Question about revenue growth

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I haven’t posted much so let me quickly express my thanks to all the great investors that share on this board, and of course, Saul!

My question is about revenue growth as it seems to be the number one factor necessary to be a Saul stock. Companies has overall revenue growth and then recurring revenue/subscription revenue growth. The easy company to evaluate was set up based on a subscription revenue model from inception. But there are many companies that are transitioning to subscription solutions. But their overall revenue growth is lower due to on prem solutions or revenue from service work. But their subscription revenue growth meets the requirements we are looking for. How do you factor that into the analysis of a company? I would think this sort of company could be flying under the radar

Thanks

jimmyutah

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Revenue growth is a thumbnail view before diving in deeper to figure out the context behind the number. What makes it so interesting is that it is a fairly pure number. It is the money coming in from sales before all other things. It is the “top line growth”. When it is NOT simple I view that as a red-flag (see the post just up-thread from Square (SQ) for example).

I think you are actually over-complicating it here with your question. It is what it is regardless of the “type” of company (subscription from the start versus transitioning…that doesn’t matter). If a company is growing revenue at 20% and their subscription segment at 200%, it doesn’t really matter. They are still growing at 20% RIGHT NOW. I may decide to watch this company more closely to see how it goes but until they have demonstrated that this growth will affect the top line, it is only interesting and not a reason to invest in my opinion.

I view such a “turnaround play” or investing it as an attempt to “get in early”, but these are flawed concepts in my opinion. Any money may be dead until these HOPES pan out and that money could be invested in companies that are proving it RIGHT NOW. “Getting in early” is FOMO; a gamble on something that might happen. I don’t think it is ever worth the risk (experience has taught me this several times). I don’t believe in the concept of “flying under the radar”. The market is pretty good at figure this stuff out, depending on time-horizon. It can be noisy in the short term, but something that looks like it is “flying under the raider” likely has its reasons. I personally view the attempt to find such a story as a subconscious need to feel like a “smarter investor”, which isn’t always the same as a successful investor. I blame the movies (which I also love).

Subscription SaaS revenue just happens to be a very attractive model because it can scale without a lot of cost-scaling making for some nice Gross Margins or Operational Leverage improvement. You can give software to another 1000 people at almost no cost (depends on type, on-boarding and support and maintenance costs, but these are the context I was talking about and why Gross Margin (GM) is also an interesting number to track, among others).

My point here is I am always endeavoring to “keep it simple”. I try not to invest in stories. I try to invest in performance that is happening right now. Stories can be nice to strengthen my view of the future for a company but if it isn’t performing in the mean time I’m out. Another good way of seeing this is just looking at how happy customers are (both adding new ones and old ones spending more). Customers need to know the products better than I do. If customers are piling on then they’ve already done due diligence on the business-case so, in aggregate, I trust the customer base. Check out Shopify’s deck slide 24. Between adding new customers and old customers spending more they roughly doubled revenue YoY: https://s23.q4cdn.com/550512644/files/doc_financials/2020/q4… (you can see slide 22 for a visual of the operating leverage I mentioned above too! As they grow the margin improves).

I hope this addresses the question. I also hope this sparks some more discussion as I am by no means perfect at any of this stuff!

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My question is about revenue growth as it seems to be the number one factor necessary to be a Saul stock. Companies has overall revenue growth and then recurring revenue/subscription revenue growth. The easy company to evaluate was set up based on a subscription revenue model from inception. But there are many companies that are transitioning to subscription solutions. But their overall revenue growth is lower due to on prem solutions or revenue from service work. But their subscription revenue growth meets the requirements we are looking for. How do you factor that into the analysis of a company? I would think this sort of company could be flying under the radar

Jimmy, do you have a company in mind? Please tell us about it and we can discuss it.
Saul

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TWLO was a “hidden growth” success story.
The loss of a large previous customer was masking organic growth. Stock went from being flat for a couple years to going on a 3-4 year rocket ride.

NVDA has/had a major gaming revenue engine, which was majority of their business. It masked their surging DC business and the “story” of the AV (autonomous vehicle) upside.
While gaming has continued to grow modestly, the stock exploded because of the non-gaming growth.

TTD had a majority of their revenue in legacy desktop display ads (think banner ads) business. Profitable, with IPO in 2016. The reasons or story behind why to invest was in the growth in Mobile, Digital Audio, and the hype around CTV. While their overall growth numbers were solid thru this process, you had to realize that the display segment was flat/declining and being offset by these newer and faster-growing lines of business.

To a lesser extent, ESTC, which provides both enterprise (on-prem) type licensing and SaaS/Cloud-based offerings, was seeing greater growth in the latter (more desired) segments.

I like the idea of a 20% grower that is adapting/transforming/adjusting and has found a 200% growth segment. The question becomes, in my mind:

  1. what % of their total business is the fast-growing segment?
  2. how long do they expect that hyper-growth to continue?
  3. Do they plan for the main focus of the business to eventually be that faster-growing segment?
  4. When will it become truly material…at 50% of the total revenues…75%? Do I think the market is unaware and hasn’t priced this in yet?

Because it could win up being a NTNX that makes a switch from hardware to software/SaaS but never can really quite execute as mgmt predicts.

So you need to believe that mgmt is both competent, capable, and committed to the faster-growing segment. Otherwise it is just hype on an ER/CC.

my 2 cents,
Dreamer

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I think you are actually over-complicating it here with your question. It is what it is regardless of the “type” of company (subscription from the start versus transitioning…that doesn’t matter). If a company is growing revenue at 20% and their subscription segment at 200%, it doesn’t really matter. They are still growing at 20% RIGHT NOW. I may decide to watch this company more closely to see how it goes but until they have demonstrated that this growth will affect the top line, it is only interesting and not a reason to invest in my opinion.

Rafe,

First let me say I appreciate your insightful post. Its important to take the ‘stories’ with at least one grain of salt. In the past few months there have been several companies discussed here who have in some way failed to live up to their initial promise.With predictable consequences.

I think that while current performance is a necessary condition for considering an investment it is perhaps not sufficient. There needs to be a good reason for expecting future performance to be robust as well.

In the case of Shopify I am uncertain about its future growth rates. The most recent rate of growth appears to me to be to some extent an artifact of the lockdown, more precisely the accelerated adoption of e-commerce and web based transactions generally during the past year. Just compare the current Y/Y results in the most recent quarter with CAGR over the prior 5 years, and note also the
variability of growth numbers from year to year. (I am referencing Shopify deck slides 22 and 24 which you allude to in your post) I question whether current rates of growth are sustainable or whether the earlier less robust trend will reassert itself.For instance Zoom and DOCU you will note seem to have already conquered the world as some here have claimed and I think this is, at least to some degree true. While I think SHOP is a long term winner I see it slowing down from here rather than accelerating or even maintaining its current rates of revenue growth…

cheers

draj

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Thank you Rafe, Dreamer, Draj. Saul I really didn’t have a particular company in mind, but rather trying to sharpen my ability to evaluate and contribute to the board. I’ve done as recommended and subscribed to various paid services for new ideas. I am scouring for new companies and wanted to understand how better, more experienced investor’s think about total rev growth vs subscription rev growth. Some of the companies by TickerTarget, Beth, MF that I subscribe to tout companies with slower overall growth. Do they see something a couple quarters early?

Bandwidth, for example was recommended by a MF premium service while it’s overall revenue growth was in the 20s but it is now accelerated above 40%. I’m wondering if this acceleration could have been predicted by better investors digging into the numbers. Bandwidth has been around since 1999. It was still a slow grower in the early part of the pandemic. But it accelerated in late 2020.

Rafe, you’re right. I am looking for companies to “get in early” but what you said makes total sense. Bet on companies that are doing it right now. Is there any reason to make a bet on a company that doesn’t check all the boxes when there are plenty of companies that do? Sounds like a rhetorical question, but is there? Thank you for your indulgence for a post that isn’t strictly evaluating a specific company.

jimmyutah

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Continuing on the Dreamer’s “hidden growth” thoughts, one that I find interesting is a company that I think Saul briefly owned in the past, data integration specialist, Talend (Nasdaq: TLND).

Based on its recent Q4, Talend is unprofitable, growing at only 17% a year, and trading at a P/S ratio below 6. So, not really a Saul stock today.

It would probably be more interesting if it were a subscription-based cloud data integration specialist growing at 100% a year, trading at a sub-20 P/S ratio.

Well, it kind of is. If you isolate their cloud business, today it has an Annual Recurring Revenue of $109M, about 38% of Talend’s overall ARR. And that cloud business is up 101% year over year, and projected by Talend to grow 48% in 2021. Cloud will be about 50% of total revenues this year.

If you were to pretend that only the cloud business exists, then that business is trading at a P/S ratio below 16. And I can’t think of many cloud businesses that showed a growth rate of over 100% last year that are trading at that sort of ratio.

So, I think the hidden growth theme might fit there.

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The two company examples that I think fit this best are Axon Enterprises and Magnite.

Axon Enterprises, Evidence.com is growing > 40% and has a recurring revenue component similar to Saas companies.

With Magnite prior to the merger of Rubicon project and Telaria, Telaria’s CTV revenue was growing > 100% granted from a small base.

It may be a way to find hidden value if the overall thesis for the company is that this revenue segment will continue to grow to the main source of revenue for the company in the future. This strategy is different than Saul’s approach of finding the best companies that are executing flawlessly.

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Hi draj,

A few points stood out to me that might deserve more discussion here (editing a bit for brevity)…

"In the case of Shopify I am uncertain about its future growth rates. The most recent rate of growth appears to me to be to some extent an artifact of the lockdown, more precisely the accelerated adoption of e-commerce […] I question whether current rates of growth are sustainable or whether the earlier less robust trend will reassert itself.

When I look at Shopify’s (SHOP) numbers I see a single quarter jump but aside from that almost every QoQ number matches the growth it has shown for years. What is really neat about this to me is that they are a much bigger company each year and yet they find ways to keep growth rates essentially the same, proportionally. I posted the numbers in a recent thread about their report. Note the single jump in QoQ and the next 2 quarters are pretty close to before the pandemic…even my guess is based on this consistency. They didn’t give guidance):


	*Guess*	Dec-20	Sep-20	Jun-20	Mar-20	Dec-19	Sep-19	Jun-19	Mar-19	Dec-18	Sep-18
Revenue	*920*	977.7	767.4	714.3	470	505.2	390.6	362	320.5	343.9	270.1
YoY	*95.7%*	93.5%	96.5%	97.3%	46.6%	46.9%	44.6%	43.8%	49.6%	54.4%	57.5%
QoQ	*-5.9%*	27.4%	7.4%	52.0%	-7.0%	29.3%	7.9%	12.9%	-6.8%	27.3%	7.3%

…Zoom and DOCU you will note seem to have already conquered the world as some here have claimed and I think this is, at least to some degree true. …"

I don’t think this is true, though I agree it is commonly stated as such. I think what we are seeing here is the application of anecdotal life-evidence to investing rather than hard data. When I look around it sure feels like the whole world is using Zoom but in reality MS Teams still has the market share. I wish I could find a quick chart to show this. I am sure I’ve seen one. There is a chart here but I don’t know much about it so take it with a grain of salt: https://www.techradar.com/news/microsoft-teams-zooms-past-zo…

DocuSign has NOT conquered the world. The figure we often talk about is their marketshare; the fact that DOCU, relative to its peers, is dominant. This does not mean they have the majority of the entire world-wide TAM. Here is a cherry-picked article that matches my memory of this (with a little extra data thrown in for fun): https://blog.mywallst.com/docusign-v-adobe-which-is-the-bett…
DocuSign boasts an impressive market share of roughly 70%. It has millions of users worldwide and 749,000 paying customers as of fiscal Q2, 2021 an increase of 88,000 on the prior quarter.
…
Total revenue increased 45% to $342.2 million year-over-year (YoY) and international revenue grew 65%, making up just under one-fifth of revenue. …

So in nice round numbers that puts the market they currently address at around $500 million YoY (and around 1 million paying customers). I’ve seen TAM estimates between $25-$50 billion, like this Fool.com article from a few days ago: https://www.fool.com/investing/2021/02/25/heres-why-docusign…. There has to be way way more than 1 million potential e-signature users in the world as well.

This site defines TAM as “The Total Addressable Market (TAM), also referred to as total available market, is the overall revenue. In accounting, the terms “sales” and opportunity that is available to a product or service if 100% market share was achieved.” (https://corporatefinanceinstitute.com/resources/knowledge/st…). Now that is a bit confusing because they threw “market share” in there but since we know Docusign isn’t making 70% of the TAM, I feel safe saying this is not the same “marketshare” we are talking about here.

So at $350M in YoY rev (which is 70% marketshare), DOCU has less than 0.5% of the TAM mentioned in the article above…is that right? Even if you cut that by 2/3 and call it unproven hype for the document lifecycle management segment, fluff, etc, that is still a LOT of room to grow. Plus, that 70% marketshare makes it much much easier for DOCU to keep wining over and over again as it expands.

Anyone willing to poke some holes in this? I’m here to learn.

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Apparently a private equity company also saw the hidden growth of Talend (TLND). It got bought out today at a 29% premium. My guess is that they’ll hold it for a couple years, and then IPO it again as a fast-growing cloud play to make a big profit.

https://finance.yahoo.com/news/thoma-bravo-acquire-data-inte…

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