10 Reasons To Be Cheerful (About The Macroeconomic Outlook) August 31, 2010
Posted by bernardlunn in capital markets, Predictions.add a comment
I made my 2010 Predictions in Dec 2009 and half year update in June 2010. My predictions were gloomy on the macro picture but positive on tech and online media. In June I turned more positive on the macro picture. Here is why;
1. Bull Markets “climb a wall of worry”. They always have and always will.
2. Too many commentators are bearish, much of it crazy doomster talk that sells blog page views (and is good for canned food, Montana cabins and guns). I am not simply being a “knee jerk contrarian” by pointing out that this consensus pessimism is positive. When all the commentary is negative, traders/investors move to cash. And cash needs to get a return somewhere, so people will invest and some of that investment will lead to great companies and good jobs.
3. Most commentators are US centric and so are reporting from where this recession originated.
4. This recession hit the “chattering class” worse than usual. The old saw applies, “it is a recession when your neighbor loses his job and a depression when you lose your job”". So the chattering class, often blogging for free or peanuts, will tend to talk about depression a bit more.
5. GDP and other macroeconomic statistics miss all the free agent and entrepreneurial activity, particularly in the most dynamic job market – America.
6. The global rebalancing is happening. This means that global demand is no longer dependent on the American “consumer of last resort” (who was actually just using their house as an ATM). Wages are rising in China and India (“Chindia”). The labor arbitrage is narrowing and a that means jobs will return to Western economies. The higher wages in Chindia means that Western firms will have a couple more billion consumers to sell to.
7. The American rebalancing is happening. This is shifting investment from property (fundamentally dead money other than construction jobs) to investment in business (when I read about a “seed financing bubble” I get optimistic).
8. People follow trends beyond reason. When things are going up they exaggerate how far it can go up. When things are going down they exaggerate how far it can go down. We are clearly in that latter phase.
9. This point is deliberately left blank. Most people miss the downside surprise. But equally most people miss the upside surprise.
10. We are animals and need our animal spirits, so we will work, trade, invest and shop our way through problems. Cheers mate!
In case you think I am a “perma-bull”, here is one example of my gloomy view and advice from Oct 2007..
SaaS Index Insights: The Bull & Bear Case On Salesforce.com (CRM) August 22, 2010
Posted by bernardlunn in capital markets, SAAS.add a comment
This is an extract from the SaaS Index Insights Report, which is available on CapitalMarkets.Com, price $125. Order here.
Salesforce.com (CRM) is a bellwether in the SaaS market. There are 3 reasons to think CRM is over-valued. There are also 3 reasons to think CRM is under-valued!
The 3-Point Bear Case On CRM
First, what is the case for Salesforce.com (CRM) being over-valued?
- PSR compared to peers is high. PSR (Price Sales Ratio) for the SaaS Index average (as of Aug 20th) was 5.00 and Salesforce.com is 9.01, indicating an over-valuation of 85%. Last quarter this overvaluation was “only” 60%. Given their market leader status that is not surprising. But for the first time, this level of overvaluation is flashing a warning signal. Concern factor: medium.
- Marc Benioff is selling shares. This was announced in the quarterly report on November 25th 2009. The % of his shares that is selling is significant. He has announced that he may sell 2,750,00 shares out of a total of 13,371,006 shares he owns. That is 21%. Whether investors are concerned about this remains to be seen. Insider selling is often a trigger for smart outsiders to sell. And the short sellers have picked up on this and are using it to drive their case. But it also may not mean anything. Maybe he wants to give serious money to charity and who can fault him (or Bill Gates) for doing that? Investors do not seem to be concerned so far, evidenced by the stock performance since he started selling. Concern factor: low.
- Their SaaS platform play has strategic issues. This is a more complex issue. Long-term growth will require moving beyond the original core market of sales force automation systems. They understand this very well. That is why they built the Force platform. It is also probably why they raised $500m in convertible debt, so that they can acquire businesses in adjacent markets. But making the transition from one market to being a platform for multiple markets is difficult. Very, very few companies have ever made that transition. Those that have made the transition are valued very highly. Taking a long-term position in Salesforce.com is largely dependent on your view of how well they will manage this transition. We have dedicated a separate section to this issue. Concern factor: Low for short-term traders, high for long-term investors.
The 3-Point Bull Case On CRM
Second, what is the case for Salesforce.com (CRM) being under-valued?
- Internet market leaders are never cheap stocks. Waiting for these leaders to become bargains has seldom worked.
- They have executed excellently to date. They have challenges ahead of course but their track record indicates they will manage them well. Long term investing is about confidence in management and they have earned that confidence.
- SaaS/Cloud is going mainstream and they defined the market and still lead it. They serve as a proxy for many investors to invest in SaaS. They have a big enough market cap to play this “pseudo Index” role.
How Did The Market View CRM Last Quarter?
In short, CRM outperformed the market significantly. In our view, the market was giving due credit to great Q-Q revenue growth in the last quarter. Analysts were negative on the last quarter and the stock went up. Most of them missed the great Q-Q momentum. Not wanting to repeat that mistake, analysts are positive on the latest quarter. But we think they are wrong. We finally think that CRM is due for a significant correction.
Why? The same reason we were bullish last quarter – the Q-Q revenue momentum. This quarter was not as good. It is not bad, but at CRM’s lofty valuation “not bad” is not nearly good enough.
What Does The Latest CRM Qtr Report Tell Us?
What we are looking for in this report is primarily Q-Q revenue growth.
If they grew by more than last quarter, that means they have accelerating growth. That would be amazing given a) their size and b) their high growth last quarter.
First, here is what we wrote last quarter:
“To recap, last quarter they reported Q-Q growth of 7.11% by adding $23.5 million of new revenue. To match that 7.11% this quarter they would have to add about $25 million this quarter.
Anything better than that means a fantastic result.
We will be looking for any “red flags” ie concerns. But barring that we are focused on Q-Q revenue growth.
What did they report? $377 million revenue. That is $23m in new revenue, which is almost the same as the prior quarter. As a % Q-Q growth that is 6.5% versus 7.11% growth in the prior quarter.
Our analysis? Very, very good. Not quite “knock it out the park” but close.”
What about this quarter? They got $17m in new revenue, less than the prior quarter. On a % basis, they grew 4.51% Q-Q, which is great for a company over $1 billion in annual revenue. But it is still less than the 6.5% last quarter and the 7.11% in the quarter before that.
This is not just the law of large numbers. The CRM growth momentum may be slowing a bit. At this level of valuation, CRM cannot even afford for that to be a question mark. The shorts may have a good quarter.
[i] Extract from 10Q: Marc Benioff, adopted a fifth Rule 10b5-1 trading plan (the “Fifth Plan”) on September 1, 2009.Under the Fifth Plan, up to 2,750,000 Shares may be sold in open market transactions at then current market prices on Mr. Benioff’s behalf at a rate of 10,000 Shares per trading day. Sales pursuant to the Fifth Plan are expected to commence on November 30, 2009 and continue for approximately one year. Sales under the Fifth Plan are subject to certain restrictions, and may be terminated at any time. The Fifth Plan also provides for gifts of up to 275,000 Shares to funds or organizations qualifying as public charities pursuant to Internal Revenue Code Section 501(c)(3). As of November 25, 2009, Mr. Benioff had beneficial ownership of 13,371,006 Shares. Actual sales transactions will be reported through filings made with the Securities and Exchange Commission as required.
SaaS Index Insights Volume 3 August 20, 2010
Posted by bernardlunn in capital markets, SAAS.1 comment so far
The Report is available on CapitalMarkets.com , price $125.
Here is the Table Of Contents:
1. Summary……….. 3
Top 5 Q-Q Revenue Momentum Winners……….. 3
Buy, Sell & Short Recommendations……….. 4
2. The SaaS Investment Thesis……….. 5
This Report Is SaaS, Not Cloud: The Top Of The Stack……….. 5
Why SaaS Is Better For Customers……….. 5
Why SaaS Is Better For Vendors (ie Management Team)……….. 6
Why SaaS Is Better For Investors……….. 6
Buy The SaaS Index Or Individual SaaS Stocks?……….. 7
SaaS And Macroeconomic Cycles……….. 7
What Investors Should Focus On During This Phase Of The Transition To SaaS……….. 7
3. Companies In The Pure SaaS Index……….. 8
Concur Technologies (CNQR)……….. 2
SALESFORCE.COM (CRM)……….. 3
Constant Contact (CTCT)……….. 3
DemandTec (DMAN)……….. 4
Kenexa (KNXA)……….. 5
LogMein (LOGM)……….. 6
NETSUITE (N)……….. 7
RightNow Technologies (RNOW)……….. 7
SuccessFactors (SFSF)……….. 8
Taleo Corporation (TLEO)……….. 9
DealerTrak (TRAK)……….. 10
Ultimate Software (ULTI)……….. 11
Vocus (VOCS)……….. 11
4. Finding The Next SaaS Momentum Play……….. 12
Revenue Is A Meaningful Comparable For SaaS Companies……….. 12
Why We Measure Q-Q Revenue Growth……….. 12
SaaS Stocks Ranked By Q-Q Revenue Growth……….. 13
SaaS Stocks Ranked Revenue By Momentum Across 2 Qtrs……….. 13
5. Finding The Next Value Play In The SaaS Index……….. 15
Value Filter # 1: PSR (Price Sales Ratio)……….. 15
Looking For Cash……….. 15
How Does The Market Trade Value In SaaS?……….. 16
The M&A Driver……….. 16
6. Who Is In Both The Value 5 And The Momentum 5?……….. 16
7. Size Matters: Escape From Small Cap Hell……….. 17
8. SaaS Index Valuation & Performance……….. 18
Tracking Versus The Big Tech Index……….. 18
SaaS Index Valuations vs Big Tech Index Valuation……….. 19
9. Valuing The Salesforce.com (CRM) Bellwether……….. 19
The 3-Point Bear Case On CRM……….. 19
The 3-Point Bull Case On CRM……….. 20
How Did The Market View CRM Last Quarter?……….. 21
What Does The Latest CRM Qtr Report Tell Us?……….. 21
10. Appendices: First Time Subscribers Start Here……….. 22
A: Index Methodology……….. 22
B. Salesforce.com (CRM) The SaaS Bellwether……….. 23
C: Force Platform – Will This Take Salesforce.com To The Next Level?……….. 23
D: Finding The Momentum Play In The SaaS Index……….. 25
E: Why Deferred Revenue May Be Becoming Less Important……….. 25
Who will the winners in the post-Finreg Capital Markets? June 27, 2010
Posted by bernardlunn in capital markets.add a comment
The “first major overhaul of the financial system since the 1930′s” is in the final stretch to becoming law (details here from WSJ). There is lots of talk of who will lose and what Goldman Sachs will do – to be or not to be (a bank) that is the question. And of course lots of critique from all sides – too much regulation, too little regulation, the wrong regulation and so on.
My question is simpler. What companies will win from this? Specifically, what companies will win the trust of individual investors and small companies seeking access to capital. I am choosing those two constituents, because they are the ones that have been sidelined by the last few decades of speculative, shadow market craziness. The firms who have done well – the Fortune 500, the hedge funds, private equity funds – will still do well (their lobbyists earned their pay, inserting small but critical bits in late night haggles).
But in the end, the health of the capital markets and of the economy as a whole is determined by two parties in a simple transaction:
1. A young high growth company needs access to capital (debt or equity or both).
2. An individual investor, either directly or via a fund, invests in that company.
Both parties have been totally alienated and left out of the party. But they are the essential parties to the transaction. So who will gain their trust?
I can think of three actual companies and one type of company.
The three companies are:
1. Vanguard. To the individual retail investor, John Bogle should be the hero. His consistent story over decades – that the cost you pay to fund managers is the biggest factor in your eventual payout – has finally become accepted wisdom.
2. Charles Schwab. With the founder back at the helm, we see a consistent focus on serving the individual investor and their advisers with quality products at low cost.
3. Grant Thornton. Who? The first two are obvious. As per Wikipedia, Grant Thornton is a “Grant Thornton International is a global organisation of accounting and consulting member firms which provide assurance, tax and specialist advisory services (SAS) to privately held businesses, public interest entities, and public sector entities. Grant Thornton International Ltd is a not-for-profit, non-practising, international umbrella membership entity organised as a private company limited by guarantee. Grant Thornton is incorporated in London, United Kingdom, and has no share capital.
Why I rate Grant Thornton is their leadership on this initiative: http://blogs.wsj.com/venturecapital/2010/06/22/grant-thorntons-proposed-alternative-public-market/# Where others in America propose “shadow markets” that lock out individual investors, this Grant Thornton proposal tackles the problem for the small cap company without tossing out the SEC regulatory protection for the individual investor.
The one type of possible winner is a startup with a disruptive online model for connecting the two parties, probably using some mixture of P2P Finance and auction pricing. I see lots of contenders but these are very early days, way too early to call a winner.
Online Transparency: Mega Wave Building Now December 3, 2009
Posted by bernardlunn in capital markets, Web 3.0 Semantic.Tags: data.gov, open university, transparency
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During the US Presidential election campaign, Google ran a series of amazing meet the candidates events that were broadcast online. They were the opposite of the sound bites on mainstream media. The candidates had plenty of time and were questioned by a highly intelligent audience. Barack Obama was one of the candidates (other ones worth watching IMHO are McCain and Bloomberg). There was one point that made me really appreciate the “audacity of hope”. It was when Obama was asked how somebody with so little experience in Washington could stand up to the special interest lobbies. His response (it is around 0.50 minutes on the video), which previewed what became Data.Gov, made my hair stand on end. Data.gov is real and in this video he describes the initial vision and mission.
Could Data.Gov Become Obama’s Greatest Legacy?
The question seems absurd. But listen to what Harold Wilson, Prime Minister of the UK for 8 years, described as his greatest legacy. Despite many high profile achievements at the pinnacle of power, dealing with big crisis and initiatives on the front page and prime time, he chose his work to create The Open University.
The Open University was founded on the belief that television and radio could bring high quality degree-level learning to people who had not had the opportunity to go to university.
At the time, the creation of the The Open University was lost amidst far more high profile news. But 40 years later all the high profile urgent stuff he worked on is simply material for the history books, while The Open University still has tremendous impact on the lives of millions by improving access to quality education.
Data.Gov will also take years to have a big impact. But it is a toothpaste out of the tube dynamic. Once the data is out, nobody can get it back in. And this is riding a massive wave of online transparency. There is no need to fight entrenched interests – just ride a massive wave that will effortlessly wash away those entrenched interests and lobbyists.
The Decline Of Asymmetric Information Intermediaries In Consumer Markets
Online transparency is about taking away the power of asymmetric information from an intermediary. We have already seen this play out in consumer markets. Buyers now have access to much better data about pricing and costs. The most notorious intermediary exploiting information asymmetry was the car dealer. That game has changed forever.
Cars, houses, travel and many other big consumer markets now have the consumer in charge. Good data and social ratings have changed these markets forever. These are the big and complex purchase decisions for most consumers. But the data is still totally simple compared to information about how laws are made in Washington and who influences how those laws are made and how they benefit from those laws.
The Big 3 Markets That Will Be Impacted By Transparency
These consumer markets are also really simple compared to these three big markets:
1. Scientific Technical Medical Publishing.
2. Capital Markets.
3. Healthcare.
The data that drives these markets is horrendously complex. And what happens in these markets really, really matters to all of us.
Enter Stage Right, The Semantic Web
The Semantic Web, the geeky guy that web 2.0 hipsters like to poke fun at, is about to enter the stage and finally has a big role to play.
The data complexity in these markets is overwhelming for a the “slap some HTML and Ajax on top of RDBMS” that is the de facto technical approach today. The best data modelers in the world cannot design upfront for these markets.
Obliterating Data Obfuscation
Software engineers use “obfuscation” techniques to deliberately hide the underlying code designs in order to prevent a user from making an illegal copy through reverse engineering. That is a reasonable objective. What is not reasonable is “intermediary obfuscation”, the deliberate obscuring of reality through layers of complexity and impenetrable jargon. Special interests use data obfuscation to protect their profits.
Three Powerful Forces Driving Transparency
We are now seeing three powerful forces driving transparency:
- Political will from the leader of the largest economy in the world.
- Consumers and B2B buyers expecting transparency from sellers and rewarding the sellers who deliver it with more business.
- Semantic Web/Linked Data technology that is increasingly mature with many passionate proponents seeking a prime time role for the technology. In the capital markets, XBRL is the key enabling technology.
Online transparency is a mega wave to ride.
Talking To John Hagel About Emergent Business Networks November 29, 2009
Posted by bernardlunn in capital markets, Globalization.Tags: big shift, china, emergence, john hagel, partnering, return on assets, ROA
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John Hagel is one of the leading business strategists, author of The Only Sustainable Edge. I interviewed him back in July about the research he is doing at Deloitte into the dramatic and overlooked plunge in Return On Assets (ROA). When Deloitte contacted me again about some new data which dug deeper into ROA in different markets, I wanted to learn more about the background story. In conversation with John, the story emerged. The story is what big western companies can learn from Chinese companies about peer partnering in emergent business networks.
The Return On Asset Bombshell
The Big Shift research done by John Hagel and his team shows:
“U.S. companies’ return-on-assets (ROA) have progressively dropped 75 percent from their 1965 levels despite rising labor productivity.”
That is dramatic. If you had to select a single measure by which to judge the value delivered by a CEO, board, or management team, it would be return on assets. To quote from the Wikipedia entry:
“The return on assets (ROA) percentage shows how profitable a company’s assets are in generating revenue. This number tells you what the company can do with what it has, i.e. how many dollars of earnings they derive from each dollar of assets they control.”
And here is the bit that matters:
“Return on assets is an indicator of how profitable a company is before leverage.”
If you want to understand the financial meltdown that happened at the end of 2008, just think leverage, i.e. debt. Companies juiced up their earnings using leverage. They have been doing this more and more in the last 30 years.
What happens when you take that away? You get the return on asset bombshell that the Shift Index reveals. It is like taking steroids away from an athlete and then saying, “Now, how fast can you run 100 meters?”
Give Your Lobbyist A Bonus
In their latest research the Shift Index team looks at how this is impacting different industries:
“While virtually every industry that Deloitte examined has been impacted by the “big shift”, the first wave of industries currently feeling the most pressure include technology, media, telecommunications and automotive. They also represent a ‘canary in the coal mine’ for industries that have just started to feel the effects of the Shift Index, including banking, retail and insurance. Finally, the report also reveals that heavily-regulated industries like healthcare and aerospace & defense are the most insulated, at least for the moment.
The take way for investors? Place your money in markets where the government has erected the barriers to entry through regulation. The take way for companies in that fortunate position? Give your lobbyist a bonus!
But what if you work in technology and don’t think that regulatory barriers are either desirable or practical? You certainly need to do something dramatic if you look at the ROA data in your industry:
“In terms of the technology industry, the report reveals that a decline in ROA of nearly 70 percent, despite the highest gains in labor productivity in the U.S. This industry is also experiencing a level of competitive intensity that has magnified almost four-fold since 1965 and is 30% greater than in the rest of the economy.”
What Companies Are Showing The Way?
This all sounded rather gloomy. Deloitte is in the business of advising large companies. So I assumed that John must have some role models, some tech companies that were prospering in this hyper-competitive economy. Surely the only answer was not just “work in a highly regulated industry and hire a good lobbyist”?
Yes, John had some role model of tech companies prospering despite hyper intense competition. But their location surprised me. In the past the role models brought out by management consultants were almost all American, with an occasional European or Japansese company thrown in for good measure.
The role models that Jon mentioned where Chinese tech companies.
As A Historian I Should Know About Quoting The Source
When he described how they were working, it reminded me of the Chinese motorcycle companies that I had written about in my original post on “Emergent Business Networks“.
I mentioned that I had written about this earlier having been impressed by the story about Chinese motorcycle manufacturers in Wikinomics by Dan Tapscott. Oops! John told me that Dan got the story from him. As somebody who studied History at college, I should know better. So, by way of an apology, here is a link to John’s book – The Only Sustainable Edge.
Peer Partnering vs PR Partnering & Platform Partnering
These Chinese tech companies are “partnering” to build products way more efficiently than they could by creating everything in-house. Nothing new there you might think. Partnering is what we all do, right?
Partnering is perhaps one of the most overused and abused term in the business dictionary.
There are two predominant forms of partnership today:
- “PR Partnerships”. These are designed to make both partners look good and to get press but they don’t involve much real work or create significant revenue.
- “Platform Partnerships”. These are when a big company sets the rules in order to get small companies to create products for niche markets or to sell their product in niche markets. This is like calling a landlord/tenant agreement a partnership.
By contrast, the Chinese model is more like “Peer Partnership”. Each company is genuinely independent and each partnership is mission critical to both parties. This involves some hard-nosed negotiation.
Keiretsu 2.0?
Cynics might say “we have seen this movie before”. In the 1980s it looked like the Japanese model was going to dominate. Their networks of companies were called Keiretsu. The term became popular in the start-up world; Kleiner Perkins called their network of contacts a Keiretsu.
I asked John if the Chinese model was simply “Keiretsu with a Chinese Face?” John had clearly considered this and responded that the Japanese model involved equity cross-holdings (that’s why the model appealed to VC firms). The problem with that is that the equity position outlives the usefulness of the partnership. Rather than re-negotiating or ending the partnership, cross-holdings tend to lock them in well past their “sell by date”.
Chinese Jiu Jitsu
Necessity is the mother of invention. Chinese companies have grown despite lacking two critical things that we take totally for granted in the West:
- Intellectual Property (IP) protection
- Well developed capital markets.
The Chinese firms turned these weaknesses into advantages through their approach to partnering – classic Jiu Jitsu.
Large American companies may need to learn some of these tricks. We are entering an era that looks a lot like emerging markets when:
- Intellectual Property (IP) protection is threatened by the “perfect copy machine” of the Internet and the consequent move to open source, open data and open everything else.
- Capital becomes more scarce as debt leverage declines and equity investors demand a greater real ROA.
StartUps Know That Partnering Has To Be A Core Competency
The 3 golden rules of a start-up are focus, focus and focus. Startups know that have to focus on the one thing that they do better than anyone else partner with other companies for everything else. Some entrepreneurs now consider the art of partnering as a core competency.
It is possible that we are facing an interesting inversion of the norm. It used to be that start-ups studied at the feet of managers who used to run large traditional companies. “Teach me to manage oh great suited one”.
Now the big cats in the corner office are being asked to think more like a scrappy bootstrapped start-up in a garage in cheap location in America or an equally scrappy start-up in a dusty corner of Western China. It’s enough to make you throw up your 3 martini lunch!
