It's been a crazy month. As of now, I'm +5% YTD while S&P500 is -24%. EVERYTHING fell. But it seems that ole "tech stocks are riskier" falsehood keeps getting disproven. Retail and restaurants plummeted; airlines and cruise lines plummeted. SaaS vital services, however, are in HIGH DEMAND. The better of the tech stocks bounced back in an awful hurry, and I'm way above the market still. Owning these vital services is MINIMIZING my risk now in the face of this pandemic.
And Zoom - just ... wow. Folks who bought in Oct/Nov are sitting pretty. I unfortunately came in later, but, it's been nothing but rocketing up since. It's been a blur.
So I've been pondering how this pandemic and the recession it fed will affect SaaS hypergrowth companies. Here's my thoughts...
The Known Knowns
Stocks benefiting in this environment, technically :
Zoom (ZM)
Clearly the big winner right now, as maintaining communications is vital during this pandemic. They made it free for K-12 to use during this pandemic. Usage is soaring, and the brand is riding high. Costs are sure to rise, as vast majority of new users are using it free, but the surge in capacity is bringing in massive customer growth and great goodwill. Crazy to watch this company's tape move opposite the other SaaS plays, almost makes it a hedge. "Zoom" is now becoming a verb, quickly (I think I've heard Zoom directly mentioned on about 1/2 of the earnings calls I've heard this month). I think we don't need any more of the countless anecdotal Zoom stories; we have a clear winner in video communications. And, AMAZINGLY, the software appears to holding up to the strain of being at full capacity -- their tech team is top notch.
Slack (WORK)
Another clear winner as newly remote co-workers need to communicate. I've stayed away because their growth rates have been plummeting, but this is sure to at least stem the tide of that for a few Qs.
Crowdstrike (CRWD)
Scattered employees being forced to work-at-home means more devices that need protecting. They made it free to add temporary devices ("surge") during the next 60d, as well as are allowing personal devices, since employees have to use their own at home.
Cloudflare (NET)
Scattered employees being forced to work-at-home means more traffic that needs protecting. My newest purchase, and it's been holding up way better than others. I sold 2/3 of TTD to buy NET, and it has been +20% vs -33% since. Their new Cloudflare for Teams product, a complete clone of Zscaler (ZS), came at a perfect time, adding a whole new line to a company already having accelerating growth, now 50%. They opened Cloudflare for Teams up immediately as free for everyone until Sept 1! That is going to cost a lot in infrastructure, but once it flips to paid, this company's new product will have great momentum. More and more are adopting Zero Trust as the way to secure their ever sprawling network, as the number of remote workers is surging.
Zscaler (ZS)
Same as NET, scattered employees being forced to work-at-home means more traffic that needs protecting. This is may be a fire lit under their struggling sales force, and helps turns the dial back to hypergrowth. Or.. it may stress an already faltering sales team into further array. I think the surge in remote working tilts it heavily towards the former, at least stemming the huge drops in revenue growth, and likely even rekindles customer growth and $NER.
Okta (OKTA)
Centralized identity is vital as a company's workers disperse into separate locations. This work-from-home scenario plays EXACTLY into their strengths. No brainer.
DocuSign (DOCU)
Overall a net positive as anything that strengthens contactless agreements is good for them. Agreements are sure to go more electronic in an age of social distancing, so this strong platform is only getting stronger. Usage may dim as companies shrink spend (don't need that contract signed after all), but this company is a clear leader in its space.
Coupa (COUP)
More scrutiny on enterprise spend means more need to track it, and this platform pays for itself immediately in managing supply. New customers will dip with budgets getting conservative, but existing customers keep leveraging their platform in order to keep suppliers & supply chains under control.
The Known Unknowns
These are more up in the air:
Alteryx (AYX)
Is an unknown. Analytics are always important, but enterprises are likely to curtail spending immediately for non-vital services, for at least 6mo. New customers might shrivel up. It's going to put "analytic software & services" up to the test to see if it is recession proof or not. I have faith that it IS vital, but I'm not sure its fully immune from reduced enterprise spend.
Datadog (DDOG)
I'm not sure how observability will play out. Budgets are going to tighten and new customers might shrivel, but SEEING your infrastructure & software is JUST AS VITAL now as it was before. So I'd call this a vital service to start with, and am not sure the work-from-home situation affects that one way or the other. Perhaps the surge in certain SaaS usage is a net positive; if services are scaling up infrastructure to handle more capacity, the need to observe also grows (Zoom and Netflix and Okta are having massive spikes in usage, so are adding more servers and service instances that need watching).
MongoDB (MDB) & Elastic (ESTC)
Are an unknown. Consumption of existing custs will rise, but perhaps not as much as before. Certain internet companies are doing really well though, and perhaps are still growing their usage. But I feel that new customers might shrivel up in an environment where enterprise spend is getting curtailed rapidly. Support contracts from non-SaaS custs may not get renewed. I'm not as excited about these db providers just given the reduced overall enterprise spend.
Roku (ROKU)
Is an unknown. Ad budgets will shrivel, but their device count is expected to grow strongly, giving more viewers and ultimately more eyes on their ad platform - that only means good things. They stand to gain marketshare - it's really between them and FireTV right now, and Roku has been slowly increasing its lead thus far. As long as they remain top dog, which seems a given, they will come through stronger at the other end of all this. But it could be a topsy turvy few months.
The Trade Desk (TTD)
Ad demand is sure to drop as budgets tighten (at least for a few months). However, they are at the forefront of the Connected TV wave, and demand for streaming platforms during this stay-in-home period is extremely high. I think they too will come through stronger at the other end of all this. But I expect some volatility.
Twilio (TWLO)
I'm not sure. Communications with customers is vital, though, so probably neutral.
Atlassian (TEAM)
I think they'll do alright, but I'm not sure workers need any more or less tracking systems when working remote instead of on-premise. And some companies are sure to start curtailing spend. But generally, it's a vital service for software development, project, & service ticket tracking. I'm neutral.
Fastly (FSLY)
I'm pretty neutral to slightly negative. Assuming that some of customers are excelling in this time of remote working (media, streaming), I think they'll be overall fine. But looking at their customer list, I also see Yelp, AirBnb, Homeaway, Alaska Air, jetBlue, Kayak, Shopify, Stripe, and a lot of retail. Those companies are NOT scaling up right now.
Smartsheets (SMAR)
I'm negative. We are about to see how productivity software does in a pandemic-fuelled recession. I think it'll make the slowly dropping hypergrowth company take a jump down.
- muji