If I had a nickel for every time some newsletter tout pitched “Silicon Valley’s Next Big Thing” …
This ad from the Oxford Club, for their Chairman’s Circle service (a package deal where you pay big $$ up front for lifetime access to all of their newsletters), is all about that next bit thing… and it implies that their recommended stock controls some hot “quantum” technology that will counter the fact that we can’t cram much more onto a single microchip now that we’re approaching the physical limitations of silicon.
And of course, it’s for a limited group only! Don’t you want to be in a special club? Here’s what they say…
“Today, I’m going to credit 37 Oxford Club Members – and 37 Members ONLY – with $2,500 in savings… money that could be used to get a “ground floor” stake in the most important tech innovation of the last 51 years.”
Oh, come on now.
Yes, the Oxford Club is doing what used to be really popular among most of the big publishers a few years back: selling “lifetime access to everything” and giving what appears to be an exciting deal, getting several $4,000/yr newsletters and a few cheaper letters forever for just a one time payment of $5,000 (sorry, $7,500 minus a “instant rebate” discount of $2,500) and a “maintenance fee” of a hundred bucks or so each year. They don’t mention that these $4,000 letters, in particular, tend to come and go as they flop or are rebranded or given new editors.
So there is some possibility that these deals turn out to be good for you, IF you actually like and want to follow their several super-expensive newsletters and think you’d be interested in following them for at least a few years… but it’s DEFINITELY a good deal for the Oxford Club, since they get their $5,000 up front and don’t have to convince you to renew in the future, and it’s got some nice marketing hooks — the idea of “owning” a “forever” subscription that you can pass along to your kids (if they keep paying those maintenance fees) might convince some folks who are otherwise in the “eh, maybe I’ll pay $150 for the Oxford Club… but $4,000 or $5,000 is way out of my league” camp. Perhaps it’s the notion of owning something instead of renting access that appeals to some investment-minded folks, I dunno.
Publishers know the value of getting cash up front — and they probably know that they can’t sell many of those newsletters for $4,000 a year to very many people even if the letters are pretty good and well-liked, if they sell them at all a lot of those sales will be at steep discounts to the “list” price. And yes, I have no doubt that they’d happily set the “limit” at 37 customers a day — presumably the ad campaign will go on for a while (it’s got a December date on the letter and is still active now), and I’d be surprised if they’ve had many days where the sales number for this product came anywhere close to that $185,000 (37 times $5,000) total for the day.
Plus, when you’re sharing or renting lists or exchanging them with other people, which is a substantial part of the business of any major direct publisher (no, Stock Gumshoe doesn’t sell, rent, loan or exchange our email list), a list of people who’ve paid for “lifetime” subscription is probably the ultimate asset — those are the people who everyone wants to market to, and presumably they’ll pay dearly for the privilege.
And coincidentally enough, to get off my high horse and back to the teaser pitch, this company they’re teasing is itself really all about “renting versus owning” — but in this case, it’s renting a software platform as a service. Something you’ve all heard of before and that’s often called “cloud computing” these days.
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And no, they own no quantum technology or miracle device that lets you exceed the physical limitations of the microchip architecture. Not even close. That’s not the business they’re in at all.
Wait a minute, you say, there’s all this stuff in the ad about “quantum space” that sounds like a way to “pack in more power” for computers!
Yes, that’s what the ad focuses on — but it’s all misleading hype. Here’s a bit from the ad:
“You just can’t fit more and more into these machines. Eventually they run out of physical space.
“Consider that IBM’s smallest transistor is 1/10,000th the size of a single strand of hair.
“There’s a limit to how much technology you can fit on something so small.
“So what’s next?
“How can this new company solve Silicon Valley’s biggest problem?
“In short, it’s created something Matthew Carr described to me as ‘quantum space.’
“It’s a new realm that allows companies to pack in billions more transistors… billions more terabytes in storage space… faster system memory… and supercharged processing power.”
So you naturally think, “hey, it’s some amazing supercomputer technology!”
But no, it ain’t.
We’ll leave you in suspense for just another few moments so we can sift through the clues and get to the reality of what it is they’re recommending:
“First, we know the technology sector is huge. Solving a problem of this magnitude – in a $200 billion industry – is a holy grail for small tech companies.
“This company already has boots on the ground and it’s taking the lion’s share of the cash…
“It’s blown every earnings report out of the water. It’s on track to collect more than $125 million in revenue this year.
“(We believe that revenue figure could begin to skyrocket 3,300% in the days ahead. As you’ll soon see…)
“It’s inking contracts with well-established tech companies like Olympus, Citrix, NetSuite and Siemens.”
The gift of a marketer is to tell you something stupid, and make you feel like they’re brilliant. How on earth could this company that’s “taking the lion’s share of the cash” in a $200 billion industry have revenue of only $125 million? Skyrocketing by 3,300% “in the days ahead” would get them to revenue of a bit over $4 billion, roughly 2% of whatever that industry is they’re talking about. That’s not my understanding of what “Lion’s share” means.
But there are some clues in there, of course, so we’re well on our way to identifying this company which they say has “created” this “quantum space.” I’ll just continue to warn you along the way that you’re going to be disappointed, but let’s get through the clues first:
“One of the top private equity firms in the world quickly and quietly picked up a 14% ownership in this company.
“It clearly recognizes ground floor opportunity when it sees it.
“Now that gives this company a safety net of millions of dollars…
“And a launch pad to blast off from its current share price of just $6!
“The point I’m making is that these guys recognize the magnitude of this opportunity. They are the types of smart investors who get in at the early stages and make a fortune when the company takes off.”
And then we get a little more hinting about what they mean by this “quantum space” bit…
“While physical microchips have limits to how many transistors they can hold… with quantum space, scientists have found a new ‘virtual realm’ where they can nearly infinitely increase our computing power.
“So while IBM’s most powerful microchip now fits 7 billion transistors on a single microchip… quantum space could allow IBM to multiply the power of its microchips 100-fold… 1,000-fold… Even 10,000-fold over the years ahead.
“Imagine Apple’s iPhone going from 32 gigabytes (GB) of storage to over 10,000 GB…
“Or Microsoft’s ‘Surface Pro’ increasing from 128 GB… to 128 terabytes!
“Companies will be able to use quantum space to vastly increase the power in your cellphone, tablet, computer… virtually anything with a microchip in it.
“It’s almost an entirely new plane of existence for these technology guys.”
So what is this “Quantum Space?”
Well, I hope I’m not being too snarky when I say, “the Internet.” Yes, it made me throw up a little bit in my mouth just to get to this point, but there you have it.
This is all a carefully BS’d reference to “Cloud Computing,” the move to get more and more data, processing power and applications off of individual devices and onto servers “in the cloud.” Which, of course, look a lot like huge racks of servers inside data centers run by Apple, Amazon, Google and every other major tech company. The “cloud” in cloud computing, lest we forget, is just a handy metaphor. Those computers and that data are still on earth, they’re just not in your office or your house or crammed into your iPhone. And, more applicably here, it’s used to talk about the move from enterprise software hosted by companies on their own servers, to “subscription” software that’s hosted and maintained by the vendor.
So is this really a small cloud computing company selling a technology-related service?
It’s not a company that invented a new, better chip, or a new, faster processor, or even a faster connection or a way to speed up the Internet… it’s a company that provides “cloud-based” call center software. You know, the software and service that a company would subscribe to so that each of their call center employees could have calls and chat sessions properly routed to the right person, and that person can have the customer or caller’s information and the appropriate sales pitch or tech support answer or whatever right on their screen in short order to best handle the situation.
And yes, lots of companies offer these kinds of solutions. Some huge, like Salesforce.com; many smaller, or smaller services tied in with other service or equipment providers (telecom companies, phone equipment sellers, payroll and HR services, payment processors, sales lead management systems, etc.). The one that’s being hinted at by the Oxford Club folks here is Five9 (FIVN), whose name is a clever flip of the “9 to 5” business day as they pitch their ability to help you provide a steady, constant and consistent call center service.
Well, in case you’re not too mad to continue… shall we look at what Five9 actually is and does?
I’ll first confirm that this is the stock being teased, just because the ad is so misleading that lots of you are saying “no way!” right now.
Here’s a final bit of clues that I spared you on the way down to this point:
“And this little firm stands to reap a good bit of the benefits this technology brings…
“Just take a look at this company’s insane financials… and the cash it’s been raking in…
“Get in on the Ground Floor of a Company About to Increase Revenues 3,300%
“While ground floor stakes in this company are available at just $6 per share at the moment…
“That kind of opportunity will be gone very soon.
“Already, its ‘quantum space’ technology is starting to kick revenue growth into high gear.
“On November 3, while the rest of the market was weathering a so-called ‘earnings recession,’ this company was blowing it out of the water…
“Revenue was up 25% year over year, climbing to $32.3 million!”
And yes, FIVN did report 25% YOY revenue growth on November 3, and it was a $32.3 million quarter for them on the revenue side, and that growth did come because of improved sales in their “subscription” business that relies on that so-called “quantum” technology.
This is a $400 million company, still quite small, debt and cash cancel each other out on the balance sheet, and right now it’s costing them about $1.20 to bring in each dollar in revenue — so they’re not getting to profitable scale fast enough for some folks’ taste (that’s probably why the stock was faltering last Summer), but that is, at least, an improvement (a year or so ago it was costing them $1.40 to bring in each dollar of revenue).
There’s a decent story of growth for call center services, both because Five9 says we’re on the verge of a big upgrade cycle for call center software (lots of widely used packages are 8-10 years old now, apparently) and because the bulls are saying that the security and reliability of “cloud based” subscription call center software is now robust enough to be appealing to big customers…. and there’s increasing demand to better integrate newer communication technology into the call center system (social media, texting, live chat, etc. — all available now to modern call center operations, but not all integrated in the same way by all software types).
And they do have some big customers, those hinted-at names in the ad are real — they do have Olympus, Citrix, NetSuite and Siemens on their client list.
Here’s how they make the client contracts seem a lot huger, and bring those billion-dollar dreams into your head:
“Now that this company’s quantum space technology has proven to help some of the biggest companies in the world save millions of dollars while also increasing their tech power…
“More than 150 contracts have poured in, including…
– Siemens ($82 billion)
– Phone.com ($6.8 billion)
– Open English ($50 million)
– Olympus ($13 billion)
– Citrix ($11 billion)
– NetSuite ($6.5 billion).
“Experts familiar with this company believe these contracts will catapult sales much higher – as much as 3,300%.”
Those are, of course, the size of the COMPANY with which FIVN has contracts… those aren’t the size of the contracts. Yes, Siemens is an $82 billion company, Olympus is a $13 billion company… but Five9 says they have “thousands of customers” and annual revenue of about $120 million now. If we assume that “thousands” means just the minimum of 2,000 to use that plural form, then the average customer brings in $60,000 in annual revenue. Presumably the bigger contracts bring in more than that, the software is sold as seat licenses to cover the number of customer service reps using the software at any one time (numbers I’ve seen thrown around range from $1,200-2,100 per “seat” per year), but even the biggest customer probably isn’t a large percentage of revenue for Five9 just yet.
That’s probably actually a good thing, you don’t want to be overly reliant on one customer — I think their “overreliance” risks are probably on the other side, it looks like they get a lot of their customers from relationships with other vendors like Microsoft or Salesforce, so changes to those relationships could be a risk.
Final match? Here’s another clue:
“Gross margins are up 600 basis points.
“And the CEO is ecstatic, saying on the earnings call, ‘This is the fifth consecutive quarter of broad-based outperformance and highlights the strong progression of our business. Our record revenue and bookings were primarily driven by continued success in our high growth…'”
And those are direct quotes from the earnings press release from November, which you can see here if you like.
An analyst from Northland reportedly estimates the market for call center services and software to be $20 billion and comments from Five9 about the size of the market bear that out (14.5 million global call center reps, something like $1,400 per person for software, that’s also $20 billion), so that’s a far cry from the $200 billion number cited in the ad (that $200 billion number is sometimes thrown around to refer to the size of the “cloud computing” opportunity overall, which, of course, has little to no connection to a little provider of call center management software — or you’ll often see references to the “business software” market being $300 billion). That would mean that Five9 currently has about one half of one percent of the market.
By way of comparison, Salesforce.com (CRM) has revenue of about $6 billion, IBM topped out at a bit over $100 billion a few years ago, Cisco (CSC), which sells a lot of call center equipment (though that’s a small part of their business) is at about $50 billion in revenue. Most of the big players in this segment appear to be either private (like Genesys, which private equity investors bought from Alcatel-Lucent) or small parts of larger tech/business services companies.
That leaves plenty of room for growth, I suppose, and that analyst does see revenue growth in the neighborhood of 20% or so annually for FIVN — the average analyst (there are only a few of them, this is a small cap stock) sees 10% revenue growth in 2016, and no analysts are forecasting a profit for the company until at least 2018 as far as I’ve seen. There’s some similar commentary from a Canaccord analyst in this article, with a target of something like 20% revenue growth and a 20% increase in the share price. The stock has more than doubled since the September lows, with results that beat expectations and management raising guidance for future growth, and has gotten its share of fawning attention as a result.
There’s a nice, brief and glossy look at the move to the “cloud” for call center software, and the potential opportunity for Five9, in a Fortune piece from last month here. Not anything there that’s not in the earnings reports, but it may help to provide some perspective.
My guess is that the most bullish possible outcome in the near term would be for FIVN to get bought by someone like Cisco or Salesforce.com, but I don’t know what the likelihood might be of that — and I don’t know whether their service is enough of a competitive threat for the already established call center market share leaders like Genesys or Avaya to make them want to buy FIVN. There are dozens of other “cloud call center” and SaaS offerings in this space, I don’t know whether there are also smaller upstart companies nipping at FIVN’s heels (but it would stand to reason, I suppose).
Assuming there isn’t a buyout (it’s never prudent to buy a stock just because you’re convinced they’ll be acquired at a premium), the rosy thing to think about for FIVN, if you want to give yourself a warm feeling in your belly about the stock, is that they have a very scalable business model in a sticky business segment. Retention is pretty high at 95% and they think it’s going higher (that’s the stickiness, companies don’t like to switch software for important functions and incur training and switching costs and take risks), and they should, as a “cloud” software as a service (SaaS) company, be able to boost those margins as revenue grows. Software is almost always a very scalable business once you get to some critical mass — unless your selling costs are really, really high (launch and development are expensive, but serving each new customer is not).
The downside, beyond the fact that they’re small and unprofitable, is partly that they’re competing mostly against larger companies, and that the stickiness works both ways. The larger, established competitors won’t easily give up customers, and customers may not be easily encouraged to leave them when it’s time to upgrade — and it’s not as though Avaya and Genesys and Cisco and others have just heard of ‘cloud computing’ or social media this year… They’re not just milking their contracts and relying on rotary telephones and sticky notes, their call center offerings are also being continually improved and updated. And there are, of course, plenty of other “risk factors” for this small company — you can browse the latest 10-Q if you want to get a taste of those. It may be that FIVN is more nimble and focused and the big players have gotten stodgy, as this article alleges, but be careful about assuming that.
Chief among those “not under their control” risks, when it comes to stock price, might be that they have some huge shareholders (Adams Street, a private equity firm, does hold 14% as teased), and those firms (who were private equity backers before FIVN went public a couple years ago, they didn’t just buy on the market at recent prices) can sell their shares and, in some cases, could force FIVN to register for a secondary offering to sell their shares en masse — a big new supply of shares could certainly hurt the stock price.
The evidence is pretty compelling that FIVN is now growing after a soft patch, and that they have some momentum in sales and a chance of really strong 20%ish revenue growth over the next couple years… but you have to go out further than that, probably, to make the current valuation compelling — there have to be growth expectations. And that means the stock will be volatile — whenever they look like they’re going to grow faster than that 20%, investors will get excited; when they have a bad quarter or lose some big contract, investors may panic. Being unpfrofitable and having your stock valued based on future potential means that investors are likely to overreact to each data point and extrapolate it into the future as they try to determine whether your company is going to be the next dominant growth stock, or just another competitor that couldn’t grow into its valuation.
Here’s one scenario: If their sales effort works and they do get some real traction and grow revenues at 20% for three years, that would have them with annual revenue of about $210 million three years from now. If we assume that they continue to improve their margins as they grow, which should be possible, they may be able to get to a gross profit margin as high as 65% (that’s being pretty a aggressive). Administrative and selling costs probably can’t get a lot lower than 40%, that’s as low as they’ve ever been and revenue growth is fairly expensive (CRM has huge SG&A costs, 60% plus, and has had similar costs since their revenue was only $300 million a decade ago). So that’s possibly 25% left over for operating profit (65% minus 40%) if they don’t spend any money on R&D (which is currently about 18% of sales but should fall substantially, as a percentage, as sales rise). If you think they can cut R&D to 10%, say, keeping the cash outlay for R&D similar to what it is today, there’s as much as 15% left over for possible cash profit before taxes and interest (they won’t owe much in taxes for quite a while, debt is currently low so interest costs are about 1% of sales).
I’d say those are very rosy guesses, at least on the cost side, but if they come near that the potential would be that they could have something approaching $30 million in profit in three years (15% of the $210 million in revenue). So the optimist who’s writing on the back of his napkin might be able to hypothesize that they’re trading at about 14X a rosy and hypothetical guess about 2018 profits. That’s very unlikely to happen, since the company itself says in its filings that they’re fully focused on growth and will likely keep adding more people and investing more in sales growth, not pushing for “early” profitability, but the numbers at least make some sense.
Is that real enough for you? If we step away from the “quantum space” foofaraw and the ridiculous idea that this company “owns” cloud computing or SaaS technology that’s inherently better than everyone else’s or is applicable outside of their competitive niche of call center software, I can see reasons why someone might be willing to speculate on the stock even if it is a fairly risky proposition at this price.
That’s mostly because sustainable growth is hard to come by, and a small company with a legitimate chance at 20% revenue growth and improving margins can be attractive even if it looks awfully expensive in the early years. I think the 3,300% growth number is complete hooey unless you can see out ten years into the future, and the sooner you get it out of your head the more sanely you’ll be able to assess the company… but I left my crystal ball in my other trousers, so I’m afraid you’re on your own for the final decision.
So what’ll it be? Want to jump aboard the Five9 train? Think it’s too expensive? Have questions or concerns? Let us know with a comment below, we can sometimes get a bit wiser when we talk to each other.
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