I need some help and advice re some of my stocks

Saul

You have had some very detailed responses, so I’ll just try to go of the gaps from my point of view.

No issues with your top 6, although I am more cautious about OKTA and ESTC…but maybe that is why my results lag yours.

GH: I had over 10 years experience in life sciences earlier in my career and have a pretty good understanding of the underlying forces, which are highly stochastic in nature. I would either be investing in several, playing a binary event strategy with options rather than stock, or running an income strategy - non of which are in your playbook.

DOCU: Don’t hold it but am interested, driven by its success in the market place (becoming a verb etc).

COUPA: Don’t hold it and probably won’t. I despise the space from a product point-of-view, speaking as a vendor who has to deal with large companies who use platforms such as Ariba and Hiperos. From an investment point of view my concern would be that the TAM is pretty much defined now by Ariba/SAP.

ZUO: Don’t hold and probably won’t. There are plenty of pricing companies out there. I remember reading early on that ZUO’s USP was the way that it made accounting under ASC 606 more straightforward…which gives it a target market for its USP of all US public companies with significant subscription business. A decent sized market to be sure, but not huge. I also read that their business model included being paid a % of each transaction…just not going to happen. Any company needs to understand where it comes in the pecking order of services for its customers: a vendor that is contributing to the end product may be able to justify a % of the selling price, but no sensible company is going to give that just for keeping the books.

What I do hold instead (I like to find Financials + Product + Management, most of my comments will center on Product as you have the others pretty well covered):

PAYC: This was a rec from MF Pro and has performed very well for me. One key driver that Pro noticed which I have not seen mentioned anywhere else is geography: the company is systematically opening up sales offices in a few new states each year. This gives them a significant chunk of new business to attack each year, while they grow what they already had.

TEAM. Lots written on this, but Jira is to developers a bit like quickbooks is to small company bookkeepers…when they go to a new company that doesn’t have a ‘system’ they will champion what they know because they know it works, and all of the new team become proseletized for when they move on. And there is a lot of career movement with software developers. (And Jira is a great product whereas Quickbooks is Quickbooks).

MDB: lots written. Evolving standard.

ZEN: Fantastic product, revolutionizes a company’s approach to customer support & works out of the box. Have held it since 2015.

ANET: I like the ‘hardware’ diversification this gives me and has products that I can roughly understand. Stellar management. (So at least 2 things that I now realize NTNX does not have)

CLDR: This one is down to Bert: he seems to really believe in the potential acquisition synergies and thinks that the market are ignoring them. The 2 companies were probably young enough that he may be right. They report later this week, so you might want to prioritize this for a research look.

I hope this is useful - I don’t tend to contribute much on this board, so it felt appropriate to do so here.

Cheers

Cham

23 Likes

Chris,

The historic and current valuations (P/S) of a few companies are provided below -

Company 2017 Current

Alteryx 12 18
Okta 11 21
MongoDB 10 24
ZScaler N.A. 30
Twilio 6 23

Company 2016 Current

TradeDesk 6 19

Company 2015 Current

Shopify 11 19
Square 3 9

The above data makes it very clear that most of the returns from the Saas stocks over the past few years have come from multiple/valuation expansion (not from the growth of the underlying business).

An investor’s return is dependent upon two things - growth of business and valuation expansion.

For 2-3 years, investors in Saas companies have benefited from both (business growth + incredible valuation expansion!)

Now that valuations are already stretched, one tailwind has disappeared and investors are now solely dependent on the future growth of the underlying business. Given these valuations; the market has already priced in ‘perfection’ and any whiff of disappointment will crater these stocks (i.e. Nutanix).

For some reference, the market darlings of the TMT bubble (Cisco and Microsoft) both peaked around 25 times revenue and in the crash, MSFT declined 66% and CSCO tanked 90%. By the way, during that bear-market, their businesses continued to grow at a healthy clip but the stocks didn’t hold up.

Best,

GM

33 Likes

Now that valuations are already stretched

Fact: valuations are higher. Your opinion: they are stretched.

investors are now solely dependent on the future growth of the underlying business

If ratios remain constant and growth continues at the same rate then you can still get great returns.

Given these valuations; the market has already priced in ‘perfection’

This is an opinion. Clearly, many disagree or the prices would be lower.

any whiff of disappointment will crater these stocks (i.e. Nutanix)

I would call NTNX’s trouble more than a mere whiff of disappointment. No one can know how the price will react to disappointment and no one can know the degree to which a stock might drop.

Many of the companies discussed here are showing no signs of slowing growth. In fact, some of them are showing accelerating growth while the others are stable.

GM, You seem to think that you know what EV/sales ratio is “fair value”. What is that number? How much more should a company be worth that’s growing 60% compares to one that’s growing only 30%? It’s highly probable that these companies will run into some speed bumps. There may be execution speed bumps and there many be market selloffs. But so long as the business results keep delivering these companies will get a lot bigger. Most are still under $10B market cap companies and I think some will grow to $50B or even much bigger.

When CSCO and MSFT reached their highs in the late 90s, they were profitable businesses with earnings. I think their P/Es were something like 80 or 100. Clearly this was a bubble and those were crazy times. Comparing that time to the current time is not a fair comparison.

Chris

17 Likes

Saul:

Here is my deep dive on Invitae:

https://discussion.fool.com/deep-dive-invitae-34140364.aspx?sort…

It’s important to know that my position taken on 2/11 is up 46%. That’s a steep rise over a very short period.

I own a 2% position in ZUO. I posted a deep dive on this board. I don’t plan to add to it. Their stated goal for growth is 25%. They will grow as the subscription economy grows. Their costs of services needs to come down a lot before I buy more. I may sell out after a couple more quarters if this metric does not improve. (I am ZUO ticker guide). Here is my Deep Dive on ZUO:

https://discussion.fool.com/another-look-at-zuo-34110062.aspx

I own a 4% position in DOCU. I like this company a lot. But it will probably not grow at the rate of your top 6 in the near term. I don’t plan to add to this position much, until they prove out their concept: System of Agreement. I view this as an anchor position. Here is my Deep Dive on DOCU (I am ticker guide):

https://discussion.fool.com/docu-deep-dive-34121285.aspx

Best, Swift…
Long NVTA, ZUO, DOCU

19 Likes

“…Thus, the companies that have a higher growth rate have a higher valuation for good reason. The trick is to quickly identify (and act on it) if growth slows. Saul is ruthless with this. An example is selling out of SHOP when the rate of growth slowed. SHOP’s stock price has not dropped and its growth is still above 50%. I guess we will see if SHOP’s growth reaccelerates and what happens to the stock price.”

The trick? You are talking about businesses that have hit a growth patch and/or are at the early stage (growing from small bases). Such high growth can be interrupted or slowed at any moment (and they can ‘reaccelerate’). I don’t get how one could see these short term inflexion points coming when talking about quarter to quarter action. We cannot. Some follows ‘guidance’ but that is no good either. Guidance is weak. The stock falls. Then they ‘beat’ guidance hugely. The stock is up. Sure read between the lines seek all the clues you can get and then take a guess. Will you be lucky or not? Saul said he is not guessing but he sells immediately after he sees growth slowing and he may jump back in if he sees re-acceleration.
Do the quarterly slowing and quickening in the numbers tell you anything really about the larger picture and the longer term trajectory of the stock? I guess that is not the game being played here.

I have to say that the sector being discussed here has been and still is a growing sector and getting in and staying in some of the best ones can definitely be lucrative. But what is the trick you are talking about?
I am amazed when one says ‘it is only growing at 30 or 40%, can I get into something that is growing at >50% or 70% instead’? That is optimizing returns! Is there really a trick? Or is more like:

  1. I see high growth
  2. I buy it.
  3. Uh oh the growth is no longer >70% (surprise surprise) but ‘only 50 and then only 40 and now a dismal 30%!’.
  4. I have been out a while ago when the growth fell below 50% and that was a few weeks ago.
  5. Let me find another high growth or switch my money to my highest growth stock
  6. Goto 2 and repeat.

That is the trick. But you need to get in fairly early in the latest push up of the stock unless you believe it is going further up. Is there more than that? That’s the algorithm.
On that frame, we have conversations about the news of the day - news that are forgotten a few weeks later.

tj

3 Likes

And what do you guys think about what happened when ASC 606 hit Alteryx because it was no longer small enough to be considered a startup (as I understand what they said without going back and looking it up, and revenue jumped some huge amount overnight, and earnings went from negative to substantially positive. Is that likely to happen with some of the rest of our SaaS companies. It seems to be “Let’s stop letting them make believe they don’t have all this revenue and earnings and make them recognize a part of it.” Sure drops that EV/S number, doesn’t it?

Saul

6 Likes

Saul, The ASC 606 thing to me shows how revenue, earnings etc are accounting constructs but the cash flow is much harder to fake. Don’t get me wrong. I’m not saying don’t follow revenue growth, earnings, but that growth looks really good in a company that has cash hitting their bank account each quarter. I’m looking at you, AYX, OKTA, ZS.

Saul, first off, what you have here at the beginning of this thread can only be described as a high quality problem to have, to worry that market-beating stocks are not market-beating-enough. Secondly, with regards to ASC 606, at some point these companies are going to not be small (or medium) high growing companies any longer. This should be considered a good thing. I don’t know when this point will be but it is going to happen.

The only thing that concerns me, and I don’t have the past history to lean back on this (I’m only 6 months into this high growth stuff), is when this party eventually ends where do we go next, and more importantly if those returns don’t match these returns will we be disappointed even if they still handily beat the market?

OKTA’s transition to ASC 606 happened a year ago.

https://seekingalpha.com/article/4154327-okta-inc-2018-q4-re…

Very little change to revenue.

I don’t understand why there was such a big change to AYX revenue, when I think most companies are like OKTA, not much change to revenue.

The negative from the change for AYX, is now $50 M of future sales have been pulled forward, no longer in the future. I think Bear was alluding to this, more risk of volatility in the sales numbers. Each quarter is more dependent on sales within that quarter.

Jim

2 Likes

Saul, I cant offer the 'Master" any logical advice apart from do what you normally do, stick with your instincts. It seems to have done you well. You sold out of Guardant and yet immediately jumped back in. One can always change their mind depending on the situation. Fwiw,I think selling Shop was a mistake, and you absolutely tore their numbers apart. Has it already bolted or do you get another chance?
Instincts…
Best. Bran.

For some reference, the market darlings of the TMT bubble (Cisco and Microsoft) both peaked around 25 times revenue and in the crash, MSFT declined 66% and CSCO tanked 90%. By the way, during that bear-market, their businesses continued to grow at a healthy clip but the stocks didn’t hold up.

Best,

GM

I don’t disagree with you except for CSCO which had FY Revs of 18.9Bn, then $22.3 then 18.9 then 18.9bn again before rising again to 22.0 then 24.8.

Flattish revenues for 3-4 years definitely helped compress the multiple, but obvs the 30-month fall in the Nasdaq market did a major role also.

Now the P/S is up to 4.4 from cheaper levels two years ago.

Long CSCO,

2 Likes

Could you explain why I would buy a Roku box instead of a Sony PS 3/4 which gets you the streaming, plus video gaming, plus a very good mid-range Blu-Ray player, plus additional Sony content?

For a little bit more $$ I get way more features.

PS4 sales alone were 56m the past 3 years, almost 100m overall and almost that many PS3 sales which many people like myself use to stream: Netflix, Amazon, Hulu, HBO, Starz, et al.

The Roku channel certainly cannot compete content wise with the Playstation Network. You can also do social media like broadcasting on Youtube if that’s your thing from a PS4. [maybe on roku also?]

This is not a Sony pitch, I just literally don’t understand why people would prefer a Roku. Maybe they stick them in a different ‘tv room’ for the kids?

3 Likes

A Roku Express, which is a great, small, simple HD device, costs only $30. Higher end Roku players go up to $100. A PlayStation4 costs $300?

1 Like

Chris,

The historic and current valuations (P/S) of a few companies are provided below -

Company 2017 Current

Alteryx 12 18
Okta 11 21
MongoDB 10 24
ZScaler N.A. 30
Twilio 6 23

Company 2016 Current

TradeDesk 6 19

Company 2015 Current

Shopify 11 19
Square 3 9

The above data makes it very clear that most of the returns from the Saas stocks over the past few years have come from multiple/valuation expansion (not from the growth of the underlying business).

An investor’s return is dependent upon two things - growth of business and valuation expansion.

For 2-3 years, investors in Saas companies have benefited from both (business growth + incredible valuation expansion!)

Now that valuations are already stretched, one tailwind has disappeared and investors are now solely dependent on the future growth of the underlying business. Given these valuations; the market has already priced in ‘perfection’ and any whiff of disappointment will crater these stocks (i.e. Nutanix).

For some reference, the market darlings of the TMT bubble (Cisco and Microsoft) both peaked around 25 times revenue and in the crash, MSFT declined 66% and CSCO tanked 90%. By the way, during that bear-market, their businesses continued to grow at a healthy clip but the stocks didn’t hold up.

Best,

GM

I’ve been thinking about this in terms of market psychology in terms of the S-curve. People were saying the same thing about how valuations were already stretched about 6 months ago. Valuations have only expanded from there.

At this point they are really stretched less than people think. As Saul pointed out, within two years, at the current rate of growth, Twilio will be back to its 2017 P/S ration. A year from now, the market could easily be pricing 4 years of growth instead of 2.

But how could it be possible that investors will stomach buying these stocks if the multiple expands to the 40s or 50s? This is when I start thinking of the S-curve.

My thought is that as the curve steepens into hyper-growth, the multiple expands rapidly and as the growth continues and the steep part of the curve elongates over time, the market becomes increasingly confident in the stability of hyper-growth and extends that growth further into the future. This leads to valuation multiples compounding upon growth multiples over time. The result is that only when we see the top of the S-curve approaching and growth rapidly decelerating, the multiple will finally contract. Until we get there, we will only see multiple expansion.

Keep in mind I know nothing and this is idle hypothesising.

10 Likes

GM,
I agree that a large part of the last year gains have been due to multiple increases. If the growth rate drops from 60 to 40% the multiples will come down say from 24 to 16. What makes you think that a 30% grower dropping to 20% growth won’t have the same rate of multiple compression say 12 to 8?

3 Likes

Najdorf,

Roku is transitioning away from its box model and is now being packaged as the default on many connected TVs. No need to buy a PS 3/4. You get Roku for free.

1 Like

Ok,I guess I will pipe up since no one has mentioned ENPH (Enphase solar panels etc).

I have 11% of my portfolio in this stock.

Besides being a big fan of Putnid, who appears to have 90% of his portfolio invested in ENPH, I am smitten by TJ Roberts who posts regularly on Seeking Alpha. He believes Enphase will be the Apple of home solar panels someday.

I cannot argue that their ER reports for the last 2 years have been very spectacular, in fact, the opposite and one should run screaming if only using the reports to make decisions.

But every time I read a TJ Roberts article and/or comments in Seeking Alpha, I just start drooling.
To me, maybe to no one else, he makes so much sense.

A sample can be found here of his positive bend on this company. (You might have to subscribe to Seeking Alpha which is free). I would rather read TJ Robert’s articles and comments any day over Bert H’s.

https://seekingalpha.com/article/4240963-enphase-energy-grea…

2 Likes

I just literally don’t understand why people would prefer a Roku.

Search across services is the big feature for my family. Do one search for a movie or show and Roku shows you all of the services (including ones you don’t subscribe to) that have that content, and the associated prices.

Also, most Roku devices are quite a bit cheaper than the Sony gaming boxes.

3 Likes

I also read that their business model included being paid a % of each transaction…just not going to happen. Any company needs to understand where it comes in the pecking order of services for its customers: a vendor that is contributing to the end product may be able to justify a % of the selling price, but no sensible company is going to give that just for keeping the books.

Nothing new. Companies getting paid by the number of users, # of transactions, etc. Even Oracle ERP has a pricing model based on # of transactions.

What ZUO does is going for a small upfront cost (thus increase adoption) and get paid as the customer’s volume increases. ZUO’s customers are primarily subscription economy and this simplistic pricing works very well, take a look at CRM pricing model.

A Roku Express, which is a great, small, simple HD device, costs only $30. Higher end Roku players go up to $100. A PlayStation4 costs $300?

You can get a PS3 goes for around $119. It’s also HD obviously.

No one answered the points about also getting gaming on the most popular platform and a really solid Blu-Ray player [as not every movie is on streaming and DVD extras and what not].

As I stated, Roku is a few bucks cheaper but you’re missing at least two big extra advantages, or one big and one little depending. Plus the PS network. And it’s simple to install as well {I am not highly tech savvy} as hundreds of millions of people have installed them. It is slightly bigger though.

Every kid I know would choose the PS3/4 if only for Fortnite alone. Which is free to play. I tried it a few times, it’s pretty fun!