The lead-in to recent Stansberry’s Investment Advisory pitches ($49 first year, renews at $199) is one of those “the wealthy are screwing you over” bits, inspired by recent reports about tax outrages:
“You probably saw the news this week about how billionaires like Jeff Bezos and Elon Musk have paid nothing in federal taxes – often for years.
“It’s completely legal. And I’d do the same thing if I were them.
“But it’s proof of just how badly the system is rigged in favor of the ultra-rich.
“That’s why I highly recommend you make this ONE move before July 29.
“It’s a way to “turn the tables” on the ultra-wealthy – and claim a share of billions in potential wealth.”
Which is not, it turns out, a promise that there’s some super-secret way to make money on bitcoin or something if you buy before August, but really just a tease that you should start investing in better companies — following one of the ideas that the Stansberry analysts feel most strongly about. Here’s a little more from the ad:
“I’m going to turn the tables for you. And show you a way to do six times better, historically, than the S&P 500. Potentially every year going forward.
“With regular U.S. stocks you can buy today….
“We call them the 61%-Per-Year Stocks.
“Because that’s how fast they could have grown your money so far.
“But now, they’re at an inflection point – a period of mass adoption.
“Meaning the gains could be a lot higher going forward.
“These are regular, U.S.-listed stocks that anyone can buy through any standard brokerage account.”
So what’s being talked up here? This is another general pitch for the idea of “SaaS” stocks, a group which includes what most of us in recent years have been calling “cloud” stocks — companies that provide software or a service or a platform that’s delivered not in a package that you install on your computer systems, but over the internet from “cloud” servers. Instead of buying the software or the tool, you subscribe to it.
Investors delight in “subscription” businesses, because predictable and recurring revenue is intuitively more valuable than revenue you have to “sell” over and over to new customers, and they have indeed done extraordinarily well over the past couple decades, with Salesforce.com (CRM) generally getting the credit for pioneering cloud SaaS software 20 years ago and bringing hundreds of companies in its wake (including many who rely in part on being integrated with the Salesforce platform, like DocuSign (DOCU), another example of past success that they drop in the ad — and one where I agree with them, I think I probably first bought DocuSign around the same time the Stansberry folks got interested).
And that SaaS idea has been a big focus of several Stansberry folks in recent years, with Porter Stansberry himself often talking it up as one of the more compelling opportunities for long-term capital-efficient growth (the only sectors he has been as positive about in recent years, in my reading, have been royalties and insurance companies, and all three are also favorites of mine… so maybe that’s why this ad caught my eye). This spiel, though presented by a new (to me) face in Tom Carroll, is really a continuation of some “cloud SaaS” pitches that the Stansberry folks have been making for about 18 months now, often based on the research of their analysts Bryan Beach and Mike Dibiase — the first round of those ads, for their pricier Stansberry Venture Value newsletter, hinted at GAN (now GAN, though it wasn’t US-listed at the time) and PAR Technology (PAR), both of which I was very impressed with and now own, and they’ve thrown around a few other smallish “cloud” ideas over the past year as well… so will the ones they’re hinting at today for this “entry level” letter catch my fancy?
Well, the sad news is that I can only try to sniff out one of them for you — there is only one for which they drop some hints in the ad.
This is what the provide, our fuel for the Thinkolator:
“… details three of our favorite opportunities today from the very best group of stocks we’ve ever found in 20 years of research.
“Selected by our top analysts with industry insider experience that gives them a huge advantage.
“For example, one of their newest recommendations is a SaaS company with a huge customer base among hotels and restaurants – businesses on the verge of a massive ‘reopening’ boom.Are you getting our free Daily Update
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“It’s also cheap… fast-growing… and almost completely unknown by the general public – even though companies like Walmart and PayPal are customers… and the legendary VC fund Sequoia Capital is a major shareholder.
“The upside potential could be hundreds of percent within a few years.
“And this is only one of the opportunities you’ll be able to access right away.”
So… hoodat? We can’t know for sure, of course, that’s not quite enough detail in the hints for the Thinkolator to provide a 100% certain match (which is usually what we shoot for), but we did get it narrowed down… and I can tell you that I’m pretty sure that this is a tease for Medallia (MDLA).
How does that match? Well, if Walmart, PayPal, and hotels and restaurants are all customers… we know it’s not a segment-specific software product, like a POS terminal or inventory management or something like that. It has to do with something that’s generic to a lot of industries. Medallia does count Walmart and PayPal as named customers, and get well over 10% of revenue (and a lot more of their customer count, since many of the businesses are small) from the hospitality and restaurant segments. And it was backed by Sequoia Capital and remains 28% owned by one of that VC Company’s funds, which is a little unusual a couple years after an IPO (but certainly not unheard of).
And it fits conceptually — it’s a not-very-well-known cloud SaaS company, it’s got solid growth in the ~20% neighborhood, which is “fast growing” in the general sense but not the nosebleed 50-100% growth that draws a lot of investor lust, and it’s pretty rationally valued compared to those sexier names, with a valuation of roughly 10X sales and a likelihood that they’ll be generating positive cash flow in the next year or so even though the income statement doesn’t look all that impressive at the moment. It may not be objectively “cheap” if you’re used to looking at PE ratios and the such, but it’s a lot cheaper than many of the SaaS stories we’ve looked at.
Medallia is a “customer experience” platform, one which integrates with lots of different systems to allow customers and frontline employees to monitor and input data for “experience management.” They have strategic alliances with lots of platforms who help to resell and distribute the software, effectively, including Adobe, Microsoft, Salesforce.com and ServiceNow, all of which are prodigious SaaS businesses in their own right, so that ease of integration with other systems is probably a big selling point. The company pitches itself as offering an “experience cloud,” combining survey data, social reputation and customer postings on places like Facebook and Twitter, call center feedback, user review data on marketplaces, and lots of other touch points, and they claim that prized “top right” Magic Quadrant from Gartner for “Voice of the Customer” positioning (they’re graded about the same as larger competitor Qualtrics (XM), and ahead of companies like Nice (NICE) and Verint (VRNT) who offer somewhat similar services). This is how they describe themselves:
“Medallia is the pioneer and market leader in customer, employee, citizen and patient experience. The company’s award-winning SaaS platform, Medallia Experience Cloud, is becoming the experience system of record that makes all other applications customer and employee aware. The platform captures billions of experience signals across interactions including all voice, video, digital, IOT, social media and corporate messaging tools. Medallia uses proprietary artificial intelligence and machine learning technology to automatically reveal predictive insights that drive powerful business actions and outcomes. Medallia customers reduce churn, turn detractors into promoters and buyers, create in-the-moment cross-sell and up-sell opportunities and drive revenue impacting business decisions, providing clear and potent returns on investment.”
The Stansberry ad is dated “May 2021”, and I’ve seen the ad circulating for a week or so, which means they also got in before last week’s news: At around 1pm on Friday, Bloomberg reported that “Software Provider Medallia Is Exploring a Potential Sale,” with interest from private equity firms percolating. That caused a brief trading halt on Friday afternoon, the stock jumped up 15% or so on the news, and today it has settled down a bit.
We don’t know if this will turn into a deal — frankly, this is the most bizarre and stupid kind of fee-generating silliness on Wall Street, funding a startup and getting them going and launching them into the public markets with good momentum… then just as the company is nearing profitability, have the serpent seduce them into a private equity takeover deal to go private again, load up with debt to make the profitability look more impressive for a couple years, then, whaddya know, take them public again, earning fees all along the way. Venture Capital and Private Equity firms are so awash in excess capital that it sometimes seems like they’re just desperate to keep it moving. And the tens of millions of dollars that get burned in “one time costs” as they take companies public, then private, then public again, or restructure or leverage them, don’t count. Drives me a little crazy.
But where was I? Oh, yes, Medallia is an interesting company, and absent that takeover chatter I’d say it’s worth a look. It’s not, however, an exciting top-line growth story this quarter — revenue growth has continued to be there, but it’s declining and dipped under 20% in the past few quarters, which helps to cool investors’ ardor. I was pretty impressed by their last earnings update, filed a few days ago (presentation here) — it was technically a slight miss, mostly because they let some of their customers adjust their contracts under COVID last year, but they also guided to slightly better growth than analysts had been expecting and appear to be on a pretty steady trajectory of gradual 18-20% top-line growth, with new customers continuing to be onboarded… and the company did also specifically note that the return of leisure travel is likely to be meaningful for their customers.
They are not the only company in this business, of course — surveying customers and employees and collecting that data is not exactly a new thing, and there are some large and better-known leaders in this space, too, including Qualtrics (XM), which came public just this year after being spun out of software giant SAP… but analysts expect Qualtrics to grow more slowly than Medallia, and it trades at a much loftier valuation but with somewhat worse operating margins. Longer-established players like Verint are far, far cheaper, and have obviously woken up to the fact that there’s a big SaaS/Cloud transition going on and are trying to catch up. I don’t know how that will work for VRNT… but if it does, we’ve certainly seen software sales companies transition to SaaS with huge success a few times (Adobe is the poster child for that success, I’d argue… It’s sometimes easier to build a new cloud business than to transition old and established customer relationships and migrate data to something brand new, and transitioning to a SaaS business means you have to suffer through a couple miserable years of falling revenue even if it does work, as happened with Adobe five or six years ago, but if your brand and product are strong enough it’s a huge win in the long run).
So yes, Medallia has some appeal in a “maybe bottoming out” SaaS provider that’s got steady growth, but maybe wasn’t exciting enough to become a stock market darling in the COVID boom and did take some negative hit from the pandemic shutdowns, and should get at least a small boost from reopening and growing in-person retail and tourism. It trades at a valuation I’d consider pretty attractive in this space, and I’d think about buying shares… but the story that they’re considering selling the company is a little bit of a yellow caution flag for me. Every company is for sale all the time, of course, and we want management teams to consider offers… but I’d rather have a CEO and board who are passionate about building a company and taking share and compounding value over time if they’ve got a good thing going, so the idea that they’re actively working to maybe shop the company puts some damper on that and makes me think that maybe they’re not seeing great traction, or maybe they see some way in which they know the company is lacking compared to competitors, and needs a bigger kick in the pants than they can provide.
That might not be fair. Maybe the reporting is misleading, we don’t really know and Medallia hasn’t said anything publicly about the news… maybe the founders or the CEO got COVID fatigue and just want to quit and go raise sheep after 20 years of work, this is a strange year and a lot of insiders are doing things for personal reasons. And maybe they will get a solid takeover offer at a rich premium price from private equity or from a larger SaaS platform (lots of tech companies, including Salesforce, are serial acquirers who love to bolt on new capabilities to their platforms), so it might work out in the short term (or collapse in the short term if that news dries up with no action)… but the word that they’re thinking of selling out, after a period of relatively weak performance for their stock, sends a little signal that maybe they’re not built for the long haul. After my quick 20-minute skim through their financials this morning, that’s the only thing that really gives me pause.
That’s just me, though, and you don’t have to invest my money or share my opinions — you’ve got your money on tap, so it’s your call… think Medallia has a chance to keep growing its SaaS platform and building value for investors? See a rich takeover in the near term? Think the faster-growing stories are worth chasing instead? Other SaaS-y stocks that float your boat? Let us know with a comment below.
Disclosure: Of the companies mentioned above, I own shares of PAR Technology, GAN Ltd., DocuSign, The Trade Desk, Okta and Avalara. I will not trade in any covered stock for at least three days after publication, per Stock Gumshoe’s trading rules.
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