No. of Recommendations: 12
My Yahoo! port goes back more than a decade. One of the ports goes back to I don't know how long, probably 2001 or 2002. Of all the stocks being followed only a few either have not been bought out, gone bust, or are complete busts as a stock. Those are QCOM (the I sold at a triple and has gone nowhere ever since, but does pay a dividend), ARMHY (bought out at enormous premium - I sold it at a triple as well), Google (very nice return), Citrix (you could own something worse - although I sold it at $120 or so, and price is now in the mid-$80s), and Network Appliance (that I sold at a ten bagger, but is now valued at a quadruple of where I originally bought it, but far below its all time highs where I sold it), RMBS (my first ever 10 bagger, has gone nowhere since i sold it and it crashed).

The biotech port is much worse, but there are 5 biotechs that have been killer stocks that would have made up for all the losers easily.

The point of this is that the quality of the stocks you choose matters an awful lot, and yes identifying bubbles or the like and selling does matter as well.

I did not own all the stocks in these ports, they were mostly there to follow. But holding the top quality of the biotechs (and yes they were identifiable for the most part) was well worthwhile (although patience is beyond human to wait for the returns for the most part).

In regard to non-biotech being profitable and having a real CAP makes all the difference. As an example Sonus was an analyst favorite bringing VoIP gateways to the world. Yet, SONS never seemed to have any pricing power. Revenues would grow, but it never translated to the bottom line. Reminds me a lot of Twilio actually. When the story is good the market gives lots of value to the revenue and potential, thus SONS was once worth in the billions. Now, still in business, reality as to its pricing power has been realized by the market and is now worth $335 million.

CREE is another one still in business. Yes, another one I sold at a opportune time. It is now worth $3.5 billion, which is about what it was worth after the market crashed and brought everything back down to reality. The problem with CREE is (1) its other product lines, including power management (that was heralded as the "game changer" for the company) never ended up working and the division was sold off. One product segment did work and that is LEDs, but LEDs is a commodity business. CREE is on the leading edge of it, but the Taiwanese are constantly catching up and commoditizing each new generation of LEDs. Thus, no pricing power.

A good lesson to be learned there.

Of the stocks we follow, again I will mention Twilio. Twilio is currently valued on its story, but it is not demonstrating any material pricing power.

SHOP - I think SHOP is different. SHOP shows evidence of pricing power and potentially being an enduring franchise. It does depend on how much it can grow, and the quality of that growth, but SHOP is a non-profitable company that I think has potential to not be caught in the above CREE and SONS like circumstances.

Nutanix - I am still not sure of what to make of Nutanix using the above examples. It is nowhere near profitable, but it is nearly cash flow break even like SHOP. A difficult thing to do given their marketing spend. Nutanix appears to be the sort of company that is destined to be bought out. But I get the feeling it will not be. So the question becomes will Nutanix become a very profitable VMWare type software franchise in the enterprise, or end up more like SONS who just could never create any pricing power and saw their valuation eventually fall by 90%. I get the feeling that Nutanix is not that either.

But as the above examples demonstrate, you need to be careful with companies that are not profitable but put forward a story of grand future profits. Not so bad if you are buying the stock on perception and selling it at fortuitous times, but stocks that do not demonstrate great CAP (and a proxy and causation effect of CAP is pricing power) even though they have a great story that puts forward a great TAM, are stocks that have to really be watched closely.

In my experience, and I have brought this up before, that such companies should be divided into consumer and business focused companies. There are multiple examples of consumer focused companies investing for many years of unprofitability to become dominant franchises. Companies like AOL, Amazon, Netflix. SHOP seems to be of this sort (even though it is more of a hybrid). Nutanix, on the other hand, is clearly a business focused company. There are far fewer examples of business focused companies that are unprofitable becoming future very profitable franchises.

In fact, I cannot think of any off the top of my head. Practically all business focused companies that become dominant start out as profitable and stay profitable. SaaS focused companies are a different animal, as yes, Salesforce is an example, but Nutanix is not a SaaS company.

Anyways, enough thoughts for the night. Nutanix requires more thought.

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