Runway for High Growth Stocks

anthonyms · January 18, 2021, 12:03pm

Whilst not an over-riding concern but a preponderance that occurs to me every so often is the runway our high growth stocks have.

Over the years we have seen Saul make pretty sharp exists when rocket ships begin to resemble mere jet craft and we know that the theoretical S curve is in part defined by the remaining TAM and the terminal growth rate of the market place.

Given that we are concentrated into our SaaS holdings which are experiencing hitherto unseen rates of growth it concerns me that we are in completely uncharted territory.

On the one hand we could just carry on switching when we see growth rates decline and the rocket ships to morph into jet planes yet on the other hand - we do get occasional head fakes (e.g. Twilio) and yet still we also see massive gains escape us when some of these declining growth rates shake us out of positions with potential Amazon scaling opportunities (Shopify and The Trade Desk).

Furthermore - occasionally we are left scratching our heads as to the potential room for growth with key positions (Zoom and Docusign) where we are wondering just how much more potential there is left in the market.

For all of these reasons I wanted to take a look at the discernible TAMs of our top positions as well as the penetration rates (TTM revenues) that our companies have achieved with respect to their market potential.

I also do wonder some times as to the relationship between the EV and some of the TAMs although this needs to also deserves consideration of other metrics like GM.

In any case I have looked at my top 20+ positions and calculated the TAM (either self declared or analysed) and the penetration rates according to the most recent TTM revenues.

I intend to track this and reflect on this further but in the meantime here’s where I have got to.

Overall Portfolio TAM & Penetration rates ranked by holding value


**#  Holding        Portfolio(%) TTM ($bn) TAM ($bn)  Penetration (%) Comment**
1  Shopify        15.3%        $2.46bn   $250bn     1.0%            Calculated as 5% take rate of $5trn eCommerce mkt
2  Crowdstrike    11.8%        $0.761bn  $32.4bn    2.3%       
3  The Trade Desk 8.9%	       $0.732bn  $725bn     0.1%
4  Zoom           5.7%         $1.96bn   $30bn      6.5%
5  DataDog        5.0%         $0.539bn  $24bn      2.2%            Unified monitoring = $8bn
6  MungoDB        4.6%         $0.542bn  $63bn      0.9%
7  Square         3.8%         $7.65bn   $160bn     4.8%            TTM includes Bitcoin revs
8  Elastic        3.5%         $0.510bn  $53bn      1.0%
9  Teladoc        3.4%         $0.867bn  $121bn     0.7%
10 Alteryx        3.3%         $0.491bn  $50bn      1.0%
11 Fastly         3.1%         $0.267bn  $35bn      0.8%
12 MercadoLibre   2.7%         $3.32bn   $35bn      9.5%            Calculated as 5% take rate of 5% ecommerce pentration of a $5trn retail market plus consumer banking opportunity
13 Cloudflare     2.7%         $0.389bn  $35bn      1.1%
14 Palantir       2.6%         $0.999bn  $119bn     0.8% 
15 Pure Storage   2.5%	       $1.67bn   $50bn      3.3%
16 Nutanix        2.1%         $1.31bn   $90bn      1.5%
17 Micron         2.0%         $22.06bn  $200bn     11.0%
18 Sea            1.9%         $3.59bn   $150bn     2.4%            PC download and mobile gaming $97bn SE Asia ecommerce & payments $30bn
19 Exp World      1.2%         $1.46bn   $15bn      9.7%            1% of US housing transaction market
20 Asana          1.1%         $0.202bn  $45bn      0.4%            Productivity management software
21 Docusign       1.0%         $1.3bn    $25bn      5.2%
22 Snowflake      1.0%         $0.489bn  $84bn      0.6%
23 ZScaler        1.0%         $0.480bn  $72bn      0.7%            (SAM)

Observations

All these TAM numbers look pretty huge
Most penetration rates are tiny ~<1% to 2%
In particular penetration rates for Zoom and Docusign - the ones we are worried about appear higher than others but still are only ~5%
The companies with the highest TAMs have defied expectations either of sky high EV/S or share price progression or both (Shopify, TTD, Square, Snowflake)
Teladoc, Palantir and Sea appear surprisingly well cushioned with extremely high TAM values and low penetration rates
Potentially eXp holdings and Micron look the most vulnerable with their penetration levels despite continued strong growth rates

(N.B. This ranking table was from 2020 year end. Since then I have sold down Micron and reinvested in Snowflake, Skillz and Lemonade.)

Cheers
Ant

12x · January 18, 2021, 1:36pm

As we all know, TAM can often be inflated. TTD’s number for example of $725 billion. TTD and it’s cohorts will never see that number, because TTD only takes 20% of the transaction. TTD’s TAM is somewhere to $145 billion. Then take out all print, radio and any other advertising that TTD does not partake in.

MU is another example. I’m not sure about the $200 billion TAM what that number includes. But since Micron is a memory manufacturer, only the memory portion of semiconductor TAM is relevant. And Micron I believe is number 2 in this space and very competitive. Samsung is number 1, and always will be number 1, so long as they continue to produce their own memory that goes into their own finished products. In some memory types, Micron has over 50% market share. They are only really able to grow if the industry does.

One of the things I was pretty critical of is Elastic announced a bunch of new offerings right before they went public, which exploded their TAM. It doesn’t necessarily mean they will compete in every single category that they have an offering in. They add a SIEM product and all of a sudden this product they may not hardly be selling any of gets lumped into their TAM and suddenly their TAM goes up $30 billion. When the $8 billion “search” industry is where their strength is.

MongoDB for example does not even have a product offering in every type of database category to capture anywhere near $63 billion TAM.

I also do wonder some times as to the relationship between the EV and some of the TAMs although this needs to also deserves consideration of other metrics like GM.

I used to take this approach but it seems like it can drive someone down the wrong path. For example, with Zoom. The best I can tell by looking online, videoconferencing is a $5.3 billion TAM industry. In no way would that ever support a $100 billion Zoom market cap valuation. But yet here they are with one.

There also needs to be consideration that even in stagnant, mature industries like videoconferencing, a disruptive technology can come along where a single company can exponentially increase the TAM.

So at the end of the day I’m not sure what weight to put on TAM on any of these companies, aside from Micron. It seems to be a very misleading number. There may be exceptions. For example, we can get a pretty good estimation of TAM for dialysis machines, for example, if a new dialysis company comes along we can’t expect that to change much. But there are other companies that can come along and increase the TAM just by offering an excellent solution and getting sales out companies/people that otherwise wouldn’t have bought, thus increase the TAM.

anthonyms · January 18, 2021, 5:14pm

All good points 12x and whilst I won’t go through all of these stocks and label everything, what I would say is:-

Yep I’ve come across outlandish TAM claims but what I have taken is a cautious triangulation on these numbers and looked for multiple sources and tried to stay conservative where I could
Taken the latest most up to date figures. For instance yes I had commented before on the VC market worth $5bn a year or so ago but that went up significantly in 2020 to around $9bn but adding Zoom phone has increased the TAM for Zoom. Same for Crowdstrike and ZS where their TAMs were only $12-15bn a few years ago but with market growth, acquisitions and new product launches they have built up their TAMs
I’ve also paid attention to breakdowns of portfolio offering and market subsegments (e.g. Sea and Mercadolibre with payments and ecommerce and gaming and even Micron with DRAM and Nand).

Anyhow - very much appreciate it isn’t an exact science.

Ant

TMFTiptree · January 18, 2021, 5:31pm

12x,

For example, with Zoom. The best I can tell by looking online, videoconferencing is a $5.3 billion TAM industry. In no way would that ever support a $100 billion Zoom market cap valuation. But yet here they are with one.

Before the iPhone, most people (at least here in the US) never thought they would need a smartphone. And Apple would never be a $2T company. But yet, here we are.

The point I am making is the “traditional” video conferencing TAM was predicated on the limited use-case that existed pre-covid. But a superior product changed peoples perception of videoconferencing, just as the iPhone changed peoples perception of smartphones.

Zoom is ubiquitous and synonymous with videoconferencing. It has changed the parameters for that market by making it accessible and easy to use. Not that Zoom will become the next Apple, but certainly we cannot rely upon outdated market estimates in a niche that has so fundamentally changed.

Tiptree, Fool One guide, long ZM

n8larson · January 18, 2021, 7:21pm

…I wanted to take a look at the discernible TAMs of our top positions as well as the penetration rates (TTM revenues) that our companies have achieved with respect to their market potential.

This is excellent and for me it captures very well the spirit of what we’re trying to achieve as investors. The concepts of (a) S-curve, (c) head-fake, and (c) how each of us decides when growth-rate declines indicate an exit point are three fundamental concepts in what I think of as ‘MTBH investing’, with mid-term being, say, 1-3 years instead of TMF’s stated 3-5+.

AND, I don’t think it went far enough. TAM is tough to pin down as said in an earlier reply, but I think “runway” could be a potential decision element for investors who could use guidance on where to direct their research attention. To that end, here’s the same info from a different angle… ant’s list sorted instead by TAM penetration % as that runway measure (and with a few other minor edits for clarity):


**#  Company      TTM Rev($B) TAM($B) Penet'n  Comment**
1  The Trade Desk  0.73      725     0.1%
2  Asana           0.22       45     0.4%    Productivity management software
3  Snowflake       0.49       84     0.6%
4  Teladoc         0.87      121     0.7%
5  ZScaler         0.48       72     0.7%    (SAM)
6  Fastly          0.27       35     0.8%
7  Palantir        1.00      119     0.8% 
8  MongoDB         0.54       63     0.9%
9  Elastic         0.51       53     1.0%
10 Alteryx         0.49       50     1.0%
11 Shopify         2.46      250     1.0%    Calculated as 5% take rate of $5trn eCommerce mkt
12 Cloudflare      0.39       35     1.1%
13 Nutanix         1.31       90     1.5%
14 DataDog         0.54       24     2.2%    Unified monitoring = $8bn
15 Crowdstrike     0.76       32.4   2.3%       
16 Sea             3.59      150     2.4%    PC download and mobile gaming $97bn SE Asia ecommerce & payments $30bn
17 Pure Storage    1.67       50     3.3%
18 Square          7.65      160     4.8%    TTM includes Bitcoin revs
19 Docusign        1.3        25     5.2%
20 Zoom            1.96       30     6.5%
21 MercadoLibre    3.32       35     9.5%    Calculated as 5% take rate of 5% ecommerce of a $5T retail market + consumer banking opportunity
22 Exp World       1.46       15     9.7%    1% of US housing transaction market
23 Micron         22.06      200    11.0%

Of course this is just a smallish sample, but my primary point is that it’s worthwhile to combine this kind of “which companies have their slingshot stretched the tightest” info with other key factors like leadership, scalability, and how well these companies might expand into other product families (Docusign’s not going to be the next Amazon, for example). I think most of us probably do it to some degree already, just not with an ordered list like this. The biggest hurdle is probably that there’s really no way to know what penetration % represents the steepest part of the S curve; that’ll vary by company.

So, pick your own candidate companies, whether you already hold them or not. Add criteria* if you like. Yes, the denominator is a shifty beast, but that’s okay. Use rough estimates. Group the results using other factors. Then insert “runway” into your conviction formula.

For what it’s worth, on a related note I agree wholeheartedly with the premise that we want companies that are not only disrupting industries/sectors by offering a better mousetrap (need a different analogy for Saas) to grab market share, but taking control and remaking them in their own image, as Apple did with the ‘connected mobile’ space.

-n8 (I *thought about adding MC or EV to this list, but wanted to stay on the subject of TAM/penetration)

WillO2028 · January 18, 2021, 8:22pm

Not discounting the amount of work given so generously, I do look at TAM as important. I just also think it’s important to put the following into consideration for context.

Bert once wrote and Darth said he put this into his permanent file.

He said something along the lines of “you simply can’t effectively calculate the TAM and market for a company that sells to developers. And that whatever you or the market come up with one day will be completely irrelevant the next as developers develop.” And thus for these types of companies hyper growth has longevity.”

tamhas · January 18, 2021, 9:16pm

Not just for developers … any company which is providing a new capability basically starts out with a zero TAM and creates the TAM as people discover what is possible. This also applies in cases where there might have been an identifiable TAM, but new capabilities, new circumstances, new acceptance or whatever changes the environment and radically alters the realistic ultimate TAM. ZM seems a good example of this, particularly in combination with COVID, where the landscape for the future is very different than what we would have expected a year ago.

RafesUserName · January 18, 2021, 11:56pm

This is going to be more abstract to try and paint a picture of how I think of tech and our companies…

We have Moore’s Law on our side (https://www.investopedia.com/terms/m/mooreslaw.asp#:~:text=M…) This is a very serious pattern. The entire human race is driving technology forward like no other industry, ever.

I wouldn’t recommend the entire book The Singularity is Near (https://www.amazon.ca/Singularity-Near-Ray-Kurzweil/dp/01430…) but it is worth wading in to as it speaks to fears that various technologies inspire as well as how technologies are in an arms race with each other as well as good and bad actors. I took a positive message from it and it was very interesting.

Both of the above deal with the fact that technology is accelerating and isn’t likely to stop any time soon. So we have an underlying multiplying force…like a wave (look at it as the TAM or technology in general), and companies form to try and surf this ever changing and growing wave. Some catch a good ride others don’t. Some just cruise on it, adjusting to stay in the sweet spot for maximum speed and enjoyment. Some take their eyes off the wave, get stuck in their own path and fall.

My point is there are a lot of factors that cause companies to fail or succeed that go far beyond conquering a present-day-TAM…and expecting that TAM to exist in the future in the same way it does today is flawed, especially with tech (it could go away, like the DVD, or it could grow massively, or simply mutate). The favorite example is Google and their book TAM…not the TAM they play in now, that is for sure. So beyond TAM there is the as-yet-unknown changes to the landscape that can trip up companies (AYX?).

The way I see it we are betting on two things we want to see.

The company is landing and expanding with their current offerings
The company is adding new offerings, and since this is tech, they are innovative enough for us to trust this will continue.

I think these are the two most important qualities. TAM only matters TODAY, as it helps us decide they are in a place where these 2 qualities have ample room to accelerate. It is something I like to consider when deciding to invest. After that it is of interest but I don’t think we can project and get much helpful information.

ronjonb · January 19, 2021, 4:09am

I’d think about TAM this way…

For 2 of my top 3 holdings…

#1: CRWD: Adding more modules to the Falcon platform means creating more TAM. Also, IoT devices ( a market that’s exploding), medical devices, self-driving cars; all that tech up there shaping our future are going to run software that runs on the cloud and obviously all those devices, endpoints, containers will need to be secured. CRWD handles about 4 trillion events each week! That’s more events in one day than all tweets on twitter in a year!

#3: SNOW: How much is a “Zettabyte”?. Well its 1,000,000,000,000,000,000,000 bytes! According to IDC, the world’s digitized data will hit 175 Zettabytes in 2025! It’s probably around 50 Zettabytes today and was around 2.7 Zettabytes in 2012. So, you get the picture of the explosion of data. As mentioned above, IoT devices, biological sciences and many others are already contributing and will be producing even more data.

So, TAM is not a static number for innovators and companies that have successfully built a cloud native platform but rather an expanding value. Many of these companies may have started off by solving one problem really well but it’s quite possible to take another problem around it’s area of expertise and solve that too; thus increasing the TAM! The innovation and competitive edge at each of these companies will decide their TAM. Atleast, that’s how I see it and also have learnt from watching the growth of AMZN and APPL.

Cheers!

ronjonb

anthonyms · January 19, 2021, 5:46am

Hi Ronjob - that’s kind of what I was meaning when referring to secular tail winds and terminal growth rate.

Same goes for Shopify with the gradual and relentless conversion of retail to ecommerce or offline adverting to digital advertising for TTD.

Investing in slam dunk secular tail wind situations adds huge amounts to conviction.

Cheers
Ant

1poorguy · January 19, 2021, 1:07pm

“TAM” is a new concept for me. Never heard of it before entering this board.

I think that is a really difficult thing to pin-down. Some things create their own market, and so TAM may actually go down even though the company is growing because the market is expanding even faster.

If I’m understanding, I would harken back to the PC market. I’m old enough to remember green-screen PCs that ran VisiCalc and a word processor (that was before even WordPerfect or Word). They were gadgets in search of a purpose. The market was almost zero, so even if you had 100% penetration the market was so small it didn’t matter. Then the market exploded. Dell made a lot of folks a great deal of money, for example. Microsoft too. Apple. Intel. Fast-forward 40 years and that market isn’t really growing much. PCs are ubiquitous. It seems to have reached a maximum, or nearly so.

So is TAM really a useful metric? Seems like it’s a moving target. It can be a large figure because the market is small, or a small figure because the market is large, and doesn’t really tell you anything about the company or it’s prospects.

1poorguy

RafesUserName · January 19, 2021, 5:11pm

> " “TAM” is a new concept for me. Never heard of it before entering this board. … I think that is a really difficult thing to pin-down. Some things create their own market, and so TAM may actually go down even though the company is growing because the market is expanding even faster."

The TAM, or total addressable market, is just the subset of the entire market that is realistically a target for a company’s sales.

TAM can’t go down unless the market itself is going away, like brick-and-mortar video rental stores. If the market is expanding the TAM is expanding. The company in relation to it doesn’t factor in to the TAM itself.

> “So is TAM really a useful metric? Seems like it’s a moving target…”

This was the point of my previous reply.

TAM is often misstated as the whole market rather than just the addressable part. Even when stated correctly, it is open to interpretation and is always changing. For example, Snowflakes market isn’t all the data in the world. it is (to over simplify) the part that is left after you remove normal file storage and on-premises storage that will never migrate. That last part is probably different depending on who you talk to, what industries and companies are involved, etc. Even if this is a bad example I hope it illustrates why finding an exact TAM is wasted effort and often only a vague sense of TAM is more than enough to decide on some things.

“…It can be a large figure because the market is small, or a small figure because the market is large, and doesn’t really tell you anything about the company or it’s prospects.”

Absolutely the opposite. First, TAM is not related to the company size. It is the real size of the market. If it is small then it is because it is a small market. Second, It DOES tell you about a company’s prospects. If a lemonade stand has a TAM based on the cars that drive past in the couple of hours it is open it is unlikely to grow to a billion dollar valuation any time soon. We talk about this all the time. One of the most important factors for me when entering in to a new investment is that the TAM is sufficiently large. I don’t want to bother with tiny niche markets (large ones can be ok).

A limited TAM was one of the bear-cases for Livongo, which really could only work in the US in its form at the time. Perhaps that is one of the reasons they wanted to sell/merge. Livongo’s TAM was something like US insurers’ customers with diabetes AND who ALSO WANTED to use the app to proactively change AND who would use it for the long term (to keep churn low; they really mean it when they say they want to change). You could have stopped short and said their TAM was all people with diabetes, but that is totally incorrect and inflates the opportunity in an unrealistic way. That is not the true addressable market, which is in fact much smaller. Even if you argued it was all the people with diabetes who ALSO were covered by an insurer that could potentially sign up with Livongo, I could buy that but still argue it is a subset of that in reality…I mean if you want to bet on it with your own money wouldn’t you prefer a conservative view over a hyped up TAM-story? Covering more health issues was really Livongo’s only way to grow their TAM outside of waiting for populations to become less healthy or maybe a new insurer coming online out of nowhere.

In summary, TAM is the actual size of the market that a company can realistically target for sales - the part their offerings can address - and you really have to look closely at each company if you want to dial in a realistic TAM. You can’t just say a company has a product in an industry and add all the industry TAMs together and go with it. it is more nuanced. I’m also saying you don’t have to go too deep. Just deep enough to know the TAM is not a wild fantasy is enough to get a rough idea of a company’s prospects relative to its TAM (ignoring all other criteria for this exercise, like rate of growth).