As we get into the meat of earnings season, I am narrowing down the criteria to evaluate an upcoming quarterly report. I would like to get input from this well-informed investor community - please let me know if I am missing anything key in my approach. Apologize in advance if this post violates any board rules (I checked before posting and I think I am in the clear).
Given the rising rate environment and market volatility, I am being more strict with my growth stock holdings. I want to own the ones that I believe will do well in 2022-2023. I recently used the following criteria to run a filtering and scoring exercise on about 93 stocks. I published the results on my substack (see below). I lean towards quantitative measures and GAAP metrics that can be used to track and compare across industry peers.
Here is what I want to see in the earnings report:
Healthy revenue growth
Future estimated revenue growth is more important than past revenue numbers.
Rev Gr YOY must be >= 50% and staying steady or increasing
Rev Gr FWD must be >= 40% (extra credit if >= 100%)
Average of Seq Gr QOQ for last 3 quarters + est. next qtr Gr QOQ must be >= 10%
Most companies should provide 2022 guidance in the upcoming earnings report, which will be instructive. For some companies, a specific product line is more important to look at versus the overall picture. e.g. CRWD’s subscription revenue stream is more interesting than their professional services.
Other revenue-related metrics such as ARR, RPO, Deferred revenue
If a company reports any or all of these, I look at their growth rates YOY and QOQ, looking for steady or improving numbers.
High gross margins
Gross margin must >= 50% (extra credit if >= 80%) and staying steady or increasing.
Margins for specific product lines along with a look at their respective revenue growth rates could be more informative.
Path to profitability
If a company is not yet profitable, I would like to see them move in that direction with purpose and action. EBITDA, imo, eliminates a lot of income statement noise and allows me to compare apples to apples across peers.
QOQ EBITDA should be increasing in at least 3 of the last 4 quarters.
Operating Margin QOQ should be holding steady or improving.
Gaining market share
Healthy sequential customer growth QOQ over at least 4 quarters.
Enterprise and higher paying customers are more important than retail customers.
Average customer growth QOQ for last 4 quarters must >= 10%.
NRR >= 100% and holding steady or rising.
NOTE: This is perhaps the most important set of attributes for the 2022-2023 environment.
Cash is king
Especially this year, I want to see a decent amount of cash on the balance sheet to avoid secondary stock offerings or bond/debt issuances. And also looking for healthy or improving cash flow performance.
Cash on balance sheet must be >= $500M.
Cash flow from operations rising QOQ for at least 3 of last 4 quarters.
Free cash flow increasing QOQ for at least 3 of last 4 quarters.
Total debt / Total cash on hand must be <= 0.75.
Key questions to ask:
- Did they beat guidance for the quarter? Extra credit only for a 10+% beat.
- What is their outlook for the next quarter and year? Important to pay attention to both the written word in the report as well as the C-suite words during the earnings call. Sometimes tone of the conference call is informative, however I don’t read too much into it.
- Any impact to TAM via new product launch, new markets (international incuded) entered, new major customer win, mergers, acquisitions?
- Any key C-suite management changes?
- Any major tailwinds / headwinds that will impact this company in 2022-2023?
- Can I communicate in 1-2 sentences why I have invested in this company (elevator pitch)?
Final question: Has my conviction level changed given all of the information above?
Publishing my thoughts at @iwannabeontheb2 and beachman.substack.com