Macro Conditions and Some of Our Companies

Good afternoon, Everyone –

This is my first substantive post here. I have been following this Board for several years now, and it has been a life changing experience for me. The selfless wisdom passed from Saul, Gaucho, StockNovice, Bear, JonWayne, etc … has taught me more than any book or course could. I am forever grateful to all those who take the time to share. I hope you know how many lives you’ve changed for the better.

Now, on to the on-topic stuff. This post is about what companies I see doing best in the second half of this year. Although this post recaps some things that have already been posted, I thought it might be a welcome summary during earnings off-season. If you’re interested in my daily musings (off topic for this Board), you can find me on FinTwit @laneylawyer.

1. Introduction

The past eight months have been gut-wrenching for a lot of us. That ATH portfolio number hit in October 2021 is hard to forget. (Sometimes it feels like that number follows me around like a rainy cloud over my head). The good news is that we’re all in this together and that I have no doubt we’ll reach those numbers again. Please take care of your mental health and remember that a lot of very smart people did not see this year coming. To me, the trick now is which companies are best suited for a rebound. We can’t predict where inflation or the fed is going. But we can listen to our companies to see how they are going to do in this environment going forward.

2. DDOG

On May 5, DDOG reported earnings for Q1 2022, and they were excellent. During the conference call, DDOG was asked how higher interest rates would affect its business, and DDOG’s CFO answered:

“We believe that digital and cloud projects are still very high priority and are not being deprioritized. We haven’t seen that. We think we’re still early on. So with the data we have so far, we think there will be continued strong investment. There is always some volatility across our customer base. Our customer base is very well diversified across industries, and we benefited from that over time. So whereas we’re not macro forecasters, and there may well be some sensitivity, we believe the long-term trends in digital migration and cloud will still be very strong throughout that cycle.”

To me, this sounds like a company that’s not seeing a slowdown in their business despite the “sky falling.” But there’s more.

On June 1, 2022, DDOG’s CFO participated in a Q/A session at the Jeffries Software Conference. Bear in mind, on June 1, DDOG was two months into its Q2 2022. DDOG’s CFO was again asked about how all the macro conditions were affecting the business. In relation to clients cutting costs, the CFO explained that “We take some comfort in the fact that we are only low single digits cost of their [clients’] cloud exposure” (i.e., we don’t get cut because there is not a lot of savings there or we’re the last to get cut because other cloud stuff is way more expensive). The CFO re-iterated what he said during the prior earnings call:

“And there are tremendous trends towards digital migration. In fact, there may be things in a tighter labor economy and with cost management where you want to go to more of a managed solution [i.e., contract with DDOG] than do-it-yourself. So there are a number of things that we look at, but we haven’t really seen any effect yet. In addition, we have a very long-term trend here in cloud migration and DevOps.”

The CFO also explained most of their customers (70 – 80%) are committed contractually so that adds some protection to the business in the event of a downturn. In response to another question, the CFO re-iterated “I’d also add the fact, emphasizing what you said that we think this is a very large market, and we’re just scratching the surface.” The CFO further explained a bad economic environment “could be a great opportunity in that potentially the end market for talent, et cetera, could become a little softer, and it could allow us to execute very well in this environment.” This does not sound like a company scared of the macro.

After the Jeffries interview, the Jeffries stock analyst that conducted it, who you know likely had more off the record conversations w/ the DDOG folks, went on CNBC to state: “We met with Datadog yesterday and they’re like ‘we’re seeing nothing. We’re seeing no fundamental slowdown.’”

Think about that for a minute. DDOG has lost close to 50% of its stock price, while there has been no slowdown in its business. One analyst compared DDOG to ServiceNow, which had similar numbers at this stage of its growth. ServiceNow is now three times the market cap of DDOG so that may be a roadmap of where DDOG is heading.

3. CRWD

On June 2, CRWD reported earnings for its Q1 2023, and they were excellent. During the conference call, as part of the prepared remarks, CRWD’s CEO explained: “The demand environment we see is more robust today than this time last year as cybersecurity is not discretionary. Additionally, the competitive environment has remained favorable to CrowdStrike” (i.e., no sign of a slowdown).

One analyst asked CRWD’s CEO George Kurtz if the world seemed a “little less rosy” and deals were getting harder to close. Kurtz responded:

“No, we haven’t seen any slowdown in terms of the willingness to buy security. It continues to be the number one risk factor for any Board of Directors. Again, when you look at some of the e-crime impact and taking out business, it is not a discretionary spend. It’s – in the hierarchy of corporate needs, it’s probably shelter.”

CRWD’s CFO Burt Podbere chimed in: “And to add, I really don’t see any additional discounting coming my way.” Later in the call, a different analyst asked about CRWD’s business “if the economy gets worse.” Kurtz responded: “[W]hen we think about where we are today and the success we’ve had, I think it’s one of the areas where security is not going to go away. The threats are going to continue to get worse, and we’re going to continue to invest.” CRWD’s CFO Burt Podbere followed up by saying CRWD’s business is “recession-resilient.”

After this earnings report, Morgan Stanley upgraded CRWD to overweight with a $215 price target. The Firm explained CRWD is "the leading beneficiary of growing secular trends within security.” I’ll take it. This does not sound like a company scared of macro issues. I believe in the leadership of CRWD, and I believe that cyber-security is a mission critical field that will continue to grow.

4. Zscaler

On May 26, 2022, ZS reported earnings for its Q3 2022, and they were excellent. During the prepared remarks, ZS’s CEO Chaudhry recognized “macro challenged and uncertainties” but said “we have seen an increase in large, multi-year commitments for multiple product pillars of Zscaler platform as periods of uncertainty can act as a catalyst for change” (i.e., no slowdown). Chaudry confirmed ZS is adding “new Global 2000 customers at a record pace,” which also indicates no slowdown. Chaudry said ZS is used by “40% of the Fortune 500 and 30% of Global 2000.” Those are big numbers. After discussing a big customer win, Chaudry explained: “Because of this substantial ROI, even in a tougher macro, Zscaler can help reduce cost while driving transformation.” Chaudry closed by saying: “in spite of uncertain macro conditions, we continue to see strong demand for our services.”

When questioned about the Russia/Ukraine conflict, Chaudhry explained that it had increased the need for their services in Europe. After one of the analysts questioned ZS on how macro conditions were affecting its hiring, ZS’s CFO explained:

“Regarding the pace of hiring, – and again, we’re seeing all the things that you’re seeing related to the global macro environment. We’re not seeing it. From our perspective, we are strategic for our customers. As Jay talked about, our deal sizes are getting large. Our strategic nature and our engagement with our customers is increasing. So our plan is to continue the pace of hiring. And if we can increase the pace of hiring, we will … So we see – we see a huge market opportunity, huge we feel we’re the leader in that market.”

This all sounds very positive.

After the earnings call, Wedbush Securities called ZS a “pillar of strength” that had “robust growth.” Not bad at all. I know there have ben some complaints about ZS’s stock-based compensation, but I see this as making sure ZS attracts the top talent and stays ahead of the curve. The lower billings growth is something to watch, but RPO remains strong so that may even it out.

This does not sound like a company scared of macro issues. Similar to CRWD, I believe in the leadership of ZS, who own a giant chuck of ZS and have a lot of incentive to make moves for the benefit of the share price.

5. A few other comments on companies.

On May 5, 2022, NET reported earnings for its Q1 2022. They were good, not excellent. Earnings was not a reason, to me, to reduce my position in NET. However, on June 1, 2022, NET’s CEO Matthew Prince presented at the Jeffries Software Conference. Prince’s statements during this conference were alarming to me. Prince said it will be a tough couple of years for tech and flat-out accused other businesses saying otherwise as liars. Prince talked about his company being an above 40% grower in the future. I wish he had said above 50%. Prince also talked about having an “all-hands” meeting to tell employees to focus on what NET is good at. I presume this is an effort to cut down on expenses for a lot of NET’s tools, which is sort of against the NET culture of innovate at all costs. Not sure this new version of NET culture will work. On the other hand, NET is supposedly entering some new markets, such as zero trust in competition w/ ZS. NET’s Prince has taken to the offensive by attacking ZS’s offering. This is unlike him, because he usually a “hug ops” guy that offers mutual respect to other tech companies. Does he feel backed into a corner and is he trying to claw his way out?

On May 26, 2022, SNOW reported earnings. They were good, not excellent. On Mad Money a few nights ago, SNOW’s CEO said their customers “are not falling off a cliff.” I’m not a fan of this phrasing by Slootman. This sounds to me like SNOW is not losing customers but may still being usage/customer. I would have preferred something about SNOW’s business not slowing down. We may have received that the past few days. Seeking Alpha wrote this morning that Slootman reiterated its financial targets at its recent analyst day, and SNOW received at least one analyst upgrade based on the news w/ a price target of $185. Someone wrote on this Board that you can now get SNOW for what insiders like Buffet paid for it, which is a powerful thought.

Based on the above, I like SNOW for a stronger rebound than NET. It also has a higher growth rate and has free cash flow.

6. Conclusion

The macro picture is grim. The drop in growth stocks has been greater than the dot.com bust and the financial crisis. But don’t let the macro picture scare you away from investing in great companies. The future is bright for our companies. My money is betting stock prices will once again follow business fundamentals. And I want to be fully invested when that day comes.

Hang in there.

Best,

BTL
@Laneylawyer on twitter

No financial advice in this post – Everybody Must do their Own Due Diligence.

108 Likes

This is what Prince actually said and I’d argue that Zscaler is who he was talking about…leading Cloudflare to actually take share in this current market.

Matthew Prince

“I think at the conference, people were pretty pessimistic. And I think that the mood, especially in Europe right now is that the world does it war both literally, but also figuratively. And I think that we are in for a difficult next few years. In our last earnings call, we said Q1 of 2022 was by far the hardest quarter we have seen since Q1 of 2020, which was the COVID quarter. And I think one of the things that was – is unique about us is because our sales cycles are so fast measured in less than a quarter typically. That let us see some of the kind of early warning signs late in 2021 and early in 2022. And that’s allowed us to adjust and adapt. But I think companies that may have looked like they were doing very well in Q1 that have longer sales cycles, you are going to start to see them having pipeline problems in Q2, Q3, Q4. And so I think what has always been a real strength of Cloudflare has been that because we see things early and our feedback cycles are so fast, we can adapt to that. But there is – but anyone who tells you – sits up here and tells you that they are not having to adapt how they are marketing, how they are going to market, how they are closing deals, how they are getting new logos, how they are getting new customers, doesn’t have their business instrumented as we do.”

Best,

Jason

30 Likes

Also I have one question BTL, when you said…
Prince also talked about having an “all-hands” meeting to tell employees to focus on what NET is good at. I presume this is an effort to cut down on expenses for a lot of NET’s tools, which is sort of against the NET culture of innovate at all costs. Not sure this new version of NET culture will work.

We’re you talking about when Mathew Prince, CEO of Cloudflare said this, “ And one of the core values at Cloudflare – the three core values of Cloudflare, transparency, curiosity and being principled, right. And we really believe in those things. But transparency, which internally, like I am on Thursday, going to give an all hands meeting where I’m going to say, guys, the world is getting really hard and that’s going to have to force us to really think about the places in our business where we are not world class and tighten up those places.”

Cause, again I think that this can be understood to mean something different than what you might have been saying in your post, and in context of the over all conference does mean, that Prince intends to be world class in everything that they do. That this might mean more pressure on those that work at Cloudflare in those areas not yet quite there…hmm. Maybe?

Thanks,

Jason

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Thank you all for the insights and feedback.

I have to say that Matthew Prince has been always harsh and never shy to go after a competitor, vendor, etc - Fastly, AWS, Hashicorp, etc. So going after ZS is to be expected.

I think finally we are getting Cloudflare (after dropping around 20% for 5 sessions) at a more reasonable price, which can be confirmed from the following report (updated June 13th)

https://www.meritechcapital.com/benchmarking/valuation-metri…

I think the growth adjusted ev ntm / revenue metric gives a good idea where Cloudflare stands.

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Laney,

Think about that for a minute. DDOG has lost close to 50% of its stock price, while there has been no slowdown in its business.

That’s been the case for many high growth stocks over the past 7+ months, in fact, many are down well over 50%. But those reductions in stock prices were not because of their business fundamentals (as they’ve continued to be fantastic, as you’ve pointed out). The stock price reductions throughout the high growth, SaaS, IT software sectors has been because the market has decided to rerate the multiples of those stocks. Its the thing we’re not allowed to discuss here, the valuations have been reduced significantly because of the current conditions we’re in. The market is much more risk-averse right now so unwilling to pay the huge multiples on P/S ratios.

I’m not saying it’s right, or justified, but it’s obvious that is what has happened to the high growth sector we follow. When I (because of Saul and this board) first started investing in these stocks in 2016/2017, the P/S ratios were mostly under 20 with the REALLY highly valued stocks in the 20-30s. We then enjoyed 5+ years of multiple expansion into the 50-60s for the top companies, with some outliers up over 100 at times. Now, we seem to have the multiples back were they were when I started riding this train, hopefully that means not much further to fall (although I know they could drop a bunch at any time, as there doesn’t seem to be a floor that we’ve encountered yet).

Again, I’m still fully invested in these names and am hoping for an actual rebound soon, and not another head fake down to new lows, but again, I know that can and may happen.

This 7 month thrashing my portfolio has endured has taught me that I will change my investing method some going forward, but I will not sell out of the current names now, as I believe them to be grossly oversold and due for somewhat of a rebound (who knows how much). Since portfolio management is off topic, I won’t discuss what I’m going to be changing about my method, it would, after all, only be right for me, in my situation, being recently retired.

Good luck to us all.
Mike

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NET’s CEO Matthew Prince presented at the Jeffries Software Conference. Prince’s statements during this conference were alarming to me. Prince said it will be a tough couple of years for tech and flat-out accused other businesses saying otherwise as liars. Prince talked about his company being an above 40% grower in the future. I wish he had said above 50%. Prince also talked about having an “all-hands” meeting to tell employees to focus on what NET is good at. I presume this is an effort to cut down on expenses for a lot of NET’s tools, which is sort of against the NET culture of innovate at all costs. Not sure this new version of NET culture will work. On the other hand, NET is supposedly entering some new markets, such as zero trust in competition w/ ZS. NET’s Prince has taken to the offensive by attacking ZS’s offering. This is unlike him, because he usually a “hug ops” guy that offers mutual respect to other tech companies. Does he feel backed into a corner and is he trying to claw his way out?

Hi laney,
Your description of Cloudflare’s CEO Prince’s presentation at the Jeffries Conference worried me and inspired me to listen to it (just a 26 minute presentation), and I was amazed how differently I perceived it than you did. I was prepared to sell part of my position but I ended up adding to it. Perhaps you didn’t listen to the presentation but got your info elsewhere.

“Prince said it will be a tough couple of years for tech”.

No, he said it would be a tough couple of years for the world.

“He flat-out accused other businesses saying otherwise as liars”.

Totally untrue! He said that they didn’t have the same rapid evaluation of what was going on that Cloudflare had.

“Prince talked about his company being an above 40% grower in the future”

No, he said something like that as they would grow in the 40’s for the next 5 years or so, at worst, he feels comfortable in continuing to go all out for growth, especially as Cloudflare is about breakeven in profits and FCF. Totally different from what you said.

“Prince also talked about having an “all-hands” meeting to tell employees to focus on what NET is good at. I presume this is an effort to cut down on expenses for a lot of NET’s tools, which is sort of against the NET culture of innovate at all costs. Not sure this new version of NET culture will work.”

I can’t believe you wrote this! Did you not listen at all to what he said? He said he wanted them to focus on the areas where Cloudflare was lacking, and was not a world leader, and bring those areas up to par. That’s the opposite of what you said. It means more innovation, not less, and more of Cloudflare’s culture, not less. And he already had said they were going all out, not cutting back. And he was incredibly enthusiastic about the future of the company.

At first I thought you just misunderstood, but as I wrote this I see that by changing each of the things he said just enough, you managed to misinterpret all of what he said, which was impossible to do if you had listened, so I have to wonder if this was just a sophisticated hatchet job on Cloudflare by someone who just happened to show up on the board to make his first post. By a short seller in other words. I hate to think that, as you sound like a nice guy, but I just don’t understand how you could have gotten so much of what he said so totally wrong.

Saul

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Saul - Thanks for your comments. Your perspective is much appreciated.

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These are excerpts from a transcript of the conference. I can’t provide a link as it’s proprietary behind a paywall, but I think these excerpts are fair use. I haven’t listened to the presentation, so if the transcript is wrong, then these quotes will be wrong.


Laney: “Prince said it will be a tough couple of years for tech”.

Saul: “No, he said it would be a tough couple of years for the world.”

Transcript: “I think that the mood, especially in Europe, right now is that the world is at war both literally, but also figuratively. And I think that we are in for a difficult next few years.”

Laney: “He flat-out accused other businesses saying otherwise as liars”.

Saul: “Totally untrue! He said that they didn’t have the same rapid evaluation of what was going on that Cloudflare had.”

Transcript: “I think what has always been a real strength of Cloudflare has been that because we see things early and our feedback cycles are so fast, we can adapt to that. But anyone who tells you – sits up here and tells you that they’re not having to adapt how they’re marketing, how they’re going to market, how they’re closing deals, how they’re getting new logos, how they’re getting new customers, doesn’t have their business instrumented as we do.”

and later in the presentation:
“It’s just – nobody is telling the truth. I mean, guys, do all know it, like the world can’t harder. Anyone who’s not telling you that is lying to you. The world has gotten harder, and it’s going to be good for us, hard in the short term. But in 24 months, we will come out with our ship being significantly more efficient with us owning a significantly larger share of the market and us being an absolute critical unreplaceable part of how every corporate network is run.” [emphasis mine]

Laney: “Prince talked about his company being an above 40% grower in the future”

Saul: “No, he said something like that as they would grow in the 40’s for the next 5 years or so, at worst, he feels comfortable in continuing to go all out for growth, especially as Cloudflare is about breakeven in profits and FCF. Totally different from what you said.”

Transcript: “We’re really well instrumented to know what the levers are to be able to control our business. But if we can continue to grow at north of 40%, then I can’t think of anywhere even in difficult times to put dollars back into – to put dollars other than back into our business. And the opportunity is so large that I think it makes a ton of sense for us to continue to do that. I mean we subscribe very much to sort of the rule 40, except right now we just don’t want to be in sort of a negative operating margin position.”

Laney: “Prince also talked about having an “all-hands” meeting to tell employees to focus on what NET is good at. I presume this is an effort to cut down on expenses for a lot of NET’s tools, which is sort of against the NET culture of innovate at all costs. Not sure this new version of NET culture will work.”

Saul: “I can’t believe you wrote this! Did you not listen at all to what he said? He said he wanted them to focus on the areas where Cloudflare was lacking, and was not a world leader, and bring those areas up to par. That’s the opposite of what you said. It means more innovation, not less, and more of Cloudflare’s culture, not less. And he already had said they were going all out, not cutting back. And he was incredibly enthusiastic about the future of the company.”

Transcript: “I’m on Thursday, going to give an all-hands meeting, where I’m going to say, guys, the world is getting really hard, and that’s going to have to force us to really think about the places in our business where we’re not world class and tighten up those places.” [emphasis mine]

I’ve tried to balance being comprehensive in selecting quotes while also being respectful of fair use. I hope this objective information on a high-growth company is helpful for the board.

best,
dan (TMF Galagan)

149 Likes

I’ve tried to balance being comprehensive in selecting quotes while also being respectful of fair use. I hope this objective information on a high-growth company is helpful for the board.

Thank you! Having the original quotes is much more valuable than someone saying “No…” without showing evidence for his interpretation.

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I listened to it to get a feel for the difference in interpretation.

Prince said it will be a tough couple of years for tech".

No, he said it would be a tough couple of years for the world.

(I agree with Saul’s interpretation here)

“He flat-out accused other businesses saying otherwise as liars”.

Totally untrue! He said that they didn’t have the same rapid evaluation of what was going on that Cloudflare had.

Saul’s interpretation is correct and Prince used NET’s rapid sales cycle of “less that a quarter” to justify their superior knowledge through more rapid feedback.

“Prince talked about his company being an above 40% grower in the future”

No, he said something like that as they would grow in the 40’s for the next 5 years or so, at worst, he feels comfortable in continuing to go all out for growth, especially as Cloudflare is about breakeven in profits and FCF. Totally different from what you said.

10:30 mins - He actually said, in response to a question about should he drive increased profitability, [He will continue to drive to break even and invest money in the business on that basis because “IF we can continue to grow north of 40%” he can’t think of a better way to invest money.] I couldn’t find where he mentioned “next five years” but he is comfortable investing provided they don’t drop below break even.

“Prince also talked about having an “all-hands” meeting to tell employees to focus on what NET is good at. I presume this is an effort to cut down on expenses for a lot of NET’s tools, which is sort of against the NET culture of innovate at all costs. Not sure this new version of NET culture will work.”

I can’t believe you wrote this! Did you not listen at all to what he said? He said he wanted them to focus on the areas where Cloudflare was lacking, and was not a world leader, and bring those areas up to par. That’s the opposite of what you said. It means more innovation, not less, and more of Cloudflare’s culture, not less. And he already had said they were going all out, not cutting back. And he was incredibly enthusiastic about the future of the company.

(12:30 on interview)He did not mention anything about par. He said they would have to focus on areas in the company that are not world class and “tighten up” those areas. (Me - these remarks could be interpreted as investing in those areas to improve or cutting those areas, I viewed his tone as neutral and either option would not surprise me. He did say that some people would find these actions very difficult and he was talking in the context of an employee meeting “on Thursday” which would have been June 3rd(must have happened by now) so any layoffs?

I’m not buying or selling.

D

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@laneylawyer - Thanks for initiating an interesting discussion about what the future might portend for some of our favorite companies.

Unlike some other respondents, I will not ding you or label you for your opinions. Everyone is entitled to their points of view and don’t deserve to be put down or called names. Contrary opinions should be welcomed because that’s what makes a market.

As we try to understand the future prospects for these companies, the key question we should ask ourselves is:

How can we confirm what is truly happening with these companies’ sales pipelines and how they will fare over the next 12-18 months?

Sure many of these companies have secular tailwinds that will help. But then we have higher growth standards for our holdings and just a tailwind is sometimes not enough to meet our desired thresholds.

Additionally, I prefer to look at actual performance numbers and SEC filings rather than the words of a C-suite leader. They are always in “sales” mode at public events, words carefully chosen without revealing too much. Not surprising that there are so many interpretations of the same comments even on this board.

And I don’t subscribe to the “mission critical” mantra that many supporters are espousing: https://discussion.fool.com/don39t-believe-the-quotmission-criti…

Everyone and their uncle is mission critical until sales start slowing down because their customer base decides to cut budgets. If your customers are in the retail sector, they are hurting. If they are in the auto business, they are hurting. If they are in the financial sector, they are hurting…etc etc.

Customers who are seeing their own sales get compressed for a variety of reasons are making tough budget decisions and technology projects are a big target for the CFO. For most technology projects, labor costs are a much bigger component of the total costs versus just the SaaS license costs.

So how do we proceed? Do we have any actionable data that we can rely on?

We have the following:

  1. Guidance from the Q1 earnings report
  2. Actual business performance as reported in upcoming Q2, Q3 etc quarterly reports
  3. Forward guidance provided in upcoming Q2, Q3 etc quarterly reports

I am usually skeptical about #1 and #3 above, because CEOs and CFOs become adept at playing the guidance numbers game so that they have a good shot at “beating” guidance every quarter.

As for #2, imo, RPO is the most informative forward looking sales metric that will tell us the true health of future revenue growth.
https://discussion.fool.com/making-sense-of-rpo-arr-and-deferred…
P.S. Errata in the post linked just above - RPO is almost always reported in the 10Q and 10K for companies with a SaaS business model.
Now RPO is not perfect, but it is the closest SEC reported numerical insight into future revenues and timing of when those contractual $ might be booked.

As we get into Q2 earnings and beyond, I will be looking closely at RPO growth trends for clues.

Beachman (beachman.substack.com)

20 Likes

Laney: “Prince talked about his company being an above 40% grower in the future”

Saul: “No, he said something like that as they would grow in the 40’s for the next 5 years or so, at worst, he feels comfortable in continuing to go all out for growth, especially as Cloudflare is about breakeven in profits and FCF. Totally different from what you said.”

Transcript: "We’re really well instrumented to know what the levers are to be able to control our business. But if we can continue to grow at north of 40%…

I would say Lane and Saul both got the above wrong in their interpretation.

‘If we can’ is nothing like saying they would/will grow at 40%+.

It’s what they will do with the dollars IF they are able to do it.

No position, having sold out of NET,
Naj

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I suggest that everybody read the transcript and make your own interpretation of the meaning of what was said. Personally I am not invested in Net because they said they were going to be all about growing and not looking to be profitable. At least that was my interpretation. So please don’t call me a liar.

Andy

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Mathew Prince, CEO of Cloudflare said this, “ And one of the core values at Cloudflare – the three core values of Cloudflare, transparency, curiosity and being principled, right. And we really believe in those things. But transparency, which internally, like I am on Thursday, going to give an all hands meeting where I’m going to say, guys, the world is getting really hard and that’s going to have to force us to really think about the places in our business where we are not world class and tighten up those places.

My take on this is that Prince is acknowledging that there are some places where Cloudflare is being out-competed, presumably because of product quality. Whether this is the product itself, what it costs, or how it is being supported or ?? is unclear. But Prince seems be taking a pretty clear-eyed look at things AND communicating them transparently, which is part of why I think he is an exceptional leader.

Cloudflare is already an outsized part of my holdings and I am adding to it at current levels.

Regards,

Dorset

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I agree with Andy, read it or watch it for yourself. Here’s a link!

https://wsw.com/webcast/jeff241/net/1698366

or

https://cloudflare.net/events-and-presentations/events-calen…

But in short I agree with Saul, He said it’s going to be a couple of tough years (sounds like he’s more bearish or honest than most) but he would rather be in NET than any other company. (He was talking macro environment.) This will be a time of consolidation where the weak will not survive and NET will come out stronger with more market share in the end. He knows what levers to pull to make sure they have enough cash to run the business but still wants to invest heavily due to the massive opportunity in front of them! He is very confident and errors on the side of caution and is very optimistic about the future. He sounds like a very confident and honest leader! He also down played the thought of becoming the 4th cloud and see’s NET as the fabric of the internet and pretty much every company in the future will use NET at least a little bit.

Good luck to all!

Chris

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Hey Guys, this is only a 26 minute video, and if you really want to understand what he said, watch the video (as I made clear that I did).
Saul

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PS - The video of the presentation at the Jeffries conference is on Cloudflare’s Investor Relations website.

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Chris (cwg75), thanks for that excellent summary. You really put it all together in one paragraph and gave a true feeling for what he was saying. I appreciate it, and I recommend it to others (post #85224).
Saul

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As a first-time poster, I did not nail the planned soft landing (pun intended). I want to thank everyone for the encouraging messages I received. My hope is to become a meaningful contributor to this community, especially for all the great things it has done for me and my family. So I did want to circle back to clear the air a little.

First, some housekeeping. Thank you for your comment, Saul. I appreciate the feedback, even when it is negative. That’s the only way to get better. Investing is tough and the “information age” (or should I say “misinformation age”) has made it ten times tougher. I want to be part of the solution, not the problem. Also, I wanted to apologize to the Board for: (1) not including actual quotes from NET’s Prince before giving my opinions on them, which would have made for a more complete post, and (2) not explicitly disclosing that I was long all the stocks I discussed (including NET).

Now, onto some more analysis on my statements about NET to make sure this post stays on topic. It is important to remember the purpose of my post: “This post is about what companies I see doing best in the second half of this year ” and “to see how they [our companies] are going to do in this environment going forward.” To that end, I tried to put the companies in order of what I think will be the strongest rebound in the near-term macro environment to the least strongest rebound, being: (1) DDOG (strongest rebound), (2) CRWD, (3) ZS, (4) SNOW, and (5) NET (least strongest rebound).

I have now re-watched Prince’s interview and digested all of the comments about it. I still would not change the order of my list. As stated in my original post, you have three companies that have indicated in one way or another that it is business as usual despite the macro conditions (DDOG, CRWD, and ZS). You have one company that re-iterated the mid-point of its targets (SNOW), which is similar to confirming it is business as usual despite macro conditions. Then, you have what NET’s Prince said during that interview. We’ve already established everyone should watch the video themselves to reach their own conclusions about what message Prince was trying to convey. So I’ll try not to re-hash the meaning of individual statements. But, based on all the useful comments, I think at the very least there are multiple reasonable interpretations of what Prince was saying, including my original opinion. Now, in my humble opinion of course, you have four companies that successfully conveyed the message to investors that macro issues have not been a big factor (i.e., had a specific intent to get that message out), and you have one company that failed to clearly deliver that message (i.e., did not have a specific intent to get that message out or missed an opportunity to get that message out). To me (aka – in my humble opinion), this is enough to order the list as I originally stated.

In my original post, I also stated SNOW edged out ahead of NET because it “has a higher growth rate and has free cash flow.” I want to dig into this a little more. In late October/early November 2021, NET’s stock price was around $200 compared to today’s $41. There was a very useful discussion on this Board started by Saul. Saul was wondering why the stock price of NET had gone so high, when it did not have as favorable growth and financial metrics as the other four companies I mentioned in my original post. The post w/ its comments may be found here:

https://discussion.fool.com/what-am-i-missing-with-cloudflare-34…

This great community banded together to provide 23 comments explaining different reasons why NET was doing so great, and Saul provided a great post summarizing the different reasons from the community here:

https://discussion.fool.com/cloudflare-here39s-what-we-were-miss…

To me (again, just my humble opinion), the primary reason that made NET so great last year–new product offerings and partnerships–is no longer being rewarded in this macro environment. The market has been indiscriminate in not rewarding companies for new products, including SNOW, DDOG, and SentinelOne. By way of specific example for NET, on May 11, 2022, NET announced “D1: The First Integrated Database for Workers Serverless Platform,” which sounded important. The past few days NET has announced more new products, which seem to be important (See, e.g., https://twitter.com/eastdakota/status/1538570511482949633), but the market has not reacted significantly to these announcements in the pre-market trading as I write this.

Based on this new environment that is more focused on numbers than new products and partnerships, I would keep my rankings the same as my original post.

After reviewing our analysis of NET last year, there are also a few things I don’t understand the tech enough to draw a finite conclusion but which makes the picture a little murkier for me. We were really excited about NET’s new products last year. It’s been a few quarters since then, but NET’s numbers have stayed mostly consistent (growth around 51 – 53% y/o/y). Do these products need more time to develop? Or were they needed to maintain the status quo? This has me wondering what fruit the current crop of NET product announcements will bear. I’m also confused about whether NET wants to be the “fourth major public cloud,” which was what Prince announced last October: “I think that we really think we’re on the path to be the fourth major public cloud. And, I think that our approach to it is actually much more differentiated than the other three, and so yeah, we will continue to build things out.” See https://techcrunch.com/2021/09/28/cloudflare-enters-infrastr…. We were all very excited about this at the time. However, at the recent Jefferies conference interview, the following exchange occurred:

Question: Everyone says you’re the fourth cloud, meaning Amazon, Azure, Google, is that an aspiration do you want to be there? Or is it…

Answer from Prince: No, I think, we – what we want to be is the fabric that connects everything including the clouds together … [Prince explained further what this means].

I don’t know enough about the tech to have an opinion on whether being the fabric is better, worse, or indifferent. Just wanted to note that it is something that confuses me. Since SNOW has a little clearer picture to me, I would also let this inch SNOW ahead of NET in my rankings (but not by much).

To be clear, I think NET is a solid company and will do well in the long run. (I’m actually a fan of Prince. I follow him on Twitter, and he is a great follow (@eastdakota is his handle)). I also own NET stock in my account and my kids’ account (I’m willing to experiment on myself but I’m not going to let my kids own junk!).

Of course, I could be completely wrong, and NET could bury our other favorites in the dust as they all climb back to their ATHs (something I’m confident will happen for all of them). Here are some things I will be watching for from NET:

  1. Does NET start to steal significant zero trust security market share from ZS? You should note that ZS’s comments cited in my original post were about a month before everyone else’s and a lot happened in that month of May. ZS is live streaming an investor conference this Thursday at 1:30 (cst), where I hope it addresses macro issues and its competition with NET.
  2. Prince is always talking about how they know how to operate NET’s “levers.” Is Prince able to pull some levers to give the market the numbers it wants this year?
  3. Do NET’s new product offerings accelerate its growth rate or profitability?
  4. Does the macro picture change to a similar environment we were in last year and start rewarding innovation more again?

Anyways, I hope this clarifies some of my thinking. Thanks for reading and letting me be a part of the Board.

Hang in there everybody.

Best,

BTL
@Laneylawyer

Long DDOG, CRWD, ZS, SNOW, and NET

No financial advice in this post – Everybody must do their own due diligence.

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Hi Laneylawyer,
Thanks for the calm reply after I and others disagreed with you last post on this thread. I appreciate the views of others and value the opportunity to discuss these differences.

When you said, “ To me (again, just my humble opinion), the primary reason that made NET so great last year–new product offerings and partnerships–is no longer being rewarded in this macro environment. The market has been indiscriminate in not rewarding companies for new products, including SNOW, DDOG, and SentinelOne.”.

It helped me think of:

Many people who are considered to be the best here often write about what Mr. Market ‘appears to be valuing now’ compared to other times and making decisions based on this (eg: Price/Sales or Growth at all cost vs discounted Free Cash a flow, etc) I’ve tried to extrapolate the past into the future regarding market sentiment myself.

I’ll admit now, I have a difficult enough time trying to maintain my own standard for how I personally value a company into which I invest. I’m no longer going to try, based on what appears to effect market sentiment presently, as it shows up in share price, and using this to try and guess what characteristics of a company will effect future market sentiment. I believe this is only accurate when looking backward and is inherently a trap I need to avoid. I see this a kin to trying to understand what specific customer issues will effect future purchases from one of our companies by looking closely at QoQ revenue growth rates, specifically when trying to do this for a company that has a usage based business model. Saul has written out some amazing standards for how to value a Hypergrowth company. I’ve added many for my self, from what I’ve learned from others here (see my July 2020 portfolio summary here: ). I’ll stick with this for now.

Best,

Jason

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