Friday File: Shaving Momentum (but not too close)
by Travis Johnson, Stock Gumshoe | October 16, 2020 5:07 pm
Checking in on Fastly and The Trade Desk after a wild week, plus thoughts on Intuitive Surgical, Medical Properties Trust and more
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Source URL: https://www.stockgumshoe.com/2020/10/friday-file-shaving-momentum-but-not-too-close/
Thanks for all the updates Travis.
What is your opinion on Nio and Li Autos? Do you consider NIO to still be a buying opportunity?
Have not looked at either in any detail.
Could you please look NIO , AAPS , CRNC,
Great work as always. As a lifetime software infrastructure analyst I always have a hard time with the valuations many of these companies trade at. I have managed to buy and hold on to a few issues like Twilio (TWLO) and bought names like Cloudflare (NET) as swing trades but I should have used trailing stops or maybe long-term options to maintain exposure while limiting risk.
Here’s the thing (some would say trauma) that sits in the back of my head – It’s not that someone is going to come straight at FSLY and put them out of business. You can substitute any internet infrastructure name you like here. But what will happen is these companies will all add to their capabilities and begin to encroach on multiple markets.
It’s a little hard for me to express this clearly after 1am on a Saturday night but the net effect is that there is only so much money out there to spend (even if it’s growing each year) and these companies will add to their offerings both organically and through M&A as in Twilio buying SendGrid and recently Segment. The net effect is that there is a consolidation and not every vendor gets to compete for the opportunity they had hoped to.
If that happens to a company trading at 4-8x sales it’s one thing. In this world of 20-50x sales, it’s quite another.
In thinking about ROIC you need a time horizon and investors have been willing to give these SaaS companies a very long one. I’m not sure that’s going to prove to be correct in many cases. And that could take sector valuations down.
Well put, thanks
Thanks for your insight, as always. One thing which should not be discounted re: TTD. As noted, agency holding company revenues have been substantially impacted, which has unfortunately led to furloughs/layoffs impacting already thin investment (buying) groups. Add the continuing squeeze on fees from clients to this and it’s apparent the agencies need to find operating efficiencies to maximize margins. What’s one way they’ll approach this…increase usage of “trade desks” to both target audiences better and automate the buying process, reducing reliance on head count and all associates overhead. The amount of $’s funneled thru TTD, and their competitors, is in the early stages.
Good luck all
Hi Travis, thanks for your update! All consistently good and inspiring! Have you got a chance to take a look at BIGC? I’ve seen folks on Twitter raving about it as the affordable SHOP nowadays! Thanks!
It’s smaller, sure, but I don’t see how it’s more affordable. The only reason to bet on BIGC over SHOP is that they’re trading at a slightly less crazy valuation (50X sales vs. 60X sales), and you’d have to be betting that they will grow faster than Shopify.
They might, and starting from a much smaller base means they should theoretically grow faster than Shopify, but right now the estimates imply that SHOP will continue to grow earnings much more rapidly than BIGC. If you think those estimates are wrong, and that BIGC is being underestimated, then perhaps it’s worth a speculation… but I’ll stick with SHOP given my confidence in their management and the blistering growth rate (I wouldn’t buy either here, to be clear, and I sold half of my SHOP this year because of that wild valuation, but I still like Shopify a lot… I just can’t contemplate buying a $100+ billion company trading at 50X sales without throwing up in my mouth a little bit).
Thanks Travis! Good reasoning!
Travis,
One thing I didnt see mentioned that I believe hurts Fastly in comparison to the other CDN providers is their lack of security products. A piece that these edge providers have to their advantage in their unique position on the edge of networks (and closer to the major internet gateways) is that they can provide cheaper and better network firewall solutions (think $ZS). Also in the future IAM solutions like OKTA (if they decide to go that route). This is why $NET holds a premium and is my most preferred cloud stock (below 50) as it is looking to become much more than a CDN provider which has very low margins.
Thanks for the feedback… yes, Fastly talks up security and the fact that the edge improves security (since you’re not providing access to centralized data), but that has not been as much of a focus for them as it has been for Cloudflare (or the pure “cybersecurity” companies). That’s part of the reason for the Signal Sciences acquisition, so we’ll see how that goes.