The May spreadsheet will be out soon. The spreadsheet will reflect the information in this blog update.
In September, when many cloud software stocks sold off in the so-called value rotation, I wrote the following: How to pick long-term stock winners in cloud computing
“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.”
The reason that cloud is more insulated is that it reduces costs and improves efficiency. Basically, things happen quicker for businesses and are cheaper to run when workloads are in the cloud. Therefore, the idea there would be a value rotation away from cloud didn’t make much sense to me as it was my prediction cloud would perform/grow like value stocks during a time of uncertainty. (Valuations are another matter which I plan to cover this month at a detailed level for my premium readers.)
The main thesis of the article quoted above is that you should know your winners because the market is telling you it does not know who the winners are when it goes through phases of indiscriminate selling. You can also say this is the case when the market goes through indiscriminate buying. To me, the market has been playing the game pickle; rushing in and out of cloud. My goal is to position you with the winners for 2020 but also in any beat-up stocks that will soar in 2021 (and beyond) once the economy resumes.
Most of you know that I don’t trend follow or trade on prices. Meaning, I don’t recommend stocks based on their price movements. This is the major advantage to this website because the gains are much higher if you can get in before the quants are turned onto a stock. I’d say the majority of my recommendations (80-90%) on the premium site are written while the stock price is near a low. It also helps to keep a steadfastness when the market panics and sells out of a promising company.
After solidifying my convictions with you in May, and getting you set up to weather the storm that has become 2020, I am going to turn towards emerging technologies again in the second half of the year. This is 5G, artificial intelligence, blockchain and various small cap stocks. I had only just begun to do this before covid-19 broke out and we very quickly had a top performing stock in our coverage (INSG) plus some nice returns on (WIFI) and (TLRA) if you followed Knox’s entries/exits.
For anyone joining us recently, here is our plan and an introduction to how we enter/exit stocks:
- We have core holdings that will not be traded or sold under any conditions. These are MSFT, ROKU, NVDA, ZM, WORK, BABA, DDOG, DT, BTCUSD.
- Up until the market sell-off in March, we held the stocks listed on the spreadsheet until we stopped out with gains. You can access the prior spreadsheets here and here.
- For any stocks we stopped out of, we plan to build more core holdings this year with buy and hold entries that we believe we will see at some point in 2020. These are on the March and April spreadsheet.
- We will buy at the upper end of these price ranges for any data center stocks (see below) and in the mid to lower region for stocks that may see headwinds from the current economic situation.
- In an effort to stay open to all possibilities, including that the market may go up before it goes down (and to buy insurance against all scenarios), we will continue to look for entries and trade stocks. This also helps us to serve various styles on the site. Please note that we only recommend stocks that make great buy and holds. We don’t trade into stocks that we wouldn’t want to own long-term.
- Although we believe valuations will eventually settle down from 2019 and 2020 pricing, we still look for break outs with stops where we can participate in momentum.
- Knox enters and exits stocks via real-time updates on the forum. It’s essential to subscribe to his chat room and my chat room if you want real-time updates as we can’t fill your inbox with blog updates for every instance of communication. Please also subscribe to the stocks you are interested in on the forum as we have chat rooms set aside for each stock. This will help you get the most value from the site.
- Knox posted on Pinterest yesterday on the forum prior to earnings, as well as Roku and Alibaba
Below, I break down my ongoing high convictions around the Data Center, Productivity Tools, and other Outliers for May. This is in an effort to come full circle on companies I’ve covered in the past and my plan moving forward. Please also keep in mind these aren’t earnings calls as we have some earnings this week and in the near future.
Data Center
This earnings season showed serious strength in the data center with Microsoft beating pre-coronavirus earnings. I like Alibaba here, as well, as the trajectory of their data center growth will surprise the market. This is because China is going from 0 to 100 on their data center growth as a country that has lagged the United States yet has aggressive ambitions to catch up. I’ve been forecasting this for quite some time now (published on FATrader and pre-dating my premium site) and I believe this analysis is currently in play.
Looking beyond Microsoft and Alibaba, Nvidia and AMD are even stronger choices for the data center but will take time to play out. This is because you’ll see companies reduce capex this year and tighten their budgets, which will affect Nvidia and AMD. Don’t be discouraged by that. Our plan is to use this as the final opportunity to lock-in our ten-year position on these companies.
The next layer of the data center is security and monitoring. For every enterprise that moves over to the cloud, especially the hybrid cloud which I’ve covered in great detail for my premium readers, there will need to be endpoint security and network/application/infrastructure monitoring. This is where it can get tricky as the field opens up and there are many competitors in each area. My favorite companies — relative to the competition — are Datadog, Dynatrace and Okta. This means that even if these companies miss earnings that my conviction will remain.
Also downstream from cloud infrastructure is MongoDB and Elastic. I like them both. I’m not sure exactly when the revenue will show up as these are not essentials for all businesses but they should see a boost from the ongoing cloud migrations at some point this year.
PDFs for reference:
Productivity Tools
When I wrote out my convictions for the premium site this year, I talked about productivity tools being a hot space. These tools, especially, save time and reduce costs. Therefore, don’t be surprised if Zoom, Slack and DocuSign continue to climb this year. I do believe valuations will come down at some point across the board as economic data and Fed stimulus battle it out. With that said, I believe these three will continue to break out as their revenue should grow at a clip and you can expect them to have higher valuations than their peers. If you believe there are others that will sustain high valuations this year, feel free to ping me on the forum to discuss.on the forum to discuss.
Knox especially thinks there is strength in Slack’s chart. I think the market is still confused on the company. That’s a good combo to have.
One thing I’d like to make very clear about Slack is that it has one of my favorite components across all tech stocks which is a strong developer community (even though Slack is not open source, there are many custom APIs being developed).
Investors may not realize that Apple’s success is due not only to the iPhone but also the developer community that supported the iPhone/iOS operating system and developed third-party applications. This created a robust ecosystem that was impossible for any competitor to shake. Design played a role too, of course, however Microsoft’s Windows mobile OS got shut out because it did not have the developer following to develop apps. In the beginning, Facebook also had a large developer community that propelled the platform forward which is how Zynga became popular.
In the S-1 Filing, Slack stated there are over 450,000 third-party applications or custom integrations. The number is likely much larger now. What is important to understand is that it’s nearly impossible to envision where Slack will end up in five years from now because the level of iteration and creativity that comes from these customizations is impossible to predict. The forward innovation will come from technologists who are not employees of Slack. They are in need of a messaging system they trust and that can be customized.
For instance, security professionals are now using Slack for anomaly notifications. When there’s a breach, or anything suspect, the security team is notified on Slack. Wall Street investors can set up price movement alerts on stocks. I’ve seen others use Slack to program robots and control commands.
With that said, Slack is following a popular maneuver for monetization that confuses the financial industry and will require a bit of patience before the profitability unfolds. Slack is choosing to scale while being underpriced and then will convert down the road to being priced more in-line with the value of the platform. For now, this means there will be questions around the path to profitability.
Shopify is an outlier that we covered with a prediction that the company would outpace the market due to the focus on merchants rather than customers. Perhaps with covid-19, the emphasis on merchants is more important than ever as many will lose brick-and-mortar sales. I do want to point out that Shopify released a new application. This was something I had predicted they’d do as it was the next natural step after the fulfillment center (an aggregated store front). I thought it might be a website but a native app makes perfect sense. This product announcement is very important for the long-term trajectory.
From the Shopify PDF in October:
“The question many investors ask about Shopify is whether it can compete with Amazon — or even Alibaba? Today, this is not a possibility as Amazon and Alibaba drive traffic to products and take a premium for helping secure the sale. They own the domain website, so customers are loyal not to the merchant, but to Amazon and Alibaba.
I believe this could be where Shopify will end up, eventually. If the fulfillment center is a success, which will take some time to test and gather traction, then the back-end will be set up for the front-end development of a website or some kind of product aggregator – whether that’s a website domain or another recommendation engine.
For Shopify, it makes sense to first build out the fulfillment center for their point-of-sale software in order for a successful pivot.”
Although I have not written a formal PDF on Docusign, the company fires on a lot of cylinders. The addressable market the company will (finally) be able to serve can become quite large as industries shift towards work from home policies. I will try to write something up officially soon although I’ve favored covering others, such as Lam and Micron, as most know/understand the Docusign story. Regardless, it’s worth repeating that I think their story has improved and is strengthened beyond 2020 by the work-from-home trends.
PDFs/References:
Downgrades For Q2-Q4
Alteryx priced at $5000+ is steep and I pointed this out in previous reports. I would never suggest someone sell a winning position; however, you may want to determine how much downside you’re willing to stomach if the market were to go red. I’m pulling AYX out of the pack as an example because unlike other cloud software, the price is not cheap. If the economy goes back to normal tomorrow, this won’t be an issue. If there are tech layoffs announced in Q2 and Q3, you might want to keep it in mind.
From the Alteryx PDF:
“Alteryx primary risk is the high pricing. The company will have to continually iterate to demand its current pricing while staving off competitors. At over $5,000 per user for the Designer product (and much steeper across other products), economic headwinds could affect Alteryx if companies seeks to reduce costs.”
And …
“Designer costs $5,195 annually per user with optional add-ons, such as location insights for $11,700 and business insights for $33,800. Server expands the offerings from Designer to include APIs and applications for more customized and automated analytic workflows. Enterprises especially have a need to improve internal server architectures for multiple employees and cross-functional teams with custom options. Server costs $58,500 per user per year with add-ons, such as Connect for $39,000.
Connect allows for data cataloging and the discovery of data with the goal of accelerating productivity. This is not a core product for Alteryx at this time, rather it provides an end to end pipeline for a full range of needs. There is indication from the Server add-on pricing that the cost is in the $39,000 range.”
We’ve also seen initial reports that human resources software is not holding with SAP expecting a decline this year and analysts downgrading similar companies, like COUP, PAYC. (The market has not taken notice). This means Workday could be exposed. Workday also carries over $1 billion in debt and may need to borrow more in the future.
PDFs:
Ad-Tech
As you know by now, I’m concerned about ad-tech for a few reasons. The peak to trough that occurred between Jan/Feb and March has been hard to quantify as company executives provide fairly vague overviews of “single digit declines” or “double digit declines” or “approximately flat” or “stabilized” while avoiding hard and fast numbers. Those that gave more specific numbers sold off (PINS and TWTR). All around, guidance is being pulled for the year, which is unique to ad-tech within the industry of tech. Meanwhile, ad-tech is trading at all-time highs.
I’ve covered this in great detail already as to why I began the year with ad-tech as one of my top trends and changed my position on this for Q2-Q4 2020 and maybe early 2021. For me, there is too much risk with stocks trading at all-time highs that are going through a major readjustment in supply/demand. I’d need more information on forward revenue this year and next year before committing to these valuations. Considering companies can’t provide this, then I’d want a discount in valuation.
I want to follow up on Roku specifically. The difference between Roku and the other ad-tech companies is that it’s situated in the center of an important micro-trend as a pureplay. This means it’s a gamble as to when the true breakout occurs because the trend is so strong.
On one hand, Roku may have a tough year as a company that is not profitable and relies on advertising. On the other hand, Roku may have a breakout year as a company that sees record adoption at a time when connected TV is already one of the best trends in technology. Knox will do his best to provide for both situations but I want to emphasize we are long on Roku and it’s one of my highest long-term convictions even with advertising headwinds. With that said, it’s likely Roku misses earnings or negatively surprises the market in some fashion this year. Follow Knox on the forum if you’re building a new position here.
For Q2 through Q4, I have changed my viewpoint on The Trade Desk. I think Snap is weak too (I understand the market doesn’t think this right now). The market beating up Pinterest and not Snap is interesting to me on many levels (and the lack of response when Snap raised debt immediately following earnings).
I personally feel that Facebook and Google are somewhat saturated and will need new growth markets but that’s counter to the market (I’ve felt this way about Apple too for most of 2019 and into the near future). Those three have enormous amounts of cash so micro-trends/growth markets are irrelevant because of traditional DCF analysis.
5G
Our 5G coverage was primarily focused on business cases. I believe the government will continue to push for 5G and that INSG and WIFI are solid choices as they require little to no capex. In fact, they lower capex depending on the situation.
I also like Twilio as a very early 5G play. Twilio is exposed to many different industries and we will find out in the earnings report tomorrow if retail/ecommerce and health care offset any of the others (such as Lyft and Uber) plus the decreased marketing budgets that SendGrid likely saw.
PDFs:
Outliers & New Coverage
Lam Research, Micron and Qualcomm are solid choices to keep an eye on. Knox will update in the forum if he sees something interesting here price wise.
I’m still very bullish on Chainlink for reasons that are not obvious right now. I believe Chainlink will jump from being a crypto to a reputable form of collateral for blockchain smart contracts. I want to emphasize that Google and Oracle are early backers.
Bitcoin is also going through the four-year halving this month. I’ll write up an editorial in advance.
Regarding blockchain, I had written an article about how blockchain and health care will one day merge in order to make data more available for cures. This is an area that should take off with the pandemic. I’ll be hunting for breakthroughs here.
PDFs: