Short-time lurker (June?), first time poster. Before anything else, I’ll echo the commonly shared sentiment that this is a haven on the internet and the stuff of dreams to have such a talented, knowledgeable and generous set of folks openly sharing their best ideas. I’m immensely grateful.
I’m fairly new to this style of investing, but having now watched the aftermath of AYX’s slowdown and FSLY’s missed earnings, I’ve had a nagging thought rattling around in my head. I’m intrigued by the interplay of who the end-user for our technology companies are and how the tech-savviness of the end-users affects the moat or durability of growth opportunity for our companies. In short, the thesis I’m exploring is this:
Tech companies that build tools for non-code based employees or consumers enjoy enduring competitive advantages due to their user base’s resistance to learning new software or technology.
Conceptually, this makes sense to me. If I am used to gmail’s user interface, a competitor must not only make a superior product, but it must be so superior as to justify my investment in relearning. This is even more so for a company considering a broad user base. Change management is costly and painful, so a software change must be clearly worthwhile not just on the basis of cost but also usability. If a technology is used primarily in the background by developers, engineers and IT teams, the users may be more nimble in finding cheaper or alternative solutions that eat away at the company’s high margins. Additionally, these companies where developers are the customers may be more prone to surprises in their earnings. As an outside investor, I might be less equipped to identify when decelerating growth is on the horizon.
Put another way entirely, the premise is that intellectual property is much less valuable for these companies than their brand identities and usability achievements with end users. A good tech idea can create tremendous value, but has a limited run of growth before competition heats up or catches up.
Ultimately, much of this overlaps with network effect, but I raise it as I think it builds upon that in cases where the “network” is simply the cost of retraining end-users, even if the tool’s “network effects” are dubious.
To explore this thesis, I’ve explored several companies currently followed here. I’d of course love insight on how past companies line up with this concept if it resonates with others on the board. This is a strictly subjective and qualitative analysis, but I’m curious how it pairs with the performance of past companies that this board has followed as well as present companies.
ZM - In this case, the end user is everyone. For a company paying for a Zoom license, they are considering not just the cost of the license, but also the end users who will interface with it. These end users are likely to be not just their employees, but also their customers and their vendors. Usability is paramount – wasted time, dropped meetings or IT support for downloading the right client and connecting audio peripherals are all much more expensive considerations than any small difference in license pricing. Once a company is using this technology, they are unlikely to change. For a company not using the technology, the network benefit of broad adoption elsewhere is reassurance for choosing to invest in Zoom as a solution. In this framework, one would expect Zoom to build upon its dominance and see limited churn through the years. End user = limited tech capable = good thing for long term growth prospects
DDOG - I’m not a techie, so please correct me if I’m mistaken here. My understanding is that the end user for Data Dog’s services are techies. They are developers and IT folks who have built their careers on adapting to new technology and services as they roll out and provide additional value. In many cases, they also possess the capability to build software to meet their needs should their use cases justify the effort. In this framework, Data Dog’s current dominance and growth strikes me as more perilous. Their tools are innovative and clearly create abundant value in the present moment, but their users are savvy enough to mitigate their value over time. Naturally, my thought is that if the margins are so good, time will provide the opportunity for others to chip away at their tools. I’d expect Data Dog to continue creating new and more powerful tools, but their established business may simultaneously wither away as companies learn from the flexibility of their tool and build (or buy) a cheaper solution that meets their limited needs. (As a paranthetical, DDOG is my second largest holding at present). End user = very tech capable = bad thing for long term growth prospects
FSLY - Well, this triggered the whole premise. When I invested in Fastly, I mistakenly assumed that a Shopify or Tik Tok built on top of it would struggle to meet their customer’s needs should they choose to switch providers, that the cost of moving away from Fastly would be inferior experience for their customers. Ultimately, I now think that Fastly’s advantage was a superior offering, but that their customers possess many of the skills necessary to replicate the neccesary components of that offering without paying Fastly’s margins. As such, companies flocked to Fastly to use the tech and try it out, but then, through near-comparable services from competitors and in-house capabilities, looked to move off Fastly. It’s not that Fastly doesn’t have a place in the market now – clearly, the infrastructure requirements will cause many to choose to outsource this and their product is excellent-- but that their margins will compress as they enjoy no “end-user” or “brand” benefit. End user = very tech capable = bad thing for long term growth prospects
NET - Honestly, this is a company I don’t know enough about to comment on. But, my non-techie understanding is that they would run the same risk of pressured margins. As their tech matures and is replicated by others, they also enjoy limited change management moat… their customers are plenty capable of adapting to a less friendly interface and/or picking and choosing their services from multiple providers. End user = pretty tech capable = bad thing for long-term growth prospects
CRWD - Crowdstrike is interesting in this premise. In some sense, their tool is built for end-users and runs on every employee’s system, but the end user has very little daily interface with the tool. also as I understand it, they have a plethora of tools in the background that, following the basic thesis here, would be subject to pressured margins EXCEPT that they seem to benefit from a beehive like knowledge network that a single company or competitor would be hardpressed to replicate. End user = more tech capable = bad thing for long-term growth prospects, though I think the network effects here more than negate this!
OKTA – Benefits from end-user being non-tech focused as well as network effects of integrations. End user = limited tech capable = good thing for long-term growth
AYX – I don’t know enough here to comment too fully, but strikes me as an in-between. The end-user here is clearly capable enough to use basic analytics tools, so likely fairly capable of adopting to new user interfaces. Additionally, it seems the size of data that alteryx thrives on is large enough that there might an outsize influence to the developer / techie viewpoint within the company when it comes to data solution selections. End user = tech capable, not code capable = neutral
DOCU – End-user is not tech-focused and usability, familiarity are key for successful adoption / use. End user = limited tech capable = good thing for long term growth
MDB – I chose this because I wanted to look back at companies from earlier years to see how they might have performed and how that might inform this basic premise. I think it’s an interesting example of one where on the surface, this premise would indicate trouble maintaining margins and growth over the longer-term – Mongo DB users are fairly tech-savvy, BUT they consistently build tools on top of mongo db that less tech-savvy users interface with regularly. In contrast to Fastly, Data Dog, or Cloudflare where the tool is a small, interchangeable component, the database structure is a bit harder to change without affecting the end-user’s experience (or appears so to my non-tech brain). End user = tech capable, but embedded permanently into built solutions = mostly good thing for long-term growth
TWLO – that brings me to Twilio. Again, the direct users of Twilio are tech-based, but the API’s tie directly into user experience and thus inform usability. A transition to new tech would again require considering usability, which provides a much stronger moat than cost or the broadness of capability. End user = tech capable, but tool’s secret is vast usability improvement for customer-type end users = good thing for long term growth.
Ultimately, this train of thought has come from thinking about how Fastly caught me by surprise and has me rethinking my conviction in DataDog and also holding off from jumping headfirst into Cloudflare. I’d love other’s thoughts on this as it pertains to DataDog and Cloudflare. Apologies if the premise got tangled up with a broader conception of moat and network effect, but I also felt that it can’t be considered in a vacuum as those play into the importance of usability as an advantage.
Long ZM, CRWD, DDOG, DOCU, PTON, MASI, TEAM, TDOC and SHOP and some odd scout ideas I won’t mention cause I’m not sure I can defend (I guess that should tell me something).