So what makes you swing your money into all growth/tech stocks? They have indeed done very well and with the gains you have had, it is quite understandable that you are not that worried about a correction. You might still be ahead even if you don’t do anything. But looking back, what was the process you went through to start investing in no earnings or small earnings and highly valued growth stocks? This was not your style 1 or 2 years ago, was it?
Hi tj,
There were a couple of things. I saw that my results weren’t as good as they had been. I decided that part of it was because I had too many stocks in my portfolio. I was way up to 25 or 28 for a while, and decided to cut back. I also had invested in some hardware stocks like Skyworks, Infinera, even SolarEdge briefly and SolarCity. That reminded me of the need for renewable revenue, and, in the cases of Skyworks, Infinera, and Solar Edge, of avoiding companies with one or a few dominating suppliers who might have their own reasons for cutting back their purchases. Skechers reminded me that retail chains (and restaurant chains) can only get so big and then they can’t keep growing. So I unconsciously migrated to a smaller number of stocks which were faster growing, had recurring revenue (SaaS companies), mostly software, with high gross margins.
As for earnings, I wrote up a review of Shopify about a year and a half ago. Here’s what I wrote:
You must be kidding. This company has no earnings. It breaks all your rules!
Well, you are right about having no earnings. It lost 13 cents in 2015, and a penny in the last quarter, and that’s why it’s a tiny position at present, but you are wrong about the other rules. It fits a lot of the other things I look for in a company. For example:
Revenue growth - This is in millions of dollars, rounded off. (Hold on to your hats!):
2012 - 24
2013 - 50
2014 - 105
2015 - 205
Thus, revenue has doubled every year, compounded.
Moat – It controls its space of providing a platform for small and middle size businesses who want to sell over the Internet. It has the best, most flexible, and most complete platform, and has such a dominant position that, in 2015, even Amazon closed its own platform for these businesses and decided to just use Shopify’s. Clients can use a Shopify platform to sell anywhere they want to, on their own website, on Amazon, or with a buy button on Facebook, etc., or all of the above simultaneously.
Recurring Revenue – It’s pretty much ALL recurring. Their monthly subscription revenue is at a current pace of over $130 million, well more than 50% of 2015’s revenue, and growing rapidly. The other part of their revenue is the cut they take on each transaction, and on shipping if necessary. That’s growing even faster.
Insider Ownership – Still run by the founder, who owns 11% of the stock. And total cash salary of the top five executives in 2015 came to just $1.3 million, according to Yahoo. They are clearly counting on a rise in the value of their stock. (The founder’s stock is Class B stock with increased voting power, so he retains control of the decision making. He certainly seems to be doing well so far.)
Long Runway and Long Way to Grow – They are only handling maybe 0.5% of all worldwide eCommerce Internet sales at present, and Internet sales are growing rapidly. They could probably compound 100% growth for another five years, and still have a wide open field in front of them. (I strongly doubt though that they actually can keep up 100% growth.)
And, in addition, in 2015 they introduced Shopify Plus, which goes after larger enterprises, and seems to be doing well, getting divisions of major companies signed up. They have over 1000 accounts already.
Absence of Debt – They have about $190 million in Cash and No Debt.
Easy to Follow, Covered by the Fool – They pass on this one.
Reasonable PE – They flunk on that one.
Most of that still holds.
Saul