Oh! This time it’s different???

Oh! This time it’s different???

Yes, this time IS different! As Tinker said, “Things change all the time.” But it’s not the this time that’s different; it’s what we are investing in that’s different. As I tried to explain, what we are investing in never existed before.

We are investing in a new model of enterprise: year after year very high growth, very high gross margin companies, whose revenue is almost all recurring, and largely locked in, and whose dollar-based net retention rates are greater than one, meaning that last years customers buy more this year than last year instead of having an attrition rate. I’ve never seen companies like this before. Have you?

Of course a company like this is worth higher EV/S and higher PE than the old model of fairly low revenue growth, with little or no visibility into what revenue that you could absolutely count on for next year!

Of course companies without security of revenue had to show a profit (PE) before we’d invest in them. Of course we pay more for a company where revenue is recurring. Of course rapidly growing revenue which has very high gross margins is worth more per dollar of present revenue (EV/S) than slower growing, non-countable on, and lower gross margin, revenue.

And don’t bother telling me they are not making any profit. Any company with 75%, 85% or 95% gross margins can make a profit whenever they decide to! All they need to do is slow down spending on grabbing every new customer they can grab while the grabbing is good. Personally, I’d rather they keep grabbing all those customers now, from whom revenue will keep growing for the indefinite future.

So YES, this is a different set of facts we are dealing with. That’s how I see it anyway.



And I totally agree that this time, in this respect, it is different!

However, beware the non-sequitur: it does not follow that Saas companies that ‘keep grabbing all those customers now’ will necessarily have revenue that will ‘keep growing into the indefinite future.’. That’s why the price is the risk.


The price is a risk, not scale of business issues, but because rapid growth businesses also depend on rapid demand, and this is partially and materially dependent upon economic growth.

What happens is not that business goes away or the company dies, but that companies are valued based upon forward revenues and earnings and cash flow and whatever value creator.

If the cloud titans and such start to slow down growth in building these huge data centers, the growth vector for many of these companies will suddenly slow down.

If the economy suddenly starts to slow down, so will the growth in these companies.

The Chinese economy is already slowing down, marginally, but at its slowest pace in like ever (still over 6%, and only a marginal slow down. The Chinese government is lowering interest rates, printing some more money, and increasing investment for government projects. Nothing to worry about here for now.

But it is the slowing down of the economy that suddenly (and usually without warning - as it will first be one, and then two, three, and then we might get it) lowers forward looking projections, and suddenly to maintain their same multiples the share price needs to fall.

Of course when the economy improves forward looking business may resume thus necessitating increasing stock price to keep the same multiple.

That is what happens, and that is why I do not want to invest in fragile businesses, with no real money printing ability in the future, as they get taken out and never recover thereafter. The good ones however do recover if they were not initially in a bubble to begin with.

That is my experience anyways. It is not so much the multiple but maintaining the forward looking prognosis that is the risk factor.



“It is not so much the multiple but maintaining the forward looking prognosis that is the risk factor.”

Amen, brother!

It also just occurred to me that the SaaS model isn’t really new. In the days before PC’s, when computers were expensive Big Iron and kept in air conditioned data rooms, software was leased along with the computer.


It’s both. The point about the multiple is not nearly well enough understood by younger investors and not nearly well enough explained by Wall Street (for rather obvious reasons).

We have enjoyed an artificially triple-charged global bull market on steroids and propose to leave the bill, (currently north of $225T and rising nicely) for our children and grandchildren to pay. Quite a party. Still going - though I was interested in Chanos’s remarks on China yesterday.

One of the nice things for smallcap growth investors is the ‘double-whammy’, that is earnings go up and the multiple also goes up; valid and normal for good companies in all times. But the artificial element of the market has fuelled an across-the-board rise in multiples. If you will, here we have enjoyed a triple-whammy.

MacDonalds has not changed much in terms of what it does. Before these heady times, you could fairly regularly have found an opportunity to buy MCD at a TTM PE multiple of 15. In recent years it has become more like 22 (although I see right now that although the company has taken some bad news recently it is still higher than that).

Do the calcs. and it can be seen why it matters when (not if) multiples revert to the mean.

I admit to being intrigued by those never looking at the P/S of smallcap phenomenal growth. The question is the one I always pose: what would you not pay? In other words, at what level of multiple would you definitely not find the price irrelevant? We know PS of 20 is no barrier to investment so why not 30? 40 anyone? Truly we have not been here before but tell me… what would you not pay? Logic dictates there is a price that finally no-one here would pay, even for our best prospect.

What we are doing makes sense - still - but the double-reverse whammy, possibly even a triple-reverse whammy (entitlement benefits have to be paid for by someone from a depleted budget paying who-knows-what in interest on debt, and guess who that will be) is part of our risk. Because it works the other way round too: even astronomical multiples that come down to huge multiples can be quite a hit.

But I learn from various posters that by some strange alchemy, the cushion of successful gains is always comfortably well-established before, rather than after, the immense loss of capital. One day that order of events, which seems so natural and obvious, may need explaining to the novice investors who joined us here a few months before the crash and felt moved to put 90% of their families’ investable wealth into a handful of companies with no earnings and subsequently basked for a few days in the unanimous congratulations of all.

Let us move responses, if any, straight to the Philosophy board, but I will not be joining you there. I am far too busy looking for prospects and learning here, for the max. 10% portfolio allocation I have to this wonderful new way of investing. 10% is a lot I admit and currently it’s more like 6% but it certainly adds zest to the investing game.


10% portfolio allocation I have to this wonderful new way of investing. 10% is a lot I admit and currently it’s more like 6% but it certainly adds zest to the investing game.

You’re getting pretty wild and crazy, Strelna. :slight_smile:



Re: “Why it Really is Different (SaaS/sub software)

I recently heard an interesting interview on Bloomberg with Tien Tzuo. He is guy who wrote a book on the subscription economy and he does a nice job of explaining why it really is different.

Bloomberg interview with Tien Tzuo:

If the Bloomberg link doesn’t work then there’s a pretty good interview with Cramer:

There’s a lot of interviews with Tien Tzuo on youtube (some of them very interesting) but many start to drag on… This one seems pretty interesting but it’s very long “Why the subscription model is the future”:

Tien Tzuo’s book:

Tien’s book sounds interesting but I’ve heard that it reads a little like a PR piece for Tien’s company Zuora. Has anyone here read it?