We're Below The Bottom. I Have Proof.

[tecmo]

With high growth firms, what I see a lot of people get wrong in valuation is truncating growth very early on. For example, revenue growth is ramped down to the inflation rate by year 10. A company growing at 50-60% today probably won’t be growing at 2-3% 10 years from now. Even growing at twice that rate makes big difference. I also believe people are too conservative on how high operating margin can truly get for these companies.

Rather than thinking about this in terms of “years”, think about it in terms of market penetration. Example. If a company is selling into a $100B market, they might pickup market share very quickly early on, maybe up to even 25% of the market; but after that it will be much harder to pick incremental share.

So maybe they grow slowly at first as the market figures out their product, then very quickly as they gain adoption, and then slowly again. The classic S-Curve. In this case it inflect at $25B.

Early Stages : 20% Growth Rate
Growth Stages : Next 25B in revenue : $50 Growth Rate (would take 8 years at 50% annual growth)
Tail Growth : Say 10% Growth Rate

tecmo
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[SaulR80683]

Hi Tafola,

I’m really sorry, and I know that your post is well intentioned, but our board is specifically for the analysis of individual high growth companies, and not for technical analysis and market timing. There are other boards that would be happy to have your post, but it is way off topic here, so I will have to have it deleted.

Saul

[ronjonb]

Well, I’m not sure if we have hit the bottom or not and it doesn’t seem to distort my investing thesis.

I owe a lot to Saul’s board and hence commenting with a different perspective on why I’m invested in some of these SaaS companies and continue to be a long time holder. I’m a Software Engineer with over 20 years of experience and have worked with the largest software company in the world building some of the products and services that are being used by millions of users in the world today.

I’ve invested in SaaS when perhaps many folks were not aware of SaaS. My investments were purely from a tech perspective. Then, sometime in 2018, I discovered Saul’s board and started learning about how hypergrowth SaaS companies have distinct advantages over traditional businesses ( including legacy software). Aspects like High Revenue Growth, Gross Margins, Net Retention Rate, Product Moat etc. A long time back I had also read Peter Thiel’s book “Zero To One” which illustrated the advantages of such software businesses; do read the book it if you get a chance :).

Also, I’ve been among the first posters on this board to write about the technical superiority of Datadog (DDOG), Crowdstrike (CRWD), Snowflake (SNOW) and a few other companies. You can find those in some of my earlier posts.

The reason I had high confidence in those names was due to my work experience in creating cloud services and also moving legacy on-premise applications to the cloud. I experienced a lot of the pain points that every software developer faces and could clearly see how these special SaaS companies were solving them!

From a Software Developer’s perspective, it is impossible in today’s world to worry about Security, Monitoring, Performance, Reliability while focussing on building your own product/feature. So, for any enterprise, it makes a lot of sense to let the dev team focus on their feature work/ user stories and using the services of DDOG, ZS, CRWD, MDB for Monitoring, Security, Performance, Reliability and data storage etc.

No doubt we saw the sudden acceleration and a paradigm shift to digitization in the past couple of covid years as businesses embraced the reliability, productivity and cost savings these special SaaS providers bring to the table.

https://discussion.fool.com/paradigm-shift-has-happened-34663619…

You’ll find my takes on Datadog (DDOG) in some of my earlier posts when DDOG was small company. In the past few years almost every training/conference I had been to or attended online ( since Covid) included some discussion or a pointer to Datadog (DDOG)!

And talking about big data, there’s no way you can ignore Snowflake (SNOW) and MongoDB (MDB).

Cheers!

ronjonb

P.S. I also like Sentinel One (S), Monday ( MNDY), Amplitude (AMPL) and Upstart (UPST)from the list of companies discussed on this board. Specially, Amplitude is a great product and simple to use whether your business is data-driven, data-informed or data-inspired. But somehow I feel it’s a business that may be acquired.

I like Confluent ( CFLT) and have some call options. Upstart (UPST) is another fascinating company that I’ve taken a small position in taking advantage of the current sell-off. The only reason I was a little hesitant to invest in it was around the AI hype. I myself have contributed to ML models that are being consumed by some of the largest services in the world and have friends who are working on some of the leading edge developments in that space. So, it is definitely a space to keep an eye on.

Long <DDOG, SNOW, ZS, MNDY, CRWD, S, MDB>. Smaller allocations and call options in CFLT, AMPL, UPST

[DoctorStrange]

“What I noticed about psychology is that stock prices can change people thesis if their convictions are not strong enough. They started doubting if the companies are not a great companies after all because their stocks dropped a lot or went sideway for a long time when there’s nothing wrong with companies’ financial performance.”

There was nothing wrong with Cisco’s performance in 2000. People simply realized it was overpriced. Their stock plunged and 21 years later still has not recovered.

It’s not 100% about investing in a good company. For example, I believe UPST is a very good company, and it’s one of my bigger holdings, but if its market cap was $1T, I would say no.

When a stock price decreases, it may not cause doubt about a company’s financial performance, rather it may cause doubt about the price.

I’m not saying the boards’ companies are over-priced, but on the flip side, Cisco was – it can happen even when a company has good fundamentals. Good fundamentals are not enough.

[rtichy]

That’s not really all that is true about Cisco. Cisco got kicked to the curb by a lot of companies in subsequent years because they were too willing to sit back and sell people expensive routers with expensive consultancy fees to configure them. Cisco’s stagnation was not just the stock being “overpriced”. Their product was overpriced. Their offering was ripe for disruption. They were disrupted.

[captainccs]

There was nothing wrong with Cisco’s performance in 2000. People simply realized it was overpriced. Their stock plunged and 21 years later still has not recovered.

Maybe nothing wrong with Cisco’s performance in 2000 but something terribly wrong with Cisco’s business model. As I remember Cisco was the original networking company that made them rich and famous but they never developed any new technology that could replace their aging networking technology to create a new “S” growth curve, instead they bought up a lot of other tired technologies like storage and WiFi routers.

What happened to Cisco is that it morphed from growth stock to cash cow which is what happens when old technologies age. It also happened to be overpriced as you point out and there were no drivers that could improve the stock price.

The most important lesson I learned from the 2000 dot com bubble is that one needs to invest in companies that will bounce back. More easily said than done. The only method that I know of is to understand the business model. Back then satellite communications like Iridium and GlobalStar were too early and the technology was not ripe for them, it would take some two decades for the technology to catch up with the dreams. By contrast, Jeff Bezos has said that online sales were successful because all the infrastructure was in place to make it feasible. My own software product, online help for Mac, was also decades too early and my company failed. The consolation prize was that it was mentioned in a Japanese patent challenge as pre-existing technology.

Hold stocks that will bounce back. Don’t invest in dreams in you retirement portfolio.

Denny Schlesinger

Cisco Acquisitions by Year
https://www.cisco.com/c/en/us/about/corporate-strategy-offic…

[CMFSoloFool]

Good analysis, it is certainly another good data point in the overall catalog of analysis tools. Thank you for sharing.

If I may, I’d like to offer a small dose of skepticism (not in intended as criticism); The trouble with guesstimating stock price movement is that everyone tries to distill the process into a systematic, repeatable, formula that can be applied to the broader market. In my experience, this will always be the Achilles heel of such methods.

For one thing, you cannot avoid macro, there are a lot of things happening in the world, the industry, state, and in the companies themselves, let alone the broader market, to apply such a predictive model without accepting the atmosphere that drives broad movements in the market (i.e. COVID, bubbles, Fed, Great Recession/Depression, etc.).

For another, there are too many emotional and immeasurable people factors that defy rational, reasoned, reactions to corporate, industry and state affairs. The market can be wildly irrational most of the time, and rarely can be said to be predictable.

When we try to distill investing decisions to a finite point on a chart, a measurement, or a report, we lose perspective of millions of other vectors affecting people’s choices. The way you see opportunities in front of you is how you see it, it is not how the rest of the world sees it. While your reasoning for calling bottom are well reasoned and supported with your data points, it is easy to fall into the trap of validating your own ideology as dogma. It is another form of anchoring.

Ultimately, if you stick to your convictions long enough, things may turn in your favor and you may look like a brilliant investor. But even a broken clock is right twice a day. Trends are formed when certain measurable things happen long enough to go from being outliers, to confirmed direction. Predicting a trend before it is measurable is fortunetelling. Spotting a trend early enough and positioning to benefit from it is investing.

[tuisona]

Hi Chris,
I went through your original post with interest as I found it to be perhaps the most thoughtful and instructive note on the topic of “valuations” of our growth stocks vs the broader universe that indices represent.

Given our stocks have sold off significantly from the point when you first posted it and we have had one more quarter of earnings behind us, I would be curious to see how you see the relative value now.If you refresh these stats for yourself, would it be possible for you to share some of the key stats with us as well as any change in assumptions that you think would be appropriate?

Of course it would be completely understandable if it is not possible.

Regards
Tuisona

[tuisona]

Apologies.
my message should have started with “Hi Eric”.
Very sorry for the error.
Tuisona