Just to mull a bit more… I find that sometimes determining the right sell moment is up for a lot of debate. This was one where my (and your) lazier sell attitude paid off, after Saul was quick to sell when the revenue growth rate slowed so much…WHEN to sell these hypergrowth stories seems like a much fuzzier choice then buying.
I think this applies to the huge majority of investors, myself included. Buy decisions are always much easier than sells. What seems to help me is being prepared and having rough expectations in mind for each company’s earnings. We all hold a thesis that caused us to make our initial buy decision. What numbers do I need to see to feel that thesis is still supported? This is just me, but I like to figure out what I believe are acceptable ranges prior to viewing the actual results. That calms my mind and puts me in a position to assess some very important information without the emotion of scrambling to figure out the numbers, reacting to afterhours prices, trying to read between the lines on conference call comments, etc. It helps me proactively assess the info rather than emotionally reacting to it.
The stocks I own that are showing success seem to follow a pattern. Many of the concepts below are either outlined in Saul’s knowledgebase or been discussed multiple times, but here are some the general checkpoints I use:
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Rapid and preferably accelerating revenue growth. Subscription revenues with appropriate margins are preferred.
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Expenses, secondary margins and cash flow that are all moving in the right direction. That means shrinking as a percentage of losses or growing as a percentage of profits.
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Appropriate customer and/or cohort growth to continue supporting their business momentum. The higher the expansion or retention rates the better.
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Conference call words that match the press release numbers. This is totally subjective, but I’d like to leave with the same general sense of enthusiasm for the company I felt coming into the call.
An underrated but required factor – in my personal calculus at least – is a history of beat and raise on guidance. Being honest, for all intents and purposes this has become a requirement for these companies in this market. Like most here I never take these numbers at face value. However, rather than ignore them completely I eyeball the company’s rough trend of recent guides and actuals to form an initial expected revenue range. Everything else I consider when assessing their results flows off of that. As outlined in my last review, here’s the process for SMAR:
”They guide for $55M in revenues and 51.4% growth. They’ve beaten guidance the last three quarters by $2.9M (7.3%), $2.4M (5.4%) and $2.2M (4.4%). Given that trend, I think it’s reasonable to expect an upcoming beat of at least $2M (3.6%). That would put revenues at $57M and growth at 56.9%. Those are the headline numbers I’m hoping they can meet or clear.
Beyond the headlines, I’m looking for them to continue their momentum in large client growth and take advantage of a retention rate that has accelerated to 134%. I’m also interested in their annual contract value (ACV). As their CEO stated last quarter, “…one of the real blessings of the company is, even though we did see a 50% step up in ACV, the number is still tiny. I mean, we’re taking $2,500 on average. So the opportunity for us to really reach the full potential with an account, we were talking orders of magnitude, not order of magnitude.” Will any of those orders of magnitude find the top or bottom lines next week?
The very first thing I do is hold myself accountable to those headline numbers. Anything too far below that number is an immediate sell signal. I quickly check the secondary numbers to see if they support the thesis. I might listen to the call or read the transcript. After plugging in the actuals and checking the rates, the last thing I do is eyeball their current guidance to see if it’s high enough to give them a chance to keep winning the beat and raise game. Some recent examples:
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NTNX was an auto sell right off the release. Not only were the numbers terrible, but the CFO was quoted in the release as saying ”…our third quarter guidance reflects the impact of inadequate marketing spending for pipeline generation and slower than expected sales hiring”. Frankly, that might have been the easiest sell decision I’ve ever made. I didn’t even need to plug in the numbers. No regrets and haven’t given it even a sniff since.
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I sold VCEL earlier this year when the revenue total and MACI contribution to it didn’t pass my smell test. Their call comments were way more guarded and even a little defensive compared to the prior quarter. In addition, their guides for the next quarter and FY were way too low to think they could win the raise game. Taking a quick look right now, it’s down almost 16% since. #WINNING!!
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Two quarters ago this process kicked out $116-118M revenues for OKTA. They came in just under at $115.5M. That got my Spidey senses tingling and alerted me to dig deeper. After dumping in the figures and listening to the call I decided the thesis still held. I kept my shares but shortened the leash.
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Using the same process, I came up with $123-125M for OKTA this past quarter. The came in just over at $125.2M. All the supporting figures lined up, their call comments made sense and I was personally impressed with their record 10.5% FCF margin in a quarter we knew would have higher operating expenses. Given this info, I wasn’t surprised to see the little price pop and actually have more conviction in OKTA coming out of this quarter than last.
All this to say I have absolutely no idea what information SMAR or MDB is going to release tomorrow. However, I do have a rough idea of the numbers I will need to see and words I will need to hear for them to keep my money. I can’t say that process is right or wrong and it’s definitely not perfect, but I’m comfortable saying it’s one that seems to be working for me so far.
PPS also time to change your board alias “novice”.
LOL. I picked the handle when I joined the Fool in 1997 and have just rolled with it ever since. I did try to change it to intermediateinvestor one time, but MF says it’s too many characters. If there’s one thing I’ve learned over those years, it’s that the market can humble you in a hurry. In that respect I think the name is a pretty good reflection of my overall perspective. I view those who believe they are stockexperts as much more likely to make major mistakes.