I think I saw this ad a few months ago and didn’t write about it for one reason or another, but it just started a heavy rotation again — so let’s have a gander.
David Gardner is a growth stock dynamo — he and his brother Tom founded the Motley Fool as an AOL chat room decades ago, and he has rightly been credited with some tremendous long-term returns over the years because of his faith in massive growth stories like AOL, Amazon, Netflix, Marvel, Priceline and others. Often stocks that I worried were expensive before they went up another 1,000%.
Of course, that comes with some downside, too — he does have a pretty good long-term record at Rule Breakers (his growth stock letter) and at Stock Advisor (which he and Tom put out together), beating the market over the long term if not over recent years, but his newsletters also put out at least a couple stock ideas a month and have done so for more than ten years… and the average return beat the S&P for those few folks who bought every stock and held through ups and downs for five years or more, but there have certainly been plenty of stinkers and mediocre ideas along the way. That’s the seemingly unavoidable downside of buying high-growth, highly-valued stocks: Many of the stories don’t play out, even if you’re a pretty good stock picker.
So with that out of the way, what’s David Gardner’s pick this time around?
It has to do with iBeacons. This is Apple’s new technology for insider location mapping — as in, knowing where you are inside a store or a stadium, which should enable advertisers (or the store you’re in) to send targeted information to your phone. So if you’re browsing through the racks of pants at Brooks Brothers and you want your phone to know you’re there and ping you with a 10% off coupon for suits, well, you may soon be in luck.
Here’s how the Fool ad pitches it:
“The shocking announcement that has Silicon Valley’s smartest investors asking…
‘Is Ecommerce Too Big to Fail?’
“August 21, 2014 – One Silicon Valley Company doesn’t think so.
“And it’s now aiming a brilliant new consumer technology straight at a segment of the market that Goldman Sachs predicts will more than triple in size by 2018.
“Incredibly, no one even saw it coming.
“Wired magazine declares it ‘exciting’ and says it has ‘all sorts of compelling use cases.’
“Businessweek called it this company’s ‘secret weapon.'”
The “announcement” is all about how there was an almost-unnoticed slide in a presentation in San Francisco that was overlooked by almost everyone … except, of course, for your Motley Fool cognoscenti.
“For three days each June, a beautiful three-story convention center in downtown San Francisco becomes the center of the tech universe.
“In an industry known for big announcements… this is the place for big announcements….
“The keynote speaker – head of software at one of Silicon Valley’s most inventive companies – had just unveiled the revolutionary redesign of his company’s flagship product.
“But this new, cutting-edge system wasn’t the most important announcement made that day.
“Not by a long shot.
“A new, disruptive consumer technology was.
“Well… that is…
“If you call the presence of a single, eight-letter word… hidden on a text-heavy slide… much of an ‘announcement’
“That was it.
“A lone, three-syllable word. Buried among 85 other words.
“On a slide that appeared for just 33 seconds. In the last few minutes of the two-hour address.
“It’s no wonder the whole world missed it!
“Actually… let me stop there.
“I guess I should say ‘It’s no wonder most of the world missed it.’
“Because a small handful of astute investors did notice that word.”
That, of course, is the word “iBeacon” … and it was introduced as part of iOS7 at the Apple developers conference (WWDC) in June of 2013. It’s still very much a “being tested” idea, basically the ability to have “beacons” inside a space that can connect with and share information with your iPhone using low-energy bluetooth. (There’s a pretty good, basic description of it from Cnet here if you’re curious).
And yes, it was not introduced to great fanfare — it was just one of several new technologies enabled by the new operating system. There was quite a bit of chatter about it among Apple bloggers and such in the weeks following, but it’s not generating headline news the way that new iPhone did, or the way the next iPhone will in a few weeks.
Will it be revolutionary and be the big savior of “brick and mortar” retailers as it enables a better mobile connection with their browsers and customers… and, perhaps, gets a step closer to a workable “phone commerce” system? It’s awfully early to guess, but that’s part of the hope and promise (the Fool has touted NXP Semiconductor several times in the past, partly because of the promise of “near field communication” chips in phones as a replacement for credit cards — this is different, but partially aiming at the same thing: finding a secure way to interact with customers through their phones and accept payment from phones through some sort of “digital wallet”).
But what’s the deal? The Fool is not recommending Apple (AAPL) based on this iBeacon technology, nor are they recommending the various companies who could make the (presumably inexpensive and commoditized) iBeacon devices themselves. So who does David Gardner think is worth an investment based on this story?
“In the time since this group of investors noticed that hidden word, the under-the-radar investment I’ll tell you about over the next few minutes has handed them a hefty 40% return on their money.
“Now… don’t get me wrong… a quick 40% on your money is pretty good. I’d take it any day of the week….
“A quick 40% is just the beginning for this investment.”
So what is this under-the-radar investment that will make us great gains thanks to the “iBeacon?” More from the Fool:
“We can sneak in with an investment in the little-known “background platform” that makes that technology work.
“In fact, the world-class investor I’ve been telling you about today believes this company is poised for a huge, long-term run.
“And so far he’s been spot on with his predictions about this company…
“It’s up 687% since he first recommended it – over FOUR TIMES better than the S&P 500!
“I’ll explain how you can also sneak in through this same backdoor in a second (which this investor believes is still poised to go up at least another 200%).”
Then we get some more reiteration about why this is such a hot area:
“Ecommerce – at least in the form we’re familiar with – is finished as the “big thing” in retail….
“The experience a person has while mobile shopping is all that matters right now.
“… the massive growth of mobile commerce, and the resulting stagnation of ecommerce – may actually be driven by an increase in people using their mobile devices while shopping offline.
“In fact, earlier this year a Gallup poll found that the vast majority of Americans – 81% – are actually shopping at brick-and-mortar stores in the same amounts or even more often as a result of mobile device use.”
Which gets us, eventually, after some more scenarios of your improved shopping experiences, and some more heady thoughts of future gains, to the point that they’re trying to make: That the solution will not be in the actual iBeacon devices but in the software that makes them connect to your phone and do something compelling.
“You see, iBeacons are nothing more than a location signal. They simply determine where your device is inside the store.
“When it comes to the integrated shopping experience… all the “events” that make a seamless digital-to-physical ‘iStore’ interaction come to life…
“iBeacon technology doesn’t make any of those events happen.
“The connected app on your phone does.
“Without the app that makes everything work – in your phone, and in the cloud – none of this is possible.
“Which makes this the modern equivalent of Microsoft Windows in the 1980s and 90s“
Not a mild promise. But finally, then, we get to some specifics about the stock:
“This is where we find our backdoor… by investing in the backend that powers the entire integrated retail experience: the platform that’s used to develop and then run the apps that make this a reality.”
How does this teased company make money? More from the ad:
“Will this company be the next Microsoft? Impossible to say.
“After all, few companies in history have delivered the returns that Microsoft did through the 1980s and 90s (more than 60,000%!).
“But it is following a very similar strategy… albeit with one important, and profitable, difference: monthly recurring fees.
“You see, like Microsoft did with Windows-based software, this company openly lets its customers develop apps on its platform (and makes it as easy as possible for them to do so).
“Then, those retailers pay a monthly fee to keep using the platform to do all the data analysis and integration that bring the iStore experience to life.
“So as long as the retailer wants to continue running iBeacons in-store, it keeps paying that monthly fee for the platform. That’s a guaranteed, recurring revenue stream.
“Multiply that by the estimated 20,000 iBeacon systems that will be in place in the next year, extend it years into the future, and you can see a major reason why David believes this company’s value could go through the roof.”
And finally, in case that’s not enough in the way of clues, we get this last wee tidbit:
“… in just the first quarter this platform was publicly available, the company outperformed Wall Street’s expectations by $21 million and then increased its guidance for the year by $100 million.
“Not bad considering the product wasn’t released until halfway through the quarter!
“Gartner also reports that this market will grow by more than 500% this year, and that our Rule Breaker has the largest share of the market.”
So who is behind what they’re calling “the one customer platform to connect everything?”
We toss those clues into the Thinkolator … and, frankly, I think you might be a bit disappointed in the result — this is Salesforce.com (CRM).
Which David Gardner has been teasing (and presumably recommending) for years — it was one of his “Cloud Computing” picks back in 2010, which we covered here, and the ad implies that he first recommended it in early 2009 when it was in the neighborhood of $8-10 (split adjusted). So it has certainly done well so far, the stock is now in the mid-$50s.
It’s also a lightning rod, with Porter Stansberry calling CEO the “next corporate psychopath” last Summer and seemingly recommending a short sale of CRM (it’s up about 20% since then), and with pretty much every value investor using CRM as an example of the kind of ridiculous, momentum driven growth stories that go up for no fundamental reason.
CRM is the poster child for cloud computing and momentum growth, and that has continued to work out pretty well for them despite the fact that they haven’t had a profit since 2011 and they’ve never traded for much less than 100X earnings (it’s 70-90X next year’s forecasted earnings right now, depending on whose estimates you use). It just doesn’t seem possible that a company could get to this size (market cap $34 billion) without generating any profit for shareholders… but sometimes that works out as long as the company continues to generate dramatic revenue growth. Companies like Amazon (AMZN) and CRM can apparently keep investors happy with that revenue growth and market share growth that allows for imaginings of future profits, in these cases enough investors believe in the continuing business growth that they are willing to wait for earnings and ignore the continuing pretty dramatic dilution of stock awards and options (CRM issues another 20-30 million shares a year, presumably mostly to employees).
The top-line growth is really there, and it has been phenomenal for years, particularly for such a large company — gross profit (revenue minus direct costs of that revenue) has almost tripled over four years — but they are paying for it. Operating expenses have risen faster (more than tripling), and the share count has gone up by 20%. The company’s most recent forecast (in their quarterly release) is for a non-GAAP profit of about 50 cents a share, so that’s where the current forward PE of ~100 comes in (by GAAP, which includes the $600 million or so of stock-based compensation — almost as much as they spend on R&D — they will have another money-losing year).
And yes, they do apparently lead in market share for integrating iBeacons in their platform — but you have to like CRM’s core business quite a lot to buy the stock, I can’t see that the iBeacon business “backbone” for mobile commerce apps is going to drive their revenue dramatically higher by itself… it will, presumably, be important for a lot of their customers who use mobile apps and want to integrate their customer data into those apps, eventually including “iBeacon” proximity information, but that’s one part of a puzzle.
As of this past quarter, Salesforce.com revenue is about half from their “Sales Cloud” services at $577 million for those three months, a quarter from “Service Cloud” at $295 million, somewhat smaller is their “Marketing Cloud/ExactTarget” product at $111 million, and then the app platform (Salesforce1 Platform) is wrapped in with “other” to combine for about a tenth of Salesforce.com revenues ($165 million). Those are all great revenue streams, and they are delightfully “locked in” and recurring because customers pay per user, per month and these huge, interconnected systems are not easily learned or adopted (which means it’s not easy to move to a competitor). I love the business, but I just can’t get my head around the valuation… which is the same thing I said about CRM four years ago, so you might want to take my curmudgeonliness with a grain of salt.
And if they start putting iBeacons in the dressing rooms to make my iPhone ping and offer me a larger size when my iBelt notices that i’m about to pop a seam, I’ll just stay home.
But it’s not my money, it’s yours — so what do you think? Will David Gardner be correct in predicting “at least 200% more” in gains for CRM after he’s enjoyed being right for 600% or so? Or is this heady valuation going to catch up with Marc Benioff’s company sometime soon? Let us know which way you lean — just use the friendly little comment box below.
Disclosure: I do own Apple, which I mentioned above. Don’t own any of the other stocks mentioned, and I won’t trade any of them for at least three days