Investing in Tech as a non-techie

[SaulR80683]

Investing in Tech as a non-techie

Over and over I have pointed out that I am not a techie, and I truly don’t understand exactly what a lot of our companies are actually doing. When muji wrote that great tech deep dive on Okta, I finally partially understood what Okta’s tech was doing, but I well realize that two weeks from now I will no longer remember what all those letters and terms mean.

What was important to me is what muji concluded:

Before now, I would have placed Okta in the IT/Security category… but after this exercise, I now realize that Okta seems unique in that it spans ALL these categories…. Okta is clearly intent on embedding itself deeper and deeper into the workflows of its customers. I will be keeping Okta in the “top tier” of my holdings until another company can prove itself more invaluable to businesses.

What was most important to me was that it confirmed what I had been able to conclude as a non-techie. In my personal conclusion to the Jan earnings that were released in March, after reading all through the conference call, I wrote (on that company document file that I wrote about to my daughter):

My Conclusion (Saul): They are much more than a sign in company now! Much, much, more!

I actually not only bolded the whole thing but underlined it as well! I want to emphasize that I didn’t understand WHAT they were doing or HOW it fit in, but I sure understood that it was a lot more than single-sign-in.

Then they announced the acquisition of Azuqua. I didn’t know what exactly Azuqua was adding, but I knew they were getting something that they valued a lot and were getting a team of talented people.

I had reduced my position a little bit because of my caution about their reduced rate of quarterly revenue growth from 58% to 50% sequentially. That was the “bad news”. In my March End of the Month Report, I wrote:

The good news is that it has become evident from the conference call and their recent acquisition that they do a lot more than smart sign in, more than I can understand, for sure, and hopefully their revenue growth will take off again.

Then came the Oktane conference and all those announcements of even more products.

Last week, the first week of this month, I bought back, at $84 or so, what I had sold after earnings. It closed yesterday at $92.65.

What can I conclude from all this? Well, a non-techie can make a lot of good decisions without understanding all the tech. In fact muji understands the tech on a level that I will never reach, but I somewhat mirrored his conclusions in that he had been prepared to move Okta back to a tier 2 position, but then he also came to realize that Okta was doing a lot more than he had realized, and was deeply imbedded in its clients’ businesses.

It also illustrates the negative side. Sometimes I just can’t understand what is going on at all. Nutanix is a good example, and I finally exited for good (I think). Another is Elastic, where I just don’t have the insight to feel comfortable about the implications of their “pure” open source business model. I felt the money was better off in companies like Mongo, that seems to be clearly trying to protect its business more actively, and Okta, Alteryx, etc.

Best,

Saul

[PDXFool23]

Saul,

One of your greatest traits is to recognize great companies. Even greater one is buy on the way up after you sold at lower price, something that is really difficult for many newbies, including me. I was walking to work yesterday morning and reading Muji’s write up which was phenomenal (yes, I know that I should not be reading while I walk but…) and was going to add to my small OKTA position as soon as I got to work. And then there was an upgrade so well and shares were over 5% up. And it held me back.

Reading your latest post reminded me of another one of yours that said if you want to own the company. Just buy the damn thing, that you ste not looking at 5% gain but for a triple.

This post is not a tech analysis but reminder to others like me. Do you like the company? Yes? Buy the damn thing!

I added to AYX at $39.50, it went down after that. I hated to see red in my account. Where is AYX today???

Thank you for continuing your generosity of sharing your thoughts and knowledge. Your letter to you daughter was remarkable. I sent it to my two older kids (23 and 26, they have different mom but I can’t call them stepkids) and will share it with my 8 year old twins when they are a little older.

Many thanks,
Natasha

[BobbyBe]

I echo these sentiments. I had sold out of Okta in March due to valuation concerns but just bought back in yesterday. I just couldn’t figure out why I would want to hold any shares of Okta if I could hold Zscaler, or Alteryx instead.

I’ve been starting to think of SaaS offerings in two categories. Business Apps and Business Utilities. Alteryx, MongoDB, Elastic, Twilio, Smartsheets, The Trade Desk…all of these companies offer business apps. You use their products as part of a work process to reach a desired goal. ZScaler and Okta are business utilities. They run in the background, like electricity, keeping everything running smoothly.

Saul’s 'Why this time is different" post expertly explains that the power in SaaS lies in recurring revenue, high switching costs, net expansion, and the colossal shift in IT spending towards the cloud. It seems to me that “business utility” type offerings capture this model slighter better than “business apps”. Businesses are going to “pay the okta and zscaler bill” in the same perfunctory way that we pay electric bills in our houses. We all COULD switch utility providers, but there really is no motivation. Security spending is much more consciously thought out because it is still mostly on site. The current situation, to use the previous analogy, is as if we had power plants in our own homes. If this were the situation, of course we would be shopping around! I don’t see many companies ever switching away from Okta and ZScaler once they are clients. With “business app” SaaS offerings, there is a greater threat of disruption. Companies will shift their spending as work processes evolve and new tools are developed. I think Saul has done a great job of picking up the present and future leaders, but just look at all the conversations that have been had about the competitive threats facing Elastic and Mongo and compare that to the conversations about competition facing Okta and ZScaler.

[Darthtaco]

Right on.

The one thing that is certain is that business apps will continue to proliferate among all businesses with increasing adoption of cloud products and SaaS.

Both Okta and ZScaler are solving critical needs for that inevitably. Pick and chose among the most promising apps, but Okta and ZS seem absolute no-brainers.

Darth

[TMFSaintCroix]

Saul’s 'Why this time is different" post expertly explains that the power in SaaS lies in recurring revenue, high switching costs, net expansion, and the colossal shift in IT spending towards the cloud.

Why are there high switching costs? It seems to me that for a lot of SaaS companies, the costs to switching are often fairly low. You don’t have that huge upfront cost like they did with installing software. I would think that subscribing is fairly easy. And thus unsubscribing is fairly easy, too.

This is where technological issues come in, and being a non-techie hurts us. It’s entirely possible that for some of these companies, there are high switching costs. For instance, if you’ve built something on Twilio or MongoDB or Elastic, and that “something” that you built only works on Twilio or MongoDB or Elastic, then switching would mean all that work is lost, or at least has to be re-done using the new technology.

But if there’s nothing built on the SaaS, if it’s just a service you subscribe to, then unsubscribing is as easy as subscribing was.

What this means (I think?) is that if somebody builds a better mousetrap in, say, cloud security, it’s actually relatively easy for companies to switch and try the new guy. Maybe I’m wrong on this. If so, please let me know. But my current understanding is SaaS makes switching your software out for something new a lot easier and less painful, not more.

[JoeChristmas]

his post is not a tech analysis but reminder to others like me. Do you like the company? Yes? Buy the damn thing!

Which is also why I’m long Elastic. The technology is phenomenal. Yes, there are issues on the business model. But at 2% of my total portfolio, whatever. I’ve been blown away with the use cases for Elastic, and I’m sure it’s going to continue to see massive, massive growth. But will its open source model allow it to capture the value of that massive growth? We’ll see… But at such a small percentage of my portfolio, I’m not really worried about it.

[Diablito]

I think the key here, though, is not simply to “like” the company. The key point I read out of Saul’s post is that he is confident now that Okta will most likely pick up their growth rate again; remember in Q4 yoy revenue growth was 50%, down from 57.6% in Q3, 58.3% in Q2, and 61.5% in Q1. That’s a trend we typically don’t like to see – and it has to be monitored going forward.

What has happened now, is that since Okta has expanded its product portfolio and by that also its TAM, they have much more growth ahead of them than previously expected by the market. That’s also why the stock price is up, the market is figuring this out.

I think that’s the essence of why this board enjoyed such astounding returns in the past. It’s not only finding the best companies in their little niche markets with hyper-growth, recurring revenue and operating leverage; it’s about finding companies that are on such a roll that they continously beat even elevated market expectations.

Okta guided for 33.7% full-year growth – obviously a low ball. According to CNN Money, the consensus estimate is 33.8% and the highest estimate is 36.6%. Those are the official numbers, of course, the market expects much higher growth. If you subscribe to Bert’s Ticker Target, he recently wrote a wonderful post about the analyst expectation game – very insightful. It’s hard to put a number on it, but from my gut feeling, everything below 45% growth for the full-year would actually be a big disappointment.

Let’s be real here: Okta got investors excited with the recent conference, rightly so I think. But they still have to deliver the numbers. I think the thesis that Okta will accelerate growth again, or at least stabilize in the high 40s or low 50s, is merited. It’s important to realize that that’s the thesis. It still has to play out, though.

Best
Niki

[thejusticier]

Saul:

Elastic has the growth you are looking for. So what we need is a deep dive in Elastic or an Elastic-ane to make you more confident about holding and buying more of this. There is surely a good story- technical and/or business wise out there. So let’s hear it.
To someone who wants to learn from you, I can’t really see the fundamental difference on how you are treating (now) OKTA or MDB on the one hand, and on the other ESTC. OKTA seemed to have a slight weakening of their growth (for many that would not even be a consideration: down to a mere 50% growth!?) but then you hear that the acquisition could ‘re-accelerate growth’ and you bought it back. All that occur in a matter of weeks or less.

The difference is some news or some event and how it is interpreted. On Mongo, you sold right after the news but you re-bought because the story about Amazon’s effect wasn’t ‘that bad or it would not go the way advertised initially’. For Elastic there hasn’t been a bad or a good news yet that makes the stock tumble, or rise sharply further. You bought ESTC because it had 70% growth. Why not, right? Since you took a position, you are waiting for some news to spur it up and it hasn’t happen…yet. You also don’t know if that news will be ‘good’ or ‘bad’. So you tempered your enthusiasm w.r.t. the other stocks that have had more positive validations. This validation comes in the form of positive stories or news but also in the stock price itself.
You are focus on the quarterly numbers and you would act mainly based on that but you are also looking for validation stories to make you more confident in holding such chunks.

I can understand why you don’t need to know what they are doing technically. You mainly rely on some people (‘techies’) who does. They can explain to you what they do but if that is good for the numbers or not is very very unclear. So that’s (understanding what they do technically) not a priority for you.

just trying to understand your approach…

tj

[SaulR80683]

Hi tj,

Your sarcasm is wonderfully humorous. I notice though, that you don’t EVER share what YOU do, or what YOUR results are, either long term or short term. You simply attack others. Certainly if you find my efforts to let others know what is going through my mind so laughable, you might be happier on another board which isn’t focussed on my approach.

Saul

[thejusticier]

it s not sarcasm. It’s just describing what you do in my words and asking if you think that is accurate.

tj

[thejusticier]

and Saul, I am not and don’t ever want to criticize but I want to ask questions. Sometimes I just need to say the things in my words.

I think this board is wonderful just as a counterpoint for the rest in MF world.

tj

[SaulR80683]

tj, if you read over what you wrote, you’ll have to admit that it sure sounds like sarcasm and ridicule.

As of right this minute, my silly methods (in your eyes) have resulted in quadrupling and a quarter more, of my portfolio (up 324.5%), in the last two years and less than four months. All of you on the board have profited and suffered with me through all the ups and down, and there were certainly downs too, and mistakes on my part, which I point out and acknowledge, and try to explain what I was thinking at the time. That’s all I can say about it.
Saul

[XMFBreakerForce]

Elastic has the growth you are looking for. So what we need is a deep dive in Elastic or an Elastic-ane to make you more confident about holding and buying more of this. There is surely a good story- technical and/or business wise out there. So let’s hear it.

Hi TJ,

Since you own shares of Elastic, why not take the initiative and do a little deep dive on Elastic yourself? Make your best case why you think we should all own shares in our portfolios. This helps us all become better investors. We each make our own decisions, and you dont have to agree or copy all of Saul’s moves. After all, there are many here who have had wonderful returns that included a variety of stocks. The entire purpose is to learn how to do it ourselves. Sure it’s nice when Saul also owns a stock you have and love, but it wont always work out that way. Same with the MF picks and Bert’s picks - you dont have to like them all and you only need a few to pay for year’s worth of subscriptions.

Fool on,
Matt

[Soludag]

Hi SaintCroix. You asked if SAAS made switching solutions easier. I’ve been on the selling & marketing side of software (ERP and Workforce Management products) and on the selection side of sales & marketing software for a few decades.

Well, for some applications, switching is much easier, but for other applications any switching is still a major undertaking.

Easy to switch, low-stickiness applications are probably single-user or single department systems that are not part of broader workflows or dataflows, are very easy to use and have few tasks to perform with few or easily-configured workflows. Selection and budgeting processes of applications for a single-user or small isolated department can be quick (assuming only basic or limited IT reviews are required).

High stickiness solutions might be those used by multiple departments, have many different tasks and user roles, multiple integrations and highly configured workflows and dataflows between departments and may have gone through significant IT security vetting. Switching out such an enterprise system is still a significant effort and usually only done after plenty of frustration with deficiencies in a current vendor’s product, development and support capabilities. In my experience most firms give existing suppliers plenty of opportunities to get their act together before pulling the plug and making a decision to seriously investigate alternatives. Most of the solutions discussed on this board are high stick solutions in my opinion. Any move to replace them would play out after many attempts to resolve issues and the selection and deployment of a replacement would likely take more than a year.

Follow the money: in my experience most enterprise SAAS contracts are actually multi-year contracts with annual payments while I think many single user or department-specific SAAS applications offer monthly or annual subscriptions – but most do not require a multi-year commitment.

Technology Plans and limited IT resources can impact stickiness. Many firms have multi-year technology plans in place and just getting an enterprise system reviewed and blessed by an IT department can take years. However, selections for some smaller less integrated solutions can often be led by the sponsoring user or department within a firm (for example a marketing department may sponsor and own the recommendation and deployment for marketing automation solutions), even though an IT department’s review and blessing is still required.

I mentioned that I believe most of the stocks discussed on this board would be difficult to switch. However, one exception that will be easy to switch out, in my opinion, is Zoom. I use Zoom now (and believe it’s the best available at this moment) but I’ve used many web conference/screen sharing solutions and have overseen switching our firm from one vendor to another. The evaluation and selection process were relatively easy, and the actual transition was probably the simplest application switch I’ve ever been a part of. Integrations are typically via established APIs and easy to perform. Web conferencing’s ease of transition is a blessing or curse depending on your relative competitive advantage.

And there is a question about the value proposition of Zoom vs Skype for Business, formerly Lync. I worked for a Microsoft partner, so SFB was free. Off and on between 2014-2017 we tried to get SFB to work consistently – but eventually gave up and instead used Join.me for 1:1 or small group conferencing. For my work we host multiple webinars per month and we’ve always had great experiences with GoToWebinar. I’ve not used Zoom for hosting webinars so can’t add any color to a competitive advantage or not.

[brittlerock]

SaintCroix,
Just adding to the info Soludag provided in his excellent reply to your question Why are there high switching costs?

I worked in IT at a Fortune 50 company for 30 years. For virtually my entire career I was engaged in systems development or transition of IT assets in one form or another.

Soludag mentioned that Zoom would entail very low switching costs. Any competitor who could offer a fully functional, easy to use product could turn it into a commodity marketplace where they primarily compete on price. There are two primary reasons for this:

One, Zoom is almost entirely externalized, by this I mean there is very little support required as the product is uncomplicated and easy to use. Resident experts may not be required as most departments will most likely have at least one “super-user” who will serve as the local go-to guy for assistance.

The other reason is that does not play a direct role in the production of anything. It is a facilitator, that’s a valuable role and I don’t mean to diminish it, but it does not hold captive business process flow information. It actually contains virtually no corporate data (other than user info and maybe the accounting info required to pay for it). Data conversion and process redesign which will both be required with any system that is embedded in the business process that has its own database (or in fact is a database like Mongo) will be sticky because of switching costs born by the functional users of the system, not the cost of the s/w. Before I retired I was involved with the implementation of dozens of such systems. Data cleanup and conversion, business process redesign, training (both user and IT), development of internal user support and vendor interface, and other similar costs far exceeded s/w acquisition cost.

[GauchoRico]

Soludag mentioned that Zoom would entail very low switching costs. Any competitor who could offer a fully functional, easy to use product could turn it into a commodity marketplace where they primarily compete on price. There are two primary reasons for this:

One, Zoom is almost entirely externalized, by this I mean there is very little support required as the product is uncomplicated and easy to use. Resident experts may not be required as most departments will most likely have at least one “super-user” who will serve as the local go-to guy for assistance.

The other reason is that does not play a direct role in the production of anything. It is a facilitator, that’s a valuable role and I don’t mean to diminish it, but it does not hold captive business process flow information. It actually contains virtually no corporate data (other than user info and maybe the accounting info required to pay for it). Data conversion and process redesign which will both be required with any system that is embedded in the business process that has its own database (or in fact is a database like Mongo) will be sticky because of switching costs born by the functional users of the system, not the cost of the s/w. Before I retired I was involved with the implementation of dozens of such systems. Data cleanup and conversion, business process redesign, training (both user and IT), development of internal user support and vendor interface, and other similar costs far exceeded s/w acquisition cost.

This is very true, IMO, and brittlerock nailed it on the head. When you look at OKTA and ZS they are tightly implemented into some of the customers’ core needs. They are very hard to replace and there is a lot of trust and confidence required. SQ offers a huge amount of benefit and it would be a big pain for a customer to switch away. Other companies that we own offer their customers varying degrees of benefit/value, are inserted a varying degrees of mission critical, and have varying degrees of switching pain. Also, depending on what is being provided, there are varying degrees of important toward trust/confidence. All of these factors make switching more difficult and vendor choice more important.

I would rank ZM on the lower end of my companies in this regard. This is because ZM is providing their customers a way to communicate via video conference. Switching may not be liked but it would not be that much of a pain to switch providers. Therefore, ZM must also have more value or customers may switch. ZM may also be more susceptible to switching due to pricing than the other companies. By other companies I mean ZS, OKTA (maybe the highest switching costs), MDB, TWLO, SQ, MDB, ETSC. All of these companies, IMO, will have an easier time keeping their customers from switching. This is due to implementation cost and because these products and services protect data, store data, touch proprietary information. SMAR might be more similar to ZM in that the customers will stay as long as the value is there.

But then there are the numbers. ZM’s revenue growth numbers are super amazing. Their market penetration is amazing. I will probably buy ZM for this reason alone but I would be more concerned about ZM’s future disruption than I would for my other companies.

Chris

[shikotus]

I too would love an Elastic explainer. I am a techie, but for the life of me I can’t understand what is so special about them. I can certainly articulate what worries me about them - it’s the thing that worries me about any search company that isn’t Google - it’s Google! Google leapfrogged and took over the search technology space many years ago, burying the likes of Yahoo, Altavista and many others in the dust, and everything seems to indicate that the gap between them and everyone else has only continued to widen since. Many have tried to take the crown - Microsoft, Amazon and many others poured millions of dollars into their own search technology. All have failed to make any any discernible dent in Google’s armor. Given that search (unlike say, social media) is not actually a “sticky” technology, that is downright incredible.

And Google, of course, is not just for internet search, either. You can get a Google appliance and stick it on your network, and power all your internal company searches with Google too.

Against that background it is very very hard for me to bet on another search-centric company without being convinced that they have found the kryptonite to Google’s Superman. If Elastic has done it, I’d certainly love to hear how.