In this episode of MarketFoolery, host Chris Hill is joined by Motley Fool analyst Jason Moser to talk about Lennar's (NYSE:LEN) rise on strong first-quarter results and continued optimism about America's housing market. Also, Coupa Software (NASDAQ:COUP) delivers a surprise profit in the fourth quarter, but shares still sell off. The guys also discuss the escalating bidding war in Silicon Valley as Lumentum (NASDAQ:LITE), MKS Instruments, and II-VI all make bids to buy Coherent (NASDAQ:COHR).

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This video was recorded on March 17, 2021.

Chris Hill: It's Wednesday, March 17. Happy St. Patrick's Day! Welcome to MarketFoolery. I'm Chris Hill. On Monday, Jason Moser was on the show. Joining me today, his Irish cousin, Jason O'Moser. Thanks to being here, sir.

Jason Moser: [laughs] Well, top of the morning to you.

Hill: We've got software earnings, we've got a bidding war in Silicon Valley, which I am increasingly fascinated by. But we're going to start today with housing. Lennar's first quarter revenue came in higher than expected and gross margins rose nearly 5%. That seems pretty big for a homebuilder. Let's face it, the housing market is hot. Lennar is one of the biggest homebuilders in America, so it seems right that shares are up a little bit this morning.

Moser: I think you said it there, the housing market is definitely hot and certainly management has been saying as much for the past several quarters. When you look to homebuilders, Lennar really should be one of, if not the first one on your list. This is the largest U.S. homebuilder by revenue. If we just look back to what they were saying, even just as recent as September of 2020, the language regarding the market in that quarterly earnings release, they really were harping on the fundamentals of the housing market remaining strong, driven clearly obviously by record low interest rates. But also, generally speaking, just an under supply of inventory. It really has been a big benefit in this point in time where it's understandable to think that maybe most consumers would have been playing pretty heavy defense over the past year given what's been going on. The housing market though, it just really continues to chug along. 

If you look at the numbers that they recorded for the quarter, earnings were up 60%, revenue up 18%. If you look at deliveries, up 19%, new orders up 26%. That new order dollar value was actually 31% and the backlog reflects plenty of activity coming down the pipe here for 2021 as well. If you look at the comments from management in the release and in the call, they just remain believers in the strength of the housing market. Interest rates are going to stay relatively low for some time, but we are still in a situation where there's a shortage of homes out there and now you've got this combination of low interest rates, strong personal savings, you've got now stimulus that has been released here, household formation continues to drive demand around the country. All of this put together, it really makes for a good situation for Lennar and other homebuilders. I think, again, going back to what I said earlier, I think that if you're looking at the homebuilder spaces, it probably needs to be the first one you consider just based on its size and position in the market.

Hill: A lot of times when housing is in the news -- I shouldn't say a lot of times -- often when housing is in the news, here in the United States, it's almost as though the headline is actually about specific markets. Particularly, when those markets are getting, quote-unquote, "overheated." We've seen this just in the past decade with San Francisco, with Seattle, any number of places. For people who are looking at Lennar for the first time, is there any regionality that they need to take into account, or does Lennar essentially play all over the country?

Moser: Lennar definitely has a presence in some areas around the country more than others. I think it's probably a little bit misguided to get focused on one particular locality. I know that saying in real estate is location, location, location. When you look at homebuilders, it's obvious they run through cycles. When you look at a stock chart for something like Lennar, for example, it's another one of those businesses where in the near term, depending on where you actually start owning the stock, that can really dictate a lot about how your turns shake out, at least in the short term, but further out, you look five years versus 10 years. Over five years, it's not really anything impressive, it's actually underperformed. But you look out over 10 years, it becomes a lot more apparent. Because you've had the chance to just really almost ignore those cycles and the ebb and flow that comes from. I think, again, with a company like Lennar, given its scale, given its presence around the country, that just means investors have to focus less on the locality side of things and really more about just understanding their ultimate goal as an investor and the length of time they're willing to be patient with holding a company like a homebuilder.

Hill: Fourth quarter results for Coupa Software were better than expected. Revenue was higher than expected. Wall Street was expecting a loss, Coupa posted a surprise profit. Why is the stock down 7% this morning?

Moser: [laughs] Well, Chris, let's go back in time to June of 2020. We've actually talked about Coupa's earnings report on this show, I believe. I said at the time, while the company was growing like a weed, it was becoming quite apparent that they present a very compelling value proposition to the businesses they serve, that the risk for a business, for an investment like this, at least in the near term, really is valuation. It's still a very modest cash flow business, unprofitable, trading for that 35-40 times sales number as so many of these newer software companies are doing so. From a business perspective, I don't think really there's anything to be concerned with here at all. As a matter of fact, I think investors who have a stake in Coupa should feel pretty good about things. Again, I think it really just is valuation more than anything, with the exception of one little point that I'll note from the quarter and what they expect here coming in 2020. 

If we look at the actual numbers they recorded, revenue $163.5 million, it was up 47% from a year ago, subscription revenue $135 million, it was up 37% from the same period last year. One of the metrics they used to really hammer home how business is growing and how many companies are jumping onboard and what they're spending through that Coupa platform, the cumulative spend under management is now at $2.3 trillion versus $1.7 trillion a year ago. Coupa is all about business spend management, the BSM, that business spend management. I think a good analogy they even draw themselves is Coupa is to business spend management much as Salesforce is to customer relationship management. I think that helps hammer home the market opportunity here. But I think the concern at least today and it's a fair one, it's probably a bit more short term in nature, it seems like it's a bit more associated with an acquisition the company made. In November of last year, they bought this company called LLamasoft, which ultimately is just bringing more artificial intelligence into their supply chain management offerings. LLamasoft, that acquisition, it's going to play out on margins here in the coming year. They did note for the year that margins are probably going to be a little bit pressured. But really again, that does seem to be timing-related, acquisition-related. 

When you look at the acquisition they made there of LLama, they're bringing on customers including Boeing and Denon and Home Depot and Nestle. I mean, really, really big customers. When you couple that along with the network effects that a business like Coupa already boasts, again, I think you have to be encouraged with the report and with what the company is doing. I think that the selling of the stock today is valuation related and probably a little bit of concern on that margin language on the call. But again, I don't think that's really core business-related as much as it is growth-related. It's something they'll get through, which would then make one think that, well, if you'd like, the cut of Coupa's jibe, so to speak, and perhaps today is an interesting opportunity to consider buying a couple of shares.

Hill: We certainly talked over the past few months about stocks that have had a great run. Even with the drop today, this is a stock that's up more than 80% over the past year, so it's had a great run. Now we've talked about any number of stocks that have put up great numbers in terms of their latest earnings and it falls in that. That's great but it's not perfect, and so we see that pullback. I guess I was just surprised. You know this business better than I do. I was just surprised because this was so much better [laughs] than Wall Street was expecting. It wouldn't have shocked me to see the stock basically flat on this news, but I was like, "I don't know. This really seems like it was a great quarter."

Moser: Well, I think it's a very good lesson for investors, particularly new investors who are really just getting their feet wet over the past couple of years here, particularly over the last year. If you have this perception that stocks only go up and price doesn't matter, listen, I've got news for you, that's not necessarily the case. Use those periods when stocks go down as good learning experiences, I think, first and foremost. But ultimately, also, price does matter. It is something to note, when price to sales is essentially the new price to earnings. That brings forward a lot of growth, a lot of expectations that these companies have to deliver on in the future. It's not to say that they won't, but that does impact your return. You have to understand how that plays into it. 

With everything that Coupa is doing well, again, at 35-40 times sales, you just have to be aware that with any of these companies that you're buying, so when you see great results, investing is really all about the future. When they're telling us that the future here, at least for the coming year, profitability might witness some headwinds regardless of the reason, that's going to be something that probably impacts that really lofty price to sales multiple. Again, I don't think it's anything to be terribly concerned about, but I think it's a good lesson for investors. Just always remember that the price does matter and you want to take that kind of stuff into consideration when you're looking at these kinds of businesses.

Hill: Coherent is back in the news. Coherent is a company specializing in equipment to make and measure lasers. Back in January, Coherent agreed to be acquired by Lumentum in a deal worth $5.7 billion. Stick with me here. In February, MKS Instruments came in with an offer of $6 billion. After that, II-VI came in with an offer of $6.4 billion which leads us to this morning and Coherent saying that Lumentum has increased their original bid to $6.9 billion. Oh, by the way, shares of Coherent are up 70% year-to-date. Not in the past 12 months, just here in 2021. [laughs] There are a couple of different ways that I want to go here. Let me start with this, because when we talked about this on MarketFoolery back in January, one of the things you had said about coherent was, and I'm paraphrasing, but you said, look, they do some interesting stuff, they do some things that Lumentum doesn't do, but Coherent as a business is struggled over the past year. I guess my first question is, are you surprised by this bidding war for this business? [laughs]

Moser: Yeah. I must say I'm a little bit surprised by it. I would pay money for Dan to insert As the World Turns music into [laughs] this intro because really this is like a soap opera of 2021 thus far, I mean, this has been pretty fascinating to watch. I mean, I have recommended Lumentum and II-VI as stocks for members over the course of the years. I mean, I didn't see this coming. It really felt like with the initial Lumentum Coherent tie up, both parties were happy. They came to an agreement. Initially, that transaction was valued at around $5.7 billion, Coherent stockholders would get $100 per share in cash and 1.1851 shares of Lumentum for each Coherent share. Then as you noted, this went back and forth with a few different companies, and really it all blows down to what Coherent does well. 

The business hasn't performed all that great recently and part of that is just due to general market conditions. But this all blows down to getting Coherent's laser expertise, and that's lasers and photonics. This represents a big opportunity and that's something that Lumentum does, but it's a very small part of their business. Lumentum's bigger focus, as I've mentioned before, is on that vertical cavity surface emitting laser technology. I know it's a mouthful, but that's ultimately sensor-based technology that's going to play more into our lives as we see 5G and 6G connectivity get faster. So then you fast forward to today. Now, I mean, Coherent stockholders will receive $220 per share in cash and 0.61 shares of Lumentum. So, they really sweetened the deal by amping up the amount of cash as opposed to the percentage of shares that you would get in Lumentum stocks. 

I think another reason why this deal, this is probably the last tango, I think these probably will wrap it up because you have a tech investment firm out there, Silverlake, which is really supporting this deal. I mean, they're going to invest $1 billion in the new business. They've got, I think, something like $80 billion in assets under management today, very tech focused. So they have a lot of expertise in a lot of these different areas. Again, this is about the laser business. Lumentum clearly wants it, II-IV, I understand why they would want it as well, It is not cheap. This is something where they're going to be paying around an EV to EBITDA of 60 times. That's a little bit reflective of less than normal times given the current state of affairs. Still, they're paying up for it and must be feeling pretty good right now to be a Coherent shareholder knowing that you're in such high demand.

Hill: You go back to January 15th, which was, I believe, the last trading day, or before the original bid was announced. Shares of Lumentum are down nearly 20% since then. I get that part of it is the overall drop in Nasdaq stocks that we've seen over the past month. But if you're a Lumentum share, I'm wondering if the reverse is true, the reverse of what you said about Coupa Software. Well, if you like the Coupa Software business yesterday, you'll probably like it more now that the stock is 80% cheaper. If you were somewhat OK with the deal as Lumentum shareholder when it was $5.7 billion, are you less OK with it now? I mean, you have to be, it's $6.9 billion, you can't be thrilled that you're paying a higher price.

Moser: Well, they're paying more, I mean, it really remains to be seen as to whether it's going to be worth it, right? I mean, that is these folks know the business clearly better than we do. I think it's safe to assume there's going to be a healthy chunk of Goodwill that moves over to Lumentum's balance sheet. Goodwill is one of those things you could view any number of ways, ultimately, even if they take impairments, then you just looked at it through an adjusted lens, we're living under an adjusted world now, Chris, though, I don't know. That would be something investors would focus terribly. This deal is essentially going to double the size of Lumentum. 

I understand them coveting that laser side of the business; I absolutely get that. if they believe that they can realize the cost savings, and it does sound like they went back through the numbers and came up with some additional ways to save some money to justify this increased offer, then more power to them. I think getting that Silverlake backing is encouraging, because it does seem like you've got a few other well school parties in the space that seemed like they really back this combination. Generally speaking, yeah, I'd rather see them get it for cheaper than more expensive, but I guess time will tell as to whether it really ends up paying off because no questions, it's going to make it a much larger company and it's going to open up the market opportunity for this newly sized Lumentum once the deal closes.

Hill: Jason Moser, thanks for being here.

Moser: Thank you.

Hill: 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. That's going to do it for this edition of MarketFoolery. This show is mixed by Dan Boyd. I'm Chris Hill. Thanks for listening. We'll see you tomorrow.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.