Why prior beliefs are so important

Investment Analysis Clubs Saul’s Investing Discussions
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An interesting facet of the heated Cloudflare debate that sticks out to me is that a lot of each person’s reaction depends on how they felt prior to this quarter and conference call.

  1. If you thought that the company is doing something revolutionary and has a great plan and a great product that almost sells itself, your response to the quarter was probably to be sympathetic to Prince and glad he’s weeding out folks who can’t sell it.

  2. If you were less in love with the company (but wanted to hold as long as they kept the streak of good results and earned their premium), and you thought Prince was fine, but no magician…just a good leader with a good company, your response to the quarter was probably that the guidance reduction showed that Prince is mortal and you probably weren’t surprised by that, but the reduction probably didn’t make you happy.

  3. If you were less in love with the company (but wanted to hold as long as they kept the streak of good results and earned their premium), but you really respected Prince and trusted him to steer the ship masterfully, your response to the quarter was probably to feel let down by Prince and that the stock is an obvious sell.

I put myself in the second group. I trust Muji and Peter Offringa and others who believe NET could be building something great, but I note that their tense is generally future with this company. I decidedly didn’t trust Prince to pull a rabbit out of his hat no matter what the environment, etc. Therefore, I held a small position in this very expensive stock. Back in January, I held a slightly larger position, and I was trimming it as it went up. I said this at the end of January in my portfolio review:

I don’t feel as good about Cloudflare long term as any of the top 3, and one reason is simple: I’m not sure how profitable they will become [note: I still question if they can get past 20% net margin] … Another reason is that I simply haven’t ever been able to get comfortable with their growth drivers. I know they are a leader in CDN/DDoS (whatever those are), but Cloudflare One and R2 are much much smaller parts of their total revenue. Therefore, I really feel like this is our most speculative company. Sure, I believe they will continue to do well in all their segments, but I don’t know how to begin to quantify that. And they don’t even give us any visibility into growth rates by segment. I’d just be uncomfortable if this one got too big…

If you, like me, saw this as our most speculative company, you’re probably selling on a bad quarter. If you think they’re revolutionary, you might be adding.

If you don’t see this company as speculative, I’d like to hear your reasons.

Bear

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Put me in camp 3, and definitely influenced by Peter beyond what I could myself figure out on my own. I really liked Prince. And in the several year out view, this may prove to be a small blip.

I’d trimmed ZS largely because I was convinced that NET was going to inflict lots of damage, but that doesn’t appear to be happening. Lucky for me ZS had been dropping since and while I’ve sustained rude recent losses and now mostly gotten out of NET, I’ve started to reinvest in ZS these last few days. My ZS sales were sitting in cash, due to luck.

The speculative part to me is that NET has now concluded they need to blow up the existing B2B salesforce and start over to better serve large enterprises. Prince seemed to be touting the GTM new strategy last quarter while also upping the forecast. Now he’s lowering the forecast and throwing GTM under the bus. This seems like a complete reversal, but is it? Perhaps it’s just a realization that it needed to be blown up. Prince didn’t know how painful this might be. Hopefully, it means that the new GTM boss is solid and not just clearing folks out to bring in his TWLO colleagues.

I can see that this quarter and the next few could be ugly because putting humpty dumpty back together again will require time and effort. The GTM strategy, which apparently was very poor (see JonWayne’s posts), is likely to get worse in the short term.

I run a sales consulting company. This change will almost certainly be painful (and likely necessary) before it gets better. Speculating on if/when it gets better is best left for another investor.

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Maybe you can answer this. I have always heard it takes about a year to get a good salesman up and running. Is that true?

Andy

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no.

It is true for someone from a different industry. But it’s not like 0 to 100 in step function, but a slope.
For a new college grad, without industry or sales experience, it’s a year to get much of anything going.

If they are bringing in new people from TWLO, they won’t have contacts selling into cybersecurity, so their contacts/relationships will be limited.
But they would have skills and tools. Should be much quicker if they are good at what they do, with a linear slope up.

I’d expect NET to have a few quarters of difficulty (some coming up to speed and others bailing out) before real traction is noticeable.

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As crazy as it sounds, given Cloudflare’s offerings and their clear advantages over their competitors, I have been wondering, for years now, why isn’t Cloudflare growing faster than they have been.

CC, Prince
“We now have 4.92 million Workers applications running on our platform, up 146% over the last 6 months. 30,000 paying customers have activated R2…, up 25% quarter-over-quarter. AI companies, large and small, continue to build on Cloudflare at a breakneck pace. When we ask them why, they cite our neutral position, rapid innovation and modern, nimble development environment.”

And now with this macro-economic down-turn, we are beginning to understand why it is that Cloudflare hasn’t been growing faster, despite their superiority in their market (I’m obviously in the First Camp).

Now, because the economy is in a down-turn, Cloudflare is being forced to overcome their nerd-dom and are realizing that the mere mortals that run nearly all the companies in the world need high quality Sales Reps to literally show them how to more effectively compete in this new World.

I love that Prince, respectfully, devoted so much time to this issue on the CC. I see upside when the economy ticks up. And, I see upside with future GTM improvements. I see limited downside in the interim with those 100 reps, now let go, having brought in only 4% of last quarter dollars.

26% Cloudflare,

Jason

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Isn’t that really just another way of saying that your reaction depends on your investing thesis? Evaluating company performance against one’s investing thesis is something we should be doing on a regular basis, to be sure our thesis is intact.

And there might be multiple theses. For Cloudflare one might admire their product innovation timelines, their previous good results, their market dominance, their management, and/or perhaps their positioning to take advantage of future secular macro trends. Others might have other theses they used to invest in NET.

For me, it’s not “beliefs,” but “investing theses” - maybe that’s what Bear means, but I think my terminology helps us frame our analyses of what’s going on and what we should do about it moving forward in a more objective light. “Beliefs” just feels too subjective to me. Maybe that’s just me.

When a company we own stumbles, it makes sense to re-examine our investing theses and see which are still intact, which are blown, and which are now marginal/questionable. And as a result of that as-objective-as-possible (granted, never fully objective) analysis we can decide to sell, trim, or buy more.

My Cloudflare investing theses are almost all intact: Product innovation timelines, market dominance, and positioning for future secular trends (IoT, serverless computing, end-to-end internet connectivity, etc.). I’m disappointed in management insight and execution, but that alone isn’t enough to outweigh my other investing theses at this point in time.

Actually, I think a bit more highly of Prince than I did a year or so ago, when I thought he was too rose-colored-glasses positive on calls. On this call, he not only pointed out what the problem was (step 1), he outlined what the remediation steps will be, and in detail. I understand why people may not be comfortable hearing those details in an ER call, but that opening of the kimono is actually something I appreciate, however indelicately it was handled on the call.

But, again, on balance, all of my other investing theses in Cloudflare remain intact, so I’m holding my moderate position.

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Really well said @Smorgasbord1. This is the crux on why people have differing opinions based on the same information. For me the investing thesis for Cloudflare was enormous optionality it has amassed due to its pace of innovation and just the growth trends in IOT and edge computing.

Personally for me it was disappointing quarter, but my thesis remains intact with some questions that need to be answered. If they came up with these results in a booming economy, that would have been serious red flag. But its clear from this earnings seasons that companies are having a hard time doing any kind of forecast including SNOW.

Also I am having a hard time finding new durable growth companies and I am worried in this environment investing a company which have done well recently might turn out to be a Buy High Sell Low strategy as sooner than later they might feel the macro impact.

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Plenty of perfectly valid statements in this thread, with several that may well come to pass. It is indeed likely that B2C collapses down the road and B2B recovers first. Selling a sector low to buy a sector high can surely crush an investor.

But these are all speculations about the future related to guesses about the macro.

It is not investing in the best performers now. We used to have emphatic statements that this forum “is not” and “will never be” about LTBH and hope. It was normal to get out if in any doubt.

But now all sorts of reasons are found to excuse indefinite patience. The macro. The sector realities. The quality of the product. The faith in the leader. And, wait for it, valuations. All these are perfectly fine–for LTBH.

This is not a criticism let alone a solution, but merely an observation that the lines between indefinite investing and LTBH on this forum have blurred quite a bit since the sunny days of 2021.

Whether one is ok with it or not is up to them, but the change in attitude is a fact that I thought is worth pointing out.

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