With so many great companies on sale it’s just hard to find the best place to grow my future fortune. I thought it would be a good exercise to compare my highest conviction name against Saul’s Stock picking criteria. With the hammering of growth stocks and companies trading at high multiples (flawed as this may be), I’m particularly interested in this company because it is trading so cheap.
I’ve left Saul’s stock picking criteria italicized and the company comparison in bold:
First, most of my stocks start with a recommendation and write-up by someone I have a lot of confidence in. This could be someone on the board, Bert, Motley Fool, or more rarely a write-up by someone else on Seeking Alpha.
This stock falls strictly under the “more rarely a write-up by someone else on seeking alpha.” and I would definitely consider it under-followed.
Second, I would want rapid revenue growth. My ideas about that have become inflated in the last couple of years and where I once might have looked for 20% to 25% as very fast growth, I’m now looking for 35% growth, and usually more.
Revenue growth: FY 2021 30% YoY Q4 2021 41% YoY Q1 2022 45% YoY
Growth appears to be accelerating and pressing past the 35% threshold, but I do believe Saul is less interested in anything under 50%.
Third, I look for a stock in a special niche, with something special about it. I guess this could be considered a moat. It also could be considered a potential big future.
The company works in AI operating systems, data-management (think SentinelOne dataset, DDOG, etc), and its current exposures include government regulation / law-enforcement, energy / utility management, advertising, and the metaverse. I do feel this company is in a special niche with a lot to offer in a few massively growing spaces.
Tied for Third, I look for recurrent revenue. I want my company to have last year’s revenue repeating this year and building from there, and not a company that has to go out and grow by selling the whole thing over again. God, this is important! It usually means software, and a SaaS model, and NOT selling things. You just can’t keep growing at 40% selling things. And when an economic slowdown hits, people will put off buying a new car, or a new house, but companies won’t tear out the software that keeps their company going. Software also usually means not capital intensive, and it also means high gross margins.
the company’s revenue is a currently a combination of SaaS and use-based billing. This is one area of weakness in the story currently, but SaaS customers increased 45% YoY and software revenue increased 78%, so I’m happy with those numbers so long as they continue to trend. There is some amount of seasonality I believe with licensing that seems to mostly be realized in the second half of the year.
Gross Margins 80%+ are very good and have only improved over the past two years.
Fifth, I look for rapidly improving metrics like rapidly dropping losses as a percent of revenue, or increasing profits if there are some already, increasing gross margins, customer acquisitions, improving cash flow, dropping operating expenses as a percent of revenue, etc. If some metrics aren’t improving (S&M as a proportion of revenue, etc), because management says they are taking advantage of a greenfield opportunity to gobble up all the recurring revenue customers they can while the getting is good, I generally approve, but want to see those revenues really growing.
This company was non-GAAP profitable for the first time last year and is guiding for increased profitability in 2022 and beyond with many references to “accelerating material growth” in 2023 and beyond by management.
Sixth, I’d demand a dollar-based retention rate over 100%. I look for one over 120%, and I’m impressed by one over 130%. A high Net Promoter score is nice too, but there’s no easy way to get that information.
Seventh, It’s been a long time since I’ve been in a company that didn’t have a lot of cash and had a lot of debt. Almost all of my companies are founder led, but I think that’s mostly because they haven’t been around for generations. They also don’t have huge customer concentrations (top three companies making up 30%-40% of revenue). But I don’t seem to have to look for those features, they just come with the territory.
Cash on hand is more than debt, and nearly 67% of the market cap, management has discussed pursuing acquisitions but has been clear to communicate they have more than enough cash to cover operations for the foreseeable future. Customer concentration is a red flag as Amazon accounts for 30% of revenue, though non-amazon customer growth was 200% YoY-- With Amazon’s recent “earnings” this company’s share price was material impacted in sentiment, though it seems at least thus far to be grossly over-reacted. Nonetheless a yellow flag / “watch-out” event.
I, like you, constantly monitor these factors and I exit if they seem to have changed for the worse, or if I think I made a mistake in the first place, or if I’ve lost confidence, or if there are new facts. But somehow, EV/S never enters into my consideration.
I do like to monitor P/S multiples, though I weigh them against YoY growth and gross margin considerations and probably care about them more in a recessionary environment or a draw down. Here’s a quick look at some of the P/S multiples of our companies.
MNDY 13x CRWD 21x ZS 25x S 22x DDOG 21x NET 22x UPST 3x BILL 16x ZI 21x SNOW 29x PLTR 8x MDB 16x This Companies P/S is currently 2x. A Quick Recap: Founder-led Profitable SaaS Model in the AI space 48% YoY growth 120% DBNRR 80% Gross Margins RPO 100% YoY Employee Count increased 25% in Q1 2022 Customer Concentration is a concern P/S 2x You guessed it, the company is non-other than Veritone (VERI) [https://www.veritone.com/](https://www.veritone.com/) There's an analyst update and product demo today (May 13) [https://investors.veritone.com/home/default.aspx](https://investors.veritone.com/home/default.aspx)
The numbers I provided are all “organic” and “pro forma” numbers, they actual numbers are much higher due to recent acquisitions-- which have so far proven accretive.
Obviously I believe Veritone is grossly undervalued which I attribute primarily to the indiscriminate sell-off in tech / growth, and smaller cap stocks. The moat seems to be massively expansive.
This is a pick and story I really like and I materially increased my position after the earnings drop.
I thought since the bottom is in and we are going to spend the rest of the year making money, it would be fun to talk about what stocks to invest in and which companies we like.
Veritone is one of those companies for me.
Stake Now – Steak Later!
Peace, Health, & Prosperity