Unfortunately, the insurance company is going to drag their feet as long as possible, hoping that the patient will die before they have to fork over 300,000.00 to save the life of a customer that will generate 30,000.00 in premiums over their new expected lifetime.
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in this case I decided to fly a kite, both as a highly speculative investment and capitalism-as-philanthropy, always my preferred kind of charity.
I thought that sentence was worth re-posting. I just got a kick out of it.
As far as the TAM is concerned for Kite, here is a link from the NIH showing new cases and deaths estimated for 2017 for NHL.
https://seer.cancer.gov/statfacts/html/nhl.html
So, let’s say they treated the 20,000 patients that are on death’s doorstep at $200,000 per patient.
That is an annual TAM of $4B which if true would result in a very low P/S ratio based on today’s value.
This doesn’t take into account any of their drugs in development right now.
Just chiming in with another view as I read their recent P/S ratio is something like 200+. Of course it is. KITE doesn’t have a marketable drug yet, but one is coming soon.
Take care,
A.J.
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I wrote:
Regarding your exit from HDP, how much was that decision related to…
1) the recent management changes and losing confidence in the company?
2) the slowing in revenue growth? 2014 > 2015 revenue growth was 165%, 2015 > 2016 revenue growth was 51%, 2016 > 2017 revenue growth, based on their midpoint of their guidance, will be 29%.
3) having better places for your money?
Saul responded:
I would say it was 1, compounded by 2. I figured they have been having decreasing growth and this is part of why the head of sales was summarily fired. I imagine that future bookings were down even more and guidance will reflect that. They’ve had a huge run-up this year, even after yesterday’s fall, and I sold as close to the opening as I could today.
I’ve been taking a closer look at all these tech companies (I’ll post something of a comparison in the coming days…still working on it) that are growing fast, are not EPS positive, and have lots of recurring revenue. I’m doing the comparisons because the EPS, EPS growth, and P/E metrics are not relevant for these companies. Some things about HDP that stood out and were a positive:
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$198M of deferred revenue on the balance sheet. This is quite enormous given that their reported revenue for the TTM was $199M. Deferred revenue was up $12.8M sequentially and $79.1M y/y.
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A comparatively low EV/TTM sales of 3.5. This compares to what I call peers (SHOP, MULE, HUBS, NEWR, TLND, TWLO) what had ratios of 17.3, 14.3, 9.1, 8.7, 8.7, and 8.1. The average difference is about 3x!
My conclusion here is that even if the growth were to slow from the current 53% (recurring revenue growth) to half that the stock price is valued attractively compared to the peer group. A second conclusion is that with the recognition of the cash already collected makes it unlikely that the reported growth rate will slow in the next few quarters; yes, if bookings do drop as you (Saul) suggested then they might see growth dropping…but a temporary slowing is ok due to the low valuation. My feeling is that HDP will continue to do quite well so while I agree with Bear on HDP, I do realize that when my past opinions have differed from you (Saul), you were correct most of the time. We will get more information on HDP’s next earnings call on August 3rd…
Chris
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2) A comparatively low EV/TTM sales of 3.5. This compares to what I call peers (SHOP, MULE, HUBS, NEWR, TLND, TWLO) what had ratios of 17.3, 14.3, 9.1, 8.7, 8.7, and 8.1. The average difference is about 3x!
HDP is still burning A LOT of cash compared to the peer group companies that I’ve selected. Last Q, CFFO was -$9M and the TTM CFFO was -$54.8M. While the burn is slowing, it is still MUCH higher than the other companies in the peer group, most of which are either CFFO positive or near neutral.
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2) A comparatively low EV/TTM sales of 3.5. This compares to what I call peers (SHOP, MULE, HUBS, NEWR, TLND, TWLO) what had ratios of 17.3, 14.3, 9.1, 8.7, 8.7, and 8.1. The average difference is about 3x!
Another BIG negative of HDP is the level of stock based compensation that they gave out. In FY2016, they gave out $98.8M. Then in Q1 2017, they gave out another $23.4M. In the last 4 quarters they gave out a total of $92.8M. They are the smallest company in the peer group with a market cap of $776M so their stock-based comp is quite a massive dilution. To put this in perspective, SHOP has been criticized by some on this board as having high stock based comp. Now SHOP has a market cap of $8.1B which is more than 10 times that of HDP yet SHOP’s stock based comp in the past 12 months was $24.9M compared to HDP’s $92.9M. So adjusted for size HDP is handing out about 40 times more stock than SHOP!!!
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Chris,
2) A comparatively low EV/TTM sales of 3.5. This compares to what I call peers (SHOP, MULE, HUBS, NEWR, TLND, TWLO) what had ratios of 17.3, 14.3, 9.1, 8.7, 8.7, and 8.1. The average difference is about 3x!
Cloudera (CLDR) is a direct competitor of Hortonworks. It may be a good idea to compare those two as well. I haven’t taken the time to figure out the actual Enterprise Value for both companies. On a P/S basis, CLDR is about twice as expensive as HDP for roughly the same current growth profile (about 30%ish). Both companies have expanding deferred revenues. HDP still loses a lot of money but is showing good signs of leverage as of late. I’ll need to look into CLDR in regard to whether they are beginning to stem losses.
From Saul:
I figured they have been having decreasing growth and this is part of why the head of sales was summarily fired. I imagine that future bookings were down even more and guidance will reflect that.
This seems to be sturdy reasoning for the head of sales being fired. This assumes it is essentially performance related. Other things COULD have happened. There could have been major differences of opinion in the future direction of the business, major personality conflicts, Verma saw something he didn’t like, the CEO saw something in Verma he didn’t like, etc…
Who knows for certain, but Saul’s reasoning certainly makes a lot of sense.
One part of me is concerned about the performance of the business under Verma’s short tenure. But another part wonders how much damage he could have inflicted due to his short stint. Finally, there were several changes at the executive level, and Alan Fudge seems to be replacing Verma’s role. Alan’s resume looks very polished.
One other final note: Going back to the August 2016 conference call the CEO has been making sales organization adjustments. In that call he announced Sales would be reporting directly to him. Then came Verma. And now, 7 to 8 months later, we have Alan Fudge.
Take care,
A.J.
2 Likes
HDP is still burning A LOT of cash compared to the peer group companies that I’ve selected. Last quarter, cash flow from operations was -$9 million and for the last twelve months it was -$54.8 million. While the burn is slowing, it is still MUCH higher than the other companies in the peer group, most of which are either CFFO positive or near neutral.
Hi Chris, I was looking at the same thing from a different angle, adjusted earnings per share. For the past 12 months HDP has been losing 50 to 70 cents a quarter and $2.38 cents for the trailing twelve months. That’s enormous.
To put it in perspective, for the past 12 months Shopify has been losing 0 to 4 cents a quarter and 10 cents for the trailing twelve months.
When you put together the enormous cash flow losses, the huge adjusted earnings losses, the huge stock-based compensation, and now the management turmoil, I think we can now agree that maybe there are safer places for our money. That doesn’t mean the company won’t do well eventually. I don’t know. But I can’t be in all the companies in the market and I want to chose ones I have more confidence in.
Saul
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I was looking at the same thing from a different angle, adjusted earnings per share. For the past 12 months HDP has been losing 50 to 70 cents a quarter and $2.38 cents for the trailing twelve months. That’s enormous.
To put it in perspective, for the past 12 months Shopify has been losing 0 to 4 cents a quarter and 10 cents for the trailing twelve months.
For a little more perspective:
Shopify had adjusted losses of 2.6% of revenue for 2016. Pretty much irrelevant.
Hortonworks had adjusted losses of 80.4% (!) of revenue for 2016. That’s pretty hard to get to a profit. It means they spent almost twice as much as they took in as revenue.
If you follow GAAP, Hortonworks had GAAP losses of 137% of revenue. That’s hard to grasp! That means that they spent (GAAP) almost two and a half times as much money as they took in in revenue.
We’ve been lucky and made a good profit on this stock so far this year, up until the management turmoil. I feel I don’t need to stretch my luck.
Saul
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SaulR80683: For a little more perspective:
Shopify had adjusted losses of 2.6% of revenue for 2016. Pretty much irrelevant.
Hortonworks had adjusted losses of 80.4% (!) of revenue for 2016. That’s pretty hard to get to a profit. It means they spent almost twice as much as they took in as revenue.
Saul, thank you for such a clear comparison! Looked at this way, it seems almost impossible Hortonworks could achieve profitability.
I wonder … how reliable a metric is this for evaluating companies with negative earnings? Might be an interesting research project to create some graphs of this data and see if any patterns emerge, especially as companies approach the threshold of profitability.
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Frank, So very sorry for you and your wife. May Jesus hold the two of you in His tender arms and his angels attend to you and her.
Jim
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Tinker - let us not forget that Vertex was going after Hep C market, drug failed, and they dropped it. Then they saw the light with Cystic Fibrosis, in a very small TAM. Once that was approved, they mixed up the concoction to address older kids, etc. and that expanded the TAM.
The question on TAM and other, say medical device companies, is that the TAM is typically never ultimately known, and then you have a real winner.
Intuitive was for a very small population when first released, gains adoption/traction, goes after everything. I don’t think anyone was thinking they could own, potentially one day, that all surgeries will be done by a device versus surgeon hands.
Netflix - started as mail order shop. Now it is the king of streaming entertainment
Amazon - was books. Now look at their TAM.
I think of these potentials in SaaS companies and other types where they are losing money but going after the market share, and then hence future increases in TAM. If you can find them early and just stay the course and buy more when they crash, it’s pretty sweet.
For those that want more on Biotech Industry, subscribe to MF Rule Breakers. Has some great coverage.
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Redsox,
I think the more relevant lesson from Vertex is how quickly the quickest drug after to launch that revolutionized treatment in its field, that sold billions of dollars of drugs in a year or two of market domination, so quickly was supplanted in the drug field by the next bigger and better drug for the same indication.
This is not unique to Vertex. I remember a case study from the 1980s when the world’ #1 selling drug was supplanted and its market nearly entirely taken by a new drug in one year’s time.
Biotech is brutal, utterly brutal.
In the case of KITE, KITE can have its drug approved, spend billions to produce it, and a new drug can come along and within months take over the entire market.
KITE has this vulnerability (as does any other biotech) but with KITE the risk may be more as KITE’s drugs have higher than normal risks associated with it, and much higher than normal costs, and much higher than normal difficulty in manufacturing the drug for mass distribution.
But as with Vertex, until that time, you can make a mint. Incivek was hardly a failed drug pulled from the market, it is a drug that added billions of dollars to Vertex’s market cap, and a credit to Vertex for having follow up drugs, and to never stop being paranoid and developing commercial product.
The issue we are seeing for KITE is commercialization and the current market cap largely has that built in.
KITE may add indications and drugs and go on to be like Amgen or Celgene or whatever, we don’t know. The CAR-T therapies though have to become easier and more economical to manufacture and distribute if KITE is to do this, as otherwise, other alternative drugs will fill the void that KITE is currently filling.
Vertex is a great example, without question. And it worked out great for Vertex even though its first billion dollar drug was supplanted entirely within 2 years or so of taking over the market. It happens and that is the biotech market.
Tinker
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