Great 4 minute video that really speaks to the type of growth we see from our innovative companies.
Innovation is how these great companies can keep growing at such high-levels for years. Also why price really doesn’t matter for the most innovative companies with the best products (unless there’s a clear bubble).
Of course we will be wrong on some, but we can adjust if the thesis is broken.
But when we are right, the returns will be life changing.
Isn’t this what David Gardner talks about with optionality? Plays into the eco-system idea, too.
JK
This to me is single largest factor…
You can call it Layers of growth… David Gardner calls it “optionality”… Elon Musk (if I remember right) calls it “rapid innovation at scale”…
In the past with brick and mortar business, this was about adding more locations and expanding into different geographies…
In the internet / cloud era, this is about expanding successfully in adjacent space BUT do it such that expansion uses your existing strength and allows you to win big… no one has done this better than Amazon… use book infrastructure to expand into selling everything… use that extended infrastructure now to create AWS… and so on…
In the universe of stocks this board follows, TWLO, SHOP, SQ are best examples of this phenomenon… this is why I still hold MELI for years…
It was this possibility that attracted me to NTNX untill last conf call…
Its an art and not so much of science…
Google is trying this for a long time and somewhat succeeding with YouTube and others but their ad revenue is so large that its hard for them to get next such big winner… Apple is in the same boat so is FB, NFLX and many others who are great companies but cant really add more sizable layers…
And there is also a risk of going down this path prematurely… e.g. AYX, ZS, OKTA, DOCU, ESTC, TDOC, SMAR have such large opportunity in front of them in their focus field that at this point, trying to expand into adjacent can be distraction / drain… although at some point in the future, they will have to look to add layers to sustain growth…
Another important criteria is network effect - at this point, its clear to see network effect, Amazon, Facebook are greatest examples of network effect success. Arguably Apple, Netflix and many of recent successes have used network effects very successfully.
One of the newer mechanism of growth - which is less talked about - though arguably lot more potent than even adding layers - is the leverage on customer usage / revenue etc… not sure if “leverage” is the right word here… may be someone can coin a phrase for this but let me explain what I mean: We all know SQ and SHOP have software and services… for which they get paid on a monthly subscription basis… however, they also offer payment services to their customers on which they collect very small profit but now thats super charges growth in near term. This is why fintech has been hot in last couple of years…
And then comes TWLO which is charging on per usage (per message, per phone call…etc) and that leverage is tremendous. As customer is growing their usage of Twilio services, Twilio revenue continues to grow for years with the same customer, even before any new layer of services…
And you have TTD which I have less understanding of business model but looks like they are essentially taking a ~20% cut of their customers’ ad spend… which explains their explosive growth…
And then comes my latest favorite example - MDB - I cant believe MDB is able to charge for Atlas on usage basis…
Ofcourse this leverage business has a downside thats unique (unlike layers of growth or network examples above) - they can become too large portion of customer’s spend and motivate customers to replace them… this is what we saw with Uber / Twilio few quarters ago… and each one of these companies run that risk… TWLO proved they can overcome…
I think SQ and SHOP go after such broad base of smaller customers, they dont have big risk of this category.
I do worry about TTD since they operate through a few large agencies, one or more of those agencies can be heavily motivated to replace TTD… and almost certain that retail investors like us would have no clue until its too late.
In the meanwhile, we continue to enjoy layers of growth, benefit of network effect and also leverage customer spend / usage… what a fantastic set of companies we follow on this board!
Great 4 minute video that really speaks to the type of growth we see from our innovative companies.
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In “S” curve terms, they layer “S” curve on top of “S” curve.
Denny Schlesinger