I thought of another huge difference between hardware stocks and our SaaS companies. In a real recession our SaaS companies may well have total revenue GROWTH decrease, but total revenue ITSELF is highly unlikely to decrease, for reasons that I don’t have to elaborate on, and you are all familiar with.
Also our SaaS companies generally have zero or negligible debt, with the exception of their negligible interest convertible loans which they took out 3 to 6 months ago, and which are convertible at prices now way higher than current prices. Seems like genius now! The almost-zero loan rates shield them from fed rate hikes, and they have plenty of cash to work with.
On the other hand, conventional hardware companies (and conventional Dow and S&P companies), generally can not only lose revenue growth in a recession, but absolute revenue is likely to absolutely decrease in a recession, maybe considerably. They also are likely to have considerable debt because they tend to have high capital expenses if they are manufacturing anything themselves, have lots of stores to sell things, or other capex expenses.
Our companies also have hugely greater gross margins on the revenue that they have (90% compared to 40%, for example), and that gives them a big safety margin.
I know that this is a simple-minded simplification, but it seems true in its essence. (And by the way, I see little or no indication that a recession is on its way. This is just a thought exercise.)
In a ‘real recession,’ total revenue will very likely decrease as customers go out of business and new business becomes non-existent. For almost every firm, although the truly great ones will probably continue to grow slowly.
Secondly, gross margins will fall as the remaining customers demand better deals. Price cuts will happen just like every other industry.
When formerly high-flying stocks fall, top tech employees quit so they can cash out their remaining big gains and start their own thing, or surf the world, etc. See FB, ad infinitum for more details.
Cash on the B/S is great, as you so rightly point out, but stocks will still fall from 58 to 15 when the recession is in full swing – even with billions in cash on hand. Some CEOs will make bad deals and get bought out down 60% from where you owned it, so you will never recover those losses when the economy turns. Happens every time.
Subscription-based revenue models haven’t repealed the laws of business & human behavior.
NajdorfSicilian, From post #48750 and some of your recent posts on other boards you must be shorting quite a few of the Saul type stocks. It’s fine to short, it’s not fine to try to convince others to sell to increase your gains from a short.
“In a ‘real recession,’ total revenue will very likely decrease as customers go out of business and new business becomes non-existent. For almost every firm, although the truly great ones will probably continue to grow slowly.”
Can’t agree more. There are lot of structurally unprofitable companies with extremely high valuations running on investor’s money. They are frequently customers of each other, and they sell into markets that they pay into. I’m sure that more than a few - among say ntnx, mdb, ayx, zs, twlo - are using Jira and Workday. I’m sure that team and wday are licensing tech from more than a few of their customers. Further, I’m sure that they are all running in part in GCE, AWS, or Azure (which are basing their capex for future anet and nvda purchases based on that demand).
The degree of interdependence among cloud software, hardware, and provider financials is frightening and I am worried about what would happen in the event of a 2000 style tech recession.
I have no idea about NajdorfSicilian outside of these boards and I’m sure he doesn’t need me butting in. But he posts on a lot more that this board, and I have personally seen great long and short side suggestions elsewhere. He seems to have the areas of profound expertise in the financial markets that I’m personally grateful for.
The guy has generally not been shy about talking about what he’s shorting, so it pretty foolish to complain about him being short (if he is, even). That is not nefarious, it’s just disagreement on the future prospects of a stock. Frankly, honest and transparent shorts are a longs best friend because force you to consider more ranges of outcomes.
People that get upset about posts and posters that have a negative point of view on compnaies they are invested in have to consider that they themselves may not have a strong enough conviction in the stocks that they hold.
I never get upset when someone has a different outlook then I do.
In fact I’d rather buy great companies at cheaper prices.
I bought a loft in Santa Monica in 2013. Paid more then asking price. Today I’m told it’s worth 60% more then what I paid for it. I have no idea until I decide to sell it what price I will get for it. The price, whatever it’s worth doesn’t effect that I love living in it. I don’t worry about the ups and downs of the price. If I was told today that the price dropped 30%, I wouldn’t get emotional about it and think I should dump it. I’d just hold on and keep loving it. Longer term I know it’s a very good investment, just like the stock market.
First off this is nothing like the 1999 tech bubble. Back then we had stocks going up five fold in a day because they added .com to the end of their business name.
Second off this is a reminder why diversification does matter. Concentration in only one industry leads to erratic returns. Sone day cloud WILL slow down.
Third one must reevaluate their risk tolerance. People forget there’s a double edge sword to those huge returns. They get wiped out just as fast. They don’t care about risk when their portfolio is up 10% in w single day.
Last after the dust settled in 2009 I do not think there was a better investment in the stock market than growth stocks that got hammered badly on the way down, only bank stocks had it worse. And they did not come back with the ferocity that growth companies did.
This is a minor blip. If it caused someone to panic they’re better off buying Clorox and church & Dwight now instead of when a real bear comes along.
From what I saw in the last bear good growth companies will come back hard.
2000 is an apples/oranges comparison. So many unsustainable companies were created. Hardware got so overbuilt. So much excess out there at the time that does not exist today. And if something better comes along in a bear, that’s fine. Could be a new opportunity along the way.
and I have personally seen great long and short side suggestions elsewhere. He seems to have the areas of profound expertise in the financial markets that I’m personally grateful for.
Great could you point me to those posts? I have never seen anything more than a few paragraphs of generalizations.
“Great could you point me to those posts? I have never seen anything more than a few paragraphs of generalizations.”
@buynholdisdead - I don’t feel particularly comfortable going through someone’s activity feed and just posting links, but if you just look back on this board fairly recently there are valuable posts about HF trader redemption calendars and Dropbox.
@buynholdisdead - I don’t feel particularly comfortable going through someone’s activity feed and just posting links, but if you just look back on this board fairly recently there are valuable posts about HF trader redemption calendars and Dropbox.
Thanks Ajm, I did go back through his feed but found nothing but generalizations, nothing that had any great insights. Most of it just seemed like drive by commentary. When the stock market declines we have many people coming on this board to say the sky is falling but when asked for any insight usually they do not give out any information. Last time the market fell we even had one poster claim that he had been out of the market since 2012, so I hope you can understand why I am skeptical of some people’s insight.
In a real recession our SaaS companies may well have total revenue GROWTH decrease, but total revenue ITSELF is highly unlikely to decrease, for reasons that I don’t have to elaborate on, and you are all familiar with.
Whether you have a GROWTH decrease or an absolute decrease depends on the mix of the customers that are using the SaaS company products. And it depends on how critical the SaaS product is to the businesses using it. If many of the customers are smaller companies and/or startups and/or not in the main business of the customers, then companies could cut back or go out of business, thus cancelling the SaaS subscription.
But many customers could be med-to-large businesses that critically need the service and aren’t going to cancel (maybe just won’t step up to the next level).
Figuring out which SaaS companies have what type of customer mix and business criticality would be golden info.
NajdorfSicilian, From post #48750 and some of your recent posts on other boards you must be shorting quite a few of the Saul type stocks. It’s fine to short, it’s not fine to try to convince others to sell to increase your gains from a short.
Not that he needs my defense, but I hope you do more diligence and research in your stock picking than you do in your Naj bashing.
I think Starbucks’ experience during the 2008-09 downturn is applicable to our cloud stocks - after all, tens of millions of people pay their ‘daily caffeine subscription fee’ to them - sometimes 2x a day and more.
It is and was one of the best run firms in the whole world.
For years 2008- 2009 their top line dropped only ~5.5%.
They still made hundreds of millions in GAAP profits, reduced their costs by cutting CapEx in half, had $770m of Op Profits, and $940m of Free Cash Flow. Strong balance sheet, net cash on B/S & no bankruptcy concerns at all.
Their stock fell 75%.
That’s what will happen to the vast majority of these stocks in a recession [and almost every high-valuation stock in any sector]. And most of these stocks are not highly profitable as of yet – although they certainly could be by 2020-21 or whenever the next recession will hit.
Since Starbucks is such a great firm with a huge moat, they’ve gone up 13x since the bottom.
The trick is figuring out ahead of time which are the firms with the truly great mgmt and products, and which will be revealed as ‘ok’ or ‘bad’ when the tide turns and their smooth sailing becomes a plunge over the waterfall around the bend.
That was an exciting time. I had cash and a good bit of it. I kept hearing on cnbc that all the institutional investors were having to liquidate holdings, and by a Lot. I kept telling myself that the stock prices on these really solid companies surely would be higher in 10 years, my general time frame for starting to use the money. I retired a few years ago early because of many many March '09 purchases, and most importantly, because I held them after x2, x5, x8 etc. and still do.
None of this current noise… trade issues, politics, interest rates, economy, anything currently discussed on cnbc… will be remembered in a couple years and none of it will make a long term difference. Only a recession will cause real pain and that will be short term, and the only thing that really matters is an investor’s time frame, assuming investments are in good to very good companies. For the short term (5 years or less), investing success is impossible to predict.