Buy High, Buy Higher

0:05Ohio is high in the middle, but some states of investing can be high on both ends. I promise this will make sense soon because Motley Fool Money starts now.

0:20I'm Rick Munarriz, and today I'm joined by fellow analyst Jason Hall and Rule Breakers lead analyst Tim Beyers. We're going to take a tug on a security stock blanket. We're also going to play an improv game with three stocks we think are worth a closer look. But first, do the naysayers have a Rongo decree when it comes to MongoDB? MongoDB was one of the last week's biggest gainers. Shares of the document database platform operator soared 44 % last week after posting well-received financial results. As investors, sometimes it's instinctive to sell into strength. If you're on the sidelines, it's easy to move on to a different playing field.

0:54Tim, you don't think it's too late to get in on the MongoDB story. What's your take on its latest results and what it means for Motley Fool Money listeners?

1:02Jason Hall:Yeah, I got three words for you, Rick. Growth is accelerating. Revenue from the cloud-based Atlas database grew 29 % in the second quarter. That is impressive. For those who don't know what Atlas is, essentially, think of the database that you could install in your own company, but you access it via the cloud. That's Atlas. You can have it in any of your cloud hosting environments, and it is growing increasingly popular. In fact, the company added 2 ,800 net new customers during the quarter, and that set a new record one quarter after Mongo broke a six-year record with 2 ,600 net new ads. So, the big mo is with Mongo.

1:45Jason Hall:My apologies. I just see Rick, and I just start riffing. I can't help myself. But if there is a story to key in on here, it's that the unit economics are getting better. Revenue growing 24 % while operating expenses only grew 15%. It's a pretty good formula for long-term success. And, I mean, you could see it in other areas of the business. So, for example, cash flow return on investment, where we take the cash flow from operations and compare it to all of the cash available for investment, including all of the debt and all of the equity. that grew to 8.96 % over the trailing 12 months. And that was up from 5.26 % in fiscal 2025.

2:30Jason Hall:So that's still not good enough. That's not above the cost of capital yet, but it's moving in the right direction. And the more we see this kind of efficient growth, the greater the premium MongoDB stock will command. Nothing is assured, but I really like the direction of this company. Yeah.

2:45Tim Beyers:It's hard to argue about what's going on with the business itself. The unit economics are better, generating positive free cash flow. They can live off their own balance sheet as they continue to grow. So you take the growth accelerating and the metrics behind the growth, it's better growth, right? You love to see that. But one of my biggest concerns, Tim, when we see a stock shoot up 40 % in a single trading session, is investors buy and then be able to hold what is assuredly going to be a really volatile investment in the months and quarters that follow. So, sales outstanding sold short has climbed all year coming into this report, and it hit 6 % of shares short right before earnings.

3:22Tim Beyers:So, probably a short squeeze playing some role here in the stock going up. Why does that matter? Because it means that bears were buying the shares to close their short positions, not necessarily just a bunch of bulls that are long companies. So, I'm curious, right? We're trying to be long-term and mindful of that. Does that really temper your near-term outlook? Or do you just think this is a case of an excellent business that's really starting to show its ability to do those good things on the business side, trading for what should prove a good price for investors multiple years from now, no matter what happens in the months or quarters ahead?

3:56Jason Hall:I mean, it's both. I think we can 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 just unlikely to happen. And there is still improvement needed.

4:31Jason Hall: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, not maximum, or maybe maximum in this case, I hope. But the maximum 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.

5:18Perfect. 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 its corporate moniker, but Jason thinks a smaller rival bears watching. Stay close. We're going to play ball with CrowdStrike.

5:41Tim Beyers:Support for the show comes from Fundrise. Investing in companies already in the S &P 500 can sometimes feel like you're being served someone else's leftovers. It's still a great meal, but it's hard not to imagine what the food tasted like when it was fresh out of the oven. But with venture capital by Fundrise, you can finally get in early and take a seat at the table alongside the biggest names in tech investing. Fundrise's mission is to give investors the access required to invest in the best tech and AI companies before they go public. Visit Fundrise.com slash fool to check out Fundrise's venture portfolio and start investing in minutes.

6:14Tim Beyers:All investments involve risk, including the potential loss of principal. Past performance is not indicative of future results. This is a paid advertisement. 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 more than an hour before CrowdStrike put in the fix. 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.

6:51The 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.

7:09Tim Beyers:Yeah. Just to 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. A 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, NetNew ARR, the measure of the dollar value of NetNew business on an annual basis, came in lower in the quarters that it's reported since after the outage.

7:48Tim Beyers:Now, sure, the company is still growing, but weaker margins, slowing growth, they don't lie. This is especially true if we look at SentinelOne, which is CrowdStrike's much, much smaller pure-play competitor in the AI-powered endpoint security space. We get some context. SecurityOne reported strong and accelerating growth and higher growth rates than CrowdStrike. Some indication that, again, the end market is 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.

8:22Tim Beyers:Now, this past quarter 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 adjusted basis to pretty exceptional margins. On a gap basis, they're still good, but they've deteriorated more than the adjusted numbers make it seem.

8:49Jason Hall:I mean, it is interesting, and the recovery has been pretty remarkable. I do concede that, Jason. I think 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.

9:32Jason Hall: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. deck, 60 % of customers who generate at least 100K in ARR use eight 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 multi-model, or should I say, module deals up front?

10:32Tim Beyers:I think overwhelmingly it's going to come from existing customers for a couple of 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 Sentinel-1. I mean, it's basically adding about every quarter its new revenue, just its new revenue is equivalent to a Sentinel-1 quarter 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.

11:10Tim Beyers: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 existing relationships.

11:35Jason Hall:I mean, you've mentioned Sentinel-1 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-1, 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-1 is special?

12:09Tim Beyers:Well, Sentinel One, their purple product is the newest branding that they're using for a lot of their AI-driven things. A 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 SentinelOne owns a quarter of the business.

12:47Tim Beyers: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. 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 rulemaker.

13:20Tim Beyers:I think cybersecurity 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 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 of that valuation, you can buy the lamb here that's growing at a higher rate and certainly trades for a much more compelling valuation.

13:58my money is still on crowd strike which is 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 trading at schwab is now powered by ameritrade unlocking the power of thinkorswim the award-winning trading platforms loaded with features that let you dive deeper into the market. Visualize your trades in a new light on Thinkorswim Desktop with robust charting and analysis tools, all while you uncover new opportunities with up-to-the-minute market news and insights.

14:35Thinkorswim is available on desktop, web, and mobile to meet you where you are. It's built by the trading obsessed to help you trade brilliantly. Learn more at schwab.com slash trading. 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.

15:10We'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.

15:23Tim Beyers:MercadoLibre is the dominant first mover and top dog in both e-commerce and fintech in the biggest economies in Latin America. Yes, and Latin America is earlier in the migration cycle for banking, fintech, and e-commerce than the more advanced U.S. market.

15:40Jason Hall:Yes, and payments in particular is a problem in the Latin American market. MercadoLibre makes this simple and digital is crucial. Yes.

15:50Tim Beyers:And Mexico in particular is one of the most exciting, largest economies in Latin America. And MercadoLibre is really early in its journey in that country. Yes. And advertising revenue rose 38 % in its latest quarter. This isn't a needle mover for MercadoLibre at this point, but it's an obvious growth opportunity given all the eyeballs it tracks. Yes.

16:13Jason Hall: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 Mercado Libre can be not a bank, but kind of a really slick payments provider and not get caught up with with consumers who have bad credit, is pretty good.

16:38Tim Beyers: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, breakthrough things works great when you're building a tech platform, not so much when you're letting other people use your money. Yes. But not just that, the lending business, also the credit cards, it's putting a riskier price profile on MercadoLibre right now.

17:06Jason Hall: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 MercadoLibre, 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 unencumbered, but that competition is coming.

17:29Tim Beyers:And scene. All right, I'll go next. Duolingo is a popular language learning platform that's taking the world by storm.

17:38Jason Hall: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.

17:48Tim Beyers:Yes, and the world is becoming smaller with more people traveling to places that speak different languages. Yes, and daily active users is growing faster than daily monthly users, a sign of improving engagement.

18:02Jason Hall: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 through it into their own AI that has been a material driver of growth over the last several quarters.

18:19Tim Beyers: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. Yes, but Google Translate, a recent update, may have Duolingo in its crosshairs.

18:36Jason Hall: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.