SaaS Churn

Investment Analysis Clubs Saul’s Investing Discussions
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Somebody linked an article about SaaS churn earlier. I’m not seeing the original thread, but I want to start a conversation.

This line stuck out to me…

A minority of firms (12.2%) project a 20+ percentage point increase in churn. This type of change is usually due to a massive wave of bankruptcy, shutdowns, or layoffs in a specific industry or set of industries. Companies with vertically-concentrated businesses in adversely-affected sectors expect significant struggles.

To quote one respondent:

“The biggest weakness is our customer environments. We are seeing customers who use our tool getting laid off in entire groups which removes the need for our technology. We also have a number of customers in hard hit industries like airlines and hospitality.”

Who could that be. I’m wondering if it’s Alteryx. I looked at their customer list and saw a good number of airlines, though not so much hospitality.

Even if it is not Alteryx that is being quoted here, who might it be?

In general, how are we to know what companies are going to be affected?

Take Alteryx. Part of me says, “The data people are more valuable than ever to struggling companies. Alteryx will be fine.” Another part says, "Many of Alteryx’s customers have zero revenue right now. Don’t suppose firms won’t cup back.

Take DataDog. Part of me says, “Infrastructure is being used to capacity and needs to be monitored. DataDog will be fine.” another part of me says, “DataDog will lose customers because a lot of the startups that use it will be going out of business.”

Then there are companies like Crowdstrike, Slack, Veeva, and Zoom who we know are seeing increased usage. But these stocks are also up. Are the up too much? Not enough? Who knows?

In short, right now, until the next rounds of earnings are released, we are just guessing. Does this feel like gambling to anyone?

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I originally brought Alteryx to my company roughly 5 years ago. I work for a large drug manufacture. My team is very dependent on Alteryx for ETL jobs and other processes. Taking this away would cause folks to migrate back to access and excel, which I suspect will be unlikely. So I think once you have a process any business would keep Alteryx to avoid bad data and as a result bad recommendations.

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Also, licenses for the base model are only 5k or so. At large companies this is nothing. Plus data is becoming king at companies. No more are the days when people take bear guesses.

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“In short, right now, until the next rounds of earnings are released, we are just guessing. Does this feel like gambling to anyone?”

It only feels like gambling if you are trying to predict the price for the next quarter or two. If you are invested in a company that you think is going to be a long term winner and change the world, well that is investing.

Forgive me if that sounded glib. I mostly said the above for my benefit as I frequently have to check my thought process to make sure what I am doing is investing and not gambling. I find it very easy to get caught up in short term price movements rather than is the company continuing to be excellent, bigger and more profitable in the future.

In regards to AYX. They have the money and market share to come through this. In fact I’d argue a recession will make them leaner and meaner with less competition. They also have the money to acquire startups at discounted prices. Short term AYX’s price might go down, I have minimal worries long term.

DDOG. Plenty of money, mission critical, more so than AYX. They have more competition both NEWR and Splunk are coming out with more competitive products and pricing but DDOG has ease of use and rapid onboarding. Companies are having to complete their digital transformations rapidly so ease of use is a big Deal.

CRWD. Similar story to DDOG

Happy investing, and maybe the occasional gambling :wink:

best,
e

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Does this feel like gambling to anyone?

Emphatically no.

I’m in my companies because I believe the underlying businesses increase my odds of market-beating returns. I’m guessing others here feel similarly. Markets will always ebb and flow. I’m buying the boat, not trying to guess at the tide.

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And let me clarify that I mean I personally am an emphatic no. I wasn’t trying to be snarky or delegitimize the question.

(I just realized it might read that way.)

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Here’s my problem with this approach. There are too many questions.

The question is, can we tell which companies are going to be affected by what’s going on in the economy, and which aren’t? Aside from obvious ones, like Square, I’m not sure you can really tell which would be more impacted by what’s going on.

The real issue is, there are no real hiding spots when there is a real bear or recession. I know these stocks got a little boost from the WFH shift, but do you really expect ANY of these companies to do well during a recession? I used to joke during the 2008 recession, that the only companies doing well were the repo men. I don’t see how, Alteryx does well (or bad) in a recession, but somehow Crowdstrike is immune to it.

Of course, I was never one to get too excited about the whole subscription model as if it were immune to downturns to begin with. But even if it is a great thing and no company will cancel, how can you even tell what the growth rates will be? Are companies still likely to go out and sign up for expensive endpoint protection? Any more than they would data crunching software when Excel has worked to this point?

If there is a desire to avoid your tech stocks getting hit in a recession, I don’t see how you do anything other than sell everything tech and buy consumer staple stocks. I’m not suggesting doing that, I’m just saying that that’s where the path would lead you if you are going to take the approach of buying what will hold up in a recession and selling what wouldn’t.

But by doing so, you are now a macro trader, making bold forecasts on the economy and how they will affect stocks.

CRM, Salesforce was at $18 in 2008, fell below $7 in 2009. And remember now this is a company that, some people would think, it has subscriptions so it should be immune to everything. Actually if I recall correctly one of their comments was the subscriptions were too short in duration at that time and companies were not renewing after the subscription ended. So no, I don’t see SaaS as some miraculous thing. I always approached it as, this is what’s growing now. Because we can see what happened to one of the founders of SaaS in the last recession.

But to answer your question, is it gambling to stay in these current stocks, it’s no more gambling than it would be to sell them all and buy JNJ.

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But to answer your question, is it gambling to stay in these current stocks, it’s no more gambling than it would be to sell them all and buy JNJ.

I agree. You are gambling regarding which company will succeed, especially with tech. But you educate yourself regarding the company to minimize the uncertainties. Sometimes that doesn’t save one from faulty reasoning. For example, I was in ZILA many years ago. They seemed to have a solid product portfolio (to me), and were pending FDA approval on a cancer detection test. What I didn’t know was they couldn’t do a proper FDA submission, and it got kicked back to them. I think multiple times. The company no longer exists.

So there is some “gambling” (we call it “risk”). The folks on this board try to minimize that by analyzing the heck out of their stocks discussed here. But in tech you can never be certain that another company will come up with a better product and take your market away overnight. People appear to be expecting that of Zoom, for example. Zoom was not first. Facetime (Apple) and others have been in this space for years. But the times we have used Zoom for tele-medicine it was clear, simple to “join the call”, and not glitchy. I hadn’t even heard of Zoom a few months ago. The coverage here is saying it is poised to take over the space, and it may very well be.

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All good responses and valid…always look at the business not necessarily the current state of everything else. If you invest in the business, you aren’t gambling.

To the fellas question tho, what company is highly dependent on those sectors? data is king and also used massively incorrectly or for bad behaviors.

I work in data with very large retailers (the kind that run the world past and future), whole salers, energy, software, etc. you could imagine that i know more than i’d like to know.

sooo, a company that relies on hospitality and airlines…? thoughts? I have none.

also, CRM is the mover of the companies that started customer relationship management in a large way. It is unlikely to become laggard because it has a foothold now and companies have already made a committment that their data is built off of. Massive data restructuring and coding for websites/interfaces/CCC would be done and probably cause disruption (in a bad way).

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But in tech you can never be certain that another company will come up with a better product and take your market away overnight.

I’ve seen a number of comments here and elsewhere to this effect. The argument that the disrupter gets disrupted by a competitor. Rather than a careful analysis that might serve to put this argument to rest, I ask you to show me examples. I can think of none. You might come up with one or two, but this is about as common as hen’s teeth. It just doesn’t happen.

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I can think of none.

I can think of a lot. Zoom, for example. People on this board (and presumably you?) believe it will seize the space previously occupied by Facetime, Google Hangouts, perhaps WebEx. Granted it hasn’t done that yet, but the folks on this board seem to be thorough. So if they think it is a possibility, then it probably is. I would think investors are actually counting on it.

When was the last time you saw a Walkman? Or a Discman? It was the greatest thing ever, until it wasn’t. Almost overnight it was replaced with MP3 players. For a while iPods were most of Apple’s business rather than their Macs. That didn’t sink Sony, of course, since they are not a one-product company. But it illustrates how a product can be obsolete overnight, and if you are a one-product company that is a danger. Oh, and MP3 players have mostly been replaced by smartphones.

Blockbuster was destroyed by Netflix (primarily) in DVD rentals. Netflix then evolved to enable streaming so they didn’t get destroyed by other streaming services.

I could come up with other examples.

It’s a reality of tech. Something can come along and replace a product overnight. In fact, you can almost count on it. The disrupter can become the disruptee. Continued innovation is required or a tech company dies. That innovation fuels the growth that is the focus of this board (from what I can tell; I’m still new here but that seems to be the emphasis in Saul’s investing philosophy).

1poorguy (works for a tech company, though not software)

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I’ve seen a number of comments here and elsewhere to this effect. The argument that the disrupter gets disrupted by a competitor. Rather than a careful analysis that might serve to put this argument to rest, I ask you to show me examples. I can think of none. You might come up with one or two, but this is about as common as hen’s teeth. It just doesn’t happen.

The one that comes to mind for me (without referring back to the DotCom bust and Netscape) is New Relic. DataDog came around and is eating their lunch. Makes me leary of the observability space. But I also like DataDog a lot.

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The argument that the disrupter gets disrupted by a competitor. Rather than a careful analysis that might serve to put this argument to rest, I ask you to show me examples. I can think of none. You might come up with one or two, but this is about as common as hen’s teeth. It just doesn’t happen.

Obviously it’s better to make your investment decisions around the norm, rather than worrying about exceptions to the rule. Maybe it’s because this board is wrapped up around software, which isn’t as easily commoditized and there can be several large players in a single space not competing on price but featuares. But I can think of several off the top of my head. GoPro, FitBit, Ambarella, National Beverage when they saw initial success with LaCroix flavored seltzer water. Going back further there are things like Garmin and RIMM. Right now from what I hear, Snowflake is really taking a beating to TeraData.

Right now the SaaS companies for the most part are really in greenfield space, they may not be bumping into each other enough yet. DataDog/New Relic as an example given, but DataDog is saying they are not displacing anyone, they are all new applications. More in this space and more obvious are the Cloudera/Hortonworks mergers because their technology is being displaced.

I’ve also owned stocks that for a period of time I owned KNOWING they would get displaced or commoditized, even though they were the leader at the time. STEC in solid state drives, who made the comment they were 3 years ahead of the competition, 3 months later their stock crashed. Sigma Designs, a leader in Blu-Ray DVD Processors. I watched as manufacturer by manufacturer switched from HD DVD to Blu Ray, Blu Ray took off and this small processor firm took off. I sold out as more and more manufacturers came into the fold and watched what accounts they won.

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People appear to be expecting that of Zoom, for example. Zoom was not first. Facetime (Apple) and others have been in this space for years.

Facetime, IMHO, was not in this space for years. Others were.
Facetime does not have the business feature set. First, this means allowing people on pretty much any device type to be invited to a meeting. Second, being able to easily share documents of any type, such as Powerpoint presentations. (Maybe Facetime now has some of this)
You can also easily email docs to all attendees, do polls, whiteboarding and more.
And third, Facetime has some low limit of number of attendees…I’ve recently been in Zoom, ( and Skype for Business and MS teams) meetings with hundreds of people.

Mike

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I can think of a lot. Zoom, for example. People on this board (and presumably you?) believe it will seize the space previously occupied by Facetime, Google Hangouts, perhaps WebEx.

OK, so that takes into the space of definitions, what does the term “disrupter” mean? From my perspective Facetime and Hangouts aren’t truly in the same space as Zoom to begin with. And Webex is a perfect example of a legacy application that was disrupted by Zoom.

Also relevant, which is another rabbit hole probably not worth going down is at what point does a disruptive technology become legacy tech. For example, Xerox put the nail in the coffin of mimeo machine makers. Did Xerox subsequently become disrupted or commoditized? I’d argue the latter. There’s tons of examples of that. It will most likely happen to all our darlings. Success invites competition. Once there’s a fair number of competitors with more or less interchangeable offerings the discriminator becomes price. Hopefully we will have moved on by then to ???

But, I’m not going to extend this discussion. You are probably more correct in the hardware space so to that extent I’ll stand corrected.

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