Dreamer Corp - Shareholder update

Investment Analysis Clubs Saul’s Investing Discussions
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I am in good mood with TTD, and so I posted a goofier version of this on NPI and wanted to share the meat of it here. This does mirror my current allocations and how I am viewing those stocks as of today. What they did today, last week, last month, or last year is sort of irrelevant except as a data point to inform me on modeling what I think they “could” do the rest of this year and beyond.

Don’t know how often I will update, but as I can’t seem to get in a habit of posting Monthly updates like many do, perhaps I will treat my port like a Corp and try to “report” quarterly to spot trends etc…

Today I am excited to announce a Reorganization of Dreamer Corp!
First, let’s take a look at our current Asset Allocations, after some rebalancing today:

TTD 27%
TWLO 12%
SAIL 9%
NTNX 7%
BZUN 7%
ZEN 3.5-4%
SMAR 3.5-4%
NOW 3.5-4%
ZS 3.5-4%
EVBG 3-3.5%
PLAN 3-3.5%
PS 3-3.5%
AYX 3-3.5%
Cash 12%

Assets we are continually considering for acquisition at the appropriate price: MDB, ESTC, ACRGF

Definitions of new Dreamer Corp Divisions:

  1. Market-beating (MBs) = will outperform Nasdaq and S&P and the rest of our acquisition watchlist.
  2. World-beating (WBs) = 100%+ gain in next 12 months.
  3. Tweeners - have more “potential” Multiple Expansion than most MBs, but less than WBs.

In 2018 we saw a number of WBs, notably TTD, TWLO, AYX, MDB and others.

Current status of Dreamer Corp:
Jan and Feb-to-date have seen significant out-performance, and likely unsustainable pace if I rely on the same WBs from 2018 to continue providing WB-type performance from March-Dec 2019.
Example: Company A grows 50% y/y in 2018 and 2019, but their stock grows 200%+ in 2018 and over 100%+ in 2019. Rationally, at some point the market should expect more parallel movement between a stocks revenue and/or earnings growth relative to their stock price growth. My opinion only. You can also call this Multiple Expansion, and I think rational minds can wonder what the limits are to Multiple Expansion for a stock already at 25 or 30 P/S?

As a result, I have identified “Potential WBs” that I have added more allocation to.

MBs I currently own, imo:
TTD, TWLO, NOW, PLAN, PS, AYX, ZS

Tweeners I currently own, imo:
EVBG, SMAR, ZEN

WBs I potentially own, imo:
BZUN, SAIL, NTNX

What we intend to do with our cash:
Watching the WBs, for either pre-ER dips or will add post-ER based on confirmation of WB-esque investment thesis.

Thoughts on WBs:
I still completely question NTNX, and always seem to lose when I go against my gut, but also factoring in that I am “too close to the business” to appreciate the stock oppty fully. On a purely hidden growth basis and strength of HCI basis, I agree that it is a candidate for Multiple Expansion more than the others. Could still be a dud, but at least you can make the valuation argument.

I like SAIL for Multiple Expansion…I am looking at their 4 straight Qs of 50% y/y in Subscription Revenue, and they compete against stodgy old guard companies like ORCL and RSA, which I think favors them.

BZUN is totally risky China ADR play, but if the numbers can be believed, they are a profitable well-positioned e-commerce play in largest middle class in world, and a Chinese consumer that loves/values “luxury goods” of the type that Baozun helps American Brands sell into China. They are partnered with the big players, and their SHOP-like “Services” segment has that 45-55% y/y type growth for multiple Qs now, so they are a bit of Hidden Growth as well. Up from Dec lows, but was so dramatically beaten down due to Trade War that is over 50% off 12-month highs.

Tweener Thoughts:
EVBG isn’t cheap by reality standards, but in the SaaS space it has more room to run and announced good numbers. Same with PS.
ZEN had recent great results and solid forecast. Feel they are in same stock upside boat as EVBG. SMAR is expensive, but a higher-growth rate and seeing/hearing a lot of buzz, so slotting them as a Tweener for now.

Thoughts on MBs
TTD, TWLO, ZS, AYX, PLAN, and to an extent NOW and PS are all aggressively-valued but excellent companies in great markets. I don’t expect world-beating returns from this point…but Market-Beating returns, yes. So holding all.

Current Business Segment mix, by Revenues:
MBs = 53%
Tweeners = 11%
WBs = 24%
Cash = 12%

I look forward to tracking the progress of these business segments, their contributions to the overall growth of Dreamer Corp (aka my port), and it will be interesting to see which Segment grows the most from this point thru the end of 2019.

Dreamer

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Dreamer-

Nice write up.

I have looked at SAIL quite a bit, and I wanted to make sure you were aware that the next earnings report the revenue growth is going to (most likely) look like it has really slowed.

This year some 4Q revenue was realized in the 3Q.

Last year the opposite happened, 3Q rev. was in the 4Q.

So you have a double wammy on comparisons, and the rev. growth is going to (likely) be much lower.

This has the potential to affect the stock, just FYI.

Thanks,
Jim

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Understood…but SAIL did put out a PR this week stating they pushed their ER to make 606 accounting changes, and noted that they “exceeded the high end of guidance”.

So while they may have a sequential drop in Licensing, they apparently will beat overall guidance they gave at last ER.

More importantly, to me, is whether their 50%y/y growth in Subscription revenue will occur for 5th straight Q.

SAIL could be a stock dud, but at current P/S and lower mkt cap, i am hopeful they are already at an acquisition floor, to limit downside.

I am not expecting an ER pop, but if trends in Sub numbers look good, i think the stock will eventually get a lot of love at some point in 2019.

Dreamer

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Jim,
Thought more about this, and it is a great point, more to the upcoming ER and not so much the long-term growth of stock.

They haven’t yet announced the new ER date, but guessing next 2 weeks.
Perhaps I let the ER play out…will have to think about this.

TTD was an outlier, and while there are other post-ER pop winners out there, the post-ER period seems more ripe for collapses, ala CBLK.

In CBLK’s case it was more about guidance, but in SAIL’s case, it may be nothing more than algo’s reading that the Q4 y/y growth rate was very low, without the context of the lumpiness of the Licensing business.

They have done approx $100m in Sub Revenue the past 4 Q’s, and that is growing at 50%+ y/y pace.
That is the good stuff, and the good story.
Services aren’t a core business nor expected to be a growth segment for them, but it is probably 5-10% of revenues I believe.

So the licensing is the wildcard and because they are smaller company, the big deals cause y/y lumpiness. In the real-world sales world, we hate lumpiness when we are on the wrong side of it, just as you point out SAIL will be when they report.

This is part of why I post my thoughts at NPI and here at Sauls…crowdsourced feedback is invaluable.

I don’t think my thesis on the company, their market, or their future is any different, but I may find a much greater entry point after the ER in addition to having another Q of numbers and forecasts to inform my stock thesis, so may think about my allocation a bit prior to the ER.

Thanks!
Dreamer

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Dreamer, There is one surprise to me in your port. No mention of IQ. I got on board with you when you first moved on IQ. In Mid Dec with the China tensions easing some I re entered in the $15.50 range. Caught almost a double since then. Based on earnings it could retest its post IPO high. Decent returns.

Why are you out. Still a compelling “story”. I do not usually buy story stocks hence my position is small but with recent action I may buy more on a dip. Really big TAM.

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I was tempted to get in IQ again, too.

Trade war fud was bad enough, been when i saw mother china clamping down on tencent and materially hurting them with a video game ban, it was another red flag.

Basically, the govt could block/ban/punish iq however it sees fit if they object to any content.

So in addition to the trade war uncertainty, the fact their ad bus growth tailed off, and risk of govt interference, i just felt safer w other stocks.

87m subs now…so i am not aurprised they are surging again, though.

Dreamer

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Dreamer - congrats on excellent outcome with TTD.
Its amazing to be able to take such a large position and get huge pop.

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Just a quick update, as I bought a couple things today, although they were stocks I liked previously but just hadn’t been able to commit long-term.

Given the great YTD results in my port (which contains very familiar stocks to Saul and others) I have raised a bit of cash and expanded into NOW and ZEN.

My allocations are in this order: TTD, BZUN, AYX, TWLO, MDB, ZS, ESTC, OKTA, NOW, SMAR, and ZEN, with about 13% cash.

With the current port of stocks like ZS, MDB, OKTA, and others priced, seemingly, for perfection, it will not be a shock to see a couple beatdowns occur in this next round of ER/CC’s coming up.

I am not opposed to consolidating back down to 7-8 stocks over time, but for right now, I like all 11 of these businesses, and plan to be aggressive on any FUD-related or unwarranted dips. Goal will be to deploy cash into existing stocks when the dust clears from next round of ERs.

Like many I am sure, I have seen positive returns in Jan, Feb, and March, and after an initial rocky start, April is currently positive also. Which is likely an unsustainable trend and won’t last forever…thus the Cash.

My thoughts on NOW:
https://discussion.fool.com/dreamer-corp-now-34191800.aspx

My thoughts on ZEN:
https://discussion.fool.com/dreamer-corp-zen-34191860.aspx

Upcoming ER dates announced:
TWLO April 30th
AYX May 1st
TTD May 9th

Dreamer

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Hey dreamer… I like both ZEN and NOW prospects.

Have a small position in ZEN because I also like their valuation relative to other high flyers we have. Their product portfolio has substantially expanded over last two years and have amazingly steady pace of ~38% to 40% CAGR for long time.
Improving FCF, relatively slow dilution of share count, trading at relatively modest PS of 15… all put together it is attractive. Its my smallest position at ~2% and looking to add looking to add with time / dips.

NOW looks great and growing. However, I worry that results of their new products and expansions are not as clear / separable in the revenue growth. It is not clear to me how much of their revenue and growth continues to be their main ITSM/OM business and what real revenue impact their expansion into adjacent markets are having. I dont believe their HR and other expansions will find it as easy to grow as their IT businesses have had.

So if their real success is from IT related businesses, a large company trading at revenue of $2.8B trading at a PS ~19t makes it difficult to see upside… same reason you are concerned about a smaller company ZS trading at PS of 33.
The difference is I am convinced that ZS has a looooooong runway which is why it is 11% position for me even at trailing PS of 33, I am not reducing it in any meaningful way.

For NOW, I am not as sure of where the ceiling is, and I worry that it may be lower than the PS of 19 conveys.

my 2 cents

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Dreamer

Following up my previous note, I skimmed through NOW latest transcript on SA… and found that NOW is indeed making real revenue traction in their adjacent market expansion.
Here is excerpt from SeekingAlpha transcript

We booked four Customer Service Management deals with more than $1 million of ACV including, a $3 million deal to a federal agency, our largest CSM deal ever. We also booked a $1 million HR Service Delivery deal with the federal agency to modernize our HR processes and employee experiences with our user forum and mobile capabilities being a differentiator.

Our U.S. federal business highlighted the quarter representing 15% of total net new ACV, up from 6% the prior year. We booked our largest Q1 deal ever with the federal agency who is now doing more than $18 million in ACV.

though I would expect real revenues from CSM and HR markets still to be small (specially for a large player like NOW), it is encouraging to see its taking hold.
Also their success in federal government market seems to be growing and they are quite bullish on that segment.

All in all, I am intrigued, though valuation is not really attractive to jump ship from my current holdings dominated by TWLO, ZS, MDB and likes popular on this board (most of which are richly valued but certainly growing at faster rate).

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