I’ve given thought to this. That’s not to say my thinking is correct, only that I’ve spent time thinking on it. Here’s what I came up with.
First, let’s briefly look at why they are experiencing such phenomenal growth. I won’t dwell on it as Saul and others have discussed this at length, but in a nutshell, virtually every company of more than a few employees (and even a lot of one man shops) is becoming dependent upon and embedded with IT components. And it’s just a lot easier to get your infrastructure from a cloud provider than build it on campus. Even if a company already has a large investment in IT infrastructure, there’s enormous pressure to off-load the administration and maintenance of that environment to as a large an extent as possible. Every company has certain functions largely in common. These are the functions that software companies have been addressing for years prior to the ubiquity of the web. ERP, Finance, Inventory, Sales & Marketing, etc. But with the web and the dissolution of corporate boundaries, more and more systems are moving to the cloud. What remains on campus are certain applications that the corporation does not feel comfortable off-loading, or applications that are so specialized that they are not commercially available, or if there is a product, it is very niche focused.
OK, that’s not the whole ballgame, but close enough. On to what might bring things to a close. There are three things that potentially could bring to a close the incredible growth we are seeing with our best cloud focused, subscription based companies, they are: 1) commoditization, 2) disruption and 3) saturation. I am not going to describe those forces. But we can quickly look at the likelihood of them impinging on our investments. I’ll pick Zscaler as an example, I’ll leave it to others to evaluate your own holdings with respect to these risks.
Zscaler is operating in an environment with next to no competition. And based on their scale and what I assume is a healthy patent portfolio the more subscriptions they sell, the stronger their competitive position gets. To be honest, I just don’t view commoditization as a significant risk. Can Zscaler be disrupted? Zscaler is already disrupting the security business for data in motion. Their business case is not just that firewalls and appliances are expensive, and inhibit the user experience, they are becoming increasingly ineffective. Companies with a big investment in security h/w are not going to ditch all that stuff right away, but they will be forced to eventually because, as noted, it just won’t do the job any longer. I’m loath to say Zscaler can’t be disrupted, who knows? But, with 30 years of IT experience (rapidly growing stale since I retired), I’ll go out on a limb and say it’s not very likely. It’s hard to imagine how they could be disrupted, but I guess that’s pretty much always true with any product until the disrupter shows up. That brings us to saturation, which in my estimation is the biggest threat to many of our favorites. There will come a day when these products are so ubiquitous that the demand will taper. True, these companies will continue to have good revenues as the subscription model provides revenue ad infinitum, but the growth will reach the top of the S curve. Unless they develop new, disruptive products they will eventually succumb to saturation. But, we are still in the early innings. I think saturation is years off, maybe as much as 10 years for some of these products. Could be even more for Mongo.
Like I said, I could be wrong, and I welcome other opinions, but that’s how I see it.