I suggest anyone who hasn’t yet done it, to read Bert Hochfeld’s new free article on Seeking Alpha. It’s called
“The Case For Investing In The Software/Cloud Computing Space Now”
And it came out today. And keep in mind that Bert is usually one of the most conservative of conservative analysts. The rating service Tip Ranks ranks him #6 out of 8,200 analyst/bloggers that they follow and rate. The top 1% of 8,200 would be 82 analysts. So being #6 puts him in the top 1/10th of 1%.
Saul
My favorite takeaways from Bert in the article were:
“Valuations, as expressed in terms of enterprise value to sales have fallen by 1/3rd or more in just 2.5 months.
All the while, the fundamental outlook for companies in the space has continued to improve.
But even for those solutions whose ROI is amenable to quantification the impact of rising rates is not significant. Take Doximity (DOCS) for example. Doximity says that the ROI of its solutions is no less than 13X their cost. In other words, users who have been extensively surveyed by 3rd parties have reported that for every dollar they have spent on the usage of the Doximity platform, they have been able to generate $13 of additional margin through increased sales of their own products. But that calculation is set against the costs of funding the expense of detail people. Spending on the Doximity platform is actually replacing the cost of paying the salaries of detail people who call on doctors and hospitals, and the other expenses associated with their employment.
The actual return of using the Doximity platform will increase in an inflationary environment because the salaries, and associated expenses of employing people will rise, while the cost of using the Doximity platform is not subject to inflationary cost pressure. The inflation leading to higher rates is enhancing its value proposition. The salaries of detail people and the cost associated with their employment is rising, while the cost of Doximity’s software is not.
The demand for software, all things considered, will increase more rapidly in an inflationary environment.
A few days ago, the analyst at Piper, Sandler who covers Upstart, Arvind Ramnani, reiterated his buy rating on the shares but lowered his price target. His thesis is the same, his expectations are the same but since the market for all tech stocks is lower, his price target had to be reduced.”
https://seekingalpha.com/article/4479940-the-case-for-invest…
Considering Mr Hochfeld’s high ranking, how do balance that with him stating in the comment section that companies like SentinelOne and Snowflake do not have acceptable valuations? I assume he achieved his ranking over an extended period of time and am curious why someone would like his work but then disregard his conclusions?
I find valuation the most difficult challenge. We are challenged to buy the best companies, which S and SNOW (among others) appear to be, yet the price we pay is so critical to successful results. Snowflake is the same company today as it was in late November but the market has decided for now it not worth as much as it was then.
I look forward to part 2.
“I assume he achieved his ranking over an extended period of time and am curious why someone would like his work but then disregard his conclusions?”
I rely on Bert’s work for software companies more than anyone else, and find his philosophy mostly compatible with mine and others here. That doesn’t mean we must agree on every tactic.
That Bert can miss out on Snowflake and a few others in the hyper growth sector and still be ranked on a rules based system as the number one analyst on the planet (which was his standing a year ago), reinforces how astounding the hypergrowth software space returns have been over the last 10 years.
I happen to disagree with Bert on two holdings, SNOW and NET, which he has avoided due to valuation. Perceived nose bleed values have caused me to sell those stocks in the past and then soon regret it. Having recently reentered at lower prices, my intention is to stay with them now for the duration.
What accounts for our different views on these two stocks is the importance of world class leadership. The way i look at it, Slootman and Prince have one in a million capability level with the vision and the executive capacity to build $1 trillion companies. IMO, companies tend to grow or shrink to the size of their leadership, almost regardless of products and markets. TAM is usually not much of an obstacle. They will position their companies to move to where the TAM is going. SNOW and NET therefore don’t look overvalued to me, rather they look like emerging behemoths.
Bert on the other hand, while does not dismiss the importance of good leadership, but may put less importance on it and considers variances in leaders to be centered around charisma (I agree charisma means nothing). This was discussed in Bert’s SA article comparing Cloudflaire vs Fastly about 5 months ago. For me standing Fastly’s CEO Bixby, a reasonably capably guy, up next to the giant visionary Prince, it’s not a difficult call on which is most likely to build the next world class technology company. Bert predicted FSLY would out perform NET over the subsequent 12 months, so far he is ahead, and i wouldn’t bet against him on that. I’ll take NET over the next 5 years.
Bottom line, Bert Hochfeld has proven over a long period of time that he is simply the best software stock analyst on the planet. But remember Buffett’s quote, “there are no called third strikes.” He became the world’s richest person at one point via stock investing while acknowledging that he avoided many successful stocks. Bert doesn’t recommend sells, like us here, he’s a long only guy. Therefore, that he overlooks a few gems doesn’t matter much when so many other gems are available to buy.
And keep in mind that Bert is usually one of the most conservative of conservative analysts. The rating service Tip Ranks ranks him #6 out of 8,200 analyst/bloggers that they follow and rate. The top 1% of 8,200 would be 82 analysts. So being #6 puts him in the top 1/10th of 1%.
By conservative, I meant that he’s very into valuation, and he misses getting into some companies that he loves because he wants to get into them 10% or 20% cheaper, and then they go ahead and rise 50% before he can enter. So when Bert says that you can get in “now”, it means something.
Bert’s strong point is analyzing and picking companies. He does have a fault though in that he hangs on and hangs on and hangs on to companies in crisis, hoping that they’ll turn around, so he’s very, VERY good at getting you into good companies but poor at getting you out when there’s a serious problem. Another problem is that because of his having to write for SA, he has to write up many more companies than he can keep up with. A problem that we avoid with our concentrated portfolios.
Tip Ranks rates what percent of his recommendations were successful (went up, I guess) over the course of a year (81% of them), and what his recommendations rose over the course of a year from when he recommended them on average (+58.6%), in the last year.
Best,
Saul
Bert’s strong point is analyzing and picking companies. He does have a fault though in that he hangs on and hangs on and hangs on to companies in crisis,
hoping that they’ll turn around, so he’s very, VERY good at getting you into good companies but poor at getting you out when there’s a serious problem.
It is impressive that many posters on this board (including Saul) can remove themselves from emotionally holding on to companies too long.
They are ruthless in selling when the numbers in earnings release don’t meet their expectations. No sugarcoating slowing growth.
This contributes mightily to their outsized returns.
For anyone trying to emulate this, you need to learn and develop this skill.
NVDAShort -
This guys name literally has the word ‘short’ in it. Some of y’all never had your ace whooped and it shows.
Do you think the people on here are so naive? Some have been investing for 50+ years and have seen it all. Pessimism sounds so smart at the time.
We did not truly understand the risks I guess. Thank you so much for helping.