Asit Sharma (3:41)

Yeah, sometimes it feels like you're taking volatility as a forward indicator. Cc, for example, what the VIX has done, which is a predictor of volatility and adjusting your stock purchases for that. That almost seems very short term in nature, Andy. But I think it's smart in terms of picking up the kinds of stocks you want at the prices you want. So when the market is getting a little too complacent, that might be time to look at stocks which have those lower trading multiples. Vice versa also holds.

Andy Cross (4:12)

Yeah, I think there's ones that are really cash heavy that sell a little bit more reasonable even like a company like Microsoft, you know, it just, it is so ingrained and so something that looks a little bit more like that rather than something a little bit more on the speculative side, a little bit more on the higher growth, higher multiple side. I love those kinds of businesses and we do too here asset and you and I do. But you know, those don't jump really to the top of my list when we start seeing valuations move up this high like we've seen over the last month or so.

Asit Sharma (4:39)

I agree.

Andy Cross (4:40)

Let's move on to earnings. Let's start with Zscaler. The zero trust cloud cybersecurity specialist jumped nearly 10% offset on Friday after reporting really healthy fiscal third quarter earnings that included a third straight quarter of 23% growth in annual recurring revenue. That's really a key metric that we like to track with Zscaler. What caught your attention when you looked at the cybersecurity leaders earnings from last week, Andy?

Asit Sharma (5:06)

I also liked that growth in annual recurring revenue or ARR as it's popularly called. I also liked another acronym, rpo, remaining Performance obligation. Think of this as revenue backlog that grew 30% year over year. So this, this is equal at 5 billion bucks to almost two years worth of revenue. Now of course Zscaler isn't going to stop growing, so this isn't really two years worth of revenue, but it just shows you the backlog of contractual work the company has built that stood out to me and also the role AI is playing in revenue composition. I think this proves out something that many of us suspect, but we don't get a chance to see it a lot in action. Which is a strong company that's a little boring, can stay stronger for a lot longer than you'll pay attention. And I feel like people have forgotten about Zscaler in some ways. With the emergence of companies like CrowdStrike, the resurgence of a business like Fortnet, these seem to be much more in the conversation these days in the cybersecurity place. But here we have zscaler, which has created highly effective AI agents for one thing, to help companies deal with security operations tasks. So it comes to mind that the business which was built around sort of this zero trust architecture really played well and plays well in an age of AI threats. Now you could call that dumb luck and maybe to some extent it is. But it also reminds me of strong companies, Andy, like Nvidia, which have sort of leading tech that prove themselves worthy of the next use cases. Now we can say with Nvidia they sort of create those new use cases. But I really liked that just reading through the call, looking at these numbers today. The strength in ongoing business is underpinned by AI demand.

Andy Cross (6:56)

Yeah, it's interesting. I mean dumb luck maybe, but also right place, right time. Jay Chandry, who's the founder, the CEO, major shareholder in the business, continues to drive it forward. I really like what I saw from some of the new initiatives. When they think about that zero trust branch they have which expands outside like core operating and they saw some really impressive performance from that product. Also you mentioned the AI initiatives, their sales progress. They introduced something this year called called Z Flex, which is a little bit more acid of a, of a usage base pricing mechanism and trying to push more and more clients to encourage using and signing up for this. And they've seen some real benefit from that initiative too. They hired a new sales director, Mike Rich, who came over from ServiceNow and so which also has some consumption based usage systems and pricing mechanisms in their own products. So I like how they're innovating both on the product side, but really driving this Sales side and I like that. And they talk a lot about how that ongoing ARR. That annual recurring revenue metric is going to be more important as they continue to build out the modules and then their clients have this consumption based pricing method to be able to add or take off different modules as they see fit based on what they need. So I like what we're seeing there and I also like the fact that they boosted guidance a little bit. Revenues, they expect to be up 23% for this fiscal year. Now their fiscal, It's a fiscal fourth quarter coming up so 23% versus 22% in the prior period. And their operating margin, they increased that a little bit too. And then their adjusted eps. So the one thing to watch I think is a dollar based retention rate fell a little bit this quarter. And they are talking about these innovations and the cost of those innovations offset and going to market and that that costs money to do that. And they're willing to take a little bit of the margin hit to kind of go into that. But, but I like the fact that they continue to innovate on both the product side as well as the sales side.

Asit Sharma (8:57)

Yeah, you're right. Andy J. Chaudhry is someone who pushes on a lot of fronts and that's what you want in a CEO on this new sort of consumption based model, the Flex model. It's interesting, we saw right after the pandemic, a couple of years after the pandemic when interest rates spiked so many companies that we admire in the software as a service world testing out these consumption models, saying okay, if you guys don't want to pay us up front for years at a time, we get that everyone's trying to control costs so we'll have a little bit of pay as you go. Now this Flex program is consumption based a little bit. But it also brings in this other concept which I think is very powerful for a company like zscaler. Traditionally, Zscaler has signed up companies for years on specific modules. And so if you wanted to change anything Andy, you had to go through a new procurement process filled with negotiations.

Andy Cross (9:47)

Very complex.

Asit Sharma (9:48)

How do you want it to do that? Which is complex. I mean that's not a lose lose, but it's not a win win either. It's sort of like, okay, we'll just take a pass. So a company couldn't get the products it wanted when things evolved. Neither could Zscaler get the revenue. But here we have. And I think this is because things are moving so fast with AI. The ability of a company to say, look, okay, we signed up for these modules, but if you can give us the same pricing, we want to switch out some. Let's take this new, for example, random example out of the top of my head. This prompt, AI prompt injection, threat protection, we want that module. So under this new plan you can do that. And the uptake of the Flex program, although it's small, has been pretty quick. And then lastly, just to circle back on the cost structure, you know, I sort of agree with you. This is a company that if it wanted to, could be turning a gap profit right now. They tend to work at sort of break even GAAP margins to slight losses. And it's not because the company's not growing. I mean you mentioned that 23% growth right at the top as a headline number in the ar, Andy. But here we've got again J. Trotter and his team. Not afraid to spend on R and D to bump that expense up to keep evolving with AI, not afraid to invest in the direct Salesforce team. And I will say I'm excited that you brought up the fact that their sales force is being directed by someone who comes over from ServiceNow, which I've often said these are the assassins of the enterprise world. They like to form aggressively, form deep relationships with enterprises and sign great contracts. Very hard to dislodge. So Jay Chaudhry now is directing his salesforce to invest in getting these deeper relationships as they go on.

Andy Cross (11:31)

Yeah, let's get down to the stocks. At about 275, you got a $42 billion market cap. You know, now it sells at about 15 times revenue acid versus about 10 times last fall, so a little bit more expensive. What do you think about the stock here?

Asit Sharma (11:46)

You know, I think if you're a holder of this company, you have much more reason to feel confident after the last few quarters than perhaps this time last year. But I'm not so sure I'm a buyer at this point. I mean, one thing I have to qualify all this praise of the company with some realism, a dash of realism. The trading multiples feel a little inflated to me now. They always do with Zscaler. It is a company that's growth oriented, has great free cash flow margins. I think of 18%. Management was talking about exceeding the rule of 50. They called the rule of 52. But basically when you add free cash flow growth to revenue growth, if you can get above 40 or 50, these are great benchmarks and I'm not dragging on those. But just to say this is historically a company that has been a little volatile vis a vis investor sentiment. So if you like Zscaler, I'm going to bet that with the sort of macro picture we have for the rest of the year and its historic volatility, you probably can get a better price if you're patient. And ac, if one thing you've taught me is true, the patient can often get that price they're looking for if they are able to hold out and keep the cash ready.

Andy Cross (12:55)

Yeah, I think they'll do about $3 billion in that ARR this this year and at this multiple after the performance been so strong, I think I'm willing to just kind of just sit back. I own it. I'm completely comfortable holding it. Not really eager to jump in, but if I see it pull back, this quarter was very impressive and I like those initiatives. And as Jay said on the call, Cyber continues to get a lot of interest. IT budgets are constrained in general, but cybersecurity is one spot where where clients are willing to spend and that's going to benefit Zscaler, I think, for many, many years ahead. Let's pivot over to retail asset Ulta Beauty shot up 12% on Friday after delivering first quarter results that, gosh, really showcased its strength in beauty. Retail comps are up 2.9% driven by 2.3% increase in average ticket size and 0.6% increase in transactions offset and the retailer took market share. What did you see in the earnings that you liked?

Asit Sharma (13:54)

The thing that stood out to me, Andy, is the model here and I think the strength of Ulta's model has been obscured over the last year or so. It's been tough if you're an investor in this world of beauty and cosmetics. But this particular model is very much based in the idea of beauty, the concept of beauty. And we can see just from the world writ large how pervasive social media is on people's understanding of personal aesthetics, their own appreciation of themselves, how they look. And I think that Ulta really plays on this. I want to paraphrase something that CEO Keisha Steelman said about the quarter and about recent trend at Ulta. She said that consumer engagement with beauty is healthy because people are willing to trade other stuff in order to keep buying their beauty products. They're willing to take these trade offs. So here we have beauty not as so much of a discretionary item for a certain set of people, but almost as a staple that you are going to continue to buy it. But at the same time, Kesha said that they're very cautious about value. So the company has to bring that value. We'll dial into this a bit more in just a moment here. What did you see out of these results?

Andy Cross (15:12)

Yeah, Kesha said that many consumers indicate that they are leaning into beauty as companies comfort and escape from the stress of macro uncertainty. So there's been often that long line that investors are focused on asset, that beauty tends to be very resilient. And I think we've seen that struggle over the past, you know, like you said past year, 18 months or so. But so I think there's a lot of expectations that are not very high coming into this quarter. And Ulta exceeded those expectations and they boosted their guidance a little bit. And the new CEO, Keisha Steelman, who, who I I, I think has a real plan for Ulta, she talked about her Ulta Beauty Unleashed initiative that is going to drive core growth scale into new business lines, streamline cost structure. So I think she set up a really good plan and she talked about how they took some market share gain, they had better member engagement in the in store performance which is someplace where she's really focusing on. And I think Ulta is excelling. I think that all started to show up now that is costing money. So they are making investments. Their capex is going to grow somewhere between 13 or 15% up to 30% this year. They're going to invest it back in the stores. They're seeing some cost pressure on the employee side. So they are making the investments. But I think with the scale they have, it's actually good investments and ultimately that return on capital is going to be well served for investors.

Asit Sharma (16:33)

I think you're hitting on something that the market picked up on, Andy, which is to say look at the outlook for this company for the rest of the year, it's actually decreasing. I think comparable sales are going to land between 0% to 1% for the entire fiscal year. So why did the stock react the way it did? I think it's the taking of market share but also seeing that the plan for new stores continues. They're going to open 60 stores this year. So if you take that sort of divided by the base rough numbers, this is a company that's growing its store count by 4 to 5% a year. I have to be careful here Andy, because sometimes when I talk fast people hear 45% but no 4% to 5%. But hey, for reasons retail that's a pretty steady store count. So if you can put a little bit of comps growth on top of that and manage that bottom line. It becomes a very nice economic model that investors can feel confident about. This is something else that came through during the discussion post earnings. The idea, as Kesha said, that look retail, some of the success is it's kind of retail 101. It's the basics. Right. She said it's about being focused and controlling what the company can control in a dynamic which is very like up for whatever the whim of current trade winds are this morning, next week when we wake up. So this environment against that you can control cost and they talked about this as you just alluded to giving up a little bit of margin, putting more people in place during store hours. So taking on that load on the payroll, getting inventory in house again, if you don't have it in house, you can't sell it. And just keeping with that store opening cadence. You see a company that's managing its cost structure pretty well but also making the investments to keep those customers engaged. They've got some 45 million people in their loyalty program.

Andy Cross (18:31)

Yeah.

Asit Sharma (18:32)

So it is a well rounded business. And as some of this dust settles around the whole beauty and cosmetics, I think folks will be looking to concentrate capital into just a few high quality names. We like Elf, Elf Beauty at Stock Advisor and that's been making a comeback. This is another high quality company and I think the post earnings results sort of reflect that vote of confidence.

Andy Cross (18:55)

Yeah, I spent about 15 bucks in Ulta just yesterday on some Elf products. So supporting both those companies. We'll get to the stock in a second. Asit. I just didn't want to touch a little bit in the tariff. She mentioned that only about 1% of their merchandise is direct import. So the rest is really partnering with the brands. And so there's some questions about how much the where's the pricing going to fall if tariffs increase and we'll have to see how that all plays. I was impressed just quickly on their strength in the fragrance. The fragrance was one of their leading spots and just new brands really investing into new brands and bringing new brands and partnering those brands inside, inside the store. They hosted 20,000 in store events this quarter with a lot of them with product partners.

Asit Sharma (19:37)

Right. That's to that engagement that they're so good at. And I think for the demographic that they aim, which is younger and younger, those brand endorsements are very important. We're sort of a personality driven consumption culture and Ulta's pretty good at that. I want to go back to one thing though and let's ding them here a Bit. Andy, just give a demerit here. I'm not saying it's disingenuous, but I think the risk is a little higher of tariffs than the company presented. It just. I totally get it. You're featuring brands in your portfolio, in your stores. 1% is direct import. But if your brand portfolios have to raise prices because of tariffs, then that's going to affect the folks who walk into the store. So I still think they've got a little bit more exposure than they may have discussed. Not that they were trying to hide it. The discussion didn't center enough around, okay, what's the impact if we get on the cosmetics level? I know 15% higher prices later this year, I don't know if we'll see that much, but to me that's a risk.

Andy Cross (20:35)

Well, we talked about that with Elf, you know, ELF manufacturing products. And where, where's the tariff come and who, who has pricing power? How does that get passed on to the retailer? The one thing about Ulta that I think they have shown very much like other big box retailers is that scale. And they did say we have the ability, we think, to be able to navigate those, but it proof's going to be in the pudding or maybe in the makeup palette. You know, as we see how that pricing shakes out. Let's get to the stock. So by the way, I will say they repurchased 986,000 shares for at about $363 per share. The stock right now is at 473. So that quarterly investment, at least as of right now, has been good for shareholders. Stock's up 10% this year, kind of flat against the market. Are you buying?

Asit Sharma (21:21)

Yeah, I would be a buyer here, Andy. I tell you, one of the things that is still apparent is the company's below its sort of historical trading multiples on some fronts, not by much, but enough that if you've got the long term vision for this company, you understand that real estate cadence, you think that this company can hold its own against some new entrants. Like look at Sephora going into Kohl's locations, right? That's a big competitor that folks talk about. Well, going forward, looking at a company that's trading close to 20 times its next 12 months earnings per share, I feel that it's good. Maybe you're not getting a bargain basement price, especially after being up 10%. And this is retail after all. We were talking about technology earlier growth stocks. This is never going to grow as quickly as a Zscaler. On the other hand. I don't think it's a bad price here. So I'm more amenable to making a purchase here. What about you?

Andy Cross (22:15)

Yeah, I agree with you. She had talked about the historical growth of beauty is like 2 to 5%. They think that will continue to grow. I think they can take some market share. They're making those investments into their stores. I think that's going to pay out dividends. And they have that membership business was up 3%. Members were up 3% this quarter. So not huge growth, but enough because a lot of those membership of which I am now one after joining this weekend, that generates a lot of the growth that you see that they see in the stores and tied to a lot of their new marketing initiatives that that Kesha Steelman and her team are taking on. So I I'd be a buyer of Ulta even after a little bit of this ramp. But don't be gre. Just nibble. If somebody wants to nibble on that, that's fine. I bought some earlier this year, so I'm pretty happy.

Asit Sharma (22:59)

All right, Andy Cross, I'm going to be looking for you to go back in store and make my nibble worth it later this year.

Andy Cross (23:05)

I'll do that for both of us and all those shareholders who also have followed us into Alta Stock. Osagerauma, thanks so much. Appreciate your thoughts on Alta, the stock market and Zscaler.

Asit Sharma (23:16)

This is a lot of fun. Thanks a lot, Andy.

Andy Cross (23:17)

That does it for he us here at Motley Fool Money. 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. 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 Rossa Sharma and the entire Motley Fool Money team. I'm Andy Cross. Thanks for listening and full on.