Is this a compelling entry point for INST?

Investment Analysis Clubs Saul’s Investing Discussions
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Started to post as a reply to another thread (http://discussion.fool.com/Message.asp?mid=33137775) but this is likely to go a little bit outside that topic alone and may be useful to others who wouldn’t be reading that thread.

I looked at adding INST to my portfolio about 10 days ago, but decided to wait until earnings. Now that recent earnings are known and share price has fallen accordingly, anyone want to comment on a few more things that have me paused on entering INST even at this lower price?

  • No longer founder-owned. One left operational role for family (medical) issues – understandable; the other was, I suppose, a “time to get a real CEO” move (??), which may also be OK in the grand scheme.
  • Revenue growth decreasing last 4 quarters
  • Many other competitors in the marketplace (Blackboard probably being the most well-known)
  • Increasing income losses QoQ w/ most recent earnings, and guiding for lower than expected (thus, the stock price drop into the high $37/low $38 range whereas before earnings it was in the $47 range)

My kids’ schools use Canvas, so we see the student and parent pieces, and it’s pretty useful. But I know educators are VERY hard to sway and take even longer to adopt new technology, much less change as a whole.

Thoughts? I guess, convince me?

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I guess my thoughts would be:

- No longer founder-owned. One left operational role for family (medical) issues – understandable; the other was, I suppose, a “time to get a real CEO” move (??), which may also be OK in the grand scheme.

Don’t care about insider ownership. Their leadership has them winning and they seem to be operating great.

- Revenue growth decreasing last 4 quarters

Yes, but that’s why the PS is 7.

- Many other competitors in the marketplace (Blackboard probably being the most well-known)

Yes, but Canvas is destroying Blackboard and everyone. Instructure’s win rates are incredible.

- Increasing income losses QoQ w/ most recent earnings, and guiding for lower than expected (thus, the stock price drop into the high $37/low $38 range whereas before earnings it was in the $47 range)

GAAP Net Loss has hovered around $12m for as many quarters as I can remember. If you want to say they’re not making progress, that’s entirely reasonable. That was Saul’s take, actually. But here’s mine:


**Gross Profit Growth**
Mar 2017: 53%
Jun 2017: 48%
Sep 2017: 42%
Dec 2017: 36%
Mar 2018: 40%
Jun 2018: 31%

**OpEx Growth**
Mar 2017: 25%
Jun 2017: 22%
Sep 2017: 27%
Dec 2017: 22%
Mar 2018: 24%
Jun 2018: 20%

That’s a trend that I think will play out well over time.

Bear

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Note about CEO – technically not the founder, but Coates was the professor who gave the assignment to the two guys who founded Instructure (was originally a class project). He’s been there since the beginning.

Also, academics being slow to respond to new tech is a huge plus. That means the switching costs are very high and with INST winning over clients so briskly, it’s a very positive sign.

Brian
No position (yet)

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Yes, but Canvas is destroying Blackboard and everyone. Instructure’s win rates are incredible.

All:

I wrote a little note here at the NPI:

http://discussion.fool.com/inst-and-the-new-paradigm-learning-33…

IMO, what is being missed (perhaps inadvertently misrepresented)is that the TAM for academic is NOT the holy grail. It is the “corporate” education:

They claim the real TAM however is not education institutions but instead businesses…all total as much as $25 Billion annually out of which education may be around $2 Billion…so perhaps the real opportunity here is businesses (they have Time, TSLA and many others).

They are guiding $209 million for 2018 vs an education TAM of $2 Billion…there is growth potential of course, but then one has to presume they destroy everyone else for the really big revenue growth in pure education alone.

They do have competitors in all their products:

It’s main competitor in Blackboard (and D2L and Moodle on the education side and then Saba, Sumtotal and Cornerstone on the corporate training side) which is believed to be of lesser quality since it is legacy, has limited support/training.

IMO, the greater TAM is the corporate education side…nearly 92% of their stated TAM.

So if one wanted to see a “compelling” entry point…there should be some indication that corporate side education is accelerating. In that vein, here is what they said in the earnings call:

https://seekingalpha.com/article/4192217-instructure-inc-ins…

Josh Coates:
Sure. Yes, I mean I can tell you qualitatively things seem to be on track with the academic side of business with Canvas as far as new deals goes. Our win rates are very steady and we’re not seeing an unusual increase in deal wins as opposed to normal which is very high in this market especially domestically. So yes, steady as she goes. On the Bridge side we are tracking to that 15% to 20% of new bookings that we told you about last time. So yes, any other questions.

So IMO, as to “compelling”…the “any other questions” speaks volumes to that issue of TAM opportunity IMO.

The bulk of their touted TAM resides in Bridge…and Bridge isn’t lighting it up as yet.

Again not saying that the stock can’t be a reasonable investment without corporate education…but that it is more likely to just be reasonable without it.

Best:
Duma

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Thanks for the catch-up. I did actually know that Prof. Coates was involved from the beginning (a class assignment at BYU, basically, as I understand it). I’m juggling reviewing ANET and ATVI results from today, so haven’t been able to dig deeper into INST and didn’t pull the trigger today… Is there any guidance as to when they might turn a profit? Or are they also running the land-grab playbook that many other SaaS companies are?

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I guess I’d ask, Why INST. They aren’t growing particularly quickly. Their cash flow doesn’t look amazing, they aren’t all that inexpensive. I’d much rather put my money in NTNX, VRNS, OKTA, NVDA,

best,
e

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Fair question… Answers (sort of):

  1. Looking to diversify a little out of predominance in my pf (a little more tech than I’d like, but I like it anyway)
  2. Found the business interesting, the company story compelling, and the financials… mostly reasonable.
  3. I already own 2 of the companies you mentioned, and fair number of others.
  4. I have cash that needs to be deployed. This wasn’t listed first intentionally – I’m not just throwing it “somewhere.” I’m just as likely to add to my ABMD position as anything, to be honest.

Just exploring a little, outside of the spaces I normally would.

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INST down about 12% over past 10 days or so on no “new” news as far as I can tell. Maybe partially due to SAAS stocks pullback?

Any thoughts out there?

jackie