Thoughts as the slide continues

[branmin]

I think part of the problem is that people are following Saul instead of thinking things through for themselves. If you do not know what you own, you will never know the value. Following someone else will only leave you troubled.

And there you have it. My port has suffered like everyone else recently but perhaps not as much due to me not selling or reducing my Apple shares and added at 145 and 158 when advised to get out and use the money elsewhere. But the suffering when I look at it, originally buying for example MDB at 38, TWLO at 45, AYX low 30’s etc, etc is hardly suffering. I just have been watching my surging profits(on paper) being depleted. For the time being and this will end and as the poster above mentioned. Know what you own. Learn from the best as I believe Saul is in that category but as he states time and time again, do not blindly follow him as what works for him may not work for you.

[SaulR80683]

…I would say Philip Fisher had a huge influence on me. He had a complete section in his book talking about what to do if you felt your stock was temporarily overvalued. You hold on. If it’s temporarily overvalued and you sell, you could live to regret it in the future. It may be the shooting star that never returns. It’s easy to think that’s the wrong approach right now, but it sure was the right approach a few months ago. Imagine how many times you would have said over the years “this is unsustainable” and sold something if that’s how you invest. There is a good chance you wouldn’t have captured all of the runup in a lot of these stocks.

I know there are people who get their slide rulers and graphing calculators out and switch between stocks because they believe a certain stock should be sold because it offers less price appreciation potential based on multiple expansion over the next few months…

I felt that MDB was way ahead of itself short term the first time that it went above 120. It wound up peaking around 180. I suppose it’s always easy in hindsight to say what you should have done, and it was so obvious that it should have been sold at $180. It’s finally back around the levels I thought it was just so crazy to be at back in March. Not sure what I would have done had I began the trading game. I may have chased it at $150 after selling at the “too high” price of $120. Who knows.

Hi 12x, That was wonderful. I wish I could write so clearly.

Anyone that is out there that is in their 20’s, 30’s, and 40’s should be jumping up and down because you are getting companies for a much better price. Those in your 50’s and on that do not have a cushion or have enough invested that can keep you going, well you really need to look at your process. Nobody on this board ever said that any stock was going to grow forever without some down side, but by following this board you could be retired a lot earlier then you ever thought. Keep studying and learning. Andy,
Who sold Tlra today and bought more ZS.

Nicely put, Andy.

What Saul is saying {if I may put in my interpretation} is that all this change in market sentiment and multiple is just NOISE. You can try to trade in and out, good luck. But far more profit is made holding the best until there is a real time to sell (based on substantive fundamental factors).

You got it right, Tinker.

From the Knowledgebase, which is still the way I think and what I’ve been trying to say:

On trading in and out: No one knows how long a stock price can keep climbing. If you sell now at $135 it could keep going up to $200 before it takes a rest. When it was up $15 from where you sold, would you buy back in or just watch it go? And if you timed it right and sold now, and it dropped $15 would you get back in, or would you wait for down $20? And then if it got to down $19 and started back up, would you panic at down $12 and buy back in? And then, what if it goes down $5 from there? Do you buy, sell or hold? In other words, trying to time the market in these stocks will drive you crazy. If you don’t have a good reason to sell just stay with it and enjoy the ride.

On staying fully invested: You’d be much better off staying nearly 100% in the market and just deciding WHICH stocks you want to invest in, instead of complicating it with deciding WHEN you want to buy, and trying to time the market. For example, you don’t want to buy now because the market is up, but I suspect you didn’t want to buy at the bottom either, because then everyone was saying that the market was going lower. And if these stocks go up 10% from here you certainly won’t want to buy, but if they go down 10% from here, you’ll wait for down 20%, and then if they start back up you’ll wait for them to get back to down 10% again, which may never happen. Just think, if you stay fully invested you can forget about all those crazy-making decisions, and just concentrate on which stocks you want to own for the long term.

Makes a lot of sense, doesn’t it.

Saul

[PaulWBryant]

Actually, I recently did this for Alteryx since it’s ~25% of my portfolio. Assuming their recent FCF target/guidance of 30-35% in 4 years and 50% CAGR on TTM revenue for 4 years, I would think that the company would be worth a 40-50x multiple on FCF at that time. So 4 years from now, I think AYX should be worth about $23B in the middle of 2023 with about 80M shares outstanding. Therefore, the share price would be about $290 which would give you a CAGR of 27% from here. I’m not worried about AYX long term.

Doing this for ZS is a little more difficult and I haven’t done the same exercise because they are not as far along on their path to profitability (i.e. more assumptions to make) as AYX is. I like ZS and have been adding. TWLO seems a bit more fuzzy (for various reasons) and I have been reducing it.

Chris,

Great stuff. But I don’t see the math very differently for Zscaler, Twilio, or many others. The key is revenue growth. We’ve gotta believe the profitability is the easy part, or we’re completely wrong about why these companies are so valuable.

If my napkin is correct, $23b in 2023 would give AYX a PS ratio of 15. So that seems a reasonable floor. In theory, it should be 15 now, then each year the share price should grow 50% along with revenue (minus a few % for the rise in share count). But we know that’s not how it works. PS will be at 20, then maybe 30, who knows, 10? …before it settles down later in the stock’s (and company’s) life. All those points along the bumpy road are our opportunities. So you say you’re expecting a 27% CAGR from here. I think that’s reasonable. But I wouldn’t look to hold a 25% position until that number is much higher (because the PS is lower). I may never get that opportunity, but that’s ok. I have others.

Bear

[NajdorfSicilian]

This assumes that the current EV/Sales multiples will hold (i.e. not rise or fall much).

Of course they are going to fall from record highs in the next 2+ years, the question is whether they grow into their valuation a la AMZN or fail to like an OSTK.

Look at ZS vs ADBE, they’re both up ~23% ytd.

One is massively profitable and has higher gross margins. EPS has grown at 58% cagr the past 5 years whereas the other one has no profits as of yet and lower margins. ADBE is the clear, unassailable leader in its field, whereas ZS does not yet hold that distinction.

ZS is growing faster topline for sure.

Both have cash on the balance sheet. Does ZS deserve to have a p/s valuation 50% higher? Maybe, but either way that ratio WILL decline 8-10 quarters from now.

Just like it has already fallen this year.

[Capitalism]

Here’s an interesting fact that I learned recently:

• WDAY grew revenues from 275M to 1.575B over the 4 year period of 2013, 2014, 2015 and 2016. That is annualized revenue growth of 55% per year. Wow you say!

So what did it’s stock price do that time? It went from a share price of $53/share to finish at $68/share by the end of 2016. That is a solid return of 5.63% annually. Not bad I guess, although the S&P 500 returned 13.44% annually during that time-frame.

Why did WDAY perform so poorly in the face of such great 55% annual revenue growth? Simple: it’s P/S multiple decreased from the 20-25 range through 2013-2014 down to only 11 by the end of 2016.

The lesson here is that when the market decides it isn’t going to pay up for growth, then you will have suffer some serious underperformance no matter how great the actual numbers look. P/S multiples truly do matter over the long-term.

Bonus fact: CRM grew revenues from $1 billion to $11 billion over the 10 year period from 2009 through the end of 2018, and it NEVER ONCE traded above a 11 P/S multiple during that time.

[Capitalism]

Here’s an interesting fact that I learned recently:

- WDAY grew revenues from 275M to 1.575B over the 4 year period of 2013, 2014, 2015 and 2016. That is annualized revenue growth of 55% per year. Wow you say!

So what did it’s stock price do that time? It went from a share price of $53/share to finish at $68/share by the end of 2016. That is a solid return of 5.63% annually. Not bad I guess, although the S&P 500 returned 13.44% annually during that time-frame.

Why did WDAY perform so poorly in the face of such great 55% annual revenue growth? Simple: it’s P/S multiple decreased from the 20-25 range through 2013-2014 down to only 11 by the end of 2016.

One more note, I selected WDAY as a good comp because many of the “Saul” stocks here are currently doing annualized revenues of 300 mln and are (or at least were recently) trading at P/S multiples up in the 20s with growth in the 50% range. So same metrics as WDAY during that time-frame.

[captainccs]

Does ZS deserve to have a p/s valuation 50% higher? Maybe, but either way that ratio WILL decline 8-10 quarters from now.

Ratios have a numerator and a denominator. If sales rise faster than price the ratio will, indeed, decline. Is that bad?

Back, once again, to the “S” curve. Zscaler is at that point in the “S” curve that we should expect extra fast revenue growth. Recently I was criticized for assuming that 85% market penetration can be achieved in five years. You are now assuming that revenue growth must slow in just 8-10 quarters (2 to 2.5 years).

I agree that eventually “that ratio WILL decline.” But, is “now” the time to chicken out? If yes, why now?

Denny Schlesinger