Confidence in AYX vs. TWLO/ZS/others

It appears there’s a lot of confidence in AYX and based on their financials, leadership and the industry they’re in, why shouldn’t there be?

I’m curious if there’s anything that would cause us to doubt AYX or anything that could ‘shock us?’

Specifically, as recently as July TWLO was this board’s favorite stock and it was one of Saul’s highest conviction stocks but then just a few months later, all that goodwill left very quickly and most people sold their positions or reduced dramatically. Fortunately for most people (myself included), we got in early and still left TWLO with a nice triple/quadruple, but not everyone was so fortunate probably.

ZS was also a favorite of many’s and after TWLO’s fall from grace, it was Saul’s next favorite stock and then ZS fell from grace in their September earnings release and some kept their shares, most halved their shares and then come December and again some additional trimming, some left, etc.

Now with AYX, at this point, their last few earnings were really solid and it appears they can do no wrong and many people have had AYX since it was in the $20s, but many have not. What if, and this is a big if, AYX falls from grace somehow like TWLO or ZS?

I don’t believe there were any major early signals that TWLO would implode like they did nor were there any early signals that ZS would implode as they did. In ZS’ case, perhaps it was part implosion, part Wall Street irrationality, but either way, the stock is down ~40-50% from its 52-week high. For many, if AYX were to implode this coming February, even a 20% haircut would still result in a 4-bagger, but then for some, that would be a 20% loss (if not a 40% loss if they got in when AYX was in the 130s/140s).

So, are we too confident in AYX? Is there anything that could cause us to question our portfolio size?

I was reviewing AYX’s glassdoor and it did cause me a bit of concern. Anecdotally, I was actually pretty bullish on ESTC since I work in tech and all of my engineering friends had a lot of good things to say about the tech. However, after some discussion on this board, I did a bit more due diligence and found that ESTC had some pretty nasty reviews from employees or former employees in Sales. While it doesn’t appear to have impacted their overall earnings, it was enough for me to reduce my holding before the earnings call. Who knows if it will have material impacts in the future, but a chaotic sales org didn’t sound like something I wanted to have a big holding in.

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You are absolutely correct…not everyone was so fortunate. My TWLO is down 21% and ZS is down 33.5%. Ugh!!

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It appears there’s a lot of confidence in AYX and based on their financials, leadership and the industry they’re in, why shouldn’t there be?

I’m curious if there’s anything that would cause us to doubt AYX or anything that could ‘shock us?’

It’s a worthy question particularly when one has decided to take a large position.

The numbers have been amazing. Revenue growth. Net expansion rate. Path to profitability. Stable and extremely high gross margins. Long term FCF margins (note these targets are 10-15% higher than CRM!!). I don’t think that anyone can argue that AYX’s metrics are as good as any company out there.

And there seem to be no signs of slowing. The growth has recently been accelerating. Any the signs and talk from management suggests that 2020 (calendar) will be even better. When the story matches the numbers, that’s a great sign that gives me a lot of confidence in the future outlook.

I’ve posted some long run projections in which I estimated future growth, FCF margin, share dilution, and FCF multiple to arrive at a future long range (5 years) stock price target to arrive at a CAGR going forward. By my estimation (assuming my assumptions end up getting delivered), the CAGR would be extraordinarily high. I think I calculated a share price between $400 and $600 in 5 years.

As for the biggest risk to AYX, I would think it would be that their 92% gross margins in a large and growing market opportunity would attract competition which could lead to a viable competitor(s) which could through competitive forces lower gross margins and reduce the future cashflows going to AYX. We haven’t seen signs of this yet and if AYX can maintain their dominance then my stock price appreciation estimates could become reality.

I admit that I, like others, have become more exuberant with my AYX investment. I think I had around an 18% allocation in March. It grew into a larger allocation, above 20%. I trimmed a few times but then the results just got better and better the past 2 earnings calls. Considering my capital gains, I decided to trim no more in 2019. I actually added back. And after the last earnings result when the share price dropped, I broke all my allocation limit rules and added more via 2020 leaps when the stock was in the low $90s. Some of you recall that in September I deleveraged most of my options. I added it all back but it’s been concentrated in AYX rather than spread across multiple names. My AYX allocation is now the following:

AYX shares: 24.4%
AYX leaps (Jan22 $90 and $100 calls): 6.3% (based on the value of the options at the midpoint of the bid and ask)

So my total allocation in AYX, considering both shares and leaps, I have a 30.7% position. Some have called me nuts for having such a large position, and they may be right. But I can’t bring myself to lighten as long as the numbers and/or the story turns the other way.

Chris

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AYX billings came in a little light. It could be just a temporary thing of course. Worth watching next Q.
Databricks a competitor, private company made a big splash recently. How much will that affect AYX - TBD. I continue to have a very high allocation in AYX. IMHO unless there is a change in numbers or new news no need to panic. Growth companies go through periods of missteps. TWLO, ZS can still fix their issues and give you a good CAGR. At the moment it is less confidence but I still have them at a lower allocation.

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I’m currently in the interview process for a sales position at Alteryx. I’ve talked to some employees in the sales department and everyone has only had great things to say about the company. Sure, some sales people have minor gripes about the “hyper growth” mindset held by management, but sales isn’t for the faint of heart anyways. I wouldn’t read in to Glassdoor reviews too much. Experience operating my own Amazon business has enabled me to arrive at the following conclusion: You will receive a review on 1% of transactions that went well, and you will receive a review on 100% of the transaction that went poorly. I assume this truth probably extends to glassdoor reviews as well.
Long AYX

Thomas

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https://www.glassdoor.com/Reviews/Zscaler-Reviews-E359434.ht…

At the same time Zscaler is rates superbly on glassdoor. I really think we put too much emphasis on collateral data. As Saul has said repeatedly, and I’ve spoken about over the years, it is actually a disadvantage to be an industry and technological expert/insider when investing. You simply get too close to things and fail to see the bigger picture. I think the same is true when we continue to use all this collateral data like Rule of 40, or Glassdoor reviews or the like.

Direct data is far more meaningful. Revenue growth, deferred revenue growth, economic scaling of the business, customer growth, relative to the rest of the industry and the like. Of course putting it all into context.

The more inference you have to make on the data the more likely you are putting wishful thinking in place of actual verifiable facts. Same in court. The less I have to say to make the fact persuasive the better our case is, and the more I have to sell the data the less likely we will win. Same with stocks.

With Zscaler we did discuss the customer growth issue back in September (I think we did it here as well) and the top down vs. bottom up business model. That is putting numbers into context. However, Glassdoor reviews require a much larger inference to the relative factor of what the investment is worth.

With AYX the only negatives we have are hypotheticals that require a lot of explanation as to how it impacts the investment. The positives are very straight-forward with AYX involving revenue growth, scaling economics, customer growth, continuing enormous ARR growth, and ARR likely to accelerate as AYX retains a growing proportion of Fortune 2000 as its new revenue growth.

AYX is making a move to focus on the most lucrative of customers, which differs somewhat from the past, but there does not seem to be any hiccup in the sales process while doing so. In fact, seems the opposite.

If we start to see the growing focus on larger customers hitting a hiccup, then we will have a more direct data point to ponder. To date all the data on that point has pointed to accelerating fundamentals.

Zs, on the contrary, the opposite. For ZS, which is still more expensive valuation wise (which, I consider a positive actually) than AYX, I don’t think the market is pricing Zscaler to not overcome these difficulties. There just is presently no direct facts to support them. You are investing in all the collateral facts, and they are good. #1 is probably that they are the only solution recommended by Microsoft to work with 365. No one else in the world. I’m sure iBoss might get an eventual nod, but iBoss is not a product for large enterprises.

Anyways, my way of looking at Glassdoor and other collateral indicators vs direct indicators. Putting it into context the market still seems a bit concerned about AYX if relative valuation is taken into account. Is that CAP thing I think and I still don’t understand why the market does not fully recognize AYX’s CAP. Good for us I think as we do.

Still, when something seems too good to be true it is worthwhile to be paranoid - but don’t let paranoia rule your life.

Tinker

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The last time relatively low Glassdoor ratings were brought up I looked into studies showing the relation between high ratings and stock returns. The short studies I found showed high Glassdoor ratings slightly outperformed the S&p. But so did low Glassdoor ratings. How can this be? High Glassdoor ratings are probably indicative of a company growing that has enough cash to throw around to treat employees. Low Glassdoor ratings were from companies in the dumps that some of them turned around leading to outsized gains. Do I base my buys on Glassdoor? I own ayx and Roku which both have lower than ideal Glassdoor ratings. I’m not going to pass on a stock because of it.

The data may be a trailing indicator of what’s going on at the company, at best. The company I work for has a 3.2 rating so can only imagine the workplace in these 4.8 rating companies. They tend to be small growing companies with opportunities for personal growth from what I’ve seen.

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Glassdoor ratings are not real. It just means HR cares about the ratings. Nothing else. I have seen my share of internal campaigns.

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Glassdoor is, at best, a forum for people who are motivated (either way) to comment – allowing a voice, whether that voice really has any statistical validity or not.

My employer scores a 3.9 for most of the major locations, but I can assure you, that doesn’t mean I don’t see astronomically stupid things happen, or that every leader is full of tender unicorn hearts and fairy dust to sprinkle on the worker bees.

As someone else said (I think it was 12x), you shouldn’t base your investing decisions on Glassdoor much at all.


And my $.02 on whether we’re overconfident in AYX: I trimmed my position early in the year, and it’s mostly come right back. That’s a pretty good indicator for me of not just the company doing well, but of other investors seeing the same. Which, in turn, means I’m on to something good, and might even regret trimming. If AYX is only $200 in five years, I’ll be pretty happy (that would be like a 600% return on my early batches); if it sees the $500+ someone predicted above, then I definitely won’t be giving those Glassdoor reviews any more credence than I do today (which is about on the level of National Enquirer entertainment reading).

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