Graceful Landings

I’ve been thinking about my tiers in my writeups.

TIERS OF HYPERGROWTH EXECUTION

Tier 1
Company over 50% growth that is having perfect execution, whose technology is self-selling or is executing a flawless go-to-market approach that scales. This creates a self perpetuating hypergrowth scenario with customers flocking to the solution. This then gets prolonged as they create a full platform with adjacent product lines, that leads high demand from current customers, shown in $NER. High margins are always good, esp >80% … but lower (50-70%) is perfectly acceptable as long as there are signs of operations being able to eventually scale. If a company already has positive op margins and FCF, things can stay here for a long time.

Tier 2
Hypergrowth company over 50% with great execution, that steadily executes. continuing into a steady mid to low 40s, after a year possibly into mid 30s. Lower margins start showing signs of stabiliziation, and eventual improvement. High margins allow for massive uptick in op margins and FCF that should scale up from here. Profitability becomes a near-term target, or better yet already here. Rare to have a company improve enough or expand TAM enough to go back to Tier 1.

Tier 3
Company having an abupt execution hiccup with a rapid fall from hypergrowth to mid 30s. Possible recovery but typically stagnant performance at best. Recovery possible though, and if going through transition with a short time horizon, may be worth holding on to - IF profitable and debt free and ONLY IF it stabilizes and has signs of continuing successful execution. If sales stabilize and eventually increase back to low to mid 40s, it goes back to Tier 2.

Tier 4
Company having an execution fail, that shows a clearly difficult recovery, or stumbled again on the “fix” (such as doubling down on expanding sales employees only to continue to have stale growth. Quick fall to under low 30s or worse. Sell immediately.

Bet you can all picture where companies discussed here align on that scale. A company can be moving up or down those tiers or remaining stable, but eventually down is the vast majority of cases once these companies hit the public market. Speed matters in how they move between tiers - companies moving UP quickly (vast improvement in subsequent Qs) are ones you prefer, as well as those moving DOWN slowly (over years). Those moving UP slowly are worth watching. Those moving DOWN quickly should be exited immediately.

So a question…
What companies in your port are at given tier? And which way are they moving? And how quickly or slowly?

As an example: MongoDB for me is moving at medium speed downward across tier 2 and into tier 3. It’s operating costs are moving the wrong direction right as hypergrowth is stumbling. Opex is growing faster than revenue at this point so margins eroding with it. It is tilting away from getting an income while also no longer scaling ROI like it used to. To reverse it’s slide, it could potentially stabilize in high 30s/low 40s then resume growth with new search product lines back into mid 40s (so back to tier 2).

As an opposite example, Cloudflare is a medium rising tier 2, moving into tier 1. They are accelerating growth and scaling costs on the global edge network they already have, but also are adding in the potential growth from what the CEO basically said was the “other half of the company’s product line”. I concur with its potential. They have the ability to add an entire Zscaler within their existing platform. This made me act and build a position quicker — as tier 1 hypergrowth is a great place to be RISING into as you add Zscaler’s TAM on top of an already solid 45-50% market edge cloud TAM. Sign me up.

READING THE SIGNS

Recognizing the signs is critical to minimize mistakes. Saul, your way of reading and (even more important) explaining how to read signs within financial metrics is brilliant, as it provide methods to gauge execution. I have always missed this piece.

I always signed up to TMF to solve that before, and just lazily held. My one skill then was to act w/o emotion through the extreme gyrations of the market. And whoo boy did I have some success. A 140%+ bagger sure erases a lot of mistakes, including losing money on 40%+ of my picks.

Fast forward to now. I have a compact portfolio, to the point where I can study and understand each company I own. To gain an understanding of the execution (revenue and customer growth, good go-to-market they are executing) as well an understanding of the technology (their platform, future trends at play, scales well).

Does anyone else love this game we play? Woo! I love researching stuff. And now I know what trends to be looking for. (Thanks for that, Saul!)

The only downside is the amount of time it takes to study. Increased by the time it takes to bundle up research and thoughts to share with others.

Three cheers for all the contributors here, big and small. Having more eyes on these core set of rules really helps - to identity up/down trends in the numbers and get a read on what we can glean about how the company is performing. The more quality contributors, the better.

I am also glad for the strong signal to noise ratio here. Policing the boards helps. off-topic jinbber jabber and one-liners still happen but at a way less freq. Let’s keep it up.

We need a motto or something.

Anyway, back to reading Saul’s feb port update. I paid $8 for airline wifi just to read it!

-muji
long MBD 6% (from 11%) and NET (from 0% to 10% since last Q)

… and currently several tens of thousands of feet above Missouri, please forgive the spelling

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An obvious motto would be “Better call Saul”. :slight_smile:

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Re;Question from muji

“Does anyone else love this game we play”

I certainly love the way you play it. I think your primer on how to evaluate changing circumstances is extremely useful.

As I have said before all your posts have been most helpful to me.

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Muji,
Like the way you framed it. Seems like ZS went from Tier 1 to Tier 3 in a hurry. Not so easy to predict these sorts of things. Only few months ago we were saying ZS had an amazing MOAT. Is a sure rule breaker (still is). Amazing glassdoor reviews (still has). It sported p/s over 40!
It will be great if we are able to identify these sorts of things earlier. ZS has been pretty much dead money for the last year.
MDB has had slowing sales too. But its stock has held up better. Maybe the “moat” of being general purpose DB.
What of ESTC. Should be Tier 1 surely.