What makes a company good?

What makes a company good? It’s important to answer that question apart from valuation. The PS or PE ratio is an easy number to get – The harder thing to surmise is how certain a company’s future is.

There are things that help: recurring revenue, history of rapid growth, network effect, path to profitability, gross margin, ability to leverage, etc. (Basically everything Saul posted just earlier today: http://boards.fool.com/saul-i-noticed-how-many-of-your-curre…) But in the end, predicting a company’s future is a judgement call.

I think it might be useful to…

  1. quantify
    and
  2. explain

…where my conviction is currently at for the companies I own. The quantification will be very “back of the napkin” math, but then I’ll explain my reasoning. I would love to hear the opinions of others on their quantification and explanations of the same.

Back of the napkin conviction rank
1 = SELL immediately. Very Bearish short and long term.
5 = NEUTRAL (obviously I don’t want to own things I’m simply neutral on)
10 = BUY as much as you can stand.

SHOPIFY (SHOP) - 9.5. A lot of revenue is recurring, they’re now profitable, they are growing like crazy and have been for years, lots of ability to leverage. I like the fact that they profit with their merchants (their customers). I like their founder. There’s not a lot not to like with this one.

ARISTA NETWORKS (ANET) - 9. Growing really fast, taking market share, VERY profitable, but not much recurring revenue. Kicking Cisco’s butt. Really seems to be a best of breed product, with smart people who keep their offerings at the top of the industry.

WIX (WIX) - 9. Almost all revenue is recurring, growing fast and have been for years, astounding gross margin, lots of ability to leverage, just not profitable, yet. Simple product at a great price and they’re innovating! Seems a no brainer with not many threats.

SQUARE (SQ) - 9. Growing really fast, taking market share, only just becoming profitable but with plenty of opportunity to leverage, but not much recurring revenue. Places I buy things use Square all the time. It really just makes sense. It’s offering something (many things) really valuable – something that’s more and more needed, and I don’t see that trend reversing.

HUBSPOT (HUBS) - 8.5. Almost all revenue is recurring, astounding gross margin, on the cusp of profitability, growing fast but not as fast as some. Also their value is more niche than the above and therefore less clear to me. However, a lot of people who do understand the product(s) seem to love it.

PURE STORAGE (PSTG)- 8.5. Growing really fast, taking market share, on the cusp of profitability with lots off leverage opportunity, but not a ton of recurring revenue. Like Arista, seems Pure is just doing it better than others, with smart people who keep their offerings at the top of the industry.

ALARM .COM (ALRM) - 6. Growing slower than most of mine but still quite well, profitable with room to leverage, recurring revenue, but a skittish market does make me wonder if I’m missing something. I don’t understand their product differentiation and that is a huge thing for me. I’m taking off even more points here than for HUBS – because I think it might not just be that they have a niche I don’t understand, but rather that they don’t really have a niche at all. I’m skeptical long term, and therefore despite the great financials, I can’t be much better than lukewarm.

MICRON (MU) - 6. Growing like wildfire and extremely profitable with more leverage possible. However, no recurring revenue (that I know of) and possibly a commodity. I feel like they may be slightly (or vastly) underestimated, so my outlook is slightly better than neutral. If I was convinced they were a commodity my outlook would be below neutral and I would not own at any price.

INSTRUCTURE (INST) - 8. Almost all revenue is recurring, great gross margin, growing very fast, but not very close to profitability. I think the product is awesome…maybe they just neet to charge more for it or something!

HORTONWORKS (HDP) - 7.5. Almost all revenue is recurring, great gross margin, growing very fast, but not very close to profitability. Also a slight ding for my inability to understand their product.

TALEND (TLND)- 7.5. Almost all revenue is recurring, great gross margin, growing very fast, but not profitable yet. Also a slight ding for my inability to understand their product. Another ever so slight ding for the recent acquisition, or they would be an 8.

NV5 Global (NVEE) - 7.5. Growing really fast, but through tiny acquisitions (but they’ve proven to be really good at it). Profitable with lots off leverage opportunity, but no recurring revenue that I know of. Still, I doubt they will have any trouble being in demand.

TELADOC (TDOC) - 6.5. I’m slightly better than neutral on what will become of this company, and fairly sure that if it goes the way I hope it will be very big. Pretty sure revenue is contract based and therefore recurring. Gross margin is great. Opportunity to leverage seems to be there. Growth has been really good organically but they’ve supercharged it with acquisitions. We’ll have to see where it levels out, hopefully years from now. Not profitable at all and it may be some time.

Feedback welcomed.

Bear

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Feedback welcomed.

Hi Bear, I could add

ALTERYX (AYX) - 9.5. TTM revenue up 58%, Dollar retention rate 135% (highest I’ve ever seen), 95% recurring revenue, adjusted gross margin 86%, operating cash flow positive last 3 quarters, just hit adjusted positive EPS last quarter, customers love it (Gartner Gold Winner in Customer Choice Award), customer base not concentrated (3000) and have grown to 268% as many as 2 years ago, huge growth in cohort spend, deferred revenue is more than two quarters revenue, etc. What’s not to like?

Saul

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ALTERYX (AYX) - 9.5. TTM revenue up 58%, Dollar retention rate 135% (highest I’ve ever seen), 95% recurring revenue, adjusted gross margin 86%, operating cash flow positive last 3 quarters, just hit adjusted positive EPS last quarter, customers love it (Gartner Gold Winner in Customer Choice Award), customer base not concentrated (3000) and have grown to 268% as many as 2 years ago, huge growth in cohort spend, deferred revenue is more than two quarters revenue, etc. What’s not to like?

That may be rhetorical but I’ll take a shot anyway. The one thing that keeps me skeptical is that there just isn’t much history yet. Sure, they might keep growing like this for years. But perhaps they’ll slow considerably.

I ranked SHOP a 9.5, and there’s no way I could be as positive on AYX as SHOP. I would probably put AYX at 8, just ahead of HDP and TLND, because AYX is growing faster and closer to profitability.

The reason I own HDP and TLND and not AYX has to do with valuation.

Bear

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Bear,

I am struggling with Talend. My emotions want to sell it and buy AYX and Pure Storage. (Moved NVDA to another account and doubled the share count. This freed up some cash for Pure Storage.)

Can you give me some good links to videos, I will be listening to the earnings call also.

Thanks
Qazulight

Sell everything rated below 8.5 and put the money in the 8.5s and above.

Rizz

I think that TLND’s shelf offering announced 10/2/2017 weighs on the shares. 10,528,483 ADS plus the 2.75 M shares they sold for Silverlake and Balderton on 11/17/2017. The 10/2 announcement was for 100M.
Until those shares come to market I think they continue to weigh on price. That is also why I am waiting for FMI to complete their shelf offering before filling out my position.

Rob

The one thing that keeps me skeptical is that there just isn’t much history yet.

Well we have 4 years of revenue (at least)


2014:  $38
2015:  $54  (up 42%)
2016:  $86  (up 59%)
2017: $129  with company's lo-ball estimate for December quarter (would be up 50%)

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Bear,
Thanks for an insightful post. The one thing I would add to your criteria (although impossible to quantify) is quality of management. I always read executive bios. Often Google the executives in that the bios are generally glowing or simply neutral. Sometimes I go to Glassdoor, but I don’t like the website (I like the content, I just don’t like interacting with the site). I pay attention when and why key executives leave a company and who replaces them.

In any case, so far as I’m concerned, management experience, intelligence and integrity are key factors in what makes a company good.

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Sure, Alteryx might keep growing like this for years. But perhaps they’ll slow considerably.

Bear, The more I think about this… I just don’t know! Sure anything can happen, I’m well aware of that. But with a dollar-based retention rate of $135 (and rising), doesn’t that mean that this year’s customers will provide $135 in revenue next year for every $100 they provided in revenue this year? And presumably at lower acquisition expense. That means revenue will “automatically” grow about 35% next year just from old customers, not counting new customers acquired during the year, barring some very unforeseen event.

That seems to me to be fairly secure growth.

Best,

Saul

18 Likes

Hey, Bear,

I don’t have criticisms of anything you’ve done here and I love the way this is laid out. Meanwhile, some thoughts and questions:

Conviction: I rate mine exactly the same way, but I never start out with a conviction rate much over 5 and usually lower for a company I’ve just bought. I need to get some experience with how they react to different occasions like earnings, bad news, critcal articles, etc. Do they take blame for mistakes or look for targets? I’d rather have a CEO who lost a million dollar asset because he himself forgot to lock the door one night, and flat out state he screwed up than any company who played the scapegoat game. I can’t stand that attitude. I also like to see how the price reacts to all these events and more, before I raise them up the ladder much. So new companies are rated lower, like the gains. Like to see
20% before I add to bring a position up over about 10%. When I give 8 or higher ratings, those would
have to commit a crime or go broke for me to get off my butt to look at the situation. :slight_smile:

Layout: I love it. For company information to be right in front of me every day, I like 2 different methods about equally but one is plenty. For me it needs to be tables and numbers (only) or very brief, 1 or 2-sentence paragraphs for each company. If I need more, it’s back to tables or even raw data, wherever I need to get it from. The problem here(Mine)is that while my verbal thoughts on any company I’m familiar with are organized in my wee little brain very much as you have written them out here. But I’m getting old enough that time has sped up more and more to the point where years seem like months used to, weeks are days, days are hours, minutes are seconds. I still write out what I think of as "blip"s that look eerily similar to what you wrote here, when I study any candidate whether I buy now or not. But because of those time factors, I no longer worry much about updating those "blip"s any more. Kind of a shame, someday I will start to forget all this stuff packed in my noggin. Guess that’s time to hang it up anyway. For more in-depth or very specific stories/articles/info, I often simply insert links to wherever I found the data, story, blog, whatever.

Q: Does your personal version for your use only look much like your post? I know it’s a lot of work to format stuff to post here, and yours is flawless, so I’m just curious. One for you, one for the board? Lots of work. Good on you.

Specific companies: We don’t overlap in holdings as much as I would have guessed but where we do:
SHOP and ALGN nothing to add, conviction almost identical. SQ, similar to SHOP and ALGN but I haven’t owned it long so my conviction level remains much lower until I see it in action, even though my size is near the upper end. Personal thing & means nothing to you.

I did sell my Micron. I think it’s very under-priced but I got impatient waiting for the TA guys to figure out the timing so the price could follow the value. :slight_smile: I’ve read headlines “MU’s going to break out!” almost every week and I think it will–some day. I couldn’t wait but I still like the company for the next 2 years minimum. Why the market hasn’t agreed yet, I sure don’t know. Bargains are rarer in this market than I’ve seen since at least 2000, probably longer. Might be to my regret, but I don’t believe much in regret, only progress.

PSTG is my current study project and will be my next purchase if it passes a couple more tests and when I have cash come in. I’m finally 99%+ invested in every account but have a couple of weeds to pull unless they shape up very soon.

INST is my next-in-line candidate I’m studying, don’t know a whole lot about it except the numbers so far look pretty good so I will soon dive in the guts.

Others: Have looked at all but NV5. Only one I didn’t like (fwiw I really didn’t like it) was TDOC. I don’t recall offhand exactly what issues in particular, but I do know they were in the numbers because I never got far into the “story” or management issues. I don’t “dig in” unless the numbers work. I’m sure you know what you need to know to have them in your arsenal. Just mentioning it because it kind of sticks out for me.

Companies I own you might be interested in: Maybe ABMD, but it’s up a bunch now, or IPGP, same, might be late. Otherwise I think I understand why none of the rest would be of interest to you. (Commodity (1), Chip (1), Old Tech (3), Too Big (4) and I’m missing 1 somewhere.

Oh, NVDA, but I know you are aware and informed of it, so you must not like it. Cool, I don’t like a port just like anyone else either, just because.

Nice work - and a lot of it.

Dan

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