If you are a growth investor

[Kingran]

If you are a growth investor understand the following:

- TAM has lot of pie-in-the-sky included
- Growth will slow; make sure your CAGR assumptions are achievable
- Current price often includes lots of optionality
- Rarely companies continue to "innovate", it is not everyday you can catch lightning in a bottle
- Don't confuse "bells and whistles" as "innovation"
- Often companies get comfortable with their first product
- Beware of companies that are buying revenue/ growth; 
- Beware of companies that are not buying other companies; Yeap successful companies add "products", "technology", at times even people 
through purchase; Not everyone can be Apple.
- Path to profitability is a must; Not every company is going to be Amazon
- Beware of companies that are growing revenues faster than customers (in the early phase certainly)
- Dual class shares means you are stuck with management
  - I was surprised to find a company with $10B valuation, the VC's controlled 30% of the voting because they controlled 50% of B class shares.  
- Mind the dilution, keep that in your valuation outlook
- Understand yourself, and accordingly invest; 
  - The growth stocks are volatile, meaning they can drop 50% on no news and remember at one point Amazon dropped 90%; 
  - When market turns bad or investors sour the drop can be brutal and quick
  - As my assets grew, it took me many years to not to view a simple 1% move as "there goes a lexus"
- If you cannot handle the volatility, then you will exit the stocks at the worst time
- Portfolio diversification is very important; 
  - concentrated portfolios require exceptional investing skill; 
  - If you are not a original thinker and copying someone else portfolio, you are not suited for concentrated portfolio
  - Understand your personal situations like saving for house, college tuition, looking at divorce all impacts concentrated portfolio 
  (separately a solid marriage is the best gift and investment you can ever make)

  
- Competition
  - Competition catches up; they make their existing solutions/ products adopt, copy critical features 
  - Companies rarely have a superior technology that cannot be replicated
  - When they cannot buy, they will copy you
  - Existing players will use their market dominance unfairly (Prime example MSFT, most of their successful products are copycat products)
  - Incremental solutions sell better than greenfield solutions 
  - The trailblazers spend tons of resources in developing the market; 
  - significant portion of that cost is sunk cost, meaning they cannot be converted to revenue in future
  - Competition benefits from your market development
  - Unlike pharma/ biotech, even HW companies, patent protection for SaaS companies are almost nil
  - Competition will steal your employees, there is nothing the company can do to stop it; 
  - Your biggest competitive differentiator walks out of the door everyday and it may or may not return next morning

- Our little secret about growth investing:
  - Before they all became public, these companies received money from VC’s
  - The VC's know about these companies, their products, management deeply than you; 
  - The VC’s, their clients, clients parents, neighbors, brother-in-laws, cocktail party friends all heard about this company, 
  - VC's and their clients got-in at the basement 
  - In many cases you are buying from the VC's
  - The investment banks that bring these companies to public know about these companies better than you; their clients buy at IPO prices
  - Remember you are buying from the investment banks clients too 
  - The employees, industry folks, partners, customers all know about these companies, and their potential
  - Often employees get their shares for no cost, yet they sell  
  - Remember you are buying from the employees too
  - So if you believe, you have found a magic sauce that nobody knew not really

This is not to dismiss growth investments as a fad, or a bad thing, or scare people, rather to help the investors to have a rational outlook and help them succeed in their investments.

Good luck.

[XMFBreakerTinker]

https://searchnetworking.techtarget.com/news/1520651/Next-ge…

Btw here is a 2010 article on NGFWs and tiny Palo Alto who pioneered them. Not so much different from FWs, and NGFWs are much more like FWs than like SWGs that Zscaler does.

In any event, from your thesis, big incumbent players like Cisco would simply expand their existing products, steal and recreate what they could, buy what they could not, and usurp the air right from out of tiny Palo Alto…

It is a hypothesis, but not proven by real world results and outcomes.

That is the thing, 90% or so of companies are not going to succeed greatly, but by creating a rule of thumb that all first mover competitive advantage dissipates so why even bother you by heuristic simply simply zero out that 10%…

I mean how easy is it to just not copy what Salesforce does? Siebel was much larger, much more established, far wealthier, and they even had the Oracle cloud to build on (after Oracle bought them) but yet funny how that never did happen.

Let me know who will just copy Word (I mean IBM for crying out loud at its peak could not compete with tiny old Microsoft), or Alteryx as a modern example, who is coming up to copy and usurp their first mover advantage? Okta? Mongo? Et al.

If you have a name, a reference, a number, let me know. Until then Amazon will kill Shopify and Twilio and Microsoft certainly won’t take Okta nor Zscaler sitting down…

I appreciate your comments, but generalities and heuristic cynicism destroys wealth (or at least creates enormous opportunity costs for those investments not taken just because 90% fail without making any distinction at all).

Btw/ you are correct, TAM is a fiction used mostly for marketing purposes by management to sell their shares. That is something we all should understand. But with that said, many times, the TAM has actually turned out to be much smaller than the actual results. Other times it is so exaggerated to be the equivalent of a blatant lie. But again, distinction is the key, not general exclusion out of systematic cynicism.

Distinction. Presently Roku is a controversially business. Do they really have a sustainable competitive advantage? Seems they and TCL are tied at the hip, and TCL may be producing what are almost disruptive picture quality at the price and rapidly moving up marketshare in the United States. Is that partnership alone enough to at least warrant some thought that Amazon is not just going to buy up TV companies or just give its product away and thus kill off Roku?

That is for another discussion. My point is: distinction. Not all drunk people are drunks. Not all pit bulls are vicious. Well, all beagles are stinkers…but again that is a distinction specific to a beagle.

Tinker

[Kingran]

from your thesis, big incumbent players like Cisco would simply expand their existing products, steal and recreate what they could,… It is a hypothesis, but not proven by real world results and outcomes.

Let me just take MSFT as an example…

• MSFT was not the dominant word processor; MSWord is the copy cat
• MSFT was not the dominant spreadsheet; Excel is a copy cat product
• MSFT was not the dominant networking software; Novell was
• MSFT was not the dominant LDAP; Active Directory is a copy cat
• MSFT was not the dominant browser; Netscape was; IE is a copy cat
• MSFT is not the dominant SW collaboration tool;SLACK is; MS Teams is a copy cat… watch out SLACK

Oh since you love cisco…

The list of companies that cisco acquired (or the companies that never realized their potential)… BTW they never bought companies that starts with x, y or Z.

https://www.cisco.com/c/en/us/about/corporate-strategy-offic…

That is the thing, 90% or so of companies are not going to succeed greatly, but by creating a rule of thumb that all first mover competitive advantage dissipates so why even bother you by heuristic simply simply zero out that 10%…

Like a skilled lawyer, you are trying to reframe the argument… All I am saying is beware and understand the failure rate is 90%;

It is entirely separate conversation what kind of valuation should be assigned to something that has 10% success rate… I am not even going there.

Let me know who will just copy Word (I mean IBM for crying out loud at its peak could not compete with tiny old Microsoft)

May be I am older… it is Lotus notes who dominated before word… Remember word started a year after lotus notes (then lotus corporation which was acquired by IBM). Office suit success is the playbook for how dominant players should abuse their market share.

PS: One has to wonder how much MSFT benefited from the anti-trust laws dilution during Reagan era.

Microsoft certainly won’t take Okta

It is too early… ADFS is a formidable offering, I would not be so quick to count MSFT out.

I appreciate your comments, but generalities and heuristic cynicism destroys wealth

Ah you are polite. The survivor bias is strong. No one remembers, counts the capital destroyed in WebVan… While you acknowledge there is a 90% failure rate, are you counting the wealth destroyed on those failures?, just asking, and yet attempting to reframe the argument.

Nothing is shameful than repeating what is already said… but then one has to set the record straight. I am not saying you should not make risky bets. Just be aware of it.

many times, the TAM has actually turned out to be much smaller than the actual results

Really? Have you ever looked in to any statistics? Please don’t confuse subsequent product additions, new innovations, technology or companies bought… Also remember the survivor bias here.

My point is: distinction.

Actually you are making a poor argument. A better argument is, the companies that succeed generate wild profits, that far outweigh the ones that fail. If you believe somehow you can differentiate what will eventually succeed and what will fail… yeah, you need a process but that alone doesn’t guarantee success… the world is complicated, there are innumerous variables that can impact the outcome…

[ajm101]

“it is Lotus notes who dominated before word”

I think Lotus 1-2-3 was was Excel copied. Lotus notes was closer to a precursor to email. WordPerfect was the dominant word processor prior to Word.

All your points on growth companies were great, particularly “Our little secret about growth investing”. I think the history of independent PC software companies like Novell and Corel is instructive for the relationship between SaaS and PaaS companies.

Also, this not direct at you Kingran, but totally unrelated and only to correct some incorrect statements here: a firewall is not necessarily an physical piece of hardware and hasn’t been for more than a decade. iptables is 20 years old, pfsense is 15 years old and they can run virtually. Next-generation firewalls aren’t necessarily hardware either, and they are much more interesting. I don’t think Zscaler is nearly as revolutionary as people here think it is. I’ve been in software R&D for about as long as iptables has been around. I would be happy to be convinced otherwise, but nothing anyone has written about it here has done so yet. It might be the single riskiest stock I’ve ever heard of.

[XMFBreakerTinker]

Webvan? That is your counter example?

Sorry, but too many examples. How the heck did Amazon not destroy Ahopify or Cisco Palo Alto?

Nothing to see here, no way to pick winners…oh that is right no one here ever invested in Webvan and a lot us did in SHOP,
And early on. I went 50% shop when it’s marketcap was $4 billion and terribly overvalued.

This forum is about examining growth companies. Individual growth companies and identifying and investing in those distinct businesses that do succeed.

You know like Palo Alto did (btw had a 26x price to sale multiple before quadrupling) despite Cisco using its size and muscle to imitate, copy, steal, and use its influence to remove their competitive advantage. Seems $3 billion in deferred revenue may say otherwise.

This forum is about rejecting Webvan and investing in Palo Alto in 2”12 or 2013, SHOP in 2015, Alteryx in 2017/2018.

It is not about avoiding future winners because of systematic heuristic objection to anything that grows due to them being minnows and easily co-opted by theirarger betters.

In fact, and I thought we agreed on this, a first mover category dominator in a non-commodity business is very rarely defeated by the larger incumbents. And that is even more so when they are faced with an innovator’s dilemma (such as not able to give up selling hardware - or to be able to price like an open source competitor).

No, Microsoft is not going to knock Okta off. No Cisco is not going to knock Palo Alto off. It will be extremely surprising if Palo will in turn knock Zscaler off given that Palo Alto has gone gung ho into its appliance strategy w bolt on cloud at edge where you can’t put appliances anyways.

But transformation is hard, and who knows how resistant to change the market will be.

Tinker

[Kingran]

Nothing to see here, no way to pick winners…oh that is right no one here ever invested in Webvan and a lot us did in SHOP

Hmmm…

Tinker, you have the crystal ball or you have the great skill to find the winners whatever buddy…

Good Luck.

[XMFBreakerTinker]

I don’t think Zscaler is nearly as revolutionary as people here think it is. I’ve been in software R&D for about as long as iptables has been around. I would be happy to be convinced otherwise, but nothing anyone has written about it here has done so yet. It might be the single riskiest stock I’ve ever heard of.

I heard it from engineers that CDMA was too difficult to implement and that its advantages were not worth the trouble anyways. I then heard it from laparoscopic surgeons that ISRG DaVinci robot produced no better results and they therefore would not use it and cannot see the product selling.

I can point you to Palo Alto outright lying that Zscaler “breaks” 365 when Zscaler is the recommended security by Microsoft for 365, not Palo Alto. Palo Alto stating at earnings call that Zscaler “is” the competition. I can also point it out by customer results (as that is all the customer cares about in the end) are transformative and disruptive. And not just the little guys. GE went totally Zscaler. Made the internet their network. Got rid of their appliances. So did Siemens, as another example of a huge company doing the same.

I can also point you to the fact that Palo Alto is not doing what Zscaler does with their cloud deployments. Their cloud deployments are extensions from their appliances and are meant to sell more appliances by keeping customers happy on the edge where appliances don’t belong. I can give many details of the inferior performance and that it is not even an imitation Zscaler network. Had many discussions on this topic and much deep digging by many folks.

I cannot tell if Zscaler, as an investment will work out. It’s business will work out, but well enough to make a great investment, who knows. But I can tell you there is a lot more to this than some IP addresses and spinning off some virtual machines into AWS.

We all do it, we have to. In this case however, that heuristic instinct is wrong, at least from a technological and product outcome perspective, both from performance and cost, which are both disruptive to the industry, and yeah, creates an utterly enormous innovator’s dilemma.

It is this sort of rule of thumb that enables Palo Alto to spit out rhetoric and have insider engineers, use to working with NGFWs an FWs (mostly delivered by hardware, with virtual machine spin offs) go yeah, who does Zscaler think they are. NGFWs and their appliance delivery method “is” security.

If not for such doubt there would not be an opportunity for a good investment. If there is no fear, and its best when it comes from this rule of thumb insider perspective sort of thing, then the investment opportunity is probably not worth pursuing.

I’m not advocating Zscaler, I am just stating that you guys do not understand what Zscaler is doing and Palo Alto is doing and that the two are not equal, not even close. It is the incumbent paradigm, given some more utility by virtual machines on the edge vs. the disruptive or at least insurgent paradigm that has no need to give anything more utility to extend the life of its technological paradigm.

The usual argument is that pure cloud wins every time. To date that appears to have held up. We’ve even argued that as a possible weakness for Alteryx. Maybe it will or maybe it won’t in security, but it does seem inevitable in the end. It is how long it takes and whether or not virtual machines spun in the cloud will satisfy the market or not.

But good back and forth, but it is clear that facts and investigation are being pitted against bias and rule of thumb by technological insiders use to working with what they worked with. See my first paragraph.

Give me an example of someone doing what Zscaler does with the same outcomes and that is a start. The rest is heuristic speculation. Hypothesis - but no facts to test it against. Palo Alto cannot do so because they do not have a product that is doing something with the same outcomes from a client benefit perspective.

Tinker

[Kingran]

I think Lotus 1-2-3 was was Excel copied.
Lotus 123 is first release in 1983, Excel is released in 87. It is all long-time I could be wrong but certainly 123 is released before Excel.

WordPerfect was the dominant word processor prior to Word.

That’s true. My first word processor was ‘wordstar’.

I don’t think Zscaler is nearly as revolutionary as people here think it is. I’ve been in software R&D for about as long as iptables has been around. I would be happy to be convinced otherwise, but nothing anyone has written about it here has done so yet.

I have tried to make the same argument, I guess I am not successful. Frankly, it doesn’t matter. I could be wrong, I think ZS success is more tied to the migration of applications to the cloud. That’s beyond the control of the company and that will dictate the growth of the company.

In all probability someone is going to delete this post, so at least we are not leaving any digital trail… LOL

[XMFBreakerTinker]

Tinker, you have the crystal ball or you have the great skill to find the winners whatever buddy…

Good Luck.

It is conversations like this that caused me to start my own forum. Kingran, let us know the successful investing advice you have given through the years here other than to criticize and cycnicize the purpose of this board.

It does not take a crystal ball. Gee, is Saul just lucky to, with a crystal ball?

Whatever buddy…how condescending.

I asked for one real world example to support your hypothesis. Didn’t get one.

Enough on this topic unless someone has a real world example and not pure speculation based upon rule of thumb information that is not even actionable.

Tinker

[Kingran]

I can point you to Palo Alto outright lying that Zscaler “breaks” 365

I think I posted the actual white paper from ZS. ZS basically skips inspecting 365 traffic because if they have to inspect, ZS proxy architecture will end up breaking 0365.

You could spin this all you want but the fact is today ZS is not inspecting 0365 traffic.

I’m not advocating Zscaler, I am just stating that you guys do not understand what Zscaler is doing…
But good back and forth, but it is clear that facts and investigation are being pitted against bias and rule of thumb by technological insiders

Tinker, you have a right to your opinion and not to your facts. By your own admission 90% of the companies don’t succeed. That’s not a rule of thumb, that is fact, statistics. My original post is not about ZS at all, it is about generic growth investing. You are confusing a generic statement with a specific investment.

Your obsession with ZS is either you are truly passionate about their technology or you have invested large enough sums, that it has to succeed.

In either case, I wish you good luck.

[buynholdisdead]

Kingran,

Your obsession with ZS is either you are truly passionate about their technology or you have invested large enough sums, that it has to succeed.

This is a weak argument and is an ad Hominem attack. There is no reason to stoop that low and isn’t welcome on this board. Once you go in this direction it only proves you have already lost.

Andy

[Kingran]

This is a weak argument and is an ad Hominem attack

Not at all. If you go back and read the original post it has nothing to do with ZS. Who brought ZS into this conversation? And I haven’t even attacked him, I just made an observation given that in all the conversation somehow Tinker has managed to veer into ZS. There is no personal attack on that. I genuinely wish him luck. Please note, I am not even saying ZS will succeed or fail, all I am saying some of the assumptions are questionable. That’s all.

If you want an example of personal attack, go back and look for posts that calls other posters as know-nothing, nonsense, idiot, etc. Oh BTW, those posts are not deleted, so you should be able to find them.

[buynholdisdead]

Not at all. If you go back and read the original post it has nothing to do with ZS. Who brought ZS into this conversation? And I haven’t even attacked him, I just made an observation given that in all the conversation somehow Tinker has managed to veer into ZS. There is no personal attack on that. I genuinely wish him luck. Please note, I am not even saying ZS will succeed or fail, all I am saying some of the assumptions are questionable. That’s all.

I could care less what you say about ZS or any other stock. But when you state that someone is only defending a stock because they must have a lot of money invested in it, that sir is an ad Hominem attack.

If you want an example of personal attack, go back and look for posts that calls other posters as know-nothing, nonsense, idiot, etc. Oh BTW, those posts are not deleted, so you should be able to find them.

This has nothing to do with what we are talking about here. If for some reason you were denigrated or belittled in the past, you have my sympathy. But that doesn’t give you the right to do the same.

Andy

[12x]

Kingran, do you have any growth stock suggestions or are you just here to lecture everyone on the pitfalls of growth investing and negative commentary on stocks discussed here?

Nobody here wonders if growth investing is a fad. It’s a term that T Rowe price and others used in the thirties. Price himself having significantly outperformed the market for decades using this “growth investing” methodology.

[Locke]

Not at all. If you go back and read the original post it has nothing to do with ZS. Who brought ZS into this conversation?

Tinker did, and he was completely right to do so because he was trying to focus on what this board is about: Discussing individual growth stocks and in the process separate the wheat from the chaff. Or tuning in to the 10% signal through the noise if you will.

All we can do is trying to find the best of breed-companies and invest in those. Only time will tell if they work out as great investments.

But if you have an actionable alternative to this approach then please share.

In the meantime, let’s stick to the rules: That means no personal attacks and sarcasm directed towards other contributors to this board. Thanks to Andy for also pointing that out

Benjamin
(Assistant Board Manager)

[SaulR80683]

Kingran,
Your whole purpose in life seems to be to attack what we are doing, and to tell us that our growth stock investing is a waste of time and sure to lose, as if you can’t stand our success. That seems to be the focus of almost all of your posts. You try to antagonize. If you don’t like growth stocks, go post on a board for value stocks. No one is forcing you to suffer here, and nothing gives you the right to come here to try to ridicule what we are doing. The focus of this board is analyzing and discussing high growth stocks, and we have had enormous success with it. If it’s not your thing, go somewhere else. You don’t have to hang around here and attack everything we do. If you insist on continuing I will simply delete your posts.
Saul

[drillerjim101]

Kingran,

When you begrudge fellow posters, you come across as petty and jealous.

Give us something positive that will both enlighten and be financially beneficial to all of us.

Thank you,

Jim

[nilvest]

wow… Kingran, your post seems like legal warning e.g.
“consumption of alcohol can be injurious to health…”
“Investing in growth stocks could be dangerous for your wealth”

Its like saying playing football is dangerous, look at all statistics… and even those who are successful football players, they have short career span and they lose all their earnings soon because they are not trained to retain money…
and ofcourse they sustain concussion and can really be bad for rest of their life…

Look - all that is true… and yet still people watch football, bet on it and ofcourse play as well… and it still huge part of society…

Kingran, imagine yourself as guest spectator invited to watch training session where Patriots or pick your favorite team is training or drafting or something like that…
Would you walk up to that gathering and start lecturing Tom Brady or whoever the key guys there on all the cautions or disadvantages of professional football or being professional athlete?
If not, why would you come on this board and keep bombarding motherly cautions to world class growth investors like Saul and Tinker and so on when all they are trying to do is discuss growth companies among fellow growth investors…
(BTW - this analogy applies even if you think group of people on this board are not top class like Patriots but at the bottom of NFL league… it is still NFL… professional athlete of some sort… this is not high school team where basics need to be taught).

Kingran, There is nothing wrong with your caution… this is just not place for it. Please find appropriate audience and place where your help can be impactful. You are wasting your time and energy here and forcing other people to do so as well.

[SaulR80683]

This should be an off-board email. It doesn’t belong on the board.
Saul