Value Investing Howard Marks Memo - Uncertainty II |
- Howard Marks Memo - Uncertainty II
- I am short on Slack - Why I think the fundamentals are against them
- Moats Before (Gross) Margins
- Long Idea - CCL Industries (TSX:CCL.B)
| Howard Marks Memo - Uncertainty II Posted: 29 May 2020 03:02 AM PDT |
| I am short on Slack - Why I think the fundamentals are against them Posted: 28 May 2020 08:58 AM PDT Hello again! I've been working on the feedback you all gave me a few weeks back and wanted to reattempt another analysis, this time on Slack. Slack is a company I've wanted to take a look at for a while and after the short COVID-19 related rally it's worth seeing what all the fuss has been about. With more people working at home, and with some mounting pressure from Microsoft with their Teams competitor product, what does this all mean for investors like us? What Does Slack Do? Depending who you ask, Slack has either saved your business from endless emails and made communication and transparency easy, or it's where employees waste their time and post funny pictures. Slack is a communication tool which works on desktop, mobiles, and browser, that lets you easily share ideas, comments, and files with one another. Recently they have even added in video calls and joining different companies together to share a chat, think a business partnership where you need open communication with one another without emailing back and forward and integrating different tools. Where Slack shines compared to competitors and similar products like Skype, Microsoft Teams, Discord, and Facebook Workspace, is the depth and ease of integration. Slack goes beyond a chat application to be fully integrated with your existing systems and processes. With a free tier and huge amounts of developer support, Slack has transformed business communication. Source: https://slack.com/intl/en-gb/features Originally the team behind Slack were building an online game, a business which after $15m of investment and two years didn't get anywhere. However, while building this they needed a way to community easily across their teams and to keep information accessible and transparent. Slack was originally an internally developed tool which turned out to be the real gem they had all along. Technically Slack originally stood for Searchable Log of All Communication and Knowledge but deep down we all know that isn't true. You can read their full story below, for now, I'll move onto how they make money. https://usefyi.com/slack-history/ Slack is a SaaS solution, which prices per user in a team or organisation. This means Slack needs to get into large established businesses and convert the whole company to use their system. This means ease of integration, administration, and watertight security are critical to mass adoption. Source: https://s23.q4cdn.com/371616720/files/doc_financials/2019/q4/Earnings-Deck-4Q20-vF-3.11.20.pdf I mentioned that Slack has a free tier, this is part of their adoption strategy. A grassroots effort to get individuals and smaller businesses involved and developing plugins and using the product, hoping they expand into the paid tiers with more plugin capacity and full history. Source: https://slack.com/intl/en-gb/about In terms of pricing, Slack goes from a free limited version to paid versions ranging from $6.50 upwards per team member. This goes back to the scale aspect, you want large corporations to bring on their whole organisation. Slack also runs an $80m fund which focuses on funding teams with a proven track record to build extensions and plugins (or whole businesses) which have Slack at their core. https://slack.com/developers/fund The Competition I don't always go super deep with companies competitors and rather look at the fundamentals to get a gauge as to how defensible the business is. In this case, and when we look at the fundamentals you'll see some of my concerns, we do have one direct competitor who is getting a lot of attention. Microsoft Teams is a like for like competitor who use their existing Microsoft ecosystem to encourage businesses to move onto their system. Microsoft doesn't have a great track record of keeping some of its business lines alive even with heavy backing, something Microsoft and Google both share. That doesn't stop this from being a thorn in Slack's side, and the biggest threat to the moat they had otherwise created. While there are many other solutions out there, few have the penetration and retention of Slack, the exception being Microsoft Teams. An investment in Slack is going to be influenced by how much of a threat you feel Microsoft presents. I believe this is something you must seriously consider. What About Slack's Fundamentals? I mentioned I was interested in looking at Slack, having now finally had a dive into the numbers and reports, I'm shocked at how the business has been run recently. Source: https://www.genuineimpact.io/ A first pass looking at Slack relative to the rest of the market already paints a bleak picture. As such I wanted to look into each aspect in more detail to make sense of these ranks and to see if there was anything worth being mindful of. Starting with the quality aspects, we can quickly discard anything to do with dividends as none have been paid. This leaves us to focus on profitability and how they manage their cash. Source: https://s23.q4cdn.com/371616720/files/doc_financials/2019/q4/Earnings-Deck-4Q20-vF-3.11.20.pdf In terms of revenue, Slack brought in a respectable $630.4m last year which is growing quarter by quarter. They have also slightly diversified their income by growing their >$1m a year customers and >$100k customers. 47% of their revenue comes from the >$100k a year customers, which is made up of 893 different companies. 70 customers are in the >$1m a year bracket which is a big improvement from 39 a year ago. Source: https://s23.q4cdn.com/371616720/files/doc_financials/2019/q4/Earnings-Deck-4Q20-vF-3.11.20.pdf Looking at the cost of revenue we can get a better understanding of how Slack is spending its money, and how efficient their business truly is. Slack has a brilliant gross margin of 84.58%, in terms of serving their reoccurring revenue that is an excellent and scalable figure to see. If we shift slightly to the profit margin we can see -90. 58%. Somewhere something is going wrong. High expenses are happening which they claim is not involved in serving the basic needs of the existing customers. We are focusing on the second to last columns, the full year ending 2020. $457.3k on research and development, $402.7k on sales and marketing, and $261.3k on general and admin? The General and admin are very high considering they believe the cost of revenue is only $97.1k, it's almost three times higher. Without going through every line is too much detail, this feels unfairly high and suspicious. The R&D and sales and marketing figures are painfully high also. 72.5% of all revenue goes towards research and development. You do not have a strong defensive moat if you are spending so aggressively to stay ahead. All it takes is for technologies to move forward or for a few missed opportunities to fall behind. Keep in mind the beast breathing down their backs is the bottomless pockets and endless R&D of Microsoft. The sales and marketing are also aggressively high as mentioned. While they have done an excellent job of expanding their customer base, the cost per acquisition is very high. If the cost of revenue is to believed they can make back the money with the lifetime value of the customers, but how long will that take, and will they be passed in terms of technological ability before then? Source: https://s23.q4cdn.com/371616720/files/doc_financials/2019/q4/Earnings-Deck-4Q20-vF-3.11.20.pdf Before you double-check if Slack is expecting a turn around next year, they aren't. The guidance stands at another full year 2021 $125k loss. Looking back at the Genuine Impact relative rankings, we know the value is going to be a tough assessment also. Source: https://gb.wallmine.com/nyse/work Technically speaking we can't do many trailing ratios as Slack has got over a year's worth of reports for us to assess. That is next month. With the data we have, we can judge the price to sales which are 28.26x, and the price to book of 25.14x. Neither inspires any confidence, as a value investor, there are a lot of red flags to be found. A company with few assets, lots of digital IP, and expensive R&D spending to try and stay ahead. This is extremely far from a value investor's dream of unrealised potential and assets waiting to be sold. To cheer ourselves up I will look at the momentum and future projections, which appear to be fairly bullish on the surface. Source: https://www.genuineimpact.io/ The future projects of revenue and EPS are both extremely high, this is easily explained by the ridiculously high marketing budget, and the fact they have a negative EPS, to begin with. When you are at the bottom the only way is up, right? Unless you somehow get worse which in the world of investments, is always possible. I was surprised at the bullish analyst outlook. The weak financials and heavy spending are not sustainable. There is a lot of insider selling, more debt being raised (49.79% debt to assets, this is due to recurring revenue commitments), and they face extremely tough competition. Looking at the analyst ratings they are slightly better than a hold but not a strong buy either. I was extremely shocked to see the target price for many of the analysts is lower than the current price. A few analysts are out of date now and their target has been hit, while others are in a firm hold camp and forecasting weak share price growth (in some cases retraction!) So Why A Sell? I love Slack as a product. I love their vision and I have grown to depend on their solutions. They have a great ecosystem and engagement when it comes to their customers too. Source: https://s23.q4cdn.com/371616720/files/doc_financials/2019/q4/Earnings-Deck-4Q20-vF-3.11.20.pdf They have even expanded internationally with 37% of their revenue coming from overseas now, slight currency exposures but they are still primarily as USD based firm when it comes to revenue. But, it just doesn't add up to me as a long term investment. The product can be replicated, and we can see dozens of new entries into the market following their best practice. We have multiple companies looking to enter (or who have) the space with bigger budgets, existing ecosystems and clients, that can play the long game. R&D spending is too high. How many years can you get it right before you are dethroned? This seems like old school Intel. A great company but they were dependant on their R&D spending to stay ahead and ultimately ended up having to change up the business to be what they are today. I don't believe Slack is going to crash, or it's going to disappear tomorrow. The current rally will likely continue, but I believe my capital can be better invested elsewhere for the long term. There are a lot of exciting tech companies with better long term prospects and who have a more defensible business. As much as I love Slack as a product. It's not a long term investment for me. You might some joy in taking short term positions and following the trends, but I'd rather focus on more interesting momentum investments. Let me know what you think of my thoughts and write up. This is my longest article yet and hopefully the most engaging. All your feedback has been extremely useful to make me a better analyst and writer! Thanks for reading and stay safe. [link] [comments]  |
| Posted: 29 May 2020 03:01 AM PDT |
| Long Idea - CCL Industries (TSX:CCL.B) Posted: 28 May 2020 11:45 AM PDT Hi everyone, Put this pitch together in preparation for some job interviews: https://docdro.id/6jyK0T0 This is my first formal stock pitch, so I'd appreciate any feedback or constructive criticism you have to offer - including any advice about pitching for job interviews! Some details are omitted in the interest of keeping things relatively concise, but I'm happy discuss any points in more detail in the comments. Thanks in advance! [link] [comments]  |
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