I’ve gotten a pile of new questions about Stansberry Venture Value this week, all relating to their pitch for some cloud SaaS stocks — and I found the first pitch about these stocks pretty compelling back in February, and even ended up buying two of them, so I thought it would be worth digging in a bit on this one.
The basic spiel is very similar to the one we saw back in February, when they were really ginning up interest in this “cloud-stock seeking” service from Bryan Beach, Mike DiBiase and Porter Stansberry… here’s a little taste:
“These are technology businesses.
“But probably not the type that would jump to mind when you hear that word.
:They’re not the kind fighting to be the next Apple and get the next exciting gadget into your hands…
“Instead, these companies have harnessed a massive shift in how people interact, analyze data, and do business. A shift that’s been accelerated – big time – by the coronavirus crisis… pushing dozens of stocks higher at a breakneck speed….
“They’re reliable, cash-generating, “meat and potatoes” businesses – that also happen to occupy a skyrocketing corner of the technology industry.”
And they also say that they’re “extremely rare,” with only about 150 “cloud SaaS” companies in existence (I assume that means “public” companies — there are tons of SaaS startups out there in the world). And that they’re looking for “hidden” stocks in this sector, cloud stocks that nobody else realizes are cloud stocks… but there is some post-pandemic talk in here as well, so this is not just a repeat. More from the ad:
“And then, the pandemic hit. Everything changed – including our search for these ‘hidden’ 10x stocks….
“In 2018, 55% of companies in the U.S. were using some form of SaaS.
“Worldwide revenues were projected to reach almost $160 billion this year.
“But that’s nothing compared to what’s happening in the wake of COVID-19.
“In a short few months, the crisis indirectly got the biggest employers in the world ‘hooked’ on SaaS companies…
“And created a buying frenzy that is only just getting started.”
We’ve certainly all seen the news about the huge winners of the pandemic — and most of those are SaaS stocks that offer a cloud-delivered service (which just means you don’t buy the software or store it on your machine, you access it as a service, usually paid by subscription, over the internet). DocuSign (DOCU), Zoom Video Technologies (ZM), Shopify (SHOP), Twilio (TWLO), etc. — all these are Cloud stocks that benefitted from the “work from home” and “e-commerce” explosions that hit the world in March, and if you’ve been actively watching the market during these past six months you can probably name at least a handful of others.
There’s a little spiel in the ad, too, about how the Software as a Service sector began — crediting Salesforce.com for creating this model in 2004 and giving birth to the “cloud” stocks in the years that followed — which is at least a sign that Porter has some mental flexibility, since he was ranting about Marc Benioff being “The Next Corporate Psychopath” and seemingly pitching a short bet on CRM back in 2013. (That seemed logical at the time, if you recall, Salesforce was trading at a crazy valuation then at 7X sales and almost 40X free cash flow, and Marc Benioff has been probably the most consistent insider seller in the world over the past 15 years, selling CRM shares almost every month… but still, a short bet on CRM would have been a disaster, it has never dipped below the price it was trading at seven years ago, and investors who bought at that time have seen 500%+ gains. The sales and cash flow have continued to rise, and it now trades at 12X sales and 60X free cash flow).
But the next winners, we’re told, are not going to be as “obvious” …
“As the most obvious winners of the “work from home” revolution, their biggest, fastest gains are likely behind them…
“Before the virus, SaaS was something companies could “get around to doing” whenever they had the time and money.
“Today, it’s not an option – you either get on board, or you get left behind.
“That’s why the SaaS market is expected to nearly DOUBLE by 2026..
“But with less than 150 ‘true’ SaaS stocks, you haven’t remotely missed this trend.”Are you getting our free Daily Update
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And, as they did back in February, they pitch this idea of software/service subscriptions as being something like a “tech royalty” … which always perks up my ears, but is, at least, a good way to visualize the compounding return potential…
“The numbers show that once a company gives it a try, 9 times out of 10, they stick around – paying a locked-in subscription fee, year after year after year.
“You may recognize the business model this most resembles:
“Royalties, one of the most lucrative investment themes of our firm’s 20-year-history
“Simply put, royalties mean you own one asset — a mine… a piece of land… or even something like a book or a song — and you collect payments over and over from folks who want to use it.”
Then we get into the direct teasing about the stock they like…
“The first and most important of these opportunities is a stock Bryan says is the most exciting discovery of his career.
“A way to get into a SaaS phenom before anyone else realizes what’s going on and drives up the price.
“See… even if you were to go out and identify every one of the 150 software as a service stocks in the world today…
… your research still wouldn’t turn up this stock.”
OK, that’s starting to sound awfully familiar… might this be a repeat of one of those February ideas?
“Wall Street doesn’t see this as a SaaS company — yet. But that’s exactly what it is.
“And that fact is going to become crystal clear in 2021.
“See this company also makes a type of hardware used by tens of thousands of retail businesses. A sales terminal, sort of like a cash register.”
OK, so yes, we can cut it off there — this is another pitch for Par Technology (PAR), which they first teased in February. Interestingly, for this one, because it’s connected to the restaurant industry and still isn’t really identified as a “cloud” idea in any big way, and the price has not gotten completely out of touch with where it was when they recommended it (it was around $28-30 when they first teased it in late February, and is just over $40 now — a nice run, but certainly not on par with the wildly exciting cloud stocks).
This is one that appealed to me right away as well, and it was mostly because of the presence of new CEO Savneet Singh, who I’d run across before and strikes me as an excellent leader to follow in this space… so I started buying after covering this teaser, too, though I was fortunate enough to buy most of my shares in March when the price collapsed.
I looked back and checked, and the hints in the ad are exactly the same as they were then, and it’s obviously been a very rough time for the restaurant business but the company has held up pretty well in the ensuing quarters — this is the little bit of commentary from the ad that’s new about PAR:
“It’s almost completely undiscovered… for now. But that’s changing. In fact, in the past four months alone, three different Wall Street firms have begun covering the company. This “discovery” process will only continue in the months to come.
“Best of all, this company is run by one of the greatest entrepreneurs in the world.
“A CEO that Bryan is thrilled to put his trust in when it comes to growing the business and taking care of shareholders long term.
“(He’s already founded a successful software company, and was an ‘angel’ investor in companies like Uber and Alibaba.)
This is — by far — the best opportunity in the world today to see the kind of rapid and relatively low-risk growth you would have gotten from buying Salesforce or Shopify at the very beginning.
“It might be the recommendation I’m most proud of, out of anything we’ve done in my tenure as publisher.
“I suspect it could almost singlehandedly pay for a first-class retirement for folks who get in now.”
You’ll have to decide for yourself whether it merits a buy here. Here’s what I wrote about PAR following their last earnings report, in early August:
From the 8/7 Friday File: “Par Technology (PAR) soared going into its earnings report on Friday morning, seemingly getting some “maybe this will get valued like a cloud stock” love again — part of that attention comes from the few investors who follow and write about the company, like Greenhaven Road Capital, but I don’t know why this week was a particularly strong one for the stock. Perhaps a newsletter pitched the shares and that hasn’t hit my radar yet (if you know of one, I’d be curious to hear who it is). This was an idea I originally sniffed out from one of the high-end Stansberry publications back in January or February, before the crash (along with GAN, so that turns out to have been a pretty profitable teaser solution).
For me, I like the trajectory of the business and their quietly growing cloud services, but this has become a bet on CEO Savneet Singh. I’ve been very impressed with him, and I thought it was great that they made him the permanent CEO earlier this year (he was a board member, and had taken over as interim CEO — you can get a good handle on how he thinks by reading his latest letter to shareholders). This quarter, they essentially did about as well as could be expected but didn’t announce anything terribly exciting — they posted some revenue growth, thanks to the acquisitions they’ve made over the past year, they’re still losing money, but it’s also true that this restaurant services company held up awfully well during a cataclysmic time for restaurants… mostly because their customers are largely big franchise chains that made the shift to drive-through, take-out and delivery more easily than your typical casual mom-and-pop operation could (and that transition is made easier, of course, by a modern POS system and back office technology, like the packages offered by Par — they say that as of July, only 6% of their Brink customers were closed).
The good news is that they kept activating new sites for both Brink (POS systems) and Restaurant Magic (back office software), adding 465 and 180 new installations, respectively, so Brink is now in 10,280 restaurants and Restaurant Magic in 5,064 — without much overlap, so there’s also a big cross-selling opportunity. That’s what has the potential to turn PAR into a powerful recurring-revenue company — the annualized revenue for Brink is now $21.4 million, and Restaurant Magic $7.4 million, with annual growth of a little over 30%.
Like Roku, Par is a hybrid company — their biggest revenue line is selling POS hardware, modern cash registers for restaurants, and that’s done at pretty low margins, and then they sell some of those hardware customers their software (Brink, etc.)… and they also make things more complex by having a small government services technology business that’s unrelated, with lumpy revenues. PAR trades at about 3X sales and doesn’t make a profit yet, but if you ignore the hardware stuff as a “break even” segment that is mostly valuable as a possible way to fuel software signups, then PAR now at a $630 million market cap trades at 22X their recurring software revenue (or better, if you assume they’ll eventually spin off or sell the government contracting business). That’s not cheap, but it’s in line with other cloud software companies that are growing revenue at 30%ish rates, and Par is so tiny that rapid growth is pretty easy to visualize. Things might remain challenging for restaurants for a while, delaying the opening of new locations, and that might give the business a little bit of a headwind… but they could also sell off the government business or get some more investor attention and rise 50% from here.
I think PAR is reasonable for a nibble up to about $35, and I’ve microdosed a few more shares into the portfolio near that level as a result, but would be patient with more meaningful buys — it’s a small and volatile stock, with a market cap of only about $600 million, so there’s huge long-term growth potential as they ramp up their cross-selling… but it’s also likely that it will have some meaningful dips after this latest earnings attention fades, and if there are mass shutdowns of restaurants again it’s almost certain that the stock would take a big hit. Still, It’s pretty phenomenal that they added so many new customers from April through June, at a time when so many restaurateurs were presumably in a bit of a panic about what their future might hold.”
And yes, there are two other stocks hinted at in the pitch — here are the clues for the second SaaS stock:
“The second SaaS opportunity Bryan is sharing today is a very tiny company… with a market cap under $130 million.
“And like the stock I just told you about… you won’t find it on any list of SaaS businesses.
“… his company’s first official SaaS product isn’t set to go on the market until fall 2020….
“Over 20 years of analyzing cybercrime, this company has amassed what industry experts are calling the most valuable database in existence.
“The company reports that this database has more than two trillion rows of data…
“And starting this fall, they’re set to turn that data into an offensive weapon against the worst cyber criminals…”
OK, so it’s someone who’s been in cybersecurity for a very long time, and has built up a huge database, presumably of threat information, but it’s a very small company and isn’t known yet as a “cloud” company. What else?
“Per Bryan’s call with the CEO, none of the big-name cybersecurity companies have anything close to this amount of data.
“He says that while big names like Cisco Systems (CSCO) or Palo Alto Networks (PANW) can block anywhere from 200,000 to 800,000 known cyber threats, this company’s product can block 2.7 billion – right off the bat.
“It’s this kind of competitive advantage that pushed mass adoption of Salesforce and Zoom…”
What else do we learn about this company? It’s apparently launching their cloud product “this fall,” so it will catch the eye of analysts and money managers then, and they think it can double quickly and reach 1,000% gains eventually.
Ready for some Thinkolator answers? This one is likely to be Intrusion (INTZ), which is new to me. It has been trading over the counter in recent years (on the OTCQB, so a “safer” part of the pink sheets) but recently applied for a Nasdaq uplisting (and a $10 million stock offering to go with it). We can’t get a 100% match here, not with those clues, but they are releasing their next-generation “cybersecurity” product soon, their latest product is in beta testing with customers now, and they have been working in this field for decades, with a vast database of “threats” built on their work over this time.
Those threats are not a precise match… their numbers are bigger, at over 3 billion IP addresses in their “block” database, but here’s the description of their new product, Intrusion Shield, that they’re in the process of launching now (this is from the S-1 filing with the SEC):
“We are in the process of developing a new product offering, Intrusion Shield, that is designed to be a next generation intrusion detection and protection solution. After 20 years of providing research, analysis, and tools to the federal government and enterprise corporations, Intrusion possesses a comprehensive and proprietary threat enriched big data Cloud of Internet activity, including information about the activities of malicious online actors. Intrusion’s Shield product will combine that comprehensive, proprietary database with artificial intelligence (AI) and real-time process flow technology to provide businesses and government agencies with a unique and affordable tool to detect, identify, and prevent cyber-crimes.
“Shield is a combination of plug-and-play hardware, software, global data, and AI services providing organizations with aggressive protection against unaddressed information security threats and the most robust defense possible against cybercrime. Unlike traditional industry approaches that rely heavily on human resources, which malicious actors have learned to bypass, Intrusion Shield uses our extensive threat enriched big data Cloud together with real-time AI technology to prevent illicit behavior. Shield’s proprietary architecture isolates and neutralizes malicious traffic and network flows that existing solutions cannot identify or even characterize. Most breaches today are caused by malware free compromises that trigger no alarms in a firewall or endpoint solution. The common denominator is network communications, and Shield monitors and analyses all network traffic and communications allowing it to identify and stop malware-free attacks. Shield’s capabilities will continuously evolve based on real-time updates originating from our worldwide installations and growing TraceCop database identifying new dangers.
“Shield does not require the displacement of any existing products but instead provides a new, additional layer of cybersecurity for customers. The U.S. market consists of 34 million businesses of which 70% of this market is the small and medium sized business market. While the company believes that many large enterprises will recognize the need this product addresses and will be incentivized to purchase Shield, the enterprise market has many decision makers for new security product purchases; therefore, the sale cycle may be longer for this product. We have identified businesses with from 100 to 1,000 users as our initial target market, as we believe this market segment has the most pressing need for the enhanced protection that the Intrusion Shield will offer. In addition to direct sales and telesales we intend to leverage existing and new channel partners, such as value added resellers and systems integrators, to market Shield to this target market.
“Shield has experienced positive progress during Alpha testing and we have identified twelve companies for the Beta release anticipated to begin in September. The configuration of hardware is a single Dell network appliance installed inline inside of the customer’s firewall. The size of the network appliance will vary depending on the number of seats and the size of the customer’s internet connection be that 1Gb, 10Gb or 100 Gb….
“We believe that our Intrusion Shield product will be novel and unique in our industry because of its plug-and-play installation, proprietary threat enriched big data Clouds, real-time AI, monthly contract and will initially be used as a complement to our customer’s existing cyber-security processes and third-party products. If Shield receives widespread acceptance in our market, we anticipate that other businesses will seek to compete with Shield; however, we believe our existing, mature, and proprietary database which are integral to the operation of Shield will be difficult, if not impossible, for other companies in our industry to replicate and will be a significant barrier to entry of competitors in the near and long term future of cyber security solutions.”
My initial reaction is that it’s an interesting company, trying to transition from a mostly government contractor in cyber security and network tracing — they want to build on their valuable database of historical threat information and with new products like Shield, and it sounds like it might be compelling because of the simplicity, adding an appliance to an existing network, but I have no idea whether or not they’ll be able to sell it or if the demand will be there. And while this first product will have a recurring revenue stream associated with it, which we always love to see, and they do say that Shield CLOUD will “extend that power to your cloud environments” any real “cloud” service that follows, built on their TraceCop and Shield platforms, would presumably not require the installation of a box in your data center and would create the potential for more dramatic scalability if it can be sold as a service.
There’s no analyst coverage of this one, naturally enough, and I haven’t seen any notification that their Nasdaq listing has been approved, but it seems likely that it would be — they do have roughly $10 million in annual revenue at the current pace, and are just barely profitable, though this transition they’re attempting is certainly high-risk… they haven’t even launched the new product yet, and don’t have much of a track record of selling into this competitive marketplace, but from the recent declines in revenue it seems likely that they’re relying on it to replace some lost revenue from legacy products or services. If it works well and they build up a strong base of Shield customers, then the stock could continue to rise, but I don’t know anything about what kind of pricing they’re offering or what size of a customer base they’ll need to break even in this new era.
So, worth considering if you like researching little companies that are going through a transition, and certainly I was happy with the two picks from Beach that I sniffed out last time around. Does Par Technology or Intrusion get you all fired up about the future? Let us know with a comment below.
P.S. That second stock they recommended earlier this year, by the way, was GAN (GAN)… which they now mention publicly, so I don’t know whether they continue to hold it or think it’s worth buying. They say they first recommended GAN the end of 2019, though I didn’t come across it until they began teasing it in February. And it was indeed obscure, small, and not yet US-listed, and I’m glad I bought it (though I ended up buying a bit later, in March). I haven’t posted 500% gains on that like the Stansberry folks say they have, and they don’t indicate whether they still like the stock, but it has certainly been a strong performer and I still think they’re well-positioned (even though they aren’t as popular with the Robinhood/day trading crowd as they were a few months ago, and management did a bit of over-promising over the summer, so the stock has come down a bit).
P.P.S. As they did in February, they’re also teasing a third stock — and it’s the same one, but it’s also still one that I don’t have an answer for. Here are the clues, in case you’d like to hazard a guess:
“It’s a tiny firm supporting a huge segment of the cash-gushing commodity industry.
“Its clients are some of the biggest and most powerful companies in the world. And it’s backed by a software giant 100 times its size.
“This little company’s main product has no competitors. And with new products likely to come online in the next few years, its revenue could reach 30 times today’s levels relatively quickly. Keep in mind, Bryan considers this a more speculative play.”
Disclosure: of the stocks mentioned above, I own shares of Par Techology, GAN, Shopify, DocuSign and Roku. I will not trade in any covered stock for at least three days after publication, per Stock Gumshoe’s trading rules.