value stocks are the best to hold in a declining market
It is true that large enterprises see contraction and pressure on sales during economic downturns.
In these cases, they often slow spend on building and expansion and retrench to their core operations.
It is worth asking, what is the role of SaaS during these times for operations
- Discontinue the uses of third party offerings to save money
To understand this, let’s understand if these third party offerings are in business units that are fundamental to the business or are dependent on the business environment.
This analysis is grounded on the acceptance of the emerging digital economy for business whether its eBusiness or large worker mobility or the shift of standard business tools such as MSFT moving the the cloud. You can’t escape it.
For both of these, I see a downturn as an opportunity driver vs headwinds…these are cost cutting solutions that are fundamental to a business.
Security (ZS, OKTA)
Security of your business information at enterprise level is mission critical.
Both OKTA and ZS perform in this space.
Let’s imagine a companies alternative to these solutions. It includes the addition of many headcount managing many additional security devices, programs, internal processes and procedures, to perform what can be accomplished for the fraction of the headcount.
Do we think a company is going to bring this in house?!? Absolutely not. The threat here is not the economic downturn, it’s the emergence of the next best thing. This bet is on the leaders and innovators.
Most of not all large enterprises, and governments, have workers at multiple locations. Many of these enterprises have requirements, if not expectations, to have the ability to notify employees of safety issues and organize incident response teams as required by regulators, or the corporate structure.
These folks depend on the ability to quickly, efficiently, and effectively communicate and organize teams of people.
This can be a home grown solution requiring a cohort of folks managing and pulling information together, keeping lists updated, constantly going through checks and documents. Or…it could be integrated and embedded with your HR systems, work management systems, monitoring tools, and external sources. For the costs of less than a couple headcount. Not on the chopping block during a downturn.
These can ramp up or down depending on the companies output and appetite for growth.
Business Operations (SHOP, SQ)
These are very directly tied with the appetite of consumers. I see some risk related to these. However, if you are going into business, both of these companies have created one stop shops to simply pop-up your business. Once you’ve done that you won’t leave them until your business folds…
Customer Service (TWLO)
Communicating with customers is important to all businesses. TWLO makes this easier than anyone. Much has been said about the costs associated with that, and perhaps as Uber did, there is a point of saturation where it may be worth building this in house. But that’s rare and not applicable to a downturn.
The risk here would be reduced usage of the platform and reduced companies trying to expand and grow. But once you’ve built it, the only use cases we’ve seen for leaving are to get to big or to die.
Operational Efficiency (AYX)
AYX starts as a luxury or experiment for some and turns into a core product quickly. It’s the ease at which you can pull segregated data into a common environment and the drag and drop tools to build the analysis. Once a company begins building these analysis and efficiencies…I think the risk is shifted completely to the team using the tool and their ability to prove worth. I see this at some risk because of a cost up front…but the AYX team has proven themselves very capable at selling the payback which would probably be enticing during a downturn when companies are crunching numbers and wasting many man hours in excel to find the answers.
Sales and Marketing (TTD)
Probably the riskiest category, yet, TTD has done a good job working to diversify their markets such that a downturn might have to be global to see the full impacts…unless it happens more quickly than we suspect…
Anti-trust if the big 3
More and more use of digital platforms and mobile
Giving data back to the client without sacrificing our personal info.
Those are the tailwinds
IT Operations (APPN, ESTC, MDB)
Not my wheelhouse, but my sense is that if you can find a database company you can pay to manage all the infrastructure for you, it’s cheaper than pulling it back in house.
I also have to believe that the ability to innovate using a code base that empowers client side solutions (APPN, ESTC) to meet customer demands for more and more intuitive and simple solutions in the palm of our hand, is better than trying to buy off the shelf solutions.
I bucket these risks as the same as AYX, minus the costs. You have the have the talent in-house to take advantage of the coding and flexibility of the tool coupled with their business knowledge. You lose that knowledge and you lose value here.
Just a Fools musings