I received this question off board, but thought it deserved an answer on the board so everyone could see it. The questioner said: “This post you made was interesting to me especially the area you bolded. Not necessarily around the tech, but around the numbers you follow”. He was referring to the following post:
Your post did get me thinking about some what if’s and me asking myself if I actually know enough about the banking industry to have the 14% position I have in Upstart.
I, and probably you, do not know enough about the internet security industry to have the positions we have in Crowdstrike and Zscaler (I know zero about it), or know enough about the observability industry to have the positions we have in DataDog, or know enough about whatever it does to have the positions we have in Cloudflare, or about the internet data industry for our positions in Snowflake, etc. That is why we follow the numbers, and it seems to work very, very well, as you can see from our cumulative results. In fact we often seem to end up doing better investing in these industries than people who work in the industries. (For example, most of the people who stayed in Fastly said they did so because it had great “tech,” which they were looking at, instead of following the numbers of how the business was doing, which were disastrous, and which got us out).
The current questioner then asked me,
I was wondering if I could get your take on the difference between great numbers and good numbers and how one stock goes from “moderate conviction” to "high conviction. There are a number of companies that are mentioned on the board… that seem to be growing meaningfully but their share price sometimes doesn’t move much. Just two examples of this are Snowflake and Fiverr, both companies put up meaningful numbers and seem to be dominating financially yet their share price hasn’t grown much relative to the dominant numbers they are putting up. Then there are others who have done just as well and they are absolutely crushing it. Would love to hear your thoughts and thanks again for your insights and the board.
These seem to be reasonable questions and here are some (I hope) resonable answers.
By following the numbers I was referring to the numbers that tell you how the business is doing. By this I am referring to how revenue is growing and whether the company is moving towards (adjusted) profitability and towards positive operating and free cash flow. I truly don’t need to understand the tech for this. Revenue growth (along with ARR and RPO) tell me whether their customers like the way their products work, and how well they are marketing those products. Profitability and free cash flow tell me how well management is running the business. (Selling a lot of product way below cost, at a loss, may give you a lot of revenue growth but a failing business.)
As far as confidence levels, they depend on how well the above numbers are doing, and in addition to what extent the company seems to dominate its niche, and how much room it seems to have to expand, and to a lesser extent, because it’s hard to determine, how difficult it would be for a challenger to displace it.
Finally, I don’t follow Fiverr, but as far as Snowflake, when they IPO’ed, it was evident to a lot of people that they were a great company, that they were growing like mad and rapidly moving FCF to positive territory, so the price got bid up to very high levels, from which it then dropped back. It then hadn’t risen for a while, allowing performance to catch up to price. About 12 weeks ago the price was briefly down in the $180’s, and now it has gradually but steadily worked its way back up to the $270 range, which is up 50% in three months from that low, which is not bad. While my initial purchases were at $302, I bought a lot more at lower prices as all the actual NEWS (and those numbers we are talking about) was way beyond “good”, and my broker currently has my entire Snowflake position currently up 16%, or roughly about $37)… I expect more good things to come and have no complaints.
Hope that this helps.