What’s “The ‘Hidden’ SaaS Stock” for Tech Royalties?

Solving a teaser pitch puzzle from Stansberry Venture Value

By Travis Johnson, Stock Gumshoe, February 25, 2020

I’ve gotten a bunch of questions about the latest teasers for Stansberry Venture Value (“on sale” for $1,897/yr, no refunds), so I thought I’d dig into that a little bit today — they’re hinting at a couple cloud SaaS stocks to pique your interest… and, well, consider me piqued.

The ad is not brand new, they’ve been pitching Stansberry Venture Value with this “Hidden Saas Stocks” spiel for a month or so, but the ad is unchanged and the two stocks that they drop some clues about have not moved much in price since they started touting them… so I guess we haven’t missed much yet.

Starting us out with the big picture notion behind the recommendations, we’re told that Porter Stansberry has “spent my whole life trying to find THIS group of stocks,” and that they’ve beaten the markets handily, returning 56% per year on average… and that only about 150 of these stocks exist, and one of them could “skyrocket 3,000% long term”.

Sound enticing, right? We start to get into the details a little further on in the ad….

“Porter’s two top financial analysts have recently begun recommending a very rare and specific group of stocks in the public markets.

“By our count, only around 70 of them have ever gone public in the U.S.

“I’ll share the names of more than a dozen of them with you today.

“This type of stock outperforms everything else in the markets.”

And this is the “best business model” description from the ad:

“These companies have harnessed a massive shift in how people interact and do business.

“But the real story is how they perfected a world-class business model — the kind Porter has been searching for across every industry for his entire career.

“Companies that execute this model well are virtually guaranteed decades of consistent revenue, with minimal operating costs. I’ll prove it to you today.

“They’re reliable, cash-gushing, ‘meat and potatoes’ businesses — that also happen to occupy a skyrocketing corner of the technology industry.”

And then the part that I like, when the magical word “royalties” comes in…

“The best SaaS companies have retention rates above 90%! So for a SaaS company, each dollar of revenue today actually represents years and years of future revenue as well.

“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.”

The ad also lists dozens of hugely successful cloud SaaS stocks, many of which you’ll be familiar with like Shopify (SHOP), Pacom (PAYC), SeviceNow (NOW), RingCentral (RNG) and Okta (OKTA), along with SaaS pioneer Salesforce (CRM) and quite a few others (some of those have been touted over and over, and several are in my Real Money Portfolio as well).

And the pitch is that Stansberry Venture Value, thanks to the insights of those analysts (Bryan Beach and Mike DiBiase), will be recommending these kinds of cloud software stocks before they’re household names and before they shoot dramatically higher. From the ad:

“They’re extremely small, with almost no analyst coverage and little to no chance of showing up on an institutional investor’s Bloomberg terminal.

“They’re the type of early-stage companies that can easily grown 10-fold in a few years — especially considering the track record of this world-class business model.

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“They’re almost complete hidden — for now. And Bryan and Mike simply can’t ever detail opportunities like these anywhere but Venture Value.”

So now I’m completely curious, and want to see what stocks they’re talking about… but I would not, of course, ever subscribe to a nonrefundable newsletter just to satisfy an itch about a “hot” stock, so let’s see if we can ID them for you. Then, if you decide this is exactly the kind of thing that delights you, sure, take a few days to think it over and maybe subscribe to their newsletter if you feel like it — I don’t know anything about the track record, and I’d suggest that you’d better be investing at least $100-200,000 in this kind of strategy if you’re ponying up $2,000 for advice, but you can make your own call once the urgency of the “reveal the secret” is removed.

The primary pitch is for two stocks, and it looks like I probably will only have time for the first one today… but I’ll get to the second one in the morning.

“Opportunity 1: The “Hidden” SaaS Stock

“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.”

Oh, MAN do I love a good secret! Whatever could it be? Might we please have some clues?

“It involves a promising, private SaaS business that was bought up before ever hitting the public markets.

“Now it’s tucked inside an ordinary-looking public company that almost no one is paying attention to.”

OK, that’s interesting. And they say the company was a compelling idea even before this acquisition, so that’s good…

“This company was already a potential 10x candidate in its own right. The kind that grows steadily with absolutely no fanfare.”

And how is it “hidden?” Apparently they’re not getting credit for this SaaS part of the business yet… so what is the core business that most investors are thinking of?

More from the ad:

“… 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.

“This hardware business is important. The company’s prior management team nurtured this business for years. The hardware business never made much money, but it’s reached an incredible level of market penetration.

“Around 60% — among some of the biggest brands in a nearly $300-billion-a-year industry.”

OK, so some kind of point of sale terminal company — that’s a tough and very competitive business, but certainly there have been some glimmers of big growth recently (think Square (SQ) or LightSpeed (LSPD.TO), the latter of which is still being touted as a “next Shopify” opportunity by Motley Fool Canada).

And apparently the “Hidden SaaS” bit is the software that powers all this hardware…

“The retail stores need this software. It actually saves them money by doing things, like tracking supply chains and staffing needs.

“It’s like razor handles and razor blades — where you can sell the handle at a loss… because you know your customer will need to buy expensive blades for years to come.

“In this case, the terminals are the razor handles… and the software contract is the blades.”

Ah, the razor and blade model! That’s another favorite, popularized by King Gillette as he built that company but also the foundation of so many other successful businesses (like Hewlett Packard’s printers and those crazy-expensive ink cartridges). So we get both royalties and razor blades? Delightful!

We get some squishy talk about the product being so popular that the company is turning away customers… which sounds odd, since one of the delights of software is that it is almost infinitely and immediately scalable, with the same product easily sold to either 1,000 or 100,000 customers. Here’s the language they use:

“This company’s existing clients have been beating down the door to install and pay for this software, on a recurring basis, forever.

“The thing is — until now, the company has had to turn them away, in a lot of cases.

“That’s right. Clients are practically throwing money at it. And it’s turning them down.”

So that’s probably hyperbolic, but apparently there’s some unmet customer demand. And we get a specific clue about that:

“It has it has a yearlong waiting list… and upwards of 80,000 potential customers for this software.

“And by Bryan’s math, even if it converts just 20% of those sales — sales to clients that already know and like it — its revenues could quadruple.”

And we get one more clue:

“… this company is run by one of the greatest businessmen 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.)”

So who is it? The Thinkolator had to get pulled fully out of the garage for this one, and I even had to change the oil halfway through… but after some cursing and a quick wack with a hammer we did get our answer: This is almost certainly Par Technology (PAR).

Which I confess to never having heard of at all before this moment, but it is a perfect match for the clues. Par is a small company that’s primarily known for supplying POS hardware to the big fast food chains, and that’s where they have that “60% market share” hinted at in the ad (it’s 60% “site penetration within key logos” on average, across large customers like McDonald’s, KFC, Qdoba, Subway, etc.).

That core hardware business is supplemented by the faster growing Brink POS SaaS business they acquired about five years ago, though they’ve also bolted on some other technology to that (including the Restaurant Magic back-office software suite they bought late last year), and that’s certainly where Par hopes to see growth.

They report on March 13, after the close, so we’ll know a bit more in a few weeks… but this is really a turnaround attempt right now that is probably going to see some fits and starts along the way, with a growth business inside the turnaround. The company had a pretty major shakeup a little over a year ago, and some activist investors got involved to push for the company to be sold because they were not investing enough in Brink or finding a way to narrow the valuation discount at which the stock was trading (that was in the fall and winter of 2018), and that led to the transition to a new CEO only about a year and a half after Donald Foley, another board member, had taken over and failed to impress investors.

Which is really what caught my eye today, frankly, because the new CEO is a really interesting guy whose name I knew — Savneet Singh hails from my part of the world (upstate NY) and went to the same school as I did, but is a decade or so younger and far more accomplished (arg!). Singh caught my eye originally because he did a really interesting interview with Patrick O’Shaughnessy’s Invest like the Best podcast a couple years ago (and he was trying to build Tera Holdings into the “Berkshire of Software” at the time, seemingly emulating Canada’s Constellation Software (CSU.TO, CNSWF), I think before he was even on the board of PAR. That’s worth a listen whether you’re interested in this stock or not. And, frankly, I didn’t notice he had taken over as CEO at Par Technology until I started to look into PAR this morning (it was “interim,” but that label seems not to be on the website any longer)… but that’s enough to get me to at least consider investing in Par Technology and the potential of their Brink POS platform.

I have no idea whether there’s really a dramatic demand for Par’s Brink platform among their customers, they do seem to have made some progress (including signing one big chain to the software last quarter), but they do have some large restaurant chains as customers and there is at least good growth in revenue for that segment so far, and it should be sticky. Probably the larger issue for PAR, at least in the near term, is that the overall revenue isn’t growing because the larger hardware business is a little stagnant (overall revenue peaked at about $250 million back in 2017, and is now down to $181 million for the last four quarters) and the government contracting business, which is a separate product offering entirely, has been shrinking. You can see their investor presentation from January here, it lays out the various businesses and their goals pretty well.

So it appears that the downside for Par recently is that they had a down year for revenue, and they will probably have to up their spending to grow the Brink/Restaurant Magic business… with no guarantee of success. But with Savneet Singh on board, frankly, and with the large installed base of hardware customers into whom they can cross-sell the Brink and Restaurant Magic offerings, there is at least some potential. I’m guessing that they should sell the legacy government services business to someone else and really focus on this growth SaaS opportunity, but maybe it’s a hidden gem — I essentially ignored it in my research (the founder and longtime CEO John Sammon built the company mostly in that area, and considered it a profitable foundation).

If we assume the hardware business is self-sustaining and can keep chugging along, we’d have to guess at what the SaaS business might be worth if the market decides to trust this company to grow it — they say they’ve grown the site count by 32% in that business, with 31% year over year increase in SaaS revenue last quarter and an annual revenue rate, as of the end of the third quarter, of $17.9 million. That’s only about 10% of the total revenue, though it will be rising with the Restaurant Magic acquisition to probably about $30 million.

But if we thought of it like other SaaS businesses? In that case, 30% revenue growth in a software business might reasonably get you a 10-15X sales valuation these days — which could mean that the Brink business today should be worth maybe $300-450 million even with all the competition. We shouldn’t get too far ahead of ourselves in applying a crazy multiple like 20-40X sales — they’re growing a lot more slowly than Lightspeed, for example, another restaurant-facing POS provider that is also expanding into backoffice stuff… but they do have the advantage of connections to all those huge chains and to franchisees that have dozens or hundreds of locations.

So $300-450 million of potential value is certainly appealing as something that could be “hidden” inside a $500 million company that has a strong hardware and government contracting business that has sustained but not grown the business over the years.

My reaction, really, is that I see some potential for PAR — but I also see that there’s some serious risk of failure. The good thing is that it’s a risk of slow decline and stagnation, most likely, not a risk of overnight collapse — so with the potential of Brink POS and my fascination with Savneet Singh’s possibilities as a corporate leader, now that he seems to be getting his feet under him and pushing to grow the business aggressively, I’d be willing to nibble a bit here. There are certainly other risks, too, the stock has gone through several long periods of stagnation, and they’ve been through several CEOs in the nine years since John Sammon stepped down, including his daughter Karen Sammon, and the Sammon family still controls a substantial portion of the stock (they own ~12% or so, but don’t seem to have any family members in leadership anymore).

For me, this is a bet on an installed base and on a manager who I think has a lot of potential… and I wouldn’t be jumping in with this small and quick investment if I didn’t have some background in looking at Singh’s ideas in the past, so I’m going in with a little nibble here and will look to see what they say in their next conference call about the growth potential with the merger of Restaurant Magic and Brink POS. It should, at least, be an interesting ride.

And as I said, I got into researching this one a bit and spending some time on Singh’s background again, so I didn’t get to “stock number two” just yet… but that’s why the world gives us tomorrow, I’ll get SaaS-y with you again then. If you’ve got thoughts on SaaS, PAR, Singh or the Venture Value folks at Stansberry, well, feel free to shout ’em out with a comment below… thanks for reading!

Disclosure: Of the stocks mentioned above, I own shares of Par Technology, Shopify and Okta. 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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William Bader
William Bader
February 25, 2020 6:02 pm

I’m curious, if anyone knows when & how the practice started of using Price/Sales or EV/Sales as a key metric for valuing SaaS/Cloud stocks. And has anyone tested the durability of this metric?