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Mary Long: The top 10 companies in the S&P 500, so we're talking names that everybody knows; Apple, Microsoft, Amazon, NVIDIA, etc, they account for 37% of the index's market cap, but contribute to 24% of its earnings. According to Apollo Global Management, that is the widest gap between those two metrics since the third quarter of 1990. You want to expand on that sound effect you just made?

Tim Beyers: In 1990, we were gearing up for a decade of just extraordinary capital appreciation toward the latter end of that decade, I remember because I lived through it, was undeserved. That would tell me that if we're not in a bubble, we're on the precipice of one. That would be an indicator that there are, let's call them bubbly characteristics around the market, but that's an extraordinary divergence between those two numbers.

Mary Long: What do you do if you're an investor that already has a position in one of these stocks that has bubbly characteristics? It's not just the Mag 7 that have these characteristics. We got a question from a longtime listener, Ben Bergen. He wrote in, "I was fortunate enough to buy CrowdStrike when it was in the low 100s, partly based on advice from the Motley Fool. The valuation is so lofty now that I'm worried it's going to crash. Should I trim my holding or just continue to hold through the inevitable correction?" What's Ben to do?

Tim Beyers: Well, we can't give personalized advice here. I think, Ben, the number 1 question is, what percentage of your portfolio is your CrowdStrike position? I'll give you my general rule here, Ben, by the ways, great name. It's my oldest son's name, so I love that name. When a stock is well over 20% of a portfolio, for me, I start thinking about, it's time to trim this, and then where can I realocate that capital. The way I think about it, and Ben, you got to make your own choice here, but this is for me, this is how I do it. When it gets to greater than 20%, I think about, I'm going to take some, and irrespective evaluation at that point, Mary, just because I am over-dependent on this one stock, and there's some capital there that I could take and maybe put into some other names that might be attractively valued or are real opportunities that I just really love. I almost look at it as, that is free money. This stock has gone absolutely bonkers. I can take some money and redeploy into some things that I find very attractive. How much is the allocation in your portfolio, Ben? That's one question. Now, the other question is about valuation, and I think we can agree that CrowdStrike is premium priced. I will give you a metric which I find interesting, also a little bit terrifying.

The free cash flow yield for CrowdStrike is 0.006%. Let me explain what the free cash flow yield is and put some context here. The market average free cash flow yield is 3.3%, so a free cash flow yield is you essentially take free cash flow and divide it by the total enterprise value of the company and express it as a percentage. What you're essentially looking for is a very high free cash flow yield, so above 3.3%, let's say 6.6%. Well, this stock is valued as if it's probably going to grow its free cash flow at less than half the market average rate. If it's much lower than 3%, that means the expectations for it are, wow, this thing has got to grow its free cash flow really at an accelerated pace for a long period of time. If it's under 1%, the expectations are really high. If it's under less than 1/10 of 1%, then the expectations are outrageous. Yes, CrowdStrike is valued at a ridiculous premium. In order to earn that premium, Mary, and there is an argument for this that it can earn that premium. As of today, CrowdStrike's operating margin is just under 1%, it's 0.75%. Over the long term, management says, we can make that operating margin between 32 and 34%. In other words, we can improve it by well over 32 points at least right now. We think we can do that. On their free cash flow margin, remember, we said the free cash flow yield, how fast does that free cash flow have to grow? They believe their margin can be somewhere 34 and 38%. Which is equally outrageous. If the business becomes as efficient as CrowdStrike is telling us it will become, then it's going to earn the free cash flow that pays for that premium, but that's a big if.

Mary Long: There are other companies that play in the same space that CrowdStrike does. Palo Alto Networks is an example of that. CrowdStrike trades at almost 100 times free cash flow, while Palo Alto Networks trades at 40 times free cash flow. The expectations that you just outlined for CrowdStrike are massive. What does CrowdStrike have that a competitor like Palo Alto Networks or another player in the space doesn't?

Tim Beyers: There's a couple of things, and we mentioned this on This Week in Tech somewhat recently. Tim and I were talking about this. CrowdStrike has been particularly brilliant at figuring out how to meet customers where they are in ways that their competitors haven't. They've introduced, I'm blanking on the name for this particular program, but they have a program whereby, essentially, you can buy some credits. Think of it this way, it's like if you had a prepaid phone, Mary, and let's say you had your T-Mobile account, I don't know if you use T-Mobile, I'm not making a judgment here, either way. But let's say you had a T-Mobile phone, and you also had, in addition to your subscription, you had a bank of T-Mobile credit that you had bought. That T-Mobile credit said, "Hey, you know what, Mary? When the next massive iPhone comes up, you're going to be first in line, and you're going to be able to use all of that credit to get that iPhone before anybody else on our customer list."

That's what CrowdStrike has done. It says, "Hey, here's the program. You don't have to subscribe because they sell modules." Those modules are like subscriptions, so you get endpoint protection, and you get identity protection, a bunch of other things. Let's say you buy into this pool, and you don't have a subscription to some other problem that comes up, but you have this pool that you could draw from, it says, "Oh, boy. Hey, we've run into a problem. We need that feature." They say, "Hey, no problem. Draw from your pool of credit, you can have that right now, you're all good. If you want to start a subscription to that module later, we're happy to get that set up for you." So they've built some flexibility into their model that allows them to earn revenue at a point where it's been really tough for their competitors to grow at the same pace. So CrowdStrike has really set themselves apart by growing more consistently at higher margins for a longer period of time while their competitors are figuring things out. That's worth something.

Mary Long: They've built flexibility into the model, but it also sounds like they've prioritized their customer. They've done that really well.

Tim Beyers: They've been really smart, and it is showing up in the financials.

Mary Long: At the top, you mentioned, there are other opportunities like, we're seeing a lot of concentration in these indexes in tech stocks. If you're watching this run-up from the sidelines, are there any well-priced opportunities to be found in the tech sector?

Tim Beyers: Yes, but I think they are not necessarily the ones that are deep tech AI-centric names with some exceptions, but they are the ones that have some apparent problems. One of them that I particularly like is Snowflake, because there are some folks who feel like there are some problems with Snowflake because the growth is slowing significantly. Is it trading for a discount or is it in the middle of a problematic period? Because that fuzziness exists, the valuation is a little better than it has been historically, but it's still not cheap. No one will be surprised that the stock I'm going to name here is Toast.

Mary Long: Do it. [laughs]

Tim Beyers: You should have just said it.

Mary Long: I know.

Tim Beyers: Because I saw it on your face. That is a company that is delivering an everyday service, but using tech to do it. I think some of those sneaky ideas where you have a great business that is tech-enabled, but it just delivers an enormous amount of value for the customer on the back end and does it in a way that scales with an increasing amount of efficiency as it grows, that is fun to watch, it's great to see, and I'm a big believer in that business. I would say more of the bargains are to be found in tech-enabled businesses, maybe less so in these straight-up deep tech businesses with some exceptions. If you can see where there are big questions about a deep tech business like Snowflake, and it becomes a dark cloud that you can see through to "David Gardner", then those can be exceptional bargains as well. I happen to think that's true about Snowflake, but not everybody agrees with me. I think I'm in the minority on that one.

Mary Long: We're going to give some more attention to those big, deep tech names. News came out. Microsoft withdrew yesterday from its seat on the OpenAI board. See, big, deep tech names. Microsoft says that it's no longer needed in that position on the board. That said, there's not much hiding the real reason behind this, which is to avoid the ire of antitrust regulators. Regulators in both the US and Europe have expressed concerns over Microsoft's sway over OpenAI. Microsoft is still a large investor in the company, they still have claims to some of the profits. Does this board exit meaningfully change the relationship between these two companies or is this handwavy?

Tim Beyers: Again, two things can be true. [laughs] It is handwavy, it is a million percent handwavy. It's designed to, I would say, modify regulators, but at the same time, a million percent changes the dynamics of the relationship between OpenAI. I don't love the idea of an unchecked Sam Altman. That doesn't make me feel comfortable because Sam Altman has been very clear about one thing and one thing only, that he has naked ambitions to make OpenAI one of the biggest companies in the world and to dominate the generative AI space. He wants to build his own hardware to do it. He wants to raise not billions, trillions with a T in dollars to make this happen. I would prefer a bit more of a check on Sam Altman, but I could see why Microsoft isn't doing this, and it definitely changes the dynamics. I don't know who has a real check on Altman at the head of OpenAI right now.

Mary Long: You started going here, but you're a giver of reckless predictions. Do you have a reckless prediction? A more independent OpenAI, Sam Altman, that worries me too. Why does it worry you? What's the reckless prediction for what that might mean for the rest of us?

Tim Beyers: I don't know that it's something that I necessarily have big worries about so much as I have questions about what that means for how we will view generative AI and the rights of a generative AI to go out and suck all of the data out of everything for its own purposes. I don't want to be subservient to a generative AI, I want to own my data. I think companies that are content creators and data owners like us here at The Motley Fool, I think we should have the rights to own our data and dictate, and I think we have a responsibility to protect our customers' data. A generative AI is a consumptive creature that will eat as much data as it can get its hands on. A wildly ambitious OpenAI will consume as much data as it can get its hands on and do with it whatever it wants until it is either checked by regulators, checked by competitors, checked by partners. I'm a little nervous about this, but [MUSIC] hopefully, what this means is that a more distant Microsoft will allow itself to also be a competitor to OpenAI. If that proves to be true, then I will be more hopeful.

Mary Long: Tim, always a pleasure talking with you even when sometimes the pictures that you paint of the potential future are a bit grim. [laughs]

Tim Beyers: Sorry, Mary.

Mary Long: Why is everybody so tired? Up next, Rickey Mulvey and Sanmeet Deo talk energy drinks, and look for the better buy between Monster and Celsius.

Rickey Mulvey: Sanmeet, the energy drink market is growing. Everyone is tired. A report from research in markets.com expects energy drink sales to grow at basically an 8% compound annual growth rate between now and 2030. That's the whole market, and there's a few dominant players that I think are worth checking out. Before we get into the Celsius versus Monster conversation, what do you think is driving this growth? Is it just that everybody's tired or what's going on here?

Sanmeet Deo: Well, being tired is part of it. I think it's been a lot of things spurring on the growth of energy drinks. When you think about it, coffee and caffeine is an energy drink in and of itself, and many people drink coffee. But now, people are looking for all kinds of healthier beverage options versus the old school energy drinks, more functional drinks that, like you said, combat fatigue, improve your productivity, keep you mentally focused, maybe improve your fitness, using it as a way to a pre-drink before you actually exercise or work out. Really just broadening out of the market for energy drinks in general, whereas some of the top players focus on certain segments of the market. Other players have now focused on a broader set to appeal to a broader audience.

Rickey Mulvey: To understand these companies as we get into Celsius and Monster, I think the best way to do that is to understand their marketing approaches. While folks have seen these in stores, can you give us a little briefing on how the marketing approaches for these two companies maybe are a little different and a little similar.

Sanmeet Deo: Yeah. Celsius actually sits at the intersection of a lot of these secular growth trends those I was talking about earlier, and it's helped them gain market share and become the number 3 energy drink brand. Something it wasn't five years ago. While concerns about caffeine content and quality of ingredients, Celsius drinks has proven to be a little bit of a healthier alternative to category leaders like Red Bull Monster. They're targeting the active healthy lifestyle, greater appeal among those that are looking to be fit and cleaner, brighter imaging and packaging. Now, Monster, I think of Monster, I always think of that movie, I just lost the name of it where they drive around to that bull and just present the drink to a bunch of students. Monster has traditionally targeted more males with focus on extreme sports, gamers, it projects a more bold, aggressive, and edgy image.

Rickey Mulvey: I have no idea what movie you're talking about. If you know the name of the movie, podcasts@fool.com, I'll send it over to Sanmeet. [laughs] I think one of the interesting things about Celsius is that it is trying to be perceived as healthier. Hold up. Tim Sparks, are you thinking of Role Model, Sanmeet?

Sanmeet Deo: Yes, Role Model. That's what it was.

Rickey Mulvey: Role model. Don't email us. Email us for other things, if you have a question about stocks or whatever. Anyway, are you buying with Celsius' brand image that it is healthier? Are you buying that this is a healthier drink than let's say your Monster Energy or a Red Bull?

Sanmeet Deo: Well, I will say, the way I found out about Celsius is we owned a fitness franchise, a gym, and the distributor that we used to buy products for our shop, foods and beverages, told us about Celsius that it was selling well in gyms, other gyms like Orangetheory and Planet Fitness and other gyms. He said, "Try it out." We're like, "Okay." We bought some, lots of people bought it. Our gym was primarily a boutique fitness, so primarily female, but we have lots of males as well, and they loved it. They would drink it right before class, and love it and keep buying it, and the sales would do well. I was like, what is this? I tried it out myself, and it tastes better. If you look at the ingredients, there's less ingredients than a Monster, so I am buying it. Honestly, a lot of these things, the healthiest energy drink in the world is water. It's just said it takes a while to get that energy, so it's the cleanest. But short of getting that, Celsius does have cleaner ingredients.

Rickey Mulvey: You're saying that water and sunlight might be healthier than these energy drinks are? Let's embrace debate here. Celsius though, you may be surprised to learn that energy drink investors have a bit of a hair trigger, and Celsius has gotten absolutely just smacked lately. On a longer chart, it is still very much outpacing the market, but it's recently gone from 90 bucks a share in May to the mid 50s. You know, this is a darling among growth investors. Has the company reported something or what's going on here? Why have expectations changed so much for Celsius in just a couple of months?

Sanmeet Deo: Yeah. Celsius' shares have been whacked, and there's really been two main concerns; slowing sales growth and declining market share. Most of that, they haven't reported yet, they're about to report I believe in August. Most of that has come from weekly data that comes from Nielsen that's indicated based on their channels, the market shares dropped from 10.1% in March to 9.6% in June, and that sales have slowed down 53% in March to just around 20%. Nonetheless, these are concerning trends, and even if they prove accurate when Celsius reports next month, I think they're short-term headwinds for a company with strong long-term prospects. Further complicating things is the distribution agreement with Pepsi, which can cause significant fluctuations in their sales as Pepsi builds and shrinks their inventory into their distribution system.

Sanmeet Deo: You think it might be a little bit of an overreaction?

Rickey Mulvey: Yeah. Some of these channel checks could be directionally correct, and so we could see some slowdown in sales and market share growth. We're not really sure exactly what that is going to look like because it's not the exact numbers, and there's always something missed. It doesn't track all channels, so a bit of a no reaction.

Rickey Mulvey: Let's talk about Monster now, which is the more mature company in this conversation. It's famous for being the best-performing stock over the past three decades. If you want to play the if I invested $1,000 in this, I'd have a second house by now game with Monster. Smash tech companies smashed the S&P 500. But Over the past five years, Monster has actually underperformed the broader market. It's no longer a rocketing sales story, but the company has been slowly buying back shares. If it's not a rocket ship of growth, do you think this is an intriguing capital allocation story now?

Sanmeet Deo: Yeah. In terms of its growth, it's interesting because, like you had said at the top of the segment, energy drink category is still growing, while Monster sales have been slowing. The question is, are they losing their sales to competitors like Celsius or others, or their existing customer's buying less? Is this a secular shift away from Monster, or is it more of a short-term headwind that's leading to future continuing sustainable but slower growth ahead? In terms of the capital allocation story, that could be intriguing because honestly, regardless of the short-term tailwinds, I can reasonably assume the monster is going to continue to grow its top line, at least even in the single digits. They're a very big business, they still have runway for growth internationally. Not much heavy lifting in those assumptions to think that they can still grow their top line. If they're able to manage costs, reduce shares outstanding, it could be a powerful EPS story over the long term, similar to some of the names like AutoZone or whatever. But however, to get to something like that, they need to repurchase at a much more aggressive rate than they have. I think over the past three years, they've only really shrunk their share about 4%.

Rickey Mulvey: Then if you're weighing, getting into this market as a retail investor, what multiples are you going to be using to compare these companies?

Sanmeet Deo: I would look at the Four PE multiples and the PEG ratios. If you look at Celsius to Monster, Celsius is trading at forward 2026 estimated PE around 28 with a 403 or EPS growth rate projected of around 37%, giving it a PEG ratio of about 0.77. Monster's trading at about a little under 22 times same PE, 2026 estimated. Three-year growth rate is 9.8% giving it a PEG ratio of 2.2. Based on those forward PEG ratios, while Celsius is trading at a more reasonable multiple given its forward earnings prospects.

Rickey Mulvey: Then if you're looking at a company like Celsius, this is a growthy growth stock, even with the PEG ratio being lower compared to Monster, and the PEG ratio is just basically a price earnings multiple with growth included, so it's a way of evening that out. What's the mindset you think an investor needs to have if they're even considering buying a company like Celsius?

Sanmeet Deo: Celsius is a classic Rule Breaker stock. You have to have a very long-term mindset with the ability to take some lumps. That lump could come even here shortly in a few weeks when they report earnings. The tea leaves are saying that their market share and their sales growth has slowed. It will slow eventually because no company can grow in perpetuity and at such strong rates forever. But if you look into the future and envision Celsius as it is now and what it could be in the future, and you see it as a bigger company, more expanded internationally, more flavors, more products, maybe have other kinds of areas that they've grown into, it could be a really great investment, but you will have to take a very long-term approach and ride the waves.

Rickey Mulvey: It's certainly. Just because it's gone down a lot doesn't necessarily mean that it has to go up from there. Let's get to the big takeaway. For your $100, what cans are you buying? What are you buying shares of, Sanmeet? Is Celsius the next Monster or is Monster the next Monster?

Sanmeet Deo: I always shy away from those next questions, but I would buy Celsius, I own it myself, and I'm going to continue to hold it for a long time. I think it has a ton of growth potential still left ahead, albeit with bumpy roads ahead as well. Whether it's the next Monster, that's too early to say. I'll tell you in 30 years.

Rickey Mulvey: Sounds good. Sanmeet, I appreciate your time and your insight. Thanks for being here.

Sanmeet Deo: Thanks, Rickey.

Mary Long: 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. I'm Mary Long. Thanks for listening. We'll see you tomorrow.

John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Mary Long has no position in any of the stocks mentioned. Sanmeet Deo has positions in Amazon, Celsius, and Toast. Tim Beyers has positions in Amazon, Apple, Snowflake, and Toast. Ricky Mulvey has positions in Toast. The Motley Fool has positions in and recommends Amazon, Apple, Celsius, CrowdStrike, Microsoft, Monster Beverage, Nvidia, Palo Alto Networks, Planet Fitness, Snowflake, and Toast. The Motley Fool recommends T-Mobile US and recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.

Are We in an AI Bubble? was originally published by The Motley Fool