Bear,
I’ve been a follower and occasional poster on this board practically since it began. The participation on this board has outgrown my ability to keep up with everything that gets posted. I have to pick and chose which threads I will follow, which posts I actually read. I tend to read most of yours.
With all due respect, I think you are asking the wrong question. From my perspective, the questions I ask myself every quarter are: “Given the growth and other factors being what they are, do I still have high confidence in the stocks I currently hold?” “Are there investment opportunities that I believe are better positioned for future stock price appreciation than what I own today?” “Do any of my holdings appear to be nearing market saturation?” “Are the products offered by the companies I own still ‘category crushers’ with little or no robust competition?” “Are the products offered by the companies I own virtual business imperatives with respect to the emerging information economy?” You get the drift I hope. It may not be these exact questions (to be honest, this is the first time I’ve written them down), but questions of this sort. If 50% growth cannot be sustained are there better investments? I don’t just look for growth, to me the actual business is vitally important. We’ve all rehashed the dot com bust when many stocks were growing at an incredible pace, while many of the companies hadn’t even fielded a product. Note, I said “stocks,” not “companies.”
We are fortunate to be witnessing and participating in the very early stages of the information economy. Just as the industrial age before it did not eliminate agrarian society. There remained a need for farm products, there is still a need for farm products. The information economy will not eliminate the need for tangible, capital intensive industrial products. Until teleportation becomes a reality (not in my life time, if ever) people will still need to get from point A to point B. Airplanes, cars, boats and trains (in all their variant forms) are not going away. Craig McCaw didn’t herald the elimination of the phone, he simply removed the wire. Steve Jobs didn’t herald the elimination of the cellular phone, he simply made it a component of a pocket sized general purpose computer.
What I’m driving at is that the innovations that come along with new economic frontiers do not eliminate the needs that gave rise to the economic era that preceded it. But they do tend to commoditize those products. Maybe that would be better put by observing that the products of the former era have reached maturity. At the dawn of the industrial age, steel was not a commodity. Even though steel production was not proprietary, the early entrants ruled the market for quite some time before would be competitors could raise sufficient capital to put a dent in the market leaders’ revenue. As Denny has pointed out numerous times, all innovations are subject to the S-curve. There always comes a time when saturation balances with new and replacement demand. At this point branding and price are the primary forces of competition.
When I first joined this board we were looking at sneakers, chips, network h/w and the like. Industrial age tangible products supported by a large consumer or b2b demand. There was talk of the information economy, but it was difficult to identify companies and products that were participants in it. That is no longer true. We are fortunate enough to be present at a time when the internet, cloud computing and other forces have coalesced in such a way as to permanently alter the economic landscape.
The companies we are invested in have products that fill an imperative demand. My view is that the s/w products and support services offered by these companies are indispensable, primarily in the b2b space. While capital is still a necessary component for the success of any business, the new economic paradigm is more dependent on intellectual properties. Capital itself has become a commodity.
While I look at growth as a primary indicator of best of breed investments, I also look at what are the goods and services. Where do they reside on the S-curve? Do they fill a crucial demand? When taken in combination with the management and business model, are they category crushers (without significant competition)?
How does this play out with my investment decisions?
MDB - The database of the information economy. Primary competition are legacy relational DBMSs. I could wax long on this. Relational will be with us for years to come, but as I often admonished my IT colleagues, there’s not an end user in the world who cares how their information is tucked away on some server somewhere. There’s not an end user in the world who cares if their information assets are stored in rows and columns or as an integrated special purpose file. It’s completely irrelevant. And as parsers, and AI functions such as recognition of real world objects and events, i.e., facial recognition, vehicle guidance, speech to text and text to speech, sensor speed, diversity and reliability, IoT, 5G, etc become ubiquitous I wonder if the relational storage model can be sustained.
ZS - The network security vendor of the information economy. Primary competition are numerous legacy h/w components with s/w controllers. The legacy environment is costly, difficult to maintain, every new component (including product upgrades) presents potential compatibility problems and requires a large effort in regression testing and the entire kluge inhibits performance.
OK, I’m not going to go through each company, I’ll just assert that AYX, OKTA, TTD and TWLO are pretty much in the same class for substantially the same reasons. I am less confident about SMAR, SQ and ZM (which rounds out my current holdings with the exception of IIPR, an infrastructure company supporting the marijuana industry). I have lower confidence in some of my holdings because I don’t see a strong moat, significant barriers to entry or high transition costs for their customers. You might note the omission of ESTC. I sold my small position as I can’t really figure out what they do, I’m not sure whether they have a moat or not and like Saul I have some misgivings about their business model. I just felt more comfortable without ESTC in my portfolio.
Does this mean I have finally abdicated to the long term buy & hold Fool mantra? No, not entirely, but I am always measuring new investment opportunities against what I believe to be the potential and performance of my current holdings. Would I jettison MDB for a poor quarter? Doubtful.
