Occasionally I sit down and do a relative ranking of where I want to put new money. This allows me to have a pretty good framework to sell or buy things if prices/news changes. Please forgive my overly long descriptive titles. I’d love to hear others thoughts and additions so please contribute.
To borrow the some of the motely fool’s terminology.
Companies in the penalty box that I have sold out of since last time
SHOP - sequential customer adds have decreased on an absolute basis. I had an offline conversation that in retrospect I should have posted to the board. Here was my basic thesis, “I felt like the quarter was pretty bad. Their growth has slowed pretty substantially. Look at their sequential MMR delta in millions, starting at q2 2018 and going back, 2.8, 2.6, 3.06, 3.14, 3 million, yoy tells the same story, q2 2018 and going back 11.6, 11.8, 11.4, 10.54. Those numbers are going the wrong way and represents the size of their customer base. They are focusing pretty heavily on merchant solutions, but they can only take so much of their customers revenue. I don’t think I would mind so much if they could show strong improvements in their cash flow but all that isn’t getting better and we won’t really see until q4 when they have finished their migration away from their servers to the cloud. If this trend continues their growth will be around 40-45% next year. I don’t see them commanding a high EV/S with 40-45% growth and negative cash flow.” On top of that I feel like SHOP is one of the least recession proof businesses that we discuss.
Companies that are executing incredibly, I have large enough positions in and would look to add opportunistically. If I didn’t own them I would establish small positions and follow them closely to add more
All are good buys at the right price, all are close to self funding or are self funding, all have amazing margins.
AYX - At an all time high valuation for good reason. Per their CC they have no real competition and think their TAM is larger than their initial estimates. AYX is becoming a platform which is one of my personal indicators for a company that becomes greater than initially anticipated. People are using the tool in ways that AYX never imagined and creating products and businesses off of AYX’s tools. Last time I did this AYX stock was around 31 with an EV/S of 13!!! Now the current EV/S is around 21. Forward EV/S of ~ 14.5. Still the least expensive of the “incredible execution companies” Has incredible margins, incredible growth and is close to self funding.
ZS - No real competition for what they do. Incredibly and amazingly expensive. EV/S recently dropped to 24 but is now back up to 28, peaked at 31. This is a company that I don’t see us making money on much multiple expansion 
. Forward EV/S is probably around 18. Probably has a huge run away ahead of it. I own a decent bit. I’ll buy ALOT more if it drops like AYX did.
OKTA - This is not your average single sign on company. OKTA is a full service identity management, branching out to a full zero trust security platform for enterprises. They recently acquired scaleft that strengthens their security chops. Make no mistake (i’m calling it here) OKTA is going to be a force. They continue to just destroy their earnings. Last time I did this I said they were looking attractive. I bought some, that is when EV/S dropped to around 16 and price aroudn 50. I think the market is finally catching on with their recent quarter. EV/S was in the 18 range and is now ~23. Forward EV/S with 50% growth is around 15 and change. Gross margin 80% and just absolutely destroying their guidance each quarter. They sound positively euphoric in their earnings call.
Companies that are executing well, aren’t as expensive as the ZS/OKTA/AYX group, but i’m hoping someone else will help me place because I haven’t extensively researched them
Twilio - Competition hasn’t really showed up, growing at an incredible clip ~50%, growth excluding uber is 60%+. EV/S is around 16 now, gross margins are in the 50% range unlike our previous group in the 80+ range. I don’t know this company as well as others. So any opinions on where TWLO should fall would be appreciated.
companies I would buy but don’t think are amazing deals, but worth owning if you don’t
MDB - make no mistake, this is a very young company. They seem to have the mindshare for non-relational databases. Atlas appears to be a real winner. They say they are the don’t have significant competition. This company is very firmly in the land and expand part of their business cycle. Burning money, but things are improving quickly and they have plenty of cash. Actually as I write this I had them in the minor warts category but I don’t think that is correct. I also dont think they are a “good” deal, but they just had an amazing quarter, have incredible opportunity ahead of them. Current EV/S is around 20, forward around 13. This is an all time high valuation for them, but it is deserved because they are killing it.
PVTL - The company has been extensively discussed, their relationship with VMware/dell and what that means for cross selling etc. I still think the unanswered question is if their subscription growth is juiced because of converting people from services revenue and if they can continue to add customers. They had very little customer growth until last quarter. Having said that they are absolutely killing their subscription revenue growth and have started adding customers again. The company’s business seems very strong but we only have one quarter of data to show that they are adding customers again. I’m very much in a show me mode with PVTL. If i didn’t have a position I’d happily open one at this price/value as i think the risk vs reward is pretty good and I like the long term business. EV/S is now 11.5 which is about where they have bounced around besides their one really large spike . A lot of questions will be answered when they report on Wednesday.
Companies that I think are relatively undervalued
PSTG - I wrote the following after PSTG’s earnings (slightly paraphrased/modified). I still feel the same “ PSTG is a good opportunity right now. So first off, yes, pstg sells hardware but the value that PSTG is selling is the software. Companies can come to PSTG and get something that is fast and simple and just works. Tinker made a point about PVTL a while back which I think applies to PSTG also. I’m paraphrasing things but, Companies want things to be simple. Whoever makes things the most simple will have the largest market. How i see it is we have a company that thinks they can grow greater than 30% in the long term but basically admitted to sandbagging in their conference call, operating margins are improving dramatically(about 10 points) and should be positive this year so they should be profitable this year. Long term they can be in the 15-20% range. With an EV/S of only 3.7 (now 5) they appear very inexpensive, I could easily see that raising to the 5-8 range (woohoo my prediction came true). But maybe would should talk about earnings, with 35% growth they should be over 2 billion dollars in 2 years, with 15-20% operating margin that is 300-400 million dollars in earnings (Obviously I’m painting with big strokes here and not including things like debt payments, lawsuits, etc). At current price that would be a 1.50 -2 dollars a share in earnings for a p/e 13-18. (i know this is two years in advance) I think one could easily see a double in share price if not more for a more reasonable p/e of 26-36 for a company that is growing so quickly. I think it is also similar to where PAYC was a year ago”
NTNX - Personally I think NTNX is a screaming buy. I’ve been saying this and I know other board members have said the same. I think Bert has echoed that thought too. Their apples to apples growth is accelerating even though the headline numbers look bad. If you calculate ev/s using their software and support revenue only they have a pretty incredible EV/S of 9!!! And that is me excluding all their other types of revenue. If they can grow anywhere near what they have been doing next year that will be down to 6. This is a company with 80% gross margins, a sticky product, and a whole slew of new products coming out, growing at ~50%+. In two quarters the headlines are going to be reading 45% + growth, not 12% (i forget exactly) If I didn’t own so much already I would be buying more. In my opinion they are hands down the best buy in our little universe of companies.
VCEL - my favorite little biotech company. Comparing their financials are a bit of a mess since they are basically a whole new company since 2017. They have the only product on the market that works better than the current standard of care. Their closest competitor just had disappointing data, only have enough money in the bank to operating through q4. Meanwhile VCEL is expanding its sales team by 80% and we should start seeing that in their revenue soon. They have plenty of cash in the bank, are self funding and should be profitable soon. EV/S is around 6. They are very volatile but I think they will be considerably bigger in 5 years than they are now. I think their current products can get them to about 500 million revenue but they also have the opportunity to expand their TAM with new products or new indications of the cartilage. Growing around 20% a year, but i’m hoping for more once the sales team kicks in. This is a small company at 500 million market cap and ~72 million TTM revenue so size positions accordingly.
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. Forward EV/S is probably around 18. Probably has a huge run away ahead of it. I own a decent bit. I’ll buy ALOT more if it drops like AYX did. <<