Reminiscences of a Stockblogger

I May Never Buy the Growth Stocks

The growth stocks have been destroyed over the last few months. Many are down by 30-50%. I wanted to get an idea as to whether I could soon step in and buy some of these names.

Below I’ve gone through my list of growers. This is not comprehensive of all growers or of the best growers. It is just the list of stocks that I track. I went through a simple exercise with each. Look at the basic numbers. Don’t look at the specific business numbers, don’t look at addressable market, user metrics, moat any of that stuff. Just look at growth, cash flow, opex – as if they were a generic business that just happened to be growing instead of a magical SaaS business.

The result? I don’t know if I will ever be able to buy any of these stocks. I mean they are still incredibly expensive by my eye. If they can’t look cheap after the kind of collapse they have had, I don’t think they ever will.

ADBE

• $243b market cap
• $6.1b of cash, $4.1b of debt
• grew 14% this year, expected to grow 15% next year
• trades at 31x PE on 2022 EPS
• in 9m cash fow of $5.1b, capex of $249mm and acquisitions of $1.47b
• I mean its 36x annualized cash flow for a business growing under 15% ex-acquisitions

BIGC

• $2.3b market cap
• $360mm cash, $335mm of debt
• grew 42% last year, expected to grow 28% in 2022
• they only grew 22% in year prior to COVID
• gross profit grew $45mm in 9m, opex grew $55mm
• cash burn of $31mm
• also had $81mm acquisitions, $2.3mm capex
• these guys are honestly kinda brutal

CRM

• $225b market cap
• $13.3b cash, $10.6b debt
• grew 24% this year, expected to grow 20% next year
• gross profit was up $$2.7b in 9m, opex up $2.2b
• they did $4b of cash flow in 9m, had $550mm capex and $14.8b of acquisitions
• in 2020 acquisitions of $1.3b were nearly have of cash flow
• so roughly at 47x FCF and growing 20%, that isn’t taking to account how much cash is being used to generate revenue growth from acquisition
• gets a 48.5x PE
• My problem here is that at $225b market cap, if they have scaled to their true profitability by now, when does it happen?
• I mean they are 2x the size of IBM – when does the market say wait – they are just growing primarily by acquisition like IBM did, why do they get at 48x PE while IBM gets 13x?

CRWD

• $43b market cap
• $1.9b of cash, $700mm of debt
• grew at 64% this year, expected 40% next year – if these growth numbers turn out to be rightits a pretty big slowdown over last 5y (110%, 93%, 82%, 64%, 40%)
• gross profit increased $300mm, opex increased $335mm
• generated $415mm of cash from operations, $105mm of capex and another $353mm of acquisitions
• trade at 209x PE on 2023 EPS, 325x on 2022
• very expensive but they are at least growing in a profitable way

DBX

• $9.3b market cap
• $1.9b of cash
• $1.37b debt
• growing at 12% this year, expected to grow 10% next year
• grew gross profit by $164mm in 9m, opex was pretty much flat ex-impairment
• generated $567mm of cash, capex/acquisitions of $146mm – ~20x FCF
• trades at 14.9x 2022 EPS
• its the cheapst SaaS by some margin, but as a company its still not really that cheap – 10% grower at 15x PE

DDOG

• $45b market cap
• $1.45b of cash, $735mm debt
• growing 65% this year, 42% next year
• trades at 44x P/S, 445x PE
• gross profit increased $200mm in 9m, opex roughly the same
• generated $170mm of cash in 9m, capex of $27mm, acquisitions of $200mm
• seems like if you are over that 40% growth number any multiple is legit

EPAM

• $31.6b market cap
• $1.3b of cash, no debt
• revenue grew 41% this year, 30% next year
• trades at 50x PE
• revenue grew $700mm, all expenses grew $600mm
• the weird thing about these guys is that they aren’t actually SaaS, they are outsourcing, but they trade at 8x P/S like they are SaaS
• before pandemic they grew 20%, I bet they come back to that level

FSLY

• they are a $3.7b company – have $1.1b of cash, $932mm of debt
• they lost $162mm in 9m
• gross profit grew $16mm, expenses grew $120mm (!!)
• were negative cash flow, maybe flat excluding working capital
• but they spent $41mm in capex
• estimates are for 21% growth next year
• FSLY is really bad, they hardly grew at all but expenses grew a ton
• Just to say it again, this looks bad to me – how can expenses increase 10x GP

CDLX

• $2.1b market cap, $293mm cash, $174mm debt
• they are growing – grew 47% in first 9m
• but expenses way outgrew revenue – expenses up $115mm, revenue up $57mm
• they burned $38mm of cash flow in 9m
• spent $494mm on acquisition – some of that growth wasn’t organic
• estimates are for 34% growth next year
• kinda brutal, I get the sense they are trying to cover up a bad business by spending to create growth

HUBS

• $24.8b market cap
• call is for 29% growth next year, had 46% this year
• they are expected to have $2.39 EPS next year – 219x PE
• revenue grew by $300mm, gross profit grew by $233mm, opex grew by $236mm
• had $143mm of cash flow, $70mm before working capital, $58mm of capex
• to their credit they aren’t buying up companies left and right, I don’t see big acquisition expenses
• brutally expensive but at least they are making money

IDN

• $90mm market cap, $13mm cash
• expected to grow revenue to $16mm this year, $19mm next year
• so they trade at 4x P/S
• grew revenue by $2.8mm, expenses by $5mm this year
• very slightly cash flow positive
• who knows, at least its reasonably cheap on P/S

Open Lending

• $2.6b market cap, $90mm of cash, $143mm of debt
• expected to grow revenue 15% next year (grew 90% this year)
• EPS estimate of 92c – 22x PE
• gross profit grew by $90mm, opex really didn’t grow at all
• their cash flow was $68mm for 9m, very little capex
• this does not seem like a terrible business – its just too expensive (update: since its auto loans, see below, it may be a terrible business)
• I mean stockholder equity is $128mm – like 20x book – that seems crazy for what is essentially a glorified bank – update: I’m wrong about this, not a bank, don’t know what I was looking at here, they are just an originator of auto loans, sell to banks for fees, also take a fee (and risk?) on insuring loan from 3rd party

LivePerson

• $2.3b market cap, $630mm cash, $565mm debt
• they grew revenue by $80mm, expenses by $56mm
• cash flow was $35mm, had capex of $57mm
• their interest costs were way up for some reason – i think accretion on convertible
• estimates are for 27% growth next year, had 28% this year
• they only trade at 3.8x P/S on next years sales
• this actually isn’t as bad (or expensive) of a business as some

Lightspeed POS

• $6b market cap
• gross profit increased $72mm
• opex increased $156mm (!!)
• they have $1.18b of cash, no debt
• cash flow from operations was negative -$27.6mm but the kicker is $398mm on acquisitions (!!)
• estimates are for 32% growth 2022, after 140% this year
• this is a shit show

Cloudflare

• $33.5b market cap
• trades at 37x 2022 P/S, 351x EV/EBITDA
• grew revenue at 50% this year, expected 37% next year
• gross profit grew $125mm in 9m, opex grew $130mm
• they did generate $24mm of cash flow, and excluding working capital generated ~$35mm
• capex was $75mm in 9m
• the numbers are better than most but its ridiculously expensive still

Okta

• $31.5b market cap
• have $2.5b cash, $1.8b debt
• gross profit grew $317mm this year, opex grew $600mm
• cash flow was $90mm this year – includes a big $198mm deferred revenue
• they spent $215mm on acquisitions
• grew at 53% this year, expected to grow at 37% next year
• trades at 17.6x P/S
• opex being twice GP does not look good to me

Onespan

• $665mm market cap
• these guys aren’t really growing – they saw a drop in revenue in 9m
• operating costs of $12mm increase while revenue dropped
• -$4.4mm cash burn in 9m, another $1.5mm of capex
• average estimates are 5% growth next year
• they have never really been a growing business $211mm, $253mm, $215mm revenue in 2018-2020
• I seem to remember a SaaS transition here so maybe that is some of the revenue slump
• though there is no discernable increase in deferred revenue that I can see
• I’m not sure if these guys are even SaaS?

Paycom

• $21.4b market cap
• grew 24% this year, expected to grow 24% again next year
• were growing 14% before COVID
• $230mm of cash, no debt
• $229mm of cash flow from operations in 9m, $275mm if not including working capital
• gross profit increased $125mm while opex increased $115mm
• they are profitable – $4.44 EPS this year, $5.62 EPS next year – 63x PE
• they are way too expensive for a company likely growing at <20% going forward

PagerDuty

• $2.7b market cap
• $545mm cash, $280mm of debt
• grew 31% this year, expected to grow 26% next year
• revenue increased from $154mm to $202mm, gross profit increased $36mm
• opex was up $62mm
• at least for the 9m, opex is increasing at faster rate than revenue
• they burned $7.4mm of cash, they would have had a little more before working capital
• $4mm of capex
• are expected to grow 26% next year, after 31% this year
• trades at 7x P/S
• this isn’t nearly as expensive as some, its not cash flow positive, but this is probably one of the more reasonable ones by the numbers

Paypal

• $226b market cap
• cash of $14.5b, debt of $7.9b
• expected to grow 18% next year, grew 18% this year as well
• has been growing in 15-21% range last 5 years
• PYPL has $191 share price, earned $2.87 in first 9m, $4.62 EPS for FY – 41x PE
• revenue increased by $3.1b, costs increased by $2.2b
• they generated $4.6b of cash flow in 9m, around $5.5b before working capital
• capex and acquisitions were $1.2b
• so $4.3b FCF in 9m – that is about a 2.5% yield annually

Square/Block

• $67b market cap
• $6.8b cash, $4.7b debt
• they grew 86% this year, 101% last year – but are expected to grow 7% in 2022
• growth two years before COVID was 49% and 43%
• EPS estimate for 2022 is $1.86 – 78x EPS
• revenue increased $7.2b, BTC revenue increased $5.2b of that
• so the rest of the business did grow quite a bit – transaction by 47% and subscriptions by 78%
• COGS increased by $6b, OPEX by $1b in 9m – so they became a little more profitable
• I’d have to dig in, 7% growth next year does not look good though for that kind of multiple

NSTG

• $1.6b market cap
• have $370mm of cash and $225mm of debt
• trade at 9.9x P/S
• they did $144mm of revenue this year, 22% growth, $180mm next year, 25% growth
• this is one of those clinical and research suppliers
• revenue grew $21mm on 9m, opex grew $33mm
• growth seemed to slow in Q321, was about 17%
• they burned $73mm of cash in 9m, another $5mm of capex
• these guys look awful, they better see growth pick up

Qualys

• $4.9b market cap
• forecast is 13% growth next year, had 13% growth this year
• $490mm of cash, no debt
• gross profit grew $25mm, 12%
• opex grew $40mm, 25%
• they grew 13-15% before COVID
• they had $160mm cash flow from operations, $21mm of capex
• so fcf was $140mm – FCF yield of 3.1%
• trade at 38x next years EPS, 43x this years EPS
• well they are generating FCF but I don’t know why they get a 43x PE

Affirm
$22.4b market cap

• grew 63% this year, expected to grow 47% next year
• trades at 12x next years sales
• they have securitizations trusts which makes them a little tricky to understand
• revenue grew by $93mm in 9m, expenses grew by $225mm
• their accounts receivables was up huge which drove positive cash flow but didn’t make money otherwise
• they are a buy now pay later company so all these loans on their books are likely subprime – pretty hard to value on numbers without understanding the loans

TEAM

• $77.5b market cap
• cash of $1.2b, debt of $350mm
• grew at 25% this year, expected to grow 24% next year
• trades at 23.8x P/S and 146x P/E
• in FY2021 gross profit grew $380mm, opex grew $320mm, but they also took a huge non-operating expense for 3rd year, not sure what that is
• in Q122 reveneu grew $155mm, OPEX grew $141mm
• their cash flow from operations was $841mm (including $294mm of deferred revenue), capex/acquisitions was $120mm
• so that is about $700mm of fcf – 100x
• its crazy to me that a company growing 24% gets a 146x PE multiple – I mean the logic that one business that grows 5% gets a 10x PE while another that grows 25% gets 140x PE is hard to fathom

Sigh – Some Stocks I Sold

I went into the new year with a lot of cash. But on the last day of trading I added a number of stocks that I thought would be tax loss reversal candidates. These are the stocks I mentioned in the last post.

It has not worked out very well.

Radcom, Silicom and Finance of America are flat with where I bought them. BM Technologies is up a tiny bit. But the rest, which are all biotechs, have not done well.

I sold Mustang Biosciences and Checkpoint Therapeutics yesterday and Caribou Biosciences and Sangoma Therapeutics today. These names were supposed to bounce into the New Year. Like just about every biotech, they have not. So I’m not going to turn this into some other thesis. I just sold.

I looked more closely at Mustang and Caribou this week, as they fell and I took the loss. You can certainly make the case that Caribou is oversold. I do want to buy it back at some point. But its in some sort of genomics death spiral right now, just like its bigger CRSPR kin like CRSP and especially the smaller guys like VERV and GRPH. It also doesn’t help that allogeneic CAR-T, which I described last post, is in the dog house right now. Allogene, which does a completely different gene editing technique to what Caribou does (called TALENS), had a trial put on pause by the FDA back in October. The reason was a patient saw a chromosomal change, and it may (not for sure) have been caused by Allogene’s therapy.

But this isn’t super good for any company looking to take T-Cells, edit them, and put them back in.

Mustang and Checkpoint just aren’t acting well.

Finally, I sold Sangamo today because my timing was awful. They released the end of a partnership with Sanofi, three days after I bought it – ugh!

These four names were a nice whack to my portfolio that wiped out much of the gains I had over the last few days in the banks and SaaS shorts. This makes it all the worse. My long held banks and SaaS are finally working only to see their gains fluttered away by a bunch of new stocks I just added last week.

It is frustrating.

So on the biotech side what am I left with? I’ve kept Arca Biopharma, Aldeyra, and Lyra Therapeutics primarily because they all trade at or below cash. Arca trades at a ridiculous amount below cash at this point, they could operate 2 years and still be below cash.

While these stocks are still going down, there appears to be no urgency to the selling anymore. They go down on a few shares and not too much volume.

That is very much not like Caribou or the rest of the ARKG or ARKK names or the SaaS names, which have been going down violently, at least until today (today is either the bottom for SaaS or it is going to get nasty IMO).

And that is really the root of my problem here and why I just can’t hold conviction here. This market has the same feel it did to me in December.

I will probably be completely wrong about this, and so I won’t try to predict the demise of SaaS, or ARK, or TSLA, or MOMO because doing so has proven to be a fools game. There is no multiple too large! In fact, today could very well be the bottom for these names. It was just the sort of day that often does it – a big whoosh in the morning and a quick recovery.

The charts of many momo names look wild -big swings in both directions and the start of a breakdown in the uptrend. I can’t shake the feeling that if the wheels were ever going to come off on these names, this feels like a good time for it.

That is a wishy-washy statement. But I can be wishy-washy because I’m not heavily positioned either way in them. I covered about half of my SaaS shorts today, the better names like Crowdstrike and Okta. I continue to hold the weaker names, and I am cringing that another big bounce is coming. I still have my index shorts just in case.

I’m comfortable owning banks, a few biotechs trading at cash and the usual assortment of micro-cap odd-balls. But apart from that, I am best off staying cautious. This last week is evidence of that.

Some Stocks I Bought

While I said I wanted to be cautious into year-end, the combination of A. being flush with cash, B. having a market that does not want to go down and C. seeing some stocks that have just been obliterated into year-end, made it hard for me to hold to that. I ended up adding a few new names to my portfolio.

Most of these are tax-loss selling type picks. Meaning I think they could get a bounce in the coming weeks because they have been hammered so hard, but I’m probably not going to hold them too long. I’m going to try to sum each of these up into a couple of sentences.

Arca Biopharma – trades at -$2 per share. It is not a particularly interesting biotech, but like I said, it trades at negative $2 per share.

Checkpoint Pharmaceuticals – Immunology biotech with a readout in its lead candidate, Cosibelimab, expected any day. The stock could go either way on those results but they are going after a huge cancer market with a anti-PD-L1 drug which is same kind of drug that Keytruda, Opdivo are – and you can google these and see that they are multi-billion dollar revenue drugs. CKPT is trying to come up with a similar drug they can price cheaper and take share with. Interim results showed that Cosibelimab is comparable to Keytruda and Opdivo so all Checkpoint has to do is duplicate those over the rest of the patients. We will know soon and I will get creamed on my small position if the results are bad.

Radcom – If you read through the last earnings transcript, and have read through the prior umpteen earnings transcripts, you may note a change in tone in the delivery. I suspect that Radcom is finally getting close to some deals. The stock price seems to be saying as much. They are a 5G telecom play and 2022 is supposed to be the year when we finally see 5G telecom implemented with some scale. We shall see.

Silicom – Thanks to Florian for pointing this out. Much like Radcom, there seems to be some momentum building here, and in this case you can see it in orders as well as in tone. The stock price is backing that up.

Caribou Biosciences – Owned it before. Did not really think I’d own it again. CRISPR patents and immunology biotech run by Rachel Horowitz, one of the original CRISPR discoverers. They do autologous T-cell therapy. Autologous means its other peoples cells, ie. you take T-cells out of a healthy person, modify them to attack a malignancy and then put them into the sick person. Doing autologous T-cell therapy is tricky because your body rejects and attacks foreign cells, and so once it recognizes the T-cells aren’t your own it kills them and that is the end of their efficacy. Caribou is using CRISPR editing to make many edits to the T-cells and basically hide them from your immune system, so they can work longer. I didn’t think I would get another chance at Caribou below the IPO price.

Mustang Bio – not quite trading at cash but close ($34 million EV). They do autologous CAR-T, which means, unlike Caribou Biosciences, they engineer your own T-cells to fight a malignancy. In the long-run, everyone thinks that the Caribou method will win out because using your own cells means you have to go through a cumbersome process of extracting T-cells, sending them to a lab, modifying them, sending them back, reinjecting them. But so far using other peoples T-cells hasn’t worked great because, as I already noted, your body is good at finding them and killing them. So there is a place for autologous. Mustang Bio announced pretty good data a couple weeks ago and the market of course sold off the stock even more.

Lyra Therapeutics – trading at cash, this is a horribly broken IPO that has a slow-release nasal patch that delivers the SOC for 6 months to patients with chronic sinus infections. It seems to work. There are definitely things not to like about this one, the biggest of which is their cash runway is not big enough to get them to the next readout, but the stock seems to bounce regularly and it has been hammered extremely hard. And its trading at cash.

Aldeyra Therapeutics – they whiffed big to everyone’s surprise with their ph3 results in dry eye disease. But now they trade at a little over cash and the results they announced has a silver lining. Again, seems pretty beaten up and due to bounce.

Finance of America – these guys originate mortgages. This is another one of those not particularly interesting companies that has been absolutely demolished over the past few months. I’ve read through the filings, listened to the transcript and I’m just not sure what is so bad about them. They are a mortgage company. They have a reverse mortgage business, a renovation HELOC type business, a regular mortgage business. It is nothing particularly exciting but I don’t quite see why the stock has been clobbered like it has.

BM Technologies – I mentioned in a prior post that one of the first things I did after I became convinced Omicron wasn’t going to amount to much for the markets was I bought back the banks. Most of these were boring old typical banks (CUBI, BSVN, BCBP, PKBK, SFBC). But I also bought BM Technologies. I owned these guys through Customers for some time, and prior to that I owned them when they were Higher One. I plan to go into this one in more detail, but briefly, they just announced a deal to buy a bank that gives them a bank charter. They have a deal with their former parent company CUBI that allows them to take back deposits and (I believe) loans that were originated by them but held by CUBI because BMTX did not have a bank charter. If you do the math on what BMTX will look like once those loans and deposits are brought back on their own balance sheet (I’ll give this math when I post on this) it seems pretty compelling.

Contrafect – Trades at $40 million EV with $60 million cash. I was actually looking at another biotech, called Cidara Therapeutics (which is also interesting and I might buy but I’m getting pretty biotech heavy here), when I stumbled on these guys. They have an antibiotic called exebacase. Antibiotics are a graveyard indication. The problem is that trials are geared to show non-inferiority rather than superiority. This means that new drugs don’t get prescribed much because they are only considered equivalent of the old drug. On top of that, you don’t want to introduce a new drug if you don’t have to because you want it in your back pocket once the old drug really stops working. Reimbursement is also tricky. But exebacase seems to actually work better than Standard of Care. Contrafect is in the middle of a Ph3 study that is looking at exebacase again, but this time it is geared to show superiority. That seems like it could be a game changer. They are supposed to readout some interim results soon, so we’ll see.

Sangoma Therapeutics – There has been so much said about these guys on Twitter and in the message boards that I don’t have a lot to add. But the stock is at the bottom of the range it trades in and the data they released in Q4 was good, not bad. Its going to go back up when biotechs start going back up, which I think is soon.

Getting more Constructive

It is starting to look like hospital admissions in Gauteng/Johannesburg are peaking at about 1/3 of what they were with Delta:

Meanwhile the ICU numbers in Gauteng are still creeping up (because it lags) but they are clearly not going to get to anywhere near where they were with Delta:

Meanwhile the most important piece of data, cases, continues to plummet.  Yesterday Gauteng cases were down 63% week-over-week.  Today they dropped 58% week-over-week.

While I can understand that the sudden rise and fall of cases in Gauteng should belay some skepticism (I saw one epidemiologist admit that it is the strangest thing he has seen), I don’t believe you can write-off a week over week drop of 63% or 58%, or the longer term trend that is becoming more clear each day, to mistakes or lack of testing.

The simplest explanation is probably the right one: omicron extremely, extremely contagious and not terribly dangerous and because of that combination it managed to make its way through Johannesburg in about 20 days with the majority of people not even knowing they had it.

Here (in Canada), we are going to test everyone and because of that we are going to see stupid, and I mean STUPID, high cases over the next couple weeks.  I bet Alberta blows through its previous case high shortly, with the only mitigating factor maybe being that we gave out rapid tests so some people can test positive at home and not be reported.  I plan to tune that out.

But I also think that relatively shortly, the voices pointing out anecdotally that very few are getting really sick are going to get loud.   Someone is going to point to outbreaks that we all have read about, like the Calgary Flames, and say 30 guys got it, including coaches, and no one was sick for more than 36 hours?  What’s that about?  We’re already seeing that in some countries.

The problem is that by the time we have enough data to scientifically prove its mild, we are all already going to know its mild by common sense.

With a more optimistic tilt, it was also hard for me not to notice that parts of the market seem to be bottoming. Biotech for example – all those crummy little biotechs I follow, they are going up and down like crazy in a volatile way but they aren’t really going down any more. At least for the last week. They just kind of test and retest and retest and they don’t really give up the ghost. I bought a few back.

I also bought back bank positions and added a few others. While I can’t say 100% how omicron plays out, I feel reasonably confident that it is not going to be a big enough deal to derail the loan books of banks. So I bought back the banks I sold (like CUBI and BCBP) and some others (like PKBK) I bought anew. I also added BMTX, which I will talk about in a later post.

The market still feels to me like its on tilt overall. And that makes me not want to take too many chances. So I’ll just wade back in here in a few spots that look to be warming up. We’ll see how that goes before I dive in any deeper.