Over the last 2 years, many people here have shifted their holdings to fast growing tech companies characterized by…
- Fast revenue growth
- Lack of positive EPS
- Lots of recurring revenue
- Light capital business model
These companies are alluring because of their fast growth and potential for very strong future EPS results and growth. Clearly, people invest in them because they hope to realize appreciation in the stock price. One challenge in analyzing these companies is the lack or EPS and adjusted EPS making some commonly used valuation metrics (EPS growth, P/E, 1YRPEG) useless. There are a number of these companies so how do we decide which are worthy of our investment dollars and how do we rank them against each other so we can make prudent allocation decisions? This last question prompted me to look more closely at a handful of these companies. I have tabulated some results for a set of these companies using their reported financial filings. The purpose to rank these companies to answer the question of how much, if any, I should allocate to each company. The companies that I chose to look at include SHOP, TLND, HUBS, HDP, MULE, NEWR, TWLO, and SPLK. I may expand the list to include other companies that are fast growing, have business models with low CapEx requirements, and are not yet profitable or barely so.
| TTM REV | MARKET CAP | CASH-DEBT | EV/Sales | 1YR REV GR | 1YRREC REV GR | CFFO (last Q) | CFFO (TTM) | Customers | Customer growth | Deferred Rev | Shares Out | Price | Stock Comp (TTM) | Dilution TTM | Updated Q | Notes
SHOP | $444 | $8,070 | $395.7 | 17.3 | 85% | 65% | $4.0 | $17.4 | 375000+ | 45% | 1 | 90.243 | $89.42 | $24.9 | 0.3% | 3/31/17 |
TLND | $117 | $1,108 | $95.1 | 8.7 | 42% | 42% | $2.5 | $3.7 | 269 | 60% | 26 | 28.688 | $38.63 | $2.5 | 0.2% | 3/31/17 | Customer # is customers with >$100K subscr rev per year; have more than 1500 customers
HUBS | $294 | $2,834 | $160.6 | 9.1 | 45% | 48% | $19.1 | $35.3 | 25775 | 28% | 25.4 | 38.5 | $73.60 | $35.7 | 1.3% | 3/31/17 | Deferred revenue on BS growing
HDP | $199 | $776 | $83.4 | 3.5 | 41% | 53% | -$9.0 | -$54.8 | | | 198.2 | 61.848 | $12.54 | $92.8 | 12.0% | 3/31/17 | Deferred revenue on BS growing
MULE | $210 | $3,340 | $339.6 | 14.3 | 62% | 67% | -$0.2 | -$2.9 | 1131 | 35% | 131.3 | 128 | $26.09 | $8.8 | 0.3% | 3/31/17 |
NEWR | $263 | $2,495 | $206.4 | 8.7 | 46% | | | $18.9 | 15216 | 13% | 72.4 | 53 | $47.08 | $31.9 | 1.3% | 3/31/17 |
TWLO | $305 | $2,740 | $276.2 | 8.1 | 58% | 72% | $2.4 | $6.5 | 40696 | 42% | 11.1 | 88.6 | $30.93 | $30.6 | 1.1% | 3/31/17 |
SPLK | $1,192 | $8,413 | $987.6 | 6.2 | 38% | 29% | $41.4 | $207.5 | 13000+ | 17% | 469.1 | 137.785 | $61.06 | $345.8 | 4.1% | 4/30/2017 | Transitioning to Cloud from On-premises; revenue growth rates will likely increase
There’s a lot of information in the table above and I have so far found it useful because for me there are a bunch of considerations in deciding which company is a good investment, how much I want to invest relative to the others, and what risks do I need to consider. Let’s discuss some of the companies and their associated metrics.
SHOP is an $8B market cap company and it has the highest revenue growth on the list. If you look deeper into the growth (not in the table above), you will see that revenue growth is decelerating slowly. I think that has a lot to do with the large number of merchants who are flocking to SHOP. They reported more than 375,000 at the end of Q4 2016. I couldn’t find the figure for Q1 2017 but I think they said in the prepared remarks that they added the most ever Q1 meaning that they should be at more than 400,000 merchants given them a y/y customer addition rate of 45%! Also, the huge number of customers reduces the financial risk of losing any one customer. The share dilution due to stock based comp was a lot lower than I thought when you compare the expense relative to the company’s market cap. The only negative is the high EV to sales ratio of 17.3. However, if the growth continues strong this figure will come down quickly.
MULE is the second fastest revenue grower on the list. After doing this exercise, I think that I will add to my MULE position. Here are some of the reasons why. They are at/near cash flow breakeven. The recurring revenue is growing even faster than SHOP’s; this was a surprise to me. Stock dilution is not a problem. They have a large amount of deferred revenue which makes their high EV to sales ratio lower than it appears; total deferred revenue is about 2/3s of their TTM revenue. They have a relatively small number of customers but many of their customers are large enterprises and the count is growing at 35% y/y. Also, if you dig further into their financial reports (not in the above table) you will see that some of their metrics are very good: revenue per customer is growing steadily every sequential quarter ($105K, $115K, $125K, $136K, $143K, $152K for the last 6 sequential quarters) and dollar based net retention rate has been above 110% for the past 8 quarters. Based on these metrics the only negative I see is the relatively high EV to sale ratio of 14.3 but the deferred revenue makes that seem not so bad.
TWLO was another surprise. The growth in revenue and recurring revenue was very high. They are adding customers very rapidly as shown by the 42% y/y increase in the number of customers. They may have lost some Uber business but they added >4000 new customer in just the last quarter. Their operations are cash flow positive. The EV to sales ratio of 8.1 is about in the middle of the pack for the group. I currently don’t own TWLO shares but will now seriously consider buying back in.
TLND is growing revenue and recurring revenue at 42%. Its adding new high value customers at a 60% rate. TLND actually has more than 1500 customers but they report the customers that spend more than $100K per year. The stock based comp is super low. I should say it was super low; if you look at their guidance they included guidance for stock based comp for FY2017; that figure is $10M up from $2.5M over the past 12 months. I would guess that the increase may have something to do to moving their operations and headquarters from France to Silicon Valley where you need to hand out stock based comp to attract talent. Even at $10M in stock comp in 2017, they will be in line or on the low end of the companies on this list.
HDP has a couple of issues. Their CFFO is very negative still; it is improving but the company is still burning a ton of cash. The other problem is the stock based compensation. It was $92.8M over the past 12 months. This is only a $776 market cap company so the dilution was a whopping 12.3%! Not good. Sure the deferred revenue looks great and the EV to sales ratio is only 3.5. I’m now considering joining Saul in his decision to sell.
HUBS has a healthy revenue growth rate of 45% and a recurring revenue growth rate of 48%. The customer count grew by only 28% over the past year; digging deeper I noticed that the average subscription revenue per customer grew by only 10% y/y so I’m not sure how they got to 48% recurring revenue growth. Stock based comp looks reasonable and they are cash flow positive. The EV to sales ratio of 9.1 is the 3rd higher in the group but close to the average. Overall (based on these financial metrics), I would say it looks like a good business.
NEWR is another fast grower with revenue growing at 46%. I didn’t find any recurring revenue breakout so I assume most of the revenue is recurring especially since they only grew their customer count by 13% over the past year……that growth must be coming from somewhere. Also, deferred revenue is high compared to their overall reported revenue ($72.4M deferred versus $263M reported over the past year) which is another reason to believe that most of their revenue is recurring. They are cash flow positive and have an average (for this group) EV to sales ratio of 8.7.
SPLK is harder to assess given their transition from on-premises to cloud offerings. This may make their growth of 38% and 29% for revenue and recurring revenue, respectively, appear smaller than it actually is. The high dilution of 4.1% over the past year stands out, but it is not as absurdly high as HDP’s dilution. The EV to sales ratio is 6.2 which is on the low end for the group. The CFFO is very healthy at $207.5M over the past 12 months. SPLK is a bit more established than many of the others in the group. Customer addition growth is relatively low at 17% and I presume that spend per customer is a focus but I need to dig into this company a bit deeper.