AYX: analyst changes 2/14

[GauchoRico]

I’m looking through the analysts price target changes. Here they are:

Wedbush: PT $152 to $168; rating unchanged at Outperform; 7:23a EST 2/14
Piper Sandler: PT $144 to $150; rating unchanged at Neutral; 9:06a EST 2/14
Oppenheimer: PT $130 to $155; rating unchanged at Outperform; 10:12a EST 2/14
Needham: PT $151 to $167; rating unchanged at Buy; 11:36a EST 2/14
Cowen: PT $147 to $165; rating unchanged at Outperform; 12:10p 2/14
Rosenblatt: PT $97 to $145; rating unchanged at Neutral; 12:10p 2/14
Goldman Sachs: PT $135 to $170; rating unchanged at Buy; 1:01p 2/14
JP Morgan: PT $100 to $130; rating unchanged at Neutral; 1:02p 2/14

No changes from any of the analysts to their rating on the stock but they all raised their PTs.

4 of the analysts now have ratings above the current price (shown in bold above).

2 of the PT increases happened AMC today.

[SaulR80683]

When you look at the list some of them really stand out and make you wonder.

Rosenblatt, for instance, raised their price point 50%!!! from $97 to $145 (which is still below the current price) and kept their recommendation at Neutral??? They must have felt Alteryx was “overvalued” all the way from when I bought it at $27.70!!! Its current price is 556% of my purchase price in two years and a few months.

It’s been the same with JP Morgan who raised their target price 30% from $100 to $130. That, to me, is the problem with using valuation to rule out companies that are just killing it. But I’ll never convince the value people and they’ll never convince me, so there we are.

Saul

[ArlingtonRed]

My brokerage account is with Schwab and they provide equity reports on just about all stocks. Currently they’re rating AYX as a strong underperform with a sell recommendation(“F”). Same for most of the SAAS stocks I own.

[Smorgasbord1]

That, to me, is the problem with using valuation to rule out companies that are just killing it.

While the roots of a valuation approach to investing come from Benjamin Graham and his “Value = Current (Normal) Earnings x (8.5 plus twice the expected annual growth rate)” formula, there are still practitioners today like Aswath Damodaran who perform very detailed DCF (Discount Cash Flow) analysis with lots of equations and charts to justify their stated company value, and yet consistently miss out on growth companies.

The equations got more complex, and Graham provided additional rules and formulas, but in my view those just mask the flaws inherent in the simple equation as well. With any equation, it pays to look at the inputs:

• Current Earnings
• Expected Annual Growth Rate

When you look at those, it’s easy enough to understand how value hounds get it wrong - they simply under-estimate the “expected annual growth rate.” Because, when you think about, that itself is a calculation, which in turn is based on assumptions the valuator is making.

For instance, a currently well-respected Value Hound is Aswath Damodaran, who continually missed out on Amazon over many years (http://aswathdamodaran.blogspot.com/2018/04/amazon-glimpses-… ). As he admits in that linked blog, that was because his assumptions turned out to be wrong. As he says: I have consistently under estimated not only the innovative genius of this company, but also its (and its investors’) patience.

While part of this is from Amazon pouring most profits back into expanding and improving the company (reducing the “Current Earnings” part of the equation), a bigger part of it in my view is from Amazon expanding where people didn’t think it could, or even should, go. And I’m not just talking moving from an online bookseller to an online everything-seller. I’m talking about Amazon creating the cloud hosting business with the introduction of AWS in 2006. There is no way any valuation exercise can accommodate that kind of business invention. This is like what Apple did in 2007, or what NetFlix did pivoting from DVDs to streaming.

DCF and other valuation exercises work best on stable, steady companies, like big conglomerates and utilities. Then again, one only has to look at GE and PGE to find failure cases even there.

For the companies we discuss here, such valuation forumula don’t apply. Period.

What’s more interesting is finding the future Amazons and Apples and NetFlixs. A lot of the companies here are one-trick ponies. Don’t get me wrong - they’re really good and profitable tricks. But, the companies do basically one thing, do it well, and when the growth is over, we move on. That’s OK, but finding those companies that have true staying power would be beneficial. I don’t have a good way to do that, but I think it’s something to look out for and a discussion worth having.

[SaulR80683]

What’s more interesting is finding the future Amazons and Apples and NetFlixs. A lot of the companies here are one-trick ponies. Don’t get me wrong - they’re really good and profitable tricks.

Hi smorg,
The problem with that is that I remember Bezos in the late 90’s saying something like “I appreciate the faith investors have in us, but our stock is overpriced. We are just a bookstore after all!” If that wasn’t starting out as a one-trick pony, I don’t know what is!

And Apple was a not-very-successful one trick pony for many years until they came out with second and third ponies (iPod, iPhone, etc).

Knowing in advance who will become a conglomerate company like amazon is not an easy assignment.

Best,

Saul

[MONYMAN3]

I have been interviewed by Schwab several times in the past regarding their trading platform and improvements that could be made to Street Smart Pro and now their Edge product. In one of the interviews, I mentioned that their equity reports are truly terrible. I said without looking at their ratings I would bet anything that stocks that have doubled, tripled or more would not be rated at higher than a “C”. After the interview I did look and my highest rated stock at the time was Shopify at a C rating. This is a stock that has returned 1500%+ to me and as of today is rated a “D”. These ratings have nothing to do with reality.

Rob

[Smorgasbord1]

The problem with that is that I remember Bezos in the late 90’s saying something like “I appreciate the faith investors have in us, but our stock is overpriced. We are just a bookstore after all!” If that wasn’t starting out as a one-trick pony, I don’t know what is!

Well, there’s an interesting back story on that. Henry Blodget wrote how Amazon’s CFO in the late 1990s, Joy Covey, called him up (https://www.businessinsider.com/joy-covey-2013-9/lightbox?r=… ):
Amazon’s spiking stock price, Joy explained, was causing problems at the company. It was distracting employees, who were spending their days obsessing about the stock price instead of Amazon’s customers. It was making recruiting difficult, because Amazon stock options were losing their attractiveness to would-be employees as the stock shot ever higher. …

I protested to Joy that I had merely said what I had thought we both agreed on — that Amazon was a great business that would be worth a whole lot of money some day.

“Yes,” I remember Joy saying. “Someday. But now all anyone is thinking about is today.”

So, perhaps Bezos public comments were of a similar effort to keep a lid on things and not his true opinion of the company’s worth.

Knowing in advance who will become a conglomerate company like amazon is not an easy assignment.

I completely agree. But, perhaps we can get clues from the past, including identifying great management. Bezos knew they weren’t going to remain just a bookseller (the arrow from A to Z in AmaZon hints at selling everything from A to Z), just as Reed Hastings named the company NetFlix instead of NetDVDs because he anticipated streaming. I do think AWS was a surprise to Amazon (it was developed for in-house development optimization and then sold as a service to other companies during the 11 months of the year that Amazon didn’t need all that server infrastructure), but again, great management is the key.

Which of the companies we own today have similarly great management AND the opportunity to expand into new markets? Looking back, the grand-daddy of SaaS stocks, Salesforce, managed to have continual success, with AppExchange, Apex, Marketing Cloud, and Einstein (AI). Does Alteryx, Data Dog, Crowdstrike, MongoDB etc. have the management and opportunity to expand? One of the frustrating things with Nutanix, for instance, was that the company was seemingly well positioned to lead a unification of public and private cloud services, but management just totally blew it. Do our current companies have both the management chops and expansion opportunities?

[SaulR80683]

I have been interviewed by Schwab several times… In one of the interviews, I mentioned that their equity reports are truly terrible. I said without looking at their ratings I would bet anything that stocks that have doubled, tripled or more would not be rated at higher than a “C”. After the interview I did look and my highest rated stock at the time was Shopify at a C rating. This is a stock that has returned 1500%+ to me and as of today is rated a “D”. These ratings have nothing to do with reality.

I agree Rob, I don’t think I’ve ever had a stock i owned rated higher than a C by Schwab, and mostly they’ve been rated D or F. I’m sure their system is a valuation rating system. The ratings don’t have anything to do with MY reality anyway, but might fit in with a strict value investor.
Saul

[nilvest]

Great discussions…

Does Alteryx, Data Dog, Crowdstrike, MongoDB etc. have the management and opportunity to expand? One of the frustrating things with Nutanix, for instance, was that the company was seemingly well positioned to lead a unification of public and private cloud services, but management just totally blew it. Do our current companies have both the management chops and expansion opportunities?

Smorgs… some thoughts to share…
I agree, NTNX did excite me with rapid product portfolio expansion… and reality hit that management attention was needed to keep running current business which was more competitive than they thought it was!!

I believe SHOP is executing on AMZN playbook extremely well today and it shows up in their slight re-acceleration in growth… although I think people are making big mistake in equating SHOP with Amazon just because they are trying to build delivery network (which is much inferior quality business than either retail or AWS piece of AMZN) but thats a different point.
Of the rest I think AYX, OKTA, COUP, ZS, ZM SMAR CRWD TTD are all rightfully focused on their mainstay business… they have long TAM in front of them and its too early for them to try to expand in adjacent markets…

TWLO is the one that clearly needed to expand and has been trying organic (Flex) as well as acquisition (Sendgrid)… there are early signs of success but I want to see the proof over next of quarters before buying into it.

Another one is SQ: Arguably they also tried too rapid an expansion, worked very well till it was focused on Square terminal as center of their expansion efforts (mom & pop shops eco-system)… and they hit the skid with rapid expansion with Caviar and Cash app and so on… now it seems that they are converging back to right path, this time using Cash app as center of their next expansion… if they stay on this path, there is a real chance that Square will be back on strong growth and even better business than the one focused on Square payment terminal.

The one I think is in more advanced stage is ROKU: While it is tempting to compare Roku to Netflix being in media business, I would compare Roku to Amazon as they are focused on owning user experience and monetizing that in multiple ways. They lump all of their non-player revenue into “platform” revenue but the fact is that there are multiple simultaneous income stream built-in to the platform revenue. I am even more excited about their international market expansion.
Ofcourse Roku is not addressing market as large as Amazon and may not have AWS type opportunity, and still to prove capability across real adjacent market, Roku management has certainly proven capability in expanding and monetizing in multiple ways… similar to early days of Amazon expanding from book store to everything store… AND successful pivot on revenue generation like Netflix switching from DVD to streaming to develop in-house content…

Another one I see with such an approach is ESTC… their platform approach with bolt-on tools on top of their elastic search tech looks like a great strategy… however, we discussed this on the board sometime back and my conclusion was that this feels more like Nutanix (trying to much, too rapidly) and lot less like a successful expansion like Amazon.

[Sansainoi]

First post here, hope it is OK.

Agree regarding Schwab ratings but SaaS gaining attention. This recently from Morning Star (public) oncluding with “While none are currently undervalued according to our metrics, all are fine additions to a high-quality watchlist.”

https://www.morningstar.com/articles/966752/6-high-quality-s…

Current position in CRWD only.
Best, Bob

[XMFBreakerTinker]

“Additions to a high quality watch list?” About 1.5 or 2 years ago or so, on the once very excellent NPI (now not so much) I posted a post about the most profound Seeking Alpha article ever. In the author said that he not yet found his entry point on Shopify, although it was up 500% since he started following it, and he would not recommend buying now.

It was absurd on its face, but to this author he saw nothing wrong with it. He watched it go up 500%, and during that whole time he never found a suitable entry point.

That pretty much seems to summarize the Schwab stock reports. Not to mention conventional wisdom, if conventional you wish to be. I can recommend some index funds then.

Tinker

[olitalia]

He watched it go up 500%, and during that whole time he never found a suitable entry point.

David Gardner: Signs of a Rule Breaker #6: Grossly Overvalued According to the Financial Media

I think there is a stark dichotomy between those investors who get this concept and think it is a brilliant insight and those who don’t and think it is the height of insanity. When I started out investing, I was a huge fan of value investing and discount cash flows. I was doing ok, but was buying many undervalued companies that never reached fair value, but became more undervalued with time–a very expensive and time consuming lesson. Almost accidental purchases of NFLX and SHOP several years ago have taught me a lesson about the difficulties with fair value estimates that I am still trying to digest. Finding this board has been a huge boost–to my education and to my families finances so thanks!! I think I will now go back and reread the RB philosophy and Saul’s knowledgeable for the 4th or 5th time–highly recommended!!

[hmcproperties]

Olitalia,

Thanks for the David Gardner (DG) reference. DG believes strongly about adding to your winners because “winners win”. DG also emphasizes regularly that he believes in preferring to add to a position at the 52-Week high as opposed to the 52-week low for these same reasons.

However, more in keeping with this thread that is about analysts and their ability or inability to evaluate and value companies that we invest in on this board; DG has also addressed on numerous occasions the following concept: Invest in disruptive companies since Wall Street doesn’t know how to value them.

I am not speaking for Saul or other contributing members of this message board, but that is often the underlying theme of this forum when evaluating our key holdings. Its embedded in the comments made by trolls that mock these companies when they pullback and discredit these companies when they break out.

Its one of the main reasons I am glad I found this board because it is made up of like minded investors that take steps to challenge each other in order to avoid group think, group bias or confirmation bias, whatever you want to call it.

The distinct competitive advantage here is in identifying disruptive companies that analysts/Wall Street find hard to value and then put them through the “Saul Investment Discussions” scrubber and see if they stand up to the scrutiny.

Harley

[JTMatrix9]

Amongst everything I’ve learned from this board, trusting my analysis after reviewing the quarterly reports and listening to conference calls is perhaps the most important. Doing this research is completely new for me, having never studied or listened to a call before.

I am grateful for everyone’s insight and especially to Saul. The explanation of not falling in love with a stock’s past results, but always looking at the funds invested as a vehicle to increase in value has been very helpful.

AYX is my largest holding and strongest conviction stock. On December 12th when the false alarm spread about the Spruce Point short and the stock plummeted, AYX was 21% of my portfolio. I reviewed the numbers, analyzed the thesis, sold some of a lower conviction stock and bought more AYX. It was down approx 6% on the day at that point. I trusted that AYX would soon increase in value and figured this was an easy way to make 6%.

Still haven’t sold any though and AYX is now 33% of my portfolio. I’m not super comfortable with this much in one stock, but haven’t found another to buy that I believe in more. Heading into Thursday’s earnings, I was not even that nervous.

Schwab shows the short interest at 10.9%. That seems pretty high to me considering the valuation isn’t as stratospheric as others discussed here. With revenue accelerating to 75.0% from 65.0% last quarter and 59.3% and 51.0% before that, I don’t understand what these people could be looking at. I used to be wary when seeing such short interest, but believe this will help push the stock up even more as people are forced to cover their shorts.

I don’t often post here. Thank you to everyone who does.

JT