Saul,
I fully understand and agree with your analysis.
Yet, there’s a wrinkle. Not every trade is driven by logic and analysis. Estimates place algorithmic trades at 70% of the total. I don’t know what logic resides inside those algorithms, in fact it’s a closely guarded secret. But I can’t help but to think that they are largely driven by technical indicators rather than fundamentals. With a falling stock price, once a certain trip point is reached the sell pressure for that stock cascades in an effort to head off further losses. This happens with total ignorance of revenue growth, margins, retention, etc. At least, that’s my assumption.
In addition, as you noted, If the conventional company is trading at an enterprise value of let’s say, four times its revenue, isn’t our SaaS company worth four times THAT! Or six times that, … or who knows, ten times that? For those investors who recognize the same factors you have documented, there remains the or who knows. In other words, valuation is not irrelevant, it’s just awfully hard to assess. I think this played a part in the recent crumbling of Zscaler’s stock price. I think that the reaction to guidance has been over compensation to a report that was actually not that bad, but that’s probably due to the algorithms firing off after the trip point was reached.
The recovery in stock price is always slower than the decay. It’s much easier to define a trip point on the way down than on the way up.
I’m not taking issue with your analysis. As I said I understand and agree with it, but I’m trying to understand how things actually play out in the market. If you follow financial articles published at SA and other places (I know you do), valuation is almost always a part of the discussion. And the analysis you provided is absent more often than not. I assume members of this board know that the quality of analysis found at SA varies widely. I’ve read a large number of articles that build arguments on information that is factually wrong. But, we seem to be living in a time when facts are less important than assertions.
What to make of all this with respect to investing decisions? I wish I had a good answer to that question. Saul is telling us to calm down because the valuation of this new class of business can’t be bound by traditional measures. It truly is different. While I believe that that assessment is true, I also don’t think that it is widely recognized.
Further, I think a recession in the relative near term is inevitable at this point. I can’t fathom what would turn the economy around quickly enough to forestall one and IMO there’s little doubt that we are headed in that direction. I had investments during the dot com debacle, but really they were more like speculative bets based on not much of anything factually substantive. I was also invested during the 2008 meltdown. My investments at the time were based on the advice provided primarily by subscriptions to investment news letters. In retrospect, the quality of the advice was pretty low. I just bemoaned the loss of equity, but did little in response to it.
I think valuation is important if for no other reason because it is important to other investors, probably the majority of other investors. And in another respect it’s irrelevant to trades driven by technical indicators. So far, I’ve not sold everything and used the proceeds to buy gold. But the situation is unnerving. Being right is not of great consolation in light of the erosion in my portfolio.
It’s a conundrum and at present I’m stuck with indecision. Quite uncomfortable.
Plus it’s also comforting to get some reassurance that we arent all nuts.