Toss out the Cloud Stocks?

Investment Analysis Clubs Saul’s Investing Discussions
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You can say, “Okay, I think that they are throwing away the good ones with the bad and I will let the ETF selling – they are all in ETFs – run its course.” The sellers of these stocks fear giving back big gains. They also have heard the stories about how the cloud business has to be slowing because data centers are slowing.

This is a hard thesis for me to swallow. I just met with a dozen or so cloud CEOs and they all can’t be snowing me. They all had good things to say and to show me for that matter. Same with CyrusOne (CONE) , one of the largest data farm REITs. The numbers are so far ahead of last year at this time that it is hard to say “you know what, forget those numbers I have my own intuition.”

https://realmoney.thestreet.com/articles/10/09/2018/jim-cram…

I do not usually go around posting Cramer opinions as we have plenty opinions ourselves. But it is as if Cramer is participating with us. A take away here is a worry that I have had, what happens when data center growth slows down? I mean there are only so many data centers to be built, and so many servers to be bought. Same thing happened during the Internet build out. The rate of growth will at some time either dissipate, or at least be variable with some up and down quarters.

That would be a concern with Nvidia, or Nutanix, or Pure or ANET or the like as they are dependent upon data center growth. I am not real concerned in regard, but it is a legitimate thing to look at.

However, as Cramer also notes, this will not hurt the cloud stocks. The use of the cloud is not going to slow even if the infrastructure to build out the cloud might slow, or at least be variable from quarter to quarter.

Mongo just accelerated growth to more than 60%! Zscaler had billings grow at 75% for two straight quarters! Nutanix is dependent on data center build out, and may have a bad quarter here and there, but HCI is not just growth in new data centers but also green fields as the percentage of data centers going to HCI continues to grow.

Does it make sense that MDB is worth 25% less now after just having a monster quarter of monster quarters? Particularly given, what is the buy out value for Mongo?

Anyways, I am just putting this out there. I think Cramer thinks a lot like we do on this board, and he, like we, do not see any real substantive issue other than supply/demand imbalance as there is a sector rotation, but the underlying fundamentals of cloud stocks if anything may be improving.

Let me know if you agree or disagree, and which particular companies you do so on.

Tinker

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Tinker, i still think we are in the beginning 20-30% of the cloud transition. Company after company mentions being in the early innings during their conference calls. The ones that don’t identify where we are in the transitions say things like, “tailwinds”, “momentum” , “surprising growth”, “market factors”, etc etc etc. We have multiple years left unless some extrinsic shock happens.

Value or worth is a tricky thing (which I hear you say all the time). Our stocks are priced for perfection, so while I agree that we have lots of growth left, I’m not surprised we have had a pull back because we had some pretty crazy valuations.

-e

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That’s very insightful, Tinker. I for one can only see cloud use growing (add Okta to your examples), and also data and its use growing (meaning more business for companies like Alteryx). I certainly don’t see Twilio’s business slowing down anytime soon either.
Best,
Saul

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I agree with all your comments. Only thing I can add is that the firm I work at is seeing more demand than ever for Cloud/Data Analytics consulting.

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Data centers have to be refreshed. Almost a SaaS-like impact there (like we mention with nvidia).

Onve hardware gets advanced, the software can do more…so then everyone needs the upgraded hardware to run the upgraded software.

So you dont need more datacenters as much as you need innovation to keep occuring.

But you will still have dataventer growth via on-prem or cloud because IT is now a profit center and competitive differentiator and a robust IT staff/infrastructure (via on-prem or cloud) is table stakes.

Doesnt matter whether you make/sell software or home improvement tools or cmas ornaments or clothes or spray paint. Every legit company for most part has an IT strategy and digital strategy to grow their business.

Dreamer

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Tinker,

You and Cramer are both dead on. The build-out may be slowing, or maybe just pausing a bit for a breather.

You brought up the early internet growth. How much money was made on build-out because of all the money spent on laying (still) dark fiber? It’s possible there is a slow-down in data center build-outs for cloud companies. And perhaps we need to wait for the amortization cycle on hardware to run it’s course so older hardware can be swapped out for more, newer, smaller, more powerful hardware. Who knows? But the transition to cloud isn’t going to stop. Most companies aren’t there yet, and the ones that are, are still trying to figure out how it all works.

We’re starting to see the fractionalization of specialization really catch on. What I mean by that is, as things transition to the cloud, we are seeing more and more niche players enter and become big names.

I’ll use AWS as an example because I have the most familiarity with its inner workings. At one point, “cloud” meant AWS. Then it was Azure and Google. They are your general utility companies. They provide the actual cloud, but it’s up to you to deal with everything. In the beginning, AWS gave you “instances” (VMs). There was no real networking, everything ran on “ec2 instances”. You had to build everything. You needed DNS? You rolled your own infrastructure. You needed a firewall? You rolled your own. Databases? Rolled your own.

Then AWS started creating “services” which allowed you to simply “deploy” a database using Redis, MySQL, or PostgreSQL, or DNS services with Route53, or encapsulated virtual data centers with VPCs, complete with networking, routing tables, and firewalls (security groups).

AWS has continued to do this. But now we’re seeing the niche players coming in. Need single sign-
on for your AWS, Salesforce, home-grown apps, ADP, etc. ? Sign up with Okta. Need data analytics? Sign up with Tableau and/or Alteryx. Need a NoSQL database? Sign up with Mongo. Need monitoring? Sign up with CloudHealth. Log aggregation? SumoLogic. Alert notification? PagerDuty. Team Communications? Slack.

Each of these, and many more, provide a very, very narrow niche service. And often times, these things can all work together! For example, with AWS’ CloudTrail, data can flow automatically into CloudHealth, which can send logs to SumoLogic for log parsing and have limits set to trip alerts sent by PagerDuty right into Slack.

At one point, each of these functions was a thing system administration team had to set up and deploy into their own infrastructure. The systems and tools used to manage the infrastructure often took up as much time, space, and effort to manage themselves as the systems they were intended to manage. And you needed a huge team to deal with it all. But now, each of these things is becoming a “service” that you subscribe to. And there’s almost nothing to deal with once you do. It’s freeing up tremendous amounts of human capital to do other more productive things. For example, people like me that used to be attached to cost centers can be turned loose to use our skills to actually help build revenue generating infrastructure instead and to automate things.

This trend will only continue, as “clouds” become more pervasive, easier to deal with, and people get trained up on how to develop for them. We are still in the very, very early stages of the cloud transition. Most developers are still of the old-school, monolithic Java App development mentality. They have no idea how to use services run by entirely other companies. They aren’t used to having to do anything that requires thinking outside the JVM. That’s literally all they know. They will have to be re-trained or replaced. And that takes time.

So, too, does the institutional learning have change. Transitioning to the cloud is not a simple “lift-and-shift” operation. It’s possibly the worst way to migrate to the cloud. It’s terribly inefficient, and often more costlier than remaining in your data center. Entire applications will have to be broken up and re-architected for the cloud. It requires an entirely different way of thinking about application design and its relationship to data. Security is a whole different thought-process, as is networking. Cloud literally turns everything on its head, and the vast majority of companies and developers out there have no idea how to use it effectively yet.

So, yeah, Cramer is right. Let me know when the sellers are done so I can back up my truck again!

–
Paul - who sees growth in “cloud” for many years to come!

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Does it make sense that MDB is worth 25% less now after just having a monster quarter of monster quarters? Particularly given, what is the buy out value for Mongo?

Price and value (worth) are not the same thing. What makes sense is that the price is 25% lower and value is probably higher than when the price was 25% higher. The market has names for it “Overbought” and “Oversold.”

Denny Schlesinger

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Pardon my ignorance, but what is this “slow-down thesis” based on? The article you’ve linked does not provide any hard data…

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I think nearly all have completely missed the point. The answers are those to an easy non-question which avoids the difficult real one.

It is not a question of the fabulous growth potential of companies’ use of ‘the cloud’. I almost see little point in discussing that because we are all agreed (and those who do not agree must surely have drifted away from the board in boredom months ago!).

No, the question on the table is this: is there a ceiling to valuation of such companies?

The problem here is that while in a bull market or a momentum sector P/FCF or P/E or P/S each relative to estimated future growth ratios can be ignored as the foundation to build a case for valuation on, in a bear market such ratios can never be ignored and to do so is highly dangerous.

I have been much encouraged by the take-out of some companies at very high P/S ratios - but that was then and this is now. I have returned to being much more of a GARP investor than formerly. Previously I would entertain the preposterous idea of having a punt on Cloudflier, a runner with limited form in the novice stakes (‘she flies like the wind’) at odds of 100:1 but now I do not.

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Cloud/SaaS stocks getting hammered today. When does margin selling start? Is it still at 2:00 Eastern?

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Does it make sense that MDB is worth 25% less now after just having a monster quarter

Yes. Because the price had gotten too far over its skis, gone parabolic, however you wish to say it.

You are suffering from anchor bias when you measure things down from the top. Just because a stock hits $100 doesn’t de facto mean that’s what it’s worth. Not ever. Just what you could transact a few shares for at that point in time.

It’s still trading at 19x P/S. That’s probably too high.

No position.

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When does margin selling start? Is it still at 2:00 Eastern?

Yes, it usually starts around 2 and crests around 3pm.

The calls start going out immediately but then they give clients a bit of time to wire money in or just sell out themselves.

Assuming any of this drop is margin selling, which it may not be. Check out the HF positioning post from Morgan Stanley I posted yesterday.

Also, perhaps more importantly, many hedge funds require 65 days notice for year-end withdrawals [and may only allow annual withdrawals on that date]. That means they only have two more weeks to sell and raise money for their received and prospective redemptions.

If this parade of selling continues, look for it to ease off somewhere btw the 26th and month-end.

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But this time is different…new paradigm, revolution, game-changer, etc. etc. :slight_smile:

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Hey Capitalism, how far up is your phone rtf Oliver over the last two,years even after market crash. 5 fold 10 fold 50x or did you wisely sit on cash and you are up 0 even after the crash today. Do tell and be honest.

Tinker

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I think this all has to do with the whales communicating when time things.
For instance I track when my stocks report earnings. I noticed a 6 week break between Q2 and Q3 for our stocks. For example our stocks start reporting again the last week of October. Surely the pain could last another week and a half tops??

Also didn’t help when Cramer started getting high on the cloud stocks. I think he’s always a day late and a dollar short.

Didn’t get out or lighten my load 2-3 weeks ago as I wanted to. Not my fool mentality and I do think they will start rising again during next earnings.

Thoughts?

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"Each of these, and many more, provide a very, very narrow niche service

Flix,
Your statement makes me wonder. Typically niche players find it hard to last as their service can be provided by a larger company or they may simply get acquired. Also niche typically means a lower TAM. Any concerns because of that for any of our companies?

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Hi Tinker–to answer your question, I am NOT up nearly as much as you and some of the other regulars here on an absolute basis because I tend to be conservative and only invest a portion of my funds in the stock market (while putting other funds in REITs, fixed income, non-public companies, and other investment vehicles). Now if you want to compare our risk-adjusted returns, then that would be a different story.

That said–I was only being half-facetious. Every time there is a market bubble (and I would call the SaaS stock craze a bit of a bubble despite attempts to justify their historically extreme valuations here on this board). You always hear the argument that this time “things are different”, “paradigm shift”, “revolution”, etc, and that these stocks would somehow be immune to a market sell-off and their businesses won’t suffer a slowdown in a slowing economy. That has never been and will never be the case. I’ve heard this story back in the hey-day of the networking stocks in the mid-1990s, I heard it with the internet stock craze in the 2000s, and I’m hearing it now about the cloud and datacenter revolutions. It is possible the SaaS plays do continue growing rapidly (though as I alluded in another post, the “expand” side of their models would take a hit if there is a perception among their customers that an economic slowdown is on the horizon). But either way, multiples shrink across the board in a market-wide decline–especially in this ETF-driven environment which tends to make individual stock-picking less relevant.

I know this is not a board to discuss macroeconomics, but I do strongly feel like the US economy has or is very close to peaking in the face of rising rates, trade wars, and a general economic slowdown in China, Europe and emerging markets. Our economy and markets were insulated from the global slowdown by the Trump tax cuts, but the effects of that stimulus are wearing off. I expect our economy to start slowing by 1Q2019 in line with the rest of the World, and that is why I think we are now seeing a “repricing” of stocks. Fun fact–economic slowdowns are often driven by consumer/business sentiment and become self-fulfilling prophecies.

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Now if you want to compare our risk-adjusted returns, then that would be a different story.

I will tell that to my mortgage company as I pay them in risk-adjusted returns :wink:

Returns are returns. And “risk” is subjective. I am going to use an extreme example, but they are most illustrative. Microsoft was considered “risky” because they had a new business model and no one (but Microsoft) understood the network effect with high switching costs and increasing returns (not reverting to the mean) thereby Microsoft was far less risky than most if not all stocks of the day, but very few people understood it at the time. That is if you are talking business risk.

I do not buy your premise of “risk-adjusted” return then other than if you are in cash or bonds or such other than stocks in particular.

Tinker

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I am NOT up nearly as much as you and some of the other regulars here on an absolute basis because I tend to be conservative and only invest a portion of my funds in the stock market (while putting other funds in REITs, fixed income, non-public companies, and other investment vehicles). Now if you want to compare our risk-adjusted returns, then that would be a different story.

As above, I was not talking about business risk-adjusted returns. There is no such thing.

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Sorry, Cap but I don’t buy it. Nice of you to show up a day like today and “add” to the board.

You always hear the argument that this time “things are different”, “paradigm shift”, “revolution”, etc, and that these stocks would somehow be immune to a market sell-off and their businesses won’t suffer a slowdown in a slowing economy.

I have read every post on this board the last 2 years and not ONE person has ever made that statement. In fact, Saul has said exactly the opposite. Maybe if you read the Knowledgebase or came around more than just the down days you would understand the way people on this board think better.

Congrats on not owning SQ, I guess?

Days like today and the last week just make me pour a double scotch and take a breath. Then, like most posters here, try to find what to buy next.

“If you want to improve, be content to be thought foolish and stupid.”
“He is a wise man who does not grieve for the things which he has not, but rejoices for those which he has. ”

? Epictetus

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