Profitability Predictions and Paramount Punches Back

0:05Profits, who needs profits? You're listening to Motley Fool Money.

0:20Welcome, Fools. I'm your host, Tim Byers. And with me are two of my teammates, Rick Minaras, whom I've served with on Rule Breakers for over 20 years now, and longtime Fool Sanmiteo, who's with me allocating capital in the Supernova Odyssey portfolio. And that's been fun and frantic. Hopefully, you're both fully caffeinated because we got some spicy earnings to get to. Today, we're going to be talking about fiscal Q3, 2026 earnings from SentinelOne, ticker S, and from Snowflake, ticker S-N-O-W, and predicting which of these two will reach gap profitability first and ideally when. We're going to make some reckless predictions here, and we want your reckless predictions too, leave them in the comments below.

1:08We're also going to provide a Critics' Choice view of the Netflix Warner Brothers discovery deal, which got a little bit spicier this morning as we are recording this. But let's start with earnings. So Rick, Sandmeet, I'm going to give you some quick overviews on the Sentinel One earnings. There was some good stuff here. There was some strong growth, annual recurring revenue up 23 % year-over-year to$1.05 billion. This is a company, remember, that competes directly with CrowdStrike. It is CrowdStrike's most direct competitor. They make endpoint security, meaning your device, your iPhones, your computers, they protect those things.

1:49And they do it with some AI here. Non-GAAP operating margins were decent, 7%. It was a 1 ,200 basis point improvement. The non-GAAP net income margin was 10%. So that was up 1 ,000 basis points. So some good stuff here. Revenue up 23 % to$258.9 million. And emerging products, mostly AI products, now account for 50 % of quarterly bookings. But the GAAP losses are big, Sandmeet. GAP operating margin for the quarter was negative 28%. And the GAAP net loss margin was negative 23%. So give me your take here. How do you look at this quarter and SentinelOne overall? Sounds like a very strong quarter in terms of, you know, their current revenue growth and their business fundamentals.

2:41You know, cybersecurity, you know, there's a few major players that I think, you know, are really ramping up. And it's a very important industry that's very much needed. And I don't think it's going to ever be a winner takes all kind of area. So I can't anticipate them generating profits soon because it's just an area where they have to invest in their business and continue to grow, continue to scale, continue to provide value to their customers. So profits may come much later down the road. 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.

3:34That worth it? Not worth it? What do you think about this company? I think it's the price of admission if you're a tech company. You have to pay up with stock-based compensation. That's how you hire the best programmers and everything else you need to make the company run smoothly. And in this case, I think the report was solid. And again, yeah, stock-based compensation is a big reason why we're talking about non-GAAP profitability instead of non-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.

4:03It's Sentinel-1, a lot like Snowflake. Five, six years ago, these companies were seeing doubling their revenue year after year. And now it's 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 the 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.

4:32I did look at it up. Analysts don't see this happening for Sentinel once 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. 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, Sandmead. Stock is up, beating the market by over 66 % so far this year. And the results were pretty good. Product revenue growth, 29%.

5:10Comes in at$1.16 billion. The remaining performance obligations. If you don't know what that is, think of it as backlog. 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 bring in some other stats here. But you follow this company, so tell me where you're at. 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 strategic partnerships.

5:53Their pipeline is growing with RPO. It's surged 37%. So their business fundamentals, 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 recently in the quarter reported some slowing guidance for revenue for the next quarter. So that wasn't looked so favorably when you have such a high value stock that isn't executing to perfection. So not too concern because as a business, this company is performing phenomenally.

6:42Rick, 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. For those who don't know how Snowflake works, it's like Sammeet said, it is an archival storage 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 1 ,200 customers, this is what Snowflake says, and it is now 50 % of new bookings. So, how are you feeling about this company and its path to profitability?

7:24I like the growth. And again, investments in AI I 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, Sanmeet 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 this is a company that will continue. As far as profitability goes, I also cheated.

7:572031 is when analysts see it turning profitable on a gap basis. Again, five, six 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 SentinelOne, I do think that it's positioned well. And yeah, again, the company has not been the best of stocks sometimes, but I do think that it's a very important company that's not very well understood and not very even well known. It's not a household name. You don't go and see mainstream investors say Snowflake and they're just looking out the window, seeing for Snowfall.

8:29This is a very legit company and doing a lot of things right. 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 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 are you? Who gets there first to Gap Profitability? Yeah, so the funny thing about analysts, even sometimes near-term expectations are out of whack. The further you go, it's more like trying to land a parachute into a tin cup down at the ground level.

9:16And 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, when they are improving this last quarter, notwithstanding as far as a 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. All right, Sammy. I'm going to agree with Rick. I think Sentinel one will get there faster. Sure. Snowflake is kind of a slow burn that, you know, lately is going to have, like Rick had said too, you know, this is one of those companies that they're going to make some big investments now.

9:57And then you're going to see way down the road, those investments paying off in cashflow generation that, that will, will be sustainable, but they have to build for that. Yeah. I've, 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. There's a sign right there. That's probably not right, but they are going full Amazon in this area. So, it does seem like Sentinel One is likely to get there first. So, if that matters to you, Maybe that's one for your watchlist. Alright, up next. Is it Siskel and Ebert?

10:41Or Statler and Waldorf? We're gonna go armchair critic over the Netflix Warner Brothers deal. You're listening to Motley Fool Money.

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11:32in a cash and stock deal worth$72 billion 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. No promises, but we will try to be a bit more Siskel 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. 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.

12:13Yeah. Very interesting development on that front. As far as Netflix, I'm going to give it, can I give it two thumbs up? I forget if two thumbs up was when Cisco and Ebert both had their hands. 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 is still growing, so you know the business is still growing. Warner Brothers Discovery was about a third of that. 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.

12:47I don't think they're going to get rid of the 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 Macs and getting that much stronger and catching up to Netflix. Netflix was always default cable to me. Now it's even more default default cable. If the deal goes through.

13:18Sorry. Well, 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 spinoff. 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? 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 gonna say i'm gonna 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 the 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 um 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.

14:51So 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. 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.

15:30And now they got an 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? It definitely helps. And that gets my, my thumb to go kind of sideways and heading towards up because, um, you know, 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 has 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.

16:15They want to make sure it continues on. So I've always been fond of the management team. Yeah. All right. We got 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. uh paramount sky skydance announced a hostile bid they previously bid they bid at least twice 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 uh 30 dollars a share roughly 108.4 billion dollars paramount stock is on the rise as we talked this morning rick was up more than 6%.

17:01Warner Brothers stock up more than 7%. Paramount is ticker PSKY.

17:10Rick, reactions to this? It feels a little, I mean, it's getting spicy. I hate that Paramount stock went up when Netflix stock went down when they had announced a deal last week. To me, this was like, well, there's no fairness here. But yeah, I see why Paramount's doing this. Again, 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. That right away says, well, hey, we got to do right by our shareholders. Also, this is going to have a clear path to just clearing the regulatory antitrust regulatory barriers.

17:46Even though Paramount Skydance just added Paramount just a couple of months ago, they're still not this monster that anyone's really scared of. 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. They don't have the money on their own. They're turning to sovereign wealth funds, which I know seems like a weird thing, but Electronic Arts had the same thing a couple of months ago. We're already used to this by now. Sometimes you're getting international money with these deals, but they're not doing governance to the actual thing, so that's good.

18:19Yeah, 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 whether it's paramount or netflix but i'm really curious how this yeah definitely a story that was already interesting became much must watch tv right now okay yes or no sand meat will there be an ongoing bidding war for warner brothers discovery i don't think so i think that um 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.

19:08It's Netflix is going to argue total, um, 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 movies and other things. And a lot of the younger generation watches more of YouTube in 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. I got news for you, pal. It's not just the younger generation.

19:47It's us older folks, too. We're watching a lot of YouTube. All right. Up next, we give you the preview for tomorrow. You're listening to Motley Fool Money. Hi, I'm Neil. And I'm Ken. And we are from the Triviality Podcast, a pub trivia-style game show where a lack of seriousness meets a little bit of knowledge. Join us each week for an hour-long game of general knowledge trivia featuring special guests from around the world, plus tons of extra themed episodes. If you want to improve your trivia game, or you just want to scream at us in your car when we get easy questions wrong, then we're the show for you.

20:19Find triviality on all your favorite podcast apps. But you know that because you're already listening to a podcast. All right, fools. On tomorrow's 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 Flippen, who has Jason Hall and Dan Kaplinger. They're going to go deeper on the merger, what it means for investors, 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.

20:53That'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 judging those mega mergers. Again, that's with Emily Flippen, Jason Hall, and Dan Kaplinger. But for today, thanks very much to Rick Munarez and Sanmiteo. As always, people on the program may have interests 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.

21:27While personal finance content follows Motley Fool editorial standards and is not approved by advertisers, advertisements are sponsored content and provided for informational purposes only. If you 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 Sammeet, our engineer, as always, is the incomparable Dan Boyd. Our producer is Anand Chakamalu, your host, Tim Byers. Thank you for listening. See you again tomorrow. Cool on, everyone.

22:07Thank you.