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No. of Recommendations: 42
I have been hot and cold on ZS for a while, strictly due to valuation.
Not saying I called today's drop...had no idea when a drop would occur...just felt like either a drop would happen or they would trade sideways long enough for their P/S multiple to come down to earth a bit.

I don't like the "this time it's different" mantra.
Valuation still matters.
Doesn't mean you have to judge ZS by a P/E ratio and compare it to JPM or something nonsensical.

But, at what point, do we agree that the multiple should no longer expand and that stock appreciation should parallel the growth rate?

All ZS did is fall back closer to the point where I feel like they could pull an ESTC: contract multiple while still providing outsized stock gains.

ZS is off the day's lows, but selfishly I hope there is another day of selling or we get closer to the $60's, as that is where I would be more comfortable buying back in.
I also sold AYX to raise cash. Company has been executing great...this was, for me, solely a valuation call. Given the recent ER and current ATH roughly that AYX is at, I think there is a good chance I can buy back in before next ER without having lost much ground.

I always go back to remembering JNPR. Currently an $8b mkt cap and they do $4-5b/yr in rev...they do over $1b/Q in revenue. In 2000, they spiked as high as a $70b+ mkt cap.

If ZS, AYX, TTD, MDB...or just about any stock commonly followed here or at Saul's (with exception of NOW) reached $4b/yr runrate, we would lose our minds. Yet most of those companies are at or above $8b in mkt cap already.

Will growth continue forever?
I think data growth will. But individual software companies can be disrupted or plateau along the way, and give way to new growth leaders.

This is a not very clear/concise way of saying that I view stock investing in hyper-growth stocks as a balance between:

1. a reasonable and rational projected future state
2. an intellectually honest appraisal of TAM.
3. a valuation metric of some sort, comprised of multiple factors including; acquisition floor, remaining TAM, projected continued growth rate, projected profitability, dividend potential??

I look at those 3 criteria, and I can't make an argument for ZM and CRWD, which are respectively about $26b and $20b mkt caps.

How many companies can we point to that had 50%+ growth for 4-5+ years or more, after hitting $300m runrate?

I mean...isn't it amazing that almost every notable SaaS company has a 20+ P/S, and many closer to 30. Yet NOW and WDAY, actual SaaS behemoths in revenue, are at 16 and 14.

We need to model for the younger SaaS to eventually COMPRESS their multiple.
NOW is 10 times the size of ZS. NOW is still growing 35%+ y/y as of last ER though, which is amazing at that size, yet their multiple is less than half of ZS.

I could be wrong, but I don't think a security company exists today, or perhaps has ever existed, that is the size of NOW current mkt cap of $48b.

ZS projections
2019 - 300m
2020 - 450m
2021 - 675m
2022 - 1b
2023 - 1.4b
2024 - 1.9b
2025 - 2.5b
2026 - 3.5b

I am pretty generous with the growth rates, in order to get to NOW's current revenue.
I allowed for 50% y/y growth for next 3 years, then dropped to 40% for 2 years, and then 35% for 2 years.

Since ZS will announce Q4 and full year at next ER, let's just say it will be "7 years from now until they hit the $3.2-3.5b annual rev mark". At which point they are given the same P/S that NOW has today of 16. This gives them a $55b mkt cap.

This sounds like massive success, right? The CAGR for holding ZS during this timeline of 7 years in which they execute flawlessly is 27%. Really solid, but about 1/2 or 1/3 of what folks around here have started to expect from their constantly expanding SaaS multiple stocks.

This proves that in order to be a massive success as NOW is and has been, ZS would have to not only execute extremely well for the next 7 years, but they would have to continually contract their multiple and continually grow less than their growth rate.

Does anyone think, in this scenario, ZS will grow exactly 27% each of the next 7 years? In order to grow more than that, in any of the next 7 years, that means they will have to spend an ENTIRE YEAR at under 27% stock price appreciation (and perhaps well under that). At some point, you will have a dud year or years.

This actually is where the TMF LTBH method can work out...provided you have picked a winner.
Tom Gardner will say he misses 40% of the time or more (I forget the exact number).
Let's say you hold 10 stocks for 7 years, and half become the next ServiceNow and the other half become the next Juniper, in terms of stock appreciation.

So (5) of your (10) stocks go from $10b to $55b and the other (5) stocks only grow the average of the S&P at around 8%/year and finish at $18b. That is a total of $100b in mkt cap growing to $365b in mkt cap, for a 7-year CAGR of 20%.

I am being very generous, as I haven't even done a scenario where a company goes down in value either due to mis-mgmt or disruption, etc etc...


What about TTD?

2019 - 675m
2020 - 945m
2021 - 1.3b
2022 - 1.7b
2023 - 2.4b
2024 - 3.1b

I say 5.5 years, including current year, to $3b, using 40% growing and then tapering down. I feel ok with their growth staying steady due to CTV and China tailwinds that haven't really started to be material yet, plus Disney growth and Amazon growth, etc...

At 19 P/S today, let's say they drop down to 10 at end of 2024, for $31b mkt cap.
It is also around low 20's% CAGR. But it seems a bit safer as you don't have to pencil in 50%+ growth nor do you need a P/S over 20, let alone 30, in the equation.

There are very few "Googles" or "Facebooks" or "Netflixes" out there. We seem to be throwing around tens of billions of dollars as chump change in mkt cap, when reality says differently.

I am not down on SaaS/growth. Just saying that eventually the dartboard method will stop working, and strictly from a share price appreciation standpoint, we may want to start thinking about what is really a good buying price and what is really a material dip.

My favorite companies are: TTD, ESTC, AYX, ZS, MDB, NOW.
Right this second, I think the short-term (12 months or less) upside in their respective stocks would be ranked something like: ESTC, NOW, MDB/TTD (tie), AYX, ZS.

Dreamer
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