I love this. My belief is that ruminating on how and why we’ve had investing success can lead us to clearer thinking about future decisions. And I completely agree with your summary of what we are trying to do:
“As early as possible” is an important phrase here. One of the reasons we were able to have such massive success in 2017-2019 is finding companies EARLY. How did we know it was early? The main thing to me was finding a company that seemed like it could really be a big business that just wasn’t yet – but importantly was experiencing torrid growth. Shopify is my go-to example. In 2016 they grew 90% YoY to almost $400m annual revenue, but the market cap was just $3.6b at the end of the year. A P/S ratio of 9??? Yeah. It was a little harder to see back then that annual revenue would grow to $1b and then $2b, and in 2023 $7b. While they’ve never been the most profitable, the potential (which you rightly focus on) was always easy to see.
There were plenty of opportunities to make money on Shopify from that $3.6 market cap at the beginning of 2017 through 2019, and by the end of 2019 it was a $45b company. But in 2020-2021, Shopify’s market cap ballooned to roughly $200b at peak. Today it’s back around $90b.
We need a better definition of what “early” means. In 2020 we saw Snowflake go public. SNOW’s 2019 revenue had been $265m. That’s less than the almost $400m SHOP had in 2016 when they were a $3.6b company. But Snowflake came onto the market with a market cap of something like $80b or $90b. Shares were priced at $120 but they started trading at $245. Today they’re below $160.
In any way that I can meaningfully interpret what “early” means, we have never had a chance to buy into Snowflake early. And I don’t think we’re early now on a lot of the companies you hold (some of which I hold too). Just look at their market caps:
CRWD is at ~$80b
DDOG is at ~$45b
SNOW is at ~$60b
And though NET is at $33b its growth has slowed at a much smaller base of revenue than the companies above. Same with MNDY whose mkt cap is just ~$10b – but wow, when these others were at the level of revenue MNDY has now, they were growing sooooo much faster. Even ZS is at ~$29b. The only way we’re early on these is if growth either reaccelerates, or starts to show a lot more durability until they reach much higher annual revenue. (Profits of course, have not been a problem, as we have always anticipated.)
We need this to be true. But what evidence do we have for it? It’s a very short list of companies that have ever grown even at 20%+ when they get to $2b, 3b, or more in annual revenue. Shopify is a big outlier and even they grew 21% in 2022 and 26% in 2023. To plateau at 30%…I don’t see where that’s happened ever. Plus, to me this doesn’t seem different from a couple years ago when we were penciling in 50% growth for a couple years and then 40% and then 30%. It fell to 30% faster than we expected…why would it stop there?
I guess what I’m getting at is that I think these are some quality companies that we identified years ago. (I remember when CRWD was just a ~$10b company at the end of 2019.) But now I wonder if these are good investments going forward. I think maybe they’re the best we can find that fit our old model. I’m not sure that means they’re good enough to beat the market if we’re no longer “early.” Look at what DDOG and SNOW and SHOP have done from 2021 to date…they’ve lost money for investors.
My proposed solution is in agreement with your sentiment: we have to find some new companies earlier in their life cycles. ELF and Transmedics could be potentials here, although without the SaaS model of course. Perhaps IOT is a future $80b or $100b company…I don’t know. I know that growth rate will be part of what determines that, and I’m afraid they’re slowing too much at not large enough of a revenue base – but hopefully I’m wrong. Maybe growth can reaccelerate. I’m just limiting how big I bet on that.
Anyway, I’ve enjoyed exploring these thoughts, so thank you. It’s a good reminder that we need to keep our eyes peeled for opportunities. You can’t be “early” on the same company year after year…eventually you need to find something new.
Bear