Opportunities in technology
As I write the overall market is taking another hammering with the US Dow Jones index down nearly 1,000 at one stage, yet again. My theory is that stocks up to February stocks were being driven higher by various factors – accelerating technological change, globalisation and rising global wealth.
This was great until the whole thing was hit by an exocet missile in the form of the coronavirus. It took a while to realise that the fact that the virus is much less deadly than says the Sars virus made it a much greater threat to the global economy. It is hard to imagine anything worse than a highly infectious flu, which kills a significant number of people so cannot be ignored and where the only current remedy is everybody going into quarantine.
It’s like Guy Fawkes has lit a billion barrels of gunpowder under the global economy and the explosion rolls on for an indefinite period. The doomsters are having a field day. Optimists like me are in full retreat , with cries of I-told-you-so echoing all around us.
And yet I am not so sure that it is game over. On the contrary, I am beginning to think this virus may kick the technology revolution into an even higher gear. People are in quarantine, self-isolation, social distancing mode but for the most part they are still full of energy and eager to work. Life and work goes on but more of it is taking place at home and for that we need technology.
It’s really anything involve gatherings and groups that is hit, which is serious but it is not the end of commerce. The worst affected have somehow to scramble through and can count of government assistance to do that as well as private sector interest once we have a glimpse of light at the end of the tunnel.
Technology may just blaze on virtually uninterrupted and that is mostly the basis for the stocks I am going to recommend below. It is unusual for me to recommend stocks at all in a bear market but this one has fallen so far so fast that it is more like a crash than a bear and crashes can often prove fairly short-lived, months rather than years.
I also have a strong feeling that for many tech stocks this is just an interruption and they will go on to reach new peaks. A more prudent man might say let’s wait for buy signals and that would be another strategy. I certainly hope when the market turns that I will be drawing your attention to many exciting buy signals but I also think that if you have a heavily technology-focused portfolio sitting it out and even building it up may prove the most rewarding strategy.
I am almost beginning to think that portfolios should not just be heavily weighted for the US but should also be overwhelmingly, even completely, in technology shares. Technology is where the action is so why not make it also the home for your money.
So here are some ideas for stocks to buy now or on any desperate down days. One day there is going to be a huge up day, when global reflation, the easiest money in human history and glimmers of light at the end of the coronavirus pandemic come together to create a perfect storm of bullishness. On that happy day we can get back to the pleasing business of kicking the currently triumphant bears up their miserable backsides.
Buy recommendation No.1 – Amazon.com @ $1,900 Next figures: 23 April
Amazon shares have taken a beating, dropping from $2,185.95 a month ago to a recent low of $1,625 from where they rebounded after the company announced that they were looking for 100,000 workers to help them meet demand. The group has three fabulous businesses – marketplace for retail, prime for subscribers and video and AWS for the computer cloud, which is surely going to become even more essential in a more virus-conscious world. The shares have traced out a massive consolidation. It could break down in some end-of-the-world scenario but I think it is going to break up and long-term prospects for Amazon look as exciting as ever.
Buy recommendation No. 2 – Adobe Inc @ $307 Next figures: 11 June
This is what Adobe CEO, Shantanu Narayen, said about the Q1 2020 results reported on 12 March, which showed 19pc sales growth.
“Our strategy of unleashing creativity for all, accelerating document productivity, and powering digital businesses continues to drive strong top and bottomline performance. Adobe’s unique advantage of enabling everyone from students to creative professionals to small businesses and large enterprises to create and deliver exceptional digital experiences is enabling our customers’ success and fuelling our business momentum. With Creative Cloud, Document Cloud, and Experience Cloud, we are growing across all geographies and industries and appealing to a broader set of customers than ever before.”
Of course Coronavirus is a concern and may well hurt short-term performance but as he said.
“While the situation is concerning and there’s tremendous uncertainty, the long-term fundamentals of our business remain undiminished. Adobe is at the centre of three massive market opportunities across creativity, digital documents, and customer experience management, which will fuel growth in the near- and long-term. Businesses must transform to deliver a personalised digital relationship with every customer.”
This is a great stock to buy on down days, any days for that matter because they are going way higher over the longer haul.
Buy recommendation No. 3 – Atlassian Corporation @$128 Next figures: 20 April
Atlassian is all about software to help teams of people work better together. It is easy to see that that business could flourish even more in the current environment. One of the striking features of Atlassian is that the company spends surprisingly modestly on sales and marketing but massively on research and development. The idea is to make the product so feature rich and such good value that it sells itself and nobody can compete.
As CEO, Mike Cannon-Brookes, noted with their Q2 2020 results, released on 23 January, the group is on a very exciting path.
“Our long-term focus is to unleash collaboration potential for any team in as many markets as possible. Few markets are as large and fast growing as the market for software. Our model positions us to impact 800m global knowledge workers in the massive, growing software collaboration market. Customers use Atlassian software to drive their most important workflows, and our frictionless go-to-market model makes it easy for any size team to adopt our products. Each new landed customer propels a myriad of expand opportunities, multiplying the number of teams that can collaborate through Atlassian.”
Any interruption from the virus is likely to be short-lived and may not even happen given that current circumstances may boost demand. This is another great long-haul stock to be bought on down days and any days.
Buy recommendation No.4 – Bill.com @ $37 Next figures due: 21 May
Bill.com is a new entry to the Quentinvest portfolio. The shares are recently floated and have been volatile, having been as high as $64.12 and as low as $23.27. It is understandable that investors are nervous because the business is on a demanding valuation. Bill.com is valued at $2.65bn, which is 17.7 times expected revenue of around $150bn for 2020. What makes Bill.com exciting is the rapid growth and the size of the addressable market. Revenue has grown from $64.9bn for 2018 to $108.4bn for 2019 on route to $150m for 2020 so this is an exciting business.
This is what they say about what they do.
“We Make Paper-based Manual Transaction Processing Obsolete
Customers use our cloud platform to generate and process invoices, streamline approvals, send and receive payments, sync to their accounting system, and manage their cash. Bill.com weaves software and payments together, and the result is a more efficient and reliable financial operation. We have built sophisticated integrations with popular accounting software solutions, financial institutions and payment processors, enabling our customers to connect these mission-critical services seamlessly. As a result, we become central to an SMB’s (SMBs are small to medium sized businesses) accounts payable and accounts receivable operation, as evidenced by our customers electronically exchanging more than 8,000 messages per day, approving more than 2.4m bills per month and storing almost 45m documents per year, as of June 30, 2019.
Today, tens of thousands of customers trust our platform to manage their financial workflows and process their payments, which totalled billions of dollars annually. And our platform extends well beyond our customers. In fact, as of the end of our last fiscal year, we had over 1.8m network members. Members consist of our customers, as well as their suppliers and clients that collaborate on our platform in exchange electronic payments.
Hence, our mission, we make it simple to connect and do business. Now that I provided a short overview of who we are, I’d like to spend a few minutes talking about our opportunity. SMBs represent a significant and critical component of the U.S. economy.”
And they believe they have a very large opportunity.
“SMBs are businesses with fewer than 500 total employees, as defined by the small business administration. In 2018, there were approximately 30m SMBs in the United States, which provided employment for over 47pc of all U.S. workers. This group was responsible for a third of goods traded by value.
While 24m of these SMBs are sole providers, we focus on serving the over 6m firms with employees. SMBs large enough to have employees tend to have a greater need for more advanced accounts payable and accounts receivable processes. Importantly, these SMBs remain largely underserved by current software solutions. According to IDC (a supplier of global intelligence), in 2019, small and mid-sized businesses are planning to spend approximately $65bn on software in the U.S. alone. We believe that we are well-positioned to capture some of that spend. We estimate the annual addressable market for services we offer today to be $9bn domestically and $30bn globally. We derived these estimates by multiplying our average fiscal 2019 revenue per customer of $1,500 by each of the 6m domestic employer firms and the 20m small and medium-size businesses worldwide.
In addition to the software opportunity, our platform enables us to pursue a large and growing payments opportunity. According to the 2018 MasterCard report, North American companies make approximately $25 trillion of business-to-business payments annually. And according to Deloitte, the U.S. market for SMB payments is expected to exceed $9 trillion in 2020.
And finally, over 90pc of SMBs still rely on paper cheques, according to a survey by the SMB Technology Adoption Index. As more SMBs move to digital payments, we believe Bill.com is well-positioned to capitalise on this evolution. SMB span all industries and geographies. We’ve developed a powerful go-to-market strategy that enables us to reach them wherever they are in a cost-effective manner.”
Buy recommendation No. 5 – Crowdstrike @ $51 Next figures due: 19 June
Crowdstrike has not been a huge success for QV. I recommended the shares at $92 and since then they have been as low as $31.91. The volatility is a function of great growth, great prospects and a humongous valuation. Analysts see sales growing from $250m for the year to end-January 2019 to $951m for the year to end-January 2022. The enterprise value is $9.6bn so with a bit of rounding the shares are valued around 10x projected sales for the 2022 fiscal year (effectively 2021) and around 40 times historic sales. This company needs to grow fast to justify its current valuation and investors find that scary, especially when a virus is stopping the global economy in its tracks.
Nevertheless, Crowdstrike is super exciting, which is why I picked them in the first place. This is what CEO, George Kurtz, had to say about Q4 2020 results, announced on 19 March/
“First, the dynamics of the competitive landscape are the best I have seen in my 27-year career. We believe this is the beginning of a multi-year trend being driven by the industry consolidation that took place last year along with the seismic shift to cloud technologies. Second, customers and partners are increasingly choosing CrowdStrike as their security cloud platform and partner of choice. As a result, we are landing bigger deals with more modules and increasing the number of new customers that start with ARR (annual recurrung revenue) over $1m. And third, regardless of the spending environment cybersecurity is not a discretionary purchase for organisations. Cybersecurity is mission critical to both the public and private sector. Endpoint or workload security is also essential to protecting a remote workforce. While the impact to the macroeconomy from the coronavirus is unfolding in real time, we know it is forcing companies to conduct business differently and rapidly shift to a remote workforce. With our cloud native platform, our lightweight agent that is easily deployed at scale and our frictionless go-to-market engine, CrowdStrike is uniquely positioned to meet their cybersecurity needs.”
Plus the company is growing at a phenomenal rate.
“Across the board, we delivered another exceptional quarter at CrowdStrike with record results well exceeding our expectations. During the quarter we added a record $99m in net new ARR and year-over-year, we increased the number of net new subscription customers by 116pc, achieving 90pc subscription revenue growth and 89pc total revenue growth, which was above the high end of our guidance. The fourth quarter topped off a historic year for CrowdStrike in which we delivered exceptional growth at scale, significantly improved our margins and achieved positive free cash flow for the year.
We ended the year at $600m in ARR, up 92pc over last year and revenue of $481m, up 93pc, making us one of the fastest growing SaaS companies at scale. Subscription revenue grew even faster, up 99pc to reach $436m. We believe our robust results this year speak to our relentless commitment to stopping breaches, our growing leadership in the security cloud category and our frictionless go-to-market engine. All of this is made possible by the exceptional execution of the CrowdStrike team. We have an amazing company and I would like to personally thank every CrowdStriker for their unwavering dedication to protecting and empowering our customers. I couldn’t be more pleased with everything we’ve accomplished together or more excited about our future opportunities.”
The company is red hot; it’s all about price but if they keep growing at anywhere near this rate they will become great value and they will stay expensive.
Buy recommendation No. 6 – Docusign @ $83 Code: DOCU Next figures: 6 June
Docusign has become the king of esignatures and more recently has built on that to launch an online platform for all types of agreements. It’s a simple business but most of the great ones are.
“Since its inception in 2003, DocuSign has pioneered the development of the eSignature. Today we offer the world’s No. 1 eSignature solution as the core part of our broader platform for automating the agreement process.
Our value is simple to understand: the traditional, paper-based agreement process is manual, slow, expensive, and error-prone. We eliminate the paper and automate the process, allowing companies to now measure turnaround time in minutes rather than in days, substantially reduce costs, and largely eliminate errors.
Our cloud-based platform allows companies of all sizes and across all industries to quickly and easily make nearly every agreement, approval process, or transaction digital—from almost anywhere in the world, on practically any device. Today, as a result, more than 425,000 customers and hundreds of millions of users worldwide leverage DocuSign to create, upload, and send documents for multiple parties to sign electronically.
Our platform also allows users to complete approvals, agreements, and transactions faster by building end-to-end processes. It enables electronic signing, payment, and provisioning requests to be embedded in our customers’ existing processes. The platform integrates with popular business apps, and our functionality can be embedded using our API (application programming interface). And it allows customers to automate and streamline their business-critical workflows to save time and money, while staying secure and legally compliant.”
The potential for offering a platform for all types of agreements looks very exciting.
“With that said, let’s move on to our business performance over our second year as a public company. It was just 12 months ago that we introduced the DocuSign Agreement Cloud. Our suite of applications and integrations that help organisations automate the entire agreement process that is; preparing, signing, acting on and managing those agreements.
We see agreements increasingly integrated with the cloud software suites like sales, service, marketing, HR (human resources) and finance. Our belief is that organisations will need an Agreement Cloud to act as a platform of record for agreements and agreement processes, which will be connected to the other clouds. For example, integrating with the HR system for offer letters or the CRM system for sales contracts.
We believe this represents the next big cloud opportunity. Over the past fiscal year, we have broadened our product and service offerings to cover every stage of the agreement process. And of the five new products that we shipped in fiscal 2020, I’d especially like to call out DocuSign CLM. Launched in November last year this builds on our acquisition of SpringCM. And it was just named by Gartner as a leader in the 2020 Magic Quadrant for contract life cycle management.”
And its producing results.
“The positive impact of all this work can be seen in our financial results, a few of which I want to share with you. Now for Q4, DocuSign’s revenue grew 38pc year-over-year to $275m and billings grew by 40pc year-over-year to $367m. We were again profitable on a non-GAAP basis and we continue to generate positive cash flow.
Our total customer count climbed to approximately 589,000 worldwide and our dollar net retention rate (revenue growth from existing customers less any cancellations) came in at 117pc. For the full fiscal year, our revenue grew 39pc to $974m and our billings grew 38pc to $1.1bn. I’m incredibly proud of the entire DocuSign team for this collective effort.”
Docusign is another new addition to the QV portfolio and I believe a very exciting one. The shares have been volatile as investors have understandably run scared of the coronavirus crisis but, like other shares in high, quality resilient businesses, they may go down but they don’t seem to want to stay down.
I am increasingly feeling that developed countries are going to join Asian countries in getting the virus under control and that as soon as stock markets see light at the end of the tunnel they are going to recover, possibly surprisingly rapidly. This happened in 1998 after the Russian debt crisis. On that occasion, shares plunged and talking heads appeared in newspapers and on TV announcing the end of civilisation as we know it. Barely had they finished speaking before shares were soaring again.
A complete shut down of business is tough, especially for anyone in businesses like travel, entertainment, restaurants and cinemas where people cannot practice social distancing but I am increasingly thinking that technology shares are going to blast straight through this; hence my move to a more positive stance. I also think good businesses in any field will not be allowed to go under for a temporary problem.
I have more technology shares that I like than are mentioned here so watch this space.