I was going to post this question to you in a separate thread, but after reading your post here, I think this is the right place.
I have followed this board for a few months now, but haven’t posted on it until now. Also, I read through all of the knowledge base (which is an amazing read for anyone, but settle in for a a while).
My question for you is what is your current perspective on profitability and valuations like PE? From your knowledge base, you speak multiple times in PART I about a “reasonable PE”. Then in PART III you discuss the graphing of your stocks on a weekly basis, and doing this for price and earnings (again discussing PE).
So my question is this: today, your investments all have negative earnings. Have you changed your mind on the importance of profitability and a reasonable PE from years ago when you wrote most of the knowledge base?
I am not trying to pry or say you’re wrong. I am merely seeing a bit of a disconnect in the knowledge base (call it your founding principles) and your current portfolio. The knowledge base appears to include profitability or PE in your criteria, but your current portfolio does not.
I’m guessing that if your investments have all of the things you outline in this thread (rapid revenue growth, moat, recurring revenue, and good $ based retention rates, improving metrics, strong balance sheet, founder-led, not high customer concentrations) that perhaps you are willing to look past lack of profitability. Is there a difference in how you look at a NTNX or AYX (where profitability is still 2+ years out) vs. something like a TWLO/SQ/SHOP that is essentially turning the corner to profitability now or in the near future?
I happily own a few companies that are not profitable (SQ/PVTL/TSLA/SHOP) so it’s not that I am against investing in companies with no earnings. However, I have struggled with some of these companies where profitability is still years away. And after fully reading through the Knowledge Base, I thought it reasonable to ask you to weigh in on this.
Thank you for organizing your thoughts so coherently. Honestly, from someone who works in corporate finance, your criteria is not dissimilar to how venture capitalists and other capital partners structure their investment theses.
Declaring and adjusting investment philosophies is a smart way to drive selection discipline and ultimately optimize ROI.
There are lots of equity/capital partners who pursue SAAS models given the compounding nature of their reliable recurring revenues and the scale those businesses can achieve based on that lower volatility around annual revenues.
I totally agree with others that your summary should be part of an investor’s core reference base!
As others have stated Saul. Thanks for all you have done for us and the knowledge that you freely share. It’s all there. Detailed, yet concise with a human modesty to boot. However, your biggest gift and not something that one can easily teach is the selling or trimming of a Company that has given you some very nice profits(and could still do so but you tend not to look back) but using that cash to invest in what you consider undervalued or totally miss-understood or under-appreciated other stocks that have more room to run and run fast in hopefully the shortest period of time. Not to mention having no emotion whatsoever with past Companies, successful or not and again taking the cash to possibly increase your positions in conviction stocks.
This takes years of experience and a gut instinct. My level out of 10 used to be around a three. Would say its now a 6/7 but still learning. A small example. About one year ago was fairly sure that SMG(Scotts Miracle Gro had a good place in the pot field with their accessories and hydroponics subsidiary Hawthorne. In January this year, I took the loss around $3500.00 and added to NTNX which has paid off substantially.
SMG could well be the future when legislation is passed here and medical and recreational is legal but it could takes years and it was just dead money and a steadily declining stock price. The main point I am making is that I haven’t given this Company one days lost sleep or kicked myself for losing money. I moved on and this I learnt from you and others on this board. Won’t always work out the way you want it to, but this lesson has to come from within.
For me Saul has given a massive sense of timing. For instance, cognex, a stock I bellive will perform well But in 2 years time. Why would I put money in it now, when instead I can put money in it in 1 and a half years and get similar gains?
Same with Disney, I’m sure it will leap significantly when the streaming service hits next year, but why invest in it now, when I can make more gains elsewhere during this time.
Thanks Saul and forum! You are the best!
P.S I no longer think 100k or 1m is out of reach within my life, without creating a personal business!!!
Rags to riches, good luck and keen senses to everyone! Let’s keep crowdsourcing the hell out of the market!
First, most of my stocks start with a recommendation and write-up by someone I have a lot of confidence in. This could be someone on the board, Bert, Motley Fool, or more rarely a write-up by someone else on Seeking Alpha.
Reminds me of a quote from Isaac Newton: “If I have seen further it is by standing on the shoulders of Giants.”
Standing on the shoulders of giants
The metaphor of dwarfs standing on the shoulders of giants (Latin: nanos gigantum humeris insidentes) expresses the meaning of “discovering truth by building on previous discoveries”. This concept has been traced to the 12th century, attributed to Bernard of Chartres. Its most familiar expression in English is by Isaac Newton in 1675: “If I have seen further it is by standing on the shoulders of Giants.”
Which non-MF writers do you follow besides Bert Hochfeld? I’m surprised you follow very few within MF.
You say some of my current stocks I moved into because I perceived that they were misunderstood by the market. I made the exact same move with Twilio (logic was that Uber was de-risking / diminishing dependence on a 3rd party for a core capability, not abandoning Twilio due to bad product), but I also thought “could I really be so right as a beginning amateur and the smart money so wrong?” so I bought a 1/6 position rather than 1/3 (and never added). Big mistake. Thoughts/advice to avoid repeating that? I’ve since improved, but slowly and I suspect there’s more improvement to be had.
This now 5-year old post of @SaulR80683’s rightly got over 200 rec’s. Some people feel Saul and others of us here have failed to adapt to the changing environment. I agree that in 2021 I didn’t know what to do. Everything was expensive…I still kind of think there was nowhere to turn…I mean we saw index funds drop 20% and 30% and more in 2022. Sure, you could have picked the perfect companies like Axon or Enphase that were actually up in 2022, but those were few and far between…I don’t think anyone made much money last year…we could have stemmed our losses better, but it was just a bad year for everyone. And in 2023 there are some companies performing phenomenally that I haven’t caught – but that’s nothing special. That will always be the case every year.
We all make many mistakes. That will happen every year too. Does that mean we should throw out the entire playbook? Come up with a style that’s brand new? Personally I believe a lot of Saul’s wisdom from 5 years ago still applies. Let’s examine:
No one talks about this, but I think it’s important. We don’t use screeners, or search penny stocks to find ideas. There are thousands of companies and then there’s crypto and etfs and bonds and all manner of things in which one can invest. We look for companies that are doing something special. Not “tickers.” More on the “special” below.
I mean, this will always be the north star. I know some look for value even in companies that aren’t growing. This is much, much harder in my experience. The price you pay is always an important part of any investment, but with a value investment, price is everything. With a company that’s growing and becoming more and more valuable, you have more margin for error.
This is another overlooked point. We’re not just looking for “SaaS” or software or tech or cloud. We’re looking for companies that are doing something special within these, and other areas. I still know little about the solar boom or the electric vehicle boom, but I can see that Enphase and Aehr have carved out niches. We’ll see going forward how they benefit from them.
Recurring revenue, as Saul says, is so important. But this is an interesting point on which we’re willing to be open minded – in other words, it’s not only subscription revenue, but anything that’s bought over and over. Example: I recently bought a look-see position (less than 1%) in Celsius, the energy drink. Is that recurring revenue? Well, kinda…it’s a consumable. They don’t have to find new customers to keep their sales at the same level as last quarter – they just need Celsius customers to continue to consume the same amount each month.
This is yet another underrated point. Sure, it’s been hard to find companies with improving metrics recently, but we can see the difference between the severe deterioration of SentinelOne’s numbers and something like Samsara. This can take some digging. Revenue growth isn’t exploding for many companies, but as one example, check out the last 5 quarters of net new $100k+ customers for Samsara:
…that’s a rapidly improving metric!
This we can be flexible on (it’s down at 6th for a reason), and in fact, I’m going to push back on this ever so slightly. Yes, I believe that the NRR is great if it’s 120-130 (at least in rapid growth times). Of course it’s nice when customers are spending more each year. However, I believe this can actually be a hazard if it’s in the 150+ range. That means sooooo much of the growth is coming from customers spending tons more each year, and there’s a limit to how long that can go on. In general, I’m down on consumption businesses…they’re great if they can drive revenue for customers, but if they’re a cost, I mean customers’ spend can only increase so much year after year. Once you get to a critical mass of customers (where the vast majority of your revenue is coming from already-ramped-up customers), consumption-based revenue can be a real headwind if customers find ways to spend less, or at least not spend more.
It’s so important to remember that asset-light companies in non-cyclical industries are free from at least some risks that other companies bear. Obviously we don’t limit ourselves to software companies only, but when we get into other areas, we need to be cognizant of the risk. This is one reason I’m not tempted by anything related to banking.
A lot of people believe (or try to sound like) they can pivot and predict every macro event and environment, or at least adapt to it seamlessly. It’s not true. This doesn’t mean we should stick our heads in the sand, but it does mean that we have to say maybe a lot. Maybe we can adapt to macro to our benefit (it’s also possible we could adapt wrongly and hurt ourselves). But “maybe” goes beyond macro…knowing what we don’t know is so important. Can we figure out which companies will benefit from AI? Maybe. Has it already been priced in? Maybe. Are we now in a bull market? Maybe. Does that mean our companies will do well? Maybe. I like how Saul doesn’t try to know the unknowable when it comes to external forces (macro). Focusing on companies makes sense, because their performance is measurable, and if they continue to do well long term, it usually works out for investors.
I like to revisit old posts like this sometimes, and I’m always thinking about what we do right and how we can improve. I’ve learned a lot from Saul and this board over the years, and I don’t want to forget these lessons.
Thank you, Bear for sharing your unique thoughts in such a great post.
Especially your thoughts on NRR are thought-provoking.
It feels so natural to think that more is always better with NRR, and in many cases, it is (like, customers either really love or need the product, use cases (demand) are growing, and the pressure to win new logos is smaller).
What is often over-looked, and tbh, I never really thought about it the way you did, is the high dependency of revenue growth on existing customers spending more and hence, having a company that’s more prone to cost optimization than many others. Additionally, the Sales (expansion) effort for NRR is probably also underestimated. We all know it’s an effort to win new customers, but esp. in tough times it’s equally hard to get existing customers to expand.
Personally, I think it’s fine to own consumption-based businesses with such a high NRR, if:
They have a very large TAM + runway to grow, and
New customer pipeline is healthy and contributes to growth and runway, and
The investor doesn’t mind sticking through optimization times owning such a stock (not blindly, ofc), and
The said investor is aware of the trade-offs of such a high NRR that you just pointed out - thanks again for bringing this thought up!
Thank you to Bear and Lisa for sharing your insights on this, dare I say relatively timeless post that encapsulates what Saul has so selflessly shared with us all.
The foundation of the post provides excellent metrics for those interested in creating their own personal investing checklist on Excel, etc.
Specifically, regarding Samsara (IOT), for which I am a shareholder, I have a bit of a concern about IOT’s revenue mix being comprised of 2/3 hardware and 1/3 software. I cannot help but compare IOT to another company that many of us on Saul’s board were invested a few years back, Alteryx (AYX). AYX had a revenue mix also comprised of hardware and software that the company worked to get off their financial statements, and yet IOT has a far larger mix of hardware than AYX did.
Although to the best of my knowledge, IOT does not have a consumption-based revenue model, it is not user based, rather it is priced based on the number of individual assets that are monitored daily, monthly and on an ongoing basis all year long. I would assume there is no or very limited “optimizing” of the assets that are monitored. To plagiarize Lisa’s point regarding investing in not being concerned about investing in user-based businesses with NRR, IOT has a
-Very large tam + runway to grow (which IOT has) and
New customer pipeline is healthy and contributes to growth and runway (which IOT has) and
-The investor (me) doesn’t mind sticking through optimization times owning such a stock (which has not happened to IOT due to their ROI and payback period of months value proposition)
-The said investor is aware of the trade-offs of such a high NRR as Bear pointed out
Guessing others may share this concern re hardware revenue concentration. How do you and others feel about the revenue concentration of IOT’s hardware?
Where did you see this? Samsara’s TTM revenue is $714m and their ARR is $856m. Seems like pretty much all their revenue is recurring. It’s possible they could lease the hardware, but otherwise I don’t see any way their revenue could be 2/3 hardware and 1/3 software.
It was Aehr Testing (AEHR) that I confused with Samsara (IOT). I received this information from the William Blair Growth Stock Conference on 6/7/23 when I posted about the interview/presentation given by AEHR’s CEO Gayn Erickson.
In fact 2/3 of AEHR’s revenue comes from the equipment (testers and aligners) and 1/3 of the revenue comes from the consumable (die/cartridge) as stated by AEHR’s CEO.
That said, please substitute AEHR in lieu of IOT for the question referenced in my post earlier this afternoon. Again, I apologize for the confusion.
1/3 of revenue recurring? That is actually more than I thought. Although yes, 2/3 is not.
I guess you have to realize this will not have a SaaS-type floor. If growth is just gonna be 30% or 40% YoY then I would say AEHR is overvalued. But I think the growth might be exploding to much higher rates.
And it’s already profitable, so that helps.
As you know, it’s a ~7% position for me. That’s about the most I can go, until we see the next report. There is some risk, as always, but I think the upside could be worth it.