We’ve had a lot of questions pop up over the past couple days about the Motley Fool’s “FAZER” stocks, which will apparently be the focus of a “special presentation” they’re making tomorrow morning.
The gist of the email, which comes from Eric Bleeker, is pure FOMO — it triggers all the feelings of angst in those who missed out on buying Netflix when the Motley Fool was recommending it 10-15 years ago by hinting at the next crop of stocks that could create similar 20,000% returns. Here’s how they put it:
“If you’re hurting from having missed out on the incredible stock run-ups of even ONE of Facebook, Amazon, Apple, Netflix, or Google, and are ready to make up for it with the “FAZER” stocks… then this event is for you.”
That’s certainly a feeling that I get from time to time — we all do. You can’t pick every great stock, and even when you do pick great ones you sometimes sell at just the worst time. (Yes, I’ve held Google and Facebook since the beginning, but missed Netflix and Amazon early on and, worse, I’m still kicking myself for selling Tencent in 2007.)
We all know that this kind of backward-looking jealousy is not terribly helpful, but we can’t help it… and sometimes the only real salve is to pick the next winner. So that’s the urge being picked at by the Motley Fool copywriters as they hint at this net group of (possible) future leaders… shall we try to name them before the presentation?
We don’t actually know what service the Fool will be selling at 9am tomorrow morning, but I’m quite sure they’ll be selling something and holding back on some of their ideas until you pay. I’m listing this under Rule Breakers until we get some clarification about what they’re pitching, but most likely it will be one of their higher-end nice services like Discovery or Extreme Opportunities. [Update: The presentation turned out to be pitching Motley Fool IPO Trailblazers, at $1,300/yr]
And the odds are pretty good that these stocks will not really be “new” to us — the Fool tends to stick with ideas for a considerable period of time, and to really latch on to their favorites, so I imagine we’ll have some repeats here who have been teased before… which is helpful, because the clues are a little limited.
Here’s what we get in the email ad:
“Which is why when I heard the other day that some of my fellow analysts at the Fool had just identified five technology companies they consider “The Next FAANG stocks,” I dropped everything I was working on to find out more.
“Turns out, they’re calling them the ‘FAZER’ stocks.”
And then we’ll go through them one at a time…
“F — the just-$2B market cap edge computing pioneer that enables internet data to travel between different countries — and even continents — at warp speed.”
This is almost certainly Fastly (FSLY), which is leading the surge for independent edge computing (independent of things like Google or Amazon cloud services, at least).
I haven’t seen Fastly pitched by the Fool before, though it is the kind of small growth stock that they tend to like… and it’s one that I started building a position in earlier this year in the Real Money Portfolio (it’s still a very small position, since I think it’s a very high-risk stock).
My rationale was that Fastly could have a “first mover” advantage in edge computing, as the one real “pure play” company that’s focused on this trend — edge computing is not really about faster transmission of internet data, though, that part of the pitch is a bit odd, it’s really about making the user experience better by moving the processing work closer to that user. What Fastly does is take the next step beyond the content delivery network (CDN) that was most popularly implemented by Akamai over a decade ago — the CDN takes content to the edge of the internet so you can access big files more quickly, like storing that hot Netflix movie in the local telecom facility in your town instead of sending that data from a central data center each time someone in your area wants to view it. That saves distance, which saves time.
Fastly goes beyond that — instead of moving a file to the edge of the internet, closer to end users, it moves the logic and the processing to the edge. That means the “thinking” that you’re demanding from a website is done closer to you, which means the “answers” will be fed back to you faster… and it also means the data you enter is more localized and silo’d, and therefore there’s a good chance that it will improve security.
Here’s a little bit of what I wrote to the Irregulars in their Friday File a couple weeks ago, following Fastly’s earnings report (you can see their shareholder letter from February 20 here):
“What really appeals to me about Fastly is the increased adoption of their network by large customers — they have been continuously adding enterprise-size customers (those that spend at least $100,000 a year), and they’ve also been getting more spend from those customers (on average now $607,000, up by more than 5% in just the last quarter). The promise is that Fastly has a huge potential growth runway, with only about 1,700 customers now and a vast potential user base as the interest grows in edge computing, moving not just content but logic and computing power to the edge of the network to enhance speed and security… and they already work with a lot of the more interesting companies who are pushing the envelope now, including Taboola and Shopify.
“There is some deceleration in sales as part of their forecast, and that’s not unexpected but is, of course, not our first choice as investors — they’re guiding to about $260 million in revenue, which would “only” be 30% revenue growth. You can see their investor letter from the outgoing CEO here, I’m still pretty impressed with them, this company reminds me a little bit of Akamai (AKAM) 15 years ago, when the idea of a content delivery network seemed a little too expensive to be worthwhile… now it might be that edge computing is that next level of CDN, moving processing and logic to nearby data centers instead of just putting video and other large-file “content” closer to customers, and the standard-bearer could, dare we hope, be a small fella like FSLY.
“It’s early yet and FSLY remains quite high risk — the nice thing is that it is not nearly as flashy or well-established as some of the cloud software names, so you get 30%+ revenue growth at 8X sales instead of the 40% growth and 25X sales that is pretty common in the cloud space. That’s similar to the valuation that appealed to me with DocuSign (DOCU) about a year and a half ago, and that stock, which like Fastly was an IPO that hadn’t really found its footing, has doubled since then.”
Everything is relative, and if all the cloud stocks collapse because we’re not doing the “20X sales is fine for high-ceiling growth stocks” thing anymore, well, so be it — but on a relative basis I think FSLY is priced reasonably, compared to the crop of rapid growth stocks that have led the market until the coronavirus drop last week.
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“A — at only $4B in market cap, their revolutionary software platform is singlehandedly replacing the concept of the in-house ‘tech team.'”
Well, the stock has lost 25% of its value in the past two weeks so it’s not quite at $4 billion any longer… but this must be Appian (APPN), which provides a “low-code software development platform” that essentially makes customized applications much easier for non-programmers to build.
This isn’t one that fell just because of the COVID-19 panic, Appian reported earnings on February 20 and posted both disappointing revenue numbers, a little below analyst estimates, and a forecast for 2020 that was meaningfully below the average analyst forecast for both revenue and earnings (well, losses — they’re not yet posting any earnings).
Appian has been a Fool favorite in the past, getting the full teaser treatment in late 2017 when Tom Gardner hinted that he was buying it as an appealing recent IPO. I thought at the time, and still think, that it’s a cool idea with nice strength in customer retention, but I still don’t understand what they do that well so I’ve never owned the stock. The risk here is clearly a “failure to grow” risk — the company can’t become profitable unless they get quite a bit bigger to scale the business, and they just posted their worst year-over-year growth quarter (with revenue growth of only 7% last quarter, a shockingly low number for them even though it’s just one quarter).
Current forecasts, based on APPN’s guidance, have revenue growth for 2020 at about 14% (and 13% in 2021)… which would be very good for some companies, but is not good enough, in my book, if you’re not profitable and are trading at more than 10X sales. If you want to buy this one you’ll probably have to become knowledgeable enough about it to be convinced that they’ll become a much larger company in the long run — it may well work out in the end, but they look relatively unappealing to me at this valuation. Better than they did two weeks ago at $63, I suppose, but still too rich for me at $45.
“Z — the radical video technology company changing the way society will communicate in the future.”
That’s got to be Zoom Video Communications (ZM), the purveyor of video conferencing software and services. This one, despite it’s crazy valuation (50X sales), has been one of the beneficiaries of the COVID-19 panic — after all, if people can’t travel for business because of a pandemic, maybe they’ll do a lot more video meetings.
The good thing about Zoom is that they’re profitable and growing very fast, with analysts predicting that they’ll earn 27 cents per share this year on revenues that increase by almost 100%. The bad thing is that I just don’t get it, and that’s probably a shortcoming for me personally (partly because I never user videoconferencing tools, so maybe I just don’t understand how much better Zoom might be than their many competitors). Here’s what I wrote last time Eric Bleeker was teasing this one for the Fool, back in June (the stock was very close to the current price back then, in case you’re curious — in the interim, to oversimplify, it dropped 40% on valuation fears, and then rose 50-60% on coronavirus enthusiasm):
“This is a company I don’t really understand, to be frank — they offer something that has been available for a long time, without an obviously better experience (as a non-user, at least) and with huge amounts of competition, and yet they’re apparently getting a $25 billion valuation (50% above the IPO price of two months ago, which itself seemed nutty to me). That’s about 50X sales, if you annualize this quarter’s $122 million in revenue (“annualize” is just fancy investor-speak for “multiply by four”), so there’s probably something more appealing than I understand about their product.”
“E — the ‘next Google’ that’s redefining the concept of search functionality as we know it, but at 175 times smaller than the current size of Google.”
That one must be Elastic (ESTC), which I’ve looked at a little bit in the past few months (they were teased by a different newsletter, RiskHedge, back in November)… this is how Elastic describes itself:
“Elastic is a search company that powers enterprise search, observability, and security solutions built on one technology stack that can be deployed anywhere. From finding documents to monitoring infrastructure to hunting for threats, Elastic makes data usable in real time and at scale. Founded in 2012, Elastic is a distributed company with Elasticians around the globe.”
Elasticsearch is based on open source software, but like many companies they essentially sell a gussied up version of the software and add integration and customization services on top of that — and like essentially all software companies, they’re migrating to the subscription “Software as a Service” (SaaS) model which provides good stability of revenues and a sticky customer relationship. They say in their latest quarterly update that subscriptions are now 92% of revenue, and that they’re still bringing in new customers at a pretty rapid clip (8% customer growth in a single quarter is very impressive, and the growth in “big” customers, over $100,000 in annual expected revenue, was also 8% — which is even more important).
I’m inclined to like Elastic, and analysts have fallen back in like with them (not quite “love”) after a rough December quarter — when I covered this stock for that RiskHedge tease back in November the analysts had a $104 price target, and then December came and scared everyone away (the stock dropped roughly 25% on last quarter’s earnings report) and the target is now $96, but this quarter was a solid one with “beat and raise” numbers that included stronger billings but also, with some worry, the loss of an executive (the Chief Revenue Officer).
My problem is that I have a hard time envisioning the future profitability given how much Elastic is having to consistently spend on both marketing and R&D to get this growth, but the growth is very strong — revenue grew 60% year over year in the last quarter, and that’s worth at least paying attention to even if operating expenses grew still faster at 64% (operating expenses have grown faster than revenue very consistently for all of ESTC’s life as a public company, though that differential has improved a little bit over the past year).
We’re actually close to testing the Elasticsearch product on Stock Gumshoe, so maybe if that’s a big success and seems worth the cost that will push me over the edge to considering an investment in ESTC… but I’m not there yet.
And one more…
“R — the silent king of streaming media that has set itself up perfectly to dominate tomorrow’s entertainment industry.”
That pretty well has to be Roku (ROKU), which I’ve never owned even though it caught my eye way back in September when it had that dramatic drop from $175 to $100 (that was when Comcast announced that they would be giving away free streaming boxes).
The stock has since recovered and then lost all of that recovery again, so it’s getting a little more relatively appealing once more — it’s still not profitable, but it’s pretty close and probably could reach profitability within a year or two if they focus a little more on costs. The impressive thing about Roku recently is that they have pretty consistently posted accelerating revenue growth — meaning that they’re growing faster now than they did last year and the year before. That’s very rare, usually revenue growth slows down as you grow, and it’s therefore a sign of someone worth watching.
The big question for Roku is whether or not it will succeed in establishing a defensible “platform” for streaming — will they be the cable company of 2025, tying together all those various streaming offerings into one interface to make things easier for customers? If so, then they will be very successful both because they control some of the advertising time on some streaming platforms they serve, including some video streams that they supply themselves, and because they earn commissions for directing customers to those streaming platforms (like Netflix, Disney+, ESPN+, Hulu, etc.) and royalties for providing their “streaming operating system” to makers of Smart TVs (and if you’ve bought a Roku TV, you’ll probably be inclined to let yourself be locked in to using the integrated streaming services, not someone else’s box, which will further boost the stickiness for Roku). That’s a company you want to own.
If, however, those big content providers balk at letting Roku “own” the streaming space and cut back on commissions, or simply make it hard for Roku to provide a great service for its customers, then they are at significant risk. And while Roku really started as a hardware company, selling those little Roku boxes, there are dozens of companies that provide cheap boxes for accessing streaming video services on your TV, including huge and deep-pocketed competitors like Amazon and Google who are happy to give their products away almost for free… so if you think of Roku as a hardware or gadget company then you’re probably not going to be interested at all.
I actually like Roku more now that I look at them afresh, and today I decided to finally pull the trigger and buy a small position following that second look (actually probably my fifth or sixth look). Roku is not the only interesting play on the continued acceleration of streaming video to the TV, for sure (I’ve held The Trade Desk (TTD) for several years, for example, and a lot of their growth is coming from serving video ads into streaming services), but they are really leading the charge and delighting customers as a “cable replacement” during a time when cord cutting is setting new records and the big streaming services are looking more and more appealing as an alternative to traditional TV.
I am really impressed with the accelerating revenue growth for a company that already has over a billion dollars in annual revenue, which also gives them the flexibility to keep investing to protect their market share against very strong competitors, and that’s what pushed me over the edge to putting on a small position… they’re not profitable, and they’re intentionally reinvesting cash flow into trying to accelerate that growth, so they’re still tough to swallow at a bit over 10X sales, but they seem to me to be pretty well positioned for a trend that’s still growing very fast. The big revenue surprise last quarter was caused primarily by the initial success of Disney+, but I expect that will not be the last “hot” streaming launch or the last revenue surge we’ll see from Roku. You can check out their shareholder letter from last quarter here, it came out on February 13 so it doesn’t even mention coronavirus or China… which means it’s at least a nice respite, even if you aren’t interested in the stock.
So that’s what I see among the FAZER stocks, mostly strong growers who have some potential… and I end up with owning two of these stocks, considering a third, and not really understanding the valuation or product strength of the other two. Your mileage may vary, of course, and I hope your opinion on these guys differs from mine — if so, please do jump in with a comment below and let us know what you’re thinking. Perhaps we’ll learn more about the Fool’s position on any of these stocks when they have their presentation tomorrow, but I’d expect it to be a fairly underwhelming sales pitch about five stocks that are already pretty well covered in the investing media, so you can probably make your own call. Enjoy!
Disclosure: I own shares of and/or call options on Amazon, Facebook, Apple, Amazon, Google parent Alphabet, Disney, DocuSign, Roku, The Trade Desk, and Fastly among the stocks mentioned above. I will not trade in any stock covered for at least three days, per Stock Gumshoe’s trading rules