A Toast, To The Future

Investment Analysis Clubs Saul’s Investing Discussions
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I’m sitting on an airplane reading the latest Kevin Kelly book, The Inevitable. (Immediate aside, if you aren’t aware of Mr Kelly, see David Gardner’s interview with him: https://www.fool.com/investing/2018/02/20/dont-fear-the-inev…) As a mini-book review, Mr Kelly boils down technological trends into 12 verbs – using present participles in particular, which imply continuous action (state of constant change). It is providing great insight into the technological trends that this board is investing around. But… I had to set the book down and write this post.

Last week I finally caught up to current on this board. Whew. I’ve been following Saul’s board for over two years as a lurker, but for some reason I find myself continually behind on posts here. With such high quantity content at an enormously high volume, I could never commit to devote time to learning the foundations of the strategy this board follows plus follow along on the company analysis. I would instead just peruse here occasionally; needless to say, it’s hard to follow along here when you only check in once a month. While I have had great success over the past two years in this market (thanks NFLX, AAPL, ATVI, AMZN), yet it pails in comparison to what’s being achieved here.

Well, no more! I am devoting my time to this board and Saul’s strategy. I sure many of you are aware… but what you have here on this board is amazing.

Many are obviously flocking here based on the utterly astounding results from Saul and others on this board. But for me… there is something else here beyond the results. This board is like a hyper-focused subset of the Rules Breakers service (and most of the picks are recommendations there). But the major contributors here all bring together the necessary ingredients for community-driven investing – a specific growth investment style from Saul (but one that is always shifting w/ the latest inputs), combined with company-specific insights from experienced investors (much more than I) who are reading the trends in the numbers, and equally important, industry insiders that can help tame the technical knowledge gap that many have understanding the industry that these companies are in and what their products solve for their customers.

It’s that later part I can contribute into. I work in the tech industry in a self-named position of “Data Architect”, meaning I build things that others in my organization (a research facility) use on a daily basis. I know Elasticsearch (from Elastic, about to IPO this week) intimately and built a large internal data store utilizing it. I stream mass amounts of real-time data on Kafka (from Confluent, a company I would think might go public some day), sending data to and fro between research and sensors and data scientists; for analysis on Hadoop and high-performance compute clusters; and into visualization tools that allow users to make dashboards and easily ad-hoc graph their research or their data streams. Companies discussed here that are in my tech near-horizon are NVDA, AYX, MDB, TLND, HDP, TWLO, VMW, PSTG, PVTL, AMZN (AWS).

I bring up my technological background because the companies followed here are part of the side of technology that I touch on a daily basis, and I wanted to tell the non-technical folk here that there are some posters pontificating here about tech companies that are spot on. Smorgasbord1, brittlerock, GauchoChris, and Tinker in particular are very on-point and on-fire lately with their analysis of the tech industry. Perhaps they give me confirmation bias on my own feelings about these industries, but in working in the world of SaaS and data science, it is very clear that this is a new frontier, with a wide variety of tech companies helping other companies achieve success.

Speaking of quality posters here, Bulwnkl is one I had the pleasure of meeting at a FoolFest in DC as a happenstance hallway conversation (Hello again, sir!). (As an aside, if you are lucky enough to attend a Fool One member event, the absolute best part is the hallway conversations with TMF staff but especially with your fellow Fools.) Bulwinkl works directly in consumer bio sciences and it was clear that this was a fellow to listen to. (And luckily for me, I did listen to him, about how he uses VEEV and how the were solving regulatory documentation hurtles for his industry, and were expanding from there.) Fast forward to this board, where unfortunately for me … I missed the KITE story that played out here as, being so behind on the board, I didn’t read it until after GILD acquired them.

Recently the realization that I can’t ride NFLX forever finally lit a fire under me to devote a few hours a week to blazing through posts on this board, to catch up on how portfolios here have morphed over 2018.

For some reason I have been mostly SaaS-averse as an investor, as working in the industry allows you to see how much sales flim-flam and “house of cards” software development goes on. As an investor, even without SaaS picks I have thus far been very successful (though mostly due to inactivity from laziness). I used Stock Advisor, Hidden Gems and Rules Breakers, picked the companies that resonated most, and batted about 50% of them beating the market. I followed companies progress and was helped by like-minded individuals on the Fool forums. The companies I owned that succeeded… and hoo boy, did they wipe out all mistakes. (Netflix becoming >140-bagger for me sure does help.)

But… after seeing the massive growth these SaaS companies are achieving in the Land-and-Expand strategy that Saul has been hyper-focused on, I can finally say that I am no longer hesitant to invest in them. As Saul notes, these companies are beginning to change the ball game, and most are huge contributors to the betterment of ALL industries. Thus far I have only focused on consumer-facing web companies like Netflix and Amazon – and realize now that I should have been focused on picks-and-shovels – the tools that are making companies succeed. And it’s high time I better leverage my tech knowledge.

I am finding my current investment strategy seems to entirely coincide with Saul’s. EVERY company must now be a tech company. EVERY company now has all the same concerns – every company needs an online presence, much less many completely require the cloud for the entirety of their existence. EVERY company has to make huge investments in security and in analytical tools – at a minimum to maintain status quo against smarter competitors, if not to be the disruptor themselves. Tools (hardware and software) that help companies in these ways are making those companies successful, and in turn, themselves.

What Saul and this board have taught me …

  1. Focus on the SaaS economy with recurring revenue, and not just consumer facing side like streaming video or gaming.

  2. Look at the tool builders that everyone must leverage in this new digital economy.

  3. Read the trends in the numbers. Here folks know how to look at the trends over time - what percentage of revenue is the earnings loss? Where are the numbers taking us in terms of recurring revenue and how it translates ultimately to profit? Are customers growing and, better yet, spending more over time? The way investment-saavy folks here can then take all these numbers and overlay an investment strategy over it is amazing – and likely what feels so ‘life changing’ about committing to this board in order to learn this skill myself.

  4. Focus. I am no longer scared of better-focusing my portfolio, instead of owning countless companies across wide variety of industries. I am down from 67 to 30 companies now, and likely will be 15 by 2019.

Why am I so excited? Basically, this massive technological wave being followed here is just beginning. There are SO MANY NEW DIRECTIONS from here that this wave of SaaS biz tooling is enabling that we can identify, and hopefully invest in during the right points in their growth curve.

There was a post from FlixFool on AMZN premium board that made me crystallize tech waves enabled by the internet… Internet hardware enabled a wave of cloud providers that enabled a new wave of tools (commerse, compute, AI, analytics). It seems we can keep riding that latest wave of tools and products.

… WHATS NEXT? Companies that leverage all the above. Bio firms can scale scientific compute to better hone their research and move faster. Healthcare initiatives that can greatly prolong our lives by helping mitigate effect of diseases. The consumer companies next wave of wearables that are able to leverage either inter-connected cloud compute (AWS, GOOG) or on-device compute (PSTG, NVDA) for AI and ML. Vehicles are coming that will have massive neural networks that are constantly updating w/ new models as the predictor data continues to flow in daily.

It’s all mind boggling, and possibilities could come from any direction. Yet I bet we’ll “know it when we see it” as new companies emerge for us to research for investment.

Count me in.

PROLOGUE

Expect me to add my voice to the technology insiders that exist here, in exchange for what I expect will be a fruitful future return.

This is all very exciting. And I for one am going follow this board continually from here on out - near daily if I can - to leverage the communal knowledge-base that is continually being updated here. Experts here are filling in gaps I have known I’ve lacked, especially better focus on the numbers instead of just the “story” of the company. Where I can, I will contribute (most likely insights into dev-facing tech companies). I likely also have a company or two to pitch as well.

Also, expect a long diatribe about Elastic and their products. In fact, I’m attending an ElasticON one-day event in DC in October that I’ll likely be reporting on. I loved the post here recently that compared and contrasted the revenue strategies and IPO numbers between MongoDB and Elastic (https://discussion.fool.com/smackdown-mdb-versus-estc-ipo-docs-3…). This is the sort of communal investor research that makes this kind of board a special place indeed.

Cheers! To you all!

Back to my Kevin Kelly book…

-muji

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muji,

Speaking of quality posters here, Bulwnkl is one I had the pleasure of meeting at a FoolFest in DC as a happenstance hallway conversation (Hello again, sir!).

I’m glad my not being able to attend FoolFest a few months back helped you to meet Bulwnkl. Maybe I’ll be doubly fortunate in 2019 to be selected to attend FF and actually be able to make it.

Yep, mazske is also primarily a lurker here. He also wants to get rid of some of his holdings and to become laser focused like some on this board.

And, I believe I met you at FF back in 2016.

Fool on,

mazske

All holdings are listed in my profile

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I wanted to tell the non-technical folk here that there are some posters pontificating here about tech companies that are spot on. Smorgasbord1, brittlerock, GauchoChris, and Tinker in particular are very on-point and on-fire lately with their analysis of the tech industry.

Hi Muji,

Nice post. Just wanted to clarify that I am not at all a techie and am not well versed on any of the technical specs of any of the SaaS and other tech companies that I’ve written about. Like Saul, I look at the numbers and use “common” sense to determine what’s important to know to determine if a company is a good investment opportunity or not.

Chris

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Muji,

This post is up there with the best I have ever read. So happy you are joining the active discussion here.

Saul and this board have literally changed (improved) my family’s lives. It aint all about money but in 10 months, this board (and TMF) have helped unlock a lot of power to spend time how we please as a family.

Your expertise will be very appreciated!

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muji,

What a fantastic post! Quite a delight to read, probably because now you are confirming my biases :slight_smile:

I’m honored you feel that my drive-by comments on the AMZN board were helpful! I, too, am in high-tech, and only recently (past 3-5 years)have I started working with SaaS/Cloud tech. So, as a result, I’m now, like you, suddenly having a “light-dawns-on-marblehead” moment about this power of SaaS. Being more on the infrastructure (now lumped in with “devops”, whatever that actually means) side vs. application development, I was seeing many of these names fly by in my day-to-day; names like ELK (Elastic) stacks, OKTA, AWS, CloudHealth (recently acquired by VMWare), New Relic, Nutanix, etc, etc, etc. But I never thought about them from an investment perspective for some reason.

Then one day I woke up and realized that these SaaS based companies all had the very same qualities that first attracted me to NFLX over a decade ago: land-and-expand, subscription-based, laser-focused customer support, constantly increasing revenues, fanatical founders still with the company, etc.

It is indeed a new world! And, with a decent understanding of technology, a basic understanding of where these things fit into companies’ and users’ lives, we have what Peter Lynch in his seminal “One Up On Wall Street” refers to as “insider knowledge”. Between our tech background, and our fellow Fools here on Saul’s board, and Saul himself, we have a ridiculously unfair advantage over the average investing public :slight_smile:

Welcome to club! I’ve only just found my way here earlier this year, but have loved every minute of it!

–
Paul

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So, what percentages—up or down-are you showing? Maybe establish a baseline to see future results based on this group.

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Muji,
Great post (I almost skipped this thread, but then noticed 90 recs - decided I best read). Thanks for the call-out, I used to be a techie, but I retired 8 years ago, so my industry knowledge is growing rapidly more and more stale by the day. Still, it’s encouraging to know that at least some folks find benefit in my observations. I guess that after 30 years in the business, some things have staying power.

As you alluded to, anyone who’s been involved with this stuff has seen multiple “silver bullet” solutions that turned out to be made of base metal. OTOH, some are pure gold. If you’ve been there and done that and actually had the job of s/w review and analysis there are some that just jump out at you as being the clear leaders, either niche monopolies in a near indispensable target area or so far ahead of the would-be competitors that the only competitive threat is some as yet unknown disruptor.

That leaves only the quality of management in question. As an enterprise architect, I’ve been on the inside of the purchasing decision making process. I had the rewarding experience of having products I championed being brought into the company where I worked (a fortune 50 enterprise). I also experienced the frustration of backing some products that did not win the bid. In almost every case, it was due to vendor mismanagement of the sales proposal and had little to do with the technology offering. That is one of the things that makes the subscription, land and expand model so powerful. It’s just a lot harder to screw up the sales proposal compared to selling a perpetual license which was pretty much the only model there was 8 or more years ago.

I temper that with the certain knowledge that I can never be fully knowledgeable about anything. As such, the community assembled here perform a remarkable service of covering the bases and filling in the gaps, both from the perspective of understanding and explaining the tech as well as digesting and analyzing the financial performance of the companies we discuss.

In any case, welcome aboard, I look forward to your future posts. I am particularly interested in what you have to say about Elastic. I have only recently become aware of this company from posts on this board. One area specifically is of interest and that is how they play in the application performance monitoring area. I’m curious if they pose a significant competitive threat to New Relic.

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Like you I also discovered this board recently. I am convinced about these stocks and very enthusiastic about the community investing approach where all of our research/analytical skills end up benefiting every one else thereby benefiting you also in the process. This is clearly reflective of the sum is more than the parts approach.

One thing I am a little concerned about is the extreme valuation of some of the stocks. Most of them, ZS, MDB, SQ, TWLO, AYX are close or have crossed a P/S of 20. Note that most of them were closer to 10 at the start of the year. At a P/S of 20 they are priced at 50%+ sales growth for the next 5 years or so. This gives me pause in committing to a full position as of now. So, I have taken up 2-4% positions in these stocks and have been adding opportunistically (MDB, AYX, ZS all have fallen a bit today) while selling my slow growers like SKX, ANET, CELG, AMAT, ULTA etc. I don’t know if this is a sound approach. I suppose time will tell.

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