Memory-chip maker Micron Technology Inc. was saved by a boom in data centers, adding to chip makers’ growth as the pandemic forces more companies to expand their cloud computing capabilities.
On Monday, Micron MU, +1.35%
reported better-than-expected fiscal second-quarter earnings and had a stronger outlook for the next quarter, despite some issues with the global supply chain due to the COVID-19 pandemic. Micron’s shares jumped nearly 6% in after-hours trading. At Monday’s close, Micron was trading at $49.15, down 8.62% for the year but a huge recovery from its plunge in March, when it hit a low of $31.13 in the early days of the pandemic.
“We continue to see healthy demand trend in cloud in the second half of the year,” Micron Chief Executive Sanjay Mehrotra told analysts on a conference call. “Cloud is still actually in early innings, and long-term trends for cloud are strong.” In the second quarter, the company said that the work-from-home economy, e-commerce and videogame streaming all drove a strong surge in demand for more cloud-computing capabilities.
In the second half of the year, Micron said that it expects demand for consumer technology products such as PCs and smartphones to improve. That’s in part due to the ongoing rollout of 5G networks, which will drive demand of new smartphones that have more dynamic random access memory (DRAM) chips, compared to 4G-network phones. The company said that average selling prices of both DRAM chips and NAND flash memory were up sequentially from the previous quarter.
One issue hovering over the company, and indeed most chip makers, is the growing rise in inventories, both by Micron and its customers, especially in the smartphone market. When asked by an analyst about the growing inventories, Mehrotra said its customers are trying to prepare for when consumer demand returns.
“Customers want to be prepared to supply the smartphone demand” when it returns, he said. “So, overall, you know, it’s a mixed picture with respect to the inventory on the customer front. Cloud inventories are in decent shape,” while mobile inventories are “somewhat in anticipation of demand.”
The chip industry has been amazingly resilient during the coronavirus pandemic, and most of the demand is due to data centers and the demand for more cloud computing. If the PC and smartphone markets return to growth, there could be even more upside for chip makers such as Micron. But for now, the sure thing is centered around the data center.
Editors’ Note: This is the transcript of the video we posted last Tuesday. Please note that due to time and audio constraints, transcription may not be perfect. We encourage you to listen to the video as well as a podcast embedded below if you need any clarification. We hope you enjoy.
Daniel Shvartsman: I’m Daniel Shvartsman, Director of the Seeking Alpha Marketplace. We’re continuing our Coronavirus, COVID-19 Marketplace Roundtable Series. Today, I’m joined by Beth Kindig and Knox Ridley, who are of the Tech Insider Research Service on the Seeking Alpha Marketplace, a service full of high conviction analysis to give your tech portfolio competitive edge.
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So guys, good morning. How are you?
Beth Kindig: Good. Thank you so much for asking us.
Knox Ridley: Great. Glad to be here.
DS: Awesome. So today, we’re going to be talking about Zoom and the SaaS sector, in general. But Zoom has been the darling stock of 2020, for sure. And I wanted to talk and, of course, we’re recording on Zoom as we do this, but…
BK: It’s a good product.
DS: It’s a very – I – whatever I might – I – it’s interesting, because I’m from a value orientation, Zoom is the ultimate growth stock, so it’ll be interested in getting to that. But whatever I say about that, the product is, well, set aside the security questions I’ll have, but the product itself is quite good. So…
BK: We’ll talk about security. I get those questions all the time, too. So if there was no question, you could ask that I haven’t gotten yet so.
DS: Yes, yes. I mean, it’s really been a – it’s in the spotlight. And so to start with, it’s always been a high valued company. Like even last year, I don’t think – EV sales has always been, I think, in the 20s or the 30s, like it’s not ever been a really cheap stock. So what – the game is always to figure out what the markets is missing. So as you first got into the stock, what did you – like what attracted to you to it even given that? Why did you think the market was still missing on Zoom?
BK: Yes. So the reason why I was pretty bullish on Zoom, even at IPO, but we formerly covered it, fundamentally, in September. And then Knox can tell you some of the technicals that he saw in January when we entered.
But it’s because when you compare it to the other products, they’re very bulky, they have a lot of friction. WebEx is where Eric Yuan comes from. It’s a Cisco product, and you have to download a lot of software before you can even have this video call.
And then if you’re on your mobile, if you go from your laptop to your mobile, or maybe you jump from a work computer to a home computer that kind of thing across device, you still have to redownload a bunch of software. And then when you go to call somebody who is not from your office, you’ve got to switch products.
And so it’s basically in this attempt for these companies to have this lock in. They’ve kind of allowed Zoom, a really great opening. Now with that said, to remove the friction, and what I mean by that is, when you click a URL you’re instantly in, you don’t have to have the software downloaded. If you do, it moves very quickly.
That’s what I mean by removing friction. It’s very challenging to do that. It’s – to take – when you develop a product and you make it seamless, it may seem like to other people who don’t develop products that just remove the software, just remove the download or just remove the sign in process. But it’s actually a lot harder than that.
And I like it when people come from backgrounds like Eric Yuan, being at Cisco for as long as he was working specifically on this kind of a product and then moving on to start his own company. That is like the perfect story to me. Because when you narrow down, who in the world knows web conferencing, like he does, then if he has dedicated his life to that and like his whole experience from a corporate company over to a startup, you could get 1,000 best or 1 million best technologists in a room and nobody is going to know web conferencing that specific – those specific features quite like he is.
And so that’s where I start to look at the team as well. But I really like product. I’m a product first analyst. I talk about at a lot of my site. [ph] I start with product. And I really like to understand the user behavior, early adopters why are they attracted to it? Who are the early adopters? What problem does it solve?
And personally, when I really look at a tech product, I like it when the market thinks there is big competitors that may not have the seamless product or the frictionless product that Zoom has, like I invest in that confusion. Like that’s actually a really great place for me to be and I’m there frequently. I’ve been there and other stock calls as well, where everyone thinks oh Google, oh Facebook, oh Apple, et cetera, and that’s kind of my specialty. But I could go more into valuation specifically if you’d like or whatever.
DS: Let’s just stay on specifically the product development here and throw out the simplification that Zoom did. What do you make of the security? Because that’s part of it, right? They removed friction and security is part of it, most obviously with Zoombombing and that sort of thing. What do you make of that aspect of the story just – since you mentioned that?
BK: Yes. I think, Facebook said, build fast break things that was like their motto. And it’s really good when a company has released a product and it’s used in ways they didn’t foresee and it breaks the product. It’s actually what happens is it that we – the coronavirus and the consumer is piling in that education.
The students and the teachers, everybody piling in. It literally broke the product in a way that every Silicon Valley CEO and – would cover it and be jealous of. Because what you want is your product being used in ways that you didn’t even foresee Nvidia with the crypto bust, that was a really great example, too. I mean, it was used in ways the company never thought it would be used to have the mining capacity and computing power needed for mining. It’s not something that Nvidia had in its playbook.
But when it broke the product, the market freaked out. That’s when I went in and said, that’s great news that people are finding new use for this product and it didn’t work out. Anyways, when it comes to security, I guess, if you’re listening to this, the one thing I would say is, it’s really common have security issues in technology. Yes, Skype has had many of them. Google has.
Everyday, Android is probably racking up so many – a couple a handful of security concerns over a course of a year Android, Google’s operating system probably has, at least, some pretty serious security issues every year in and out since it’s been acquired by Google.
So you can’t really give me and in Facebook. I mean, what about our example then Facebook with security issues. You can’t really give me a tech company, where there hasn’t been major security issues.
DS: So you’re – so essentially, it’s a little exaggerated because Zoom has been in the spotlight recently.
BK: Par for the course. People are completely exaggerating it. It’s part for the course. It’s totally normal for product that, that is growing and reaching mass scale to have growing pains. Security is very, very common in this – in the tech industry. Hackers and even just developers are not thinking of everything on their own. Some people will even hire companies to hack their product, because they know their security concerns.
So to me, it’s not – it’s just another day in the life of a tech analyst. Nothing out of the ordinary there to me.
BK: Stay calm. Yes.
DS: So now, let’s step back to valuation. And we can take it either pre-COVID or I can rea-sk the question for the post-COVID world after their last quarter. But what do you – when you’re looking at a stock that is – because, again, Zoom, it’s been magnified to such a great degree this year, I don’t know what’s it already quadrupled in 2020 or something. But even before then it was in the spotlight to a degree.
So how do you find entry points? Or how do you find something that you’re comfortable with? Where ultimately, you’re looking for, maybe you’re – I look for free cash flow that’s ultimately going to come back to me as the investor. How do you guys think about that?
BK: Yes. I mean, I – and I’ll pass this question on to Knox in just a moment, because basically, the way that I have the tried and true, in my opinion, when it comes to tech stocks is that, number one, I’d say, valuations. We might need to come up with a new way to value a tech company. It doesn’t really fit the value metrics of any other industry and I think that we found. If you didn’t know that before, I think, that this probably proved it.
So what we do is, I basically find a company where I like the product. I like the fundamentals, and I pass the ball down the field, the Knox, and he works on the technical analysis. And to be clear, I don’t know how he does what he does, but he is very good at what he does. And he has a way of looking at the momentum. So, I’m sure Knox can tell you more.
KR: Yes. I mean, I use strictly technical analysis, which I know in some circles and finance is considered voodoo. But it could be a quite useful tool, especially when looking for favorable risk reward setups and “overvalued tech stocks.”
There’s two basic setups that I look for. And arguably, this is the only two setups in technical analysis and it’s little complicated. But it’d be simple trend following, which is a stock in motion, tends to stay in motion.
And in the case of Zoom, it was countertrend trading, which is a little bit more difficult. You’re basically trying to, in essence, catch a bottom. And Zoom was showing my absolute favorite setup of all-time, which is a powerful move up from its IPO or any support region, then kind of a more of a controlled three-step decrease back to the support region.
And then when Zoom was at about $64, I was like where it’s a break to an all-time low, which is when you want to get out of the stock, we’re looking at a 6% risk here, $59.80. So we went long at $64, set a stop at $59.80, and the projections that we were seeing if we were accurate, was seeing Zoom go to about $1.55, $1.56, which at the time seemed crazy, right?
And the benefit of using technical analysis was, I really wasn’t concerned at all about the valuations. I had no idea that the price of sales in Zoom at that time was $28. And in retrospect, that doesn’t really matter, because it’s a 300% right now. So I mean, I kind of have a finance background.
And I’ll just kind of say from my own standpoint, I got burned in 2011, 2012 by sticking with kind of a value metric for looking at tech stocks, like I never got involved in Amazon. And the reason being is because of evaluations, and I couldn’t have been more wrong when Facebook came out.
I mean, I remember the roadshow with the Hoodies and Warren Buffett coming out saying, there’s so many better stocks out there. And everyone said, it was going to fail no owners to the business model. I bought at around $25 and a fold around $50, which seems like a great trade.
However, I couldn’t have been more wrong. I knew nothing about micro trends, nothing about audience networks, for example, and their valuation seemed crazy to me at the time. And once again, I couldn’t have been more wrong. So anyway, that’s what I love about Beth is she does, she knows the product. She understands these micro trends. And more than half of the battle is sticking out with stock to go into and my job is easy compared to what she does. So…
DS: So let me go back, but stay with you Knox for where we are now. And then I want to come back to Beth about the sort of the other trends here. I don’t have the chart in front of me, but in my head $1.55, $1.60 is sort of where I ran out to then all of a sudden I had that big run rate before earnings. It actually didn’t move much out of earnings, but then it started running again. So are you feeling that this is a continuing stock emotion, sort of trend following moment? Or how do you shape it up right now?
KR: Yes. I mean, I set up our system. You want to – and you’ve heard all the great investors say it is – want to cut your losses and let your winners run. And we’ve kind of created a system, where we systematically do that. When we go into an entry, I’m going in based off of a breakout, like a trend following breakout, the stock consolidates and then volume decreases, sellers dry out and then it breaks above the consolidation pattern. We go along with a stop underneath the consultant, underneath face, if you will.
So we’re looking at like maybe a 5% to 10% risk at most, some of them fail. If they fail, we get out looking at small losses. But whenever they work, they really work. Zoom is a great example. Datadog is another great example. The stock just kept going. And so I tend to let my winners run.
And with Zoom, I mean, we’ve taken – I kind of do the opposite, some investors will tighten the risk controls as the gains increase. And when it comes to these tech stocks that are involved in these micro trends that we see going on for years to come, I tend to loosen up the risk controls a little bit and let them give them a lot more room to run some Zoom. Yes, I mean, probably do for a pullback, who knows. But if it pulls back within evaluation that we see to be unreasonable, we’re probably going to add to our position.
DS: So when you say tech loosen up on the risk controls, you’re not bringing your stop losses or whatever along with you as the stock moves up at or not as much, is that what you’re saying?
KR: Exactly, we’re not.
KR: We basically have – we do our – we construct our portfolio in really the two kinds of moves. One is, we will just do an open trade, where it’s a very tight stop loss. We’re trying to catch a breakout. We’re trying to catch the bottom. And whenever we’re successful in doing that in stock that we want to own, the bet is as a high conviction on. I mean, we want to own that stock while this growth trend is going on, it may pull back 30%, 40%, even 50%, we find ways to hedge that.
The last thing we want to do is get out of one of our winners and then try and do the whole process over like we know where we want to be. And once we got a good position, we want to let that ride.
DS: Okay, great. So, Beth, my question for you. I have a couple on the fundamentals with – still with Zoom, which is – first of all, one of the most fascinating parts of this year, not to make light of, there’s a lot of serious stuff going on. But as investment analysts, we’re trying to figure out well, what’s going to last? What’s – just temporary, what is pulling forward?
And so in Zoom’s case, you have – how much of this is pulling forward demand? How much of this is accelerating the trend towards video conferencing or collaboration? How much of this is actually opening new doors for them? So what do you make of Zoom’s position, their TAM, or whatever else in – at this time compared to where we were five, six months ago?
BK: Yes. I think that’s a really great question, because this is where I think it really helps to do in-depth analysis rather than only trade on price, because we had really pushed hard on Zoom even before the coronavirus, and I’ll tell you why. And this is – it leads into your question is that, cloud software – our cloud budgets are 4.5 times larger than IT budgets going into 2020 with or without the coronavirus.
So that’s a big trend to get involved with. And then within that, so we have 4.5 times larger spending on cloud than IT. Within that productivity tools, we’re going to lead that spending. So Zoom was already perfectly situated, where the budgets were headed. And so that’s why like, I don’t – I – I’m not a – I stay out of discussions around news headlines or hype or price followers, they’ll get in really involved with the news headlines in my opinion.
I’d really try to stick with these trends, because the conviction remains and I think that. So to me, I don’t see it as a coronavirus company. I didn’t get – we – my first coverage of it was – in-depth was in September. It was a 10-plus page report. Knox was trading it actively keeping a really close eye on it, found his entry in January.
So we are pre-coronavirus Zoom people and my readers were. And so when somebody says to me, is this a pull forward? I don’t think it. I think Zoom would have done well with or without the coronavirus. You’re increasing the speed of communications. You’re lowering the latency and you are doing it much cheaper and better than any competitor. There’s always a market for that.
And so anyways, to me, like, I don’t see Zoom as – I think Zoom is now on everyone’s radar. But I actually had said in September, it would be viral, because I – the way those links can spread. If you were around during when social media was very new, there was certain key ways that social media spread that Zoom was very similar to socially speaking. And that’s why I said, it would probably go viral at some point. But – so I don’t see it as a coronavirus stock like others.
I – there – with that said, though, cloud software is certainly getting – the evaluations are outsized. And I think that it’s going to get very confusing for people who have a lot of winners when there is a pullback, because you’re going to have to figure out where your convictions are.
And then the thing about cloud software that’s really interesting is that, I think, between July of 2019 and July – and September of 2019, we saw 30%, 40%, almost 50% drawdowns in stock prices. So we don’t need a coronavirus or unemployment numbers or GDP contraction in order to have that sell-off. In fact, like your February to March was very similar from your July to September.
So, there has been perfect softball pitches this year, meaning, like a lot of people have a lot of winners. And as do we and as do a lot of people and that’s a – it’s going to be interesting to see how it ends, because our – the year ends, because I think – I don’t think they’re all winners, the whole cloud software category. I think we’ll see eventually, the unemployment and the budget tightening hit that category.
And so for me, I’m long Zoom. I think it’s going to be a great product and a great company with or without the coronavirus. But overall, software cloud – cloud software, I’m questioning other companies that are more in the middle. We know who some of the winners are. We know who some of the losers are. But it’s that middle, that broad middle that I think is going to be really interesting to see how Q2 and Q3 play out.
DS: I want to bookmark though, because I really interested in hearing more about that. Quickly, the last question on Zoom. You’ve sort of hinted at this competition, Google has refocused on Meet. Microsoft is pushing Teams, which also means Slack – or excuse me, Skype. Facebook is opening up Rooms. Any – you didn’t sound concerned earlier? Do you still think there’s market confusion around that? Or do you think there’s something to be worried about from the Zoom perspective?
BK: I like Microsoft. Microsoft Teams is probably going to do an excellent job of protecting Microsoft’s turf. But there’s a lot of room for an alternate – alternative to Microsoft. There always has been, there’s never been, I mean, except for I guess, PCs and office software back then they did pretty good.
But Microsoft, I just think there’s always an alternative. And AWS users are not locked into the Microsoft ecosystem and walled garden and they’re going to be probably more likely to use Zoom Video. Consumers have clearly voted, I’d say. I don’t think consumers are, I think, they’re a pretty easy read, but enterprise is where the money comes from. So, yes, I’d look at the non-Microsoft camp.
DS: Okay, fair enough. So what’s going to cloud software? I guess, you’ve sort of hinted that we did see a drawdown, obviously, in the COVID period. But as you mentioned last summer as well, how do you look at the market now, whether it’s from a technical perspective or from this fundamental aspect of somebody who is – a lot of investors have watched the SaaS rally, have watched the Datadogs, have watched not just Zooms, but these other companies that Fastly was up big today, et cetera, a lot of big moves going on in that sector.
What do you look at as far as if somebody is looking to enter? Is this the time? Do you care about that? Are you still just focused on looking what are the winners versus the middle versus the losers? Or how are you thinking about the sector as a whole?
BK: Again, I think with entering that’d be great question for Knox.
KR: Yes, I could handle that. I mean, I guess, that I mean, the momentum that we’re seeing, I mean, what I find is I try to let the market tell us the direction it wants to go into. I mean, everyone has opinions on what should be happening or even banging their head, getting angry that it’s not happening based on the thesis they have. And we know the economic trend within cloud. We know it’s real. And a lot of these companies are going to do well regardless of recessions based on the service they offer to business if we know that.
And so you take Datadog, for example. I mean, it’s been a classic trend following trade. I mean, we got in at 35. We got in, again, around 50 before earnings and it broke to all new highs. And then just recently, it built a beautiful base and broke above 73 and we got back – we got – we added to our position at that point.
So we’re adding when we – when the market – when the stock is telling us that it’s building up for another move forward. So I mean, we’re not really saying taking money off the table. Right now, I know that sounds crazy to a lot of people. But the trend is still up, which is this.
DS: Okay. It’s such a – yes, it’s still something that’s hard for me is, when you see something go up, you just – it’s the value investing meaner version sort of mindset. And that’s very hard to change. The…
KR: The thing is just if I could say one thing. I mean, what’s interesting is in this sell-off in March, with markets around 35%, a lot of these high-value overvalued, high beta plays didn’t go down that much and they were leading out of this. And that’s one thing that we found very interesting in this sell-off, and even in corrections this year in the last few months. A lot of these tech names weren’t really correcting with the broad market of a lot of these values.
A good example would be Wells Fargo trading at price to sales at 1.5 just two weeks ago, and it seemed like a good value. But since then it’s down 20%, both I mean. So, yes, not to kind of belabor that point. But, yes, I mean, we still see a lot of growth in these names.
BK: I think it’s helpful to have both separate people who have strengths, because it just – it’s like I could really focus and get in-depth on product and fundamentals and then I’m done. Pass the ball hand in like Zoom is a great example that I really went in-depth in September and then Knox set and find the setup he wanted until January. It just shows you like the process there.
And then after that, I never had to think, again, like is it getting too high? Because he is looking at things with such a – he takes the emotion out of it. And he – he is really trying to find, I mean, he can tell you more about. But between like fear and greed, I think fear and greed once they start to enter a stock, it can get really hard unless you’re practiced at technical analysis.
And for him to continually enter that stock, I thought it was pretty bold. And anyways, I think that that’s the main piece is like, finding that person that can keep entering no matter how high it goes. That’s a big asset to have.
DS: Yes, it’s definitely a different sort of skill, both to classic sort of quantitative oriented analysis and also to product fundamental analysis, and it’s good to have toolset for sure. The question I want to follow-up with you, Beth, was you hinted at winners versus middle versus losers. I’d love to hear a little bit more about what you think examples of companies you think besides Zoom that are set up to win in this environment, and if you have any middling plays or losers off-mine, just for people there?
So I think, it’s been one of the things I hear a lot is people will go into the SaaS sector and say, “All right, give me my content management software and give me my video conferencing and my collaboration and et cetera.” And they’re just sort of putting bucket and bucket, so to hear a little bit more about how you differentiate the sector, given that it does seem to be poised at an interesting point would be great?
BK: So the question is, what other winners I’m looking at or which ones I’m more cautious on?
DS: Yes. I’d love to hear like an example of a winner you’re looking at versus a company that you’re a little bit more like, maybe they don’t deserve to be where they are?
BK: Yes, it’s always controversial to do that. And every time I do that, I hear from engineers and former employees and my inbox gets pretty full anytime I say something about a winner or one that’s trading a lot on price, but we’ll go for it and see what happens here.
The one that I like which Knox has mentioned is Datadog, because I really like the migration to cloud infrastructure, except – especially that hybrid play, which is that you have on-premise and also public and private cloud. And those monitoring tools, there’s a couple of them out there, but Datadog is probably the one that comes to mind for the market. They’re going to be in demand. That’s just how it is.
There’s not – you have cloud migrations. You’re going to have more need for cloud monitoring. And so I like that one and have for a while. I think, it’s totally worth its valuation. It’s kind of like Zoom Video, where I thought it was before the coronavirus, and I most certainly do now.
And then you had mentioned Fastly, I’m a little more cautious on Fastly, because I – question if the market understands that, they’re basically trading, in my opinion, they’re investing in a CDN, Content Delivery Network, so they’re caching content and streaming.
So, the Netflix pull forward, which they’ve been very clear as a pull forward. Although that’s from a subscriber standpoint, data usage. So the more streaming there is, the more Fastly’s revenue is going to go up. In general, CDNs have a lot of pricing pressure. So it’s going to be interesting to see if Fastly can remain competitive long-term and/or if that usage when it disappears or when it goes back to normal levels, if Fastly is going to have the revenue or the earnings beats they’ve been having.
A lot of people say, they’re invested for the edge computing. the edge computing platform. I think that that’s interesting, because I – my understanding is, it’s a beta product. I don’t think they have a lot of customers there right now. If they do, please e-mail me and let me know where they are and what those use cases are.
But a real edge computing is going to come from – there’s a couple of different players out there. Equinix is one. I think Amazon AWS and Microsoft Azure is going to get in there as well, I think that they’re going to bring the origin, the server – the origin servers, they are going to bring them closer to the edge. And that’s how that’s going to go in my opinion. I don’t see as CDN being a big player there beyond what they already do, which is caching content.
So as long as investors know that they’re investing in Fastly for the streaming boom we just saw and may continue to see and that edge computing platform is still being tested. And it – it’s not necessarily where that market will go, then please go have at it. But if you’re thinking you’re investing in the edge computing platform, I think that you should be a little more cautious and look into that. That’s my opinion.
DS: Okay. So in other words, one way to think about it is that, they’ve got their market, they’ve got that CDN market, and it might – that might be a case of – the game hasn’t really changed the way that Zoom’s game is changing. And this other game is still unclear if they can actually play in that?
BK: Yes. So while they are – more streaming is going on, more caching content is going on, because everyone is staying at home. While that’s driving the revenue, I believe a lot of investors think that they’re getting it on edge computing platform play, and we will see hopefully, Fastly can pull it off. I’m always a big fan of small teams taking on big challenges. That’s great to see.
But I’m not – that’s not – I don’t think that’s happening right now. I think that they’re just capitalizing on the old – older technology of CDN, which is caching a lot of streaming content. And their revenue is already, so it’s pretty tiny, I think goes on $50 million a quarter. So any boost there is going to look exciting.
So anyways, good luck to everyone there and hopefully, it works out. Like I said, I’m always a big fan of small teams conquering big challenges, but edge computing is a very, very, very big challenge. And I think that’s – origin servers are going to be the ones that, that do that. And then there’s other companies that have been dealing with computing in various ways that are more likely to take that market.
DS: Okay, great. That’s great stuff. Okay. Any other – before we wrap up, any other last thoughts on sort of the cloud sector, the current market there, either technical or fundamental things that should – people should be watching for?
BK: I always like to ask Knox what is – what setups is he seeing right now? That’s always a good question if he is trading anything last week, this week?
KR: Yes. We’ve actually, once again, I know that sounds counterintuitive and scary, but we’ve seen quite a few setups. I mean, if you’re not – if you haven’t – if you’re not making money over the last couple of months, you’re just not really paying attention. I mean, I don’t know, maybe this is going to be a W kind of recovery, who knows what’s really going to happen.
But we made an initiation today on stock that is showing a tremendous setup, we did last week. So yes, they’re out there. They’re really happening. All these positions, keep in mind, have stops on there. So in case, they do fall, we have minor losses and we have a build up our cash position at the right time. But, yes, I mean, the opportunities are still there, really are.
DS: And these are sorts of opportunities that, again, are more on the trend following sort of consolidation potential breakout play, in that genre?
KR: Yes, predominantly, yes. I mean, I’ll offer one, which was Twilio (TWLO) I mean, Twilio in June whenever the market was down 7% in a day and continue to kind of trend down a little bit in a correction to observe stay flat, building a really solid base above a really high gap. It didn’t even come close to testing that gap. And instead, it’s just broken out just a little bit above where it is. And so it’s at all new highs and the projections that I’m seeing are even higher.
So yes, we took that shot. We went into Twilio. We had a very tight stop. And right now, it’s about 5%, which is not much and we’re looking for in tech, but it’s a good start. When if it fails, we break-even. And so that’s kind of what we’re trying to do is just take these setups, some work, some don’t. The ones that don’t are very small losses. The ones that do are fantastic, they make up 10 folds on the small losses to that as well.
DS: And that’s another good example. Twilio, obviously, huge move after its earnings last quarter and so very interesting. Okay. Okay, before we sign off, any disclosures in any of the positions that you guys – or any positions in the stocks that you guys named?
BK: Zoom Video and Datadog?
KR: Twilio and Fastly. We own Datadog, Zoom and Twilio.
DS: Perfect. Okay, great. And we mentioned, at some point, we must mention Google, which I still have a sort of position in myself.
BK: Microsoft, yes.
KR: Microsoft, yes.
DS: Okay, great. Yes. Yes. So…
BK: Nvidia. Nvidia for sure. Yes. Like, what are we talking about boy? Yes, I think that’s all we talked about.
DS: Okay, great. Okay. So I’ve been speaking with Beth Kindig and Knox Ridley. They are the authors of Tech Insider Research on the Seeking Alpha Marketplace. You can go to seekingalpha.com and search either of their names or Tech Insider Research or go to seekingalpha.com/marketplace, and you’ll look them up, they’re rising on the charts, so should be sure to find them.
Guys, thank you so much for taking the time out of your day to join me. I really enjoyed it, and it’s been a fascinating half year in the tech sector and hope, it continues to produce opportunities for you guys.
BK: Thank you, Daniel.
KR: Thanks, Daniel.
Disclosure:I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: Daniel Shvartsman is long GOOG. Beth Kindig and Knox Ridley are long ZM, TWLO, MSFT, and DDOG. Nothing on this video should be taken as investment advice.
The leader in the enterprise log management, Splunk (SPLK) is one of the few companies in the software space we have liked for some time due to its resilient and fast-growing business. Having landed over 90 of the Fortune 100 companies as its clients so far and reaching over $2 billion of annual revenue last year, the company will turn to the SaaS model to accelerate growth further. Upon the complete transition into SaaS, Splunk will benefit from a higher-velocity customer acquisition process and better pipeline visibility as opposed to its historical contract-based model. We will maintain our overweight rating on the stock.
(source: company’s Q1 earnings call)
Splunk is a deep-moat enterprise software company with ARR accelerating at +40%.Even without the transition to the cloud, Splunk is already one of the most well-performing and most innovative software companies with its ARR accelerating at +40%. Splunk’s core offering is equipped with a patented dynamic log search technology, which can query, ingest, and process heterogeneous data. This proves to be the company’s competitive advantage in the business, given the offering’s capacity to process massive amounts of real-time security, DevOps, and even business-related data. Given the big-data capability and variety of use cases, the company has established a niche in the high-valued enterprise segment. As enterprise customers like Intel, Shopify, Blackstone, Hyatt, Nasdaq, and more have come on board, the total number of orders > $1 million has increased by over 68% to 494 over the last two years.
(source: company’s Q1 earnings call slide)
However, with the company growing at a staggering 40% CAGR to potentially reach ~$5 billion of ARR and ~$1 billion of OCF (operating cash flow) in 2023, it will be harder and harder for the company to move the needle on growth.
Consequently, the shift to the cloud-based delivery model will enable a higher-velocity sales process with better visibility, eventually accelerating overall growth. With the cloud-based delivery model, potential customers will have more frictionless access to onboard themselves into the product, have a look around, and try the product before arriving at the decision-making process: to have a chat with the sales team or purchase/subscribe directly from within the platform.
As illustrated by the hypothetical yet typical user journey, the decision-making process will happen at a relatively shorter cycle, eventually accelerating top-line growth in the long-run. Furthermore, the fact that all these trials are happening within Splunk’s cloud-based platform will allow for a more effective individual user tracking based on various parameters such as features used or usage frequencies, which will result in a more contextual lead qualification process and eventually better pipeline visibility.
There are no major risk factors we see in Splunk at present, though in our experience, its strong value proposition in the enterprise segment has not been to relevant in the mid-size or SMB segments. Within those segments, we have seen various competitive offerings by players like Mixpanel, SumoLogic, Nagios, or LogDNA that target more specialized log management use cases at much more affordable pricing points. As such, Splunk’s recent acquisitions of VictorOps and SignalFx, which possess a more diverse customer base, appear as a lower-risk move to penetrate the lower end of the market while expanding into fast-growing DevOps Incident Management and APM segments.
Given the transition period into SaaS that affects its revenue recognition, profitability, and visibility into the full year, it would be quite challenging to evaluate Splunk from a P/S perspective. The ARR acceleration and the overall progress of the cloud transition, however, have been very impressive. There are not a lot of SaaS companies that can confidently guide a mid-40% growth in ARR, let alone under the current circumstances. Using its expected FY 2021 ARR of ~$2.4 billion as a proxy to its revenue, the Splunk’s P/ARR stands at ~12x, considering its ~$30 billion market cap. However, considering Splunk’s market leadership in log management and exceptional growth, we found 12x relatively moderate considering that other market leaders like ServiceNow (NOW) and Alteryx (AYX) have been trading between 18x and 20x P/S.
Disclosure:I am/we are long SPLK.I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Splunk Inc. shares fell more than 5% in after-hours trading Thursday after the software company reported that sales grew less than executives expected and issued a second consecutive disappointing forecast.
Splunk SPLK, +0.10%
reported a loss of $305.6 million, or $1.94 a share, on revenue of $434.1 million, up 2% from $424.9 million a year ago. After adjusting for stock-based compensation and other effects, the company reported a loss of 54 cents a share, down from adjusted earnings of 2 cents a share a year ago. Analysts surveyed by FactSet had expected an adjusted loss of 57 cents a share on sales of $443 million.
Splunk disappointed investors in March with its forecast for the first quarter and full year, and failed to live up to its quarterly forecast with Thursday’s results while rescinding its annual guidance. Splunk continued that pattern Thursday, projecting revenue of $520 million for the second quarter, while analysts on average expected $550 million, according to FactSet.
Splunk sells data-crunching software used for security and other purposes, and has been focusing on a cloud transition that can lead to lower revenue totals but better predictability of future results. Cloud revenue grew 81% year-over-year to $112 million, Splunk reported.
“Our shift to a SaaS model is accelerating with cloud driving nearly half of total software bookings in the quarter with [annual recurring revenue] growing 52% year over year,” Splunk Chief Financial Officer Jason Child said in Thursday’s news release.
Kingsoft Cloud Holdings (KC) has filed to raise $425 million from the sale of ADSs representing underlying ordinary shares, per an amended F-1/A registration statement.
The company provides enterprises in Asia with a suite of cloud-based service offerings.
KC has produced revenue growth but no gross profit and is generating large operating losses and operational cash burn. I’ll be watching this IPO but not participating.
Company & Technology
Beijing, China-based Kingsoft was founded to provide enterprises with complementary cloud services as an alternative to their on-premise information technology systems. Kingsoft is a spinoff from Hong Kong-listed Kingsoft Corporation (HK:3888).
Management is headed by Chief Executive Officer Mr. Yulin Wang, who has been with the firm since 2012 and was previously EVP at Phoenix New Media Limited and COO at CNEC.
Below is a brief overview video of the Kingsoft Cloud antivirus system:
The company’s primary offerings include:
Storage & CDN
Kingsoft has received at least $1.1 billion from investors including parent firm Kingsoft, Xiaomi and FutureX.
Kingsoft is the largest independent cloud service provider in China and focuses its efforts by industry vertical: gaming, video and financial services.
The firm seeks marquee customers in each vertical to be able to demonstrate its capabilities and market more efficiently to other prospects in the vertical.
Selling and marketing expenses as a percentage of total revenue have been dropping as revenues have increased, as the figures below indicate:
Selling & Marketing
Expenses vs. Revenue
Source: Company registration statement
The Selling and Marketing efficiency rate, defined as how many dollars of additional new revenue are generated by each dollar of Selling and marketing spend, was a very strong 5.3x in the most recent reporting period.
According to a 2020 market research report by Allied Market Research, the global market for cloud services of all types reached a value of $265 billion in 2019 and is expected to reach $928 billion by 2027.
This represents a forecast 16.4% from 2020 to 2027.
The main drivers for this expected growth are a large and continued transition by enterprises worldwide from on-premises systems to cloud environments and ongoing innovation in cloud system offerings by service providers.
A Frost & Sullivan report commissioned by Kingsoft shows the expected growth of various sectors in China as shown in the chart below:
Kingsoft’s recent financial results can be summarized as follows:
Sharply growing topline revenue
Little gross profit and low gross margin
Large and growing operating losses
High and increasing cash used in operations
Below are relevant financial metrics derived from the firm’s registration statement:
% Variance vs. Prior
Gross Profit (Loss)
Gross Profit (Loss)
% Variance vs. Prior
Operating Profit (Loss)
Operating Profit (Loss)
Net Income (Loss)
Net Income (Loss)
Cash Flow From Operations
Cash Flow From Operations
Source: Company registration statement
As of December 31, 2019, Kingsoft had $290.6 million in cash and $358.2 million in total liabilities.
Free cash flow during the twelve months ended December 31, 2019, was a negative ($206.6 million).
KC intends to sell 25 million ADSs representing ordinary shares at a midpoint price of $17.00 per ADS for gross proceeds of approximately $425 million, not including the sale of customary underwriter options.
Existing and external shareholders have indicated an interest to purchase shares of up to $125 million at the IPO price, an unusual signal of support by investors.
Assuming a successful IPO at the midpoint of the proposed price range, the company’s enterprise value at IPO would approximate $4.2 billion.
Excluding effects of underwriter options and private placement shares or restricted stock, if any, the float to outstanding shares ratio will be approximately 12.5%.
Per the firm’s most recent regulatory filing, the firm plans to use the net proceeds as follows:
approximately 50% to further invest in upgrading and expanding our infrastructure;
approximately 25% to further invest in technology and product development, especially in artificial intelligence, big data, cloud technologies and internet of things;
approximately 15% to fund the expansion of our ecosystem and international presence;
and approximately 10% to supplement our working capital for general corporate purposes.
Management’s presentation of the company roadshow is not available.
Listed underwriters of the IPO are J.P. Morgan, UBS Investment Bank, Credit Suisse and CICC.
Kingsoft is seeking significant U.S. public capital investment as it spins out of parent firm Kingsoft.
The firm’s financials show strong revenue growth, breakeven gross profit, large & increasing operating losses and growing use of cash in operations.
Sales and marketing expenses as a percentage of total revenue has dropped and the sales and marketing efficiency rate is a strong 5.3x.
The market opportunity for helping enterprises transition from on-premises systems to the cloud is an extremely large and multi-decade market, so the firm enjoys favorable tailwinds in terms of market dynamics.
On the legal side, like many Chinese firms seeking to tap U.S. markets, the firm operates within a VIE structure or Variable Interest Entity.U.S. investors would only have an interest in an offshore firm with contractual rights to the firm’s operational results but would not own the underlying assets.
This is a legal gray area that brings the risk of management changing the terms of the contractual agreement or the Chinese government altering the legality of such arrangements. Prospective investors in the IPO would need to factor in this important structural uncertainty.
Comparing KC’s proposed Enterprise Value /Revenue multiple of 7.48 to the NYU Stern School’s aggregate basket of publicly held Software (System & Application) category, which had an EV/Sales multiple of 8.77 in January, 2020, the IPO appears reasonably valued from that perspective.
However, the firm has barely been able to generate gross profit, let alone operating or net profit.
It is common to see high growth enterprise software firms generate significant gross profit while producing operating losses.
KC is producing no gross profit plus generating large operating and net losses.
While I’m bullish about the industry the firm is in, I can’t get too excited about its financial results, so I’ll pass on the IPO.
Expected IPO Pricing Date: May 7, 2020.
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Disclosure:I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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