DISCLAIMER: This note is intended for US recipients only and, in particular, is not directed at, nor intended to be relied upon by any UK recipients. Any information or analysis in this note is not an offer to sell or the solicitation of an offer to buy any securities. Nothing in this note is intended to be investment advice and nor should it be relied upon to make investment decisions. Cestrian Capital Research, Inc., its employees, agents or affiliates, including the author of this note, or related persons, may have a position in any stocks, security, or financial instrument referenced in this note. Any opinions, analyses, or probabilities expressed in this note are those of the author as of the note's date of publication and are subject to change without notice. Companies referenced in this note or their employees or affiliates may be customers of Cestrian Capital Research, Inc. Cestrian Capital Research, Inc. values both its independence and transparency and does not believe that this presents a material potential conflict of interest or impacts the content of its research or publications.
We're Feeling Good About This One
If you read our work on Seeking Alpha and elsewhere you'll know a few things about our approach. You'll know that we like numbers a lot; that we like stock charts almost as much; that we have a nice line in space-sector investing; but first and foremost you will know that we love cloud software stocks. Because a good cloud software business is capitalism par excellence. High growth, predictable revenues, pricing power over their customers, high gross margins, scale so well to their operating cost base that 30% plus EBITDA margins are viable even whilst growing revenues at 30-50%+, oh, and hardly any capex. And ... you get paid upfront so if you know what you're doing, you generate more cashflow than you do profit. Seriously - what's not to like.
In the twenty years since Salesforce.com (CRM) burst into investors' consciousness, the notion of putting your stuff in the cloud - whether your stuff be cat videos or government intelligence data - has moved from "you must be joking, pass me the RAID array and a big ol' air conditioner" to "well I suppose some of our less sensitive stuff that can be delivered slowly can go remote" to "Cloud, you say? You mean I can employ less IT guys and stop having to write them checks for rooms full of stuff I don't understand? Where do I sign?".
You know all this already.
Because even if you don't know cloud like we do, you do know that cloud stocks are always too dang expensive. Bright green day? Too scary to buy, they've run up too far. Bright red day? Too scary to buy, they've fallen so far so fast, who knows where the bottom is? This is kind of true, at least insofar as the volatility in some of these names can give you an ulcer in the space of a few hours if you aren't level-set on your understanding of the business and your plan for the stock. Tech has always been this way. If you talked to investors in tech back when exciting smelled like a Winchester drive, they'll tell you that, man, those hard drive stocks, sheesh, they're too scary to buy.
Tech is always the scary sector. That's because it's a permanently high growth sector. And has its origins not in Moore's Law but in the rapacious, destructive nature of capitalistic expansionism. (Which in our view has its roots in the very soul of humanity but it's Friday so let's leave the metaphysics for another day). Capitalism never met a profit it didn't want to smash to pieces. Somebody else's profit, that is. And customers in a capitalist economy never saw a price they didn't wish was lower.
In the technology industry these two powerful drivers combine to deliver something called euphemistically the product lifecyle. Which in essence means, if you have a startup, particularly a software startup, you say - you see that big incumbent vendor over there? Your Cisco (CSCO) or your IBM (IBM) or your Microsoft (MSFT) or your Splunk (SPLK) or your AT&T (T)? I'm off to ruin their world. Deflate their prices. Crush their margins. Poach their best customers. Hire their best staff. Suck value out of their market cap. I'm their worst nightmare. They just don't know it yet. And - being from the Valley most likely, you dress all this up in a tofu-based wrapper and label it tech for good or helping customers do better or something like that. Your average software startup is a werewolf in vegan clothing.
Right now the cloud plays are the werewolves, and the old-line vendors - by which we mean most any tech company born before around 2005 - maybe even before 2010 - are lunch.
This threat has been on the horizon for some years now, since Internet 2.0 got going in around 2012. That's when telcos began to get their act together and delivered data connections that actually worked, and when software development and deployment platforms figured out how to make real the promise of orchestrated microservices, hosted virtual machines and other spookily Matrix-like innovations. Along the way you can thank Amazon (AMZN) and Microsoft (MSFT) for their pervasive low-cost computing platforms too. The best examples yet of how old-line is managing to suck a little value back out of the new crop of names.
The first wave of the covid crisis sealed the deal. Now enterprise customers are rushing to cloud vendors, not for the tofu but for the cost savings. Buy cloud software, employ less people. Employ less people, lease less real estate. Lease less real estate, pay less utility bills. And on and on. Capitalism is always trying to destroy something, and now it has its sights set on the Fordist workplace. The distributed enterprise is now a thing IRL, not just a slide on a Citrix (CTXS) (unlucky! it came too late for you) sales presentation. And you can't run a distributed enterprise without cloud software. (Mainframe whisperers, yes, we know you can telnet to a zSeries, or the turbocharged version thereof, but you know that's not what we're talking about here).
We think that the 2020s are going to be the Cloud Decade. We think that cloud will continue to penetrate enterprise IT spending. We think that the leading cloud software vendors are going to maintain strong revenue growth and move into substantial cash generation - some have already done so.
So our Cloud Decade Portfolio is just that. We have a 10-year horizon on this investment project which, as always, is a real-money project. We're committing Cestrian staff personal account funds to the project and we publish the work we prepare in pursuit of our investment goals.
Subscribers to our 'Fundamentals' Marketplace service here on Seeking Alpha now gain access to our construction, tuning and maintenance of our Cloud Decade Portfolio. We're layering in the key cloud stocks in each essential element of the distributed enterprise. It won't surprise you to know that Salesforce (CRM) is in there - and you already know that Twilio (TWLO) is a constituent. It surprised us to find that we had to include Cloudflare (NET) amd HubSpot (HUBS). There will be many more. We select the names based on rate of revenue growth, actual or potential cashflow margins, competitive moat, and so forth. Many of the ideas we had ourselves, many came from subscribers and were then discussed at length in our chatroom - we have folks from all walks of life - investors, software product people, traders - all sorts. Bringing multiple perspectives to each stock discussion. Over the life of the Cloud Decade Portfolio we'll be adding new names, adding allocations to existing names, trimming those names, and all in all doing our best to keep the portfolio moving up over the years.
You'll get access to the Cloud Decade portfolio work, to our short-term 'Mouse Raid' trading ideas, our short-term 'Tealeaf Technical' ideas, to a truly great chat service, genuinely welcoming to all, that is on fire most days - save for Fridays when it gets a little lighter. Also to our 'Risky Business' series on portfolio risk management, our 'Macro Musings' series covering the rates backdrop to the market ... and let's not forget our 'Epicurean Weekender' blog which takes you nicely into Saturday morning.
We offer two week free trials so you can try all this out for nothing.
If you like it - we'd love you to stay. We charge $199/month, or $1999/yr if you pay upfront. If you become a member and then write for us, you can reduce your renewal fee down to zero with enough published. If you refer new members to us, you can reduce your renewal fee. We want to continue to build our cloud community - the more, truly, the merrier and, crucially, the better investors we can all become.
You have nothing to lose but the 2 weeks you spend in the trial.