CrowdStrike vs. Symantec

Investment Analysis Clubs Saul’s Investing Discussions
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“a formally defined “moat” simply doesn’t figure into the calculation and doesn’t matter that much.”

Just to add a nail to this coffin, I can think of lots of companies with great moats that ended up going out of business. As an example, one of my most disappointing investments to date has been INFN. It has patented technology (the photonics integrated circuit) that makes optical transport of data over the internet faster and cheaper than its competition. Great moat, right? Over the last 5 years its stock price is down 70%. A moat is nice, but growing sales and recurring revenue directly prove the company has something its customers want.

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The one other piece of advice I would give to all of you is to have a strong understanding of yourself and your personal risk tolerance and investment goals. You can be the greatest stock picker in the world but it all flies out the window if you get into a situation like March this year and you sell everything. It’s sad that the average investor in US stock markets has significantly underperformed the indices because they chose to buy and sell at the wrong times.

Not everyone has the risk tolerance to run a portfolio like Saul. It takes rare fortitude and I am certainly not capable of it. So I don’t try even though I could probably do a bit better returns.

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Hastan

Not everyone has the risk tolerance to run a portfolio like Saul. It takes rare fortitude and I am certainly not capable of it. So I don’t try even though I could probably do a bit better returns.

Hmmmm, When was the last time I heard this? You really should read every post on this board. We have been doing very well and everytime we hit new highs someone comes on the board, with this exact warning. Its almost like clock work.

Andy

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Me admitting a personal failing is not a criticism of anyone here. But I did notice quite a few people here who were selling some or all of their positions in March - right when the clear opportunity to buy was there. That’s a mismatch of risk tolerance and investment strategy. You should never be selling at the bottom like that.

After 2000 the majority of growth stocks were down or flat for 10+ years, and the markets rewarded contrarian thinking and a willingness to think critically about valuation and implied expectations in technology investing. If that happens again I would be interested to see how many here stick around. And many of those stocks that were down or flat produced phenomenal operating results in that period. If you pay 30,40,50x gross profit for a company it can be flat for many years of high growth.

Personally I would be very satisfied to do 10% a year over the next 5 years with valuation as it is.

I’ve read a lot of this board. I find a lot of gems here. It’s a great resource.

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I’ve read a lot of this board. I find a lot of gems here. It’s a great resource.

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Respectfully, reading is one thing, understanding it is another. We have heard it all before though. 5-10% a year is just not for us. You are on the wrong board. Of course what you say can happen. However when many of our Stocks have quadrupled and more in price and the event does occur and we lose(on paper) say 30-50% it should not totally bother us. However if one has done their homework and nothing has changed with our conviction stocks, what a great time to add or sell if required and still reap some great gains.
This is not 1999/2000.
Stuff happens but reaping 10% a year is not on my agenda. March this year should have proved that to you.

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Me admitting a personal failing is not a criticism of anyone here. But I did notice quite a few people here who were selling some or all of their positions in March - right when the clear opportunity to buy was there. That’s a mismatch of risk tolerance and investment strategy. You should never be selling at the bottom like that.

I didn’t take it as criticism but as a warning. We get a lot of warnings, what would be more helpful is to have people bringing more ideas and write ups to the boards. Yes some people sold in March and hopefully they learned a lesson. I didn’t notice quite a few selling but there are always a few people that sell. Hopefully they learned their lesson. This is exactly what this board is about. You make mistakes and learn off of them. Nobody knew where the bottom was going to be, and one person that sold realized he needed a bigger cash cushion. Lesson learned.

If you pay 30,40,50x gross profit for a company it can be flat for many years of high growth.

Most of these companies are not profitable, you sound like you are a value investor. There isn’t anything wrong with that but value investor’s have not been doing all that great for the last 10 years. I think you are missing what Saul is trying to teach. If you are stuck in one mindset then you can’t expect to keep making high returns. When growth stocks finally go out of favor then I plan on rotating to which ever philosophy is making money at the time. But for now I plan on making hay while the sun is still shining. After all, Greenspan said in 1996 that the market was irrationally exuberant and yet the market didn’t crash till 2000. That is four years after Greenspan made that speech. Four years people would have been out of the market. If Greenspan can’t time the market, who can?

Andy

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After 2000 the majority of growth stocks were down or flat for 10+ years

We don’t invest in a category of stocks, but in individual companies … companies which are not doing what all other companies are doing. The returns you see reflected on this board would not be realized now if we were investing in “growth stocks”.

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It’s the growth that tells the story. If a company is growing revenue very rapidly, year after year, it’s evident that they are probably doing what they are doing much, much, better than anyone else. And if they quit doing it so much better than others (or run out of room to grow) and slow down growth, we reduce our positions and then get out. As you said, a formally defined “moat” simply doesn’t figure into the calculation and doesn’t matter that much. For a lot of our companies, their moat is just that they do it so much better, and that it would take so much work and expense to duplicate what they do, and by the time you did they’d be further along anyway.

I.e., let the customers find the moat and look for the evidence that customers found something they really like in the revenue. Assumption is that other customers will really like that something for some time period.

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There are all kinds of moats. I use iPhones and Macs . Why, since they are more expensive? The answer is mainly because I am too busy to learn a new OS. Also Apple stuff lasts longer and there are few virus problems.
That is a huge moat in practice. Even though there would be no immediate monetary cost in switching.

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My position on moats in software, especially SaaS software, is - look at the tens or hundreds of millions in salaries and licenses and TIME invested in intellectual property (conception, design, development, testing rollout, support) achieving that market leadership in whatever it is. THAT’s the moat.

Zscaler has a HUGE first mover advantage in their space. Symantec had it and a big moat 20 years ago, but they stopped innovating - or the innovators left, as they do in the software world, leaving the company in the hands of the police, not the marines.

Docusign also has a big advantage, although their solution is fairly narrow and expensive for what it is. It’s the warranty of the process around the tool where they add the most value.

Moats get built and filled depending on the amount and the quality of the design & product. But they can dry up if allowed to - like Symantec’s. Or any other company.

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Personally I would be very satisfied to do 10% a year over the next 5 years with valuation as it is.

Hastan, it seems that you are a Value Investor, and are only on our board to heckle and criticize our way of investing. There are other boards where you would be much more content I suspect, and find ways of investing more to your liking. You don’t have to stay here!

But if you do decide to remain, I suggest that you try to learn something from the board instead of staying in permanent smug criticizing mode. After all it’s a method that has produced a profit of up 872% in three and a half years as of today’s close. Perhaps you could learn something from that method as many on the board have done. It would be a lot more fun than making 10% per year for the next five years. After all, most of us are up over 10% in the last two weeks alone.

And don’t bother telling us that you are just being noble and warning us about what could happen?

Do you really think that you are the first person who showed up to warn us. We get them regularly. We’ve had them every year. We have lived through the sell-off in tech stocks in the last months of 2018, and 2019, and the big crash in March of 2020, and we survived, and are still up 872% in 3.5 years. Sure beats 10% per year.

Best,

Saul

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Hastan you may have been investing in stocks like these before SAul’s Board came along. So was I. But you probably were not investing in some of these stocks unless you are venture capital because they were not public then.
COUP is one of my lower conviction holdings. I appreciate the insight, though 2030 is beyond my investing horizon.
Covid as an epidemic will end within a year or so . We should be looking at a post Covid world. One still suffering from unpleasant economic impacts but also one still switching to the Cloud.
What counts in markets is who wins, not who has the best fundamental analysis.

more value type TMT plays I am not adverse to seeing them discussed ,though they are often so well covered that it is is hard to see how anything new can be figured out.

Thanks for the words of warning. Yes this great market opportunity will end, the question is when. And from what level. Me, I have no idea ,though it does seem to be becoming frothy in the last week or two.

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I think hastan’s point is he has been doing this longer than thevSaul board has been around, long term returns of 40%+, but NOW selling out due to valuation concerns such as COUP needing 7% of global GDP excl. China to justify its price, and would be grateful if these stocks can continue going up 10% annually.

That COUP comment is interesting and very unusual, but hey, Hustan was grateful enough to warn us after his yearly 40%+ annual gains that THIS time is the time it ends so maybe the figures shouldn’t be questioned and don’t look a gift horse in the mouth.

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That is a huge moat in practice. Even though there would be no immediate monetary cost in switching.

Yes, there are different moats. I think Apple is a great example. They have patents, but mostly it is not prohibitive to write software and outsource hardware. Their moat is customer loyalty. Apple users generally really love their Apples (Macs, iPhones, whatever). That is a stickiness that only Apple can lose, but no one can take. That’s a moat.

Good example of a non-infrastructure moat. Also, other posters mentioned installed user-base. That is also huge, but I alluded to that when I referred to cost of switching. Even if that cost isn’t necessarily monetary, it’s just a PITA to transition everyone onto a different platform (and there is usually an associated learning curve). It has to be “worth it” for someone to do that. Windows and Office are examples. There are alternatives (including from heavy-hitters like Apple and Google), but they don’t generally get much traction (especially Google…their OS doesn’t seem to be catching-on at all). As another poster said a few weeks ago, Windows and Office is “good enough” so that it isn’t worth it to move to other software. It is the de-facto standard, really. That’s a moat.

I think CRWD may be building their moat, as another poster illustrated very clearly and succinctly. Which is good. Especially since I’m long CRWD now!

IMHO, moats matter. It’s the lack of moats from competitors that is allowing some of the stocks followed on this board to break-in and perform. If Microsoft had a killer app that did everything Zoom did, you probably never would have heard of Zoom. It would be DOA. But Zoom exploited the lack of moats and is doing well. I won’t rehash my concerns about the future, but it seems clear they did exploit insufficient moats to start eating other companies lunches. To the benefit of many here.

1poorguy

*Note: long GOOGL and CRWD, no position in AAPL or MSFT or ZM.

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Dear Hastan,

Thanks for your thought-provoking posts.

I find it strange that some on the board are heckling you and dismissing you as a ‘value investor’ when you actually revealed that your largest position is a hyper growth company (SE) that has outperformed, for the past few years, all the other SaaS names regularly talked about here.

They may have missed that tiny detail.

If i may pick your brain a little as a SE shareholder myself, how do you think about the risk/reward and upside on SE over the next 3-5 years?

In general, I think gaming and ecommerce are actually very much ‘recurring revenue’ in nature and are not inferior compared to saas when analyzed using similar frameworks often used

Thanks in advance
Ursawarrior

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Ursawarrier - not Hastan here but FWIW here are my thoughts.

SE has been on my watch list for ages but I never managed to enter. I do have a front row seat though, living in Singapore.

The rewards? They are a the epicenter of gaming, fintech and ecommerce targeting a 600m person region backed by Tencent (in terms of funding and access to gaming libraries) - you can draw conclusions from there.

I imagine 3 potential short to medium term risks though that are untested:-

  1. Shopee has overtaken Lazada as the #1 in the region through an unbelievable saturation of media advertising (with Christian Ronaldo fronting the campaign). If they were to pull back from this level of advertising it is unproven whether customer stickiness is there to maintain the business or whether they are forever stuck with almost unsustainable levels of Ad spend.

  2. Whilst some local competition has dropped out of the running during covid, the competition is still fierce - with Lazada (backed by Ali Baba), Zalora, RedMart, Grab, GoJek all vying for ecommerce, digital wallet and delivery business. Whilst Singapore might be one of the richest countries on earth, the rest of SE Asia is still emerging. Prices are low, margins are tight and competition is ruthless.

  3. SE might be growing double digits now, however whilst eCommerce might be growing at rate of 20%, the current terminal rate of growth in eCommerce is about 40%. If/when Shopee starts to hit this level of growth then the valuation rating could come down. They are already in “emerging markets” so short of entering real frontier markets like Bhutan, Laos, Papua New Guinea or places like that then they can’t rely on geo expansion within this region unless they challenge India and China incumbents which I can’t see happening.

Ant

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It’s not my largest position (it’s 3rd and the two above are not things this board would be interested in).

I’m fortunate to have access to some of the most senior and formerly senior people in Lazada. When I spoke to them across late 2018 and early 2019 I got a clear image that Taobao execution culture dominated Lazada and that they were trying to approach the market in a far too analytical and mature way when many merchants in the region were not sophisticated. That for me was the main insight that led me to become very interested in Shopee which at the time was being valued at zero by the market.

Clearly the story is a bit different today. I tend to think about it in a simple way - Sea controls the dominant e-commerce platform in a region containing 10% of the world’s population. It has an innovative and brilliant management team who has created 2 market leading digital companies in 10 years and soundly dominated the competition. The opportunities in the digital economy of SE Asia are enormous and this is a management team you would back to exploit that. If you look at WeChat - around 30% of chinese digital GDP transacts on the platform, but Tencent failed to create the digital vertical companies that were built on that platform - most notably PDD and Meituan. I would think Sea have a similar opportunity in terms of digital economy but with the guidance of Tencent are arguably better placed to exploit their platform from a vertical perspective. Companies like this have opportunities that span huge markets and Sea is even starting to expand into LatAm and India - I expect pitched battle in each of those markets soon enough.

If I compare this to some of the high valuation software companies I look at - the opportunity is just a lot bigger than most vertical software markets and there is no looming hyperscaler to come and fight me. Theoretically I could see several trillion dollars transact across Sea’s platform each year when SE Asia’s digital economy matures. Of course there is execution risk and potentially they may have to fight off Amazon at some stage but I think there’s enough opportunity here to justify that risk.

Valuation - well we are still at mid teen ebitda multiple in gaming and a sub 1 GMV multiple on e-comm. Those are multples that are not materially above historical trading ranges for similar companies.

My personal cost basis is around 30 in this so obviously I have a different perspective than a new buyer - of course I suggest anyone interested do their own work.

MELI is also something I’m very interested in on similar lines - digital GDP share - but I don’t have any real local access there to support my thought process so I’m not involved unfortunately. But also something you could look at if you want.

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I’m not saying this is the time it ends - I still have a lot invested in similar companies and broadly I expect over the next 10 years to do very well out of growth.

What I do see is the following

  • huge increases in retail investing, particularly in high growth momentum stocks. You can look at IBKR, Robinhood, Schwab data
  • valuation levels in several stocks that rival dotcom levels
  • valuation levels in several stocks from which the best executing companies of all time would not have produced good returns at similar growth levels
  • all in the middle of one of the most serious recessions ever - in the most recent recession FANG and software traded down 50%, this time they traded up 50%. This is despite most software budget surveys pointing to a steeper deceleration than in 2009.

The above are true now but were not true last year.

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And in general I don’t think about “now is the time to sell everything” or anything like that. I have progressively reduced my exposure to growth over the past 18 months in half. And at every time it has been the wrong decision. The only really good decision I made buying in March.

My investment style in my personal account is to make small changes on a regular basis, to have very strong fundamental convictions and act on them, and to think very long term. This means I am basically always a seller in up markets, and always a buyer in down markets. And that doesn’t always work out for me but it makes me very comfortable. Other people successfully do the opposite. There are many ways to skin the cat in investing.

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Thanks Antonyms and Hastan.

Your inputs on SE are very much appreciated. I put half my money into SE at $15 in Aug 2018. Then watched it go to $10. Started selling at $30 (to you Hastan) and have been selling all the way up but wish I had just kept the entire position. It has been very hard to find people to discuss SE as there isn’t much dialogue on SA and my network in Singapore has pretty much only just discovered the stock.

My largest investment mistakes have always been selling and not holding. Apple and Amazon in 2009. Shopify at $150. And now SE. What I have been trying hard to learn from the investors on this board is how to simply hold to your great stocks and not get scared and sell. I tell my wife all the time i need to learn from Saul and his buddies on how to stay invested.

My thoughts and concerns on SE:

SE management is pretty remarkable and a team that can create the #1 mobile game in the world and beat out Alibaba in creating the #1 ecommerce app in both Taiwan and SE Asia is certainly a remarkable team. Them understanding the need for localization is no fluke and came from a decade of operating on the ground.

On Gaming: I have been following Free Fire’s revenues for a while now and I think that Sensortower’s numbers are actually on the low side for 2Q. This happens when there are large non-linear changes in the revenue. This has happened before (4Q18, 1Q19). I cannot confirm this of course because I have no access to sensortower algorithms. The simple reason that i think 2Q numbers will be surprisingly good is because Free Fire is now #10 grossing in USA, while everyone is still talking about India.

With ATVI at 60+bn market cap and with 3 divisions each making slightly less ebitda than Garena, it is not hard to value Garena being worth 20-25bn. The risk is a lot of it is from one game, but that was also true for bluehole, supercell, epic.

On Shopee: regarding Antonyms’ point on SE marketing spend - I think Covid-19 pretty much ended the need for any further need for advertising since everyone has had to download the app in the past 3 months. And every merchant has had to open stores. I do think they are beyond critical mass where it matters. But the subsidies on shipping being labelled as ‘marketing’ is where i think they continue to burn cash for a while. Long run I don’t really worry about the profitability of the platform because having operated an ebay and amazon store myself i understand perfectly the willingness to pay 15-20% fees or ‘digital rent’ for a sale. It wouldn’t have mattered if some other platform offered me 0% fees if no one shopped there.

I do think 0.75 - 1x GMV is a rough approximation of what a 3P marketplace that is growing should trade at, and Shopee will probably reach 35bn this year, 70-80 bn within 2 years and 100+ bn within 4 years. China ecommerce is already in the ballpark of 1.5 to 2.0 trn and still growing at 20+%. So SE Asia (at 1/3 China GDP) ecommerce will be ‘mature’ at about 500bn or so. If shopee has just 30% market share of that well that’s a pretty significant business in 4-5 years. I do think the ecommerce adoption growth rate will stay accelerated, SE Asia gets there (20% of retail) faster than it took China, simply because of the availability of smartphones.

Where i think Shopee can potentially lose market share is by a new entrant into the market doing things differently, like PDD. At the same time, there is nothing stopping SE from adopting everything PDD is doing now and applying that in SE Asia.

Long-term it is not difficult to see this being a 100bn company. In the short-term i worry if it is overbought. We have seen this stock pull back 30+% no less than 3 times since Aug 2018.

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