High/Low

Here is my attempt to get as reductive as possible in clarifying my thought process as we go into earnings season. I purposely focused mostly on the business case and not so much on the numbers as I keep a running tally of that stuff. Please feel free to add your thoughts. I would find it helpful.

MDB
**High:**leader in non-relational databases, complete package. That segment is growing 30+% a year, managed database (atlas) is a huge hit. MDB is constantly expanding their TAM by moving into adjacent spaces. Potentially huge huge TAM.

Low: crowded field lots of competition, MDB database isn’t particularly performant, postgres is moving rapidly into the non-relational space.

AYX
High: leader is data prep, strong in analytics, nascent in machine learning. Force multiplier…allows people to do WAY more work, faster, easier, and better. One data scientist can do the work of many. Incredible ROI. No real competition

Low no real cloud strategy that we know of

ESTC
**High:**opensource search backbone. Many businesses are built on elastic search, almost an industry unto itself. Use cases increasing rapidly, logs, monitoring, APM, security, maps.

**Low:**Amazon is making ESTC change their business model. (see many posts on this board about it)

ZS
High: redefining network security for the cloud. Disrupting security and networks. Cheaper, faster, better than everything else out there. HUGE opportunity. No real competition.

Low: expensive? But is it?

CRWD
High: next gen endpoint detection and response. Crwd has single handly destroyed the growth of the other endpoint providers. Allows companies to employ fewer security-personnel, lower TCO, better detection, faster. Huge market

Low: lots of competition, product isn’t as sticky as others

OKTA
High: sits at the heart of enterprise IT, SSO, security, access management. Very very difficult to dislodge and has serious value for enterprise.

Low: Growth appears to be slowing, very expensive

SMAR
High: Work execution management on steroids. Good ROI for companies. Provides high value add ons to automate project tracking which are seeing great uptake.

Low: uncomfortable with the moat. Some big time competitors.

TWLO
High: Provides the building blocks for developers to easily and powerfuly allow communication of all forms. Has reached a scale that it no longer has much in the way of competition

Low: needs to effectively integrate and cross sell sendgrid (not exactly a low but a risk), margins aren’t great as TWLO is a middle man between telephony and developers (i’m reaching here)

My Take
I’m pleased with each company’s business. I’ve always been impressed with SMAR’s numbers which is why I’m invested in it and I was beating the drum that others should invest back when it was much cheaper. I’ll continue to read to understand the business case better and in the meantime, I’ll definitely hold on to them as their numbers are just too good.

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CRWD
High: next gen endpoint detection and response. Crwd has single handly destroyed the growth of the other endpoint providers. Allows companies to employ fewer security-personnel, lower TCO, better detection, faster. Huge market

Low: lots of competition, product isn’t as sticky as others

Ethan, just curious what you mean here. With 147% Net Retention Rate, looks very sticky to me? Perhaps I’m missing something.

Thanks for the summary. I tend to agree with all your notes.

Just a Fool.

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Ethan,

I own each of the 8 stocks (plus SQ and TTD). Here are my thoughts:

MDB: Highest marks for growth. Atlas growth is decelerating fast but Atlas’ proportion of the total business continue to rise and is very significant now so even a quickly decelerating Atlas revenue growth can positively contribute to overall MDB revenue growth; I think that this may contribute to beating revenue growth expectations. I give it highest marks for market dominance and penetration vs TAM (which is also growing). I’m happy with this company as one of my big holdings. OpEx percentage of revenue appears to be trending in the right direction. Long term this seems like a no-brainer investment. Near term its one of my target for options. My position size is 16.1% which I feel is appropriate.

AYX: Very high and consistent results for growth of the past several years. Happy with management’s running of the business. Improvements to cashflow…let’s see this continue. Market penetration versus TAM is still tiny. Everything continues to look great so will keep monitoring it. AYX is my largest position at 21.1% even after trimming over past few months.

ESTC: Revenue growth and other metrics are excellent. OpEx percentage of revenue needs improvement and I would like to see this starting to move. I hypothesize that the stock is/was temporarily depressed (when below $90) due to the lockup expiring recently. I suspect that the Amazon threat also contributed to the stock price depression, but I don’t believe that this threat will amount too much. Therefore, in June I saw this as a trading opportunity sold July $90 puts to but November $80 calls. I have bought back the short puts and still own the calls (free riding is nice) which control about the same number of shares that I own. The stock has been moving up nicely over the past 2 weeks and has shown strength even on days when the SaaS stocks are mostly down. I am holding my shares and options and expect that the shares can still move significantly higher (that’s the bet). I expect the next earnings in early September. ESTC is a lower confidence position than AYX, TWLO, and MDB so if the shares rise to $100, $120, and then $140 I will likely sell my call options.

ZS: The revenue growth is very excellent and I would like to see it continue above 60%. Free cashflow has been positive for 5 quarters now. I really like how management is running the business for the long term. Market penetration vs TAM is still tiny. Nothing wrong with it that I can see. Expect many years of growth ahead. I own 11.4% position. My confidence in this company is very high, and I would be willing to increase my allocation.

CRWD: Amazing revenue growth. Earnings for the April quarter are due out on Thursday. The S-1 provided a range and the quarter was already over when they did so I don’t expect any big change/surprise on Thursday to the April quarter numbers. The management commentary and guidance could include the near term share price. I bought my shares on the day of the IPO. I currently have a 3.5% position which is highly dependent on CRWD’s continued very hyper revenue growth.

OKTA: Growth may be slowing. We will see if it reaccelerates, stagnates, or continues to drop. The inconsistency causes me some concern. But the stickiness, the untapped TAM, the new adjacent products/services all sound great. So here we have a situation where the story doesn’t exactly match the numbers. I have been selling shares over the past several months which dropped my allocation from over 10% to 6% now. I’m not planning on buying or selling at this time.

SMAR: I own it because of the numbers which look great. It’s a 3.7 position which I’ll likely hold as long as the business continues to perform.

TWLO: TWLO has shown continued excellent business metrics almost across the board. The only negative is the lower gross margins compared to those of my other stocks. I expect TWLO to be a much, much larger company eventually so long term I see it having similar potential to MDB. A big part of the potential is due to TWLO’s disruptive power in multiple huge markets. This long term vision for the company gives me greater confidence to speculate/trade on TWLO in the short term when I see opportunities. This is because if I am wrong on the short term timing then I can still avoid losses assuming the stock eventually goes up (short puts can be rolled forward indefinitely). So for TWLO I see some catalysts that led me to speculate on a short term trade (about a month). The earnings are likely due out on 7/31 or 8/1 although the date has not been announced yet. The SendGrid integration is well underway so there’s a chance for some cross-selling synergies. Also, TWLO just announced some improvements to SendGrid’s marketing emailing capabilities (see press release from last week). Then there’s their annual Signal conference on August 6-7. TWLO and the other SaaS companies tend to announce new products at their annual user conferences so there’s likely going to be some interesting new stuff. All of this can move the stock and lead to analyst PT upgrades. So I sold the Aug 2 $160 puts to buy calls ($142 and $150 strike prices) that expire on 8/23. The 8/2 expiration date of the short puts was chosen to maximize premium plus give a chance for worthless expiration immediately after the expected earnings release (assuming it’s on 7/31 or 8/1). If the stock doesn’t rise to $160 after earnings then they can be rolled forward on a weekly basis. The 8/23 expiration date was chosen to give analysts time to digest any new products from Signal, update their financial models, and issue PT increases…then time for the stock to respond to this. TWLO is a 19.2% position for me and I’m happy with this allocation.

Chris

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Hey Chris,

One quick question, you stated…

Atlas growth is decelerating fast…

IIRC the last 3 quarters of YOY Atlas Rev growth have been:

300% (2 Q’s ago)
400% (1 Q ago)
350% (last Q)

And I thought I remember seeing that I thought we could expect another 2 quarters in the triple digits before they start seeing some harder compares.

Am I missing some sign of decelerating growth, or were you saying that in the future you expect some quick deceleration (or from estimates, possibly), not that you’ve already seen it?

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Jafbrblev,

I meant sticky in the technical sense. Crwd talks about being able to deploy 80k endpoints in an afternoon. So figure a couple of days to switch out an endpoint solution. Contrast that to something like okta which between app hookups, identity management, permissions etc is a major undertaking to switch out.

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IIRC the last 3 quarters of YOY Atlas Rev growth have been:

300% (2 Q’s ago)
400% (1 Q ago)
350% (last Q)

And I thought I remember seeing that I thought we could expect another 2 quarters in the triple digits before they start seeing some harder compares.

Am I missing some sign of decelerating growth, or were you saying that in the future you expect some quick deceleration (or from estimates, possibly), not that you’ve already seen it?

My comment was from memory so I didn’t have the numbers in front of me. Wasn’t there also some mLab customers last quarter that needs to be backed out? Yes, I do expect Atlas growth to continue to decelerate.

Chris

This is a helpful exercise, thanks Ethan and Gaucho. Here are my latest thoughts culled from my last Latest in Earnings post on 6/17 (#56976), plus CRWD, which I bought a bit of at IPO. Beyond that, I haven’t bought or sold anything in that time (having too much fun this summer) but likely will make some adjs in late July.

CRWD: Their cloud-based endpoint protection system of 10 modules analyzes 1T real-time events per week! Like ZS, they have huge potential in that they can leverage ML/AI over their entire customer base’s logs. Massive revenue (+110%) and customer growth (+103%) on top of an amazing $NER of 147%. This company debuted expensive (> market cap than ZS), but this SECaaS is clearly doing something right and leaving competitors (Symantec, Cylance, Carbon Black) in the dust. I wrote up a deep dive of their product line in #55994 if interested in more. Will be increasing my 1% position obtained at IPO.

ZM: I don’t own it [yet]. I admit their insane numbers are compelling; extreme revenue growth propelled by high cust growth (especially in the high-spend tier) and the $NER are all enticing. But it seems like such a replaceable service with litle moat - I challenge any ZM fans here to expand on what moat they have or what stickiness applies to their service besides “being better” (Webex and Gotomeeting both set such a low bar!). Ultimately I think OKTA, ZS, MDB, AYX, TWLO, and ESTC are all way more sticky enterprise services. Despite that, I may nibble with a 5% pos just to ride the hypergrowth, but keep it on a short leash. Surprised to see 1/3 of workforce is in R&D - AR and AI are clearly both coming to video-conferencing, so those are something to watch for.

MDB: Knocking it out of the park, and stock reflects that. I did buy more after last earnings as I mentioned I would, and now it has risen into 13% position for me. I know I compare this to Elastic all the time, but geez, MDB organic growth was +68% to ESTC’s +68% CCURR! They both deserve your attention. But relative strength of MDB remains way stronger. Look forward to seeing what gets announced at MongoDB World this week.

ESTC: Fantastic and very relevant move into security space with Endgame acquisition. ESTC continues to expand beyond db hosting and into focused enterprise SaaS space (search-as-a-service, and now security-as-a-service). They made excellent use of Swiftype’s products to extend themselves into being a enterprise search service competing against Google, and are spinning into other exciting new directions like SIEM. Saul and many others have exited but I and few like Dreamer and Darth are moving in more. I know MDB has been winning on relative strength - but that is why it was 3x the position for me. Lockup is finally over, and as market wakes up to ESTC’s potential, I want to be ready. The past several months have gone nowhere - but it is where it is going from here that matters today. [UPDATE: ESTC up strongly last 2 weeks. Finally!] I upped my position to about 1/2 of what MDB is, mostly from SQ sale and TTD trim. Look at how quickly they are moving on their product line releases - this company is not standing still.

SMAR: Smartsheets is a core data management platform (built around a spreadsheet with custom forms and dashboards over it) and having lots of products coming out based on that core. This gives lots of optionality - but I find it a bit confusing when looking at their product line. It remains to be seen if SMAR can keep selling as product line expands but something is working – the numbers show that customers are growing, and keep spending more and more (top tiers growing faster plus $NRR of 134%). I need to get this up 3-4% soon.

ZS: I still vote ZS as stickiest service. They warned of difficult comps next Q so maybe a little rocky ahead. Still wonder why the $NER is so muted, perhaps due to larger initial deals? [UPDATE: Saul confirmed YES this is the case.] Not sure what to think about the new acquisition. LOTS of room internationally to grow - APAC is just beginning. I continue to sit on my 11% and wait.

OKTA: Okta is maturing into its next phase. Growth slowing to 50% yet growth in high quality custs is accelerating and $NRR stays at 120% (customers spending more). Impressed by their recent acquisitions – very excited by the Zero-Trust forays from ScaleFT (expanding Okta to managing access to your on-premise and cloud servers as well as on-premise applications) and the workflow mgmt UI enhancements they get from Azuqua. I hope my deep dive got some folks here into this exciting company - it’s gone up 39% in the 2mo since. If it keeps that up it will overtake TWLO as my #1. [UPDATE: It has.] I am going to trim it a bit but it will stay a top 5 position.

ROKU: Roku is in a crowded space against the big-wigs yet excels at being neutral ground for CTV (unlike Amazon, Google and Apple). Roku is clearly focused on growing the eyeballs. Unit sales continue to grow the base, and active accounts is growing faster while ARPU is rising. They seem somewhat complicated with their ad sharing deals, but the base equation is simple: Accelerating streaming hours = more ads = accelerating revenue. I will increase to 5%, probably from TTD trimming.

TTD: TTD revenue can be choppy based on advertising trends, so the drop in growth is to be watched to see if one time dip or new trend. But growth has dropped to 41% from 56% just last Q. Hulu just opened up a new frontier for CTV ad space, while Spotify and podcasts are making audio ads grow +240%. Walled gardens are getting extra scrutiny. International expansion continues. Trimmed this a little on its exuberance but it remains a 11% position. Likely to trim more from here.

SQ: S&M expense rising more than adj rev growth, but sub rev growth remains exceptional (128%). Larger sellers are driving GPV growth. SQ is moving towards SHOP, while SHOP does the reverse. Market has been pretty sour about everything, as it hasn’t remotely returned to prior highs in Sept’18 (38% more to go…), while SHOP goes up and up. Disappointing. I’ve dropped it from 9% to 4.5%.

AYX: Solid revenue growth, driven by more customers (+35%) that are spending more (rising $NER). Hard to complain about 50% growth, but I still keep a close eye on this non-SaaS company. I’d be very excited to see them start moving towards SaaS products instead of just having Windows desktop apps sold on an annual fee, but doesn’t appear in the immediate cards. I am not sure what the ClearStory acquisition is really gaining them, and they consumed their website so I don’t have any vision into what they did. They are making stronger moves in ML it seems from Inspire conf announcements, with a new beta AutoML feature.

TWLO: Twilio continues to shine. Custs growing (31%) while spending more ($NER 145%!!). International is just beginning so expect more spend as they expand to new carriers. Doubling their roadshow events. The need to directly communicate with your customers is only going to grow. This remains a top pick.

SHOP: SHOP continues to rise while SQ price remains stagnant. Revenue growth now under 50%, while sub revenue has dropped from 55% this year to 40%. Growth is slowing markedly, yet the market doesn’t care. At some point I need to move on but I am glad I have not as of yet.

-muji
long all that but ZM

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MDB: Knocking it out of the park, and stock reflects that. I did buy more after last earnings as I mentioned I would, and now it has risen into 13% position for me. I know I compare this to Elastic all the time, but geez, MDB organic growth was +68% to ESTC’s +68% CCURR! They both deserve your attention. But relative strength of MDB remains way stronger. Look forward to seeing what gets announced at MongoDB World this week.

Great summaries, muji! But MongoWorld 2019 (MongoWorld 2020 is next May) was a month ago so we shouldn’t expect anything this week.

Chris

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what an excellent thread…
Specially relevant as next round of earnings coming soon…
this is what makes Saul’s board so exceptional…
thank you Ethan, Gaucho, Muji…

nilvest
long position in all these names (except TTD which I exited and explained on the board, ZM & CRWD which I dont see need to reduce some other position to buy into at this point).

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Muji,

For your ZM “challenge”:
Yes, it does not have the kind of moat a company like ZS has. On the bright side though, the current market leaders in their field don’t have a moat either, so ZM can gain market share in a rapid fashion.

Two years ago somebody suggested TEAM. I balked at the idea because I thought they didn’t have a moat either - we switched ticketing and project management tools 3 times in 6 years in our company. So I never bought in and missed a 400% return on thr stock in the past 24 months.

I think ZM is the same kind of a story. Even better, I think compared to TEAM, Zoom’s product is much more polished and farther ahead of their competitors. That’s why they are growing faster than TEAM was.

Ultimately, if you don’t ever want to own “low moat” companies, don’t buy them. However there’s good money to be made on some of them.

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Wonderful summaries folks.

I have a 5% stake in ZS, and I do like the company and its competitive position, would like to take it up to about 8%, but what is holding me back?

I believe the sale cycle is longer than most of our companies. Who makes the call at a larger company to switch to ZS? What does it takes to get an executive to put their career on the line? With ZS, a company is almost giving up control. Until we get more companies like GE in the short term, the growth rate can slow somewhat. If however, we continue to get the likes of GE coming on board, the growth should accelerate. Another risk is, if by chance ZS get a breached (hacked), how would the market and potential customers react?

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Great summaries, muji! But MongoWorld 2019 (MongoWorld 2020 is next May) was a month ago so we shouldn’t expect anything this week.

Oops, good eye Chris - I missed an inline update as that blurb was written a month back. Since then, MongoDB announced several products around Search, moving closer to ESTC features and also combating AWS. My full writeup was here:
https://discussion.fool.com/mdb-getting-into-search-34232660.asp…

Highlights:

  • MongoDB Atlas Data Lake (directly competes with AWS Athena to query over S3).
  • MongoDB Atlas Full-Text Search (don’t want Atlas users going to Elastic for that)
  • MongoDB Charts (dashboarding tool, went GA)
  • Open-source project to improve use under Kubernetes (ESTC is doing the same)
  • Field Level Encryption (that was just highlighted in a separate thread)
  • Distributed transactions (can do ACID transactions across clusters)
  • Wildcard indexes (improves the flexibility of text indexes)
  • On-demand Materialized Views (allows views to auto-update on a regular basis)

-muji
long MDB, ESTC

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What a great thread, thanks to all!

Just a quick input from my side regarding Zsclaer and Zoom:

Ethan, you couldn’t find any low points on Zscaler except for high valuation. One thing that I’m mildly concerned about is that they are very dependent on Office 365, and as such Microsoft, as a partner has some leverage on them potentially. I’m not losing sleep over this, as I believe currently they have a great win-win partnership (a lot of Zsclaers growth is coming from that very successful symbiosis) and there is no reason I can think of to mingle with that. However, as with customer concentration risk, also having a strong partner (I think I read somewhere that Office 365 accounts for 22% of the traffic that is secured through Zscalers’ data centers) could become a risk. So I keep it on the radar.

Muji, you challenged us to make a case for Zoom’s moat. First of all, I think it is evident from the steep valuation of Zoom that the market is seeing a very strong moat with Zoom. Why is that? The most compelling moat-argument I have heard so far is that Zoom might be the rare enterprise software company with a real network effect (Slack also falls into that category). This is easy to understand: the value of a communication tool (like Zoom or Slack) to one user depends on the number of other people that might be willing to use the network. If there are a lot of companies using Zoom, it becomes more useful and valuable. Classic network effect.

The network effect is arguably the strongest form of competitive advantage because it tends to tip towards winner take all – which means low or no competition and high margins. They are also much rarer than people think – often they are confused with economies of scale (which is more common, also powerful but not as strong as the network effect). I would argue that Zoom and Slack are the only companies in the Saul universe that have a real network effect. However, I think that both companies are not yet the undisputed leaders in their respective fields (it’s too hard to tell at the moment) – which is why I think their valuations are too rich at the moment to invest in them.

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