I have a friend who was the risk management officer for a hedge fund. The hedge fund closed a few years ago, and my friend was able to retire (he’s perhaps in his early 40s). Being in charge of risk management naturally has made him very conservative and worried about risk, and while he admires what we do on the board, he can’t get comfortable with investing in our “overvalued” high growth stocks. I got an email from him yesterday evening saying
“Saul, I have to bow to you because I’m honestly baffled why all these growth stocks you like are not at least down ytd. I get it, but it is shocking in the world of risk aversion.”
He was really puzzled. All his textbooks and MBA classes had told him we should be way down, even more than the averages. I wrote back and tried to explain (explanation below is a little expanded from what I wrote initially):
As of today’s close, my portfolio is up 23.3% ytd. I predicted that these SaaS stocks would be seen as a haven, a safe port in a storm, because their revenue is on subscription, they have high net revenue retention rates, and while companies that sell things, whether clothes, refrigerators, cars or microchips, can see revenue fall precipitously as customers don’t buy as much this year, in the pandemic, as they did last year, our companies may see revenue growth slow, but revenue itself shouldn’t fall at all, because unless a customer company goes bankrupt, they won’t pull out the software that’s running their business and keeping it running, and saving them large amounts of money, to save a few bucks on subscription costs.
while companies that sell things, whether clothes, refrigerators, cars or microchips, can see revenue fall precipitously as customers don’t buy as much this year, in the pandemic, as they did last yea
In addition to this, companies that sell stuff are having their supply chains disrupted. Also, they can not produce more because their workers cannot go to the factories to work and their inventories will get depleted. In contrast, SaaS companies deliver their products/services through the wires in the network or via waves through the air. There is nothing physical to build so the workers are not in factories but still working (software engineers) at their computers at home. Once an SaaS update has been programmed and released in the cloud it instantly becomes available to all the customers so there are no inventories to deplete.
Thanks Saul for keeping this board running and for educating us all. I have learned so much and benefited tremendously from your posts and the knowledge that you share with us. As of today, I am up 35% as well but I hold two stocks that are not discussed on this board often: TSLA and NVDA. If the market holds in April, I am looking forward to sharing my portfolio update later this month.
The big thing about these SaaS stocks is the majority of them actually are better off in a shift to remote working. That’s why SaaS stocks, as well as vaccine companies like Moderna, have held up so favorably during the selloff. Teladoc is also up and it’s not SaaS. No subscriptions.
The worst stocks are cruise lines, restaurants and oil stocks. Demand for these things dries up during a lockdown.
I just checked LYV (LiveNation). It’s down 50% YTD. People aren’t going to be buying tickets when there are no concerts to go to. BKNG, Booking.com is down, but not by a huge amount due to its staying power. EXPE, the weaker player, is off almost 50% this year. The same for TRIP Tripadvisor, which has been in a downtrend for over 5 years. RH, Restoration Hardware, which is a solid company managed by a very capable CEO, is also off 50% from it’s highs. I recall a year or 2 ago, a quarter that saw a selloff in the market, they reported lower than expected revenue growth because their high end clientele was not shopping as much due to the stock market. But these are all short term things.
In contrast, SaaS companies deliver their products/services through the wires in the network or via waves through the air. There is nothing physical to build so the workers are not in factories but still working (software engineers) at their computers at home.
There is nothing physical to build…in the short term.
But someone does have to buy and install servers, hard drives, routers, internet connections and the like or the SaaS companies cannot grow in the long term.
Some recent reports say that even though demand it up the supply of the hardware is down due to supply chain disruptions (mostly due to China being closed in Feb-Mar).
Companies that had excess capacity and/or were planning on bigger growth will be able to expand more rapidly.