They're still good, but they've deteriorated more than the adjusted numbers make it seem.

B (8:36)

I mean, it is interesting and the recovery has been pretty remarkable. I do concede that, Jason. I think it's been, it's been interesting to watch it. But how much do you think that net new ARR number is due to selling more into the existing customer base versus selling to new customers? And the reason I ask this is reputationally they took a hit, right? And so it would follow that if the recovery really is working well, then those customers that decided to stick it out, if those customers that stick it out are spending more, that would be a pretty darn bullish sign. Now, obviously CrowdStrike needs a mix of both. We do know this, but they have spent years telling the street to pay attention to this metric. Hey, what's the proportion of the customer base that buys five, six, seven or even eight plus modules in the implementation today? The company says that I've just pulled this from the latest quarterly deck. 60% of customers generate at least 100k in ARR use. 8 or more of these CrowdStrike modules and they've got more than 20 of them. I think it may even be more than 25. So let's just be generous and say it's about a third. So handicap it for me here, Jason. Where they were reputationally, what they're trying to do now, will more or less than 50% of CrowdStrike's growth over the next five years come from growing these massive customers from within or from winning massive multimodal or should I say module deals up front.

C (10:20)

I think overwhelmingly it's going to come from existing customers for a couple reasons. Number one, this is the top dog in the space. It has by far the lion's share of the market already. Its growth rates are slower but its revenue dollar growth is substantially larger than, than, than Sentinel One. I mean it's basically adding about a, every, every quarter. It's new revenue, just its new revenue is equivalent to a sentinel 1/4 of total revenue. Right. So that's how big they are. So we have a maturing industry, we have the top dog in the industry. I just don't think they can find enough net new business to generate that. I think one of the things with the slowing growth rates is probably some new customers that are coming to it that are probably starting small and they're going to be adding more modules over time as they find that it is the best platform and any concerns they have about issues like the outage that happened last year kind of start to fade into the background. So I think overwhelmingly it's going to come from those, those existing relationships.

B (11:23)

I mean, you've mentioned Sentinel One here. I've looked at this company, it is an interesting company and I do wonder, is there a scenario where the lamb eats the lion? And I know that sounds utterly absurd, but Sentinel One, I mean they have survived in this market and they've survived in this market for quite a long time. I have to imagine there's something special about this business and maybe it's the AI imbued threat detection, maybe that's a slightly better alternative. Is there something you've seen in looking at the business that makes you think Sentinel One is special?

C (11:57)

Well, Sentinel One, their, their purple product is the newest branding that they're using for a lot of their AI driven things. Couple of things they highlight is the fact that they play well with others, which I think is important and how this is a more kind of a tech driven, AI driven product and less people driven, which is interesting. You think about CrowdStrike, that doesn't seem like it makes sense. But if you listen to what Sentinel One, what they say, maybe that's the case. Some similarities. You have founders behind the business. Yeah, I think you've got a little bit deeper experience in Cybersecurity with CrowdStrike. But the founder and CEO of Sentinel One owns a quarter of the business. So this is someone who's been deeply involved as well. We love those aspects of winning businesses that have the culture that Comes with those founders that believe in the mission of what they're trying to do. I don't know if this is as much a case of like the lamb eating the lion, so to speak. Maybe more like a Pepsi Coke kind of situation where it's just such a gigantic market that you can have multiple winners, which isn't always the case. You know, we look at the history of a lot of rule breaking businesses as investments. There's been one that's emerged that has disrupted, has become the top dog and has turned into the rule maker. I think cyber security is so big that this again could be the Pepsi to the Coke here. And here's the interesting thing about it. If you look at the longer term history generally, Pepsi has actually been the better investment than Coke. I think you think about valuation with with these two stocks right now. Right now, Crowdstrike you're paying a similar multiple to what you were paying for the stock back when it was growing closer to 30% a year. It's growing at 20% a year now and you're still paying for those multiples for about a third that valuation. You can buy the lamb here that's growing at a higher rate and certainly trades for a much more compelling valuation.

A (13:46)

My money is still on Crowdstrike which has more than doubled the S&P 500 this year. Which brings us back to Buy High, Buy higher. When we get back from the break, we'll turn due diligence into an improvisational comedy art form. Can I get a suggestion? Stay with us. We're going to turn playtime into paytime.

C (14:03)

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C (14:12)

So I thought it would be fun if we made $15 bills, but it.

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So there goes my big idea for the commercial. Give it a try@mintmobile.com Upfront payment of $45 for 3 month plan equivalent to 15 per month required New customer offer for first 3 months only. Speed slow after 35 GB of networks Busy taxes and fees extra c mint.

A (14:33)

Mobile.Com I've been a Fool for what is now 30 years. I've also been helping run Miami's longest running improv comedy theater for the past 13 years. I want to bring these two passions together now. Yes, and is a core principle of improv. You take something simple that your scene partner gives you, you build it up together. You bring a brick, not a Cathedral. Jason. Tim, I want us to take a stock that we're passionate about followed by a simple bullish thesis. We'll then go around the room. Yes. Anding the positives. Then we'll. Yes, but some potential concerns. And when we're out of bullish or bearish bricks, one of us will just say and seen and we'll move on to the next stock. Jason, let's start with you.

C (15:10)

Mercado Libre is the dominant first mover and top dog in both E Commerce and fintech in the biggest economies in Latin America.

A (15:19)

Yes. And Latin America is earlier in the migration cycle for banking, fintech and E Commerce than the more advanced US Market.

B (15:27)

Yes. And payments in particular is a problem in the Latin American market. That Mercado Libre makes this simple and digital is crucial.

C (15:36)

Yes. And Mexico in particular is one of the most exciting largest economies in Latin America and Mercado Libre is really early in its journey in that country.

A (15:48)

Yes. And Advertising revenue rose 38% in its latest quarter. This isn't a needle mover for Mercado Libre at this point, but it's an obvious growth opportunity given all the eyeballs it attracts.

B (15:59)

Yes. And we are only just starting to see how big the payments processing part of Mercado Libre's business can be. And they've managed to reduce their risk materially that MercadoLibre can be not a bank, but kind of a really slick payments provider and not get caught up with consumers. That bad credit is pretty good.

C (16:25)

Yes, but if you look at its financial results over the past three or four years, that lending business is the thing that is driving most of the earnings growth that the company has generated. Move fast, breakthroughing things works great when you're building a tech platform, not so much when you're letting other people use your money.

A (16:44)

Yes, but and not just that the lending business, also the credit cards, it's putting a riskier spice profile on Mercado Libre right now.

B (16:53)

Yes. But I'd have to say that the E Commerce business, as great as that has been, it is still the core business for Mercado Libre. But you have to figure that that is a business where you're going to see a lot more competition. MercadoLibre hasn't faced a lot of competition yet. The growth has been kind of unencumbered, but that competition is coming and seen.

A (17:18)

All right, I'll go next. Duolingo is a popular language learning platform that's taking the world by storm.

B (17:25)

Yes. And it has some of the best unit economics. I've ever seen. It's not uncommon to see a dollar of sales and marketing expense produce $7 or more of new revenue.

C (17:35)

Yes, and the world is becoming smaller with more people traveling to places that speak different languages.

A (17:42)

Yes. And daily active users is growing faster than daily monthly users. A sign of improving engagement.

B (17:49)

Yes. And the AI threat that we all thought, well, maybe not all, but a lot of us thought would really hurt Duolingo actually became a strength. They judo threw it into their own AI that has been a material driver of growth over the last several quarters.

C (18:06)

Yes. And those of us that remember trying to use CD ROMs in our laptops to learn languages are finding out that it's much easier to do it in a cloud based app ecosystem.

A (18:17)

Yes, but Google Translate, a recent update, may have Duolingo in its crosshairs.

B (18:23)

Yes, but in addition to that you have all of the large language models doing language tutoring for people on demand and that is a pretty interesting and possibly threatening substitute.

C (18:38)

Yes, but like health and fitness and weight loss and so many other categories, using learning a foreign language often proves to be ethereal and a short lived, exciting venture that doesn't prove to be sustainable and seen.

B (18:56)

All right, let me start us off. Let's talk about Warby Parker. Warby Parker is revolutionizing the market for developing and selling fashionable prescription eyewear.

C (19:06)

Yes. And this is definitely an industry that is ripe for disruption with one giant player and not a lot else.

A (19:14)

Yes. And it's teaming up with Google to roll out its first entry in the AI glasses market.

B (19:21)

Yes. And this is a company that is doing an incredible amount of growth through traditional stores and those stores are highly profitable with 35% for Wall EBITDA margins.

C (19:34)

Yes, and it hardly operates in any market outside of North America right now.

B (19:38)

Yes.

A (19:39)

And its mix of E commerce and small boutique stores help broaden its reach and crystallize the brand.

B (19:44)

Yes, but Warby Parker is a very small player in a very big market. There's roughly 300 stores now in a market where there's somewhere on the order of 45,000 optical locations, including at some of your favorite big box discount stor.

C (20:04)

Yes, but the relationship so many of the people in the eyewear profession have are pretty deep with the biggest player. And change management is the hardest thing to do if you're going to disrupt an industry.

A (20:15)

Yes, but it's still trading below the $40 reference price it hit the market.

B (20:19)

At when it went public four years ago and seen.

A (20:22)

Well done, Tim and Jason, thank you for indulging me today. Let's form an improv troupe someday.

B (20:28)

Thanks, Rick.

C (20:28)

Let's look a take. Do it.

A (20:30)

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 on 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 purposes only. To see our full advertising disclosure, please check out our show notes for Tim Byers, Jason Holland, the entire Motley fool money team. Hi, I'm Rick Manars. May your days be sunny and your life Motley fool money.