What Cybersecurity, Shoes, and Homebuilders Tell Us About Change

0:04Today on Motley Fool Money, Palo Alto Networks is bracing investors, home builders are sweetening deals, and footwear brands are rewriting the playbook.

0:20I'm Emily Flippen, and today I'm joined by analysts Sanmeet Deo and Dave Meier, and we'll be discussing a few industries and businesses that are being forced to adapt to the changing world of business. around them. To start, of course, we have to talk about cybersecurity. Now, cybersecurity stocks have been on the front lines of both innovation as well as investor scrutiny. The world has moved increasingly to the cloud and the industry has been forced to reimagine what security looks like in this new world. Palo Alto Networks just dropped its fourth quarter results. And based on the headline numbers, it'd be easy to almost forget the checkered history that this company has with this level of innovation.

0:55Just last year, the business launched a new platform strategy that involved vendor consolidation, even giving away its product for free. Now, that obviously spooked investors, but here we are just a handful of quarters later, and it seems to be paying off with business accelerating. Dave, this space has been hot. It's been crowded, but Palo Alto Network's report didn't happen in a vacuum. Fortinet, Checkpoint, and even legacy players like Cisco have all tried to find their own niche and security. With a continued move towards these off-premise solutions, how should investors read this quarter?

1:26David Meier:I think they should take away that bundling works. If you look at the quarter, sales were up higher than expected. Margins are expanding. More and more people are doing what Palo Alto calls platformization. Now, we're not going to get into what the details are there, but basically, it's folks buying more than one of their products. And that's happening. That's actually accelerating. And larger businesses, enterprise-level businesses are saying, you know what? It's actually great for us to have a one-stop shop because sales to large businesses are increasing at higher rates and the deal sizes are going up.

2:09David Meier:So, in a fragmented world, basically, Palo Alto's strategy, which they put in place many years ago to create a platform where you can come and pick what you want, that's really starting to pay off. And they were kind of late to that game though. I mean, lots of other companies have moved to the same platform-esque strategy. They want to be the one-stop shop. No longer is it just good enough to be like a firewall provider. You have to provide full edge-to-edge security. And when you look at the industry, I mean, do you think this is the industry where you just buy a bucket of companies because the strategy is similar across all of them or is there value you been picking the best names?

2:49Yeah.

2:49Sanmeet Deo:You know, for someone not as technically inclined as me, when it comes to cybersecurity, for me personally, I would rather own maybe like a basket, two to three stocks. Some of the bigger players that I know that, you know, are doing well. Palo Alto has done well for a long time. They're a very impressive CEO as we've been discussing, you know, offline. But it's an important area that I think with the growing technology needs in AI and cloud computing and all the different technologies that we're using. Cybersecurity is definitely an important place to have something in your portfolio. Yeah. And along those lines, I think one of the things that we all need to recognize is one is

3:31David Meier:the bad actors are not going away. And in fact, they're innovating very quickly in order to create the threats that companies like Palo Alto and other competitors want to negate. And one of the things that, at least if you believe the Palo Alto data, and I don't have any reason not to, is the threat vector along the AI lines, meaning the more we interact with agents, the more opportunities there are to create threat vectors. That is actually providing growth on the outside. And internally, the company is bringing AI capabilities across all the services on its platform. Basically, it's an AI race.

4:14David Meier:Who on the outside is going to create the threat vectors and who on the inside is going to protect you against them? Basically, that's built-in demand and built-in growth for the future. Sad to say, but that's actually how it

4:27Sanmeet Deo:works. Cyber threats are a growth industry. You can't invest in the cyber threat companies, So you got to invest in the ones that are protecting against those things and they got to be growing too. And I think the edge that existed with these cloud native platforms has increasingly gone away because even the legacy players have kind of gotten out here. The cat's out of the bag. They've all made the adjustments. So now it's a matter of proving that you have a product that is simply superior to that of your competitors. It's not a matter of if you need security, it's how you're going to implement it.

4:58David Meier:And I will say this, the one thing that CEO Nikesh Arora said was, it's not about how well you protect, it's about how quickly you can find, identify, and neutralize the threat. That's actually the thing that they're being measured on now. Up next, we're moving from firewalls to footwear. Shoes are having their own moment with brands stepping into new partnerships, styles, and even new markets. Stick with us. they say leadership isn't just about where you're going it's about the conviction it takes to get there for those who demand the world and possess the drive to claim it there's a vehicle of equal distinction dynamic by design and engineered for pure impact the Range Rover Sport rises to meet you the moment you take the lead this is the most advanced Range Rover Sport yet a master class in uncompromised performance and unbridled agility inside the innovation is seamless you'll find an elegant 13.1-inch touchscreen that puts total control of the vehicle's systems right at your fingertips, but it's the refinement that sets it apart.

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6:33New brands like On Holdings have taken market share. They just posted yet another quarter of double-digit growth. And at the same time, Crocs is teaming up with the NFL ahead of earnings season. and Nike is seeking to claw its way back towards growth through a renewed relationship with Foot Locker. Sun Meats, the whole shoe game feels like it's shifting here. What do these moves tell us about how consumers view the industry and who could be the ultimate winner?

6:55Sanmeet Deo:Yeah, you know, shoes have basically all kinds of, even athletic shoes have essentially become fashion accessories. I mean, you know, you used to be back in the day, we'd, you know, buy a shoe for running, buy a shoe for basketball, well, buy a shoe for utility purposes, whatever we needed for walking. Now, the shoes are being used for sometimes all of those things, but mostly for fashion, mostly for casual wear. The pandemic really shifted things where we're using shoes for a lifestyle approach. And a company like On has really taken that and making very fresh, clean, authentic designs that like are really resonating with um younger people and also the the athletes but also the leisure athletes the people that might be using them for dual purposes where they might be running with them or might they might be walking with them and then you have also like the the shoe companies like crocs that ugly is in when it comes to crocs so you know um they uh they if you never like crocs they're not going away anytime soon because if you if you have kids you know all the kids are wearing crocs they have multiple pairs you can add gibbets to them you could do all kind it it's a way to express their identity um especially for kids and younger people that you haven't had in other shoes and and now with crocs recently signing with nfl to kind of um have a partnership with them to be able to have your own favorite team crocs um with their own favorite like with your own gibbets for those teams it's it's really become a matter of expressing your identity fashion comfort all wrapped up into one now nike has been a very very popular brand for a very long time the dominant brand when it comes to athletic peril shoes running shoes is what they kind of grew up on and they were always fashionable as well you know you have your jordans that now are actually being used even more in like fashion sense instead of just basketball but they kind of lost their way you know they they weren't as they didn't keep up with some of the trends and the kind of cool styles they shifted a little too hard into the direct to consumer channel going away from some of their wholesale partnerships with Foot Locker and other companies.

9:08Sanmeet Deo:Now they're getting back to that because they did struggle with sales and margins. And then they're also at risk with tariffs and whatnot. But they're making a comeback. They're strengthening their partnerships again, focusing on what they need to do with their wholesale channels as well as their direct channels and freshening up their identity and their portfolio of shoes. I'm actually surprised Crocs didn't do this a while ago.

9:34David Meier:Yeah. Because if you think about it, like it's, it's going to be hard to, let's say have a Crocs specifically for an, uh, an individual athlete, but across a league, like I'm, I have to wonder if this was in the works and maybe, you know, got bogged down in negotiations or something, but you know, think about, think about this way. What if they did it with the NBA? Because you could imagine players on the sidelines, maybe you're out, maybe you're taking a break, maybe during warm-up, you come out with your Crocs and you are supporting the team. I'm a little surprised that wasn't done earlier. And I will also say this, I take a little bit of umbrage against what you said about footwear and fashion.

10:21David Meier:It's always been here. I mean, they've always tried to create a fashion piece of it. But that said, it is amazing how many different types of lifestyles that shoes are becoming a part of. For example, my daughter's in residency. She cannot live without her UFOs, which are Crocs competitors, as well as her Hocus. It is amazing in the medical world how being on your feet all day, something, and I think we'll all are in agreement here, the Hoka is an ugly shoe. There is nothing fashion conscious about that, but it performs well. It does what those people need, and they're willing to pay for it. And I will say this one last thing.

11:06David Meier:I've had an argument with our colleague, Seth Jason, who's a huge runner, and he keeps telling me, I can't believe, you know, why do people like on holdings? Why do people like on shoes? I never see them out on the trail when I run. And I'm like, dude, you're like running a hundred miles at a time. Like, like, you know, and finally he said the other day, I saw my first pair out in the wild and I'm like, great. That's awesome that, that those types of athletes are looking for him because I will say here in Pauly's Island amongst the older crowd of which I am slowly getting there on whole on shoes are everywhere.

11:40David Meier:Like everybody wears them around. And I think it's because there's a little bit of fashion, a little bit of comfort. Um, and that's the name of the game. Like you got to figure if you're a shoe company, you got to figure out how to address all those things in one product in order to, uh, meet the demand of your demographic. Well, for me, it comes down to what actually is, um, innovation versus reaction. And I rewind to just a handful of years ago when Nike made their decision to largely pull out of third-party retailers and go straight direct to consumer with the intention of protecting their brand image to prevent themselves from becoming the next Under Armour, for instance.

12:18And at the time, that felt like innovation. That felt really inspired. And it's a little ironic now to see Nike almost walking that decision back. Not that direct-to-consumer isn't important to them, but they're realizing that distribution was always part of their value chain. And at this moment, their market share is being eaten by companies like On Holdings that, For whatever reason, whether that be brand prestige or performance, seems to be rising in levels of popularity. And I do think that On has pushed forward an actual real innovation with technology, right? Their light spray, which could localize distribution, is something really interesting.

12:50And so for me, when I look at a business like Crocs, kind of tying this all full circle, I cannot, for the life of me, understand whether or not this deal is innovation or reaction. I mean, I think licensing is smart for Crocs, but it's always been on the fattier side of shoes. And there's some part of me that can't feel like we're just pre 2008, right before the Crocs crash.

13:11Sanmeet Deo:Well, you know, you got to think of the kids because they love their sports teams. They want to represent those. And so, you know, my son has some Texas Longhorns Crocs. And so I'm sure they, I'm sure they had to strike up a deal with some of the big universities like that to have those. So putting you both on the spot here, unexpectedly, if you have to choose between adding on holdings, Crocs or Nike, or let's also add Foot Locker in there as well to your portfolio today. Is there one that's standing out to you? Well, I'll go first. I currently own on holdings. So I would, I would continue to add on to on because they're just doing some impressive things with innovation and really capturing the market.

13:50David Meier:I agree. I like on, I think the challenge for Nike and we're seeing them throw their weight around a little bit with the, um, with getting back into the prominent displays at foot locker. That's that, in my opinion, that comes from the direct relationship that they have strong relationship that they have with Dick's sporting goods, but they still have, you know, they still have a long, uh, road to hoe. Uh, and I think right now, uh, on has the momentum they have that not only performance, uh, but it's a, there's, there's fashion and it cuts across all demographics. And what I mean is from the youngest to the oldest, they're selling their shoes across that entire range of ages.

14:32I'm inclined to agree with you both, but for the sake of playing devil's advocate, I do feel like I need to point out how cheap Nike looks on a relative basis. If they're able to kind of craft this turnaround that I think management is leaning towards and distribution is a part of that. But I do think this is a brand that has not lost its attractiveness. And so while On might be the up-and-coming exciting new player today, there is something nice and stable about knowing that Nike's brand is still retaining value that probably is going underappreciated by the market today. Up next, we're moving over to housing, an industry that, unlike shoes, is hitting a speed bump.

15:07We'll see you after the break.

15:09David Meier:Trading at Schwab is now powered by Ameritrade, giving you even more specialized support than ever before. Like access to the Trade Desk, our team of passionate traders ready to tackle anything from the most complex trading questions to a simple strategy gut check. Need assistance? No problem. Get 24-7 professional answers and live help and access support by phone, email, and in-platform chat. That's how Schwab is here for you, to help you trade brilliantly. Learn more at schwab.com slash trading. A report out from Reuters yesterday noted that U.S. home builder sentiment has dropped to its lowest level in nearly three years.

15:46Higher interest rates, lower affordability, and consumer hesitation seem to all be weighing on the sector. Dave, we've seen builders throw in everything but the kitchen sink to try to motivate buyers. After years of it being a seller's market, it seems like buyers now have the cards. But confidence is still sinking. Affordability is at all-time lows. What should investors make of this?

16:06David Meier:I actually think investors should... There's a lot to be made of this. Not only should we think individually about the sector, the home building sector, if they're still throwing everything out of it, out at it, right? Which means typically they don't lower price. That's one, that's one place having bought a few new homes. That's one place that they don't negotiate, but they will give you add ons, right? They will give you rate buy downs and things like that. And if those don't aren't effective and they actually start reducing prices, um, which some anecdotal data might suggest that they are, that's bad from a margin standpoint.

16:46David Meier:Because you're already trying to say, hey, in order to get this sale, I'm willing to squeeze margins. And now I'm willing to squeeze margins even further. So I would say there's a little bit of caution in the sector itself. So as an investor, be wary. Make sure that you are looking at the highest quality builders. One that comes to mind is DreamFinder Homes. The ticker symbol is DFH. They do a good job of making sure that the markets that they build in are solid and they've been able to translate that into good performance, stock notwithstanding right now. The other thing we need to be a little bit careful about is the overall economy.

17:25David Meier:Because if these home builders slow down, they employ a lot of people within the economy. So, if we see them slow down and they start laying off people, that makes the job numbers difficult. Who knows what can happen from there? So, there's a lot to be tied into this number, this home builder sentiment number, because it's really a leading indicator of not only the industry that they play in, but the economy overall. This is one of those industries that I rewind back to just a few years ago, and I would say the same thing then that I'm saying today, which is that whenever I see sentiment like this really low for industries or businesses that have really, in my opinion, like long-term need to exist, right?

18:08The need for housing in the United States. To me, I think to myself, okay, well, this is a short-term headwinds, a long-term opportunity, but it's still been a really tough few years for home builders, even despite the fact that I think the skepticism has been around. And of course, a lot of that has to do with interest rates, but Sanmeet, I mean, when you look at this industry, what stands out to you? Because for me, I view opportunity, but at the same time, I viewed opportunity for years now, and has not manifested into shareholder returns.

18:36Sanmeet Deo:Yeah. And the thing that sticks in my mind, because I do think a lot about the consumer is just the affordability. The affordability of homes just does not seem sustainable. It's just gotten too expensive. And even if you lower rates, your interest rate will be low, but you're still paying that on a very, very high mortgage. And those housing prices, especially in high demand areas are not really coming down. And there's younger people just not buying because they can't afford to. coming out of college or coming out of business schools or graduate schools and they can't buy, what's going to get them to be able to buy?

19:10Sanmeet Deo:So that affordability thing always sticks in my head of how does that problem get solved?

19:15David Meier:The one good thing is that a lot of the home builders, their balance sheets are much, much stronger than when we had the housing crisis. There's not as much leverage in the system. There's not as much leverage on their balance sheets. They're doing a good job of spending capital wisely, trying to have capital asset light businesses where they don't necessarily own the land, but they have rights to it and things like that. So there might be a little bit of turbulence here, but at some point the prices of these home builders could get to a point where they become very attractive, even if there's some, again, some volatility in the sector overall.

19:58David Meier:And I give a lot of management's credit for playing the game differently based on what happened in the 2005, 2006, 2007 timeframe. I'm not sure who will be the innovative leader here in housing, but one thing is clear to me based off this conversation, they need a little bit of innovation here to prevent their industry from entering some sort of segment down phase here on a more permanent basis. But one thing is clear. I mean, look, whether you're looking at housing or cybersecurity or shoes, the industry changes. And if you don't change along with it, you're probably going to die. Dave, Sammy, thank you both so much for joining.

20:34David Meier:Thank you. Thank you. As always, people on the program may have interest in the stocks they talked 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 The Motley Fool editorial standards and is not approved by advertisers. Advertisements are sponsored content and provide for informational purposes only. To see our full advertising disclosure, please check out our show notes. For Sammy Deo, Dave Meyer, and the entire Motley Fool Money team, I'm Emily Flippen. We'll see you tomorrow.