Why I'm adding to Alteryx and not ZScaler

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When ZScaler started dropping a couple of weeks ago I added more. But I ended up selling it all yesterday before earnings. I feel relief today. But I’m not gloating. I could very well be feeling sellers remorse in a few years time. But as we should remind ourselves, emotion is something that we need to check when investing. I’d like to explain my thinking in my decision with ZScaler

  1. Valuation of Alteryx and Zscaler is at relative parity. Both are growing around 60%. ZScaler has gross margins of around 80%. Alteryx has gross margins around 90%. Before Monday and Tuesday, both were valued at around 30 p/s. Now they are both closer to 20% with Alteryx slightly higher.

  2. Alteryx has a greater TAM. While one should take TAM numbers with a grain of salt, it’s not insignificant that ZScaler identifies its current TAM at 13 billion while Alteryx described its market opportunity on Cramer the other day as being 26 billion.

  3. Alteryx is in a better industry. Security is fraught with risk. Security companies are constantly defending against malicious actors trying to bring them down. That’s just the nature of the industry. It’s not to be expected that ZScaler will suffer a serious breach, but the climate is such that there will always be competing security products and companies are wise to create layers of defense. ZScaler was a first mover in cloud security, but Crowdstrike and other companies already have competing offerings. Not to knock Zscaler’s offerings, but security will always be an industry with many players. There is always an arms race. It is unlikely that ZScaler will ever have more than a fraction of the market.
    Alteryx, on the other hand, believes that its market is winner takes all, and it probably is. Killer apps such as Photoshop and Excel push out all other challengers in their niche. Alteryx looks to be the killer app in the field of data science. There is a risk. They might not be the eventual winner, and in that case their business will eventually stall out and fail. But if they succeed, they will capture basically their entire market. Their current growth and pricing power shows they are on their way to that success. If the Alteryx thesis plays out, today’s prices will look VERY cheap. ZScaler, however, could still be a successful security company and never justify its current multiple.

This is my thinking on why Alteryx is the superior investment.

Here’s one reason why I might be wrong. I really don’t know how transformative ZPN is going to be. Could this technology become a fundamental element of web traffic? If so, ZScaler will become something truly special and one of the foundational technology companies of our generation. I’m not a tech person so I don’t know what the future for ZPN truly is. Therefore I need to consider ZScaler as a speculative investment and put ZScaler in my speculative basket instead of my growth basket.

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  1. Alteryx has a greater TAM. While one should take TAM numbers with a grain of salt, it’s not insignificant that ZScaler identifies its current TAM at 13 billion while Alteryx described its market opportunity on Cramer the other day as being 26 billion.

TAM is a bit pointless…lofty numbers that seem to shift and eventually fade or evolve as industries change to something else or tech is disrupted. (imagine storage array TAM before/after hyper-converged products showed up, as an example)

Anyway…I did the opposite, which may be completely wrong, too:

Bought more ZS today at a whopping time machine discount near their 2018 Sept peak price, or at their Feb 2019 prices…however you want to look at it. Basically a reset button.

I believe cyber security will become the new insurance; you don’t need to like it, but you know you have to pay for it.

AYX has a lot of competitors in data analytics. I would argue that ZS has fewer in cloud-based security. So that means they can make hay off a bigger chunk of a smaller TAM, in theory.

My allocation order is now:
ESTC
TTD
ZS
AYX
10% cash in case there is another leg down for SaaS/growth sector rotation.

I peaked on July 26th at 87% YTD for combined ports.
Now at 64%.
I had about 40% of my current ZS allocation going into ER, and that hurt (obviously). But I am hopeful that we get a retracement in the coming weeks/months, starting with analysts potentially getting more positive after analyst day next week and Zscaler’s Zenith Live event.

If you are wondering why CRWD can grow so much faster than ZS, keep in mind they don’t do the same thing. Rolling out endpoint protection doesn’t have the same paradigm-shifting impact as moving away from legacy ntwk/firewall security infrastructure that ZS goes up against. Will PANW or Fortinet or others start winning with their cloud-based solutions? Yes. But I believe there will be plenty of TAM to go around for all the notable players, and cloud/multi-cloud growth shouldn’t be waning anytime soon; current cloud customers will grow their footprints, and either reluctant existing companies and new/startups will be new entrants to cloud. As ZS pointed out, they “only” have 20% of top global accounts, yet most of those will be transitioning to O365, so tailwinds remain in place. SD-WAN continues to ramp, so those tailwinds remain in place.

They probably get close to $450m in this coming FY.
Then follow that eerily familiar path we have seen others take (OKTA, TTD) of 600-700m, and then hitting $1b. From there it is a couple years to $2b.

3 years to $1b, 5-6 years to $2b.

If ZS can maintain a 12-15 P/S at $1b scale, that would be a roughly $12b-$15b mkt cap, and they are now closer to $6b? That would be a 25-35% CAGR.
If they can be an 8-10 P/S when they hit $2b, they would be $16-20b mkt cap (which is where I kind of always have seen the end state). That would be a 16-27% CAGR.

I don’t plan on holding for 5 years. But I might hold for 2-3 years as they approach that $1b runrate. Not supposed to talk about timing on this board, but I want to make profits and move on, so if/when I hit a double from today’s prices, whether it comes in 9-18-24-36 months, I am likely calling it a win, unless they have morphed into something much different and have a much rosier upside (due to new solutions and TAM).

Dreamer

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Dreamer,
Thank you for your update. I came to this board the first week of August. Read the KnowledgeBase, rules, etc. I started with TMF just before being retired :slight_smile: 8 years ago. I was very fortunate to have found TMF. I had grown to a 30 plus stock portfolio. In a matter of weeks have trimmed out hardware and sold out GOOG and most of AMZN. I had positions in TTD, OKTA & MDB.

Now my top stocks above 6% are
MDB
ZS
AYX
ESTC
OKTA

I listened to the call last night and the key takeaway for me was in the tone Jay Chaudry’s voice in response to Gray Powell’s question on improvements to the cloud firewall.

"So in summary, we’re trying to do things the new way where you don’t control the network, you don’t worry with network security you securely connect a user to an application and you’re simply a switchboard in the middle of it. So very comfortable technology and the lead we are increasing. And next week you’re going to see some significant big new areas of expansion that we’ll be announcing at Zenith Live.

I have started capturing past 2 years rev, margin subscription revenue but it is challenging during this maelstrom of SaaS stock re-evaluations. So it is what it is. I am comfortable moving out of the previous stock positions, just need more experience with this growth approach.

Your note today helped bring peace.

If anyone can direct me to a link or note on how to use a spreadsheet or other to capture daily individual portfolio stock performance to thus be able to provide weekly monthly and quarterly individual stock performance I would appreciate it. I have read Saul’s Knowledgebase and other links “Additional Information” etc but I have not found the answer, but likely I just missed it. Skimming instead of reading.

Commway

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Alteryx is in a better industry. Security is fraught with risk. … It is unlikely that ZScaler will ever have more than a fraction of the market.

Many of your conclusions you are drawing are incorrect. For ex: Symantec and McAfee pretty much owned the anti-virus market between themselves. I think you started with an view point and making arguments to that and they are not adding up.

Alteryx, on the other hand, believes that its market is winner takes all, and it probably is.
Don’t buy everything a CEO says. Their job is to be optimistic. If you don’t realize there are many companies in the analytics field and many established companies with established products, with $1 B+ R&D budgets and with multi-billion existing revenue.

Alteryx looks to be the killer app in the field of data science
If this is your theory then you should make sure you understand the technology landscape, competition and AYX is truly the killer app.

If the Alteryx thesis plays out, today’s prices will look VERY cheap. ZScaler, however, could still be a successful security company and never justify its current multiple.
Actually you are under estimating ZS potential for success and AYX risk. Please note, I own AYX with a cost basis of low 20’s and don’t own ZS. But I am under no illusion that AYX success is given nor ZS is in a tough industry. If you don’t realize the competitive pressure both companies face, the challenge and the opportunity, the potential for success and failure, I would say they are identical.

What you are seeing ZS share price is a sales execution issues. It should not be a surprise OTR came out with a research report talking about channel issues, and most on the board were dismissing it as FUD, short report, etc. The challenge for all of us is, how to overcome commitment bias. When we own some stuff we are not open to other view points.

Actually ZS price could get to some ridiculously cheap level like mid $30’s and could setup for huge gains from there.

In any case, I wish you good luck with your investments.

PS: wishing luck is not dismissing your work on identifying the investment rather recognition on my part there are so many variables that impact any outcome in life and many are beyond our ability to imagine or control. You do what you need to do and let luck (or God if you are a believer) carry you the rest of the way.

Cheers,

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Dreamer,

Have you looked into ROKU as companion to TTD in CTV/OTT ad space? Here is the reason why I like them as a concentrated CTV play.

  1. #1 by a mile in streaming hours. 43% and increasing of connected TV streaming hours and 22% across all mediums. Amazon was #2 at 18% and holding steady of share.

  2. Most recent data I can find (April 2018), 83% of all US OTT Programmatic Ads were delivered on ROKU platform.

  3. Roku dominates and is pulling away with US device sales. US accounts for 85% of OTT global OTT market. US accounts for 70% of global streaming hours. The international market is very much undeveloped, and to immature to have a leader yet.

  4. CTV ad inventory on ROKU platform “more than doubled”, again. The company says they are in early innings and building out the full market is at least a three year event to truly mature.

  5. Revenue growth has accelerated every quarter for at least the last year from mid 30’s to 59% most recently. The amount the company beats it’s top of line guidance has been accelerating, most recently $25M over managements top line guidance. A $25M beat this next quarter yields further acceleration to 62%.

Q3&4 are seasonally the strongest quarters which gives me high hopes for the rest of the year of upside surprises.

  1. CTV ad delivery averages a 47% failure rate due to technical decencies along the supply chain resulting in missed revenue opportunities. Not sure if ROKU has the same failure rate or not but there is significant room for improvement in revenues without the already more than doubling of inventory. These issues will get solved by the industry sooner rather than later.

  2. Far from the walled Garden image, Roku is an open source developer platform with a several year mature Unified Ad Framework. This framework connects Ad inventory fro ROKU supply and ROKU publishers supply and over 40 DSP including “major players” like The Trade Desk.

In summary on CTV space programmatic ads are almost all being delivered on ROKU platform, that’s where a lot of TTDs ads are going. ROKU gets a larger chunk of the Revenue equation than TTD does.

Some of the sources of data

Programmatic ad share

https://www.businessinsider.com/roku-wants-to-control-the-fu…

http://blog.pixalate.com/programmatic-tv-connected-ott-unite…

Streaming hour share and CTV fail rates

https://drive.google.com/file/d/1CwtY4lX55k-IvHyOLAs5ZvuMUSj…

http://www.conviva.com/wp-content/uploads/2018/08/Conviva-Q2…

Most other sources come from earning call or ERs.

Darth

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