A (3:17)

Profits may come much later down the road.

B (3:20)

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, that worth it? Not worth it. What do you think about this company?

C (3:38)

I think it's the price of admission. If you're a tech company, you have to pay up a stock based compensation. That's how you hire the best programmer and everything else you need to make the company run smoothly. And in this case I think the report was solid. And again, yeah, it's stock based compensation is a big reason why we're talking about non GAAP profitability instead of 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 Sentinel 1 a lot like, well, like Snowflake 5. Six years ago these companies were seeing doubling the revenue year after year and now it's slow, slowed dramatically. They're 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 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 profitability 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 it's 20 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.

B (4:50)

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. Sanmet 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 one. I'm sorry, 7.88 billion. That's big. That was up over 37% and the non GAAP operating margin did expand by 450 basis points year over year and reached 11%. Give me your take here and then I'll, I'll bring in some other stats here. But you follow this company so tell me where you're at.

A (5:39)

Yeah, this is a classic case of fantastic business tough stock because the business fundamentals just continue to improve quarter after quarter. They're continuing to announce, you know, strategic partnerships. Their pipeline is growing with RPO, you know it surged 37% so their business fundamental and they also signed a deal with Anthropic to kind of 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, you know, they recently in the quarter reported some slowing guidance for, for the next, for revenue for the next quarter. So that wasn't look so favorably when you have such a high value stock that isn't executing to perfection. So not too concerned because as a, as a business this company is, is, is performing phenomenally.

B (6:42)

Rick, let me give you, 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. So for those who don't know how Snowflake works, it's like Sanmet said, it is an archival 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 1200 customers. This is what Snowflake says and it is now 50% of new bookings. So how you feeling about this company and its path to profitability?

C (7:24)

I like the growth and again investments in AI 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 harder 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 GAAP basis again 56 years from now. It's a very long wait for investors. But I do think that especially with Snowflake, which has even stronger free cash flow and a stronger free cash flow margin than Sentinel One, I do think that it 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. It's not a household name. You know, 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.

B (8:33)

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 going to summarize here. You said analysts saying Sentinel 1, Gap Profitability 2032. Snowflake Gap Profitability 2031. Agree or disagree? Rick, where, where are you? Who gets there first to gap profitability?

C (9:05)

Yeah, so the funny thing about analysts, the further, the more even, sometimes near term expectations are out of whack, the further you go, it's more like dropping, you know, trying to land up a parachute into like a tin cup down at 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 1, they are improving this last quarter notwithstanding as far as margin front. I do think Sentinel One will actually get there faster, sooner than Snowflake. But I think both companies will get there eventually. But I don't think investors are going to punish them. But again, against what I read, I'm going with Sentinel One.

B (9:41)

All right, set me.

A (9:42)

I'm gonna agree with Rick. I think Sentinel One will get there faster. Snowflake is kind of a, a slow burn that, you know, Lightly is gonna have. Like Rick had said too. You know, this is one of those companies that they're gonna make some big investments now and then you're gonna see way down the road those investments paying off in cash flow generation, that that will, will be sustainable. But they have to build for that.

B (10:07)

Yeah, to be fair, we want your predictions, listeners. But I will say Snowflake has been aggressively saying don't look to us for profitability because it may never come.

A (10:23)

That's a sign right there.

B (10:25)

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? We're going to go armchair critic over the Netflix Warner Brothers deal. You're listening to Motley Fool Money.

D (10:52)

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B (12:03)

By now we've, we've all seen the news that Netflix has agreed to buy Warner Brothers Discovery Ticker wbd, Netflix's Ticker NFLX in a cash and stock deal worth 72 billion by while also taking on a bit more than 10 billion in Warner Brothers debt. In light of the genre in which 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 Sisle 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.

C (12:53)

Yeah, so very interesting development that. But as far as it's Netflix, I think I'm going to give it. Can I Give it two thumbs up. I forget if two thumbs up was two thumbs up and Ebert both had their nice, I have two hands, I can give it two thumbs 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's 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 and make them stronger and find new outlets for them. I don't think they're going to get rid of the hbo, HBO Max. They'll just never name it terribly like HBO Max did with the Max name. But 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 service competitor at that pricing 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 getting that much stronger and catching up to Netflix. And Netflix is always default cable to me. Now it's even more default default cable if it goes through. If the deal goes through.

B (13:58)

Sorry. Well that's, 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, Sandmead, 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 and 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 spin off. You know, if this deal goes through, they're going to spin off what they 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?

A (14:34)

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 thumb for just the fact that the financial burden is, 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, I always think of Netflix as that young, lean, mean upstart. They're not really that anymore. They're, they're more of the dominant play. But, you know, it is a big financial commitment for something, you know, 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.

B (15:39)

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 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 100% 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. And now they got a, an extra bit of war, 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?

A (16:23)

It definitely helps. And that gets my, my thumb to go kind of sideways and go sideways.

C (16:28)

Okay.

A (16:28)

Heading towards up. Because, you know, I, 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 that's 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, it continues on. So I, I, I've always been fond of the management team.

B (17:01)

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, Paramount Sky, Skydance announced a hostile bid they previously bid, they bid at least twice for, 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 Netflix has bid. $30 a share, roughly $108.4 billion. Paramount stock is on the rise. As we talked this morning, Rick was up more than 6% Warner Brothers stock up more than 7%. Paramount is 2%. Ticker PSKY. Rick, reactions to this, it feels a little. I mean, it's getting spicy.

C (17:56)

I hate that Paramount stock went up when Netflix stock went down. When they had 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 of all, it's more money. So that right away says, well, hey, you know, shareholder, you know, 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 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. 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 months ago, so we're already used to this by now. The center, you're getting international money with these deals, but they're not doing governance, you know, to the actual thing. So 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 who, whether it's Paramount or Netflix. But I'm really curious how this, yeah, definitely a story that was already interesting became much, much watched TV right now.

B (19:15)

Okay, yes or no? Sand meat. Will there be an ongoing bidding war for Warner Brothers Discovery?

A (19:23)

I don't think so. I think that 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 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 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 of movies and, and other things. And a lot of the younger generation watches more of YouTube and 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.

B (20:24)

I got news for you, pal. It's not just the younger generation. It's us older folks too. We're watching a lot of YouTube all we give you the preview for tomorrow. You're listening to Motley Fool Money, Cold mornings, holiday plans.

E (20:38)

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B (21:54)

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 Flippin, 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. 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, whether or not it's smart capital allocation and a framework for for judging those mega mergers. Again, that's with Emily Flippin, Jason hall and Dan Kaplinger. But for today, thanks very much to Rick Benares and San Migo. 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. While 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. That's it for today's Motley Fool Money. Thanks again to Rick and Sam Meath. Our engineer, as always, is the incomparable Dan Boyd. Our producer is Anand Chakabalou. And your host, Tim Byers, thank you for listening. See you again tomorrow. Cool on everyone.