We are trying to find companies that are (were recently) growing fast. This is not difficult because all we need to do is look at the past 2-3 years of results to see how they have been growing. The next step is more difficult. We must make a judgment about the future growth. Will the company continue to grow? Will growth accelerate or decelerate. We need to look for clues to make an assessment. What is management saying on the earnings calls? Are they seeing more opportunities and an increased pace? Are they introducing more products/services that can help generate more revenue? What is the churn and the net dollar based expansion rate? Is the market close to saturation or still wide open greenfield? Is there competition. There are many things to consider, and we must determine what is relevant and what is irrelevant (this will be the topic of another post).
In January, there were some concerns about MongoDB’s continued success in the market due to Amazon’s announcement of a competing offering. This can sound scary but it is relevant or irrelevant? Is it a negative, neutral (no consequence), or even a positive. Each investor must decide how to weigh new information and decide whether it warrants taking action.
I previously avoided investing in 2 companies because I was concerned about the sustainability of their business model. The concern has to do with the idea that the growth that was there in the past to years will disappear, that we might see a deceleration which would result in a declining stock price and no more price appreciation for investors. The two companies are OKTA and TTD.
Last Spring (May 2018), I has a conversation with Saul about OKTA. I couldn’t get on board because I was concerned about their business model. I thought that OKTA is more subject to getting disrupted that alternative companies in which I could invest. I didn’t buy. But the companies kept posting stellar results. I finally bought in November, a couple of quarters later. At that time, I still had reservations about the sustainability of the business model. They can get disrupted once someone comes out with a better way to manage security, I thought. But I thought that I might be wrong for a while and why not make money on OKTA while they continue to deliver amazing business results. I could always sell later if I smell a deceleration. I added substantially to my position in late December when I finally sold my remaining NVDA. I have now changed my mind on my business model concerns and OKTA has continued to deliver good results. I have no plans to sell but I will continue to monitor the results and news on an ongoing basis. My expectation has completed changed to one where I think they will continue to add functionally and more revenue generators. I am expecting a reacceleration of revenue growth.
This was another company that I avoided. The concern was also related to the business model. Digital advertising companies have had challenges and competing with Google and Facebook is not a place where you usually want to be. I had a bad experience with Criteo a few years ago. But the business results of TTD where so good. The vision of Jeff Green seems extraordinary. I made a similar decision in buying TTD. As long as the business results continue, I will probably stay invested. I will continue to monitor.
Now we get to ESTC. It has better growth than all the others (except recent spurt by MDB and the amazing growth of ZM). I don’t really understand the technical nuances of their offering and I’m not really sure how Amazon open source project will affect ESTC. But I do like the growth. Like OKTA and TTD, I want to give ESTC a chance to keep doing what it’s doing with respect to reporting continued growth. My confidence in OKTA is now very high. My confidence in TTD is less high (probably in part because of my own ignorance). And my confidence in ESTC is the lowest of the three. But the business results give me enough confidence to stay invested. Will the Amazon threat result in future growth deceleration or will it be of little consequence. I am currently betting that the threat is of little consequence to my investment, but I may change my mind if the business results show signs of faltering.