Investing in Great companies

My very working class family has doubled our net worth Feb 2018 to Feb 2019 and I feel safer with the investment choices than ever thanks to everyone who contributes to this amazing forum. The following is why I feel safer and measure of some of the great companies discussed here. I’m so grateful I’m embarrassed to ask for more; but, please see the ten or so question/comments I’ve added to the quantitative part below and comment if you will.

I see Moat consisting of more than the typical (network effect, significant cost to enter market, patents, brand); but, it can also include: (in no particular order at this point)

  1. being Founder Lead (not just their habits of transparency, execution (eg. Agile’s velocity) but also his/her ability to communicate during CC’s. Reasonableness of c suite stated vision of how to execute and for potential of optionality/growth adjacent
    2)SAM/TAM, not only from the CC’s given by the Co. but when researched in trade magazines; market penetration %. Is it growing, growth adjacent.
    3)Dollar Based Retention rate (revenue and bookings); now more often expressed as Annualized Recurring Revenue
    4)CAP measured by: growing market share, Gardner Leader/magic quadrant, Net Promoter score, adoption rates by developers (tags in software engineering forums), number of competitors and how well healed/ motivated / how well staffed with expertise etc.; developer fan base (fanaticism of product users within customer organization); self on-boarding.
    5)level of product integration into customers infrastructure/processes
    6)level of disruption to current market paradigm/first mover advantage
    7)asset light/software defined/cloudified/AI benefited - in current paradigm shift in way of doing business and where in the S-curve of technological adoption for the particular sector being applied.
    8)Then there’s the numbers are they predictably accelerating toward more growth/FCF/Profits what are their margins and how well will they be able to sustain margins.

And then when to buy is: relative to other companies with equal or greater confidence in the above (Moat).
I used to trim and add based on FUD/hidden growth/momentum but i believe the market is more wise to these companies than in the past as am I and therefore there is less of this and I only trim/add when confidence levels change as measured here.

So for each company I’ll score each of the above 8 measures of Moat: (1-5) When to buy: (1-5)
To arrive at a confidence level (45 being the best company to invest in)
TWLO my allocation at present is 16%
1: 5
2: 5
3: 5
4: 5
5: 5
6: 5
7: 5
8: 5- this isn’t as clear as other companies; however, as Saul once said,’mark ups by telecoms appear to be properly measured as pass through’.
Moat Total: 40
How much more weighted should it be due to short term market conditions x current subjective risk appetite? 1 = 41

AYX 17%
1:5
2:5
3:5
4:5
5:4- Anyone have an argument for difficulty of replacing if disruptor comes along?
6:5
7:5
8:5

Total Moat: 39
How much more weighted should it be due to short term market conditions x current subjective risk appetite? 1= 40

Zs 12%
1:5
2:5
3:5
4:3- my understanding is that the on-boarding is difficult, right?
5:5
6:5
7:5
8:5

Total Moat: 39
Is it a Buy relative to those with similar Moat (how much more weighted should it be due to short term market conditions x current subjective risk appetite ?) 3= 42

OKTA 12%
1:5
2:5
3:5
4:5-no code plug in software looks like the future.
5:4-this looks to becoming foundational in the development of others sw stacks
6:4
7:5
8:5
Total Moat: 38
Is it a Buy relative to those with similar Moat (how much more weighted should it be due to short term market conditions x current subjective risk appetite ?) 1= 39

TTD 11%
1:5
2:5
3:3- 85% is low relatively speaking- I’m comparing relative to the others here.
4:3- not sure of the transparency of their product for the ad agency customers.
5:2- what’s the difficulty in removing this product if/when a disruptor comes along?
6:5
7:5
8:5

Total Moat: 33
How much more weighted should it be due to short term market conditions (FUD) x current subjective risk appetite? 3= 36

MDB 11%
1:5- I’d give optionality an 8 if executing on it.
2:5
3:5
4:5
5:5
6:5
7:5
8:3-without execution of adjacent possible may never be as profitable relatively

Total Moat: 38
How much more weighted should it be due to short term market conditions x current subjective risk appetite? 3= 41

SMAR 6.5%
1:5
2:5
3:5
4:4-I do understand that their’s is a platform and not just a spreadsheet in the cloud, I intend to follow its stickiness.
5:4-once tons of work are on their platform it would be ridiculous to transfer it, right?
6:5
7:5
8:4
Total Moat:37
How much more weighted should it be due to short term market conditions x current subjective risk appetite? 2= 39

SQ 5%
1:5
2:5
3:5
4:5
5:3- I do believe the ecosystem is getting more sticky; there a great deal of competition, perhaps?
6:4
7:5
8:5
Total Moat: 37
Is it a Buy relative to those with similar Moat (how much more weighted should it be due to short term market conditions x current subjective risk appetite? 4= 41

ESTC 4.5%
1:5 - per Muji’s fat pitch, ESTC is executing on its available optionality extremely well.
2:5
3:5
4:5
5:5
6:5
7:5
8:5

Total Moat: 40
Is it a Buy relative to those with similar Moat (how much more weighted should it be due to short term market conditions x current subjective risk appetite)? 3 = 43

CLDR 2%
1:3
2:5 - per Bert they have Enterprise solution platform from Data ingestion to the edge
3:4
4:3
5:3
6:2
7:4
8:3
Total Moat: 27
How much more overweight should it be due to short term market conditions (what’s the market missing) x current subjective risk appetite? 4(merger is ahead of schedule) = 3

So the numbers are telling me I’m waiting for a turn around in market sentiment toward CLDR and then looking to add ESTC when that happens?

These numbers could also be saying to sell CLDR now and buy more ESTC immediately?

Thanks again for all the help in my sleeping a night and enjoying this adventure more than ever!

Jason

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excellent post… thanks for sharing W

Jason –

Very interesting post. There’s a clear logic to your process and all the categories you’ve come up with are relevant to these companies. The only question I would ask is what are your criteria for the 1-5 grades within each category? The way I see it that’s ultimately where you will end up separating your companies. For example, you have:

3)Dollar Based Retention rate (revenue and bookings); now more often expressed as Annualized Recurring Revenue

MDB and SQ both get a grade of 5. Looking quickly, 94.3% of MDB’s revenues come from subscription with a reported expansion rate of 120%+ for 16 straight quarters. On the other hand SQ – which has multiple revenue streams – gets 44.8% of its revenues from subscription and doesn’t report any type of retention rate as far as I know. Relatively speaking, that looks to me like two companies that deserve different grades within this category. If I had to guess, say 5 for MDB and more like a 2 or 3 or SQ? Likewise, would a company like TTD who gets virtually no subscription revenues and relies more on volume than any type of cohort expansion be your baseline for a 1? (Please note that I don’t really have any specific criteria here myself. I’m just mentally riffing.)

Or:

6)level of disruption to current market paradigm/first mover advantage

AYX, ZS and SMAR all get grades of 5. AYX has repeatedly stated they aren’t seeing much competition in either use cases or the contracts they are trying to land. ZS appears to be one of a kind as well. Both would seem to be reasonable candidates for a 5.

On the other hand, SMAR’s advantages seem to be more niche related. They’ve done a nice job as a work management tool outside of IT. However, TEAM (with Jira) dominates the IT space. PLAN does something similar in the financial planning space. COUP seems to be the collaboration leader in the procurement space. SMAR just acquired a company named 10,000 feet for more exposure to the marketing and professional space. Even Smartsheet itself lists a lot of competition: https://publish.smartsheet.com/66705777144142c5ba304da9839e2…. While they might have some first mover advantage in a specific niche, it appears they will not only run into overlap fairly quickly as they grow but might also be a tick behind depending on the use cases they are trying to address. That seems like SMAR deserves a lower grade in this category, at least in my opinion.

I know that doesn’t answer all your questions, but those are a couple of quick points I’d raise for discussion. There aren’t a ton of companies in your sample and they are all excellent in their own way, so there admittedly might not be many 1’s or 2’s. However, the criteria you use in separating grades 3 through 5 will clearly matter as you continue to run companies through this screen. They might not all end up with a final group of scattered numbers like your CLDR example, but I’d eventually expect more differentiation and fewer companies pulling down a slew of 5’s as you continue to flesh this out.

One of the benefits I’ve found on these boards is learning from the thought processes of others. I think this is another great example of that. I’d be curious to see how this list evolves and adjusts as you go. Thanks for posting it.

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Oops, should have read near the bottom of last post. (In regards to the obvious inaccuracy you so kindly pointed out) I was ‘not’ as careful as could be to eliminate confirmation bias.

I needed to have included the word ‘not’ in that sentence. Please forgive the inaccuracies for the basic effort in trying to quantify confidence.

Thanks again,

Jason

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