I need some help and advice re some of my stocks

I need some help and advice. What I’m looking for is some thoughts to help me evaluate some of my stocks.

I have currently ten tech stocks. I’m very content with the top six. It’s the bottom three that I’m not sure what to do with: Build them up? Sell out of them and re-deploy the cash? Sell some and put the money into one of the others, or into some of my top six, or into something else entirely?

Here’s the situation. My top six positions run from 21% positions to 7% positions. I have a lot of confidence in them. Here’s a capsule of my top six:

Twilio – Massive growth and a Category Crusher. Last quarter Base Revenue up 77% and accelerating. Up in the high 60%’s even without the acquisition. Retention rate of 147%, and also accelerating. It doesn’t get any better.

Zscaler – Massive growth and a Category Crusher to come. Last quarter Revenue up 65% and accelerating. Billings up 74% and accelerating. Retention rate of 118%, which they say is held back because they are now making very large sell’s off the bat. Again, it doesn’t get any better.

Alteryx – Massive growth and a Category Crusher. Last quarter Revenue up 57% and accelerating. (Switched to ASC 606 which will make Revenue growth and earnings look even better). Retention rate of 132%. Powerful performance.

The Trade Desk - Massive growth and a Category Crusher to come. Last quarter Revenue up 56% and accelerating. Earnings up 102% from 54 cents to $1.09. Again, powerful.

Okta - Massive growth and a Category Crusher to come. Last quarter Subscription Revenue up 53% but slowing a little. Retention rate of 120%, and stable, but cash flow, gross margins, operating margins, net margins, all improving.

Elastic - Massive growth and a Category Crusher to come. Last quarter Revenue up 70%. Calculated Billings up 68%. Deferred Revenue up 73%. Powerful.

I basically have no worries about these six, and they make up almost 85% of my portfolio.

There also is Gardant Health, a biotech which is pioneering liquid (blood drawing) biopsies for cancer, and which is a 4.3% position, and which I feel is now a very positive risk-reward situation. I’m neither adding more, nor selling any.

Now we come to my question stocks: Coupa, Docusign, and Zuora. Together they make up 6% of my portfolio. These are all SaaS companies with easy to understand businesses, but ones that are growing more slowly than the ones above, and with questions (to me) about where they are going. Let’s start with Docusign:

Docusign dominates the field of digital signatures on documents and is expanding into trying to manage the entire business of preparing, signing, filing, etc. It’s easy to understand, as I said. Customers love what they do. Last quarter Revenue was up 37%, but up only 34%, excluding its acquisition, Subscription Revenue was up 38% and Billings was up 40% (and rising). Their Retention Rate was only 114% but they guided to 118% to 119% going forward (perhaps because they are hoping to upsell their customers with the new technology they just acquired in the acquisition). The stock has gone straight up the last nine weeks since I bought it. My question is, where does this business go from here. It’s hard to compare it with my top six which are growing by an average of over 60%. And to what extent has Docusign already become a stable slowing business? How much can they realistically add on each quarter? I’d appreciate knowledgeable opinions on this.

Coupa dominates the field of simplifying a company’s disbursements (spending and buying things), organizing this and watching for fraud, etc. It’s much more complex than you imagine when a customer has hundreds of offices and divisions. Coupa’s business is easy to understand, as I said, and it’s easy to see its attraction. Customers love what they do. Their Total Revenue and Subscription Revenue are both growing at 42%. However their Retention Rate is only 112%, (and that is higher than it’s been), I presume it’s because they usually sign up the whole company at once. Where does this nice little company go in the future? Any informed thoughts?

Zuora dominates the field of helping companies who sell things on a subscription basis to handle billing, revenue recognition, etc. It’s apparently much more complicated than you’d expect. Their most recent Total Revenue quarter was up just 33%, but that was because they had a bulge of service revenue last year because of ASC 606. Their Subscription Revenue was up 43% which sounds a lot better. Fifty percent of their revenue comes from tech companies like our SaaS companies that sell software on subscription, but they are moving into other verticals. Their Retention Rate was only 115%. They talk as if the whole retail world will be selling subscriptions soon, but I’m skeptical and it’s hard for me to see that their business is as general as Zscaler’s for instance. I’d love to hear your thoughts.

Looking at the three of them, they all look like good companies, and ones which will be successful in the future, but they just look like weaker versions of my top six, in unfortunately a lower category, with lower Revenue growth, lower Retention Rate (internal growth), and less room to grow in the future. I couldn’t see taking money from any one of my big six to add to one of these, at this time. Do you agree?

I’d like to find another company that would be in the top category and I high confidence company? Any suggestions?

Thanks for your help.

Saul

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Hi Saul-

Of your 3 question stock, I own DOCU.

I like DOCU, and think the transition to system of agreements is going to be the growth going forward. I am not adding to my DOCU position because I want to see them prove it first.

I want to see the growth rate and retention rate accelerate.

I’m not invested in ZUO because of the high service revenue with low margins, which brings the total revenue growth and margins down. I don’t separate and look at the subscription revenue separately, because the service revenue is required to support the subscription revenue. I also think the high subscription revenue is a sign of a complicated product , like Pivotal, it will always be there.

I like Coupa, and I know you don’t worry about valuation, but it is really expensive so I don’t want it at this price.

Stocks I like (in order) that I own and think have lot’s of potential.

ZEN

last 4 quarters of revenue growth

38–>39–>38–>41

*accelerating revenue growth (although only slightly)

  • improving margins
  • recently have added a bunch of new products, are moving upstream to bigger customers
  • ZEN is becoming a platform company, with other companies building products on top of their platform
  • recently added the longtime CFO of Amazon to it’s board
  • net expansion rate is 119, so about 1/2 of revenue growth from existing customers, 1/2 from new

PS

last 4 quarter of revenue growth

34%–>38%–>42%–>42

*accelerating revenue growth
*becoming the standard for corporate IT training

  • partnering with google, amzn, oracle, microsoft to provide their training to corporations
    *net expansion rate last 4 quarters, 120–>125–>127–>128

This message is getting long, so I won’t elaborate on the other 2 I like.

Team and Invitae

I also noticed you didn’t list SQ. I still like SQ as good as your top 6.

Jim

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Hi Saul

I didn’t notice SQ on the list did you sell out of your position.

Thanks
Angelo

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My gut feeling, DOCU is kind of baked in, almost a utility. Where’s the phenomenal growth? I own them but I’m thinking of trading for TTD, though I’m wary of advertising, or adding to ZS, OKTA. (Who doesn’t want better security?) I fear TTD may have a shorter run once they get the low hanging fruit.

But I really know nothing…

Perhaps I am wrong but I thought you sold out of Guardent Health or did you since buy back in?

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Saul,

Here’s how I look at it.

I agree that you want to be invested in the best companies. Your top six are great companies with great prospects. The other 3 have lower growth which until recent times would have been amazing. Times have changed so now we have companies growing 50-70%. What are the reason why you would want to own the slower growers?

Diversification? Well, the slower growers are in the same category as your faster growers so you’re not getting any sector diversification. They’re all SaaS companies. You’re just lowering your firm-specific risk. My opinion is that the value of putting 6% in these slower growers is not helping you to diversify significantly so I wouldn’t hold these companies at the expense of putting more into your faster growers.

Also, in what you wrote about your companies, you also mentioned a lot about your top 6 that suggests that you have more confidence in their market position/competitive positive than you do for the other three. Again, why would you keep the slower ones? I know they were try out positions for you. If they were accelerating their growth then maybe but you didn’t mention that they were accelerating.

I try to put my money in the faster growers provided that I believe that the growth will continue and provided that I don’t see any major issues that will be problematic for their business.

My allocations reflect that and are as follows:

TWLO: 20.6%
AYX: 20.0% (bought back a bunch after another great earnings)
SQ: 14.2%
MDB: 12.3%
ZS: 10.5% (added after a great earnings)
TTD: 9.7%
OKTA: 4.1% (added after a great earnings and price drop)
NKTR: 1.7%
ESTC: 0.5%
NTNX: 0.2%
cash: 6.4%

I have rewarded the fast growers be allocating more to them. I have not invested in DOCU, PLAN, and other SaaS companies that are growing in the 30-50% revenue growth range because I have the opportunity to invest in companies that are growing 50-70%. If I didn’t have that opportunity then companies growing 30-40% (if there were the best available choices) I would buy them.

SQ and MDB which you once owned and sold are also growing ~60%. These businesses and their financial results still look outstanding to me.

Chris

49 Likes

Looking at the three of them, they all look like good companies, and ones which will be successful in the future, but they just look like weaker versions of my top six, in unfortunately a lower category, with lower Revenue growth, lower Retention Rate (internal growth), and less room to grow in the future. I couldn’t see taking money from any one of my big six to add to one of these, at this time. Do you agree?

There is a “SMAR vs ZUO - Tinker Criteria” tread at the NPI. I voted for SMAR. The chart I included shows that Mr. Market agrees with me.

https://discussion.fool.com/smar-vs-zuo-tinker-criteria-34153599…

I’d like to find another company that would be in the top category and I high confidence company? Any suggestions?

I’m long DOCU and SMAR. My choice of top pick would be SMAR because I believe they are the ones that offer most value for the buck to enterprise. DOCU is OK but not necessarily a top pick until they master “Agreement Management.”

Denny Schlesinger

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This message is getting long, so I won’t elaborate on the other two I like: Team and Invitae.
Jimbo

Jimbo, Please DO ELABORATE on Team and Invitae.
I know nothing about Invitae. Has it been written up on the board? Or by Bert? Tell me something about it.
I invested briefly in Team some years ago, but I just couldn’t imagine how a company built on helping other companies have group collaborations was going to be a big hit. I guess I was wrong!
I did look at Pluralsight and saw it as in-between the top category and my second tier (with an expansion rate of 128 and revenue growth of 42%, but I couldn’t get excited about a company giving training courses to other businesses.

I also noticed you didn’t list SQ. I still like SQ as good as your top 6.

I still do have a 5% position in Square. I just didn’t consider it as a SaaS type company, but more as a fintech. I also don’t think of it as having as great a market to spread out into as the others, it has a high market cap already, and it would be much more vulnerable to an economic slowdown than the others would be. I also didn’t mention it as I didn’t want this to be about Square, but about the other questions I asked.

Thanks,

Saul

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Saul:

Seems you already answered your own question.

You have less confidence in at least 3 of your stocks and you have confidence in at least 6 others (I don’t get the GH myself…where is the impending product???..unless you are merely playing this for a buy-out…this one seems like a very long slog).

I know you dont like portfolio management threads but I do think there is some pretty good data on the risk reduction from diversification requiring only around 6 stocks…above that number didn’t seem to reduce risk that substantially.

So why would you feel the need to add these 3 minor plays anyway when you have total confidence in the other 6?

Both ESTC and OKTA are substantially off their highs and you have total confidence in them so…why must you have 10 again?

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You perhaps brought back in again Saul as I see from feb’s results that you did indeed exit your position and like me, watched it go from low 40’s to near 70 in a matter of weeks, unless as mentioned you brought back in again a few days later?

I have 2-3% positions in Docu, PS, Smar, Plan and Cvna and Sail(will sell shortly) that since Dec have done OK. Impressed with Docu from a personal point of view as can’t believe how easy this process is but bothered that they have all extremely confidential documents on their servers.

I believe I made a mistake in selling Shop and been waiting to get back in? Its now getting very difficult to find an AYX or MDB or OKTA in the low 20-mid 30 range.

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I agree that you want to be invested in the best companies. Your top six are great companies with great prospects. The other 3 have lower growth which until recent times would have been amazing. Times have changed so now we have companies growing 50-70%. What are the reason why you would want to own the slower growers?

Diversification? Well, the slower growers are in the same category as your faster growers so you’re not getting any sector diversification. They’re all SaaS companies. You’re just lowering your firm-specific risk. My opinion is that the value of putting 6% in these slower growers is not helping you to diversify significantly so I wouldn’t hold these companies at the expense of putting more into your faster growers.

Also, in what you wrote about your companies, you also mentioned a lot about your top 6 that suggests that you have more confidence in their market position/competitive positive than you do for the other three. Again, why would you keep the slower ones? I know they were try out positions for you. If they were accelerating their growth then maybe but you didn’t mention that they were accelerating.

Thanks Chris, that was very useful, and as you could tell, it was the direction my thoughts were moving in.

Saul

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I know you dont like portfolio management threads but I do think there is some pretty good data on the risk reduction from diversification requiring only around 6 stocks…above that number didn’t seem to reduce risk that substantially. So why would you feel the need to add these 3 minor plays anyway when you have total confidence in the other 6?

Both ESTC and OKTA are substantially off their highs and you have total confidence in them so…why must you have 10 again?

Hi Duma,
I sleep better at night with more than six. With six, the AVERAGE position is almost 17%.
Saul

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Perhaps I am wrong but I thought you sold out of Guardent Health or did you since buy back in?

Hi bran, I bought back in after they announced the results of their big study, even though the price had moved up a huge amount. I had sold out because if the study failed to reach its desired endpoints, the outcome of the other two things they were waiting for (FDA and Medicare general approval) seemed much less likely. Now they each seem like considerably better than 50%, so I’m back in with a 4.3% position.

I don’t get the GH myself…where is the impending product???..unless you are merely playing this for a buy-out…this one seems like a very long slog.

Hi duma, Perhaps you are thinking of another company. Gardant has a couple of very, very good products already out there, being used by biotech research companies, and EVEN getting Medicare reimbursement in part of the country for use with patients, even though it’s not yet approved by the FDA, simply because it is so good, so useful and so cost effective. I never have heard of Medicare approving something for reimbursement without FDA approval before, myself. Doesn’t mean it never happened. Granted, it’s still a speculation though.

Saul

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Hi Saul:

Re: ZOU

Management is from Salesforce.com (CRM). OKTA and VEEV have very successful investments; they have ex-CRM management. I’m hoping/expecting ZOU management can repeat their success to some degree.

ZOU reports March 21, 2019. My sense of the situation is that execution risk is very high. As far as what numbers to expect and how to interpret them, I’m relying somewhat on Bert.

FWIW, Goldman Sachs expect the company to miss on revenue and has a price target of $18.

Ross
Long OKTA, ZOU, and VEEV in that order
“Bet the jockey, not the horse.” — An old racetrack saying.

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Hi Duma,
I sleep better at night with more than six. With six, the AVERAGE position is almost 17%.
Saul

OK, I thought you said that the other three were only 6%, thus making the other 7 94% of your portfolio?

If you are contemplating some diversification away front these top heavy stocks, then perhaps this board could go back a summarize the fastest revenue growing stocks out there. But you do seem to be already highly concentrated at 94%.

Of the 3 you mentioned, I do like DOCU. It has become the standard of esignaturing and now a verb as such. The SOA is likely to be huge but it is NOT an overnight sensation, the sales cycle may be a bit longer. But DOCU isn’t going away anytime soon and still have a huge market in esignaturimng alone.

You like high revenue growth companies (>50% YoY revenue growth) here is a list of those that you do not seem to own at this time:

SMAR
MDB
SHOP

That list is pretty small…perhaps there are others, but this is rarified air. What others are there?

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Docu reminds me of VEEV. Solid performer with a big moat. Will provide good returns. I just don’t see either having AYX or TWLO type returns.

ZUO I wouldn’t touch. They just seem unnecessary to me.

COUP I haven’t looked at before but the growth rate looks right and the relative strength looks good. YTD is pretty outstanding. Whatever they are doing seems worthy.

Have you considered EVBG or SMAR.

EVBG growing 43%+ with virtually no competition in a mission critical SaaS field. 90% of revenue is contracted prior to quarter start. 95%+ of revenue is recurring subscription. Competition who?

https://www.g2crowd.com/products/everbridge/competitors/alte…

SMAR 59% rev growth. Market has taken to it with strong relative strength of late. Carving out a fairly dominant position in the project management space. The key is that they perform the collaboration and project management functions. Most competitors do one or the other. They are aiming to be the enterprise software where the day begins and ends with Smartsheet and everything in between. With other plugins from the other vendors like Salesforce, Docusign, Slack, Gmail, Zendesk, etc. Everything imports and works in the “sheet” so most everything in a work day is done in the Smartsheet app.

Darth

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Saul,

I think you should check out Smartsheet again. It’s growing faster than any of your 3 borderline positions.

Here’s a great write up Stocknovice did a couple months ago: https://discussion.fool.com/smartsheets-q3-update-smar-34083755…

Bear

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Oops, wrong link, though that one is good too. Here’s Stocknovice’s write up: https://discussion.fool.com/a-deeper-look-at-smartsheet-smar-341…

Bear

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Swift had a good post on Invitae.

https://discussion.fool.com/deep-dive-invitae-34140364.aspx?sort…

and here is the slides from the last earnings report.

https://ir.invitae.com/investor-relations/default.aspx

Here are my notes from the last earnings report.

The goal of Invitae (NVTA) is to bring genetic testing into mainstream medicine to help patients make informed health decisions.

In the future genetic testing will likely be provided to everyone.

Rev. 45.4 (+79%)
cost of goods (cost to run a sample) down to $243 (from $320 a year ago)(-24%)
Gross margin 53% (from 33%)

operating expenses $50 M (vs $43 M) ( up 16%)
cash burn of $17 M (they are working to reduce the cash burn)

  • making progress to profitability
    *rev up 79%, oper. exp. up only 16%
    *moving into new markets
    *guidance for $220 M for 2019 (up 50%)

They recently announced a secondary stock offering, the offering was oversold. The market didn’t mind, made an all time high Friday.

Team

write up from last October

https://discussion.fool.com/atlassian-team-34046083.aspx

since then one earnings release

Rev. $299 ( +39%)
g. m. 87% (vs 84%)
oper. margin 25% (vs 22%)
Fcf $122 M (up 41%)

Jim

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The stock symbol should be ZUO. I apologize.