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:
91
92
124
124
138
…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.
Bear