Recently I joined Tim Beyers and Brian Feroldi on The Motley Fool podcast. In the hour-long interview we discussed cloud stock valuations, trends I’m bullish on, why I think Zoom Video and Shopify are the best cloud stocks, my prediction that EVs would pullback (they later did) and why that’s a buying opportunity, and why I continue to be long FUBO due to the company being centered between two important microtrends albeit extremely early.
Here’s a brief summary of our conversation which occurred on February 9th prior to tech stocks selling off, and yet the information is even pertinent now. If you want to watch the full video, it is available below the article.
Cloud Valuations
Leading cloud stocks were trading at 50x sales when I was first interviewed by Motley Fool (minute 35:15 – 40:00). I emphasized that I don’t buy big positions in this range.
We also discussed the high likelihood that cloud stocks would soon revert to the mean of approximately 30x sales for leaders and 20x sales for average companies.
That’s exactly where we are at now, so I don’t see the sell-off as a big surprise. As I write this on March 4th – we are in the healthy pullback range as leaders often hit the forward 30 P/S range and average growth in cloud stocks the 20 forward P/S range.
What is unusual is the sheer number of cloud stocks forecasting growth in the range of 30% to 40%. We won’t know who is going to pull ahead of the pack until we see what Q1 reports due to the tougher comps from last year.
Please note, data was pulled approximately two weeks ago.
In the past, momentum traders could pile cloud leaders growing in the range of 50% to 70% and make their bets that those forecasting top growth would perform. Nine times out of ten, the company met its forward guidance. This year we don’t have that luxury as the category faces harder comps.
Towards the end of the interview, I was asked my favorite cloud stocks for 2021. I said it was easy to get creative here but I prefer to stick to the tried and true during years where the market doubts a tech vertical. I named Shopify and Zoom Video as my favorites as their bottom lines are exceptional and on par with Salesforce. This is one way to tell if a company has product-market fit, as they do not need to use sales and marketing budgets to drive growth.
Cloud stocks are going to test momentum investors who don’t study underlying fundamentals. Our fund is 2/3 long-term buy and hold and 1/3 momentum and we continue to hold cloud stocks in our buy and hold portfolio.
How I Find Stocks
Instead of using stock screeners, I like to invest in mega trends. It’s more forgiving for the companies. Companies positioned at the center of powerful trends can pivot or change the business model and the outsized demand will overlook those mistakes.
That’s why I prefer to invest in trends rather than use screeners. Tech needs to be forgiving, because growth tech companies are trying to take over the world.
I need a big trend so I don’t lose conviction if there’s a bad earnings report or other short-term issue. Investing in trends helps me to stay patient while the management executes.
SPACs:
We chatted about SPACs prior to the selloff in this interview and I had said “proceed with caution” yet look for gems. The way we do this is by investing very small percentages in speculative names – as low as 0.5%. From there, we layer either as the company breaks out on strength OR we layer in at lower prices if we have a higher-than-usual conviction.
Here’s a breakdown as to our strategy, which is spearheaded by Knox Ridley, our research site’s portfolio manager.
- Early trend, 1%. These trends haven’t showed up yet in earnings.
- Some Evidence, 2% to 3%. We see some evidence for these trends in earnings.
- Overwhelming Evidence, 5%. These trends have overwhelming evidence in earnings.
The Bull Case for Fubo
FuboTV is centered in a crucial trend, which is live sports streaming. The bear argument on Fubo is that licensing fees are too high for the company to improve margins and become profitable. This is negated by the Sportsbook launch which is coming much sooner than I originally thought. My best guess is we will see institutions initiate prior to the Olympics yet before the Sportsbook launch.
Comcast has announced a 9% stake in Fubo and Disney has a 5% stake in the company. They will want to run sports betting through a separate brand as these are family-friendly entities.
Sports are seasonal and Q1 should not be compared to Q4, yet the bears will attempt to hammer on this. At our fund, we do not compare Pinterest’s Q4 to its Q1, for example, as we understand that smart money does not do this either.
In the interview, the point I make is that live sports OTT is the holy grail as the majority of cable subscribers continue their subscriptions for this purpose. In fact, all of the cord-cutting leading up to this point (about 10-15 years) is equal to the cord-cutting opportunity of live sports fans. We do not see Fubo as a sports licensing business just as I did not see Roku as a hardware business. You can access my previous analysis on Fubo here and a library of analysis on Roku here.
Instead, Fubo is a live sports OTT business that will drive monetization through its Sportsbook. Subscribers are willing to pay $65 per month for Fubo because it offers access to a wider range of live sports.
Fubo announced last January that it plans to offer sports betting in a separate app, which is a model that worked for Sky Media in the U.K. While you’re watching live sports, you can open a separate app and make a bet with your friends. This is ideal for casual betting rather than serious gambling. With many states in debt and legalizing sports betting, this is a tailwind.
You could say, “Why don’t you go with DraftKings?” Fubo has the same size audience that DraftKings did in 2019. Yet, the valuation of DraftKings is 3-4 times higher than Fubo and fully valued. I also think Fubo will do well with casual betting compared to DraftKings.
Chinese Electric Vehicles:
The interview from February 9th was especially timely in regards to EVs as I had said they were trading at historic valuations and could see a 30-40% haircut. We like this trend so much that we started to layer in around the time of the interview and as the market has sold off, we’ve continued to build our exposure to Chinese EVs.
I’m bullish on Chinese EV companies due to China’s desire to reduce its dependence on foreign oil. The country does not produce oil like we do in the United States.
Another reason I like Chinese EVs is because nationalist China will probably want its domestic car companies to be in the top three for sales. Apple is number 4 or 5 in China for smartphones (depending on the quarter). I wouldn’t be surprised to see Tesla to follow the same path as Apple in terms of ranking in China. This is important because China’s lack of oil plus its population is a nice combination.
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Access the full interview here:
Interview timestamps:
0:00 Introduction
1:33 Cloud valuations
5:00 Okta and Alteryx
6:45 Research Process: How I invest in major tech trends
9:00 AR/VR Trend: Unity, Apple, Snapchat
18:00 SPACs
21:40 Opendoor
22:40 Star Peak Energy Transition Corp.
26:30 Cloud earnings
28:00 Portfolio Management: When to enter and exit
30:15 Entries: Roku, Magnite
32:00 Exits: Alteryx, Dynatrace
37:50 Fastly, Cloudflare
43:20 FuboTV
49:10 Agora.io
50:15 Chinese EV: NIO, Xpeng, Li Auto
53:30 Favorite cloud stocks: Shopify and Zoom