Several readers have been asking recently about the “Power Portfolio 2021” pitch from Investorplace (previously known as Power Portfolio 2020), so I thought I’d dig into that for today’s edutainment episode. The service is a two-pundit “upsell” product, currently being sold at $2,499/yr (no refunds) and boasting regular picks that combine the “top down” trend picking from Matt McCall with quantitative “bottom up” stock selection from Louis Navellier… the idea being, naturally, that the combination of good numbers and hot trends should lead to good stock picks. They say their picks in this newsletter will be unique, ideas that they haven’t shared in their other services.
And, frankly, I’m a little exhausted after ending a lovely vacation and being back at work for a few days, so I’ll skip over some of the big picture silliness (I write every weekday, really? all day? But the couch is calling!).
Yes, McCall and Navellier have both made lots of good picks in the past, and probably had fantastic years in 2020, as you’d expect for growth investors (anyone who stuck with stocks with strong revenue growth and high or rising growth expectations should have made a lot of money last year). I’m sure they’ve picked lots of stinkers in the past, too, every growth investor has. They don’t have public track records in any meaningful way, but back when Navellier was being tracked by Mark Hulbert, before Hulbert Interactive fizzled away, I recall that the general tendency was for his quantitative services to outperform in bull markets and give back most of that outperformance in bear markets. Kind of what you’d expect — growth and momentum stocks go up faster than the market, by definition, and when the manure hits the air circulation device they go down faster, too.
Navellier used to manage a some publicly available mutual funds under his name and others, and still has a managed accounts business, and the mutual funds, at least, tended to be expensive disappointments from what I remember, and have mostly disappeared (as you’ve probably noticed by making your own investment decisions, consistently managing a portfolio is a lot tougher than picking a hot stock or two each month… partly because the impact of the losers doesn’t just disappear once you’ve sold them). You can also use his free portfolio grader service to see how particular stocks rank with his quantitative methodology, in case you’re curious.
So let’s just get to the few hints they toss our way, shall we? The general idea is that they’ve launched this service with a “Hypergrowth Portfolio” of ten stocks, and will be adding to it if and when they find more ideas that they can agree on. There are only two that are at all hinted at with any specifics in the ad, so we’ll focus on those.
And I should warn you, this will be a bit of a challenge for the Thinkolator, because they don’t drop a lot of clues… here’s the pitch for the first one:
“These stocks are stretched across various industries with a lot of growth potential in 2021.
“For obvious reasons I can’t just give you the names and ticker symbols of all of them, but here’s what I can say…
“There are two specifically I’m personally excited about.
“These companies are hands down the best at what they do.
“For the most part, they’re small and their revenue is growing at breakneck speeds.
“One of the companies is a truly innovative software company that will absolutely be a huge benefactor of the “work from home” trend.
“It’s the perfect picks-and-shovels play.
“They’re cutting out the middleman and helping companies scale their remote capabilities and voice messaging needs.
“And their current client list is really impressive.
“Google, Microsoft, Zoom, and RingCentral all depend on their software.”
Thinkolator sez this is very likely to be Bandwidth (BAND), a small company that I admit to not having heard of before. Here’s how they describe themselves:
“Bandwidth is a software company focused on communications for the enterprise. Companies like Google, Microsoft, Cisco, Zoom and Ring Central use Bandwidth’s APIs to easily embed voice, messaging and 911 access into software and applications. Bandwidth is the first and only CPaaS provider offering a robust selection of communications APIs built around their own nationwide IP voice network – one of the largest in the nation.”
Yes, we can add AAS to pretty much everything these days, right? I’m thinking I should start calling Stock Gumshoe a BaaS company (Blatheration as a Service). CPaaS is “Communications Platform as a Service” — basically, the voice and telephony network that software providers can build on to provide their own branded and managed video conferencing, VOIP telephone service, etc. They describe themselves pretty well on their website, if you’re curious to dig in a bit. They’ve been public for three years or so, recently made a substantial acquisition (Voxbone) to expand their network globally, and, no surprise, the stock roughly tripled in 2020 as revenue growth from their big customers (including Zoom) picked up.
All of the numbers will sound pretty familiar if you’re used to looking at subscription based businesses — they had revenue growth of 40% last quarter, most of it from CPaaS business, active customers grew at 25% (they now have 2,015), and they had “dollar-based net retention” of 131%. They also raised their forecast for the fourth quarter, which we’ll hear more about in six weeks or so when they next report.
There is not a lot of analyst coverage for Bandwidth, mostly because they’re small, but they are profitable on an adjusted basis, they’re probably lowballing their guidance for the fourth quarter because of uncertainty about the acquisition, and the average analyst expectation is that they will grow revenues by 38% next year, and that they’ll earn 35 cents in adjusted earnings per share, which would be lower than the likely 45 cents+ they’ll probably end up with in 2020. That means we’re looking at a PE of roughly 300, but, with their acquisition, also perhaps more growth potential as they expand more internationally.
And yes, they do rate an “A” grade in Navellier’s portfoliograder. The shares dropped a bit after they announced the Voxbone acquisition, and the insider selling that went along with it, but have otherwise held up pretty well. My quick thoughts on this one are that it’s relatively attractive as a growth speculation, particularly since it trades at only 12X sales, compared to the wilder valuations of Zoom or RingCentral (50x and 30X, respectively)… and it could help to enable those next generations of competitors to RNG and ZM and others, as well, so that’s interesting… but as a “picks and shovels” play that supplies the APIs for other tech companies, the concern would be what kind of pricing power they have, and how they can hold the line against other telecom network/CPaaS providers — nobody cares which network underlies their Zoom call, so BAND doesn’t have that kind of brand power or network effect with end-users, so I don’t know how defensible their business is.
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Probably it’s OK, given the retention and revenue growth this year, to some degree BAND seems like a smaller and cheaper Twilio (TWLO), which also sells itself as a CPaaS company (though doesn’t own its own networks, as far as I know)… but I don’t know enough about BAND and the state of its competitors to be particularly confident.
Other random thoughts on this one?
The founder, David Morken, controls most of the Class B shares and holds huge voting power, so he can do just about whatever he wants with the company — that risk is common to tech stocks, but worth noting.
And when it comes to the risk of losing a big account, like Zoom Vide or someone else, they said they had no single customer representing more than 10% of their revenue as of 2019. I don’t know if that continued to hold true with the huge ramp-up from some key customers, presumably including Zoom, in 2020 — companies generally only disclose that when they decide they have to, which in my experience is “once a year in the 10-K, or when a huge customer is lost” (like when Fastly (FSLY) lost a big part of their TikTok business a few months back, when TikTok accounted for more than 10% of their revenue, or GAN (GAN) was notified that FanDuel would drop some of their services).
My guess? If Zoom and RingCentral have another great year, BAND will, too. And 40% revenue growth, trading at 12X sales, sounds downright cheap compared to the hotter and sexier “work from home” stocks, but that’s about all I can tell you about this one.
What’s their second stock?
“Another company that made our list will be a big benefactor of the work-from-home economy
“They help over 2,000 companies better connect with their customers virtually.
“I know that might not sound exciting, but for any company that just got forced into remote work, their service is a godsend.
“This company has incredible earnings momentum heading into the new year, and just like the other company I mentioned, their client list is rapidly growing, which is great for investors.
“I’m talking about clients like Under Armour, DoorDash, Salesforce, and lululemon.
“Even one of Matt’s favorite stocks, Teledoc, relies on this company in order to provide their telehealth service.
“I better stop there before I give too much away.”
Too late, I dare hope — Thinkolator sez this is very likely to be Five9 (FIVN), which slots itself into the CCaaS business (Contact Center as a Service). Here’s a description I pulled from YCharts:
“CCaaS solutions support omnichannel communication and include automatic call distribution and interactive voice response. Five9’s intelligent routing solutions can direct customer inquiries to the call center agent best able to handle a customer’s inquiry and suggest the best course of action for an agent to resolve the question quickly and satisfyingly. Over 90% of Five9’s revenue is recurring, with two thirds attributed to subscriptions and one third related to usage (in minutes).”
Five9 believs that they’re in a huge addressable market, with “contact center software” representing a $24 billion opportunity, and their $400 million or so is but a fraction of even the portion of the call center that has already gone to the cloud (15%, they say, so about $3.5 billion). That’s an appealing ocean in which to be swimming, and obviously managing customer connections well is a huge key to any business, particularly for any consumer brand.
FIVN is profitable on an adjusted basis (like many tech stocks, the headline earnings look a lot better than the GAAP earnings, because they use stock-based compensation to reduce their cash costs for payroll), but analysts, interestingly enough, do not see a ton of growth in 2021 on that front — the current consensus estimate is for 88 cents in adjusted earnings in 2020, and 83 cents in 2021, with revenue growth of a little under 20% net year.
If that’s how it works out, then FIVN is absurdly overpriced for a company that’s not growing super fast (and 2022 isn’t dramatically stronger, with still sub-20% growth)… and FIVN is already right at the average analyst price target, so, as with all these high-growth SaaS stocks that enjoyed huge blowout success in 2020, a lot is riding on what this group starts to say about 2021 forecasts when they begin reporting. We’ll learn more on that in mid-February when a big wave of these companies report (FIVN is likely to report around February 19), but it’s quite likely that the whole group of “SaaS companies that trade at 20-30X sales” will trade in as a group when there are market-wide shifts in sentiment. Like today, for example, with most of those names down by ~4-5% or so.
And that’s all I’ve got for you today, dear friends — a couple pretty solid but not 100% certain answers to that “Hypergrowth” tease, how do those sound to you? Have other candidates to suggest who might fill out that top ten they’re teasing, beyond those two that they actually hint at? Think McCall and Navellier will be right about another stage of growth for these kinds of companies in 2021? Let us know with a comment below… thanks for reading!
Disclosure: Of the companies mentioned above, I own shares of Google parent Alphabet, Teladoc, Fastly and GAN. I will not trade in any covered stock for at least three days after publication, per Stock Gumshoe’s trading rules.