What makes a company good? It’s important to answer that question apart from valuation. The PS or PE ratio is an easy number to get – The harder thing to surmise is how certain a company’s future is.
There are things that help: recurring revenue, history of rapid growth, network effect, path to profitability, gross margin, ability to leverage, etc. (Basically everything Saul posted just earlier today: http://boards.fool.com/saul-i-noticed-how-many-of-your-curre…) But in the end, predicting a company’s future is a judgement call.
I think it might be useful to…
…where my conviction is currently at for the companies I own. The quantification will be very “back of the napkin” math, but then I’ll explain my reasoning. I would love to hear the opinions of others on their quantification and explanations of the same.
Back of the napkin conviction rank
1 = SELL immediately. Very Bearish short and long term.
5 = NEUTRAL (obviously I don’t want to own things I’m simply neutral on)
10 = BUY as much as you can stand.
SHOPIFY (SHOP) - 9.5. A lot of revenue is recurring, they’re now profitable, they are growing like crazy and have been for years, lots of ability to leverage. I like the fact that they profit with their merchants (their customers). I like their founder. There’s not a lot not to like with this one.
ARISTA NETWORKS (ANET) - 9. Growing really fast, taking market share, VERY profitable, but not much recurring revenue. Kicking Cisco’s butt. Really seems to be a best of breed product, with smart people who keep their offerings at the top of the industry.
WIX (WIX) - 9. Almost all revenue is recurring, growing fast and have been for years, astounding gross margin, lots of ability to leverage, just not profitable, yet. Simple product at a great price and they’re innovating! Seems a no brainer with not many threats.
SQUARE (SQ) - 9. Growing really fast, taking market share, only just becoming profitable but with plenty of opportunity to leverage, but not much recurring revenue. Places I buy things use Square all the time. It really just makes sense. It’s offering something (many things) really valuable – something that’s more and more needed, and I don’t see that trend reversing.
HUBSPOT (HUBS) - 8.5. Almost all revenue is recurring, astounding gross margin, on the cusp of profitability, growing fast but not as fast as some. Also their value is more niche than the above and therefore less clear to me. However, a lot of people who do understand the product(s) seem to love it.
PURE STORAGE (PSTG)- 8.5. Growing really fast, taking market share, on the cusp of profitability with lots off leverage opportunity, but not a ton of recurring revenue. Like Arista, seems Pure is just doing it better than others, with smart people who keep their offerings at the top of the industry.
ALARM .COM (ALRM) - 6. Growing slower than most of mine but still quite well, profitable with room to leverage, recurring revenue, but a skittish market does make me wonder if I’m missing something. I don’t understand their product differentiation and that is a huge thing for me. I’m taking off even more points here than for HUBS – because I think it might not just be that they have a niche I don’t understand, but rather that they don’t really have a niche at all. I’m skeptical long term, and therefore despite the great financials, I can’t be much better than lukewarm.
MICRON (MU) - 6. Growing like wildfire and extremely profitable with more leverage possible. However, no recurring revenue (that I know of) and possibly a commodity. I feel like they may be slightly (or vastly) underestimated, so my outlook is slightly better than neutral. If I was convinced they were a commodity my outlook would be below neutral and I would not own at any price.
INSTRUCTURE (INST) - 8. Almost all revenue is recurring, great gross margin, growing very fast, but not very close to profitability. I think the product is awesome…maybe they just neet to charge more for it or something!
HORTONWORKS (HDP) - 7.5. Almost all revenue is recurring, great gross margin, growing very fast, but not very close to profitability. Also a slight ding for my inability to understand their product.
TALEND (TLND)- 7.5. Almost all revenue is recurring, great gross margin, growing very fast, but not profitable yet. Also a slight ding for my inability to understand their product. Another ever so slight ding for the recent acquisition, or they would be an 8.
NV5 Global (NVEE) - 7.5. Growing really fast, but through tiny acquisitions (but they’ve proven to be really good at it). Profitable with lots off leverage opportunity, but no recurring revenue that I know of. Still, I doubt they will have any trouble being in demand.
TELADOC (TDOC) - 6.5. I’m slightly better than neutral on what will become of this company, and fairly sure that if it goes the way I hope it will be very big. Pretty sure revenue is contract based and therefore recurring. Gross margin is great. Opportunity to leverage seems to be there. Growth has been really good organically but they’ve supercharged it with acquisitions. We’ll have to see where it levels out, hopefully years from now. Not profitable at all and it may be some time.