What You Need to Know Before Investing in Cybersecurity and 3D Printing Companies
On this episode ofMarket Foolery, Chris Hill is joined by Motley Fool analysts Jason Moser and Taylor Muckerman. The cast discusses the cybersecurity space in the aftermath of international attacks before turning to the listener mailbag for questions about investments in 3D printing and the housing market.
A full transcript follows the video.
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This video was recorded on May 15, 2017.
Chris Hill: It'sMonday, May 15th. Welcome to Market Foolery. I'm Chris Hill. Joining mein studio today ... from Stock AdvisorCanada,Taylor Muckerman and from Million Dollar Portfolio,Jason Moser. Happy Monday, gents!
Taylor Muckerman: Yes,indeed.
Jason Moser: HappyMother's Day-after.
Hill: Exactly.
Moser: Didyou get yourself in trouble yesterday? Ordid it work out alright?
Hill: No,I called my mom with the kids,made dinner for the missus, all good things.
Moser: Whatdid you make?
Hill: Well,we had a little bit of a mixed grill.
Moser: It waswhat she wanted, ultimately, right?
Hill: Yeah,exactly. A little swordfish, a little shrimp,a little sausage. I was talking about this withmy next door neighbor,because he was out there grilling as well.I feel like, any time I'm grilling,I'm just thinking,I can basically grill whatever,and I find that my wife is like, "Oh,you don't have to do multiple things!" AndI feel like, it's grilling. It'snot like a stove, whereyou have to manage a bunch of different things. No,I can grill three or four different things,that's not a problem.
Moser: Notat all. My philosophy is, whenyou're grilling burgers or steak,if you're not throwing some andouille sausage, orperhaps some shrimp or something else on there,you're just not leveraging --
Hill: You'rebeing a little lazy.
Moser: -- your grillinginfrastructure. I mean, you have to go ahead and --
Hill: I like the business aspect you take to this.
Moser: Youhave to understand the operating leverage that's in play here. You'regoing to get that thing started up. Make the most of the time you're putting in it.
Hill: You'rehurting the gross margins of the propane.
Moser: Let's nothurt the gross margins. [laughs]
Hill: I think we're done now, that's going to do it for today's edition. We'regoing to dip into the Fool mailbag, but I thinkwe should start with one of the big storiesover the weekend, which is having ripple effects onWall Street, and that is the cyber attacks that took place affecting businesses around the world. There wasthe ransomware, a tech which encrypts files and thendemands payments to unlock them, and the so-called "Wanna Cry" malware that was spreading around the world and affecting businesses. Maybe not surprisingly, cybersecurity stocks are looking good today.Symantec(NASDAQ: SYMC),Palo Alto Networks(NYSE: PANW),FireEye(NASDAQ: FEYE) shares all up between 4% to 8% today. Again,not a surprise that they're up. But I'msort of curious about this industry,because I look at cyber attacks as something that'sonly going to get worse, there will only be more of them in the future. I'm not saying these stocks should be up every day. But what's going on with these businesses, that we're not seeing a bigger bull run on these stocks?
Moser: Doyou want to start?
Muckerman: I think it's a very fragmented industry. I'm not sure there's any clear-cut winners. Not just one winner.I think you have a lot to choose from. Alot of private companies in this space, too. So I think the fragmentation might be one reason why. Butyou see this every time after there's a hack ofmeaningful size. They pop in the next few days,then they come back down to earth.I don't think a lot of these businesses have the stability you might see,because a lot of them are fairly new.I think there's still some hesitation around who might be the winners here,kind of like 3D printing, whichwe might talk about a little later --
Hill: We will get into that.
Muckerman: Theindustry makes a lot of sense, butI still think that some of the companies in there --just like this industry,a lot of 3D printing companies are privately held, so there'scompetition behind the scenes that investors might not be witnessing,and I think that probably holds true herewith the cybersecurity industry.
Moser: Yeah.I think first and foremost, it is anextremely difficult market to understand.I think it's difficult for investment analysts to understand.I think it's a difficult market for those market professionals to understand, even. ButI think you have to ask yourself, what reallyconstitutes a sustainable edge in this line of work? Because really,when you think about it, the nature of the market, the nature of cyber threat, is to always becomesomething that no one has ever seen before.
Muckerman: Youhave to be fluid, yeah.
Moser: Andhow do you prepare for that? And how do you determine which company is best prepared for that? Becauseyou really don't knowuntil hindsight, "Well,everybody was prepared for that one, except forthat company and that company."So it's just very difficult to suss out the winners. Likeyou said, I think in general, theconcept makes sense. It seems like it would be anopportunity, albeit, we're tending to root against thesetypes of things, but they're going to happen no matter what. But I think it's so fluidand it's so difficult to figure out whatconstitutes any kind of a sustainable edge there, it makes it really difficult to pick a winner. Andit's fragmented, and then you have private opportunities versus public. The tech moves fast, andI think this moves even faster.
Muckerman: Andyou don't know you need it until it's too late. If you're a company,how are these Palo Alto Networks and FireEyes ...I mean, yeah, they can say theyprevented this from happening, because they can see the attacks that were rebutted, butuntil your company is attacked, you're just like, "We'rejust paying these people, and we're not really sure what they're doing for us," untilsomething like this happensand everyone freaks out and says, "Wehave to go pay somebody to help us!" And then a year goes by with no attacks, and maybeit goes by the wayside again until something like this happens.
Hill: Marketfoolery@fool.com is our email address. FromMatt Riley, "Haven't heardyou guys talk much about 3D printing in a while.I was wondering if you had any thoughts on companies, or the state of that industry."
Muckerman: Personally,I'm not investing in any of the 3D printing companies. If I'mgoing to benefit from it,GE(NYSE: GE) might be the first place I would look. They made a couple 3D printing acquisitions last year, up to about $1.5 billion. So they're using it in-house, and I'm surethey're going to work their way intoproviding additive manufacturing opportunities to some of their customers. Butfirst and foremost, they're trying to get in there and reduce their cost by using it to their advantage, rather than trying to compete in the 3D printing market. I think that's where I would bet thatit's really going to make a difference, internally for some of these giant manufacturing companies. I think 3D printingeliminated their consumer base business last year,because they just didn't see the future,and it was competitive, andthere wasn't a huge market for it.Stratasys(NASDAQ: SSYS) isstill trying to achieve some relevance in the consumer space. But I'm going to bet on thatin the giant manufacturing space,rather than trying to pick the winners who are trying to sell these machines to folksindividually.
Hill: Yeah,it's like the old adage in politics thatI think was born out of theWatergate era and All The President's Men,"Follow the money." I think if you look at,maybe related to what we're seeing inartificial intelligence and home assistance and that sort of thing, where you seeIBMand then Amazon, Google, Microsoftreallystarting to pour money into those homeassistants, that sort of thing. I think Taylor is right, to see the next move or wave of 3D printing, keep an eye on where GE is spending andwhere the other big manufacturers are spending.
Moser: Yeah. Thetechnology is super cool, but theconsumer implications are not directly tied to us. We benefit fromAppleandFordand GE allusing that technology.
Hill: Butyou don't want one in your garage?
Muckerman: I mean,it requires some technical skill. There's a high hurdle for people,I can't imagine you can just go out and buy a 3D printer andplug it in and reading an instruction manual and then becranking out a bicycle in the next two weeks.
Moser: And let's think about the level of frustration inhaving a regular printer. How often do you hit print, and it won't connect, or it's out of ink, or out of paper. So consumer-wise, the applications aren't there. So it's neat technology. I'm thinking that you'll see some consolidation,like you were saying, Stratasys 3D Printing was the other company that isvery well-known. A company that doesn't get enough credit for the space isProto Labs(NYSE: PRLB),because Proto Labs was focused more on the design software andprototype production forsmaller businesses, individuals and whatnotmaking it very easy to get those types of3D printed products without having to actually invest in that infrastructure. And they'rebuying some more 3D printing capabilities, as well.
Muckerman: Themanufacturers turn to them,rather than trying to sell a product, they're selling a service.
Moser: Yeah. Andjust like we talked about before, I'llgo back to that Jeff Bezos quote wherehe talked about the toaster, you can just click and buy a toaster on Amazon and in less than a day, have a toaster at your doorstep, oryou could go buy a 3D printer, buyall of the things thatcomprise the toaster and then you print off the toaster, andthat's going to be pretty cool, it's probably going to take a while,it probably won't work as well --
Muckerman: And you'llburn your house down.
Moser: Yeah,maybe. There won't be a warranty on that toaster. So there's just no reasonto go through all of that other than to say, that'spretty cool technology. Like most things,like you said, follow the money. If this company isgoing to have the big money and the resources and the wherewithal to use those resources,they're going to.
Hill: In between the GEs and thosetypes of companiesspending and investing in this space, and using 3D printers, andpresumably at some point in the far future, whena lot of people have these in their homes, whenI think about an in-between step,I think about contractors. I think about people whose business is building homes. I thinkthat could be an intermediate step, whereyou see, whether it's through aHome Depotor on their own, if you see contractors saying, you know what? This isactually worth it to me,for the supplies that I'm using,I don't have to order and keep an inventory oflots of different sizes of screws and nails and whatever --
Muckerman: Pipe fittings, whatever, yeah.
Hill: Yeah. I can justcustomize what I need on the spot.
Moser: Themedical profession,I think that's another one where we'regoing to see more. Consumers aregoing to be the beneficiaries here, it'snot going to be something where you're going to go print off your hipreplacement. But there will be a company that's going to be able to do that infar less time for far less money. And so, yeah, again, youlook at the industries that are going to reallybenefit from this disruptive technology. It'snot quite like the internet, in thatthe internet has given us all of these opportunities in the public marketsbecause of the way it's disruptedvirtually everything we do. 3D printing technology iscertainly disruptive, but it'sjust not as disruptiveon the consumer front.
Hill: Email fromAxel Brucknerin Germany: "Iheard you speaking recently about good indicators for a strong U.S.housing market in the future, soI'm curious how you would evaluateFannie MaeandFreddie Mac. The upside for these stocks seemstremendous compared to the risk." What do you think, Jason?
Moser: I wouldactually probably beg to differ there.I guess, maybe, he's thinkingupside compared to risk, and risk meaning that these arecompanies that are more or less underwritten by the U.S. government. So, yeah,from that perspective, the risk is, generally speaking,probably pretty low. But I thinkunderstanding what these companies do, they make their money from, essentially, fees and net interestmargins, so they're more or less like a bank. But they're not stocks that trade on any underlying businessfundamentals. I think they tend to trade more on who's in office, and whatcourt ruling recently wentin their favor or in someone else's favor. So to me, they're not reallybusinesses as much as they are necessaryentities, and we're trying to figure out where they fit in our housing market going forward. Because clearly,something went wrong not too terribly long ago. I thinkwhen we look at housing in general, the housing opportunity for investors is absolutely a must in the portfolio. You look at that as one of the biggerpicture plays that you need to havein your portfolio one way or another. I would not look at one of these twobusinesses as a way to do that.I think if you're concerned with one of these businesses,I don't know why you wouldn't just pick a big bank,because then at least you have a bank that'sgoing to be based on profits, and you'regoing to see dividends, and stocks that tradea bit more on fundamentals. But I think the opportunity is there. If you look at home ownership rate here,going back to 2005, right about when it peaked,it's been on a pretty steady decline since then.
Muckerman: Slow, yeah.
Moser: Yeah,it's reverted all the way back tobelow where it was in 1995. So,I think there are plenty of opportunities. I thinkthis notion that millennials are not buying houses is misguided. There is data to prove that they are. They'recertainly being a bit more particular, a bit moreconsiderate when buying houses. But ownership is one of those things where, yeah, at 20 years old,you're like, "No, I'mnot going to buy a house, of course not,I'll tell you I'm not going to buy a house," butthen life happens. When you hit 25 to 30 years old, things change. You don't mean for them to change, they just do.
Hill: Andthat's also one of those narratives that's now four or five years old. There arestories that I've seen online that speak to that, they're parroting that same line, and you read them and think, "I think you'rebeing kind of lazy."
Moser: Whatdo you mean, the line that millennials aren't buying homes?
Hill: Yeah, like"That was the case five years agoand the data proved it, thereforeI'm going to just repeat that line." Maybe it's time for some updated data.
Moser: Right. If millennials aren't buying homes, you need toprepare for a home ownership rate more like 40%,and I'm just telling you, that's not going to happen.
Muckerman: Yeah. They'renot getting the opportunity. It's not that they don't want to. A lot of new home builds are generally being priced mid-market to high-market now. They'renot really getting entry levelprices to buy their first house. So they probably want to, but it's a little bit more difficult for them to,because I think new builds are stillpre-recession levels. It's on anuphill slope right now. We're still far, far behind in terms ofopportunities to buy a brand new house for these folks. And some of the hotter cities where you're seeing millennials move, they're priced out of the market, andit's become a rental societyin a lot of these cities, with banks, afterthe recession, buying upa lot of the inventory and renting it out, and not offering these used homes for sale. Andif you're not building new homes, you'restuck in limbo there.
Moser: Yeah,and the economics dictate it. It'sall about supply and demand,just like any other market.I was reading about this, I think it was in Minnesota, of all places, you're seeing homes that are going on markets that, they don't last but a couple of days on the market before they're gone. Speaking from recently selling a townhouse of ours inFairfax here, which is apretty good sort of entry level pricefor this area, and I mean, this is an area where housing is a bit more expensive, our house was gone in less than a weekend,because the price was attractive. So you're seeing, in areas where Millennials or first-time home buyers have thatopportunity, they'redefinitely jumping in there. And wherethere is lower supply, those home builders aregoing to come in and start building more for those types of buyers. So youlook at all of the different ways you canparticipate in that market, and it'sanywhere from retail, like Home Depot, tosomething likeEllie Mae, whichI've talked about a million times on our shows,taking a part of every loan that goes on out there, or something like a big bank whereyou can get that dividend in --
Muckerman: Timber companies, nicediversifier,softwood lumber.
Moser: Yeah, material suppliers. I look atsomething like Freddie Mac or Fannie Mae,and I think, well ...
Muckerman: There'sbetter options out there.
Moser: Way,way better options.
Hill: I do, however, like how Axel is thinking about it, just interms of the upside relative to the risk. Regardless of whatever stock you're looking at, that's a greatexercise to go through.
Moser: No question.
Hill: Shout out toone of our longtime listeners, Levi Waddell inSouth Dakota. Thispast Saturday, he ranThe Brookings South Dakota half marathon. He mentioned that during the marathon, he had saved up a week'sworth of podcast. So hopefully we didn't slow him down.
Muckerman: "Ihave to finish,I can't listen to this anymore!"
Hill: [laughs] Exactly.
Moser: "Ihave to buy that stock!"
Hill: No,I think it was more like Taylor's, like, "God, as soon as I'm done with this race, the sooner I can stop listening." The geniuses atMondelezare at it again. They haveunveiled the firework Oreo. That's right, it's an oreo withpop rocks embedded in the cream filling.I was about to say that you couldn't pay me to eat one of these. You could. It wouldcost you a lot more money than you would think.
Muckerman: Justdon't drinkCoca-Colawhile you're eating these things.
Hill: Exactly.I do like, however,what they did along with this -- anda bunch of people have emailed and tweeted about this. Mondelezis offering a $500,000 prize forpeople to submit ideas for their nextlimited edition flavor. If you think about whatPepsidid withFrito-Lay, and the contest they had forpeople to submit ideas for flavored potato chips, that seemed to work outpretty well for them. So just based onwhat I've seen this morning onTwitter,it's a wonderful mix of peopleoffering legitimately good ideas --I'm already on record as offering up ham and potatoes.
Moser: Ham and potatoes.
Hill: I say just go totally contrarian. In fact, I'll probably tweet that out to the Oreos people, with #myoreocreation.
Muckerman: What'sgoing to be the creamand what's going to be the cookie flavor?
Hill: I'll leave that to theculinary geniusesto figure that out. I'm going savory,far away from the desert,I'm going ham and potatoes. Butif you go on Twitter and type in thathashtag, #myoreocreation, there are some things that looklegitimately tasty, andthen you have people who are just completely trolling. Just trolling Mondelez with things like --
Moser: Well, it's a very troll-worthy request.
Muckerman: Andthey probably want some of thatfor the publicity.
Hill: People arealso putting their photoshop skills to work,coming up with packages of Oreos that they've photoshopped to include their favor,my favorite being codeine and cannabis. Sure, why not?
Muckerman: Itprevents the coughing, thecodeine.
Moser: I wonder ... you'regoing full savory.I'm not so well schooled on this,are there anysavory flavors to this point? Or are they all gearedtoward the sweet tooth? Oreois obviously geared toward the sweet toothin general. But are there savory Oreo flavors?
Muckerman: We had an Oreo happy hour last year at the Fool, and I don'tremember seeing anything too savory.
Moser: Chicken and waffles, maybe. But they did that for thepotato chips, I'm not volunteering that as a flavor. On the one hand,I like where you're going with this --
Hill: Oh,I'm not going to win.
Moser: Maybe not.
Muckerman: Ifwe talked about it on the air enough ...
Moser: I like that thinking. But the one thing I was looking at, to me, itstrikes me that a banana cream pie Oreo makes perfect sense.I figured there would have been this flavor by now, but I can't find it.
Hill: They're trottedout about 60 different flavors. 60 differentvarieties.
Moser: Theyhave to have a banana cream pie, right?
Hill: Take to Twitter and fire that up.
Moser: Maybe youreally take this in a completely different direction and youput up something like an IPA flavor,for all of you craft beer lovers out there. An IPA has a very unique, hoppy flavor. Maybe an IPA Oreo is just whatthe doctor ordered.
Muckerman:Anheuser-Buschmight try to buy Oreo if they do that.
Moser: That's adistinct possibility.
Hill: I just hope thatwhoever wins this isactually one of the dozens, andafter they accept the half million dollar check, they're like, "OK, seriously, just knock it off."
Muckerman: And they send us a box of the flavor that they win with.
Hill: [laughs] Exactly. Alright, Jason Moser, Taylor Muckerman,thanks for being here, guys! As always, people on the program may haveinterests in the stocks they talk about, andThe Motley Fool may have formal recommendations for or against, so don't buy or sell stocks basedsolely on what you hear. That's going to do it for this edition of Market Foolery. The show is mixed by Dan Boyd. I'm Chris Hill. Thanks for listening, we'll see you tomorrow!
Teresa Kersten is an employee of LinkedIn and is a member of The Motley Fool's board of directors. LinkedIn is owned by Microsoft. Chris Hill owns shares of Amazon and Coca-Cola. Jason Moser owns shares of Apple, Ellie Mae, and Twitter. Taylor Muckerman owns shares of Amazon, General Electric, Home Depot, and Twitter. The Motley Fool owns shares of and recommends Amazon, Anheuser-Busch InBev NV, Apple, Ellie Mae, Ford, PepsiCo, Proto Labs, and Twitter. The Motley Fool owns shares of General Electric. The Motley Fool recommends FireEye, Home Depot, Palo Alto Networks, and Stratasys. The Motley Fool has a disclosure policy.