Scamify

[SaulR80683]

In both these companies, the thesis boils down to this. Throw the house at aggressively conquering and growing the market. Profits don’t matter. Plow back everything into this strategy. When we’ve conquered the market, dial back on marketing expenses. Profit.

Maybe think of it like this: Here’s how Talend is thinking about it. They have a clear field and no competition at present. Every client they get now will probably be their client “forever,” as a reasonable estimate [smile]. That means the recurring revenue goes on and on each year without the same cost to renew them that it cost to get recruit them in the first place. In fact, on average they will get more and more revenue from each client each year.

But if they wait and don’t spend the marketing dollars now, who knows whether someone else will come along and challenge them some time in the future and they’d never get those customers, and all that recurring revenue.

The recurring income is the missing link, you must realize. The critics like Ears (no offense meant) are missing that they (the critics) are balancing the marketing cost spent this quarter just against this quarter’s revenue. But that revenue is going to keep coming, and growing. That marketing cost should be distributed among many years of income to the future

As the management of Shopify said on one of their conference calls: “we would be crazy not to capitalize on the evolutionary moment in the development of retail”. They are out to get as many customers signed up as they can as fast as they can, and getting as much revenue stream as they can. That revenue stream isn’t going to go away. Who’s going to risk destroying their whole business switching to someone else to save a few dollars.

Best

Saul

[GauchoRico]

In both these companies, the thesis boils down to this. Throw the house at aggressively conquering and growing the market. Profits don’t matter. Plow back everything into this strategy. When we’ve conquered the market, dial back on marketing expenses. Profit.
The strategy relies on still being and remaining the dominant solution when spending dials back.

This has worked very well for Facebook.

[earslookin]

That marketing cost should be distributed among many years of income to the future

Should.

Ay, there’s the rub!

Having invested in my share of Shopifys over the years, I’ve learned that these so-called
“investments in marketing” and recurring revenues often turn from “should” to “should have”.
So, rather than wishin and a hopin, I look early on for evidence.

There’s something different about Shopify. Often times you’ll see signs in even the early years of
what the business model might look like down the road. Talend, for example, already shows signs
of operating leverage. Plus they do a good job of laying out their path to profitability by showing
their target margins. Whether you believe it is one thing, but at least it’s a path you can
monitor. With Shopify there is zero evidence of operating leverage and zero indication what
margins might look like or how they will get there. That, coupled with the in-your-face SBC, doesn’t
pass the sniff test.

We’ll see how it plays out.

Ears

[creelon]

Hello Ears,

With Shopify there is zero evidence of operating leverage ???

I think that we can both agree that there are 3 buckets of OpEx with Shopify. You previously
posted the last 5 years utilizing GAAP. Beginning in 2012 and ending in 2016, the OpEx as a %
of revenue (excluding SBC and related payroll taxes) = 84%,79%,74%,59%,57%. During this time,
the company was hiring extensively to support growth and the accompanying SBC was computed on
stock prices going thru the roof.

Where might the OpEx go to when they no longer feel the need to grow expenses? Take one of their
Shopify Plus customers as an example, when Tesla is selling hundreds of thousands of cars per year and tens of thousands of solar roofs and tens of thousands of battery packs, why does SHOP have to hire more people to service that account? How much more G & A will that account require then? How about R & D? IMO, SHOP has a very large amount of operating leverage that can only be limited by competition. That is exactly why they are spending now to acquire the customers before competition can make the required investment to take share away.

Best regards,

Mike

[earslookin]

Hi Mike,

Let’s compare Shopify:

Shopify            2012     2013     2014     2015     2016
                  -----    -----    -----    -----    -----
Revenues          $1.00    $1.00    $1.00    $1.00    $1.00
GAAP Costs        $1.06    $1.08    $1.21    $1.09    $1.10

To HubSpot:

HubSpot            2012     2013     2014     2015     2016
                  -----    -----    -----    -----    -----
Revenues          $1.00    $1.00    $1.00    $1.00    $1.00
GAAP Costs        $1.36    $1.44    $1.42    $1.26    $1.16

Both firms have recurring revenue, both firms invest heavily for the future.

Do you see the difference? For every dollar of revenue Shopify brings in today,
it has to spend about the same as it did five years ago, maybe a little more.
For every dollar of revenue that HubSpot brings in, it has to spend less and less
each year to earn that dollar. We can see a path for HubSpot, not so for Shopify – at
least not yet. HubSpot is able to leverage its costs – even at this early stage – whereas
Shopify can’t. If they throw SBC into the mix, they can make it appear like there’s a path.

Just .02. I think we’ve kicked this horse to death. Appreciate the discussion.

Thanks,
Ears

[tecmo]

Every client they get now will probably be their client “forever,” as a reasonable estimate [smile]

If you assume a lifetime value of the customer that goes on “forever” - then you will pay almost any cost to aquire them. The key flaw in this argument is the “forever”; customers go out of business, they switch platforms, etc…

Also you should never assume constant pricing power; eventually every business turns into a comodity.

tecmo
…

[SaulR80683]

The key flaw in this argument is the “forever”; customers go out of business, they switch platforms, etc…

Hi tecmo, that’s why the quotes around the “forever,” and the [smile].

[EdmundMuskie]

I remember exactly where I was in January 2000 when I pulled out of the market. My father, the worst investor in the world had called me and screaming that I should have suggested to him as I had my sister a very high flying tech mutual fund that she had tripled her money in. I suggested that he wait, that the market was way overvalued, but he said that he had missed enough and was getting in on another friends suggestion. This was a time when everyone was jumping in. I was living at the time in the heart of Silicon Valley and seeing first hand the effects of seemingly everyone being a new millionaire on paper.

I certainly don’t feel that we are anywhere near that market froth.

Still I find myself very heavy in cash, 56% today. I’m at a point in my life that it’s more important to preserve capital, then chase gains.

Ironically I’m beating the market, even this heavy into cash because the stocks I hold are all doing incredibly well, so it’s very comforting to have this safety net and at the same time still outperforming the market. My core holdings, most I’ve held for a very long term, AMZN, FB, AAPL, NFLX, SHOP, PAC, are all having great YTD returns. I still hold a very small position in TWLO, but have a limit order to sell at 27.

I also hold a large position in the Oakmark International Fund, which has been very solid YTD.

So I’m very content right now. If SHOP continues up say to 100 I might sell half my shares.

I also don’t see myself being fully invested until a bear market roars. If that never happens again, I will just stay in heavy cash for the rest of my life, possibly take a part of that cash and buy a rental property. The great thing really is that I sleep very well at night.

Chris

[Smorgasbord1]

This an interesting concept: keep half in cash as a hedge against a major market correction, and the other half in high flying companies to keep returns up. However, I wonder how much protection that really does provide. In a collapse, those high flying companies may go down way more than the market as a whole and so could you end up pretty much in the same place as if you had been fully invested in the general market.

Diversification as protection in a major collapse, such as what we saw in 2008, is hard to achieve. Even if you run the data and look for investments that are not correlated in a normal market, during a black swan event there may be new correlations. I think this is an interesting article: https://ofdollarsanddata.com/the-unknown-unknowns-of-investi… :

to get a better understanding of your true level of diversification you need to calculate the correlations between the assets you own. The correlation will tell you when one asset goes up (or down) in price whether another asset goes up (or down) in price. Assets that move together are said to be positively correlated and those that move in different directions are negatively correlated.

the S&P 500 had a positive correlation with international stocks, a low correlation with REITs, 3m T-bills, Gold, and U.S. homes, and a negative correlation to U.S. corporate bonds and 10 year Treasury bonds. This means that, an investor could have come to the conclusion to have a portfolio that included the S&P 500, REITs, Gold, U.S. Corporate bonds, and 10 year Treasury bonds. This portfolio would not have a high correlation between its assets (as of 2003) and would be diversified.

Let’s now fast forward to the financial crisis. If we look at the 5 year correlation covering the 2007–2011 period, …this is where certain kinds of diversification, though usually helpful, would have failed… every asset besides 3m T-bills and 10 year Treasury bonds became positively correlated at the same time. Our hypothetical investor in 2003 would have only had safety in their 10 year Treasury bonds while all other assets lost value in the crisis. The problem is that correlations trend to 1 during panics. When all hell breaks loose, anything that is risky tends to lose value as investors flee to safe assets.

There’s still protection in having over half one’s portfolio in cash - but what you do with the other half might matter. In 2008-2009 I suspect there were portfolios that lost more than half their value, and that simply can’t happen in this approach. But for more modest corrections, the high flying portfolio might go down by 50% when the rest of the market goes down 25%, and then there’s no difference in where you end up. Personally, I’m attracted to the two extremes, so thanks for the post.

[mauser96]

I also keep a substantial cash position . It has not paid off in the last few years. But it will one day. My stocks are almost all tech types so sector wise I am not at all diversified.

I have found that for me the only way I can get enough guts to buy stocks deep in a bear market is to have the cash to do so without feeling completely busted over my losses.

The other possibility is that some urgent need for cash might arise just at the wrong time in a bear market. Perhaps a chemo treatment your insurance refuses to pay for or a close relative that needs instant cash help.

[EdmundMuskie]

“however, I wonder how much protection that really does provide. In a collapse, those high flying companies may go down way more than the market as a whole and so could you end up pretty much in the same place as if you had been fully invested in the general market.”

Good points.
My feeling is that the stocks I am in, aside from SHOP, are the exact stocks that in any correction are the names investors will first pile into. They are exactly the names I will buy after a correction, if we ever get one, therefore I am very comfortable holding them through a correction.

There are a few names I would add and continue to watch, that I would be glad to make core positions, but not in this crazy political world environment.

So yes if I was holding a bunch of companies like SHOP in my portfolio, I would be very worried in a correction. The likes of AAPL, FB, NFLX, AMZN, I invite a correction so I can build even larger positions.

Chris

[anthonyms]

Interesting discourse Chris - thanks for that injection into the thread. On a couple of points…

1. It feels like SHOP is running out of breath - it seems to be panting to a 0.5% daily gain after weeks of 3-5% daily gains as we approach 100. Unless it just blasts through it convincingly I can see it bouncing off the 100 level pretty hard. It feels stretched and it has bent the line way above its moving average uptrend. I’m considering top slicing although that isn’t for a valid Saul method reason like overweight portfolio exposure but more valuation trading.

2. On a broader correction front - I have had in the past a 25% portfolio allocation in my former employer in the healthcare sector. That to a degree gave me some crash protection as it was pretty far away from any correlation with momo stocks. As I reduce my holding out of it, I am conscious about parking money in perhaps a non momo correlation space to give me some crash protection and even allow rotation back into Saul method stocks that do get beaten down. I’m considering whether the S&P small cap ETF might be the right play on that front as well as a decent investment in its own right.

I guess there are 3-4 considerations in my mind from a correction concern point of view with Saul Method stocks…

1. Getting the wrong stock selection in the first place after misreading the performance… e.g. Patriot National

2. Missing the signals to get out once the story turns sour, that Saul seems to time pretty well and certainly better than me (e.g. BOFI, Ambarella, Skechers, SolarEdge, Skyworks, Synchronoss etc etc)

3. Holding higher performing high growth stocks that get stretched in their valuations and come back to earth with a bump after a correction whilst still representing excellent fundamental business progress and potential for a continued longer term hold

4. Holding high growth and high performing stocks that are pre-break even and where profitability may never come through that represent high risk companies which in a correction are likely to be hit even harder and then still not survive - either hitting bankruptcy or getting bought out with low ball offers whilst they are at rock bottom and without any bargaining hand and facing cash crunch etc

Ok 1 and 2 I just need to get better at. 3 I don’t worry about too much as it should all come good in the end. Yes perhaps I could beat the market if I could time entry and trimming ahead of market corrections but that’s pretty tough to do. For every stock I have successfully trimmed at peak valuation (e.g. Abiomed and Sierra Wireless) there has been 1-2 I have trimmed too early (Mazor and TAL) and still more that I never trimmed at all when I should have (AMBA, Skyworks, Skechers etc). Still #3 situation is not like holding a busted flush after the dotcom crash.

What I really worry about is #4 - which is much more like holding a dotcom crash portfolio. I am starting to get concerned about this as Saul’s Method which was once strictly for profitable companies is now starting to represent a series of holdings that are loss making enterprises and not proven profitable franchises. This could be a much greater risk of a hard landing in a correction than holding strictly profitable businesses that are growing fast especially if this co-incided with a recession adding further pain to loss making companies.

I’m not sure whether Saul looks at his portfolio and consciously considers a limit to the allocation % or # of holdings that are in the pre-breakeven / unprofitable stage or not but I’m starting to think its something to consider.

Ant

[darrellquock]

Ant,

I must have been asleep at the wheel. When did the SWKS story turn sour?

SWKS is one of my core holdings and the thesis hasn’t changed…Although it depends on Apple for a significant portion of its’ revenue, it is a key player in the IOT story…

[anthonyms]

Well its growth went negative last year from 35% growth rates. That put it in the sin bin for me and it lost its credibility on guidance. Of course the share price has now bounced back but it went up to 120 and then back to 50 to that was a pretty quick souring. We are waiting to see whether the growth story comes back but right now it is in single digits which does not cut it. I’m keeping an open mind and there are a couple of fools on here who are dissecting the story for us in order to better understand what was going on. Saul lost patience with it along the way and whilst I made money it wasn’t anything like what it could have been had I got out at the peak or had they delivered what they kept saying they were going to (which they did not).

Ant

[EdmundMuskie]

Hi Ant,
A lot to think about. As I say that it occurs to me that I have nothing to really think about with my portfolio except for selling half my SHOP shares. The other holdings I will not sell.

This is a time when I think with every passing day we become incredibly vulnerable to a massive correction. I’m referring to the one subject we are forbidden to talk about in the MF world, you know the one. Which in my mind is really stupid.
Possibly the entire reason the market has climbed in the last few months has been because of that subject, and that same subject that to corporate America and Wall Street seemed so appealing, tax cuts, deregulation, that same subject just might be unraveling to an incredible ending if the news becomes reality in the weeks ahead. It will have a very big impact on the market in my opinion, but we can’t talk about it can we. Crazy.

So without talking about that subject we can’t discuss, you know the one, it’s the exact reason why I am heavily into cash, even though I cannot talk about it. Again, crazy.

Lastly I will just say that it’s a subject that should be on everyone’s mind because it’s just too important to ignore, even though we can’t talk about it.

Chris

[anthonyms]

I’m referring to the one subject we are forbidden to talk about in the MF world, you know the one.
Very intriguing. Haven’t a clue what subject is the subject of a site wide ban. If you said in the Singapore world I would know what word you meant immediately.

Is it something to do with sex, politics or religion?

Ant
ps oh wait a minute do you mean Trrummp?

[captainccs]

Lastly I will just say that it’s a subject that should be on everyone’s mind because it’s just too important to ignore, even though we can’t talk about it.

Chris

I’m no mind reader, I have no idea what you are talking about.

Just because some indexes are hitting all time highs does not put them in a bubble, besides not all indexes are growing in lockstep:

Currently there is a rotation into high tech that is depressing everything else:

YTD
BRKA         0.6%
DJI          6.2%
S&P 500      7.2%
NASDAQ      14.6%

http://discussion.fool.com/this-baby-ain39t-done-falling-yet-327…

It’s good to look out the window to see what the weather is like.

Denny Schlesinger

[MataroPete]

…oh wait a minute do you mean Trru…/i

I don’t really think there is a useful purpose to talking about Trru…, let alone being forbidden in some sense by board rules.

Firstly, people have made up their minds about him one way or another already, whether as a businessman, a president, or as a human being. But secondly, even more importantly here, there is either no correspondence between him and Saul stocks or one so amorphous as to be useless.

Pete

[MataroPete]

…oh wait a minute do you mean Trru…

I don’t really think there is a useful purpose to talking about Trru…, let alone being forbidden in some sense by board rules.

Firstly, people have made up their minds about him one way or another already, whether as a businessman, a president, or as a human being. But secondly, even more importantly here, there is either no correspondence between him and Saul stocks or one so amorphous as to be useless.

Pete

[sorry for the formatting issue previously-must learn to preview]

[SaulR80683]

…oh wait a minute do you mean Trru…

Getting off topic guys…Let’s let it go.
Saul