Why big down day...

Investment Analysis Clubs Saul’s Investing Discussions
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I disagree that a discussion of the reason most of the stocks held here are down significantly today is off topic.

No, it’s not a discussion of the financials of an individual growth company, but when almost ALL of the highly held stocks from this board see a drop of between 3-8%, it’s good to know why that’s happening and to determine if it’s something to be concerned about.

I suppose you can remove this post if you want, but I don’t think it should be. Here’s why it looks like “our” stocks are down today, an article in Barron’s from a Morgan Stanley analyst Keith Weiss basically down on enterprise software stocks’ valuations who issues a bunch of ratings and target price cuts (most of the article is Slack specific, if you want to read it all, I"ll highlight some of the more general comments he makes). And it seems the market agrees with him…

https://www.barrons.com/articles/slack-servicenow-and-other-…

Now I don’t agree with his findings, so I do think this is an opportunity for folks that are looking and able to add or start positions in some of these stocks. I’m not calling a “bottom”, would never try to do that, but a 5-10% better price than yesterday, on top of the already decreased prices, for no other reason than this analyst’s opinion is a potential good time to add if you’re looking to do so, it’s a decision each person has to make for their situation. Here are some of his points:

Slack Technologies, ServiceNow, and a number of other enterprise software stocks are trading sharply lower Wednesday after cautionary comments from Morgan Stanley analyst Keith Weiss on growth rates and valuations in the group…

Weiss trimmed his price targets on a host of high-multiple software stocks…the market is obviously taking his cautionary take to heart…

As noted, Weiss does a deep dive on software multiple compression in a separate note, asking rhetorically if the sharp pullback in enterprise software valuations offers a buying opportunity in the group. Weiss advises against bottom-fishing, warning that there is still risk in “high multiple names. Despite solid secular demand trends behind software and generally solid Q2 results, software stocks have pulled back 23% on average from the 52-week highs,” he writes. “With a combination of high growth software multiples at historical peaks and heavy institutional ownership of the names, prices proved difficult to sustain against a volatile macro environment and sector rotations away from momentum names.”…

So is it time to buy? Nope, he says. Weiss notes that many stocks still trade at sales multiples above historical averages, with stocks still up 27% year to date on average despite the pullback. He also says the company’s CIO survey finds “a steep deceleration in software spending growth into 2020,” and he cautious that many companies face “difficult comps” in the second half of the year. “We see unfavorable risk/rewards for a lot of the high fliers in software,” he writes.

Now if he’s right about the “steep deceleration in software spending growth into 2020”, that would obviously hurt our stocks in the short term, but I tend to think the many reasons Saul has outlined for owning these software shares will once again spur some share price appreciation moving forward (at some time, I don’t know when), unless their growth rates just start falling off a cliff.

Good luck all!

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Here is some more info that will help us ride this out:

https://seekingalpha.com/article/4296816-cloud-names-getting…

Summary
The cloud names are getting killed. I think there are bargains in the rubble. Take some small bites to start.

There seem to be a bunch of different data items that is the cause for the drop, but frankly, it doesn’t completely add up.

Buy what is working! My housing names are all green. Mr. Market is telling us there is further upside in the home builders.

Let’s keep an eye on Datadog. It’s a recent IPO that still has the lockup and earnings, but has strong insider buying and Cisco offered to buy it at $7B. We will shoot against that valuation to buy.

and …

I think there are buys in this group <Saul’s type>, but let’s wait a few days for them to bottom out to get aggressive. I would not stop you if after you look at a few of these names decided to initiate a small position today.

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Thanks for your explanation and I agree that a lot of investors like to know why a sector of stocks has decreased or increased again thank you

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The seekingalpha article is a little off saying: “Datadog had 4 insiders buying about $15 million of shares at around $34.”

It’s always nice to see insiders buying but according to the following link they were buying at $27.
http://openinsider.com/screener?s=ddog&o=&pl=&ph…

$27 happens to be the same price (and timing) that the underwriters had a right to purchase additional shares so they may have just been taking the opportunity to purchase shares at a nice discount.
https://investors.datadoghq.com/news-releases/news-release-d…

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Cooler Heads Must Prevail!

When all about you seems lost; remain focused, stay true to your investment thesis and always remember that this is the path we have chosen! A path of high growth, high returns and high VOLATILITY!

From September 2018; take a moment to read this Gartner article:

https://www.gartner.com/en/newsroom/press-releases/2018-09-1…

  • Worldwide Cloud Services will grow 17.3% in 2019

  • Fastest Growing Segment will be IaaS; to grow 27.6% in 2019

As a point of reference (as paraphrased from another subscription to which I belong); it took the IaaS market approximately 12 years to evolve to a $31B market. It will take only 3 years to double to $63B in 2021!

We all know that we are on track with cloud based companies for the next few years. The market is currently filled with whacky sentiment and emotion right now. So when everyone is bailing out and prices are dropping; we should be considering going back in for another bite of our highest conviction companies.

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Foodles,

I suppose you can remove this post if you want, but I don’t think it should be. Here’s why it looks like “our” stocks are down today, an article in Barron’s from a Morgan Stanley analyst Keith Weiss basically down on enterprise software stocks’ valuations who issues a bunch of ratings and target price cuts (most of the article is Slack specific, if you want to read it all, I"ll highlight some of the more general comments he makes). And it seems the market agrees with him…

I think that one of the reasons that Weiss’ comments had such a big impact is because he is apparently considered to be a top ranked analyst. Based on the site below, he gets 5 stars out of 5.

https://www.tipranks.com/analysts/keith-weiss

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Wnewyorktokyo - Thanks for the comment and link. It seems like a lot of collateral damage. I entered AYX today with the big drop.

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I don’t trust these investment bank ba$tards for a second. This is at least the third across the board selloff driven - apparently - by a no-news negative “they’re overvalued” “analyst” press release / article in the last 2-3 months.

I suspect / speculate they have shorted the crap out of this sector at the top, and are now talking down their book through these mouthpieces. They’ll make 20-50%, cover the shorts later this week (carefully), and be out.

This is definitely a macro consideration for hot growth sector investing. The investment banks do this all the time. This is why it’s called “speculative”.

Fall in love with the companies, but not the stocks.

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Dangerously off topic…

I know it’s not OK to share our angst and concerns on market moves. Fun and emotionally satisfying to chat with like-minded souls outside the ‘rules of the board,’ but outside the rules.

MORE IMPORTANT to me, is there a way to identify the analysts and companies that follow and comment on the stocks we all follow and comment upon? Who is ‘Keith Weiss?’ What’s his background? Track record? Credibility in influencing this segment of the market?

https://www.linkedin.com/in/keith-weiss-a582706

Kip

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Weiss is a top rated analyst. He is ranked #166.

I think some folks will hear what the #3 ranked analyst has to say in Bert Hochfield’s next market commentary or SA Post. Yes, Bert Hochfield is ranked #3: https://www.tipranks.com/bloggers/bert-hochfeld

I’ll take this in stride as a data point. I added to some holdings today.

However, after the analyst comment and Zscaler beat-down, is there value in asking members of this board whether their companies are likely to validate or disprove his comments from a CIO survey.

He also says the company’s CIO survey finds “a steep deceleration in software spending growth into 2020,” and he cautious that many companies face “difficult comps” in the second half of the year. “We see unfavorable risk/rewards for a lot of the high fliers in software,”

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OKTA is down, today, too…an older holding of mine, bought before much discussion of cloud stocks. Maybe good earnings will help…think OKTA’s is in late Nov. STJ

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I caution that my experience in the business is getting more and more stale. But having spent 30 years in the IT shop of a Fortune 50 company I can relate how I observed these things to work up until about 10 years ago when I retired. I’ll also add that while the technology changes at the speed of light, corporate culture does not. In fact, it changes much more slowly than and aircraft carrier reverses direction (to use a worn analogy).

Corporate budgets are determined top down. In essence, there’s a pot of money for operations, the size of which is determined at the C level (with participation by the board?) on an annual basis. An emergency and contingency fund is taken away from the get-go as they know a plan is a plan. Then there’s reality as the year progresses. What remains is divied up at a high level to each member of the C suite. Some of the members have more clout than others. Sales & marketing for example. If it’s an engineering/manufacturing firm like the one I worked at, they too have a lot of clout. These are the parts of the company that generate revenue. IT is generally pretty far down the list as IT is a cost center. Even if the company’s primary product is software, IT is still a cost center. What IT contributes is “reductions” primarily in costs and risks. And, oh yeah, at this point they also keep the business running. No large cap (or maybe any) company can exist without IT.

So a survey of CIOs that indicates that spend will diminish next year is based on what they perceive to be the macro economic factors that influence the businesses that they work for. They gaze into their crystal ball (OK, I’m being facetious) and based on what they see they make a guess as to how their budgets might fare. Actually, the CEO, CFO and head of sales (a number of C titles exists) provide early estimates (subject to change) and then a relatively small number take the time to respond to these surveys. In many companies, these surveys are never responded to as a matter of policy.

So right there, be aware that these surveys are not in any way statistically valid. They are a snap shot at a point in time of a subset of CIOs at companies that provide answers. I’ve yet to see one that includes margin of error or anything that indicates a scientific basis for the information provided. But I caution, my experience is stale - maybe things have changed. I doubt it.

So then what. The CIO tells the survey taker what he estimates his next year’s budget is going to be based on present knowledge and educated guesswork. Does that tell you how he’s going to spend the money inside his organization? Usually not. Is there a historical basis for estimating how the spend will be allocated? Well, if one has been keeping vendor records over the years, the answer is well, yeah, kinda sorta. But it will never tell you how money is going to be allocated on products with a short time period in the marketplace. There’s just no historical basis to make a guess at that.

Let me reiterate what the mission of IT is, it’s to reduce costs and risks and keep the ship afloat. Keeping the ship afloat is absolutely number one priority. Storage capacity and network bandwidth will get prime consideration. Even mundane desktop products are vital. Installed software that is currently at the heart of business operations will take priority over purchases of new products - but that’s where things start to get sticky.

From the top levels of management financial considerations generally outweigh technological prowess. If I recall correctly, software has a 5 year depreciation schedule, so it’s ROI is determined over a 5 year lifespan even though it may remain installed for much longer. The ROI must be favorable with respect to a host of other investment opportunities. And, in most cases, upper management tends to be skeptical of software ROI to begin with. The hockey stick (or payback period is probably more important than the ROI. When we see software with very easy on-boarding, low training requirements, fast utilization (ZM anyone?) this is all plays into a rapid hockey stick.

OK, those are the typical financial hurdles. Only after they are shown to be satisfactory do the tech battles begin. If there is an array of competing products all of which have more or less comparable ROI and payback (and vendor stability, and freedom from serious litigation and a bunch of other non-software related factors - the more deeply the s/w might become embedded in the company operations, the more important become these other factors) do technical issues related to functionality, use cases, usability (user interface), maintainability, language (if the company has a lot of foreign users of the s/w), etc. become considerations.

And here most of you were probably thinking the best technology always wins. Not by a long shot.

Anyway, we’re primarily invested in companies that don’t have a lot of history, but enough at this point to have credibility with most all Fortune 500 companies. Most of the software made by the companies we’ve invested in have proven to dramatically “reduce” costs and/or risks. And they can prove it, not just by assertion, but by customer experience. Don’t believe me? Look at the revenue growth. If they couldn’t meet their claims, they wouldn’t be growing at 50% - 100% or more.

So if IT budgets are constrained next year does that mean our companies will suffer or benefit? Ha! I don’t know. It all depends. If things get squeezed to the point where there’s barely enough to keep the ship afloat, they will suffer. Else, they may be seen as the highest and best use of the available software dollars.

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Brittlerock, great summary of the machinations of management and budget.

I do believe things have shifted for IT in a lot of companies.

Digital transformation brings CIO into the strategy conversation, not just keeping the lights on. Power in the budget process may have increased for their initiatives. Not sure in general, since the “rain makers” that bring the revenue will always be given the most attention.

The shift to subscription and consumption based software also changes the accounting. Is there a depreciation schedule on subscription based? I don’t think so, which is one appeal of the model.

Subscription and developer lead also gives more flexibility in IT since new software can be brought in and trialed easier, like TWLO, it’s possible the CIO is the last to know. ZS on the other hand is a significant disruption in strategy and would need to sell the upper crust of IT and probably the CEO.

Your description of the budget process though does highlight the challenge.

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Weiss is a top rated analyst. He is ranked #166. I think some folks will hear what the #3 ranked analyst has to say in Bert Hochfield’s next market commentary or SA Post. Yes, Bert Hochfield is ranked #3:

Thanks Soludag, I followed your link and found

Bert Hochfeld: Ranked #3 out of 6,974 Bloggers on TipRanks (#16 out of 12,530 overall experts)

That means Bert is ranked in the top tenth of one percent, one one-thousandth, of analysts.

And for example, here’s a brief paraphrased and edited excerpt about one of these stocks from his most recent weekly summary:

“I think those who keep talking about a tech bubble have it wrong. I am a pretty good source if one ever wants history of what a tech bubble looks like, and this is so far from that period as to basically defy my writing skills. There are companies that I think overvalued, but these are real companies with real revenue and almost all of them will grow up to generate lots of cash. (We got a lot of questions about CRWD yesterday when Citi initiated at a sell and it led to a 10% downdraft. We think, and have said that the shares are too expensive, but the commentary by the Citi analyst with regards to market share limits for CRWD is most likely very inaccurate). We have our own valuation discipline, but from a strategic point of view, we think CRWD, like ZS, has essentially invented a category.”

Best,

Saul

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Very informative message. Thank you!

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- Worldwide Cloud Services will grow 17.3% in 2019

- Fastest Growing Segment will be IaaS; to grow 27.6% in 2019

Great reminders, HCM. As always, we need to remember the fundamental drivers of success. Our stocks can move, a LOT, with momentum. Up or down. But as long as the companies continue doing what they’re doing – gaining customers and revenue, advancing toward profitability, etc – in the long run they’ll move up by the amounts that their businesses grow. Many of my favorites have around $300m in TTM sales, and plan on having $1 billion run rate in just a few years. That’s the kind of thing I want to be involved in.

I am basically fully invested again. Cash position is down to 2%. Here are my current holdings:


SMAR	13.9%
MDB	13.6%
TWLO	13.1%
ESTC	11.1%
AYX	10.8%
TTD	7.3%
ZS	6.8%
CRWD	6.2%
PINS	5.4%
DDOG	3.8%

Already in October, I’ve added a little to SMAR and ESTC and CRWD, and a ton to AYX, TTD, PINS, and DDOG.

I sold OKTA. With everything else so cheap right now, I can’t pay the premium for OKTA.

Bear

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MORE IMPORTANT to me, is there a way to identify the analysts and companies that follow and comment on the stocks we all follow and comment upon? Who is ‘Keith Weiss?’ What’s his background? Track record? Credibility in influencing this segment of the market?

Yes! Ignore them all. Some of the world’s greatest investors and speculators have advised against buying and selling on stock tips, you have also heard it here often enough: “Make up your own mind!” An advisory by the likes of Keith Weiss, TMF, and Saul make sense to subscribers who are following the whole conversation but, for occasional listeners, their advice is nothing but a stock tip. The followers hear about it when they change their mind, occasional listeners don’t.

¿Why big down day? Because that’s how markets work. People are always chasing yield, when something is going up they pile on sending it even higher until the bubble bursts. Then everyone runs to sell because the first in line recovers most and the last in line loses most – greed and fear.

The above applies to stocks, not to the companies. Just because a stock is going down does not mean the company is going down. This is what justifies Saul’s insistence that we focus on companies not stocks, a view I share for the most part but not entirely. I see value in also understanding trading patterns.

The lesson is simple, if you can’t stomach the volatility you need a less volatile investment vehicle. I lost a lot of money when the dot-com bubble burst and I learned an important lesson: “Good businesses bounce back.” One must ascertain that the business is sustainable to build a sturdy portfolio, not an easy task. One example, the idea behind optic fiber was perfectly sound but it had the seeds of its own destruction. Quite simply, optic fiber was so good that prices dropped even faster than Moore’s Law making it impossible for optic fiber companies to pay off their capital costs. Lacking liquidity they went bankrupt. The buyers of the assets got then for pennies on the dollar and are now successful businesses. Falling prices were the red flag many of us missed. The business seemed brilliant, and it was, yet the companies still went bankrupt.

Denny Schlesinger

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I am basically fully invested again. Cash position is down to 2%. Here are my current holdings:

SMAR 13.9%
MDB 13.6%
TWLO 13.1%
ESTC 11.1%
AYX 10.8%
TTD 7.3%
ZS 6.8%
CRWD 6.2%
PINS 5.4%
DDOG 3.8%

Already in October, I’ve added a little to SMAR and ESTC and CRWD, and a ton to AYX, TTD, PINS, and DDOG.

I sold OKTA. With everything else so cheap right now, I can’t pay the premium for OKTA.

Bear, I’m curious how you arrived at your decisions on which companies to add shares/allocation. You sold OKTA because you say it’s “expensive”. TTM EV/Sales at about 24, TTM growth in the low 50s, and 83% GMs. It’s also completely dominating its category. It’s also been improving Operating Margin.

ESTC is growing faster (mid 60s) with 80% GMs and has a lower TTM EV/Sales at around 17 but profits are no where in sight…they sure are spending a lot.

CRWD is growing even faster at 94% (but dropping) and has a TTM EV/Sales ratio of 27. The big question is how big can they get.

DDOG has the highest TTM EV/Sales ratio of them all at around 37, 75% GMs and growth of 82%.

SMAR is growing in the high 50s (consistently for a year) with 81% GMs but profitability seems farther away.

Anyway, I think it’s more interesting to hear why you did what you did than just what you did. Just contrast, Saul completely sold out of SMAR and ESTC and cut TWLO in half. He explained his reasoning.

Looking forward to hearing your thoughts.

Chris

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Here’s my current portfolio as I seemed to get out at the right time and back in over the last couple of weeks. Only off my highs by 8%!!

Zs 18.3% (hit too hard)
Roku 18.1% (I see $200 in 1 yr)
Crwd 17.1% (hit too hard)
Lvgo 14.6% biggest risk/reward
Tndm 8.58% (great org growth)
Mdb 6.83% (Ayx, estc, ddog)sim
Ntnx 6.07% (turnaround play)
Tlra 4.27% (tv add play)
Inmd 2.09% (a lot to like)
Twlo 1.87% (will likely increase before earnings)

I trade in and out of a few into earnings, but this is what I got currently.

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Bear, I’m curious how you arrived at your decisions on which companies to add shares/allocation.

Ok, I’ll try to answer your questions.

You sold OKTA because you say it’s “expensive”. TTM EV/Sales at about 24, TTM growth in the low 50s, and 83% GMs. It’s also completely dominating its category. It’s also been improving Operating Margin.

Actually OKTA revenue only grew 49% last quarter. With an EV/Sales of 24, it’s relatively pricier than most of my others, which are growing revenue much faster (59% last quarter for AYX, 58% for ESTC, 62% for PINS, and even faster for TWLO, DDOG, and CRWD).

ESTC is growing faster (mid 60s) with 80% GMs and has a lower TTM EV/Sales at around 17 but profits are no where in sight…they sure are spending a lot.

Yes, they’re growing a lot faster than OKTA and they’re much cheaper by PS or EV/S.

DDOG has the highest TTM EV/Sales ratio of them all at around 37, 75% GMs and growth of 82%.

Pricier but growing 60% faster than OKTA! But this is my smallest and least confident position.

SMAR is growing in the high 50s (consistently for a year) with 81% GMs but profitability seems farther away.

I don’t care so much about when a company is likely to become profitable. I care that they can get there. Smartsheet knows what they’re doing. Growth has been very consistent at over 50%, and the PS ratio is currently below 20.

Let me know if that helps or if you have other questions about why I did what I did. The bolded statement above is probably the main answer to what I think you’re asking. I’m not concerned with how far a company is from profitability as long as I see them getting there easily.

Bear

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