Category: Productivity

Zoom Video: 2019 Analysis

Posted on by io-fund

Zoom Video Communications is a company with a valuation where logic is ignored, and any investor in the stock would need to get comfortable with this. The current valuation of $25 billion comes from a company with $546 million in revenue and EBITDA of $39 million this year. Zoom is expecting revenue of $129 million to $130 million with non-GAAP income of $2-$3 million. Q2 non-GAAP EPS is expected to be $0.01 to $0.02. One reason Zoom is demanding a high valuation is that the rapid revenue growth coupled with achieving profitability should create the perfect storm over the next few years.

According to Gartner, by 2022, 65 percent of meeting solutions users will take advantage of SIP/VoIP-based audio-conferencing tools. This is up from 20 percent in 2017 while 40 percent of meetings will be facilitated by virtual concierges and advanced analytics. The exact size for the video communications market varies considerably depending on the source – this is because the market is very new. According to research from Markets and Markets the video communications market is expected to grow an average of 8 percent a year to nearly $20 billion by 2023 with another report expecting that the industry will register a CAGR of 9.2 percent from 2018 to 2025. IDC, however, pegs Zoom's future addressable market much higher at $43 billion, as cited in last quarter’s earnings call.

SECTION 1: Financials   

Zoom Video Communications is a company with a valuation where logic is ignored, and any investor in the stock would need to get comfortable with this. The current valuation of $25 billion comes from a company with $546 million in revenue and EBITDA of $39 million this year. 

Compare this to Square with a similar market cap, yet revenue of more than $2.27 billion. Zoom’s enterprise value/sales of 50 is the highest of EV/sales of any U.S. tech company valued at more than $500 million, according to FactSetData. With free cash flow of $15.3 million, Zoom trades for 450 times forward free cash flow. 

Revenue in the most recent quarter grew 103 percent to $122 million, surpassing estimates of $111.7 million. This was the eighth straight quarter of triple-digit top line growth. Zoom is profitable with EPS of $0.03 quarter and $15.3 million in free cash flow. 

Zoom is expecting revenue of $129 million to $130 million with non-GAAP income of $2-$3 million. Q2 non-GAAP EPS is expected to be $0.01 to $0.02. 

One reason Zoom is demanding a high valuation is that the rapid revenue growth coupled with achieving profitability should create the perfect storm over the next few years. 

To get an idea of growth over the past few years, Zoom’s S-1 Filing showed $60M in revenue in 2017, $151M in revenue in 2018 and $330M in revenue in 2019 with an estimated $540M in revenue for the upcoming fiscal-year. The 100%+ revenue growth has been accompanied with gross profit margins in the high 70% to low 80% range. I would not be surprised if Zoom exceeds expectations on revenue in the current fiscal-year.

Zoom became profitable in the year ending January 31st, 2019 with $7.58 million in net income or 3 cents EPS. The year prior, Zoom reported a net loss of $4.8 million. 

Analysts are currently seeing more downside with a median target of $83 and a low estimate of $55 with a high estimate of $115. 

SECTION 2: Growth & Addressable Market         

According to Gartner, by 2022, 65 percent of meeting solutions users will take advantage of SIP/VoIP-based audioconferencing tools. This is up from 20 percent in 2017 while 40 percent of meetings will be facilitated by virtual concierges and advanced analytics. 

The exact size for the video communications market varies considerably depending on the source – this is because the market is very new. According to research from Markets and Markets the video communications market is expected to grow an average of 8 percent a year to nearly $20 billion by 2023 with another report expecting that the industry will register a CAGR of 9.2 percent from 2018 to 2025. IDC however, pegs Zoom's future addressable market much higher at $43 billion, as cited in last quarter’s earnings call.

At the end of first-quarter fiscal 2020, the company had roughly 58,500 customers (with more than 10 employees), up 86 percent year over year. Zoom has a strong partner base that includes companies such as Salesforce, and these partnerships will be instrumental in future growth. 

Additionally, the company announced that its U.S Federal Risk and Authorization Management Program (FedRAMP) authorization has been approved, with the sponsorship of the US Department of Homeland Security. This authorization allows US Federal Government agencies and contractors to securely use Zoom for video meetings, API integrations, and more. The nod to Zoom over competitors Cisco and Microsoft is an important clue for Zoom’s future potential.

Some analysts claim the domestic market is close to saturation, and Zoom will have to look for more opportunities in overseas markets. This is unlikely as video communications is incredibly nascent. However, looking at the first quarter, APAC and EMEA revenue grew a combined 127 percent year-over-year and Zoom sees international expansion as a major opportunity. As such the company plans to add local sales support in further select international markets over time and also use strategic partners and resellers to sell in international markets

Revenue from APAC and EMEA collectively represented about 20 percent of Zoom’s revenue for the quarter and management noted that it could be the beginning of a sizable opportunity to bring the Zoom platform to other regions.

SECTION 3: Product Analysis       

Founded in 2011, Zoom describes itself as a leader in modern enterprise video communications. The CEO states that Zoom is enabling greater effectiveness in human-to-human interactions over a distance with use cases that are not possible with legacy systems. 

The translation here is that Zoom is a much easier-to-use video conferencing application with very little friction in downloading the app before you’re ready to join a video call. Zoom is an example of the “sum of its parts is greater than the whole.” Its success is based off many micro improvements to video conferencing that adds up to a serious advantage over the competitors. 

Cisco is the main competitor that Zoom is disrupting as CEO Eric Yuan was a former engineer at WebEx before it was acquired by Cisco. 

Zoom has a “bottoms-up” viral customer base, which means junior employees evangelize the service at the company. These are often some of the most loyal customers. For instance, 55% of $100,000 or higher revenue customers were started with a single employee’s free trial. This is an important insight to the traction of the product.  

The secret sauce to Zoom is that the business model has a viral mechanism. Some of the best growth in tech products occur when the product multiplies across users exponentially. This is why social media reported incredible growth – one user invites many users to the platform with a simple link. 

“Viral mechanic” means the spread of growth across users as a built-in mechanism to the product. The first Zoom user in an office naturally evangelizes the product by inviting more people to a conference with a simple link. The users who are invited do not need to sign up for Zoom, and the experience is much better than other conferencing solutions that require many steps to join a conference and are not in HD. 

Teams are increasingly mobile, switch between many devices and need to join meetings very quickly. The competition does not allow for this as software needs to be installed to join a meeting. Zoom’s easy access URLs to join meetings are essentially going viral in every office where they convert one free user. This is the foundation to Zoom’s success. 

SECTION 4: Key Metrics         

Software-as-a-service (SaaS) has unique key metrics that venture capitalists look for when privately funding a SaaS startup. Subscription revenue run-rate is one metric used, although it can be overly simplistic

Annual Revenue Run Rate = Monthly Revenue * 12 months  

ARR does not account for churn or growth. Zoom’s ARR likely looks better than the more mature companies on the public markets (which are contrasted below) because Zoom is a smaller company and has gone through periods of hyper growth. 

For this chart to be completely accurate, you would have to compare growth from the same year of a company’s inception as Zoom is going public early compared to the other companies in this chart, and therefore, demonstrates hyper growth compared to a more mature company that files to go public. 

Regardless, this snapshot of annual recurring revenue shows the company not slowing down anytime soon. 

Private investors typically calculate the monthly recurring revenue, which calculates the amount of revenue you have in the beginning of the month + the revenue you gain during the month – downgrades or customer churn.

TECHNICAL  ANALYSIS:   

By Knox Ridley

After an upward trend following the IPO, and a gap-up after its last earnings report, Zoom has completed what appears to be its primary uptrend, and is currently taking a breather.  The first move down corrected to the exact 50% retrace of initial IPO uptrend, while the next move, pushed back up to the 78.6% retracement prior move down.  

We are currently trading at the 38.2% retrace of the initial IPO uptrend, and this area is providing strong support for ZM.   Zoom is a stock that regularly swings from overbought to oversold, so when I see it range bound, which is narrowing while leading up to earnings, we’re likely to see a strong move in the near future.

If we look at the 200-day moving average in orange, you’ll see ZM has been trading just below this average up until yesterday.  The 200-day is currently pointing down, and through its slow shift down, ZM has traded in the same direction as this average.  Furthermore, if we attach a Volume Weighted Moving Average (AVWAPs), anchored to the beginning of the IPO uptrend and another one at the all time high, just before Zoom’s correction, you’ll notice an additional dimension to this trading range.  These 2 AVWAPs can be seen in dark purple, and they are also compressing ZM into a tight range. 

These AVWAPs show who is in control.  In terms of the primary upward trend, you’ll notice that ZM is trading just above this average, indicating that the bulls are still in control of the primary trend.  However, the AVWAP from the all-time high shows who is in control of the correction we are currently in.  Even with the move up today above the 200-day, the price is still trading just below this AVWAP.  This tells us that the bears are in control of this correction for now.  Zoom will remain in this trading pattern until one of these AVWAPs is broken, which we should see in short time.    

CONCLUSION:           

There’s no reason to believe that Zoom Video will miss on the top line or bottom line. The company is centered in a major shift from audio to video for enterprise communications. The company is overpriced by most standards; however, the product’s strength is likely to defy the bears with the product winning out over time.

However, a $25 billion market cap with $546 million in revenue may be too outsized of a valuation for a buy-andhold. To initiate a long buy-and-hold, I’d like to get Zoom between $78-$83. With that said, I personally like Zoom enough to be in the game for these earnings and in the short-term. I believe the triple-digit revenue growth should continue to excite the market in the near term and makes a decent momentum play. 

The primary risk to Zoom Video is a broader market pullback (which would drive pricing down across growth stocks). In my opinion, the tide “for all boats” will have to recede for Zoom Video’s valuation to come down.

Please note: The I/O Fund conducts research and draws conclusions for the Fund’s positions. We then share that information with our readers. This is not a guarantee of a stock’s performance. Please consult your personal financial advisor before buying any stock in the companies mentioned in this analysis.

Download This Analysis in PDF Format:

1b31fcdc-22b6-47a1-af9d-e27bb3c7a239_Zoom-Video-Communications-Premium-Analysis-2019.pdf

Slack’s missteps have now made the stock a ‘buy’ at the right price

Posted on by io-fund

Slack Technologies is the fastest-growing software-as-a-service (SaaS) company of all time and a Silicon Valley favorite, yet the direct public offering (DPO) clearly did not go well for public investors.

The shares WORK, +8.03%  opened at $38.50 on June 20, rose to $42 intraday, and have now sunk to a record-low of $26.25 in after-market hours leading into its first earnings report as a public company.

The losses are at 36% from its intraday high, and that occurred when many cloud-software initial public offerings (IPOs) have enjoyed triple-digit returns since going public.

So what went wrong? And, more importantly for growth investors, will things go right for San Francisco-based Slack soon?

Before the company releases second-quarter earnings Sept. 4, here’s insight into its revenue, valuation and competitors.

Slower growth

Slack’s product — an instant-messaging and collaboration system — has massive potential with a 143% net customer retention rate, yet the financials undermine the company’s growth trajectory. For instance, guidance for the current fiscal year is at 47% to 50% revenue growth year-over-year, down from 82% in the prior year. The slower growth, which was revealed in an updated prospectus two weeks before going public, was unlikely to win over many people regardless of how much traction the product has with current users.

Yet, there is impressive traction, with the average user keeping the app open for nine hours on her computer and engaging with it for 90 minutes a day. Compare that with the daily time spent on Facebook FB, +2.60%  58 minutes, Instagram, 53 minutes, YouTube, 40 minutes, Pinterest, 14 minutes, and messaging app WhatsApp, 28 minutes.

As I covered before the DPO, both sides of the debate have valid points when evaluating Slack’s future stock performance. However, due to Slack’s product strength, my prediction is the stock will have a turnaround as user loyalty will overcome the financial turbulence. The questions that remain: timing and valuation for entry.

Divergence in user base

Slack’s revenue grew 110% in fiscal years 2017-2018, and then slowed to 82% in 2018-2019. The company is now forecasting 47%-50% growth in the current fiscal year with revenue between $590 million and $600 million, compared with $400 million in fiscal 2019. This year’s estimated adjusted loss is estimated to be 41 cents to 44 cents a share.

On June 3, Slack released an updated prospectus that showed growth in customers worth over $100,000 in contracts, yet revealed a decline across paid user growth from 9,000 in the year-earlier quarter to 7,000 in the current quarter.

In other words, there is a divergence as overall paid users are declining, while customer accounts worth over $100,000 are growing. That could be because of internal efforts to raise revenue and focus on enterprise-level customers, which is a common strategy leading up to public offerings. More quarterly earnings are needed to ultimately decide which direction this will go, and if the larger accounts will pay off as a primary focus for growth.

Slack provided the net dollar retention rate in the S-1 filing, which depicts what percent of revenue from current customers is retained from the prior year, after accounting for upgrades, downgrades and churn. This is helpful in predicting growth for subscription-based companies.

The formula for the net dollar retention rate is: Beginning of period revenue + upgrades – downgrades + churn = y with y/beginning of period revenue.

If the net dollar retention rate is above 100%, then the growth from the existing customer base offsets the losses. If the number is below 100%, then downgrades and churn exceed growth.

Slack published a net retention rate of 143%, which is very good and outperforms most cloud software IPOs that provided this number in the past. This is due to Slack’s sticky traction and low churn with the current customer base.

One thing to note about the retention rate is that Slack officially launched in 2014, and has a shorter history than other companies on this list with many having launched 10 years prior to IPO compared with Slack’s five years. Typically, the longer the time period, the lower the net retention rate due to more opportunity for customer churn.

See: Beth Kindig runs a forum on tech stocks where she answers readers’ questions.

Valuation

Slack’s valuation is high — there’s no argument there. If we look at the $600 million in estimated revenue for fiscal 2020 at the $14 billion market cap, then Slack has a forward price-to-sales (P/S) ratio of 24.

Of course, we can name a long list of cloud-software companies with comparable price-to-sales or higher, but the difference is that Slack has not won over sell-side analysts, whereas Shopify SHOP, +0.67%, Zoom Video Communications ZM, +1.16%  and Okta OKTA, -0.20%  have. Certainly, returns are healthier if you can beat sell-side analysts to a winning stock. (For instance, my newsletter subscribers beat sell-side analysts to Roku ROKU, +7.67%  for much higher gains.)

We are also seeing some slight exhaustion in the market with regard to cloud-software valuations. Last week, a few companies beat on both top-line and bottom-line estimates, such as Veeva Systems VEEV, -0.82%  and WorkdayWDAY, -0.75%, yet the stocks dipped as much as 6%.

One thing to consider with Slack is that the potential market is nearly impossible to predict as the company is carving out a new category. The global enterprise collaboration market is expected to grow from $34.6 billion to $59.9 billion, with a growth rate of 11.6%.

This is a sizable market for a company with $600 million in revenue. However, it’s hard to determine where Slack’s product fits. Slack CEO Stewart Butterfield alludes to owning 2% of the software market as a force extender for the other 98% of the software market, and that would equate to a market worth $12 billion in annual enterprise software sales.

Okta is a great example of a company that has similar numbers on its profit-and-loss statement, yet Okta earned its market cap through a series of strong earnings reports and gaining the trust of public investors, whereas Slack demanded a record-breaking price-to-sales right out of the gate. TwilioTWLO, +2.02%  also has a similar profit-and-loss statement, but is trading at 16 forward price-to-sales. Slack not only priced itself too high for a new company with slowing growth, but it’s also likely the direct public offering didn’t help.

DPOs

In August 2018, Slack was valued at $7 billion in its last venture round and listed at nearly double that in June 2019 when it was listed on the public market.

Herein lies the problem with direct public offerings, which are heralded as a way of cutting out middlemen and fees: The lack of a lock-up period allows the company to price high on the public markets for the benefit of insiders rather than fairly price the stock with the understanding that insiders will lose if the company is overpriced and the stock attracts downward momentum.

Many investors are aware that IPOs can be risky, although tech companies have a penchant for proving these risk-averse investors wrong with many recent triple-digit success stories. In this case, however, both Slack and SpotifySPOT, +0.03%  have proven that DPOs are not ideal for public investors as the opening valuations have not been sustained in the long term. This could be due to a lack of consequence for listing too high.

Competitors

There are some valid points on the more bearish side of the debate, but using Microsoft MSFT, +1.17%  Team’s 13 million users as the primary weak point is not of them. As with most David and Goliath battles in tech, the market has this backwards.

Slack is a small, relatively unknown brand that has managed to keep pace with one of the world’s most recognized brands — Microsoft. The fact they are almost equal in users at 10 million for Slack and 13 million for Microsoft is a boon for Slack, not the other way around. This proves that Slack is a serious contender and able to attract users with a hundredth of a decimal point in revenue compared with Microsoft’s trillion-dollar market cap.

Slack is a stand-alone app compared with Microsoft’s legacy enterprise software suite, which is now sold as a subscription in the cloud as Microsoft Office 365, yet was originally launched in 1990. Microsoft Outlook has an estimated 400 million users, primarily enterprise.

To say that Microsoft launched Teams in 2017 and has quickly caught up to Slack is not exactly accurate. Microsoft has owned business communications for nearly 30 years and has spent $35 billion in acquisitions to own the messaging space pre-emptively with the acquisition of Skype for $8.5 billion and LinkedIn for $26.2 billion. Those acquisitions occurred around the same time that Microsoft considered acquiring Slack for $8 billion.

Microsoft then leveraged its hundreds of millions of enterprise software customers and copied Slack’s approach. Yet, somehow, Slack should be afraid of Microsoft? I disagree. Investors should be asking themselves why 600,000 organizations are downloading a separate app to hold their business discussions with many being Microsoft Office users.

More importantly, the word Slack is becoming synonymous for business messaging. Like what Kleenex did for facial tissues, “to slack someone” means to send a coworker a message. I do not foresee anyone using Microsoft Teams in this manner, and this is the best free marketing a company can have.

The main product differentiation is Slack’s customization. There are over 1,500 standard integrations with Slack, such as with Zoom video-conferencing and Google Drive. However, there are over 450,000 applications developed internally by Slack customers, according to the CEO. Those applications come from developers who want a more advanced alternative to the closed ecosystem that Microsoft provides.

Conclusion

There is a healthy debate on Slack, and both sides have valid arguments. On the one hand, you have a company with slowing growth, and on the other, you have a product with strong industry key metrics and a highly engaged user base.

When looking at valuation for companies that have similar profit-and-loss statements, it becomes clear that Slack came on too fast and too strong with its valuation. This is a mistake the company has paid for, as the momentum is now downward. Better to have listed at a $10 billion market cap and earned the $14 billion market cap than the reverse, as many public investors can be myopic with tech products and are easily scared off.

For opportunists and visionary investors, however, the downward momentum on a product that is becoming synonymous with business messaging is welcomed for an attractive entry.

This article appeared on MarketWatch September 4th, 2019.MarketWatch September 4th, 2019.

Slack: Timing and Valuation

Posted on by io-fund

I believe Slack will be one of the better turnaround stories. The question is timing and valuation. Due to weak technicals going into earnings, I am on the sidelines on a product that I believe has some of the best key metrics in the industry right now. I’m waiting because the probability of Slack selling off on any perceived weakness is higher than Slack rallying.

Now, Slack could rally, and that’s a chance that anyone reading this should carefully consider. I wrote in MarketWatch today why I like the product, especially for the net retention rate and stickiness. This is why I have a high conviction that Slack will have a profitable turnaround in the future.

As you’ll see in the analysis, I do not see Microsoft as a primary threat (but let’s hope the market does see Microsoft as insurmountable obstacle so that we can get the stock cheap). As a tech analyst, it is one of my strengths to truly understand the competitive positioning of products compared to financial analysts, who are numbers driven and removed from the startup scene.

Even with Microsoft Teams growing faster than Slack, this will not be a concern for Slack’s trajectory long-term.  Slack is taking market share from Microsoft, not the other way around. Regardless, there’s room for both — and Slack is a pure play stock with the right key metrics.

Note: Microsoft is a recommendation of mine for cloud infrastructure-as-a-service and enterprise software revenue segments. 

Slack’s profit and loss statement is more positive than its first appearance for a few reasons. To start, the company does not monetize the majority of its users. The company is doing this to gain market share, yet Slack can monetize when the market begins to hit saturation (which will not occur anytime soon as Slack has tapped an estimated 5% of the market). But, when the company is ready – that revenue will be there waiting.

Also, consider that the Slack messaging app is only 5 years old. The product launched publicly in February of 2014. Meanwhile, it already has similar financials as Okta, which launched in 2009. Zoom video has 3 years on Slack, launched in 2011. In startup years, that’s a substantial amount of time.

The third is that Slack is a data powerhouse as messaging is a superior form of data. This is not related to the P&L, but is a future driver of revenue and is a benefit currently invisible in the financial statements.  The store of data that Slack has will convert to revenue in the future.

Now, back to the main question – timing and valuation. I would love to get Slack at a $10 billion valuation as I believe the company will grow to a $50 billion valuation once the market for enterprise B2B messaging matures and all of Slack’s integrations are fully understood. I would settle for a $12 billion valuation.

My hope is that Wall Street beats this stock up on the slowing growth and that sell-side analysts don’t want to take the risk on initiating a position until the herd is more positive on the company. The technicals on this stock are weak at $14.5 billion, and that was Slack’s mistake to price high rather than earn its market cap over a series of earnings reports.

I’m rolling the dice that I can get Slack cheaper than where it is today with the understanding this will be a long term holding of mine by early 2020. Nobody can tell you for sure what will happen with an earnings report (or the market’s reaction) – everything is a probability.

Knox has been watching Slack closely since the DPO and he has some thoughts for you on entry.

Technical Analysis

By Knox Ridley

Since its DPO, Slack has been in an obvious downtrend, making lower highs and lower lows.  On one hand, because the price action is so new with limited inputs, there is not a lot of information to make an in-depth technical report on Slack.

However, as we mostly see with new IPOs with a fundamental story that is not fully understood, as well as no earnings to spark a reaction, price will typically align with Fibonacci ratios quite succinctly, as can be seen in the chart below.

Support/Resistance Targets

In a corrective move, we commonly see 3 moves in the downtrend, where the third move is usually the same length as the first move, and at times will extend to a ratio of the first move. This is exactly what we are seeing in Slack today.

The B wave retraced almost exactly 50% of the A Wave’s initial move, as shown in the first red resistance line around $38.45.  Then Slack trended to nearly the exact length of the A Wave (100% extension) around $31.25, before making a corrective bounce to the $35 region, a price cluster that will hold significance for Slack to break through in a bullish move, which is highlighted by the green dotted line.

Another phenomenon we see in technical analysis is the significance of round numbers.  This is evident in the support/resistance region around $30.  Slack respected this region with force until recently breaking below it, signifying a new leg down, at which point it became strong resistance.  I view this price cluster a significant psychological support/resistance.

Slack has found support again around the price cluster that coincides with the 1.382% extension of the A Wave’s which is between $28.50 region.  As you can see, Slack has traded within the trend channel, highlighted by the blue lines, and seems to be looking to break out to the upside, even after making this last push towards this region.

Internal Strength

AVWAPS

I attached a Anchored Volume Weighted Moving Average (AVWAP) to the 4 major bounces, which indicated the lower highs within the downtrend.  The AVWAP shows the price of Slack from each of these specific emotional points, which signify failed breakouts and the commencement of the downtrend to new lows.

The AVWAP is like a voting machine that not only looks at the price, but the amount of shares that was purchased at that price.  Because of these factors, it’s a very accurate tool for seeing the exact moving averages that need to be reclaimed in an uptrend.  These trends are shown in black, and represents the trend we are currently in.

As you can see, Slack has a lot of work to do in order for the bulls to regain control. These moving average will act as significant resistance on any uptrend, and once reclaimed in full, will be a strong statement that the bulls are in control.  I will want to see these Slack begin taking back these AVWAPs before committing fully to the uptrend.

Relative Strength Index

At first glance, Slack’s RSI is quite weak.  It’s spent the majority of its time below the 50 line, and like we see in downtrends, the 60 line of the RSI is not broken.  Reclaiming the 60 line in the RSI will be crucial for Slack to get out its current downtrend.

However, there is a pattern developing in the RSI that is one of my favorite signals to trade – Positive Divergence.  This is highlighted in the chart, where the price is making lower lows and the RSI is making higher lows.  It’s a strong indication that selling pressure is letting up, at least temporarily, and that a reversal could be underway.  Whether this reversal is corrective or the beginning of an uptrend, is too soon to tell.

It’s always dangerous to trade a stock in a defined downtrend.  However, we believe Slack is a fantastic long-term play.  If you want to roll the dice at the $28 region, make sure that you have very tight stops in this market, and at most, put a stop in just under to 200% extension at $24.

There is less risk at $35 or above (bullish pattern), or at the 200% extension at $24, than where it is currently priced.

Workday: 2019 Analysis

Posted on by io-fund

SUMMARY: Workday began to pivot from software-as-a-service (SaaS) to a platform-as-a-service model in 2018. The company is becoming a leader in machine learning and AI in the HCM market, and a PaaS model will assist platform-level ML capabilities. This also helps to leverage the Adaptive Insights acquisition by combining the insights from business planning across the other segments, such as financial management, HCM and analytics.

Market Research Future estimates the global human capital management software market will reach $24 billion by 2023 at a CAGR of 9 percent during the 2017-2023 forecast period. Workday not only is the leader in Gartner’s magic quadrant from a product standpoint, but had led the category in year-over-year growth of between 30-40%.

It is reasonable to believe Workday will control the majority of the $24 billion market if the company executes globally.

 

4ae9da06-c5a9-4965-b999-90042cd5af9d_Workday-Premium-Analysis-2019.pdf

Workday: 2019 Analysis

SECTION 1: Fundamental Overview    

As with many cloud stocks on the market today, Workday has solid revenue growth yet is not profitable on a GAAP basis. Workday carries debt on its balance sheet of $1.22 billion.  Net losses last quarter were $116 million. 

In the previous quarter, Workday’s revenues grew 33% to $825 million, which beat forecasts of $814 million. Subscription services grew 34% to $701 million, exceeding expectations of $692-$694 million. 

In the upcoming quarter, Workday expects to earn subscription revenue of $746 million to $748 million and services revenue of $124 million. Zack’s consensus states Workday is expected to report revenues of $872 million, up 29.9% from the year-ago quarter. This is in line with the company’s guidance on the last earnings call. 

Unlike other cloud stocks, Workday is profitable on a non-GAAP basis. The company is expected to post quarterly earnings of $0.35 per share for a year-over-year change of 4 cents. Notably, expectations are lower than last quarter’s reported adjusted EPS of $0.43 per share.

Cash Flow is negative due to a streak of acquisitions, such as Adaptive Insights for $1.5 billion last year. In total, Workday has acquired 13 companies; many small startups which hurts its operating efficiency and overhead. 

Last quarter, Workday raised its full-year outlook for subscription revenue a hair from $3.03 to $3.045 billion to $3.045 to $3.06 billion. The company states there is a subscription revenue backlog of $6.80 billion, up 30% yearover-year.

SECTION 2: Product Overview    

Workday offers tools for enterprises to manage human resources, payroll, and finances. The company is a software-as-a-service company with over 85% of revenue coming from cloud subscriptions. 

The company serves the human capital management (HCM) and financial management ERP markets with applications that expand its cloud-based system to include analytics and business planning. HCM allows an organization to staff, pay, organize and develop its workforce. Financial management ERP provides core finance functions, such as general ledger, accounting, accounts payable and cash management. 

According to the fiscal Q2 2019 earnings call, more than 35 percent of the Fortune 500 and 50 percent of the Fortune 50 companies use Workday HCM for core HR. The product was placed as a leader in the Gartner Magic Quadrant for Cloud HCM Suites for midmarket and large enterprises in August 2018, with no update released since.

Workday’s cloud financial management solutions have less traction with 8 companies in the Fortune 500 and 530 customers overall.  

The acquisition for Adaptive Insights, which is a provider of business planning and financial modeling tools, will help to strengthen Workday’s presence in Enterprise Resource Planning (ERP). At time of acquisition, Adaptive Insights also had 3400+ customers compared to Workday’s 450+ customers due to Adaptive Insights strength in the small-to-medium business (SMB) base. 

Workday began to pivot from software-as-a-service (SaaS) to a platform-as-a-service model around 2018. The company is becoming a leader in machine learning and AI in the HCM market, and a PaaS model will assist platform-level ML capabilities. This also helps to leverage the Adaptive Insights acquisition by combining the insights from business planning across the other segments, such as financial management, HCM and analytics. 

Machine learning and graph analysis applications were launched in April with Skills Cloud, which discerns team and candidate skills to offer hiring recommendations, team building and training. The newly launched Discovery board will uses ML, graph and pattern-detecting, and natural-language processing (NLP) generation to provide unified reporting. 

Looking into the future, Workday’s ML capabilities may be able to reduce employee headcount. Although Workday prefers to not advertise the fact their product enhanced by machine learning can replace jobs, this is an understood benefit of Workday’s product that is presented at conferences. 

SECTION 3: TAM and Competitors           

Market Research Future estimates the global human capital management software market will reach $24 billion by 2023 at a CAGR of 9 percent during the 2017-2023 forecast period. Workday not only is the leader in Gartner’s magic quadrant from a product standpoint, but had led the category in year-over-year growth of between 3040%. Ceridian and Ultimate Software have posted the next highest growth levels. Ultimate Software is also in Gartner’s leader quadrant, yet was founded in 1990 and has been usurped by Workday. It is reasonable to believe Workday will control the majority of the $24 billion market if the company executes globally.

In my opinion, Workday’s competitors are a strength as Workday is without an attractive alternative. Both Oracle and SAP tend to be overpriced and clunky, which means they require too much software for the desired task. 

In Oracle’s case, the company is distracted with data management, and sales and marketing. HCM and financial ERP are not Oracle’s core revenue segment, and this helps Workday standout as Workday invests more into newgen applications. Notably, Workday was spun out of a “hostile takeover” by Oracle of the company PeopleSoft in 2005 for $10.3 billion. After the acquisition, over half of PeopleSoft’s workforce was laid off, totaling 6,000 people. The former CEO of PeopleSoft and chief strategist went on to found Workday approximately two months later. Today, Oracle’s PeopleSoft is known for having security issues with several cases reported between 2010-2016 including social security numbers. 

SAP has a similar lack of focus, and is also not entirely cloud based, which makes SAP unlikely to innovate faster than Workday on machine learning. Workday has captured more customers in the United States, as well, where the majority of its customers reside. Notably, SAP will be harder to compete against in its native geo, Europe.

On that note, Workday continues to see global expansion as one of its growth levers, with total revenue outside the U.S. up 41 percent to $184 million, representing 23 percent of total revenue.

See Conclusion Below Section 4             See Conclusion Below Section 4            

SECTION 4: Technical Analysis:      

By Knox Ridley

4.1 Moving Averages:          

Workday is currently trading below its 50-Day Simple Moving Average, and just above the 200-Day Simple Moving Average. The 50-day is a generally accepted measure of determining the uptrend’s primary support, to where the 200-Day is considered the last stand for the uptrend. Workday is trading well below its 50-Day and has been riding the 200-Day. 

Simple Moving Averages can seem arbitrary in their time frames, and in a way, they are. The 50-day and 200-day do not really align with any significant accumulation of time other than they are round numbers and are commonly accepted as indicators by the investing community. Because of their popularity, they are powerful tools that any chartist must factor into their analysis.  

However, to get a better idea of who is in control of the price for a deeper insight other than popular moving averages, I prefer to use Anchored Volume Weighted Moving Averages (AVWAP).  These averages factor in volume to the price, and we can anchor the average to any time we want.  

I anchored, in green, the AVWAP, to the November lows in 2018, just as this renewed uptrend began.  You can see that it sits just below the 200-Day.  

This is a more accurate portrayal of who is in control of this trend.  If this average is breached, and the price trades below, then Workday’s pressure will trend down and a larger retrace could be in its future.  However, for now, the price is respecting this average, indicating that the uptrend is still intact.

4.2 Retrace Target:         

In short, if Workday breaks this average, as well as breaks the current support range it is trading in, we can expect a deeper pullback.  My first target is around the $172.5 support.  This coincides with closing the gap, and will likely remain at this support for some time.  

Below this level, and I will target the 38.2% retrace, which also coincides with the 168% extension. This range has also been a strong price cluster for the Workday’s price action, so it will be a likely target for any deeper retrace, which is around the $142-$140 region.   

4.3 Internals:    

The RSI was indicating negative divergence leading up to the sell off at all-time highs.  This is evident with the red and green arrows going in opposite directions.  The RSI has broken through the 40 line, and is attempting to climb back, while price stays flat.  

The RSI is now turning back down before even hitting the 50 line. The momentum has faded from Wday, and the RSI is in a selling range.  However, looking back at its 3-year trading history, you’ll notice that it’s hit the bearish zone numerous times, and each time it was a short stay. 

Until Workday meets resistance multiple times at the 50 line and punctures the 30 line with force, it’s very possible that it could regain its momentum and continue in an uptrend.

Conclusion: 

Quite a few stocks are showing weak price action, and are pointing to continued weakness, likely due to broader market issues, such as the inverted yield curve, trade war, etc. – rather than due to factors in the individual stock.

Workday is fundamentally strong with low competition and good prospects for future growth from machine learning, as indicated in the fundamental analysis. Ideal buy-and-hold from technical analysis is in the $142-$140 region. If the earnings report is weaker than expected, I’d see that as a buying opportunity – especially if the price breaks the $172 support and we get a deeper correction. 

Short-term, Workday can make a good trade with call options at or near $190 and/or a small position with 10% trailing stop. Less than a month ago, Workday was at $212 and was at $195 less than a week ago. A strong earnings report could renew these prices. I personally like the end of September $190 call options. Per the paragraph below, any calls may need some time as this week has been a little choppy for cloud stocks. 

This week, we are seeing mixed reactions to cloud earnings. Veeva Systems beat earnings Tuesday, received analyst upgrades, yet the stock price has dropped a few percentage points today. Anaplan also beat earnings, yet stock price dropped a few percentage points today. Okta, as well, is down after-hours despite an earnings beat. Therefore, there’s a chance, even with an earnings beat, that Workday’s price doesn’t withstand the broader market. 

Please refer to the forum for updates. 

Slack IPO: Pros and Cons

Posted on by io-fund

June 20th is the official date of the Slack IPO, although the technical term is not an IPO but rather a DPO for Direct Public Offering. Of the cloud software companies to go public over the last few years, Slack may be Silicon Valley’s pet favorite. You can think of Slack as a cloud-based messaging and delivery hub for teams as email is ineffective for frequent communication and projects. The product is simply amazing in terms of productivity and team work flow. From a customer perspective, the cost of the paid product is offset by the time employees save by eliminating collaboration friction such as long email threads and lost files. With that said, there will be plenty of product bias on this stock from Slack power users.

Prior to the Slack IPO (or DPO to be exact), I had cautioned that cloud software is pricey right now and is breaking records from the dot-com era on price-to-sales ratios. Cloud software has carried the Nasdaq rally from December lows with some cloud software stocks seeing 100% returns compared to 13% on average from mega-cap FANG stocks over the last six months.

IPOs in the cloud software category have been especially rewarding over the last two years with PagerDuty, Okta, Twilio, Zoom and a few others trading at triple percentages from their IPO price. By simply breathing the same air as the cloud software vertical, Slack is likely to see a healthy bump when the company officially begins to trade. Notably, Class B shares are trading privately between $21 and $31.50 over the past four months with a volume weighted average of $26.38, which represents a 142% increase in value from the last private valuation of $7 billion in August of 2018.

Keep in mind, we saw the fragile ground cloud software companies are on with Zuora, which reported disappointing earnings resulting in an overnight loss of 30% in value with stock price dropping from $20 to $14 on May 31st.

Setting aside my affection for Slack (I’m logged in on two separate accounts as I write this), there are a couple of issues that require more visibility. One paramount issue is that direct listings are risky as there is no lock-up period and this didn’t go well for Spotify. The financials also reveal paid users are decreasing even though paid accounts over $100,000 are increasing. Ideally, these two metrics would both be in an uptrend. Net dollar retention rate is strong with Slack, although it has the benefit of being a fairly young company with the product having launched in 2014, and this puts the retention rate in Slack’s favor compared to prior IPOs in the same category.

You can read my analysis on Spotify here – which also had a direct listing.

1. Slack IPO Pro: The Product is Awesome

First and foremost, Slack is an exceptional product in a high-growth category and has a loyal user base. Slack currently holds the title of fastest-growing SaaS startup in history. Enough said.

2. Slack IPO Con: Direct Listing

Slack is not looking to raise money, and has chosen a direct listing as opposed to a traditional initial public offering. This means insiders will initially sell their stock and there will be no lock-up period. Eliminating the lock-up period creates even more risk than usual compared to traditional IPOs that have six-month lock-up periods.

There is quite a bit of information about Slack’s direct listing available, as well as Spotify’s direct listing, and therefore, I will not go into an exhaustive analysis of the pros and cons (there are primarily cons for public market investors). You can read my analysis on Spotify stock here when I said the stock was too high at $185 and is now priced at $127.

The issue with a direct listing for Slack is that the company should be raising money with the level of competition the company is currently facing from Microsoft globally (Microsoft is technically in the lead, according to Gartner and a few other sources). In addition, Slack has partnered with other collaborative cloud software products, such as Atlassian and Oracle, but both of these companies are much larger than Slack and are able to copy what Slack offers.

Slack has 10 million customers which is not much considering Microsoft is already in the lead and some startups may nip on their heels such as Asana. In addition, we see in the financials that Slack’s cost of user acquisition with around 50-60% of revenue spent on sales and marketing over the last two years. If this number is not improving, then Slack should be raising money to expand its reach.

3. Slack IPO Con: Net Losses Not Improving

Slack’s prospectus reports “good enough” financials that will satisfy most growth investors. Revenue grew from about $105 million in 2017 to $220 million in 2018 to $400 million in 2019 representing growth of 110% and 82% respectively. International represents one-third of the revenue. The net losses were relatively flat, ranging between $138 million to $146 million for all three years, although Slack’s prospectus states the “net losses have been decreasing as a percentage of revenue over time as revenue growth has outpaced the growth in operating expenses.” This is true, but the decrease in operating expenses is due to cutting back on R&D as a percentage of revenue rather than sales and marketing. Relative to revenue growth, we see that the cost of acquisition remained the same with sales and marketing at about 64% of revenue in 2018 and 58% of revenue in 2019. As pointed out above, Slack should be spending on R&D to remain competitive in the cloud collaboration space.

On June 3rd, Slack released an updated prospectus that does not show any improvement in the net losses although the revenue grew to $134M in the most recent quarter compared to $80M in the year-ago quarter. In fact, the net losses of $38M in the most recent quarter are higher than the year-ago quarter of $26M.

Notably, according to the updated Prospectus, Slack shows growth in customers over $100,000, yet shows a decline across all paid user growth from 9,000 in the year-ago quarter compared to 7,000 in the current quarter. In other words, there is a divergence as overall paid users are declining while customer accounts over $100K is growing with the current quarter growing 24% compared the year-ago quarter. More quarterly earnings will be needed to determine which direction this will ultimately go.

4. Slack IPO Pro: Net Dollar Retention Rate

Slack provided limited key metrics in the S-1 filing although the company did provide net dollar retention rate. Net dollar retention rate depicts what percent of revenue from current customers is retained from the prior year, after accounting for upgrades, downgrades and churn. The formula for net dollar retention is:

Beginning of period revenue + upgrades – downgrades + churn = y with y / beginning of period revenue

If net dollar retention is above 100%, then the growth from the existing customer base offsets the losses. If the number is below 100% then downgrades and churn exceed growth.

Slack’s Net Retention Rate at 143% is very good and outperforms most cloud software IPOs that provided this number in the past. As mentioned in the introduction of this analysis, Slack has power users and a loyal brand following, which is reflected in the retention rate.

One thing to note about the retention rate is that Slack officially launched in 2014, and has a shorter history than other companies on this list with many having launched ten years prior to IPO. Typically, the longer the time period, the lower the net retention rate due to customer stabilization.

Conclusion: Slack will likely make a good trade due to brand appeal, traction and the current strength of cloud software in the market. The company knows how to make the financials look good by reducing R&D and maintaining similar levels of user acquisition as the year prior. For a long-term trade, I’d wait to see if the net losses improve and if Slack can prove that a direct listing was the best thing for the longevity of the company rather than in the best interest of the insiders. For Spotify, a direct listing did not fare well for early investors (including George Soros). With that said, Slack has stronger fundamentals than Spotify and is likely to be a very hot IPO. Follow me for updates, as the total addressable market for cloud collaboration is at $24 billion and with one or two strong quarterly earnings reports, Slack could transition from a solid short-term trade into a solid long-term holding.

Zoom May Be the Best Silicon Valley IPO of the Year

Posted on by io-fund

This post originally appeared on FATrader.com on April 16th, 2019. Beth later appeared on Yahoo Finance discussing this analysis. This post originally appeared on FATrader.com on April 16th, 2019. Beth later appeared on Yahoo Finance discussing this analysis. appeared on Yahoo Finance discussing this analysis. 

This may be hard to believe, but on Thursday, Silicon Valley will have a company go public that is already profitable. If you’ve used Cisco’s Webex for meetings, then you’ll understand Zoom. The company provides web conferencing that is simple for users to join and has a lot of features to assist in virtual meetings.

Zoom has a “bottoms-up” viral customer base, which means junior employees evangelize the service at the company. These are often some of the most loyal customers. For instance, 55% of $100,000 or higher revenue customers were started with a single employee’s free trial.

Financials

Zoom’s financials outperform successful software-as-a-service companies on the public markets today, such as Workday and Okta. Here’s a snapshot of the S-1 Filing showing $60M in revenue in 2017, $151M in revenue in 2018 and $330M in revenue in 2019. The company has been posting 100%+ revenue growth for three years with gross profit margins in the high 70% to low 80% range compared to more mature SaaS companies currently on the public market posting increasing net losses (Okta and Workday).

In the year ending January 31st, 2019, Zoom became profitable with $7.58 million in net income or 3 cents EPS. The year prior, Zoom posted a net loss of $4.8 million. Compare this to Okta’s net loss of $125M on similar revenue this past year or Workday’s net losses of $418M on approx. $2.8B revenue.

Zoom’s IPO price continues to change daily. The shares are now being priced 8 percent higher than previously estimated last week with a valuation around $9 billion. This is up 9x from the company’s most recent private funding round, which was priced at a $1 billion valuation. SalesForce Ventures has agreed to buy $100 million Class A stock at the IPO.

Zoom has disrupted Cisco’s WebEx, which is clunky and more intensive software for video conferencing. Some Wall Street analysts have speculated Cisco and Microsoft are a threat to Zoom, although the opposite is true.

Zoom’s CEO Eric Yuan, owns 19 percent of the stake in the company, and was a former engineer at WebEx before it was acquired by Cisco. On a similar note, I would not be surprised if SalesForce acquired Zoom given its large stake and the loyal customers Zoom could bring to a predominant SaaS platform. Yuan has adamantly stated he would not sell a company after his experience with the WebEx acquisition, although this may be too idealistic for a standalone conferencing product. Long story short, it is likely Zoom will agree to an acquisition in the future.

SaaS Metrics

There is a breakdown of Zoom by venture capitalist Alex Clayton of Spark Capital. It bears mentioning that many of the software-as-a-service VCs support one another in public offerings and Clayton is a little too enthusiastic about Zoom. However, Clayton does a good job of visualizing the data. I’ll summarize some of what he says here and point out a few things you should consider when looking at the data that comes from the VC side.Spark Capital. It bears mentioning that many of the software-as-a-service VCs support one another in public offerings and Clayton is a little too enthusiastic about Zoom. However, Clayton does a good job of visualizing the data. I’ll summarize some of what he says here and point out a few things you should consider when looking at the data that comes from the VC side.

Software-as-a-service (SaaS) has unique key metrics that venture capitalists look for when privately funding a SaaS startup. Subscription revenue run-rate is one metric used, although it can be overly simplistic.

Annual Revenue Run Rate = Monthly Revenue * 12 months

ARR does not account for churn or growth. Zoom’s ARR likely looks better than the more mature companies on the public markets (which are contrasted below) because Zoom is a smaller company and has gone through periods of hyper growth. For this chart to be completely accurate, you would have to compare growth from the same year of a company’s inception as Zoom is going public early compared to the other companies in this chart, and therefore, demonstrates hyper growth compared to a more mature company that files to go public.

Private investors typically calculate the monthly recurring revenue, which calculates the amount of revenue you have in the beginning of the month plus the revenue you gain during the month minus downgrades or customer churn.

Zoom has an advantage over many other public SaaS companies by posting positive net income. Many of the SaaS companies on the market today trading at 30x price to sales are not profitable. Okta, especially, may appear overvalued after Zoom’s IPO as the company posts similar annual income but with staggering net losses. Zoom is not in the same category as Okta, as Zoom is web conferencing and Okta is identity management. However, they share the same SaaS subscription-based business model and more financial clarity for investors in this business model will likely shift perception of how a SaaS company should perform on the public markets. Basically, Zoom’s financials are a safer bet.

Takeaway

Zoom is likely to be a popular IPO due to being a profitable SaaS company. With many companies like Okta, WorkDay, and Twilio trading at 15-30 Price to Sales ratios, and many not profitable, you can image the excitement that will follow Zoom. I am going to allocate a small percentage to Zoom’s IPO, provided it remains at a $9 billion valuation. I am considering a short on Okta as of Zooms’ S-1 Filing as the stock has climbed 80% from December lows.

As many FATrader analysts have pointed out, IPOs are risky.

I am a tech analyst, not a financial advisor.

Pure Play Tech Stocks to Benefit from IaaS Growth

Posted on by io-fund

This is the second article in a 2-part series. The first article “Best Bet for Growth Stocks in 2019? Secular IaaS.” can be accessed here.This is the second article in a 2-part series. The first article “Best Bet for Growth Stocks in 2019? Secular IaaS.” can be accessed here.here.

One reason for Microsoft’s success with growth rates of 76% in the last two quarters is the company’s hybrid approach. This approach helps customers keep their most sensitive data on their own servers while sending workloads that have advantages as  cloud apps, such as real-time data analytics, to Azure. This, in turn, has caused Amazon to chase Microsoft with recent efforts to improve its hybrid solutions.

The Department of Defense is a perfect example of an entity that would want to keep its most secure data with on-premise servers while leveraging the cloud for artificial intelligence and machine learning. Fortune 500 companies with substantial IP are another example of who would require on-premise security.

Understanding hybrid is key because it gives transparency into how companies with big budgets think and how they evaluate the cloud. Security is clearly a concern as on-premise servers continue to be in demand as a counterpart to the public and private cloud. Therefore, small to mid-cap companies which help to make the cloud more secure have room for near-term growth.

Additionally, the strengths and benefits of the public and private cloud include mining data more efficiently and improving accuracy and also productivity. Therefore, any small to mid-cap companies that assist with data insights or improved work flows will have room for near-term growth. For example, SalesForce is a major growth story that came from improving both the accuracy of sales targets and productivity of sales teams.

Below are a few of the more popular stocks in the cloud space. Although it is my belief some of these are overbought, and will have to prove themselves if we do go through a bear market, it most certainly doesn’t hurt to have them on the radar and to look for the right entry point.

  • Okta and Zscaler are both in cloud cybersecurity. Okta is in the identity and access management market which secures access to APIs, provides single sign-on, and prevents data breaches by protecting identity credentials through multi-factor authorization.

Zscaler is a “zero trust security architecture” that verifies identification and access. Currently, most companies use a virtual private network (VPN) as a security architecture and Zscaler improves on this by leveraging the cloud rather than physical or virtual appliances.

 Risks: One of the greatest risks to these companies is the ongoing competition in cybersecurity. Cybersecurity, in general, is a hard space to create a competitive moat.  In Okta’s case, the tech giants can duplicate the majority of these services. An acquisition, especially talent based, would be a good outcome for Okta. In Zscaler’s case, a competitor could come in and create a pricing war. I also noticed recently that insiders of Zscaler have been selling their stock – one at $2.1 million in stock and another at $4.5 million. 

  • Twilio is a common household name in the San Francisco and Silicon Valley area due to a well-run developer evangelism team. This company was heavily promoted at every developer conference over the last 10 years and you can bet that most of its revenue comes from a very loyal fan base. Twilio’s cloud products are voice-based and SMS/text messaging based, as well as other communication functions through APIs. The translation here is that you can essentially make phone calls and send text messages in the cloud, for instance, like when you call or text through Lyft’s ride share app. Developer-led technologies with strong adoption and loyalty are hard for competitors to shake. In fact, it’s one of the primary key metrics I look for when making tech stock buys.

Risk: There could be a point where artificial intelligence begins to eat into Twilio’s market share. Any manual requests by users or communication done through texting, for instance, will be replaced with highly accurate voice commands. We will speak what we want rather than type what we want. Google, Amazon and Apple are quickly building this out, and the accuracy will be nearly perfect. You can read more on my analysis about the rise of AI assistants here. Twilio has clearly had amazing returns of 335%, so if you got in early, you’re high-flying right now. 

My newsletter subscribers get this information first. Sign up here.My newsletter subscribers get this information first. Sign up here.here.

  • Slack is also a common household name in the San Francisco and Silicon Valley area, and the 8 million subscriber base in 2018 includes 50% global teams in Europe and Asia. Slack is a collaboration hub for work that lets you communicate across multiple team members without having to create long and confusing email threads. There are many productivity features such as sharing files, making calls in-app, and having separate work spaces and threads. Programmers were especially fond of Slack in the beginning and now it’s caught fire across all departments. In fact, I’m currently logged into Slack as I type this communicating with my team.

Risk: Slack filed for an IPO this week, actually. The company is choosing to do a direct listing which introduces risk as the founders and VCs don’t have to wait to cash out of the shares they sell. For obvious reasons, it’s better to have the founding team be in the same sink-or-swim boat as its stock investors (if you don’t believe your company will have returns over the next 6 months, why should I?). Direct listings for buzzy tech IPOs are relatively new, and I’m still a bit weary of them. That point aside, Slack does have serious potential for growth.

  • Veeva is disrupting the pharmaceutical and life sciences industries by assisting with sales and operations while meeting health industry regulations. Veeva has a history of being an outlier with no competition to speak of, and is one of the rare companies that was already profitable when it made its public offering in 2013. Today, Veeva is close to securing the fifth spot for a cloud software company to reach $1 billion in revenue. If Veeva does hit TAM, an exit strategy could be a solid acquisition for deep pocketed Walgreens, CVS or Amazon who has big ambitions to get into pharmaceuticals.

Risk: The major risk to Veeva is the current valuation and total addressable market as they are targeting a specific industry. With a PE ratio hovering around 100 and price to sales of 19, this stock is priced to perfection. Quite a few tech stocks that came of age during the bull streak (for Veeva this was 2013) may have an awakening ahead of them. If there is a good entry point, Veeva’s revenue growth will continue with analysts projecting revenue to “reach just over $2 billion by fiscal 2024.” As an individual investor, I have to make sure the first $1 billion in revenue is priced right with a fair valuation or the second billion in revenue (projected to be five years from now) won’t matter for my returns. 

  • Workday is a cloud platform that increases productivity across HR and finance. This is done through machine learning, analytics and real-time reporting through a cloud platform. Products include financial management and human capital management. Workday is a large cap company and is ranked as the 27th largest internet company by revenue and is one of the first five cloud software companies to achieve $1 billion in revenue.

Risks: Similar to Veeva, Workday came of age during a raging bull market in 2012 and its valuations reflect this. It saw an 83% increase the day of its public filing and went on a tear in 2017/2018. The 52-week low is $107 and its current price is $186. With a price to sales ratio of 15, and no P/E ratio to speak of, I think we will see a better entry point than where it currently stands.