SA Article Yesterday: “‘I’ll Never Make My Money Back!’ or How We Fool Ourselves”

There was a great article on Seeking Alpha yesterday titled: “‘I’ll Never Make My Money Back!’ or How We Fool Ourselves.” The author is a guy named Chris that lives in Europe (Belgium-ish area I believe). I follow him on twitter (@fromvalue). He follows a similar investing style to the Board members and is an advocate for a lot of the tech SaaS growth companies. His full article is here:

I thought his article was comforting because it described a lot of feelings that I know I have been going through.

The article opens with the famous quote from Peter Lynch: “Far more money has been lost by investors trying to anticipate corrections, than lost in the corrections themselves.”

Chris explains that a lot of his subscribers are worried they “will never get their money back.” He credits this worry to the mental phenomenon of “recency bias,” which “is the feeling that everything will continue as it has been recently.” He makes the point that growth stocks have been hit much harder down but that “the returns should be much higher as well. Of course, it’s much harder to feel that today. Recently, we have seen high-growth stocks crash and therefore, we automatically assume they will not go up again.”

Chris then looks at Salesforce (CRM)–the grandaddy of Saas tech growth investing–and how it performed during the GFC. On the way down, CRM lost 68.02% (sound familiar!):

Chris opines that there were likely many people at this time in December of 2008 with recency bias thinking “This overvalued story stock will never go back to all-time highs … The stock has to go up 330% just to get even.”

But, if you looked passed your recency bias and held onto CRM, from December 2008 to December 2009, CRM rose 488%:

My takeaway from the article: it is hard to believe our stocks will ever hit their all-time highs right now due to the recency bias in our heads but, if you can recognize that bias for what it is, all time highs don’t seem so unlikely.

To make sure this post stays on point, I also wanted to add some analysis of how this applies to individual growth stocks. My current recency bias is the strongest for two consumption-based stocks I hold: SNOW and DDOG.

Consumption business models are getting hit the hardest right now. But that may also set them up for the biggest rebound (if we can put off our recency bias). I try to think of it is as a bar that chose not to charge a cover. You don’t charge a cover so you can pack the house with people and because you know you’ll make your money once the people get inside and start spending. SNOW’s Chief Revenue Officer, Chris Degnan, had a nice article on why a consumption-based model is better for the customer:

He explains the following: “While subscriptions work well for ensuring predictable revenue for SaaS vendors, this model can be challenging for customers. They must estimate upfront how many licenses they may need and pay a monthly fee without any guarantee they will use all of the licenses or features they contracted for. While SaaS delivery and the subscription model are now viewed as mainstream, customers deserve stronger value than what subscriptions can provide. That’s why the consumption-based model makes sense now more than ever. It’s a great opportunity to extract more value from your software investments, gain a competitive advantage, and develop true partnerships with your SaaS vendors.”

Despite a horrible macro environment, SNOW and DDOG are doing a great job of getting customers into the door through new customer adds. Those customers are willing to walk in because they know they are not required to make a minimum spend. While not as predictable as charging a cover at the door (aka subscription model), this potentially sets these companies up for a greater rebound once the customers start buying drinks (aka data consumption). We saw this w/ DDOG during the pandemic, when it was hit hard by spending cuts when everyone thought the world would end but recovered nicely when the clouds cleared.

Hang in there everybody.

BTL
@Laneylawyer on twitter
Long SNOW and DDOG

No investment advice, just musings.

141 Likes

Andy Jassy’s shareholder letter today made me think about the post above and consumption models. He does admit AWS is facing “short term headwinds,” but he explains these headwinds as follows:

“One of the many advantages of AWS and cloud computing is that when your business grows, you can seamlessly scale up; and conversely, if your business contracts, you can choose to give us back that capacity and cease paying for it. This elasticity is unique to the cloud, and doesn’t exist when you’ve already made expensive capital investments in your own on-premises datacenters, servers, and networking gear. In AWS, like all our businesses, we’re not trying to optimize for any one quarter or year. We’re trying to build customer relationships (and a business) that outlast all of us; and as a result, our AWS sales and support teams are spending much of their time helping customers optimize their AWS spend so they can better weather this uncertain economy. Many of these AWS customers tell us that they’re not cost-cutting as much as cost-optimizing so they can take their resources and apply them to emerging and inventive new customer experiences they’re planning. Customers have appreciated this customer-focused, long-term approach, and we think it’ll bode well for both customers and AWS.”

DDOG and SNOW have this same type of consumption model, which can be scaled up and down based on a customer’s needs. While this means slower revenue growth in uncertain macro times, it is this precise feature that attracts more customers to these platforms and sets them up for a quick re-acceleration in growth in the future.

Hang in there.

BTL
@laneylawyer on twitter
Long DDOG and SNOW
No investment advice, just musings.

49 Likes