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Jason Moser, The Motley Fool

In this week's episode of Industry Focus: Financials, host Jason Moser brings on Motley Fool interns Greg Bechtel and Alise Montgomery to chat about their work. Greg and Alise will pitch some companies to the team next week, and they're sharing a sneak peek here today. Find out why they're so excited about Smartsheet (NYSE: SMAR) and CrowdStrike (NASDAQ: CRWD), the biggest opportunities and risks for these companies, and metrics for investors to focus on.

Plus, some bonus mini-pitches -- tune in and learn more about cybersecurity company Mimecast (NASDAQ: MIME) and e-commerce retailer Revolve (NYSE: RVLV) and why the interns are paying attention to earnings for Square (NYSE: SQ) and Charter Communications (NASDAQ: CHTR) this quarter.

To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. A full transcript follows the video.

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This video was recorded on July 22, 2019.

Jason Moser: Welcome to Industry Focus, the podcast that dives into a different sector of the stock market each day. It's Monday, July 22nd. I'm your host, Jason Moser. On today's show, we've got a couple of special guests in the studio, our fearless summer investing interns Alise Montgomery, Greg Bechtel. Guys, thanks for joining!

Greg Bechtel: Thanks for having us!

Moser: Well, this has been a great summer! For listeners who don't know, we are very fortunate as a company here at The Motley Fool to have a crew of anxious interns join us every summer, and the investing team usually gets dibs on at least a couple. Greg and Alise have been working with us here, learning about our investing process, developing their own investing process, and coming up with a lot of cool stock ideas in the process. Today, we're going to talk a little bit about the internship, some of their takeaways, maybe even some advice for those listeners out there who'd like to consider an internship here. Of course, we're going to talk a lot of stocks.

First and foremost, let's get the introductions out of the way. Greg, I'm going to start with you. Tell our listeners a little bit about yourself, where you're from, where you go to school, what you're studying.

Bechtel: Yeah, absolutely. My name is Greg Bechtel. I'm from Houston, Texas. I go to school in Miami University in Ohio, which may be a little confusing to some. I'm majoring in finance.

Moser: Finance, so you're right here where you need to be, probably digging into those Cap IQ financials.

Bechtel: Absolutely!

Moser: Are you going to be taking any of the stuff that you learned here back to school with you?

Bechtel: Absolutely, for my three last classes. We'll see if I can fit that.

Moser: That's right, you're finishing up in December.

Bechtel: Yes.

Moser: Alise, how about you?

Alise Montgomery: I am a senior at Tufts University, and I'm majoring in finance. I've loved The Motley Fool over the past five years, listening to the podcast. I'm really excited to be here! I love interning here, it's so much fun!

Moser: Well, we certainly enjoyed having you! I want to check in with you real quick. I remember 10 years ago when I got here, a lot took me by surprise. It was a little bit of a unique changeover from having jobs with bigger corporations. We have a bit of a unique culture here. I wonder, is there something, working here, that has taken you by surprise? Pleasantly surprised, hopefully. Greg, what about you? Anything here that surprised you since you started here?

Bechtel: Yeah, absolutely. I've been pretty knowledgeable about the company for the past three years. I've had a pretty good sense of the laid-back company culture that the Motley Fool definitely has. But for me, it's an extreme. From what I've seen, the company culture is just amazing. I don't know why, but I'm laid right in the middle of the investing team, right in the middle of everything. It's been a great surprise, all the help and friendliness I've got from all the different employees. So, in addition to the daily tasks we do each day, I've had the opportunity to go up to anyone and learn about their investing process.

Moser: You'll find that more and more here, even beyond just the investing team. There are people who work in the tech department, or people who work over on the fool.com side with editorial, people who work with the people team, there are all sorts of different lines of work here. And everybody here, I've come to find, is very eager to talk and help and share. Alise, how about you? Is there anything that's taken you by surprise since you started here?

Montgomery: I've been amazed by how everyone's so willing to help me. I've learned so much here so far. It's great to be able to walk up to any of the analysts here and ask them a question about a company I'm studying or a certain industry I'm really interested in. It's definitely a great place to be if you want to learn a lot.

Moser: Yeah, I've always said this is like a Montessori School for adults. I don't know if you guys are familiar with the Montessori School. I went to a Montessori School growing up. You just, you come into work every day, and you just do. You get going with whatever you want to do. If you have questions, people are always ready to help. It's a learning process every day. Certainly, as investors, that's one of the neat parts of the job -- you never stop learning. Thankfully, we've created a team here that shares that mentality. Everyone helps everyone. I think it makes us all better in the end here.

But let's get into talking stocks here. Part of the internship is actually stock pitches. You guys are tasked with finding companies, digging into those companies, presenting those companies to us in the form of a PowerPoint, a stock pitch. We get to follow up with you guys, offer some feedback. So, you started this internship with your first pitch. I want to talk about the companies that you both pitched.

Greg, let's start with you. What is the company that you pitched first for the investing team?

Bechtel: At the start of my internship, I don't know how, but I found myself looking into the cybersecurity industry. The one that really impressed me that I started researching was Mimecast. They provide a cloud-based platform for security services, mainly starting with email, and also things like continuity and archiving services. I had the pleasure of researching them for about three weeks and presenting to everyone.

Moser: We actually use Mimecast here. Maybe some listeners out there are familiar with it. But getting into that market opportunity of cybersecurity and what Mimecast does, what were some of the things that attracted you to this business?

Bechtel: As I said earlier, I've had the pleasure of learning about different people's processes. When looking at this first company, I was definitely looking at those criteria to go down and make sure to pick the right company. The things that checked that box with Mimecast were good management team -- Peter Bauer and Neil Murray. I made sure that they're heavily approved and reviewed, and they're very much long-term-thinking-based. And then, also having good insider ownership in the company, over 5%. And, for an early tech company, they've displayed great revenue growth, which is very important, and positive free cash flow. In addition to that, they've proven out a great product and innovate year by year. They've done a great job of establishing a loyal customer base.

Moser: Yep. I think a loyal customer base is important pretty much in any walk, whether it's retail or cybersecurity. This is a relatively young company. It's something that we're all still learning about because it's new. What are one of the bigger risks out there for this company that investors need to know about?

Bechtel: I think the risks are the same for a lot of these companies I've been looking at in the tech industry. Since they're so young, they're investing so heavily back into their growth. That's one of the risks I see for the future, is bursting that bubble becoming profitable. That's definitely something to look into for the future.

Moser: A good point there is, with a loyal customer base, at least that's something they can rely on. That, I think, will allow them to make those big investments up front, feeling like you're building a product that people like, they can take that money, keep plowing it back into the business, building more products and services. And let's be clear, cybersecurity is a pretty big market overall.

Bechtel: And that's definitely one of the reasons I was looking into that industry, because I believe in today's big-data world, it's going to continue. They're going to be players that we'll see in the future.

Moser: You think about security breaches. We were just learning today about Equifax's fate in having to fork over something like $700 million for the data breach that they were subject to about a year and a half ago. When you talk about data breaches, it's a matter of when, not if. You have to approach pretty much anything in today's day and age as there's going to be a data breach at some point. So these security firms do play a very big role.

Alise, talk a little bit about your stock you pitched.

Montgomery: I pitched Revolve. I actually was so excited, the first day of our internship, they actually IPO-ed. I was really excited to look at this company and look at their financials. It's a company I've been following for a long time, in terms of, as a customer, I love what they sell. Basically, what they are is an e-commerce company. They use data analytics to monitor their supply, so they can supply the right products for the right trends. They mitigate a lot of risk that way. It's such an interesting company, especially in the retail market, because that can be very risky, and potentially very unprofitable if it's not monitored properly in terms of the supply and demand. It's a very interesting company. One thing I love about it is the interface of the website and what they offer. They offer so much in terms of the way that they provide pages so that you can shop for certain occasions. It's perfect for people who need to shop for a wedding or a birthday party or traveling on vacation or something. I mean, I love it, and all my friends love it, too.

Moser: I was going to say, something you really focused in on in the pitch was, you were talking about this from the perspective of a consumer. Oftentimes, we do look at a lot of these businesses, and we think, "If I like it as a consumer, maybe it's something I need to learn a little bit more about as an investment." And in a lot of cases, good products do make for good investments. Not always. There's always going to be a Krispy Kreme out there for every Netflix or Amazon. But it struck me that you felt like this was a pretty good experience from the consumer side.

Montgomery: Yeah, I never really considered retail to invest in, so it was actually a really cool opportunity, because they are mostly a tech company as the backbone of the company, but they're a fashion company. It's very interesting. A lot of the retail market is moving in that direction, so I think it's a great play in that market.

Moser: What do you think is one of the risks that investors should be aware of with this company?

Montgomery: Maybe a recession of some sort. How can they monitor the potential for demand in a recession? People aren't going to buy as many clothes, they're not going to spend extra money. It's just an extra, it's not what you're buying on the regular, it's not a necessity. I think that's one of the risks. But they've gotten through a recession, and they're still growing. They've grown a lot recently. So I think it's a great company to invest in.

Moser: OK, great! Now, next week -- this is Monday, so you have just a little bit more than a week here to work out your final pitches. I know you guys are digging into them now and putting them together, but you have your final pitches next Tuesday. I wanted to talk a little bit about the companies that you're digging into for that pitch.

Greg, I'll go ahead and start with you because the company you're going to be throwing our way is Smartsheet. I have to admit, Greg, I've never heard of this company before. Tell me a little bit about it now. Give me a sneak preview.

Bechtel: The first thing I was looking for, and the new company was definitely one that hadn't been recommended before, I really wanted to find something new, because that's what I thought I did with Mimecast until about halfway through my research. It was a double whammy—I found out that we had recommended it and we use it.

Moser: You can't do that here, man.

Bechtel: It's impossible.

Moser: So, tell us a little bit about Smartsheet.

Bechtel: They provide a cloud platform that helps with work management when it comes to unstructured work. To go off that real quick, they see their opportunity as, over 50% of work done at companies is unstructured in the sense that it's done through email or in-person meetings. Their whole plan is to streamline that process and help more efficient decision-making.

Moser: I think we can all get behind that. Tell me a little bit about, what are some of the pros here of this business? You look at this business, you think, "Man, that's got a lot going for it?"

Bechtel: The first thing I was super interested in is how well received the product is. Although they have their pitch, this thing has shown that it can be useful in 2,000 different use cases. It's helpful for companies all over. The reviews are amazing on it. Also, as a newly public company, their growth has been incredible. It's been 50% year-over-year growth for the last five years. They've spread out to sell to 95 of the Fortune 100 companies, and then 75%-plus of Fortune 500 companies. Also, I'm really interested in their ability to organically grow. Kind of just like Mimecast, their customer retention rate is great, almost 100%. In addition to that, their revenue retention rate, which is very important with these early-on tech companies, is 134%.

Moser: That's tremendous!

Bechtel: Really highlights their loyal customer base and ability to sell more and more to the customers they have and their pricing power. Well, definitely a company I'm interested in for the future.

Moser: It sounds like they're just getting started. This is a new IPO. Talk a little bit about what is concerning, what concerns you with this company today, a risk maybe that investors ought to know?

Bechtel: Similar to Mimecast, they're investing heavily in what they're doing. They still have negative free cash flow and negative net income. But it's a whole new world with these stocks. If you look at their stock performance after the recent IPO, they've been killing it. I think their revenue growth and customer increase is enough to get investors on board. I'm not too worried. I think they'll cross that profitability line sometime soon.

Moser: It does feel like the market is in love with all these SaaS companies. All you have to do is have a cool name and offer a cool product, and they're going to give you a lot of credit, give you a lot of runway with it. I think sometimes maybe that's a little bit detached from reality. Maybe sometimes it's not. But the bottom line is, a lot of these companies have gotten a lot of credit here up to this point, so I could see where maybe the market's overlooking the profitability question today because of that retention that you're talking about. They have a good solution, a product out there that their customers are using. But yeah, that profitability is always going to hang over them until they actually reach it.

Alise, talk a little bit about the company that you're going to be pitching.

Montgomery: I was going to pitch CrowdStrike, actually, ticker CRWD. They're a cloud-based security company. If you're in public and you're using Wi-Fi, they're able to monitor the platform you're on so they can strike and block those risks for potential hackers. It's actually a great service in terms of, if you're someone who goes to coffee shops and work and you want not to be in the office all the time in a secure space. That gives you that secure space when you're in public as well.

It's a subscription-based business as well. That's another great thing, just like what Greg was saying. What I love about their company is -- they actually posted earnings. They're growing revenues year over year, for the quarter, at least, 103%, which is actually what management projected, so that's pretty good. Subscription revenue has gone up as well. It's gone up 116%. That's great. You were saying recurring revenue is actually one thing, Greg, for security companies, and theirs is pretty sticky as well, in terms of their platform. It's gone up 114%.

Moser: The subscription plan and customer retention, eventually they have to bring profitability down for investors, you have to deliver, but I can understand why the market will give businesses like these some credit when you have that subscription plan and that retention rate. The signs of trouble are perhaps when retention starts to slip, or overall customer opportunity starts to dwindle a little bit. Those are certainly things to keep in mind for the company.

Now, we were talking a little bit about one of the other risks for this company, Alise. That was in regard to 5G, wasn't it?

Montgomery: Exactly. 5G means a growing, basically, platform service. Everyone's going to have 5G eventually. And that's something that's a risk for this company because 5G, if you're in public, you can use your phone as a hotspot, and I'm sure your company would pay for that as well. That's another way to have a secure network if you're in public. That could be a risk for CrowdStrike.

Moser: I'm sensing a theme here, a lot of security ideas out there.

Bechtel: Really showing that we can get out of our comfort zone, doing the same things.

Moser: [laughs] Well, I love it! It's a lot of new names that perhaps some of our listeners aren't as familiar with. It's some names that I'm not very familiar with, and I'm learning all about them with you guys.

OK, we have earnings season coming up here. It's literally just getting started now, what we refer to as Earningspalooza. Chris Hill threw some numbers out there the other day, the last two weeks of July, there's something like 1,600 companies announcing earnings. So we're getting ready to get hammered here with a lot of information. We wanted to take this time to give you one company that you're watching this earnings season, and why you're interested in it.

Greg, I'm going to start with you. What's the company on your radar for this earnings season?

Bechtel: I guess my answer for this is going to be Charter Communications. That's not because I'm the most expert on this company, but I wanted to talk about it because I had the chance to do a 10-K challenge on them last week. For people who aren't knowledgeable of what that is, it's something us interns get to do where we get an hour of looking at a 10-K, and then dig into the important parts and form an opinion on the company.

Moser: How did you feel about the 10-K challenge, by the way? That's something we've talked a little bit about before on shows. I always found it helpful as the first step in the process. I was able to read about a company, and then within that hour, make a determination whether I was interested and wanted to learn more, or whether it needed to go in the either "too hard" pile or "not interested" pile.

Bechtel: I think it's been a great assignment for us to do. I know, the first couple of times I've looked at 10-Ks, it feels like I'm reading a novel. I don't know where to start and where to end, and I normally get bored and throw it away. Doing it a few times, I've been able to pick out the parts and learn about the company a little quicker.

Moser: What got you interested in Charter?

Bechtel: Charter Communications, what got me interested is the fact that I use Spectrum Wi-Fi, which is pretty lame, so I started looking at it. But yeah, they're a giant cable TV provider. They also provide Wi-Fi and voice communications. Something that got me interested in is, they've quadrupled in size since 2015 and 2016, when they merged with Time Warner Cable and Bright House Networks. In the past year, they did $44 billion in revenue, compared to $9 billion in 2015. They've grown dramatically.

Moser: How does this company grow organically? Or is this a story where this company is going to grow more through consolidation in the space?

Bechtel: I think they're going to continue to grow. They can continue to reach out to a new customer base, mainly for their internet services, and also video services. There's definitely a lot of risks in the industry. But I'm very interested to see if they can continue that success since their merger. The stock's been performing very well.

Moser: OK, great! Alise, you're paying attention to a company I think a lot of our listeners are very familiar with. Matt and I talk about this one all the time. Tell us about it.

Montgomery: Yeah, Square. I've been a huge fan of this stock for a long time, especially since you guys coined that term "war on cash."

Moser: It's worked pretty well for us so far.

Montgomery: I love that whole basket, the war-on-cash stocks. I love Square! This company's grown a lot. This is one I'm really looking forward to in terms of the earnings report. Last quarter was so-so. But I think if we can look toward the gross payment volumes to continue to grow, and they actually have a larger portion of that be larger payments, that would be a huge driver for them. If that's growing, that's a great metric to look for. Hopefully, they do continue to grow that. Last quarter, they grew year over year 27%.

Moser: Yeah, it seems like I'm seeing a lot of retailers out there using Square these days. So I feel like they're getting in more and more storefronts. To your point about the gross payment volume, it's growing, but when you compare it to something like PayPal, which is considerably higher, No. 1, it shows you how big PayPal is, but then also, No. 2, I think it shows you the opportunity that's out there for Square.

Speaking of Square, we like to talk a lot about leadership at The Fool. Everybody seems to have an opinion on Jack Dorsey and running two companies at the same time. What is your opinion on that matter?

Montgomery: I don't think it's that big of an issue. He's been able to run two successful companies that way. They're both doing pretty well. Square is, I'd say, a little bit better than Twitter, just because it's been hurt a lot more with other things. But I love Square! I think he's able to take charge of both companies and do it well. I haven't seen an issue on that so far.

Moser: Yeah, I tend to agree. I think if there were obvious signs, they'd be apparent. He certainly seems to be doing a good job. Though, if I had to choose one, I would choose Square because I think the overall market of payments.

Montgomery: Oh, absolutely!

Moser: I own shares of both companies. I'm happy with them either way.

OK, guys, before we wrap it up, I want to give you a chance to offer up some advice. I'm sure we have listeners out there who either would be interested in applying for an internship or maybe know someone who'd be interested in applying for an internship. It is a very popular internship every year. It's a fun place to work, so we have a lot of people who want to come check it out. Give our listeners one piece of advice, for those who are considering applying for an internship here. Greg, I'll start with you. What's one piece of advice?

Bechtel: Beginning the interview process going into looking in the investing internship, it's extremely important to already be investing and know what you believe in, and be able to show the interviewer how you're actively interested in the position.

Moser: That's a good call.

Bechtel: If you're not sure what that strategy is, I would like to add that long-term investing isn't a bad idea, since that's what we do here. That line definitely helped me out a little bit.

Moser: [laughs] Nice. Alise, what about you?

Montgomery: I would say, showing a love for studying companies and stocks, loving to research companies and the market. I think it's that passion and energy that we like here at The Fool. Honestly, I think that's great. It also drives you to learn more about companies and find great new companies that you normally wouldn't find if you didn't have that enthusiasm.

Moser: So, stock nerds. You're just saying, "Hey, guys, just tell them you're a stock nerd."

Bechtel: And if it's in person, you don't have to show up in a suit.

Montgomery: Yeah, it's great!

Bechtel: You can pretty much wear whatever. I've worn a Texans jersey once.

Moser: We would never hold the suit against you, but yes, we do like to be comfortable.

Montgomery: Maybe for the first day.

Bechtel: I did wear a suit on the first day, and I got made fun of a little bit.

Moser: I wore a suit for my first interview here back in 2010. You can do it and still get away with it. We're just kind of an easygoing work environment here, but I think that's a lot of the reason why people like staying here for so long.

Hey, listen, we'll leave it there. Alise, Greg, thank you so much for stopping by today!

Montgomery: Yeah, thank you so much!

Bechtel: Thank you so much!

Moser: 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. Today's show was produced by Dan the man Boyd. For Greg Bechtel and Alise Montgomery, I'm Jason Moser. Thanks for listening! And we'll see you next week!

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Jason Moser owns shares of Amazon, PayPal Holdings, Square, and Twitter. The Motley Fool owns shares of and recommends Amazon, Netflix, PayPal Holdings, Square, and Twitter. The Motley Fool owns shares of Mimecast. The Motley Fool is short shares of Equifax and has the following options: short October 2019 $97 calls on PayPal Holdings and short September 2019 $70 puts on Square. The Motley Fool has a disclosure policy.