I never said ADBE isn’t a bargain. 24% growth doesn’t sound very great, but accelerating sounds nice. Why don’t you write them up for the board, Naj? I’ve heard of Flash and Acrobat but I don’t know how much money they make on enterprise versions – I think I’ve only used the free versions.
Not Naj, clearly, but Flash and Acrobat are not drivers. Flash is being deprecated industry wide for reasons beyond going into here. Acrobat has very little value. Creative Suite however is a category killer (think how Autodesk is/was in CAD space) in a way that very few of the company discussed here are. Honestly, in a way that is almost unique in software. It is profoundly difficult to do nontrivial analogs to what CS supports in open source software, as opposed to Alteryx, whose primary value is in data prep (but outside of that, is probably not close to open source numerical analysis toolkits that working data scientists use).
AYX is certainly growing much faster. 59% and slowing versus 24% [but accelerating from their 5-yr average] for Adobe.
AYX is trading at 320x FCF, which presumably will drop after they report versus 34x for Adobe [same].
Why is AYX in/close to bargain territory and Adobe not so? Or are they both and you just prefer AYX with its higher valuation?
ADBE is a 120 billion dollar company, ayx 5.5 billion. I’d say AYX has the ability to proportionally grow much larger. Just a very different investment
Traditional sales models were built upon contractual lock-in, which led to a lot of unintended consequences. So our companies today don’t have a lot of bad incentives built into their business. They focus on taking care of their customers and not on leveraging their contracts.
Old school software companies spend a lot of time, effort and costs with contracts and revenue recognition. Our new companies chose not to do this. Also, highly negotiated contracts leave a lot of bad Ts & Cs that make both sides feel as if they got screwed on the last deal. Generally, our companies don’t have this level of customization of their contracts.
This is really excellent stuff, DJ. I shouldn’t write a quick one liner, but you did a great job covering the advantage of the SaaS model from both the vendor and the customer perspective and it makes a great deal of sense.
One should also note that the old style on prem software installation tended to result in customized versions of the original code, either because maintenance was specifically the responsibility of the customer or because the vendor provided maintenance and responded to modification requests with a customer specific change that did not propagate to other sites. A few vendors avoided this by not supplying source code, but these were in a minority for enterprise software such as ERP systems. Not infrequently, this resulted in a customer copy of code which was so heavily modified that the customer could not update when the vendor produced a new version because of the cost and difficulty of applying all the changes to that new code base.
SaaS licensing with centralized cloud-based code creates a huge incentive for the vendor to incorporate requested modifications as options within a common code base to minimize the difficulty of managing and evolving that code base. This facilitates a more continuous cycle of evolution of the code base uniformly across all customers, thus avoiding the problem of a site falling behind contemporary norms because they can’t upgrade.
What am I doing? Well, I am 100% invested (except for cash that I need for the next 2 years) in these SaaS stocks. I am sitting tight and watching. If prices on these stocks drop another 20-30% then I will start using my living expense cash and going on a rice and beans diet.
Somebody posted the other day that they might mortgage their house to buy more. I say they should at least look to history to see where a similar stock traded of an extended period of 15 years.
Chris,
We’re actually pretty much on the same page. I certainly agree no one should mortgage their house to buy more, and as I keep saying, things can ALWAYS get cheaper. I don’t think we even need to look at historical ranges. That’s always the case.
The argument, my argument, is that not only are we no longer over-valued, we’re verging on under-valued. I’m not banking on that, but as you know, even if multiples don’t expand but only hold, a company growing at 50% should earn you close to 50%/year on your money! (Minus some dilution) Heck, even with a little multiple contraction you can still expect to make 30% per year on a company growing at 50%. When PS ratios were at 25 and 30 and more, I didn’t expect that. I’m not sure what I expected…but I assure I was trimming rather than buying.
I’m not trying to time the market here. I’m actually trying to encourage people not to try to time the market, and like, sell out and “wait for the bottom” or something. If people want to own other stocks, that’s fine. I happen to think these are the best.
When I read your initial post of this thread, it seemed like you were saying that people would be smart to buy these companies now.
What??? Yes, of course I think it’s smart to buy these companies now. Why on earth else would I own them?
Chris: When I read your initial post of this thread, it seemed like you were saying that people would be smart to buy these companies now.
Bear: What??? Yes, of course I think it’s smart to buy these companies now. Why on earth else would I own them?
What can I say? I had it in my head that you were advocating leveraging since I assumed that you were already all-in with no more cash. I probably made a wrong assumption…I wrote that with no food for 36 hours and low blood sugar while I was prepping for my colonoscopy. :-0
Chris: When I read your initial post of this thread, it seemed like you were saying that people would be smart to buy these companies now.
Bear: What??? Yes, of course I think it’s smart to buy these companies now. Why on earth else would I own them?
Although one-liners are frowned upon on the Saul Board:
Quite frankly, I am super jealous of those investors just checking out this board for the first time and having the opportunity to buy starter positions in these companies today!
“this resulted in a customer copy of code which was so heavily modified”
but this also locked in the customer as it was not easy to swap out.
traditional SW companies really made their money on yearly maintenance/support fees. The cost of sale could be quite high. Back in the day there were articles that said COS was 75-125% of the revenue gained. But you needed to grow revenue (obtain new customers) to drive the maintenance fees, where all the profits are.
In the SaaS model, the cost of sales, generally, is lower, as you don’t have to justify the high upfront price. Some of these companies sell themselves (ie. TEAM), some still require a salesforce (CRWD, ZS).
The yearly subscription revenue can be thought of as the equivalent of Maintenance/support fees.
What can I say? I had it in my head that you were advocating leveraging since I assumed that you were already all-in with no more cash. I probably made a wrong assumption…I wrote that with no food for 36 hours and low blood sugar while I was prepping for my colonoscopy. :-0
It’s a good point you make. I would never recommend anyone use leverage, and for the record, I have never used margin. (I do buy some call options from time to time.)
The reason I continue harping on the valuations we’re seeing is that I feel the opportunity is knocking. I added some Twilio and Alteryx today since they report next week. Either they’ll get a bump or look even cheaper. (Could say the same for PINS, but I’m just holding there because it’s still pretty new to me.)
I do have very little cash left, as you mention. I have a little because I again sold out of TTD. I am no longer a TTD doubter – I think they will do great. But if I have to bet on them vs AYX or TWLO or MDB or ESTC or SMAR, I’ll leave TTD alone for now. But that’s just me.
Re AYX,
there is a lot of support for AYX on this board, and as I don’t own any I had a look to see what their product does.
From what I can tell they sell software for people that can’t program in python or R / or it’s faster to develop solution for analytics on data using AYX tools than python or R.
AYX tools are rather expensive.
However, there is a competitor called KNIME that offers the same concept, but their tools are significantly cheaper. Gartner and users I found rate KNIME as good as AYX.
So from my perspective, it looks like AYX’s growth could be limited by a competitor in their space. Or this should put pressure on their margins.
I would like to hear what others think with respects to AYX’s competitors and its future growth. The MF page for AYX does list possible competition as something to watch for.
there is a lot of support for AYX on this board, and as I don’t own any I had a look to see what their product does. From what I can tell they sell software for people that can’t program in python or R / or it’s faster to develop solution for analytics on data using AYX tools than python or R.
Writing R or Python is easier than understanding the math behind this stuff. That is what I’ve never understood about AYX - while most of the research data scientists I’ve worked with have written ugly code, they have all been able to write serviceable code. Most have advanced degrees, and it’s not for the programming side of thing but probability and statistics.
Data science has been a high demand field for the past few years. From what I have read though is there are a lot more people majoring in this field due to the high wages one can expect as a data scientist. I have read the field is becoming more competitive for data science majors.
Is it a possibility that data scientists have more time on their hands or are more prevalent that they can duplicate Alteryx code and not have to buy a license then?
There is a severe shortage of data scientists. And frankly paying a data scientist to custom build code that can be systematically done through an Alteryx is a complete waste. Remember, Alteryx is only $5k a seat per year (peanuts software wise, less than $450 a month, I pay nearly that much for legal research software) and it is sophisticated enough to accommodate data scientists. Not if you need to run a supercomputer, but for most practical hardcore data issues that are just too much of a pain on Excel, yes. The ROI is far in excess of $450 a month or whatever.
When you run your own business you get to see real revenues and real costs. Alteryx is a pittance per seat.
Once you get Alteryx you start to use it more and more for other tasks. So although most things can still be done fine on Excel, the things that can’t need Alteryx, and when you get it you find even more things that you thought you could not do at all until you got Alteryx.
There was an anecdote two years ago or so. A manager had two neophyte employees. He gave them a business problem to solve. They used Excel and could not get it done in two weeks. He then emailed a link to Alteryx for a free trial. Within hours they solved the problem.
The issue w Alteryx is maintaining sales momentum. Not that hot shot data scientists will bring it in house or start their own “clone” but cheaper Alteryx.
AYX is trading at 320x FCF, which presumably will drop after they report versus 34x for Adobe [same].
Why is AYX in/close to bargain territory and Adobe not so? Or are they both and you just prefer AYX with its higher valuation?
ADBE is a 120 billion dollar company, ayx 5.5 billion. I’d say AYX has the ability to proportionally grow much larger. Just a very different investment
ADBE has doubled in price, AYX is the same. Valuation does matter, even [especially?] on the highest-growth names. It is very hard to get a nice return once you’re already at 320x FCF.
Being smaller size won’t ‘rescue’ you from that. AYX still trading at a whopping 111x FCF. Adobe’s ratio actually grew from 36 to 40x.
Adobe’s fwd22 PE is 35x having grown revs at 26% and EPS at 33% last Q. 47% ebitda margin.
Reported March 23rd:
'ADBE reported 1Q21 revenue/non-GAAP EPS of $3,905M/$3.14 compared to our estimate of $3,741.3M/$2.76 and Street’s $3,760.0M/$2.79.
Positives: Digital Experience growth beat estimates, Creative Cloud ARR back above 20% growth, full year guidance improving. Digital Experience revenue grew 24.0% compared to our 18.8% estimate with the subscription portion growing 27.1% after ending the year at 13.9%. The strength in DX appears to be sustainable with the normalized growth looking to accelerate on a subscription basis through the year. Creative Cloud added $329M of new ARR, the highest ever first quarter addition. The segment’s ARR growth rate was back to 20.3% y/y after dipping to 19.3% in the fourth quarter. Adobe does not typically raise their full year estimates after the first quarter so we see the ~$300M revenue raise after a ~$155M first quarter beat as a really encouraging sign.’