Company Market Cap
Smartsheet 5.3b
Elastic 5.8b
MongoDB 8.3b
Alteryx 9.5b
Twilio 17.8b
The Trade Desk 11.1b
Square 26.5b
Zscaler 9.1b
Anaplan 7.5b
Pinterest 18.3b
Crowdstrike
7 Likes
Company Market Cap
Smartsheet 5.3b
Elastic 5.8b
MongoDB 8.3b
Alteryx 9.5b
Twilio 17.8b
The Trade Desk 11.1b
Square 26.5b
Zscaler 9.1b
Anaplan 7.5b
Pinterest 18.3b
Crowdstrike 17.2b
Sorry, I didn’t mean to post that without comment. Finger fumble.
Here’s the deal. These companies will have various “end states.” I’m not smart enough to know what they are. But based on the size of revenues now, gross margins, operating expense trends, and revenue growth rates, I value them differently. In my opinion, it’s not really a science.
Here are the market caps I can imagine these businesses reaching in the next few years. I may be way off – Chris said something yesterday that makes me want to reiterate: these are guesses. Don’t look at them with a high degree of confidence. Still, it makes sense to think about where these businesses are heading.
Company Market Cap
Smartsheet 20b (4x)
Elastic 30b (5x)
MongoDB 50b (6x)
Alteryx 50b (5x)
Twilio 50b (2.5x)
The Trade Desk 50b (4x)
Square 100b (4x)
Zscaler 50b (5x)
Anaplan 20b (3x)
Pinterest 50b (2.5x)
Crowdstrike 25b (2x)
Maybe I’m dead wrong about where these businesses will start to slow down – maybe I’m underestimating, or overestimating, their near term potential. Maybe some will flame out a la Talend or Nutanix or 2U. Maybe some will become 200b businesses or more. But I think this is my best guess. In parentheses, you can see what this implies for growth from here. This is why I like Elastic and Mongo so much more than Crowdstrike or Twilio right now. So much more room to grow (in my opinion).
Again, perhaps I need to be severely corrected…but I think this is worth discussing. If anyone sees the path for Crowdstike to become a 100b company, well, then I’m thinking about it wrong.
Thanks,
Bear
73 Likes
Again, perhaps I need to be severely corrected…but I think this is worth discussing. If anyone sees the path for Crowdstike to become a 100b company, well, then I’m thinking about it wrong.
Is Shopify missing here because many others don’t own it(after selling out?) Who would have thought 2 years ago or so that it would now have a 45 billion evaluation(probably was less than the 15B mark then) and could easily double from here?
I hear what you are saying, but doesn’t necessarily mean that it will happen. Yet it sure can, be it at an evaluation of 5B or 25B as of today…depends on your time horizon and your conviction.
Shopify
end of Aug 2016 $42.00
end of Aug 2017 $110.00
end of Aug 2018 $145.00
Today 2019 $407.00
17 Likes
This is basically how I decide if a company still has appreciation potential, but only if I want to buy stock in it first. For example, I cannot determine if SMAR is truly differentiated enough from Atlassian. Since I cannot do that, I don’t buy SMAR stock nor do I care to pick a guess as to what it’s terminal market cap could be. Nor would I just buy one because these figures showed it could appreciate the most.
As for Shopify, I read an article about them here on TMF saying they could be a $100 billion company, which did make a lot of sense. Because they are in a huge industry with very little competition. Now when they get to $50 billion or $100 billion or whatever you could always revisit that.
But $100 billion, while impressive, is not earth shattering. Consider Adobe is over $100 billion and their main business was founded upon the PDF document. Who would have thought the PDF document could create a $100 billion business? I probably wouldn’t have guessed it. So these guesstimates may be useless and my next thought would be to not even value them. But using this approach, I too found CRWD and ZM to be all out too expensive compared to alternatives, based on Mkt cap/opportunity. Now I could be wrong so I may revise this approach as time goes on depending on how CRWD and ZM do.
As I said $100 billion is not earth shattering. Adobe is there, CRM is too. And Splunk could even get there in time? They could just start growing 25% a year for the next 5 years, who knows.
But with your list I could see MDB and TTD being much, much bigger than you show, due to the markets they are in. TTD is in a HUGE industry of advertising. There is a lot of unstructured data out there, much more so than structured, so MDB could be in an industry bigger than Oracle, depending on how much value organizatins decide that unstructured data is worth.
23 Likes
Maybe I’m dead wrong about where these businesses will start to slow down – maybe I’m underestimating, or overestimating, their near term potential. Maybe some will flame out a la Talend or Nutanix or 2U. Maybe some will become 200b businesses or more. But I think this is my best guess. In parentheses, you can see what this implies for growth from here. This is why I like Elastic and Mongo so much more than Crowdstrike or Twilio right now. So much more room to grow (in my opinion).
Again, perhaps I need to be severely corrected…but I think this is worth discussing. If anyone sees the path for Crowdstike to become a 100b company, well, then I’m thinking about it wrong.
Yeah, market cap is important but more important in relation to TAM. It’s a quick and dirty gauge to guesstimate how much growth might been available in the future. But I think further analysis is required. Think about how each company might get there. But before, I go there, I want to point out that acquisitions cause market cap to go up without necessarily increasing the company’s stock price. For example, when TWLO bought SendGrid, the market cap took a big jump without the share price.
So from where is the growth going to come? Each company should be examined individually as the growth drivers are going to vary company to company. Probably the biggest factors for me are the following:
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How fast have revenues been growing in the recent past? If it’s been growing faster that’s better.
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Has revenue growth been accelerating, decelerating, or stable. Accelerating is best but we must be careful to understand any reasons or explanations to make adjustments to make sure comparisons are apples to apples or other reasons for changing rates.
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How much room for future growth is there? Is the market saturated? Is it disrupting, getting disrupted, or going after greenfield opportunities? This relates to market cap to TAM.
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Do the numbers match the story/management commentary? This is a big one. When ZS and AYX management say that they’re just scratching the surface of the opportunity and they don’t see any meaningful competition AND then the business growth and other metrics are amazing…that’s golden. When management is rah-rah and then the results are not that amazing (e.g. TTD (slowing growth) and TWLO (longer time to get Flex going and longer time to get synergies from SendGrid) in recent reports) my confidence in the stock drops a bit.
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Market (TAM) growth is important. This makes companies like MDB, ZS, and CRWD more attractive.
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How is the company’s competitive position? Are they competing for every order or are customers coming to them? Do the results support this view? If margins are high and stable/growing then this is a good sign. AYX saying that they have no competition and then it’s backed up by consistent GMs >90% and accelerating growth is a great sign.
There are other things to examine but my main point is that there are many factors to consider and they are not always the same factors across companies. I think it’s more of an art than science to finally decide which companies should be owned and what the allocations of each should be.
Chris
58 Likes
Just a few thoughts on this.
Just for a moment, let’s assume the growth rate of the companies is the same (pick a number) and the TAM is the same (pick a number), those with lower market caps will tend to appreciate more quickly. However, that isn’t the real world. Both TAM and growth rates along with many other components will materially differ amongst companies.
Secondly, by jettisoning those with larger market caps, one may be missing out on a great opportunity to do nothing and watch returns increase significantly over time simply by being in a great business. While I may trim some before the next time they release earnings, Shopify is a current candidate for doing nothing. Yes, I do think the valuation is incredibly rich currently. But it won’t be forever.
Thirdly, I believe Twilio has an enormous opportunity ahead of them in transitioning traditional call centers to their platform. How many businesses need call centers? Tons of them. If Twilio has the right offering that can save money while improving efficiency, that amounts to a very large opportunity. Not to mention the other communication paradigms they may be able to disrupt in the process.
Finally, simply focusing on market caps requires portfolio turnover once a company is too large. This assumes you can find the next stock poised to become a great business. Saul wrote just today or yesterday about not being able to find bargains as the rest of the world has caught up to us. I couldn’t agree more and have been saying that for some time as well. It is going to be tougher and tougher to find the next great business at a great valuation. Why would one jettison a stock they feel can grow much larger simply because the market cap is too big already for one that may have more question marks? If the growth rate of the business feels like it is in tact, then why toss it to the wayside?
To summarize, I agree that market cap is important. With the same confidence between two companies, I’d choose the lower valued company, but that doesn’t summarize all of the decisioning that takes place at all. There are just too many other factors involved.
Sorry to ramble a bit.
A.J.
13 Likes
12x: But $100 billion, while impressive, is not earth shattering. Consider Adobe is over $100 billion and their main business was founded upon the PDF document. Who would have thought the PDF document could create a $100 billion business?
Nitpicking.
Adobe first created PostScript, a page description language, in the early 1980s and it quickly became the industry-standard printer language. Then Type 1 digital fonts. Then Illustrator in the mid-80s. Then their flagship software, Photoshop, in 1989.
The PDF didn’t come along until 1993 with the introduction of Adobe Acrobat and Reader.
12 Likes
While I wish that some magic metric would allow me to invest in companies that I needed to pay no attention to for 4+ years, experience shows that there is no magic. One company will be growing like crazy and then something will happen … possibly even something that had been mentioned, but dismissed … and there will be a sudden change in prospects. Meanwhile, some other company that had good, but less exciting prospects, will get everything right and grow like a weed … or a weed company! All these assessments are sensible to do … but none of them should be used in isolation and many of them are not best suited to reduction to a number because there is too much “color” in the background of that color. 'Tain’t easy folks!
6 Likes
Consider Adobe is over $100 billion and their main business was founded upon the PDF document.
Not discounting the importance of the PDF and Adobe: https://en.wikipedia.org/wiki/History_of_the_Portable_Docume…
However, I strongly believe that Adobe’s main business was founded in the earlier stages of the personal computing revolution, approx. 1985, and that main business was founded upon PageMaker, desktop publishing software. I may need to be fact checked, but I believe today the lion’s share of Adobe’s revenue comes from their Creative business segment.
Regardless, I completely understand the primary point of your argument.
1 Like
hmcproperties: However, I strongly believe that Adobe’s main business was founded in the earlier stages of the personal computing revolution, approx. 1985, and that main business was founded upon PageMaker, desktop publishing software.
Sorry, nitpicking again.
PageMaker was a failure. The King of desktop publishing/page layout was QuarkXpress, owning well over 90% of the publishing/advertising/design market. PageMaker repeatedly tried unsuccessfully to dethrone QuarkXpress but it was a clumsy, inelegant piece of software.
Long story short, Apple had some OS issues and Quark believed that sales for Macs were declining anyway and started releasing updates for Windows before releasing updates for Macs – even though most of the publishing/advertising/design world used Macs. Quark also made upgrading a severe and expensive headache… and had a “if you don’t like our software go find something else, ha-ha, good luck” attitude.
With InDesign 1.0, Adobe finally got their software right and before long users could do things in InDesign that they’d been begging Quark to make available for years. Deadline focused production folks liked it and creatives loved it. Typography and layout were handled way better. And InDesign quickly dethroned QuarkXpress. Today, InDesign owns the page layout, publishing/advertising/design market. They are the King. No one uses QuarkXpress anymore. Well, virtually no one.
3 Likes
Yeah, market cap is important but more important in relation to TAM. It’s a quick and dirty gauge to guesstimate how much growth might been available in the future.
This is exactly the point of the "S curve, you cannot grow big in a small market so TAM matters. In addition, the “S” curves shows how growth typically happens. The slow initial phase negates the idea of “getting in early” and the slow late phase the idea of hanging on.
The idea of putting a number on the final size leads to static thinking while growth is very much a dynamic happening. The best time to invest for growth is during the company’s prime growth stage. As a rule of thumb that’s between 15 and 85% market penetration by the whole industry, not just by the company you are looking at.
Above I highlight for growth because there are specialists who invest early, venture capitalists, and late, dividend investors, neither of which is addressed by Saul’s methods.
Then there is the 50% drop which recently happened to an NPI/Saul darling
NVDA: https://softwaretimes.com/pics/nvda-08-28-2019.gif
Nvidia’s story has not changed and an investor like Philip Fisher would have held on. The above chart also follows the Gartner Hype Cycle
https://upload.wikimedia.org/wikipedia/commons/thumb/9/94/Ga…
My point is that stocks are dynamic and it makes little sense to put price goals on them. Analysts and their clients love targets because they don’t see the whole dynamic picture. As GauchoChris stresses, “I want to point out that acquisitions…” M&A also affects growth as do new product/business lines as is the case with Apple (computers, consumer electronics, stores) and Nvidia (gaming, crypto currency, AI, supercomputers, self-driving cars). These new product/business lines can increase TAM dramatically adding “S” curve on top of “S” curve.
We have to accept the realities of complex system that cannot be reduced to a number the way classical economics reduces everything to a single point of equilibrium. That’s not how the world works.
Denny Schlesinger
26 Likes
Adobe first created PostScript, a page description language, in the early 1980s and it quickly became the industry-standard printer language. Then Type 1 digital fonts. Then Illustrator in the mid-80s. Then their flagship software, Photoshop, in 1989.
Another example of “S” curve on top of “S” curve driven by new product lines and also by acquisitions, they bought out Macromedia:
On December 12, 2005, Adobe acquired its main rival, Macromedia, in a stock swap valued at about $3.4 billion, adding ColdFusion, Contribute, Captivate, Adobe Connect (formerly Macromedia Breeze), Director, Dreamweaver, Fireworks, Flash, FlashPaper, Flex, FreeHand, HomeSite, JRun, Presenter, and Authorware to Adobe’s product line.
https://en.wikipedia.org/wiki/Adobe_Inc.#History
Denny Schlesinger
2 Likes
Thanks for reminding of the history of Adobe and its product development and acquistion curve. They killed it (in the past) because
- Postscript became the standard for highspeed printing / fonts that large financial services cos needed (TAM+)
- Photoshop became ths standard for digital publishing development (TAM+)
- ColdFusion was at one point one of the main web/application server technology platforms (TAM+)
- Dreamweaver was another type of solution like that and popular
- Flash obviously became the video development solution until several years ago - it’s been passed by HTML5 etc etc and has security flaws to the point that Chrome is disallowing it next year and has been blocking it by default for a couple of years now
which leads me to a thought… is Adobe now a reasonable shorting opportunity as the milk from the old cow begins to dry up? PDF solutions are now highly competitive and micro-priced. Hmmm
1 Like
Not that I totally disagree with your analysis, but suggesting that company A might grow to 4x current cap is meaningless without expressing a time frame. And when I see one analyst or another suggesting that some company might be a great 10 year investment, I must pause and wonder where and when did the acquire that crystal ball.
Like Saul, I make an investment with the plan of never selling, but then I re-evaluate just about every quarter. One bad quarter generally does cause me to pull the sell trigger is there’s a reasonable explanation from management, but I do start paying closer attention.
At present, I hold 12 positions, all but one would be considered “Saul” stocks (the outlier is in the marijuana business). Half of those are 10% or more of portfolio. I have varying degrees of confidence and that is reflected by the size of the position. For example ZM is at about 3%. I think it’s a good, well managed rapidly growing company, but I would also say I’m kind of going along for the ride. I don’t see anything about their offering that can’t be rather easily copied. Maybe I’m stupid and fail to realize how difficult it would be to come up with a better/cheaper mousetrap, but that’s the way I see it. It wouldn’t take much for me to sell that position and put the money to work elsewhere, irrespective of how much growth potential might remain in their market cap. On the other side of the coin MDB is better than 14% of my portfolio. So far as I’m concerned they already dominate the No-SQL document DBMS market which has ever growing data types that demand organization and management coupled with ever expanding use cases. It would take quite a serious reversal to shake my confidence in Mongo’s potential.
So what do I pay the most attention to? Easy answer: moat, TAM, revenue growth, margins and retention rate. Yeah, of course I consider growth in customer base, product innovations/introductions, and myriad other factors including intangibles like management speak.
And I pay a lot of attention to the commentary on this board. Aside from Saul, there’s enormous brain power and experience to be found here that far exceeds my own. I don’t emulate anyone in particular, but I pay close attention to quite few folks who post here (Bear being one of them).
So, thanks for the perspective. I don’t find this specific post to be very compelling, but I appreciate the thought that went into it and the openness to share and invite commentary.
12 Likes
Very interesting thread. I think a key factor in these companies potential valuation is the culture of the company and their ability to innovate into adjacencies.
Look at the nitpicking over Adobe. The company added new lines of business so well and was so agile that it achieved a huge market cap. For people who came along later in the company’s life, they didn’t even realize the roots of the company. I have heard that the culture at Adobe is top notch from friends. On Glassdoor, it has a 4.2 rating and 86% recommend the place. I don’t know if this measures the right thing, but it is interesting to me.
Many “Saul stocks” also have strong ratings on Glassdoor (e.g., Twilio at 80% recommend and 4.1 rating) which I find interesting.
So what I am interested in assessing is can the company effectively exploit adjacencies. There aren’t many product categories where a single category can generate 20-30 billion in revenue annually. So to reach a hundred billion valuation, you really need to have multiple product categories.
My thoughts on this…
Rob
2 Likes