In this podcast, Motley Fool analyst David Meier and host Deidre Woollard discuss:
- The reason behind Palo Alto Network's lowered outlook.
- Where the next big cybersecurity threats could come from.
- fuboTV's attempt to sport a sports streaming superpower.
Motley Fool contributor Matt Frankel and host Ricky Mulvey look at Meta Platforms' rebound and if PayPal could be next for a glow-up.
To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. To get started investing, check out our quick-start guide to investing in stocks. A full transcript follows the video.
This video was recorded on Feb. 21, 2024.
Deidre Woollard: Cybersecurity takes a swoon. Motley Fool Money starts now. Welcome to Motley Fool Money. I'm Deidre Woollard here with Motley Fool Analyst David Meier. David, how are you doing today?
David Meier: I'm doing very well. How are you?
Deidre Woollard: I'm doing well, but we're going to talk about a company that maybe isn't having the best Wednesday we have ever heard of.
David Meier: I don't think it is.
Deidre Woollard: That's cybersecurity firm Palo Alto Networks. Now, they had a solid quarter, revenue up around 19%. They met expectations. They're growing their business, their biggest customers, there's a lot to like there. But the market did not like this usual fall of late poor guidance. So tell us a little bit about what's happening here.
David Meier: So you're exactly right. Q1 performance came in pretty much as expected, but the guidance for fiscal Q2, as well as fiscal year 2024 the growth for those two, came in much lower than expected. So the company had been and had been continued to achieve this just under 20% revenue growth. But now the expectations are for mid-teens and that's a big difference, especially when your stock is trading at premium valuation metrics before their earnings supported, was trading at just under 13 times forward sales. When you don't meet expectations and you're trading for a premium, that's unfortunately your stock is going to sell off shortly, and that is exactly what is happening [laughs] today.
Deidre Woollard: Well, management was really careful on the call to try to explain why this is happening [laughs].
David Meier: Were they?
Deidre Woollard: I felt like they were, they were talking a lot about the demand is not going away, we're stepping back to go forward to some extent. The guidance is not a consequence of demand. What do you think? You studied this company, do you believe it?
David Meier: The first thing is, we're going to see what happens. We don't know exactly today, what exactly happened. We have management talking about a lot of things that they saw happen, such as spending fatigue or customers wanting more value for the dollars that they're spending on their cybersecurity. We've got management also saying, hey, we're still pushing this idea of selling the platform as opposed to selling individual modules. So again, those are, we'll call them excuses, but it didn't say, hey, the sales cycle is lengthening or we didn't get a deal in that we were expecting to and it's pushing into 2Q. We didn't get any really specifics. We got some broad terms. So right now, I'm willing to give this management the benefit of the doubt because of what they've done in the past. But, the little yellow flag in my head has gone up.
Deidre Woollard: Well, and I think the yellow flag goes up because of what you mentioned about trading at a premium. It's giving me a little bit of, we've got Nvidia after closing bell today, so thinking about [laughs] what happens when the guidance, does it meet the really high expectations?
David Meier: Yes, the higher the premium, unfortunately, the more the stock has the potential to fall if you don't meet those very high expectations. That's the way the markets work nowadays.
Deidre Woollard: Indeed. Well, I want to zero in on the platform thing that you mentioned because they talked a lot about this on the call. It's big part of their earnings is this. They say they validated platformization [laughs] in the cybersecurity space. Now that seems like lingo to me, my lingo [laughs] meter went off, but what does it mean? And is it any kind of moat for them? Because they were a little different than some of the other cybersecurity companies.
David Meier: Yes, that's an interesting buzzword. Again, let's go back and look at what Palo Alto has done and over time, and especially since CEO Nikesh Aurora took the helm. They've been transforming from mainly a firewall hardware and software provider into a complete cybersecurity platform. We'll call that a one-stop shop. But they've made that transformation. They've spent a lot of money and a lot of time getting to be from a one product company to, I believe in the pitch to investors, they said they were a leader in 21 individual categories. They've put those all together and that's your validated platformization [laughs] strategy coming through.
So again, they've done that and it's proven to be a good strategy. If you look, their sales, sales growth increased as a result, their stock price has gone up. The CEO says, Look, I want to lean even more into this. Especially if customers are demanding more value for their cybersecurity dollars. You can come to me and through one channel. You can turn on all the things you want from us as a result of having a platform or having a one-stop-shop. The phrase notwithstanding, I do agree that they have turned into a formidable one-stop shop. The challenge to get to your second part of your question is, does this provide a moat? None of their competitors are standing still. Some of their competitors are saying, hey, we're going to just focus on one thing and we're going to be really good at that. So companies, buyers do often like to have go with best-of-breed. Then the other part of it is, there's no reason that other companies can't try the same strategy. Will it provide a moat? We'll see this is a very competitive industry, but right now, or for the last, let's say five to seven years and I think going forward it does give them a little bit of an advantage to have one or more salesperson be able to give them the whole pitch as opposed to lots of individual salespeople giving them separate pitches.
Deidre Woollard: I'm thinking about this because you are on our member-facing programs this morning and you were talking with one of our other analysts about cybersecurity like CrowdStrike and Zscaler and the other person said, why not just buy the basket, you can't call it at this point. What do you think about that?
David Meier: I think that's a good strategy and the reason is because Palo Alto has a platform. They've made acquisitions, they've done technology development, they have their technology foundation that they use within their products. But it's not necessarily the best one and it has to evolve over time. So having a basket of technology innovators within the cybersecurity industry is probably a better bet than just making one bet on a platform, because there are lots of smart people who are attacking this problem differently. The other thing is, we don't know where the threat vectors are going to come from next. We don't know necessarily the technological foundations that are going to nullify those threat vectors. So you could go back and forth between who's a leader in this area of cybersecurity and who is a leader in that area. So I do think that basket approach is a better one. Basically diversifying across the technology innovations within cybersecurity.
Deidre Woollard: You had such a good point there about we don't know where the threat vectors are coming from. Because, we talk so much about the good side of AI, but the bad side of AI and the need to protect against AI and the need to protect your AI. There's all these different things that are going to come up. So Palo Alto, they talk about this goal. They want to achieve 15 billion in annual recurring revenue by 2030. They have this way to do this with AI security. They have these three components; they want to keep employees safe fall using AI, of course makes sense, they wanted to secure the deployment of AI models. Of course, you don't want threats, tinkering with your large [laughs] language [laughs] models or anything like that and then securing AI apps from real-time cyber attacks, which sounds terrifying. This sounds like a good theory and a good plan. What could go wrong here?
David Meier: I agree with what you're saying in terms of this sounds like a good plan, but I think the challenge going forward is going to be, are these really serious threat vectors? The other part that you have to ask is, what is the cost of having an attack within these three areas? Let's go back to what Palo Alto did originally and that's firewall. Having somebody attack your firewall and get into all of your computer systems, that's very bad.
Deidre Woollard: Oh yeah.
David Meier: That could be catastrophic. You are willing to spend a lot of money in order to protect against that threat. By no means, I don't want to trivialize anything within the AI threat vector, but is the worst thing going to be somebody attacks what the answer to your prompt is? Is it, it messes with the AI generative video that you're looking to create? Again, I've realized that I'm in some ways trivializing us. I don't know what the threat vectors are. I imagine Palo Alto knows better. They gave actually some pretty big total addressable markets for the three categories on the order of three to five billion, five to seven, and I think six to 10 so they think it's real. The challenge will be, are they right? Can they use their technology in order to go after and nullify those threats? Then can their marketing and sales do a good job of convincing people that yes, this is something you need? It's early days. We'll see.
Deidre Woollard: Yeah, the early days factor is one of the things that I think makes this particular category so challenging to invest in and try to figure out where things are going next.
David Meier: I think that's a safe bet to say that someone will attack it. We just don't necessarily know how.
Deidre Woollard: Exactly. Well, I want to switch categories a bit. I know you like to watch sports. I like to watch sports too and I'm wondering if you had a take on Fubo's move to basically go after Disney, Fox and Warner Bros. Discovery, they announced that their sports bundle and so Fubo is basically saying, it seems to me like, hey, you stole our idea. We've already been doing this so don't do that. The philosophy is not out yet, but it feels a little like a hail Mary to me, what do you think?
David Meier: As a former Fubo subscriber, I will say for full disclosure, I do subscribe to Hulu. Now, Hulu Plus, and they give me 75% of my sports that I actually religiously watch and I subscribe to other providers as well to get the things that Hulu doesn't provide me. I'm not going to speak to the legal challenge as I'm not a lawyer but I think if we step back and think about what Fubo's doing against major content producers such as Disney, Fox, and Warner Brothers. This really shows the challenges of being solely a distributor of content in an era where there are essentially no barriers to entry. Look, you and I could start a platform to distribute content and I realize maybe technologically that might be a little bit difficult to do it but seriously, we could do it.
All we need to do is create the platform, go to the content providers, cut deals with them in terms of paying for their content and then figure out how to get subscriptions. There's nothing that is actually preventing you and I or from anybody else of doing that. Since it's so easy now and it's so cheap to basically distribute content over the internet, Fubo stands to lose quite a bit as a result of not having their own content. This gets back to the same timeless debate. Do you want to be a content creator, or do you want to be in the distribution business? Well, Disney, Fox and Warner Brothers on the sports side have said we can do both now. Again, I don't know about the merits of Fubo's case because I don't know all the details.
They came out and said, hey, you're doing some anti-competitive practices. That's certainly going to get some lawyers attentions, in terms of they have the case, but I don't know, are they? They're just saying you can access our content here. You can access our content on Fubo. They want as many people as possible and as many platforms as possible to access the content. That's why they're content producers. But we'll see, it does feel like a little bit of a Hail Mary and I don't want to see Fubo fail in any in any shape or form. But yeah, this is the big guys essentially throwing their weight around as there's no barrier of entry to distributing your content.
Deidre Woollard: Yeah, they've they've got the deep pockets, so I'm curious, why did you stop having Fubo? Was it because you could get most of what you needed and get other content?
David Meier: It was because i couldn't get TNT and sometimes there was hockey and basketball that I didn't get to see and at the time, I believe Fubo also weren't able to resign their deal with Monuments Sports, which is the Washington Capitals. I was watching those Capitals religiously. I went to Hulu and got that and then when I moved, I actually was not able to get the Carolina Hurricanes, which is the other team that i support because apparently Pawleys Island being four-and-a-half hours away from the Raleigh-Durham area is still in the area where they want me to go to the game so I actually had to purchase Bally Sports South in order to get access to my Carolina Hurricanes.
Deidre Woollard: I'm glad you shared that because that's an example of some of the hoops we go to go through, especially as sports brands because I'm in Alexandra, I'm also a Caps but my core team is the Bruins so I had to get ESPN in order to get my Bruins.
David Meier: Yes, and so I have the plus package as well, and ESPN Plus has so many great games and I get them for such a very great price because, even though I follow the Hurricanes and the Capitals, I love watching the Bruins play, I love watching the Rangers play, I love all these teams and ESPN Plus is the perfect venue for it. I watch too much sports. [laughs].
Deidre Woollard: So do I. Well, let's leave it there. Thanks for your time today, David.
David Meier: Thank you so much.
Deidre Woollard: We talked about a lot of stocks on the show, but it's just a peek at the Motley Fool's investing universe. This year we're rolling out a new offering. It's called Epic Bundle. Service includes seven stock recommendations every month, model portfolios and stock rankings, all based on your investor type. We're offering Epic Bundle to Motley Fool Money listeners at a reduced rate as a thanks for listening to the show. For more information had to fool.com/epic. We'll also include a link in the show notes for you. Is PayPal, the next Meta? Or is Meta the next Meta? Ricky Mulvey caught up with Matt Frankel to talk about how the payments company can turn it story around.
Ricky Mulvey: All right Matt, I'm seeing a lot of internet chatter where people want to find the next Meta. Some folks are hoping that it's PayPal. Before we get to how the story translates, let's start with the Meta turnaround story. The stock has been a five-bagger since its low in November of 2022. Little uncommon for now, a mature-ish tech company. That's not something you'd expect to see. While it's easy to see the chart in hindsight, why we're investors so pessimistic about Meta just a year-and-a-half ago?
Matt Frankel: Well, think about what was happening a year-and-a-half ago. It bottomed in late 2022. This is when all the Aragon out of the big bubble of the tech companies, money was free for a long time, things like that. It's a perfect storm of two things. One, Meta was investing billions of dollars in the metaverse side of the business that was losing those billions of dollars and at the same time it's ad business was in terrible shape. Advertisers stopped spending money because of economic fears. This is what happened with other social media companies as well as what happened with Alphabet. Their ad business was just terrible.
Investors really couldn't fathom why they were throwing billions of dollars into a unproven technology at the same time while their ad business was losing money or was declining. Since then the ad market has recovered. Ad revenue in Meta's case was up 24% year over year in the fourth quarter, which as you mentioned, for a mature company, that's a pretty big jump. The metaverse part of the business is still unprofitable. But it's hitting some impressive milestones. Reality Labs is what they call their metaverse division.
It broke $1 billion in revenue for the first time ever in the fourth quarter. It's not profitable, but the metaverse side is showing promise and the ad business has recovered nicely. Its margins are really strong, 54% operating margin in the fourth quarter, and the stock is actually trading even after that, the giant move that you mentioned, it's been a five-bagger in a year-and-a-half. It's still trading for a lower forward PE multiple than Microsoft or Apple. A lot of investors would argue that Meta is still the next Meta because it still looks reasonably priced for what's going on.
Ricky Mulvey: Yeah, that's a good point. There's the year of efficiency that was that's been well-discussed. I also think there has been a narrative shifts where you saw Zuckerberg talking. Pretty much he went all in on the metaverse by changing the companies named to it. Now, he's still talking like the metaverse Reality Labs doing well. They're generating revenue, I should say, coming up in earnings calls. What you're also seeing is a narrative shift with the new AI components. How that's becoming more and more a part of the public strategy for Meta.
Matt Frankel: Yeah. It would be dishonest of me to say that the AI surge hasn't had anything to do with the move in the stock. Their arguably one of the biggest potential beneficiaries of the AI investment boom in a lot of different ways. On both the ad side of the business, which look at The Trade Desk, which is a Foolish favorite. AI and ads are a good combination when they're done correctly so that part of the business benefits lot. The metaverse side of the business it's an AI technology essentially. The AI surge has increased investor optimism beyond what the numbers are telling us right now. I would say that's a fair statement as well.
Ricky Mulvey: Now I'm seeing a lot of chatter. Let's move to PayPal. Because I think a big question is, you have this dominant in many ways, payments company, it's been beaten down. It's in a position where it's either going to languish or turnaround. To be clear, we are in a pessimistic era for PayPal. We're going to maybe criticize the bulls in a sec, but are the bears underestimating the power of PayPal's platform? Of note, a 2023 Motley Fool survey that found PayPal is the most popular digital payment app, followed by the Cash App, then Venmo, which PayPal also owns.
Matt Frankel: I would say they are underestimating the network effect and the usefulness factor, I guess I would call it. One thing that I've personally noticed, this is just completely anecdotal evidence, but I've noticed PayPal available as a seamless checkout option at more and more websites that I use over the past, say two years. It's a functionality thing. I know we'll probably talk about this more later, and throughout the industry take rates are going down in the payment industry. Payment processing services, they're becoming a commodity essentially whereas a lot of companies offer them, there's very little pricing power. The real differentiator is the usefulness of PayPal's business. I can check out with PayPal on 90% of the web sites I go to. I can't say the same for Cash App or Zelle.
It's becoming a real usefulness factor and that's what the new CEO, Alex Chriss, seems to be really focused on, is increasing the usefulness because you're right. If I own an online business, I can find ten different payment processors that would be happy to process my money. I want to go with the one that detects fraud better. I want to go with the one that convert sales better because it's easy. I've gone away for websites because their payment process is clunky and I can't remember ten different passwords and I'm an old guy, we don't have our passwords memorized in our heads. It's more than just the payment processing. It's which one's going to be the most useful partner for its customers. That's what I think the bears are missing about PayPal.
Ricky Mulvey: I think there's also the competition component, which is, maybe more important to the PayPal story, where I think at the time of Meta's peak pessimism there was, everybody's going to leave for TikTok, Meta's declining. Folks forgot that there were still like 3 billion people on the platform. Instagram is incredibly popular and also can be used together with TikTok. This is a bit of a different story where the payment volume has been growing for PayPal, as you mentioned. But when people are looking for partners, yes, they're looking for fraud detection. They're also looking for that transaction take rate and that's steadily been declining. I know you follow PayPal or the bulls may be underestimating the power of the competition in this space.
Matt Frankel: That would be fair to say to a degree, the barriers to entry have gone up considerably. There are a few big players in the space. It will be real hard for someone to just start a new payment processor at this point. But yes, there is a lot of competition in this space. PayPal is a very profitable company. It's worth pointing out you mentioned the take rates are going down. PayPal is still a very profitable business. Its overhead is very low compared to its margins. I'm not that concerned, the take rate, yes it's dropping a little bit, but this is still a very in-demand business. They're still in the very early stages of figuring out how to monetize certain parts of the business, particularly Venmo. There's a lot of different ways they can monetize.
I love the Honey acquisition, for example, because it helps convert it's payment processing customers into another form of monetization. I think that's where the business is going ahead. Think of like commission-free stock trading, brokerages make money off of other things because they have those customers with their money and their investments at those certain firms. PayPal is going to head in that similar direction where maybe eventually they don't make the bulk of their money off of the percentage they're getting from payments and they have a bunch of adjacent businesses and things like that. Remember, this is Alex Chriss', I call it as first semester as CEO, so he's still in the early innings of figuring out where he's going to take this. But I like what I'm seeing so far.
Ricky Mulvey: Honey is a browser extension where if you're shopping for online, it'll show you deals, promo codes, where also you can buy a product. CEO Alex Chriss, in his first semester has been promising a more focused company and some new innovations such as Smart Receipts for merchants that can offer personalized deals to customers after a transaction. However, he's also been offering lighter earnings guidance than Wall Street analysts have wanted. One of the big moves that Zuckerberg did, he changed the narrative around Meta promising. This is a year of efficiency. We're gonna be more focused. What can Chriss do in his first year to change the narrative around PayPal?
Matt Frankel: I feel like he's being a little conservative on purpose with that guidance that you mentioned. A few days before the earnings report, they unveiled a bunch of different AI initiatives. You mentioned the smart receipts. There's also there a revamped PayPal checkout experience online for customers. The guidance doesn't include any of those new initiatives. It's worth pointing that out. He reduced the workforce by 9% just a few days before that guidance was out too. I feel like first he wants to make the business as lean as it should be, which we're seeing a lot of these big workforce reductions throughout the fintech industry.
A lot of them had too many people working for lack of a better term. He's rightsizing the business first, doubling down on AI, and then I think once the businesses where it needs to be headcount wise and things like that. That's when you figure out what the next monetization steps are. Just like when any new CEO jumps into a big company and really wants to pivot, because let's be honest, previous management's growth strategy wasn't exactly great. Remember when they were going to buy Pinterest for $70 a share and no one knew why.
Ricky Mulvey: Why not?
Matt Frankel: As a Pinterest shareholder, I loved that move. But as a PayPal shareholder, I thought it was, why would you do that? The last management did was just growth at all costs, things like that. Point being, I'm willing to give Alex Chriss a little bit of time to figure things out. I mentioned this was his first-quarter, the fourth-quarter, its his first-quarter as CEO. I feel like he's been reasonably active so far when it comes to making his efficiency moves. I'd like to see a little bit more of the long-term vision beyond just, we're going to incorporate AI into what we already have. How are you going to monetize better? I think that's why the stock's still beaten down. It's pretty clear on that. Everyone thinks that the businesses mature. It's not going to be able to monetize any better until he shows otherwise, I don't know if the stock is going to become the next Meta or anything like that.
Ricky Mulvey: On yesterday's show, I talked with Jim Gillies about the Home Depot transition from growth story to cash-cow. Even a large mature business with flat revenue can still outperform the market. One less discussed comparison that I thought might be able to be made to PayPal is Adyen, which is sort of a plugin payment processor. You don't see it as much as a customer, but you've used it with companies like Uber and McDonald's. Starting to get back on track with payment processing growth and margin expansion forecasts, the stock got beaten up after growth came in a little lighter than expected and also they were adding to their workforce at the time where Wall Street wanted them to get a little bit leaner. When you look at Adyen's come back it's from a stock perspective, do you think PayPal can take any tips from that story?
Matt Frankel: There's a few things they can learn from Adyen. They should've started learning from Adyen, when Adyen stole eBay from them. If you remember PayPal was a spin-off of eBay. You probably remember that headline a few years ago were eBay ended its relationship with PayPal. That was in favor of Adyen. A couple of things Adyen does better is, one, they focus on the long term. You mentioned they were investing heavily in the business at a time when the macro-environment was terrible. That's because they didn't really cared what was going on in the economy this quarter. They had the money to invest. They knew where their business needed to be.
They made decisions regardless of what the quarterly results were telling them to do. But I would love to see that Adyen doesn't give quarterly or annual guidance. They focused on long-term metrics. I would like to see PayPal shift to that. I'd like to see PayPal really doubled down on being kind of an omnichannel payment solution like Adyen is. You mentioned like McDonald's. They need a payment solution that you could pay in the app, you could pay online, you could pay in the store. PayPal could do better. They've tried a few times to incorporate like in-store checkout and they do a decent job with it but they're not an omnichannel payment solution. They're just not at this point. I loved to see them really doubled down on kind of being merchants one-stop payment solution. That's one thing that Adyen does really well. That's why they've been so successful with these big businesses. You mentioned McDonald's, they've Uber, they've Etsy, they have a bunch of different big businesses that you use constantly. They're just killing it when it comes to big businesses. I love that long-term focus is really helping them do it.
Ricky Mulvey: PayPal still has some work to do, maybe a longer-term focus to take and maybe Meta's the next Meta. Matt Frankel, as always, appreciate your time and your insights.
Matt Frankel: Thanks for having me.
Deidre Woollard: 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. I'm Deidre Woollard. Thanks for listening. We'll see you tomorrow
