Tremors

PANDEMIC IMPACT ON TECH

It’s been a crazy month. As of now, I’m +5% YTD while S&P500 is -24%. EVERYTHING fell. Saul harps on the “our stocks are riskier” falsehood all the time, and it keeps coming true. Retail and restaurants plummeted; airlines and cruise lines plummeted. SaaS vital services, however, are in HIGH DEMAND. The better of our stocks bounced back in an awful hurry, and I’m way above the market still. Owning these vital services is MINIMIZING my risk now in the face of this pandemic.

And Zoom - just … wow. Folks who bought in Oct/Nov are sitting pretty. I unfortunately came in later, but, it’s been nothing but rocketing up since. It’s been a blur.

So I’ve been pondering how this pandemic and the recession it fed will affect SaaS hypergrowth companies. Here’s my thoughts…

Stocks benefiting in this environment, technically :

ZM - Clearly the big winner right now, as maintaining communications is vital during this pandemic. They made it free for K-12 to use during this pandemic. Usage is soaring, and the brand is riding high. Costs are sure to rise, as vast majority of new users are using it free, but the surge in capacity is bringing in massive customer growth and great goodwill. Crazy to watch this company’s tape move opposite the other SaaS plays, almost makes it a hedge. “Zoom” is now becoming a verb, quickly (I think I’ve heard Zoom directly mentioned on about 1/2 of the earnings calls I’ve heard this month). I think we don’t need any more of the countless anecdotal Zoom stories; we have a clear winner in video communications. And, AMAZINGLY, the software appears to holding up to the strain of being at full capacity – their tech team is top notch.

WORK (Slack) - Another clear winner as newly remote co-workers need to communicate. I’ve stayed away because their growth rates have been plummeting, but this is sure to at least stem the tide of that for a few Qs.

CRWD - Scattered employees being forced to work-at-home means more devices that need protecting. They made it free to add temporary devices (“surge”) during the next 60d, as well as are allowing personal devices, since employees have to use their own at home.

NET - Scattered employees being forced to work-at-home means more traffic that needs protecting. My newest purchase, and it’s been holding up way better than others. I told 2/3 of TTD to buy NET, and it has been +20% vs -33% since. Their new Cloudflare for Teams product, a complete clone of Zscaler, came at a perfect time, adding a whole new line to a company already having accelerating growth, now 50%. They opened Cloudflare for Teams up immediately as free for everyone until Sept 1! That is going to cost a lot in infrastructure, but once it flips to paid, this company’s new product will have great momentum. More and more are adopting Zero Trust as the way to secure their ever sprawling network, as the number of remote workers is surging.

ZS - Same as NET, scattered employees being forced to work-at-home means more traffic that needs protecting. This is may be a fire lit under their struggling sales force, and helps turns the dial back to hypergrowth. Or… it may stress an already faltering sales team into further array. I think the surge in remote working tilts it heavily towards the former, at least stemming the huge drops in revenue growth, and likely even rekindles customer growth and $NER.

OKTA - Centralized identity is vital as a company’s workers disperse into separate locations. This work-from-home scenario plays EXACTLY into their strengths. No brainer.

DOCU - Overall a net positive as anything that strengthens contactless agreements is good for them. Agreements are sure to go more electronic in an age of social distancing, so this strong platform is only getting stronger. Usage may dim as companies shrink spend (don’t need that contract signed after all), but this company is a clear leader in its space.

COUP - More scrutiny on enterprise spend means more need to track it, and this platform pays for itself immediately in managing supply. New customers will dip with budgets getting conservative, but existing customers keep leveraging their platform in order to keep suppliers & supply chains under control.

These are more up in the air:

AYX - Is an unknown. Analytics are always important, but enterprises are likely to curtail spending immediately for non-vital services, for at least 6mo. New customers might shrivel up. It’s going to put “analytic software & services” up to the test to see if it is recession proof or not. I have faith that it IS vital, but I’m not sure its fully immune from reduced enterprise spend.

DDOG - I’m not sure how observability will play out. Budgets are going to tighten and new customers might shrivel, but SEEING your infrastructure & software is JUST AS VITAL now as it was before. So I’d call this a vital service to start with, and am not sure the work-from-home situation affects that one way or the other. Perhaps the surge in certain SaaS usage is a net positive; if services are scaling up infrastructure to handle more capacity, the need to observe also grows (Zoom and Netflix and Okta are having massive spikes in usage, so are adding more servers and service instances that need watching).

MDB & ESTC - Are an unknown. Consumption of existing custs will rise, but perhaps not as much as before. Certain internet companies are doing really well though, and perhaps are still growing their usage. But I feel that new customers might shrivel up in an environment where enterprise spend is getting curtailed rapidly. Support contracts from non-SaaS custs may not get renewed. I’m not as excited about these db providers just given the reduced overall enterprise spend.

ROKU - Is an unknown. Ad budgets will shrivel, but their device count is expected to grow strongly, giving more viewers and ultimately more eyes on their ad platform - that only means good things. They stand to gain marketshare - it’s really between them and FireTV right now, and Roku has been slowly increasing its lead thus far. As long as they remain top dog, which seems a given, they will come through stronger at the other end of all this. But it could be a topsy turvy few months.

TTD - Ad demand is sure to drop as budgets tighten (at least for a few months). However, they are at the forefront of the Connected TV wave, and demand for streaming platforms during this stay-in-home period is extremely high. I think they too will come through stronger at the other end of all this. But I expect some volatility.

TWLO - I’m not sure. Communications with customers is vital, though, so probably neutral.

TEAM - I think they’ll do alright, but I’m not sure workers need any more or less tracking systems when working remote instead of on-premise. And some companies are sure to start curtailing spend. But generally, it’s a vital service for software development, project, & service ticket tracking. I’m neutral.

FSLY - I’m pretty neutral to slightly negative. Assuming that some of customers are excelling in this time of remote working (media, streaming), I think they’ll be overall fine. But looking at their customer list, I also see Yelp, AirBnb, Homeaway, Alaska Air, jetBlue, Kayak, Shopify, Stripe, and a lot of retail. Those companies are NOT scaling up right now.

SMAR - We are about to see how productivity software does in a pandemic-fuelled recession. I think it’ll be make the slowly dropping hypergrowth take a jump down.

-muji
long many of these

102 Likes

AYX - Is an unknown. Analytics are always important, but enterprises are likely to curtail spending immediately for non-vital services, for at least 6mo. New customers might shrivel up. It’s going to put “analytic software & services” up to the test to see if it is recession proof or not. I have faith that it IS vital, but I’m not sure its fully immune from reduced enterprise spend.

Alteryx’s product supports the manipulation of large amounts of data. Some of their customers use that data in their main line of business. Others, not so much.

Example 1: A medical research company are using it to organize genomic data to feed to deep learning neural network software they use to develop new medicines. Those guys will continue paying Alteryx because it is key to the company’s main line. Changing the workflow to save $100,000 a year is crazy.

Example 2: A chain of trendy restaurants was using a trial version to see if they can use it to find relationships between the kind of customer and the kind of food they order. Their big discovery last year was that high school girls order ice cream at 3 times the rate as their grandmothers. But due to the pandemic, they can’t pay their lease to Store Capital. So they have abandoned their quest for cheerleader menu selections. And AYX doesn’t snag a client.

I have never used AYX product, but i have trained deep learning neural networks, back when they were still in the academic research phase. If my company asked me tomorrow to go back to that (I would in a second), I would probably look over AYX’s product line.

So for me, to decide if AYX should get too hurt, I would need to see their client mix. How many restaurants and motels versus how many data-centric companies.

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WORK (Slack) - Another clear winner as newly remote co-workers need to communicate. I’ve stayed away because their growth rates have been plummeting, but this is sure to at least stem the tide of that for a few Qs.

SMAR - We are about to see how productivity software does in a pandemic-fuelled recession. I think it’ll be make the slowly dropping hypergrowth take a jump down.

Muji,

These are both collaboration tools. Not sure what evidence suggests the one that’s had plummeting growth will benefit and the one that’s had steady growth will suffer.

Bear

1 Like

The market seems to agree that there is alot of uncertainty on how this will effect Alteryx’s business. It has been hit harder and not bouncing as well as others discussed on here. It’s down big again today when other high growth SaaS are flat/up slightly as of now.

They have good penetration into big customers in the Global 2k, so I would think the customer base is diverse and strong enough to not throw their AYX contracts out the door. I do think the NER will drop a good amount from 130%+ - I also have alot of faith in the management team’s ability to steer the ship, but the market seems to have different views.

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Hi Muji, congrats on your YTD performance, very impressive!

Owning these vital services is MINIMIZING my risk

I would say that I don’t think anyone really measures ‘risk’ as intra-month or even 3-month performance, downturn or not. Risk is generally defined as ‘risk of permanent loss of capital,’ by Buffett and other world-class investors and that’s widely accepted in the investing world. I think Saul would be the first to say a monthly 20% rise or gain is just noise in the long-run for good companies.

And ‘everything’ didn’t fall, some big blue-chips are up: Costco, Gilead, Clorox, Regeneron, Kroger, Amazon is up almost 10% this year, etc.

But SaaS is holding up nicely for the most part!

ROKU - Is an unknown. Ad budgets will shrivel, … But it could be a topsy turvy few months.

TTD - Ad demand is sure to drop as budgets tighten

Watch out! You’re going to be called a shortseller, ‘fearmongerer,’ ‘trying to sow fear and doubt,’ just like I was last week for saying those obvious facts, even though I was long both ROKU and TTD.

Some obnoxious posters may even email you obnoxious private messages in an effort to keep their bad behavior hidden. Maybe Saul and his board mgmt will add ‘no personal attacks via email’ to their list of board rules, just a thought.

best,

Naj

long CRWD, TTD, AYX, DDOG, ADBE, MSFT, etc

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Some obnoxious posters may even email you obnoxious private messages in an effort to keep their bad behavior hidden. Maybe Saul and his board mgmt will add ‘no personal attacks via email’ to their list of board rules, just a thought.

I’m not really sure why this even needs to be said, but if you receive an email that you deem inappropriate, please report it to the Fool! Obviously none of us want people out there harassing anyone who posts on this board, either publicly or privately!

Bear

11 Likes

They have good penetration into big customers in the Global 2k, so I would think the customer base is diverse and strong enough to not throw their AYX contracts out the door. I do think the NER will drop a good amount from 130%+ - I also have alot of faith in the management team’s ability to steer the ship, but the market seems to have different views.

Imagine you had a button you could press that costs $1 every time you press it, but it increases your annual revenue by $3. Would you stop pressing the button?

That might be a relatively realistic measure of the value of Alteryx to certain companies.

Bear

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Bear,

I agree they will keep pushing the button. But I am trying to figure out why a company like COUP that has a lower growth rate and similar FY20 sales than AYX trades at a 50% higher valuation and have recovered alot better. COUP is just one comparison.

AYX is still down 40%+ from the highs and still underperforming.

The market is showing there are concerns about Alteryx’s sales during this pandemic (more so than other software names). In my opinion it’s irrational, but will probably have to wait awhile to figure that out.

bnh

1 Like

Muji,

These are both collaboration tools. Not sure what evidence suggests the one that’s had plummeting growth will benefit and the one that’s had steady growth will suffer.

Bear

This is one piece of evidence by the CEO in favour of $WORK growth. Well worth a read

https://twitter.com/stewart/status/1243000487365861376?s=19

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Maybe Saul and his board mgmt will add ‘no personal attacks via email’ to their list of board rules, just a thought.

Excellent idea, Naj. Will do!
Saul

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Bear,

Valid to call SMAR & WORK both collaboration tools, but I think their product focus is pretty wildly different, and that leads to my different thinking on their prospects. Let’s throw TEAM in mix too as it is another team collab tool.

The key difference between them is that Slack is a communications tool (replacing email and face-to-face convos), while Atlassian and Smartsheets are centralized project and operational process tracking.

TEAM - Group collab tools around software development & service.

  • Software development tracking (sprints, tickets, bugs)
  • Project tracking (tickets, todos, timelines)
  • Service issue tracking & incident mgmt
  • Internal wiki
  • Integration with a lot of outside dev tooling (Github, etc)

All of these things were already important to software companies before, whether workers were on-premise or remote. I fail to see how work-from-home situation across its clients helps or hinders the reasons to need this tool.

SMAR - Group collab tools around most any business operations.

  • Project tracking
  • Software development tracking (issues, enhancements)
  • Centralized content & design collab
  • Marketing campaign mgmt
  • Sales tracking
  • Centralized forms
  • Mgmt dashboards

Again, I feel that these solutions are equally important to companies before, whether workers were on-premise or remote. I do overall agree that Smartsheets has a pretty impressive core platform, mostly due to the open-ended nature of their platform and how it can likely be adapted to many other processes from here (verticals can spin out endlessly, as we are seeing in their Accelerator tools). Those Accelerators are getting interesting, but it’s all M&A trackers, Sales and Marketing tools. But are new companies going to sign up for this now if enterprise spend may screech to a halt? Perhaps some of that is countered by some companies adopting more centralized collab tooling on certain things they may have done in-person before, like content collab.

To see who is using SMAR, browse their customer list:
https://www.smartsheet.com/customers . I don’t see any major concerns… but it is manufacturers, suppliers, banks, tech cos, hotels; a wide spectrum of industries. Customers right on their front page is IHG (hotel chain that is hurting right now), Western Digital (having major supply chain disruptions), Whirlpool (manufacturing whose factories are likely affected). At the same time, lots of health orgs too, and those might be needing a lot of data tracking tools right now. So perhaps the net effect is all neutral for their platform? But my educated guess is that the slowing growth drops a bit faster the next few mo as enterprises curtail spend, so I am out of SMAR to put those funds into other tooling that I see as more critical and more embedded.

I’m sure it’s a vital tool but I do not see it as deeply embedded. It does appear SMAR is starting to be able to integrate w/ other enterprise tooling more and more like Dropbox, Slack, Salesforce, and ServiceNow – they are up to ~50 they can integrate with.

WORK - Inter-team communication

  • Broad appeal to all businesses
  • Especially helpful tool for dispersed work environments
  • Interconnect focused teams (sales, marketing, etc)
  • Customer help desk
  • Workshop/class communications

Slack is more just about interconnection of people. This has a much broader appeal in that it applies to all businesses right now that are being challenged by stay-at-home.

TEAM is pretty software-dev focused tho any projects can be managed on their tools. SMAR is very focused into automating/centralizing specific business processes. Very different focuses for these collab tools.

-muji
long none of these but most interested in WORK

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Thanks tchalla, I was going to post about that same thing. Someone posted it upboard a bit too but with little detail, and it was ignored.

I follow WORK’s CEO on Twitter and he had a fantastic thread the other day on the challenges of being a public CEO during this time. Here are all the tweets in a readable format.
https://threadreaderapp.com/thread/1243000487365861376.html

I highly highly recommend reading it all. Incredibly rare to have this level of insight, of looking through the CEO’s eyes at a SaaS company’s operational response to all this.

FYI in 6 days they’ve gone from 10M to 12.5M (+25%) active users (MAU).

READ IT.

-muji

22 Likes

Great read Muji, many thx.

Muji
I am already long Slack, but after reading the post I will add more
What a CEO, what a company
Thank you for sharing
Wyking

Slack is more just about interconnection of people. This has a much broader appeal in that it applies to all businesses right now that are being challenged by stay-at-home.

…SMAR is very focused into automating/centralizing specific business processes. Very different focuses for these collab tools.

Muji,

I see your point, but the broadness of appeal is mitigated (perhaps superceded) by the unit economics. Maybe SMAR gets 1/100 of the users WORK gets, but they get 500x as much per user? Just making up these numbers but you get my point.

Still, your posts on Slack have been interesting, especially the CEO’s thread. I just can’t get excited about Slack for some reason. When they reported a couple weeks ago on Q4, they had 70 customers spending in excess of $1 million annually, which boggles the mind. How is Slack really worth that much to these customers? But for that same quarter, YoY revenue growth was only 49%.

I think WORK may get a bump from the WFH environment, but I just don’t know how many more organizations are going to pay a ton of $$ for what they offer. Please tell me what I’m missing, because I just don’t get it.

Bear

“Q4, they had 70 customers spending in excess of $1 million annually, which boggles the mind. How is Slack really worth that much to these customers”

Interesting question. My answer requires some assumptions, but having been in commercial real estate, I think my assumptions are within reason.

Company A is a large enterprise employing 1,500 employees in their HQ in a large urban center in the U.S. (NYC, DC, Chicago, etc.) and then employing another 500 at various regional offices throughout the country.

Assumption 1: Space Planning Requires an allocation of 200 Square Feet of office space per employee

Assumption 2: Base Rent + Pass Thru Charges for a Total Gross Rent of $75.00 Per Square Foot.

As the company continues to grow, succeed and expand, they begin to hire more employees and offer work from home (WFH) options to a number of employees that perform functions more independent to the business model and are not required to be on-site; thereby forgoing the increased cost of having to expand their rental square footage in a fixed office space.

Assumption 3: Annual Occupancy Cost Per Employee = 200 x $75 = $15,000 Per Year

Slack (WORK) or similar products facilitates and allows employers and employees to cut the umbilical cord and effectively and efficiently WFH. Plus work remotely and easily communicate with other associates around the country and world.

Assumption 4: $1,000,000 Product Spend Break Even = $1,000,000 / $15,000 = 16 Employees WFH

If in fact you buy into the WFH model, I think it is clear that in many urban office markets where housing employees on-site is an expensive proposition, the economics become favorable pretty quickly.

Harley

4 Likes

“Q4, they had 70 customers spending in excess of $1 million annually, which boggles the mind. How is Slack really worth that much to these customers”

Interesting question. My answer requires some assumptions, but having been in commercial real estate, I think my assumptions are within reason.

Company A is a large enterprise employing 1,500 employees in their HQ in a large urban center in the U.S. (NYC, DC, Chicago, etc.) and then employing another 500 at various regional offices throughout the country.

Assumption 1: Space Planning Requires an allocation of 200 Square Feet of office space per employee

Assumption 2: Base Rent + Pass Thru Charges for a Total Gross Rent of $75.00 Per Square Foot.

As the company continues to grow, succeed and expand, they begin to hire more employees and offer work from home (WFH) options to a number of employees that perform functions more independent to the business model and are not required to be on-site; thereby forgoing the increased cost of having to expand their rental square footage in a fixed office space.

Assumption 3: Annual Occupancy Cost Per Employee = 200 x $75 = $15,000 Per Year

Slack (WORK) or similar products facilitates and allows employers and employees to cut the umbilical cord and effectively and efficiently WFH. Plus work remotely and easily communicate with other associates around the country and world.

Assumption 4: $1,000,000 Product Spend Break Even = $1,000,000 / $15,000 = 67 Employees WFH

If in fact you buy into the WFH model, I think it is clear that in many urban office markets where housing employees on-site is an expensive proposition, the economics become favorable pretty quickly.

Harley

1 Like

Sorry, there was a critical typo in my first version

Slack (WORK) or similar products facilitates and allows employers and employees to cut the umbilical cord and effectively and efficiently WFH.

Harley,

The point is, could they do it just as well without Slack? I guess the answer is no. So they can do it better with Slack. But how much better? I guess the answer for some companies is “$1 million+ better,” but it still confounds me.

Bear