No. of Recommendations: 102
For those worried about whether our SaaS stocks will come back and why they are valued at such a higher EV/S than Walmart and General Motors, I thought that this was a very appropriate time to pull this from my June End of the Month. Even if you've read it already, rereading it might soothe your jangled nerves. It worked for mine.
Saul



AN EXPLANATION OF THE VALUATION OF OUR STOCKS
I’m sure that some of you have wondered why our companies are valued so much higher than conventional companies. There’s been a lot of discussion and worry on the board (which is a good thing, and a lot better than if there was no worry). Here’s a more detailed explanation of their valuation expansion. It has occurred because other investors (and the market) have gradually come to realize the facts I explain below. I’ve tried to make the explanation as clear as possible, and I hope that it makes good sense to you.


The kind of companies that we are investing in now never existed before! Look, ten years ago I searched for companies growing at 15% or 20% a year. And 25% was a dream come true. Now I don’t even bother looking at a company with 20% or 25% revenue growth.

We are investing in a new model of enterprise. Our companies have very high revenue growth year after year. I’m talking about 40% to 65% per year for most of them, but some even higher. These are also very high gross margin companies (70% to 92% for the most part). Their revenue is almost all recurring, on software subscriptions and thus largely locked in, and their dollar-based net retention rates are generally greater than even 120%. This means that last year’s customers buy a lot more this year than they bought last year instead of having an attrition rate, or forbid-the-thought, being companies whose customers make one time purchases, or companies that sell hardware, and thus don’t even have ANY revenue guaranteed next year at all. I’ve never seen companies like ours before. Have you?


Think how different this is from companies that sell “things” and have to go out and sell them again next year to the same people or different ones. And think how low capital intensive our companies are. No factories that have to be built or enlarged to expand sales! Just lease more software.

Of course a company growing revenue 50% per year, with 95% recurring revenue, 92% gross margins, and a 130% dollar-based net retention rate is worth a much, much, higher EV/S than the old model of company, with fairly low revenue growth, low gross margins, and with little or no visibility into revenue for the next year and beyond!

And revenue which has very high gross margins is worth more per dollar of current revenue (in other words, it’s worth a higher EV/S) than lower gross margin, revenue. WHY? Let me explain it to you.

EV/S, which is traditionally used for evaluation, puts sales (revenue) as the denominator. But that’s silly! On $100 million of sales Alteryx, with gross margins of 90%, keeps $90 million, while a grocery chain, with gross margins of 10%, keeps $10 million on the same $100 million of sales. Revenue by itself doesn’t tell you much of anything. It’s the gross margin dollars which ought to go in the denominator, not total revenue.



Let’s consider an extreme example for clarity of understanding: I’ll take a hypothetical conventional company and compare it with an equally imaginary one of our SaaS companies:

Let’s say that our conventional company has a 23% gross margin. That means it keeps $23 out of every $100 of revenue to cover operating expenses and profit. And let’s say our SaaS company has a 92% gross margin. That means that it keeps $92 out of that same $100 of revenue. (I said it would be an extreme example, but Alteryx had a 92% gross margin last year, and a 55% rate of revenue growth).

Almost by definition, the high gross margin company is worth four times as much as the conventional company FOR EVERY MILLION DOLLARS OF REVENUE, because it keeps four times as much of every dollar of that revenue as gross profit. (It’s not the revenue that counts, its what you keep out of it. For example, a grocery chain may keep only 5% of its revenue.)

Thus, it’s totally normal for the SaaS company, with high gross margins, to have an EV/S ratio four times as high as the conventional company, even if they were growing at the same rate. The high margin company SHOULD have an EV/S ratio four times as high! (And, for example, if you were comparing it to a conventional company whose gross margins were 31%, our SaaS company should have an EV/S three times as high, etc.)

Note that that is WITHOUT even taking into account the higher rate of growth, which compounds, and without taking into account the recurring revenue.



WHY is the RATE OF GROWTH of revenue important for comparing EV/S? There’s a heck of a good reason! Next year our SaaS company growing at 50%, will have $150 of revenue instead of $100, and with its 92% gross profit margin, it will keep $138 toward covering operating expenses.

Let’s say our conventional company is growing at a nice steady respectable 10% per year. Next year, it will have just $110 of revenue, and with its 23% margins it will keep just $25 towards operating expenses. So now we have $138 versus $25… one year later!

The difference in compounding is enormous and grows each year. If we go just one additional year later, our SaaS company will have $225 in revenue and will keep $207… while the conventional company will have revenue of $121 and keep $28.

Look at that again! Both companies started two years ago with revenue of $100. Now our company is taking home $207 in gross profit , while the conventional company is taking home $28!!! Just two years later!

I won’t trouble you with the calculation for the third year, but our SaaS company growing at 50% will keep $310 in gross profit, which is ten times the $31 the conventional company will keep in gross profit. That gives you an idea of the enormous power that the combination of high growth and high gross margins (that our companies are blessed with), has.


And for those who will maintain that companies can’t maintain 50% revenue growth for three years, Zscaler was over 50% the last two years, and at 59% and 65% the first two quarters of this fiscal year. Twilio was 66%, 44% and 63% for the last three years, Alteryx has been 59%, 53% and 55%, etc, etc, etc.

If the conventional company is trading at an enterprise value of let’s say, four times its revenue, isn’t our SaaS company worth four times THAT! Or six times that, … or who knows, ten times that?

Remember that in two years the SaaS company will be taking home 7.4 times as many dollars in gross profit as the conventional company, and 7.4 times an EV/S of 4 gives you an EV/S of about 30. That’s what many people simply don’t get. You don’t even have to look at that 10x three-year example, which would justify an EV/S of 40.

You can argue that the rate of growth for the conventional company should be 13% instead of 10%, or that it should have a gross margin of 28%, or 35%, instead of 23%, and that will change the numbers slightly, but it won’t change the story at all.


And in our defense, my example used 50% revenue growth, but as of the end of May, when I made up this example, Okta was the only stock in my portfolio with revenue growth that low last quarter. All the others were above it. In fact, the percent rates of growth of revenue for my companies in the previous quarter were 50%, 51%, 56%, 55%, 59%, 65%, 71%, 81%, and 108%. Thus using 50% for our SaaS companies in the calculation was no exaggeration. In fact, it was actually being quite conservative. And five of my nine companies had gross margins over 80%, and two others were over 75%.



Now let’s consider that our company has almost all recurring revenue, and a dollar based net retention rate of 130%, which means that it is enormously more certain that our SaaS company will have increased revenue next year than that the conventional company will even have the same revenue next year. How much is that worth in increased EV/S? Is that security of our revenue worth another 30% tacked on? Or 20%, or 40%. I don’t know. But it becomes clear that, by simple arithmatic, the reason that our SaaS companies are exploding in EV/S is that the market is starting to do the same arithmatic that I just did.




To summarize

We have Factor One – A company with a higher gross margin takes home more dollars out of each $100 of revenue, and thus, by definition, is worth a higher EV/S, even without considering the higher rate of growth.


Then Factor Two, even more important. Companies with high rates of growth of revenue will compound that revenue enormously in just two or three years, and combined with the high gross margins, that will produce hugely more gross profit dollars than a conventional slower growing company that started with the same revenue.

That our companies have an even greater EV/S (EV divided by current sales), flows by definition from that, when compared to a conventional company with the same revenue!


Finally Factor Three, which is perhaps less easy to quantify, but a large percentage of recurring revenue, and a high dollar based net retention rate, gives much more security to the revenue and to its potential increase, and thus would warrant an even further increase to the EV/S in some investors’ eyes (like mine).



To summarize the summary,
The huge, even enormous, relative number of gross profit dollars that our companies have, and will have in the future, for each current dollar of revenue, because of their growth rates and high gross margins, compared to the relatively small amount of gross profit that a conventional company has, and will have, for the same current dollar of revenue, is what gives our companies the much larger EV/S ratios. Simple as that!

And don’t bother telling me our companies are not making any profit. Any company with 75%, 85% or 95% gross margins can make a profit whenever they decide to! All they need to do is slow down their enormous S&M spending, whose purpose is to grab every new customer they can grab while the grabbing is good. Personally, I’d rather they keep grabbing all those customers now, because revenue will keep flowing from them for the indefinite future.

So this is an entirely different set of facts we are dealing with. That’s how I see it anyway. And I hope that I made it clear for you.




ON MARKET TIMING
Let me remind you that I’m no good on timing the market, and I don’t try. If I did, I would have exited all my positions at the end of April 2017, when I was up 26% in four months and my portfolio had already beaten my total results of the previous two years (combined!). It was clearly time to get out and wait for the pullback that never came!

Picking good companies makes much more sense to me than trying to pick good companies AND trying to time the market too. I have stocks in a small group of remarkable companies, in which I have high confidence for the most part. I feel that they mostly dominate their markets or their niches, they are category crushers or disruptors, they have customers that absolutely need them, they have long runways, and they will have great futures.

All enterprises, whatever industry they are in, use more and more software, want to use the cloud, AI, big data, and the rest, and they need the software that our compaies are leasing. Most of our companies provide the picks and shovels for enterprise companies switching over to the cloud, and the enterprise companies NEED what our companies have to offer.

Again, good luck and good investing to you all,

Saul
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No. of Recommendations: 44
Gary, from our board, kindly sent me this link to an article from The Investor’s Field Guide (which I had never heard of) with a little article on EV/S

investorfieldguide.com/a-history-of-the-price-to-sales-ratio...

The article pointed out that :

 Higher margin businesses tend to trade at higher price-to-sales multiples. Which brings us to two important quirks about the p/sales ratio: margins and leverage.


First, If you sort all large stocks into five buckets based on their price-to-sales, and then calculate the total net margin for each bucket (total income/ total sales), you see a clear trend: higher price-to-sales = higher average margins, and lower price-to-sales = lower average margins.


Saul: Well, of course, that’s what I’ve been saying)


A second quirk is that companies with more debt (high debt/equity ratios) tend to trade a cheaper multiples of sales, whereas those with little or no debt tend to look more expensive (as their sales are being generated with less borrowed capital).

Saul: Our SaaS stocks have no net debt because of low capital expenses, and thus look more expensive.

Saul
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No. of Recommendations: 25
Our SaaS stocks have no net debt because of low capital expenses, and thus look more expensive.

Few random observations:
- SaaS companies don't have debt because they are able to get cheap financing through equity.
- While a business like (WMT, HD, easy examples) invest in their stores, it shows up as assets in balance sheet, on the other hand the investments made by SaaS (in SGA) pass through the income statement and the only place you see it is on the accumulated NOL (Net operating Losses); This sort of messes up the traditional ROE calculations, or various GAAP based valuations; On the other hand an investment in a store may be salvaged partially whereas the investment on the SGA has a very finite life and if it is not converted into sales within a period, basically it is lost (also the reason they are treated as operating expense and not as "assets"); hence the SaaS stocks react big on sales execution issues.
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No. of Recommendations: 9
I know of no better example of the benefits of the business model, and scalability of these SaaS companies compared to a low margin/high asset requirement model, than comparing your favorite SaaS company to Carvana. Carvana pays $439 in interest per car sold. Versus $95 in interest per car sold last year.

Debt, and the interest expense that comes with it, is a nonissue for these SaaS companies because they just don't have to spend so much on assets needed to grow their revenues, relative to their gross profit. Here in this case the asset (that does not show on the balance sheet) would be that SG&A and R&D.


This isn't just financial statement trickery. There truly is greater leverage in software.
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This isn't just financial statement trickery. There truly is greater leverage in software.

Just to be clear, I am not saying there is any financial statement trickery involved. Leverage is not unique to SaaS, you have it with software, and in other tech companies like Google, etc.

Again, R&D can be a long-term asset, and SGA is bit tricky, only if you convert it into a paid customer. If not, that SGA is lost, it is not an "asset", you will not be able to leverage today's SGA spend 2 or 3 years later.
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No. of Recommendations: 6
you will not be able to leverage today's SGA spend 2 or 3 years later.

My Citi credit card is 29 years old and my web hosting account is over 15 years old. David Skok analyses the "S" in SGA in terms of "Lifetime Value" (LTV)

What’s your TRUE customer lifetime value (LTV)? – DCF provides the answer

Overview

The old formula that everyone uses for customer lifetime value (LTV)) –average gross profit per customer divided by churn – ceases to work properly when you have very long customer lifetimes and negative churn. LTV can become infinite, which clearly doesn’t reflect reality. This post offers a new way to calculate LTV based on discounted cash flow analysis that takes into account the risks associated with revenue that is far off in the future, and the time value of money. The resulting LTV can help companies better understand and manage their future revenue streams and it much more accurately reflects what an investor would pay for that future flow of cash.


https://www.forentrepreneurs.com/ltv/

And not all R&D is successful. Edsel? 737 MAX? How many we never hear about?

Denny Schlesinger
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No. of Recommendations: 29
Saul,
I fully understand and agree with your analysis.

Yet, there's a wrinkle. Not every trade is driven by logic and analysis. Estimates place algorithmic trades at 70% of the total. I don't know what logic resides inside those algorithms, in fact it's a closely guarded secret. But I can't help but to think that they are largely driven by technical indicators rather than fundamentals. With a falling stock price, once a certain trip point is reached the sell pressure for that stock cascades in an effort to head off further losses. This happens with total ignorance of revenue growth, margins, retention, etc. At least, that's my assumption.

In addition, as you noted, If the conventional company is trading at an enterprise value of let’s say, four times its revenue, isn’t our SaaS company worth four times THAT! Or six times that, … or who knows, ten times that? For those investors who recognize the same factors you have documented, there remains the or who knows. In other words, valuation is not irrelevant, it's just awfully hard to assess. I think this played a part in the recent crumbling of Zscaler's stock price. I think that the reaction to guidance has been over compensation to a report that was actually not that bad, but that's probably due to the algorithms firing off after the trip point was reached.

The recovery in stock price is always slower than the decay. It's much easier to define a trip point on the way down than on the way up.

I'm not taking issue with your analysis. As I said I understand and agree with it, but I'm trying to understand how things actually play out in the market. If you follow financial articles published at SA and other places (I know you do), valuation is almost always a part of the discussion. And the analysis you provided is absent more often than not. I assume members of this board know that the quality of analysis found at SA varies widely. I've read a large number of articles that build arguments on information that is factually wrong. But, we seem to be living in a time when facts are less important than assertions.

What to make of all this with respect to investing decisions? I wish I had a good answer to that question. Saul is telling us to calm down because the valuation of this new class of business can't be bound by traditional measures. It truly is different. While I believe that that assessment is true, I also don't think that it is widely recognized.

Further, I think a recession in the relative near term is inevitable at this point. I can't fathom what would turn the economy around quickly enough to forestall one and IMO there's little doubt that we are headed in that direction. I had investments during the dot com debacle, but really they were more like speculative bets based on not much of anything factually substantive. I was also invested during the 2008 meltdown. My investments at the time were based on the advice provided primarily by subscriptions to investment news letters. In retrospect, the quality of the advice was pretty low. I just bemoaned the loss of equity, but did little in response to it.

I think valuation is important if for no other reason because it is important to other investors, probably the majority of other investors. And in another respect it's irrelevant to trades driven by technical indicators. So far, I've not sold everything and used the proceeds to buy gold. But the situation is unnerving. Being right is not of great consolation in light of the erosion in my portfolio.

It's a conundrum and at present I'm stuck with indecision. Quite uncomfortable.
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The recovery in stock price is always slower than the decay.

---

My gains by Jan/Feb of 2019, off of Dec 24 2018 lows, says otherwise.

My opinion only, but the proliferation of info, access and speed of access to that info, for machine-trading/algos, means the rotations and pivots can be much faster than in previous years.

My expectation is some of these hardest-hit will pop back up to a certain level fairly quickly. Not necessarily back to ATH in a heartbeat, but many/most can go up 15% from here and still be well off highs. Given these stocks can move up 10% in a day on no news, that 15% gain can come in a hurry.

No idea if this is bottom of rotation, but acquisition costs provide me with a floor, so I am wading in with remainder of cash soon.

Dreamer
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But the situation is unnerving...Quite uncomfortable.

You're not alone, brittlerock, I'm sure many are unnerved/uncomfortable, myself included, as I posted about a couple days ago.

I think a recession in the relative near term is inevitable at this point. I can't fathom what would turn the economy around quickly enough to forestall one and IMO there's little doubt that we are headed in that direction.

I do disagree with the bolded sections above. I agree with "recession is inevitable", as that's always the case, it's just a matter of when, I just can't say that it will be "in the relative near term" (although I guess it depends on your definition of that). Nobody can predict these things, so I don't try.

All that said, it looks like the other shoe has dropped on our high growth stocks today as many are giving up the slight gains they made midweek after Monday's rout.

Throughout the week I brought my cash position down from 18% to 15% with adds to a good many of my holdings. Not buying more today, but will wait to see what Monday brings as those seem like they can be bad days. If next week remains this low for our stocks (or even goes down more), I'll probably bring my cash position from 15% down to 10-12%.
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No. of Recommendations: 80
A little excerpt from Beth Kindig's blog/newsletter (I'm a free subscriber, but you do need to sign up). This is cut from a much longer article and is just a piece of the conclusion:

https://beth.technology/how-to-pick-long-term-stock-winners-....

"How to evaluate cloud software
The evidence doesn’t point to a rational reason for the sell-offs. Some stocks are priced high, but knowing which ones deserve to be, is going to be more important than ever.

• The larger the market, the safer the investment... Does the product solve a pain and reduce overhead for businesses? These will outlast the more niche markets and products that are considered a convenience. To illustrate, if you are providing software for office communications that replaces office telecom equipment, not only is your product a necessity but it will be the solution to high telecom bills during a time when costs are being cut. There are numerous (such) examples.

Ignore earnings estimates....

• We hear a lot about competitive moats, yet high switching costs is a protective buffer that serves two purposes: It locks in subscription revenue and staves off competitors... Look for companies that have high switching costs.

My prediction is this may be one of the last cycles when tech is considered less safe than value stocks. As the market will find out (the hard way), cloud software is actually very safe. It is insulated from trade wars and overseas manufacturing issues. It reduces costs for enterprises, which is ideal for a recession.

Lastly, cloud software is at the beginning of a rapid growth cycle compared to its counterparts in tech — such as mobile, e-commerce and advertising — which are reaching saturation, are finding themselves in the cross hairs of anti-trust, and are susceptible to consumer spending changes.

The best companies in the category of “cloud software” will continue to post rapid growth regardless of economic conditions, and the investors who run from this sector will suffer bigger losses from missed opportunities than investors who know their winners."

Sensible woman,

Saul
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While it is true that this is a new breed of businesses, they still are subject to the laws of competition. When gold was first discovered in California, the first couple of guys got rich. Then everyone else came kept coming, until it became so saturated that most people started to lose money. Because these SaaS companies are so successful, it's just an invitation for more competitors to enter and enter FAST. Look at how fast the gold rush came and went. Look at how many internet companies sprung up out of nowhere and so quickly. The same thing happened in the crypto market before the crash, with the number of altcoins that sprung up suddenly. It does not take long for competitors to come.

The second is TA. In brief, I've had my share of "conviction" companies. I generally buy them near highs, like IBD. Once they start tanking, the technical damage is so great that the stock just cannot get up anymore, at least within a reasonable time frame. ZS and CRWD, in my view, have sustained so much technical damage that it would be very hard to rise for months, at the very least. In many ways, if a stock doesn't bounce back right away, such as TTD a few months back, the path of least resistance is down. I've lost *a lot* of money with that lesson!

Finally, I compare companies with ones that are in the same industry to estimate the ceiling. For instance, the market cap of PANW is about 20B. It's a leader and it's about as much as the market is willing to value a cybersecurity business. CRWD was something like 20B and ZS was like 15B. PANW isn't growing as fast, but it's more established.

For what it's worth, ZS and CRWD are one of my larger holdings, so I've had a bad week.

DoesMIWork
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A little excerpt from Beth Kindig's blog/newsletter...

Wow, thanks as usual, Saul! That piece is quite the endorsement for the stocks discussed here, and for holding and even adding as able at these lower prices. Yes, it feels good to hear someone else saying these companies really are different, even if it rings of confirmation bias.

Sounds like she should (or could already) be a welcome member of your board's community! 🤣
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Wow, thanks as usual, Saul! ... Yes, it feels good to hear someone else saying these companies really are different, even if it rings of confirmation bias.

Hi Foodles,
Yes someone else who is a very valued contributor to the board wrote the same thing to me off-board:

Thanks for posting that article. I was actually already aware of most of the points she made, but somehow having an outside authority enumerate them is reassuring.

And I make three. It was reassuring for me as well, to get the confirmation from someone who is apparently a really competent professional in the field, saying the same things we've been saying, and wording it so clearly. It was especially reassuring for me to hear the same thing from Bert and from Beth on the same day.

Best,

Saul
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It does not take long for competitors to come.

There is nothing about SaaS that makes it easier or faster to come up with a top flight complex product. With the gold rush, a small amount of money would provide one with the standard equipment and then one merely had to show up and find a place that was not already occupied. One cannot similarly show up with a new document DB, search engine, security product, or whatever.
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My prediction is this may be one of the last cycles when tech is considered less safe than value stocks. As the market will find out (the hard way), cloud software is actually very safe. It is insulated from trade wars and overseas manufacturing issues. It reduces costs for enterprises, which is ideal for a recession.

Lastly, cloud software is at the beginning of a rapid growth cycle compared to its counterparts in tech — such as mobile, e-commerce and advertising — which are reaching saturation, are finding themselves in the cross hairs of anti-trust, and are susceptible to consumer spending changes.


Hi Saul,

This is good stuff, and she echo's what Bert has been saying all along - if/when a recession ever hits, these companies will be the least likely to be cut by enterprises, due to the fantastic ROI they get from these SAAS companies, as they become mission critical their day to day operations.

During a recession, would Uber cut Elastic's search services? Good grief, could you imagine? They would send you drivers from PA from your trip from Manhattan to JFK Airport.

You could can envision scenarios for each of our SAAS companies and come to the conclusion that they are very valuable to the customers they serve. Also the average investor probably forgets that these companies dont worry about manufacturing costs, tarrifs, and so forth. The last month or so has felt eerily similar to last year around this time as well.

I'll go ahead and subscribe to her letter as well.. I like sensible folk. :) Plus it's also comforting to get some reassurance that we arent all nuts.

Best,
Matt
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No. of Recommendations: 2
I know that this board does not include technical analysis, but IBD has basically issued a sell report on most of the stocks discussed on this board. Most stocks have fallen below their 50 day and 200 day Moving average on significant weekly volume. This normally means at least a few quarters before these stocks return to their glory, and of course this depends on their performance exceeding expectations. A few of these stocks might be large winners, but most will never regain their highs.

Good luck and happy investing.

John
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Thanks Denny,

Your post 59735 may have been the single most important post I’ve read since reading Saul’s knowledge base and in my seriously humble opinion may be a reason if not the reason for the recent recalibration to the value of the Saas business model.
Is that over dramatic? I hope to hear why from more intelligent people than I, which are in over abundance on this board for sure.

Jason
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Sorry,
Denny’s post I referred to is above at 59700.

Thanks
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these companies will be the least likely to be cut by enterprises that is not the whole story. Existing software would not be cut but many companies would not buy more. They will hoard cash when they are fearful, especially if they have a lot of debt. And debt is the one thing that kills companies in recessions. Valuations of Saul NPI type stocks even at today's cut prices are dependent on growth. Which will slow. And buying power of many institutions will be cut by redemptions as well as by fear and the lemming like behavior of institutional investors.

In any case we are buying stocks not companies and stock prices of all of these companies will likely fall in a recession. They are not "safe" .


cloud software is at the beginning of a rapid growth cycle compared to its counterparts in tech that I do agree with. But it's hard at this early stage to be sure of the ultimate winners
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There is nothing about SaaS that makes it easier or faster to come up with a top flight complex product. With the gold rush, a small amount of money would provide one with the standard equipment and then one merely had to show up and find a place that was not already occupied. One cannot similarly show up with a new document DB, search engine, security product, or whatever.

I wish that were true. It is worse, an incumbent has technical debt and is built on older technology. They have pressure to be cashflow positive. A newcomer can build a stack for next to nothing, have billions in VC money at their disposal, have an established market to attack, have predictable margins to set to steal business, and have much more tolerance from their investors for cash burn.

There is a new distributed database (as I've mentioned, document dbs just a subset of distributed data stores, as is Elastic) popping up all the time. Riak, notably, has been bankrupted by newer entrants. There are literally dozens of highly credible security endpoint startups in funding series B-C. Security probably has the toughest road because of lack of proof of ML models and the talent is so tight, but some of those startups are toying with hybrid models.

It's frighteningly easy to disrupt an entrenched PaaS and those 90% margins are big fat targets.
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No. of Recommendations: 34
A few of these stocks might be large winners, but most will never regain their highs.

How do you know? And if you know, tell us which ones. That would be most helpful, specially if you explain why each one of them will be a bust going forward.

Saying but most will never regain their highs with no specifics backing it is worthless because it is not actionable.

Denny Schlesinger
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No. of Recommendations: 18
In any case we are buying stocks not companies and stock prices of all of these companies will likely fall in a recession. They are not "safe" .

It depends on the definition of safe. If safe means "an escalator to financial heaven" there are no safe stocks, fast growers will fall by 50% on a fairly regular basis and that does not make them unsafe if they bounce back. My experience is that "unsafe stocks" are the ones that go bankrupt -- total loss. A stock that goes sideways is no worse than cash.


cloud software is at the beginning of a rapid growth cycle compared to its counterparts in tech that I do agree with. But it's hard at this early stage to be sure of the ultimate winners

There are two approaches, Geoffrey Moore recommend "buy the basket and sell the losers." I think the better alternative is for the company to establish itself before buying the stock, around the time of the curve in the hockey stick.

One important caveat, SaaS is a business model, not an industrial segment. Lumping all SaaS together is a mistake, do it segment by segment, security, database, communications, AI, etc.

Denny Schlesinger
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Your post 59735 may have been the single most important post I’ve read since reading Saul’s knowledge base and in my seriously humble opinion may be a reason if not the reason for the recent recalibration to the value of the Saas business model.

Thank you but I don't follow your reasoning. You seem to be implying that people read the linked article and based on it downgraded all SaaS stocks. What did I miss?

Denny Schlesinger
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A stock that goes sideways is no worse than cash. I would be quite surprised if the stocks most of us own will go sideways in the next Bear. And even if they do go mostly sideways, there is a lot of volatility. Will any of Saul's stocks go bankrupt during the next Bear? TBD..
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‘Thank you but I don't follow your reasoning. You seem to be implying that people read the linked article and based on it downgraded all SaaS stocks. What did I miss?’

Denny Schlesinger



Yes, absolutely read the article you posted.
And to your point, the author of the article,David Skok, is #2 on Forbes List of 100 most influential websites for Entrepreneurs. And I found his argument of taking the view of future cash flows at a discounted rate quit easy to understand. And if people are ‘just now catching on to he power of the Saas business model’ as many have said, his argument throws a big wrench into the mix. Going from infinite value to zero in 10 years time, if this view hasn’t been considered or the Saas business model was taken too simplistically, could be enough to ‘recalibrate’ expectations. did I just put quotes around what I said? So, between the time of ‘just catching on’ and the publication of this highly read article a lot of money has gone into Saas company stock and now a lot has come out and I haven’t been able to find much of any reason for it.

Just an idea, like the Berlin Wall.

Jason
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Sorry,

When I haven’t found much of any reason for it. I should have said, ‘I haven’t found much of any reason for the money to be coming out of these Saas companies’ other than what the article you posted said about discounting future cash flow and that is a stretch I admit.

Thanks
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No. of Recommendations: 55
A few of these stocks might be large winners, but most will never regain their highs.


How do you know? And if you know, tell us which ones. That would be most helpful, specially if you explain why each one of them will be a bust going forward. Saying "but most will never regain their highs" with no specifics backing it is worthless because it is not actionable.



I have to agree with Denny's comments on this. That was one of the silliest comments I've seen recently. And stated with such authority, no less. But, on no basis and with no evidence at all !!!

Does the writer really believe that "most" of a group of companies growing revenue at 50% to 98% annually will "NEVER" come back from a 20% or 30% decline??? Can he really believe that? Is he out of his mind?

These companies weren't declining because of company specific business problems, but they were all declining simultaneously because of sector rotation. And so we are now having people show up speculating about whether these companies with no net debt and 90+% of their rapidly growing revenue locked in and recurring, and with 70% to 90% gross margins will go bankrupt, bankrupt(!) of all things???? What is the basis for that ??? That's so unlikely as to border on the impossible. But when the market goes down, these people and these ideas always show up, so I shouldn't be surprised.

And finally, A few of these stocks might be large winners. Well, all you need is "a few".

So think about whether the scenario being presented makes any sense at all before you get scared by these absurd speculations.

Saul
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Discounted Cash Flows and Time Value of Money are very old concepts. That article itself is over 2 years old. The selloff is not limited to SaaS. Many growth stocks, regardless of industry, have been hit. Basically anything that has gone up a lot this year has been hit.

The only way that article linked could be relevant is if long term bond yields go up causing Net Present Value of future cash flows to be worth less. Long term bond yields did rise recently, but all it did on the other hand was abate some of the concern over the inverted yield curve.

Let's chalk this up to the market is selling off growth stocks, for some unknown reason. And it certainly isn't from that article from 2 years ago. There is a "flock to value" after a very wide pendulum swing to the growth side over the past couple years. This pendulum swinging back the other was will occur over an unknown period of time. Both growth and value investing work, but this board is focused solely on growth investing. And It's probably not a good idea to go around chasing what's hot for the moment. Eventually, growth will rebound, and when it does, the growth stocks followed here (or whatever is being followed at the time) will come back with a vengeance.

There is nothing special about what is happening with SaaS stocks. Take ENPH for example, which makes DC-AC inverters. Roku makes operating systems for Smart TVs. Neither of these have anything to do with SaaS, let alone enterprise software, yet both of them have been hit over the last couple weeks.


Here is an article that explains what is going on: https://seekingalpha.com/article/4291503-week-momentum-massa...

Note, it does not explain WHY it is happening nor WHEN it will stop happening. Frankly I don't even think either of those can be explained with any certainty, other than the WHY is herd behavior, in which case, the WHEN is unknown.

I noticed this when this correction started happening. For the first time basically since the 2009 correction, growth stocks, as a whole, finally underperformed to the downside compared to the rest of the market.

I realize this is OT but I see a LOT of people talking about this correction, and I don't blame them, I believe there are a lot of people who started investing recently and have been following this board buying a bunch of SaaS stocks, and up to this time, SaaS meant a safe haven in times of the minor corrections we've had. To discuss this in further detail is OT, of course, and I don't have the answers anyways. But what I can say is the fall is not limited to SaaS, but high growth stocks in general. The last part I think is relevant. I'm convinced SaaS is not some monolithic industry like steel mills or railroad manufacturing. Steel prices or steel demand goes down, all steel mills get hit. Railroads get overbuilt, all train and car manufacturers get hit. But SaaS? It would have to mean databases, web security, videoconferencing, procurement, data analytics, and so many other industries (the only real thing they have in common is they are B2B) would follow the same demand cycle. I do not think that sounds likely. In addition it does not explain the ENPHs and ROKUs of the world getting hit at the same time.


Let's call this what it is, a bump in the road for growth investors.
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Saul,

I could not agree more; as has often been repeated on these boards...

"Stocks go down FASTER than they go up, BUT they go up MORE than they go down."

Additionally, I recently read:

"It has been a tough week for growth companies. After soaring to stratospheric heights over the past several years, the shares of many rapid-growth companies have suddenly nose-dived. These sharp share-price drops can be unnerving, but experienced investors recognize them as simply the price of admission to the stock market's long-term wealth creation process."

The "price of admission" indeed. I have always agreed with those that have argued that one of the most critically defining characteristics of successful investors is TEMPERAMENT.
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Thanks for the perspective, Saul. For the past few days I went back to some of your writings in the past on this board, and I found a post about reflection at the beginning of 2017, where you reflected, among other things, the second half of 2015 that I think unfolded somewhat similar to this past month.

You wrote that by July of 2015, you were up by more than 50% for the year, but ended the year up 16% or so (which still beat the indexes that year). Over that period, your stocks did horribly while the major indexes did nothing much --- similar to now.

What happened afterwards: you had a flat year in 2016, but then rocketed to stratosphere in 2017 and 2018.

I brought up this history because I'm curious with 3 questions for either you or the other veterans on this board:

1. Do you guys recall other times something similar happened (Saul stocks tanked, indexes did OK)?

2. 2015 episode took many months to get the loss recouped (and then much more). Did these other episodes take similarly long time (late 2018 was quite different: market and Saul stocks both tanked, and in the end the recovery was quick and furious)?

3. Do you think the ultimate takeoff in 2017 and 2018 following the 2015 underperformance the result of sticking to the same investment philosophy, or because you adopted and modified your approach (caught on the SaaS train)?

Thanks.

Bashuzi
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Yes, absolutely read the article you posted.

...And if people are ‘just now catching on to he power of the Saas business model’ as many have said, his argument throws a big wrench into the mix. Going from infinite value to zero in 10 years time, if this view hasn’t been considered or the Saas business model was taken too simplistically, could be enough to ‘recalibrate’ expectations...


David Skok is called the godfather of SaaS for good reason. I stopped reading the article at

Our first attempt to model this phenomenon, showed that there is a point where the customer churn starts to bring down the revenue. Here’s a graph showing what would happen if you had a cohort of 100 customers that initially started paying you $100 a month, but each remaining customer increased their payment by $5 every month. The monthly Customer Churn Rate is 3%:

because something triggered a red flag, that something was the word "cohort." I'm not a fan of DCF because while it sounds perfectly plausible in theory, in practice all the inputs are mostly guesswork. GIGO! Why a 10% discount rate in a ZERO interest rate era?

The text by Skok I quoted above seems logical but I had my doubts so I started playing with a spreadsheet. First I reproduced his 5 year 100 client cohort. It came out pretty much like his but the curves had kinks in them. Why? I also though that increasing the pay by $5 a month didn't make sense. Why not 5%, after all, 5% is $5 when you start with $100. ;)

The reason for the kinks, it turns out, is a rounding difference with huge implications. 3% of 100 is 3 but 3% of 97 is 2.91 so you round it to 3 clients, not quite right and a huge difference. By rounding, the cohort dies in five years. The kinks exist because you start subtracting 3, then 2, and finally 1. If you use 3% not rounded the cohort never dies, it approaches zero but never gets there. It does not make much difference in the first chart but I have a surprise for you in the next ones.

Cohort size: http://softwaretimes.com/pics/cohort-size.png

The next chart compares rising the revenue by $5 vs. by 5% a month using the more realistic 3% shrinkage. The green line is the $5 increase which matches Skok's while the red line the 5% increase.

Cohort-payment-5 %: http://softwaretimes.com/pics/cohort-payment-5.png

What if the increase is only 3%?

Cohort-payment-3 %: http://softwaretimes.com/pics/cohort-payment-3.png

So the secret is up-selling enough to make up for the cohort shrinkage!

A final note, I said above that I'm using the same web host for over 15 years and I'm still paying the same $35 a month. What has happened is that the servers got faster, the bandwidth was increased, the storage space was increased, they added an off-site backup service and an off-site emergency server. Clearly their costs have been falling and they didn't pass it all to us the customers. Unlike most businesses, high tech is highly deflationary, costs keep falling and it certainly applies to the hardware side of SaaS.

Denny Schlesinger
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These companies weren't declining because of company specific business problems, but they were all declining simultaneously because of sector rotation. And so we are now having people show up speculating about whether these companies with no net debt and 90+% of their rapidly growing revenue locked in and recurring, and with 70% to 90% gross margins will go bankrupt, bankrupt(!) of all things???? What is the basis for that ??? That's so unlikely as to border on the impossible. But when the market goes down, these people and these ideas always show up, so I shouldn't be surprised.

Certainly feels like Stocktwits here lately with all these doom prophets warning us for the end of the SaaS world. Thankfully sanity still prevails on this board. Keep up the good work guys, learning every day here.

- Paul -
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brittlerock said:

"I think a recession in the relative near term is inevitable at this point. I can't fathom what would turn the economy around quickly enough to forestall one and IMO there's little doubt that we are headed in that direction."

Having restrained from a reply to this for two days out of concern of continuing off topic discussions, i must say that this conventional thinking, like many conventional views in the market, will likely prove to be incorrect. In any case, a near term economic decline is certainly not close to inevitable. Australia hasn't had a recession in 28 years! Moreover, even if we experience a macro downturn, it doesn't mean hypergrowth stocks or stocks in general will hit the skids.

Also, comparing this period or any other period to the dot.com bubble is the other narrative i would like to briefly refute.

Nearly every major company on the planet allocated substantial funds to modernize computing systems during the last 5 years of the previous century. You didn't have to be that smart to predict that tech spending would drop precipitously in the first quarter of 2000, from the frantic 50-100% growth to modernize their computer systems before Y2K to 10-15% growth immediately after Y2K. It is the only time i know about when the inevitability of tech spending falling off a cliff was so precisely predictable.

FUD beginning in 1995 about the impending computer systems disaster on January 1, 2000 was pervasive and mostly justified because the double digit year change was unfixable and that impending disaster frightened the entire business world to modernize computer systems before that date. So by 2000, everyone was up to date and tech spending was over for a few years.

When posters compare the present to 2000, they miss that Y2K bug which was a giant variable. It's useful to note that other sectors grew during that period 2000-2003. For example, BRKA hit a multi year bottom of $40,000 in early 2000. These 3 years remain my best in relative out performance.

My business is leadership and only after i have satisfied myself the CEO/Chair is true greatness or something approaching that, do i look deeper into businesses that otherwise look like enduring growth stories. My view is that companies tend to grow or shrink more to the size of their leadership than the size of current estimated TAM/markets and products. TAMs can be expanded if the capability and will is there. AMZN TAM was originally thought to be books, then all online retail, now much more. BRKA was a declining textile manufacturer when a young superstar overpaid for it 55 years ago. Or TAMs can shrink as with GE and decades ago in the case of GM.

My bet is that the winners among the upstart cloud companies will include those led by exceptionally capable, committed, honorable, shareholder friendly CEOs. Usually it works out that way. Sometimes it doesn't. AYX, ROKU, TTD, ZS, WIX, ESTC, ANET, APPN, RNG, and OKTA are among the young companies today with that kind of leadership, IMO. Sometimes i get it wrong.

My apologies for straying. I very much wish to comply with the rules here, which i respect as authoritative, wise and constructive.
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. . . IBD has basically issued a sell report on most of the stocks discussed on this board. . . . This normally means at least a few quarters before these stocks return to their glory, and of course this depends on their performance exceeding expectations. A few of these stocks might be large winners, but most will never regain their highs.

John,

Your devotion to technical analysis, and IBD's use of it in particular, is striking. In itself, it is inappropriate to the board, so I will redirect the conversation to something more relevant, but that also addresses your point head-on.

First, I note that worrying about what most of the companies will do is pointless: If a minority of the companies beats the market going forward, as they have over the last year or so, and the rest go out of business, then in time such a portfolio would still result in market-beating returns. I prefer to make money by investing, not console myself with a majority that achieved mediocrity. But I risk diverging into portfolio management.

Second, I note that volatility is normal, including sector rotation, and does not "mean" anything, in spite of many being, shall we say, fooled by randomness. Volatility is, in fact, particularly to be expected of companies with the greatest future prospects, because they have a chance of having a big piece of the sort of future that is the most difficult to predict -- the kind least like the past.

Speaking of predictions, I will make some in response to your predictions, above.

1) The companies I refer to, hereafter referred to as "the companies," by ticker symbol, are, in alphabetical order:

AYX
ESTC
MDB
OKTA
TTD
TWLO
ZS

I stipulate this list because without doing so, it is impossible to agree or disagree on whether a prediction turns out to be accurate, without which meaningful conversation is not possible with regard to this board's stated rules.

I chose an odd-numbered list because it is unambiguous, then, whether "most" performed as predicted. If you have a different list in mind, please state it, or else accept this list for the record of your predictions as well.

2) I predict that within 1 year, most of the companies will be 30% higher than their close as of Friday, September 13, 2019.

3) I predict that within 2 years, most of the companies will have achieved new all-time highs on their way to whatever their eventual fate is, and a minority at least will have done within a year. This is stark contrast to your prediction of "never."

4) I predict that over the next 10 years, there will be more than one instance of volatility such that most of the companies will be cut by 40% or more -- perhaps much more -- from their highs. And I further predict there will be much doom-saying about them at those times, none of which will turn to be true for most of the companies.

5) I predict that a minority of the companies will lose our collective interest, and my personal investment, over the next year. The future is uncertain, as discussed above. This is another artifact of our investing focus being about the prospects of the business, and not the TA that you have brought to our attention.

If any board manager feels this post is off-topic, please let me know and I will FA it myself.

Warmly,
Wot
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You wrote that by July of 2015, you were up by more than 50% for the year, but ended the year up 16% or so (which still beat the indexes that year). Over that period, your stocks did horribly while the major indexes did nothing much --- similar to now.

Yes, I recall 2015/2016. It was a crazy year. By August 2015, my portfolio was up something like 60% YTD. That was the highest percentage gain I'd even had and the rise happened very quickly. Some of the favorite stocks at the time were SWKS and SKX. We were using the 1YRPEG as a main metric to make decisions on which stocks to buy and how to allocate.

1. Do you guys recall other times something similar happened (Saul stocks tanked, indexes did OK)?

As I recall it, the market (S&P500) ended up dropping something like 20% between the Summer/Fall of 2015 and February 2016 (Jamie Dimon bottom). The stocks that I was in all dropped 40-60%.

2. 2015 episode took many months to get the loss recouped (and then much more). Did these other episodes take similarly long time (late 2018 was quite different: market and Saul stocks both tanked, and in the end the recovery was quick and furious)?


The 2 largest allocation stocks that I had were SWKS and SKX. SWKS peaked in May 2015 at around $110. It had dropped to the mid-$60s by February 2015 and it took 2 years to get back near the previous high of around $110 but it didn't stay there. More than 2 years years later the stock is now at $82. SKX peaked in June 2015, and it never fully recovered and is still 30% below that peak.

3. Do you think the ultimate takeoff in 2017 and 2018 following the 2015 underperformance the result of sticking to the same investment philosophy, or because you adopted and modified your approach (caught on the SaaS train)?

You can read about this switch here:

https://boards.fool.com/why-my-investing-criteria-have-chang...

and here:

https://boards.fool.com/oh-this-time-it8217s-different-33123...

I think there are both differences and similarities between the 2015/2016 period and today.

What is different

1) the companies and the business models are very different. SWKS is a cyclical business that greatly benefitted from the adoption wave of the mobile phones. SWKS has several large customers that make up a huge percentage of their revenue (customer concentration risk). SWKS does not have recurring revenue like the others. SWKS is sensitive to China and trade wars and supply chain risks. SWKS is sensitive to currency fluctuations because it has a large percentage of its business outside the United States. SKX has it owns sets of risks that are distinct from the SaaS companies.

2) In the 2015/2016 period the overall market dropped about half as much as the then "Saul stocks" but they all dropped. In recent weeks, the market has been up yet the SaaS companies have dropped a lot.

What is the same

1) The companies that Saul and others are invested in have dropped a lot.

2) During both times, the companies that Saul and others were invested in had run up a lot more than the the overall market. I think that this is an important similarity and should be examined and discussed in more detail. Specifically, how much of the previous outperformance is "justified" (i.e. due to the underlying performance of the businesses) and how much of the outperformance is more "flimsy" (i.e. due to the stocks becoming in favor more; and this is more subject to a reversal than business performance). Maintaining the second part of the outperformance is dependent on the stocks continuing to stay in favor while the former part is more solid because the businesses have created more support for tangible value.

3) The psychological effect on an investor (i.e. us) is somewhat similar. During both times, we were happy and euphoric about the increases. More importantly, we explained and justified the stock price increases that we had seen by some logical arguments. In 2015 it was because the 1YRPEG ratios of our stocks were low (compared to other stocks) so the stocks had a better value. This fell apart when the stocks ceased continuing to post their previously high growth rates. In fact, for some of the companies, the revenue growth actually went negative. As I recall, the stock price dropped before we noticed that the business growth had slowed. Today, we are explaining and justifying the stock price increases by the business model, the recurring revenue, the growth rates. From our analysis we believe that the growth will continue. However, one explanation by Saul could possibly lead us into trouble. That explanation is that others have now caught on to our SaaS stocks and that is why the EV/Sales multiples are higher. This is a way of justifying the higher multiples. However, we don't really know where the multiples will go or finally end up. They may revert to the previous highs, they may stay around to where they have dropped, or the may fall further. Saul's opinion/argument that others have now caught on and so therefore the multiples will stay where they were or may even go higher is an opinion that may or may not turn out to be true. We really don't know. An alternative explanation is that the SaaS stocks (and other stocks that have increased a lot in price) continued their increase due to momentum and now that momentum is gone. Will it come back or not. I certainly don't know.

4) How the business goes the stock price should eventually go. This is the voting machine/weighing machine thing. The voting machine definitely played a part in part of the rise. The weighing machine also played an important part in the rise because the underlying businesses have performed. When in 2016 the business didn't perform they dropped. We need to keep an eye on the businesses but we also need to consider the possibility that the weighing machine may be in the process of being recalibrated.

So here we are in the middle of our violet storm. So what should we do? Everyone will make their own choices. Personally, I closed out most of my options positions so that I will not be in a situation where I am forced to sell (if the stocks continue their decent). I did the opposite in 2015, adding to my options positions when the stocks begin to drop. At the time, I continued to believe that the analysis was solid, that the companies were great, and that the growth would continue. Well, it turned out that I was wrong and that the companies were not on sale after all. There were margin calls and that episode could have wiped me out financially. But it didn't and I learned some valuable lessons.

Another question is when will our companies recover now that have now dropped between 20% and almost 50% (ESTC being an exception: only down 10%) from their July all-time highs. I don't know. I tend to think that it could be a while (and they may not have bottomed yet). This is just my opinion, but I would be surprised if these stocks go back to their all-time highs before the end of 2019. It will really depend on 2 things: how the businesses perform (and we're only getting 1 more cycle of earnings results before the end of 2019) in the coming quarters and when will the companies come back into favor. If the businesses perform then they should also come back into favor but at what multiples. No one can know, but my personal guess is that the highs on most of the companies might be matched in 18 months with a range of 6-24 months. If it's 6 months then the multiples will need to go back up. If it's 24 months then the growth of most of the businesses should be able to support the previously high stock prices with a lower multiple; and this is what's keeping me in the stocks. Again, this is just my personal opinion and I could be wrong.

Chris
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A few of these stocks might be large winners, but most will never regain their highs.

How do you know?

Couple of points, first of all it is not clear whether Peak valuation for SaaS companies is here, one week of growth selling and value rallying doesn't change any long-term thesis. On that basis, we dont' know what is the peak valuation, we may only know that on hindsight.

On the other hand, not all fast growing companies eventually don't succeed for various reasons. Industry consolidation is something everyone understands.

Let me thrown in "Center of gravity", that is some existing players are so big, they occupy a unique place in customer mind share/ IT spend, etc. While they may not have the niche products to begin with, either they catch up overtime or buy their way into the market. You have seen many examples of promising companies taken over by bigger rivals. One challenge of late on this is, legacy IT companies valuation vs these hyper-growth companies. It allowed SalesForce to buy some companies because it enjoys similar valuation. However, a better template is IBM's purchase of RHT. Once the company gains sufficient size and predictable revenue, profit profile they could still be bought by legacy IT companies.

Each of the scenario allows investors to participate on the upside up-to a point.

In all of the cases, unless the current price is peak valuation and followed by an immediate decline in slow price, there is a potential for while valuation may come down and the company's growth would have expanded the market cap or market price.

On the other hand, we also know a large number of companies are bought out regularly. Also, the assumption that a company that is growing today at 80% or so will continue to grow at the same pace, or will have a gentle decline in growth is a dangerous assumption.
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Thanks Chris for posting the detailed reply to my questions. I really appreciate your perspectives.

Personally I am inclined to agree with you that this time it's probably going to take a while to get the prices back to their July peaks (hope they do), and we probably haven't seen the bottom yet. In the short term I probably will raise some more cash from these stocks and put to some more defensive sectors to wait out the storm and earn some return before getting my hyper growth allocation back. I'm thinking about the stocks whose EV/S are still relatively high (maybe ZS and TWLO are more reasonably priced now?).

That part of my account may end up missing some of the rally if I get back to hyper growth allocation too late. But if there is more to fall and recovery is a slow slug in this space, the opportunity cost of no action may not worth it.

One thing we learned these past few weeks is that contrary to what Saul sometimes says, valuation at the end of the day always matters, in addition to every thing else that gets analyzed on this board.

Bashuzi
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I apologize. That was meant to be a private reply. Totally off topic.
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A couple quick thoughts.

A little excerpt from Beth Kindig's blog/newsletter

Who is she? Good question, so I looked up her resume. For the last ~5 years she has: 'Directed the content marketing and go-to-market messaging at Intertrust Technologies that provides enterprise PaaS cloud services, cybersecurity, trusted data, health tech...'

She does content marketing. Not somebody I would rely on to speak about stocks as she is a pure stock cheerleader who majored in Buddhist studies. I am not making that up.

• The larger the market, the safer the investment...

This is false, the grocery store business is huge and you're lucky to make 1% margins in that line of work. Nobody thinks of them as safe. Banking and Mortgages was a huge market in 2007 and we know what happened in 2008.

• Ignore earnings estimates....

The difference btw firms that trade at 6x EPS, and 12x, and 25x and 60x eps and 30x sales is the latter are the ones that continually beat and raise their estimates, and the 'deep value' cyclicals are the ones that do not and can go from 8x to 4x eps at times.

Since, as investors, we'd like to know if our stocks are going from 15 to 30x PE or the reverse, one must pay attention -- especially to the earnings estimates that are coming from the Company itself. Anyone who says otherwise is a ....well, a content marketer I guess. Look at NEWR today.


Some of the very expensive SaaS stocks will turn out to be 'safe,' because they end up winning their category or give a decent return from here as the solid #2 choice. Many will not be 'safe' by any definition of the word with big rallies followed by 60-80% drops in a relatively short period of time as has happened before.



Long TWLO, FB, MA, ADBE, CRM, IQV, AMZN.
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who majored in Buddhist studies. I am not making that up.
-----------------------------------------------------------------

I also saw that on her LinkedIn profile (finished in 2009). Naropa University is also not a school I have heard of. That said, perhaps she brings a different perspective. A few of her thoughts and ideas likely have some solid merit, and should be judged on their own rather than based on what she majored in. Broad, macro idea are probably not something to take from someone with that limited background, howevever.

https://www.linkedin.com/in/bkindig/
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Naropa University is also not a school I have heard of.

https://www.naropa.edu/about-naropa/
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Instead of throwing bombs at Beth Kindig's background, how about stating facts which show her stock analysis is faulty.
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I am a subscriber to her service. Can't say that I did a background check on her before hand. I did, however, read a decent amount of here "free" content before subscribing and felt it was informative. From here website it states:

"Beth Kindig has published over 900 articles in the last 8 years exclusively on technology and startups. She has held product marketing and developer evangelist roles at tech companies representing products in data, security, internet of things, connected cars, connected home, mobile, encryption, health care, and finance tech. Her articles have been featured in Venture Beat, MediaPost, AdExchanger, and the International Association of Privacy Professionals. She has written over 30 reports and whitepapers on enterprise technologies. She has been a speaker at Android Developers Conference, GamesBeat, Advertising Week NYC, Tech Week and more."


I retired at age 54 as a real estate developer. I studied Public Policy in college which provided me with limited or no tools for success in my field. I tend not to judge based on degree or institute of higher learning.

To each their own...I pass no judgement. If you are uncomfortable with her or her background, then I would not rely on her analysis.

David Gardner was an English major BTW....
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Yes, she's a content marketer. She gets paid to write positive articles for the industry. She's a paid tout, similar to the guys you find at the racetrack who'll share their 'inside info' with you as long as you pay them for a hot tip on the 4th race at Delta Downs.

Accurately identifying her educational background is not the same as bad-mouthing it. It speaks to her knowledge base.

You may find that irrelevant and enjoy the differing perspective that comes from studying buddhism in college, others are likely to disagree.


David Gardner was an English major BTW....


And his portfolios got incinerated in the 2000-02 downturn. QED.
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No. of Recommendations: 22
Najdorf, what is the "correct" background to have? Is it the same as all those fund managers who trail the S&P 500? The same pedigree that Bear Sterns, Merril Lynch, and Lehman Brothers looked for? Where is this secretive club on Wall Street actually beating the market and how does one buy into it? How is their pedigree better than the founders of LTCM?
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No. of Recommendations: 0
The larger the market, the safer the investment...

you wrote

This is false, the grocery store business is huge and you're lucky to make 1% margins in that line of work. Nobody thinks of them as safe. Banking and Mortgages was a huge market in 2007 and we know what happened in 2008.


This statement is loosing context I think. If we are to change that statement by adding a grocery operator is able to increase sales by 50+ percent with gross margin about 60% whereas the overall market is growing at 3%. Then you can see that this upstart is taking market share from the existing players. Now its up to you to decide whether competition can quickly add the capability to minimize the impact of whether this new upstart will continue to gain traction for some foreseeable future. If you can surmise that the advantage is not easily surmountable than would it make you more interested?? I think thats what she may be indicating.

Just hoping to provide full context as I understand and not debating anything about her background. Its definitely odd for someone w.o finance background to have such deep insights but that have been done by others so definitely out of realm of possibility.

- Ruhaan
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No. of Recommendations: 6
My 3 year old nephew says that the word "Alteryx" sounds stupid and they are stupid. Please analyze his claim and rebut it on its merits. Don't just reject his point of view because he wears underwear on his head and doesn't know what stock is.

At any rate, wasn't the first line or two just pointing out issues with her background, and the rest of the post was devoted to dismantling her points in order? I recall something about market size and earning estimates mentioned.

I think if she had said something this board didn't like, that people would be shouting "FUD!" and giving her the Citron treatment. Beware confirmation bias, it destroys your money.
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No. of Recommendations: 52
Accurately identifying her educational background is not the same as bad-mouthing it. It speaks to her knowledge base.



Hey Najdorf,

My training was in medicine and psychiatry. I guess that's why I always trail all those fund managers, because I don't have an MBA.😟

Oh wait, I beat all those fund managers for thirty years now! 😀 ...But I have zero MBA type training and zero tech knowledge. Maybe that's why I do so well. Or maybe there's a common sense factor. 😀



She gets paid to write positive articles for the industry. She's a paid tout, similar to the guys you find at the racetrack who'll share their 'inside info' with you as long as you pay them for a hot tip on the 4th race at Delta Downs.

I guess you put all your effort into reading about her college training, and you never got around to reading ANY of her articles. She likes some, and doesn't like some, and is neutral about some others, just like you, me, and everyone else.

Saul
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No. of Recommendations: 0
Educate, amuse, enrich.

Gartners!!!

Please add "put down in an insulting and condescending fashion."
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No. of Recommendations: 38
David Gardner was an English major BTW....

And his portfolios got incinerated in the 2000-02 downturn. QED.




Hi again, Naz. I suppose with all your sarcasm for David Gardner that your record must be much, much better than his. But he's been posting his record for years. Yet, on the other hand, you never post your portfolio so we can see how you are doing. Is there a message in there somewhere? QED. 😀

Saul
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No. of Recommendations: 4
i think beth kindig is smart. i don't need to look at her educational credentials or anyone else's to determine the quality of one's ideas.

People who quote experts irritate me when they do that. Make your point and support it any way you want or don't support it. I'll assess its quality and usefulness.

i have met many Ivy Leaguers who are dunderheads. Some such souls post on TMF. I don't hold it against them just because they went to Harvard

i don't agree with much of what beth offers but i don't care from where she comes. Nor do i care that Bert is a felon, i still think he is a decent, committed, capable man.

i have associated with a few giants, some of them had traditionally elite credentials, some did not.

i learned something about Saul's background today. Despite that, he remains the same impressive person to me as yesterday. :) Saul has had better returns than me over the last few decades, though i have better financial credentials.

The first beth pieces i read were a few months ago when she did brilliant measured articles on ROKU and TTD. If someone here is saying they were shill articles for either company, i just say they were darn good, and not that favorable to TTD.

She also writes hit pieces.
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No. of Recommendations: 12
Najdorf,

My final comment on this topic.

Unless you are a subscriber to Ms. Kindig's paid service, I am not sure you have enough data or information from which to draw the conclusions and support the accusations you are making in your posts. As an aside, I think it is unfair of you to present your statements as fact, thereby impugning Ms. Kindig's professional reputation when she does not have the forum here to respond and defend herself.

I will not argue the merits of your points or substantiate your accusations. I have read quite a bit of her fundamental analysis (with technical analysis provided by her associate) on a number of companies that have been discussed in this forum and feel that her paid content is not what I would describe as "content marketing", written for the sake of "getting paid to write positive articles for the industry", "paid tout" or being "similar to the guys you find at the racetrack".

Regardless of her professional pedigree; your character assassination comes across as uninformed, low brow and misogynistic. Quite frankly, it is beneath the quality and mission of this great discussion board. Further comments should be directed to the "Internet Trolling" message board. "BE BEST"!

Something tells me I am going to be your next victim.

Harley
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No. of Recommendations: 2
My chiropractor is a graduate of Naropa. Small school, only 400 undergrads. About half the size of the one I went to. Lots of meditation as part of the learning process.

I can't say I know of any particular background that guarantees a person will have a good understanding of markets and the companies that comprise them. But I suppose if it were a choice between undergraduate years spent doing drugs vs. doing meditation, I'd probably put more faith in meditation. Not that that's the choice, but just saying.

-IGU-
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No. of Recommendations: 35
I don’t know, Winston Churchill was such a bad student he basically nearly flunked out of school and his dad, who really had disdain for the boring and uncoordinated buffoon was sent to military academy instead of college as it better suited his “limited” intellect (although he did thrive and showed a talent for rising horses and it continued his love of military strategy (not that he ever was in a position to use strategy during his military service days).

Funny, how this unaccredited man may have become the foremost English linguistic of his age, one of the best selling and best paid authors of his day (yeah, Hitler made tens of millions- helps when your book becomes required reading for a nation - and thus was the best paid by far - author of the time) and may have been THE key person who literally saved the world from the worst tyranny in history (his idea for the tank in WW I - yeah had that little fiasco in the Dardanelles (but turned out to have been a good plan poorly executed) and he fought off his peers who wanted a negotiated peace with Hitler.

Small little accomplishments for such a poor accredited individual (educationally and work experience wise). Best to ignore such people with such little credentialing.

Maybe that English degree and the best growth investor of the past 25 years discredits him as well. Yes, lost it all in the internet bubble...yes, but from the rubble he held to Amazon and found ISRG that little search engine in China and so on.

Churchill was said to have 1 or 2 good ideas every day out of 100 he would come up with. He should be judged on those 98 or 99. Wonder how many wrong tracks Einstein went down before getting it right (but at least he was accredited - albeit mostly a failure thereafter for all the good his degree did him.

Okay extreme examples. The point is there is no success without failure. If you don’t fail along the way you never will have a great success. Knowledge is king, no matter how you get it, accredited or otherwise. Heck, I was counseled out of Duke MBA my first year. I did so poorly it was nearly impossible that I’d graduate. Ended up #1 in year 2 and came out right in the middle. But I suck and I have failed, failed big.

But you know what I’m still here, I learned, and maybe I still have something to contribute.

Anyone who attacks a person on their credentials alone, and focuses only on their failures, and not their ideas, seems rather like (excluding me as I know how boring I am) they are excluding some of the finest people in the world.

Lincoln was a self-taught imbecile lawyer, Grant a drunk, Hitler - okay even evil can show the example - was homeless not more than 15 or so years before he became - you know. If only people had actually believed his ideas that he wrote about for all to see.

Anyway, even with the Hitler example (the most evil of all, but an era that also produced Stalin and Mao - all at the same time in history) I think the point is self evident.

Don’t underestimate or dismiss someone on criteria unrelated to what they can demonstrably do. Also don’t overestimate people simply based on their credentials.

Yes, a top 25% law school graduate is most of the time a superior lawyer (but not always) as an example.

Now my Professor at Duke MBA or Saul, who to best manage your port...I suppose it depends on what your looking for. If it is best returns the answer is obvious.

Btw I don’t even know who this woman is everyone is talking about. I just don’t like the way some people are talking about her or David Gardner for that matter.

Tinker.
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No. of Recommendations: 13
IT'S TIME TO CLOSE THIS THREAD.
There are 55 posts on it already but the last ten or twelve posts are just devoted to refuting one particular ridiculous post (my refutes included). LET'S JUST LET IT DIE.

Thanks for your cooperation.

Saul
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No. of Recommendations: 1
If I could give you 500 recs, I would. Well said Tinker.

Best,

bulwnkl
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No. of Recommendations: 0
Sorry Saul,
I didn't read your post before I posted. Apologies

bulwnkl
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