Reflections upon doing my weekly graphs

Reflections upon doing my weekly graphs

As you know from the Knowledgebase, I do a weekly high/low/close graph on my stocks at the end of each week. In looking at them this week I paused for some reflection. For example, I see CloudFlare and Crowdstrike have been going straight up for quite a while.

To look at them separately, Cloudflare has gone up 141% from $34.20 to $82.40 (weekly closes) in 13 weeks!!! It’s up 136% from my first puchases in July at $34.97. It’s up 45% since I made that fairly large investment in it at $56 something about nine weeks ago when I suddenly sold out of Fastly (you’ve all heard about that at length). Let me assure you that ALL my stocks have NOT done as well.

My other straight up stock is Crowdstrike. It’s up year-to-date roughly 253% from just under $50 to over $175 at Friday’s close. I bought the largest part of my position at around $50 near the end of last year. It got as low as $33 in mid-March when everything cratered, but just for a day or so and I wasn’t smart enough to add at that point. But thinking about “straight up,” if you figure from that $33 low, it’s up 433% in nine months. Both of these companies are at all time high weekly closes, and have been closing at all time high closes pretty regularly.

These are just my thoughts and reflections, but Cloudflare and Crowdstrike seem to me to be bets on the ever-growing cloud and ever-growing data, on the need of every company for a move to the cloud, and to have better security when they do so. The market seems to feel that their growth is just going to keep going at a very high rate for the foreseeable future, and that they are not dependent on Covid for that.

Then I look at Docusign and Zoom. They had been going straight up too, but stopped. I have only had Docusign for 11 weeks, but its stock price is about unchanged in those 11 weeks, maybe up 2%, while Cloudflare and Crowdstrike have been shooting straight up. Docusign tripled its price (up 200%) from Jan to July, but hasn’t moved since then. Zoom rose ytd about 720% to its high in mid October, but it is DOWN 29% and $160 from that high, and if I look back a full 13 weeks, it’s still down about 10% even from there. So what is going on here? As I said, Docusign and Zoom had been going straight up too. Clearly something happened to the market’s perception of Docusign and Zoom in the last two to four months that didn’t happen to Crowdstrike and Cloudflare. Why???

Docusign and Zoom got enormous pushes from Covid, with huge increases in adoption of their base products Docusign-ing and Zoom-ing, but where does their growth go from here?

No one is going to quit remote signing and go back to paper, with or without Covid, but again, Docusign has already had their big growth push, and while revenue won’t shrink, and while it will keep growing, growth will slow rapidly. Think of it this way: They’ve already signed up the low hanging fruit, and with Covid, most of the middle hanging fruit as well. What’s left now is mostly the high-hanging, hard to get to sign-up fruit. Data will keep rising exponentially but the number of people who will need to sign documents remotely is finite and will come to an end!

Docusign has some exciting sounding new products in the works, but its base signature signing business is so large, and growing, with a current run rate of $1.5 billion. How much can these new products move the needle, especially since they are just starting out and are not instant set-up like the signing product? The CEO and CFO say it will be a few years until their new products’ revenue gets big enough to move the needle so that it can be broken out (see below). If they get $5 million in new sales per quarter (not bad coming off a base of near zero), they only move the total revenue needle about 1%. To grow 50% next year will take $750 million in ADDITIONAL revenue! And over $1.1 billion in additional revenue the second year. Where will that come from? Sales of their platform business will REALLY need to accelerate, considering that they are at about zero relative to their total revenue currently.

Zoom has the same problem in an exaggerated form. What do you do for an encore after you have conquered the world?

Yes, they will show 350% year-over-year growth in the next quarter, but that’s just a dead man walking. That’s the old growth that they had in the April and July quarters that got them up to this level of recurring revenue that causes that 350% yoy growth. That level of growth is already dead! It has already stopped What happens now?

I personally think that hardly anybody or any company with a Zoom subscription will cancel it post Covid. That’s not the question. It’s that Zoom has already signed up the low hanging fruit, the medium hanging fruit, and even most of the high hanging fruit that is willing to sign up. What now? They have new products like Phone and OnZoom, but they aren’t going to be able to move the needle compared to the huge Zoom revenue they already have. (OnZoom is still in beta). Zoom will keep growing but it will be a much, much slower animal than we are used to. Data keeps growing exponentially but the number of people who will need subscriptions to video with each other is finite and comes to an end. By January they will have over $3 billion in recurring revenue run rate, and it will take an enormous amount of growth to push that by 50% per year. Like 1,500 millions of dollars in the first year! And then 2,250 millions of dollars in the second! Do you see that coming from phones? Rooms? OnZoom? I see the market pricing this uncertainty in.

I hope that this helps.

Saul

PS – At Friday’s close I had a 6.65% position in Zoom and an 11% position in Docusign. For comparison my positions sizes in Crowdstrike and Cloudflare were 28.2% and 22.7%

PSS -
I found these quotes from Docusign’s CEO and CFO (UBS Conference Dec 7th). Bolding is mine, of course. Doesn’t mean it will be a bad investment. No one will go back to paper, just that it won’t grow as fast as you may be thinking. See my comments below too!
Saul

Question

Yes. And Dan, maybe just sticking to the product, just more broadly across both the CLM side and the eSignature side are there one or two relatively new products, you mentioned Notary and Analyzer? Are there one or two that you think could be, let’s say, needle movers in fiscal 2022, or fiscal 2023? What are you most excited about is having an impact on the business as we look out into next year?

Dan Springer CEO

And I think the big three for us will be CLM, the Advanced Analytics, and Notary over the next two years. And Notary will never have the total opportunity that CLM or Advanced Analytics have. It’s going to be, a more sort of specific set of use cases. And so it’s not going to have the breadth of growth, but it’s going to be a good growth opportunity for it that will play out over a few years, the other ones will play out over many, many years.

Now, in terms of needle moving, I think that will be the difference between good and great. They won’t, in the next few years, just because of the size of signature, be in a position where we’ll be saying, Hey, this is an important part of our total business. So as an example, like, I think if you go to Cynthia and you say, Cynthia, when will you break out some of these other products? It won’t be in in fiscal 2022. It might be there in 2023, I don’t know, Cynthia, you’re more knowledgeable, about when that would be appropriate, what? I wouldn’t say 2022, would we say 2023 is possible? What’s your thoughts on that?

Cynthia Gaylor CFO

… I would say it’s probably, it’s likely to be further out than that, if you just think about, those the product suite, and just kind of the how big eSignature is as a percent of the revenue today. Right and how quickly it’s growing. The other pieces are growing, but just off of a much smaller base.

Saul again:
Remember FY 2021 is now, and ends at the end of this coming January, Jan 2021. So Fiscal 2021 is pretty much calendar 2020, so what they are talking about is not as far away as it sounds. February starts FY 2022.

So here is what we have: the CEO saying:
They won’t, in the next few years…
Then saying: would we say 2023 is possible? Questioning what he just said (“They won’t, in the next few years”)

And then the CFO saying :
it’s probably, it’s likely to be further out than that.

Okay so the consensus is probably that their best guess now is that their new products won’t have enough revenue to move the needle or be broken out separately until FY 2024. That starts in Feb 2023, two years from this coming February. But they may just be being cautious. (Or overly optimistic because they don’t know yet. And there is no real competition in Signature, but there is competition in the platforms that they are talking about.)

Look, these are both good companies, and will grow well into the future, just not as fast as they were growing these past few quarters.

Saul

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Thanks for the write up, Saul.

The only counter I have to the DOCU thesis you laid out is that DOCU’s international revenues are only 20% of total revenues. Adobe (admittedly, not a like-for-like competitor, but looking at them for the sake of this discussion) gets more than 40% of revenues from the international division.

I don’t know what DOCU’s post COVID growth rate would look like, but I’d imagine international growth would support it’s total growth rate for the next few quarters (maybe years).

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When asked about growth post Covid on the last earnings call, the CEO said the following:

Yes, yes. So let me tell you what I know and what I don’t know. What I know is what Cynthia just reported to you, which we had, something I can say for the last three quarters, the highest rate of billings growth we’ve ever had in our history. And didn’t think that would happen this quarter after last quarter, and it did.
Given the compare in Q4, you see the guide, I don’t think we would say we expect that to happen again, by any means, next quarter. But the growth has been very strong, and it’s been consistent. So the tricky part of your question is in the post pandemic. I have no idea when that’s coming, any more than any of the other people on this call.
My sense is that it has been an accelerant to our business. So there would be some lack of that accelerant occurring in a post-pandemic world. But at the same time, I think the second part of your question, which is really important is we’re also hitting our stride with the capabilities we have and the rest of the Agreement Cloud. And we’ve also built a lot of sales capacity, right, as we’ve seen this opportunity.
And because the TAM is so big, I think the biggest determinant of our ability to grow is our ability to onboard quality people that can build the software that we need and then represent and sell that software into the marketplace so we can then work with our customer success team to drive adoption. So if we can continue to scale our team effectively, I think we can continue to grow at very exciting rates. So I think that’s kind of how I look at it right now. And I do think it’s going to be a little while before we realize what the new normal will be.
And what we said the last couple of quarters what I still think is what we’d say today is that, at some point, the sort of enormity of the tailwind that is there will be less enormous. But it may be substantial that people have said, digital transformation is what I need now, and they flipped a bit. And we will continue to see strong growth of that. But my assumption, not really having any detailed ability to guess the future, is that, that growth will be at a higher rate than we were pre-COVID happening but probably not at the same growth rate that we’ve seen in the last few quarters, where it’s been amazingly heightened.
So I think it will be very strong growth and probably higher than you’ve seen previously. And so when we look at our revenue growth, I think you’ll see next quarter — when Cynthia pulls together, I think what you will see is an exciting growth future for us, and probably from a billing standpoint, slightly below the incredible numbers we put up the last few quarters.

So the CEO thinks growth next year will be above pre covid levels (38-40%) but below last quarter (53%).

Jim

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FWIW: We are a medium-sized tech company and we are switching from AdobeSign to DocuSign next year. They have more features and will allow us to integrate the contract process deeper into our product.

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Hi Saul

Everything you write makes sense. However whilst both Docu and Zoom have peaked in the US I believe there is still massive room for growth internationally.
During the last earnings call Kelly Steckelberg said:
Our combined APAC and EMEA revenue grew 629% year over year and was consistent with Q2 at 31% of revenue. We plan to continue to invest in international expansion to capitalize on our brand awareness and the increased global opportunity. Now turning to profitability.

They grew from a relatively small base. I am UK based, zooming is not a verb here yet. My observation is that Zoom has not penetrated the market yet (we are still using MS Teams, whatsapp and Skype) in Europe. If they will manage to land here, there will be a massive opportunity for growth.
Docu has started to expand in Europe but has a huge opportunity to grow further. Many companies here in Europe began using either Adobe or Docu to manage signatures electronically. It is moving now from land towards expand (I am working for a big FTSE 100 company and we are expanding the use of Docu massively).
So given that Covid will continue the WFH trend for another quarter and assuming there is room for international expansion I believe it is worth holding on to my 13% in Zoom and 3% in Docu.
If they manage international expansion we will see a continuation of growth short to medium term.
Particularly on Zoom I am worried we might face a cliff after Q1 but I don’t see better investments at this stage.
So I am using the next couple of months to identify alternatives and decide after the Q4 earnings where to move my money… I hope this will not be too late.

Cheers,
Sven

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Interesting that although DOCU has gyrated in this 220 zone since 8/2020 there was a marked spike at the time of their previous earnings release in early 9/2020 which just as quickly fell off with no news. Did the market suddenly change its collective mind about the runway?

The stock started to take off in 3/2020 after a clearly COVID overall market slump. Their earnings call for 3/2020 for Q4 gave a 10% sequential for revenue increase of $25m (so pre-Covid)

Their sequential revenue increase went 8%-15%- 12%. So the stock continued a steady rise despite the sequential growth rate going down for 2021 q 1 earnings call early 6/2020 with revenue growth of $24m, Earnings call early 9/2020 for revenue increased by $43m.

So playing with the numbers a bit what may have happened is the q2 15% probably picked up some of some of the growth that would have otherwise fallen to the q1 2021 (earnings call 6/1 covering Feb 29 to April 3). So not only was q2 good but it looked great compared to the COVID nicked q1. That makes the rate of increase going from 15% to 12% smoother and possibly more palatable.

If one draws a line on the stock price from 3/2020 to the peak of the spike in early 9/2020, the line is fairly straight. Interesting.

So why the fall off after a blowout quarter and the 9/2020 earnings call? TAM is 25b, earnings call they are targeting $5b “within a few years”. So currently at about 10% of TAM. Was the market being as rational as Saul? Or missing the CMF_muji write-up?

They guide for revenue of $404-408m in 2021Q4 which would be a 6% sequential but they have guided Q1 6/2020 earnings release for Q2 $318m and we got 342 and q2 9/2020 earnings release for q3 360 and we got 382. Probably reasonable that revenue will be higher than 408m for q4 then? They say they will give guidance for the entire fiscal 2022 at the time of their next earnings call (early 3/2021).

So for me, I still see a fairly rapidly growing company with a lot of room to grow. 40% growth for year revenue, 80% gross margin, very light business and quarter FCF of 38m. I am not sure how to define “low hanging fruit” - I understand the concept, I am just not sure that DOCU can’t pick more fruit from the 22b or so remaining TAM. So I am happy to hold, bottom line.

Basic question, but is there a seasonality to their business? Real estate deals revolving around the school year (perhaps a moot point in 2020 for sure).

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I am UK based, zooming is not a verb here yet. My observation is that Zoom has not penetrated the market yet (we are still using MS Teams, whatsapp and Skype) in Europe. If they will manage to land here, there will be a massive opportunity for growth.

I do agree that Zoom likely still has a lot of room to grow internationally. However, all of my UK based friends and relatives are using Zoom at work; for catching up with friends; and for exercise classes. It’s exactly the same here in Ireland - all references are to Zoom, rather than any other video-calling app.

Just another data point!

Alex

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Let me point out that I am still rooting hard for Docusign and Zoom to go up as they make up around 15% of my portfolio. I’m not angry at them. I’m just pointing out reality. I posted my observations just to alert people that, for Zoom especially, the sequential 77% and 102% growth that we saw during the April and July quarters, isn’t something that we will see again! With a $3 billion run rate, it will take a miracle for Zoom to grow at 50% next fiscal year. It would take adding 1,500 million dollars in revenue in a year, and I don’t see any way for that to happen. Last quarter they added 113 million dollars. In a quarter! Let’s be real about our expectations!
Saul

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Saul,

It is my understanding that Zoom doesn’t need to grow at 100% sequentially to reach 50% revenue growth for the next FY. They don’t even need to grow sequential revenues at 20% avg for that to happen. It’s not priced for this kind of growth anymore.

If they can average ~11% sequential growth in the next FY then the next FY revenue growth will be over 50%. Last Q revs grew 17% QoQ and using their guidance with past beats over guidance- I am expecting at least 17% QoQ growth for this Q. Which shouldn’t be far fetched with where we are in the pandemic.

My point is that it will not take a miracle for sales to grow 50%+ next FY and I even find it likely to happen.

Bnh

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The missing detail in your “50%” YoY growth statement is that sequential QoQ growth has fallen and will likely continue to be in the same range as we saw at last quarterly report.

ZM will grow for a long time. It will not be a 100%+ QoQ grower. <-this is what popped the stock to over 600% this year.

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If they can average ~11% sequential growth in the next FY then the next FY revenue growth will be over 50%.

Their 4Q guide is $811. That’s a $3,244 run rate.

And if they grow 11% QoQ here’s what that looks like:


1Q   $900
2Q   $999
3Q $1,109
4Q $1,231

So, going from a $3,244 run rate to $4,924 is 50% growth. But the question still is, “Where are they going to find this additional $1.68 billion in business?”

On the conference call they talk about OnZoom (in beta), and selling phone into their existing base. Is there $1.68 billion there?

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The point is not whether ZM will grow 30% or 50% next year. The point is ZM will significantly slow down from 100% QoQ growth rate. This will have negative effect on the stock price for few months to 1 year. But can ZM settles on a steady 50% YoY growth rate for the next few years? It’s hard to say for certain. And even they can do it, 50% YoY is a very slow growth rate when we have 100% YoY growers to invest in.

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CloudL,

ZM sequential revenues have already had a significant slowdown from 100%. This is no surprise. Look at the last report they just released. The market isn’t expecting them to return to anywhere near 100% (or even 20%).

ZM stock can do very well if the sequential growth rate stabilizes in the range of 10-20% over the next few Qs. I understand that there are questions about where the next leg of growth will come from, but a large growth slowdown from 100% QoQ has already happened.

50% growth is not very slow even for this board. What 100% growers are there besides SNOW/TDOC?

Bnh

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Bnh, TDOC guides next year organic growth in 40s. They actually upped few months ago from 30s to 40s. Don’t confuse it with “acquisitions-based” growth rates.

Hi bnh91,
The revenue slowdown affect on stock price doesn’t just last 1 quarter and rinse and the stock continues to rise. Last quarter growth rate was 17%. Yes the stock dropped 12% but did it slowly climb 17% like nothing happened previously? Nope. It was flat line. The buying is not strong enough to push it up. For high quality growth stocks, their stock price go up slowly but steadily between earnings in anticipation of continuously growing revenue. Right now, the market is on a wait and see or is anticipating stagnation of revenue ahead.

I am currently long: CRWD(20.8%), PTON(18.7%), SNOW(16.l8%), LPRO(12%), AHCO(10.3%), and a little bit of LMND(2%).

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What 100% growers are there besides SNOW/TDOC?

Since you asked…
Peloton
Ontrack
Mercadolibre (on a Fx neutral basis)

and there or there about…
SEA
Shopify

(I hold all of the above which combined make up >20%).
Ant

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DOCU’s eSignature subscription revenue is not seat-based, unlike Zoom. I see your point about getting the low hanging fruit during Covid, and thereby front-loading the growth of many years into one year. But there’s a notable difference in the way DOCU and ZM monetizes each onboarded user. DOCU uses capacity based subscription, they make revenue per transaction, which is number of envelopes to sign. It’s not clear cut like payment processor companies, but below is the Q&A with the CFO about capacity based revenue. So in a way, as more digital envelopes are signed, the more DOCU’s revenue will rise. DBNER also reached 122%, which is an acceleration while onboarding the record high user base. These two usually don’t happen simultaneously, because an acceleration in newly onboarded users temporarily brings down DBNER.

Scott Randolph Berg Needham & Company, LLC, Research Division – Senior Analyst
How do your salespeople tackle pricing? When you move from a single product like on the eSignature side, I know it’s priced on an envelope nature, but as you move in and expand Agreement Cloud, which has kind of some different components there, maybe it’s seat based, maybe it’s usage, you’ve got some different versions there, but how do you approach pricing maybe as you expand the product set?

Michael J. Sheridan DocuSign, Inc. – CFO
Yes. So I would start with eSignature. You’re right. It’s – we call them envelopes. Our customers’ purchase capacity is a subscription and that capacity, essentially, think of it as an envelope as number of transactions that they have capacity to execute. But we have the ability, we have product SKUs that are based in seats for eSignature or based in users for eSignature. We’ve structured our pricing and packaging to appeal to that broad set of customers and how they like to purchase.

The thing about eSignature is even customers that purchase it in terms of seats, for example, there are still reasonable levels of transactions that underlie those packages. And so it’s still transaction-based in terms of capacity.

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In addition to those already mentioned, here are two more that are well north of 100% growth; one has a recurrent revenue stream while the other is a great FCF generator:

IIPR: 147%, 160%, 194%, 270%, 210%, 183%, 197% from Q1 2019 to present (left to right)
ETSY: 137% and 128% over the last two quarters but with gross profit growth of 160 and 157.

While neither belongs on this forum in strict terms, IIPR does meet the fundamental idea, as I see it, of high growth plus predictable revenues.

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Cannabis stocks are specifically OT for our board.
Saul

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