Chit Chat Stocks - 10 High Growth Software Stocks That Just Hit 52 Week Lows; Lululemon Update: Phantom Roaring Kitty? (LULU, SNOW, MDB)

Starting point is 00:00:00 Welcome to Chit Chat Stocks. On this show, hosts Ryan Henderson and Brett Schaefer analyze businesses and riff on the world of investing. As a quick reminder, Chit Chat Stocks is a CCM Media Group podcast. Anything discussed on Chit Chat Stocks by Ryan, Brett, or any other podcast guest is not formal advice or recommendation. Now, please enjoy this episode. welcome to chit chat stocks this is our weekly power hour episode i am your host or your co-host ryan henderson and i am joined as always by brett schaefer we have got a lot on the docket today quick reminder we do these shows live on youtube on thursdays at 9 30 pacific time 12 30 eastern time so if you look up chit chat stocks on youtube you'll find us and we start these shows like i

Starting point is 00:00:58 said at 9 30 pacific time you can ask questions and we get a lot of questions throughout the show so we'll take those as we go if not keep listening to us in podcast format we love that too we have a ton of stuff on the agenda today we have a new theme or a new segment that we're going to do on a recurring basis roaring kitty the man himself might be back tbd there may uh there may be a bit of a twist in there that I wouldn't say I discovered, but people are starting to speculate about. And then we're going to be talking about 10 high growth software stocks that just hit their 52 week lows. It seems like software Mageddon is coming around thanks to Salesforce's rough report and people are starting to call it cyclical business maybe. So we'll be talking software

Starting point is 00:01:48 as well. What topics do you have for us this week, Brett? Yeah, I got Lululemon. They reported earnings which is fun i should say hey welcome in everyone my name is brett schaefer as well i join every week um yes blue lemon earnings we've been talking about them this year it's been quite interesting with their drawdown interesting report we'll talk about that uh and i forgot i did the notes yesterday but i don't even remember what i did let's see pulled up here um oh mexico got a new president i know we like following mexican stocks and that's a tricky country so that could be fun um the nvidia hit three trillion dollar market cap and there was a this isn't really a topic but we don't need to describe the photo ryan but did you see the photo for those that are in

Starting point is 00:02:36 the now hard to mess if that's not an indicator of a blow off top right well before we do that i want to talk about our friends our sponsor public.com if you trade options you've got to ask yourself why wouldn't you choose an options trading platform that puts investors first at public.com there are no commissions or per contract fees and more importantly it is the only platform where you can earn a rebate on every single contract traded that means you can save on your options trading costs and keep more of your capital in play whenever you trade whenever you trade options on public your savings are automatically applied so don't change your strategy change your platform and see the difference in your bottom line no

Starting point is 00:03:18 commissions no per contract fees and it's the only options trading platform where you can earn a rebate on every contract traded that's public.com this is paid for by public investing options are not suitable for all investors and carry significant risk full disclosures are in the podcast description all right i want to talk uh hmm should we do our new theme um yeah why don't Lululemon first. That seems to be one that people are really interested in. I think it can tie people in for the most catchy one. And then what's your – and then we can do the theme after that.

Starting point is 00:03:54 Why don't I talk through the numbers? Yeah. All right. Lululemon, from everything I saw, looked like a pretty good report. I'm pulling things up right now. And I believe 10% top-line revenue growth. Slight margin contraction, if I'm not mistaken. But moral of the story is that they announced a new share buyback program, billion-dollar authorization on top of already $700 million authorization, so $2 billion roughly.

Starting point is 00:04:28 I have a ton of sirens going in the background here, so I apologize for the audio. It's going to get louder. Here, just take over and talk Lulu Learnings. All right. So essentially what I saw was about as what you'd expect. America's revenue, which is North America, Canada, and the United States. That's the two markets they've been in for the longest time. I believe they were founded in Vancouver.

Starting point is 00:04:55 So actually probably got just as much market share in Canada as the United States. That segment only grew 3%. But China grew 45%. international grew 35%. And then we saw a slight divergence between men's revenue and women's revenue. Men's revenue grew 15% year over year, women's growing under 10%. Nothing super crazy on the margin front, seemed pretty standard. It's not like they've had to increase marketing or promotions or anything like that to get to sales. I didn't see anything, at least when I pulled up any of the on the on the numbers there the question i have is it seems like people are

Starting point is 00:05:36 actually right that and they probably saw it in the alt data i guess that's stuff that i don't really look at for uh you know the america segment for women has slowed down quite a bit and it's something that they talked about on the call i believe where the um they said that they were not executing as good as you know as as good as they thought they should be um seems like they've lost a little bit of market share to those other people like aloe and all the other upstarts out there the question is can they fix it or is this a permanent change to the industry where it's just going to be much more competitive going forward going after this lucrative woman's business in north america for um what do you call it athleisure the entire

Starting point is 00:06:22 industry yeah i don't know there is obviously if the idea here is that the growth is coming from china it's a very different investment and it seems like there has been the north america slowdown in general men's is still growing okay it's outpacing women's a little bit but still not the kind of growth you would hope to see out of this brand in north america so for me i'm kind of glad i didn't touch it uh because i mean well the stock jumped so to all you with a psychological long or anyone that's actually long lululemon congrats but it's a very different investment for me now you're looking at potentially maybe it's just a bad quarter but maybe a lower growth business in north america

Starting point is 00:07:19 and something where you're playing like the growth in china which that's just not an investment i'd love it's harder it's harder yeah and that market's more tricky i guess for uh for someone that lives in north america living in north america i can tell given some of the data just given the anecdotes out there being living here whether the business is still sound and yeah i don't know the question we have here okay we have one from tyler that says do you guys think lulu is just a north america consumer slowdown possibly i mean we've seen a lot of retailers a lot of consumer brands even across restaurants whatever where they've had really bad comp sales tough comp sales this

Starting point is 00:08:11 first part of this year maybe that's part of it but i think if you read all the articles out there you just look at what's happening with the competition out there there's so many whether how small they are or not if there's dozens of these smaller uh at leisure companies out there that can add up to being a competitive threat and the thing is blue lemons it's they're still doing fine i mean it's not like north america revenue is going down but i wonder how or whether they can take the next step to become, quote unquote, the Nike of that niche of athleisure or it's going to be more competitive than we think. I mean, look, it's still profitable, still a good business.

Starting point is 00:08:53 You're not going to be 100. You're going to have a monopoly in athleisure. But do you have this? The question, do you have confidence that North America revenue can grow significantly? I don't really know. Like, how aggressive is Aloe going to be? how aggressive are all these other people going to be? Are we seeing a change in just trends that are unpredictable, right? I mean, I don't know much about this, but people

Starting point is 00:09:18 seem to be wearing baggier clothes now. That could impact things for Lulu for at least a couple of years. So it's tough. The stock is at, I think, a trailing earnings ratio of about 30. Not sure about forward but it's not like this is an undemanding valuation or earnings multiple it's not like it's a um a company that's fallen down to like 13 times earnings we're still at about the market multiple which i think is using the market multiple might be not not not good right now good just because it's so high but what what are your what are your uh what are your thoughts on that ryan yeah i mean it looks cheap just because relative to its history it's always been more expensive right and it's nice to post a little chart here and there where it's like this

Starting point is 00:10:10 is the cheapest it's ever been but i think the outlook's different than it's been in the past you're looking at really a business that has a lot of competition in north america it's seen some international growth it's investing internationally i shared a chart there of uh mainland china stores and operations and it's just been growing rapidly that's the fastest growing market where they're putting a lot of their resources so it i don't know the chinese market well at all i definitely don't know it for apparel and yeah like you said it's not like this is trading at some low teens or even single digit earnings most multiple it's not been bombed out it's in one of its biggest drawdowns but still it's it's fairly expensive and i think i'm

Starting point is 00:11:03 going to stand by the fact that i don't want to touch apparel businesses ever yeah it's a tough one and stock's done pretty poorly over the last five years at least i think you actually maybe pull it up but yeah i think that's pretty much it nothing really exciting on that one we'll see people might be right people might be wrong i had no clue stock might do well but not the game we like to play all right 14 what total return over the last five years has been 14 annualized over the last five years maybe it was three years i was looking at where it's been tougher but i mean that's pretty good stuff yeah it's not bad the uh let's talk about some other fun stuff also apologies to everyone for the chaotic start to the show but uh we're rolling now so what do we

Starting point is 00:11:55 want to discuss roaring kitty yeah we can do that one or maybe yeah whatever one you have three on yours pick pick whatever one you want all right so roaring kitty uh here's i'm gonna pull this quotation from i think it's a bloomberg article it says game stop shares surged after the reddit account that drove the meme stock mania of 2021 posted what appeared to be a 116 million dollar position in the video game retailer the june 2nd screenshot posted by keith gill who goes by a profane handle involving the phrase deep value on reddit shows a stake of 5 million shares with an average cost basis of 21 27 apiece a position that large would make gill one of the company's five biggest investors and is more than six times the number of shares his account showed in april

Starting point is 00:12:44 2021. There was a screenshot which also included 120,000 call options worth $66 million due to expire on June 21st. They couldn't verify that that was Gill, but basically it somewhat coincided with – it seemed like it was Gill. Here's my question though. Keith Gill never had that much money even after his gains from gamestop he never had that much money i mean this amounts to like multiple hundreds of millions of dollars so unless he got some money in between then maybe from that movie or something well it seems unlikely that that happened so what there is some suspicion that he sold his account he sold his twitter account this is not him placing the trades or was hacked let's just say we can't accuse him of selling it

Starting point is 00:13:48 if he doesn't know what's going on or maybe but the thing is i feel like he would figure it out if it was going on even if he was a hermit living in the woods he would probably figure out this at this point it's interesting because we don't know and we have a question here that says uh oh yeah tyler asked the question that you asked here do you think gail sold his social media profiles uh do you guys think the brokerages should ban him do you guys think it will get prosecuted i think they should just investigate what happened so given that there's a digital trail here they can figure out and do an audit of who is actually doing all these things yeah but is it illegal well it depends on what what actually happened that's what i mean we

Starting point is 00:14:30 don't know what happened so here's my suspicion you're keith gill you just made a once in a lifetime bet really now you know that if you post some position you'll have a whole bunch of people follow you in but you just went through like the ride of a lifetime basically where you own gamestop got a whole bunch of garnered a cult-like following around it and made a ton of money in the process less money than what's posted here are you really going to risk your probably what looks like a good chunk of your personal wealth on weekly maybe three week call out of them well barely in the money call options right that seems a little unlikely that doesn't seem like something i would do if that's how much money i had yeah you don't go to the roulette table right

Starting point is 00:15:26 yeah but he didn't either hey last time basically was sort of after the no he was just owning it for like the diffident play well i mean it was like good analysis he got to like it wasn't he wasn't just buying out of them if i remember correctly he had a position it wasn't out of the money call options and he did thorough analysis and owned it for a while yeah but it did hold on And he really embraced the meme stuff after a while. But I agree, it's probably not him. It's interesting because I don't know whether it's legal or not, but if someone hacked his account, misled people, bought these options,

Starting point is 00:16:13 did a pump and dump by posting the screenshots, should it be legal? You would have to be a very wealthy hacker. yeah i'm not sure exactly what i think it's more likely i guess it could have been a hacker but it seems like like if i were a fund up-and-coming fund and i knew i could buy a an account that would allow me to guarantee that my trades worked by posting a reverse uno card on some twitter account that seems like uh this feels like a fund it does it feels like a crypto bros that have way too much money i think if he did all this stuff and it's just him it's clearly not illegal he's just posting some memes and people are following him and it's not wrong to say i own this and

Starting point is 00:17:10 follow the trades but if someone manipulated that account or like a screenshot and said um basically like they don't actually have that position maybe they they wanted it to seem like it's a huge position because that can drive more attention and stuff like oh he has a hundred million dollar position or whatever whatever it was and if it wasn't them or if it wasn't actually him i don't know if that's illegal or not by the letter of the law but it does seem to me a bit to be extremely misleading and there should be some investigation to figure out what happened because there's people on the other side of these things that can get hurt and you want honest markets

Starting point is 00:17:51 as much as we possibly can. Okay, let's move to a new topic. I don't know. Rory and Kitty, if this is really you, good for you, I guess. But why would you risk all your wealth? It just doesn't seem like it. that's got to be all his wealth and then some yeah that's it's it's interesting we'll see

Starting point is 00:18:21 but if you got to somewhere buying playing at the roulette table if you got if you became a millionaire playing at the roulette table sometimes you just love playing the game again um but yeah you want to hit your new topic that your recurring statement that you're planning on doing here with small and micro caps? Sure. Thanks. So posted a thread this week. Basically, it seems like high growth software stocks are kind of getting bombed out right now. A number of them have hit their 52-week lows. If you look on the 52-week low list, just look that up on Google, you're going to see a ton of software stocks. And so I'm going to go through some of these and just talk through some of the ones that have all hit their 52-week lows in the probably basically like the last week.

Starting point is 00:19:14 And let's see if any of them seem attractive. So I'll kick things off with Snowflake, the first one here. I'm doing this in order of largest market cap to smallest market cap. I'll share the screen for video listeners on – I believe we do it on Spotify too. but you should be able to see some of this stuff on the screen share yeah and so snowflake they uh help get rid of data silos it's a data warehousing platform and it's really done a good job growing with kind of the cloud market overall so their five-year revenue kegger or the annual growth rate for their five-year revenue uh 96 it's down 66 from its highs and it's got

Starting point is 00:20:00 a market cap of 46 billion dollars the sentiment on this one seems horrible everyone seems to think that this is like uh kind of fading away i guess or maybe people are just taking victory laps because it used to be one of the most expensive stocks around honestly i don't know the market for snowflake very well but it's still a fairly demanding multiple it's not like cheap in the traditional sense look at it look at this i mean you see that that's operating income and just keeps moving in the wrong direction they do have plenty of cash to burn which great let's just be unprofitable then i mean that price to say it doesn't make sense if they have the money to invest i don't see why they would

Starting point is 00:21:01 if they think they're generating a good return out of their investments that they're deploying it makes sense for them to do it right sort of but i think most good businesses are all usually profitable once they hit i'm sure this is a considerable size i mean there's if you're that good of a business i don't really see why you can't be profitable at this scale and if you're not well okay what are those operating expenses that are keeping you growing but if they keep growing this fast i mean here's here's is crazy right remember snowflake price to sales 120 when it came public i guess now it's down to 15 but that's a multiple compression right there maybe the opportunity is there because everyone's gotten washed out i don't know how much cash does

Starting point is 00:21:42 have let me check sometimes it's tough to find that on since the definitions here total cash and short-term investments 3.5 billion um i'm guessing they do a lot of sbc so the actual cash flow is not that bad so that's not a concern here i bet the concern is share dilution which let's check her out total shares outstanding growing in about four percent a year not a yeah Yeah, that's a headwind. That's a headwind right there. But 96% revenue growth. Now, I don't like situations where we just say,

Starting point is 00:22:24 but look at the revenue growth. But 4% dilution and 96% revenue growth, the revenue growth per share is still quite strong. And in theory, if they can get to a reasonable operating margin, it seems like they're probably going to – It's hard to imagine them not working out if they start to see some operating leverage. The second one I'm going to talk about, though, is Atlassian. This is an Australian-based company here.

Starting point is 00:22:53 They are a project management software system. They're most famous for Jira. It's not something I've worked with before, but it helps connect technical and business teams so that they can plan and track and manage everything together. 36.5% annual revenue growth for the last 10 years. Pretty staggering. Drawdown, it's down 65% from its highs. It's got a $41, $42 billion market cap. What do you think about this one, Brett?

Starting point is 00:23:24 Let's see. I'm looking at operating income. If I look at all these, Ryan, and they don't generate any earnings, I'm going to be mad. because what are we doing with the software companies? But I know Dropbox actually generates a profit. I'm looking, I was going to look at the, I'm assuming they have high gross margins, this little, I know we're using price to sales and that's a crime,

Starting point is 00:23:45 but I like to, if I know the gross margins are high and they're not profitable, I think it's a decent proxy. We're at a price sales of about 10. I mean, what was that growth rate again on revenue? How fast are we growing? 37% over the last decade annually. Okay, well, what about recently? You got it right there in front of you.

Starting point is 00:24:06 Yeah, let me... Let's see here. Let's see. Since June 2021, 32%. Pretty good. Yeah. Here's the thing. I think you might be looking at some of these wrong, to be honest.

Starting point is 00:24:20 We're going to get into some of these human capital management software where it's hard to distinguish between one another. But with businesses like Atlassian and Snowflake, they've built a product and a business that is durable. Like it matters to customers, it seems. Now, I'm not in the nitty-gritty. I don't really understand the customer value prop that much. But from everything I've read, it seems like the customers love this product. these are the ones where if they find religion or if an activist ceo comes in or you get or not an activist ceo activist brings a ceo in or an activist just joins the board whatever and you

Starting point is 00:25:04 get a salesforce like situation i think you can start to see serious operating leverage in these businesses and you're probably going to get really strong returns possible but at a let's say okay you got a price sales of 10 let's say they can get to best of the best operating margins of 40 what are we at a pe of 25 i mean yeah that can work if the growth rate continues right but i'm betting on microsoft level margins i don't know if that's a bet i want to make at a price sales of 10 now if it's down to four or five i mean that's i think that's a different story but someone like Snowflake or Atlassian these valuations don't really attract me especially because it's not a sector I have any sort of circle of competence on okay let's move to the

Starting point is 00:25:55 third one here Viva Systems Viva is a leader in cloud-based software for the global life sciences industry I remember hearing what they basically a description on the details of the business and And essentially, it sounds like this really kind of powers a lot of the pharmaceutical companies. And I'm not 100% sure what the competition looks like in that space, so I'm not going to talk too much about it. But really strong growth rate over the last 10 years, 30% annual revenue growth, $28 billion market cap. It's down just under 50% from its highs. You can go through some more of the numbers here. i remember they came public i want to say in like 2015 or 2016 could be wrong there

Starting point is 00:26:47 ryan they're growing revenue at 30 if for anyone that had the share screen there and guess what they're actually generating and operating or positive operating earnings this this one yeah they went public a while ago um they've been public for at least 10 years i think and i believe yeah i don't i don't know this coming at all but i believe it's like salesforce but for specifically biotech and that could be a little bit different i think someone described it as something of biotech so it's one of those software platforms but specifically for that industry maybe pharmaceuticals as well which makes sense given that's a niche that has a lot of interesting things that you want um that's particular to that one let's look at price to sales

Starting point is 00:27:28 hey whoa okay 11.8 not terrible for a company that's this profitable growing that quickly yeah this one attract i mean given the fact that they're able to grow more efficiently than atlassian or snowflake this one attract i'm more attracted to this one and because they're in a niche i wonder if they can have some sort of a better competitive advantage where these broad-based platforms just there's another competitor that comes out every month at a silicon valley yeah this it excites me i worry that maybe this is closer to maturity than some of the other businesses maybe there's ways to upsell but you know being that they are so niche and if you look at the customer count on the segments and kpis i imagine it's yeah i'm not sure tapered off a

Starting point is 00:28:16 little bit do they they don't do the customer account they don't do customer account but ryan let me ask you a question do you think biotech and pharmaceuticals will be a larger industry in 10 years or a smaller industry i'd say almost definitely larger yeah definitely larger okay let's move to the fourth one here mongo db this is one that you actually pitched to me i want to say like four years ago and yeah for the life of me i just could not grasp the business but basically here's the headline mongo db provides a document database which makes it easy for developers to store structured or unstructured data they have grown revenue at 50 a year over the last nine years 17 billion dollar market cap it's down 60 from its highs

Starting point is 00:28:59 and it dropped significantly it dropped quite far after its latest earnings report so some cause for concern here on the latest report i remember growth's kind of flatlining a bit sounds like maybe there's a little more competition coming in um yeah that could be tough obviously yeah what's the operating earnings look like uh yeah let me pull that one i did want to i guess before i change this one look at their so they have their mongodb atlas which basically was a new product back in 2016 or something around there and it's their cloud-based solution for their typical database it's supposed to be superior to something like oracle but i don't know the nitty-gritty details of why but it basically went from zero to a billion dollars

Starting point is 00:29:47 revenue in what is that one two three four five six seven years which not bad yeah let me pull up that operating earnings let's see if they're profitable i'm guessing no yeah this one's ugly like snowflake i'm sure it's all sbc and stuff like that i'm sure they're generating positive free cash flow and they brag about that but let me pull up maybe why don't we just use price to gross profit that's better price growth profit of 13 that's not terrible if you believe growth can reaccelerate but if you said that like here's the thing about these you know looking at a software company like this i have no idea why revenue's slowing down and if you don't have any idea why revenue's slowing down you can't make any sort of estimates about the future which would

Starting point is 00:30:35 concern me for a lot of these yeah the other thing is price to gross profit of 13 most of their costs are operating expenses you know it's i would assume so yeah it's not even I think gross profit is very misleading relative to what they could eventually earn. It's nice that they have high gross margins, but it requires a lot of research and development, a lot of developer talent, which is costly. So I'm going to say eh on this one. We've gotten through four here. And I think Viva Systems is probably the most attractive so far. The fifth one here is Paycom. Now this is what I'm a little more familiar with. They're a human capital management software provider primarily for small and medium-sized businesses they help with uh talent

Starting point is 00:31:24 acquisition as well as time and labor management among other functions so basically helping run the workforce helping attract new employees or uh keep track of new talent as you're acquiring them um i think there's some to like here paycom has been around for quite a while 31% revenue growth over the last 10 years annually. $8 billion market cap down 73% from its highs. Wow. All right. Yeah. I'm seeing this one again. I think listeners won't be shocked to see that I'm seeing positive operating earnings and that actually makes me way more excited about the company. I mean, seriously, think about these software companies with these supposedly high margins. If you can't generate positive operating earnings at a $3 billion

Starting point is 00:32:13 revenue level like when are you gonna do that i just okay um sorry little rant there but let's go look at this valuation price to sales 4.7 this one's attractive i remember looking at them i believe we did a show on them a while back wow in 2021 that price of sales got up to 30 i mean was software was crazy ryan do you like people were getting 10 beggars left and right the multiple expansion was crazy and it seemed like those didn't seem like one of those situations where were you worried that like i felt like this too like am i missing something when those that multiple expansion just went crazy a couple years back yeah i started to think software was like these unbreakable models which just is not what's the ev to ebit on this yeah i was going

Starting point is 00:33:06 to say we can actually use a real earnings ratio here it looks like 13 and a half wow i saw some people tweeting about it too like uh some kind of value focused people 13 and a half that's not bad this takes the cake for me so far i want to know why why why is it down so much what what's what's happening because they're for a company that that chart looks so good the revenue growth looks so good the operating earnings look so good um why is the eva 13 and a half because i think people are like they must be expecting that not to continue why what did they say what happened that's that would be my next question obviously we can't talk about it now but hey ryan maybe that's the next one you look at for uh for the old podcast here yeah i could be i can be down

Starting point is 00:33:52 to research that one sixth one here is paylocity we had someone come on and pitch this beforehand or sorry on our show before uh andrew marshall he came on pitched paylocity he i talked to him He's actually since sold, but PayLossy offers payroll and tax services to simplify, automate, and manage compliance requirements as well. So basically it's payroll software provider, and they earn some extra interest income because they hold on to funds for a little bit, which this stock is down 54% from its highs. It has had remarkable revenue growth over the last 10 years, 30%. Profitable now. Profitable, yeah. I think they're earning a lot from that interest income.

Starting point is 00:34:43 Right. Look, maybe they – like interest rates could go up from here. It's possible. It doesn't seem like that's what's being telegraphed right now by the Fed. But if rates do come down, it certainly hurts them. Interest income is ultra high margin. It doesn't really cost anything. and so it really helps profitability the issue is that i'm seeing a lot of these companies do

Starting point is 00:35:11 this now bill.com is similar where yes you are earning interest on their funds people didn't care about that for a while but now customers are starting to care because they're starting to look at this and say okay they're holding my funds when like yeah they're generating interest on it, but I'm getting sick and tired of having these funds held in limbo. I'm going to try to find a solution that doesn't do that. And there are certain solutions to kind of circumvent some of these payroll and billing solutions. And I've seen that more and more. People try to get around Paylocity, get it around bill.com, find a cheaper solution. So that would be what I'm a little bit concerned about here. How much is core revenue growing as opposed to interest revenue?

Starting point is 00:35:59 all right we can pull that up they do have that for us operating revenues um let's just do quarterly to see recent okay loading since june 2021 operating revenues are growing at 33 annual clip doesn't seem like there's been much of a slowdown recently but i'm sure guidance must have been weak something like that i heard yeah i heard they missed their guidance but yeah p of 41 ebitda sales 5.5 even ebitda 27 not super cheap either all right i'd say meh on that let's move to the seventh one here day force this is a company i really had not heard of prior to ticker what's ticker d a y day force huh haven't heard of this one they also provide hr payroll workforce management software as well as talent management

Starting point is 00:37:04 functionality i'm starting to realize that this is a bit of a crapshoot it seems like it's a bit of a commodity there's a lot of software stocks yeah um now has it grown quite as fast nine-year revenue kegger is 12 it's down 62 from its highs and it's a market cap of 7.8 billion dollars it looks like they had a huge drop during covid yeah i wonder if so yeah you're seeing the share screen here i wonder if they sold a segment because let me look at just if we go from june 2020 i know that might be a bad comp here and a little bit of a chart crime but from june 2020 to today revenue has grown at 24 rate that's not bad um let's look at see is it profitable that's just a question every software investor

Starting point is 00:37:55 should be asking is the company I'm investing in profitable and they are positive operating earnings doesn't seem like much what's the trailing oh yeah sorry that's quarterly oh yeah that's why it doesn't seem like much trailing

Starting point is 00:38:09 133 million and market cap of 8 billion okay not that great alright let's look at the sales ratio price to sales of five just i'm gonna pass here's here's a tip that i've gotten uh heard on in the past and i make sure to look at because it's helped me like with stuff like peloton look at the definition of

Starting point is 00:38:38 operating expenses like a lot of stuff it's not the same for every company a lot of companies where you go well gross margins are 80 why do they have negative 20 operating margins Maybe it's because they're putting a lot of their cost of goods sold within operating expenses. So just look at that definition. It's in all the annual reports. Okay. Let's move on to the next one here. A company we're familiar with, Dropbox.

Starting point is 00:39:06 I think a lot of people are probably familiar with this. Compete with Google Drive. It's a file sharing content collaboration platform. It's actually gotten better at helping teams kind of work together on projects over – or projects, documents, presentations, stuff like that, and then sharing out of it as well with their acquisition of – I can't remember what it was called. They acquired some company. Or no, not DocSend. DocSend. DocSend, that's right.

Starting point is 00:39:35 However, growth has stagnated a little bit. And frankly, it's kind of flat over the last couple quarters. So a little bit concerning. Generates a lot of cash. Has some stock-based comp, though, that's worth kind of taking a look at. They did do a big price hike, which maybe is leading to some of the attrition in paying customers. They have $440 million in last 12 months operating income. The market cap is, what did you say, around $8 billion right now?

Starting point is 00:40:10 7.2 7.2 so EV to operating income of what mid-teens yeah let me look at total shares outstanding from June 2021 it's declined at a

Starting point is 00:40:28 6% rate so not bad that's not bad that can help it's just I'll be honest I was happy when we exited this position yeah we have owned this in the past it's just tough they're they haven't executed that well they seem to be playing a little flailing a little bit with new products yes the capital or excuse me the capital

Starting point is 00:40:52 returns program is smart um they have good cash conversion all that good stuff they're reducing shares outstanding by a good amount but where do new customers come from besides acquisitions I don't know. It's a little bit messy. Probably works from here because the stock is so cheap, but is it a high-quality business? No. I'm more interested at probably 10 times EBIT.

Starting point is 00:41:20 All right. Yeah. Just giving the buyback. Yeah. I mean, if we're expecting low to mid-single-digit growth, margins may be trend a little bit up. the buyback is there but when they really reduce share count they took on some debt to do it initially so i wonder how much they can really fund to the buyback they probably take down

Starting point is 00:41:44 shares i'm guessing by like mid to high single digits on a going forward basis let's take a cash and equivalents yeah i mean it's come down a little bit about a billion dollars in cash left and liabilities total long-term debt a little higher so yeah definitely about net cash of zero from what it looks like yeah uh i'm not interested in dropbox at this price just honestly uh let's go where kiva w-o-r-k-i okay yeah i got it they say where kiva is a fit for purpose connected reporting and compliance platform basically i think that that just means they help customers individually it's not like it's a purpose-built solution and not just one out of the box

Starting point is 00:42:36 platform where everyone can use it in the same way 10-year revenue growth 21 annually 4.2 billion dollar market cap down 53 from its highs is this bad boy profitable i'm gonna check no they're getting better like the visualization helps here you uh they're getting they're moving in the right direction but still why aren't you profitable at such a large scale price to sales 6.3 not crazy yeah this can work if you believe or if there's some part of the story here where you think they're going to deflect a profitability and quickly and remember it's not just oh we have a five percent margin it's we're going to hit 20 30 margins which all the software companies seem to talk about and never actually do so my guess

Starting point is 00:43:34 would be they don't do it because it seems like uh what is it called the the base rate on these software companies is they love talking about their margin inflection that doesn't show up except an adjusted EBITDA numbers. Yeah, I'm probably going to pass on this one here. Last one, let's go EPAM Systems. Now, full disclosure, this is not a software stock per se. It's more just like software consulting. They have a whole bunch of employees in,

Starting point is 00:44:07 actually a lot of their employees were in Ukraine. And this was a business that grew revenue really quickly. it was a talented tech workforce that uh was lower cost than what you would get in america and if you look out over the last 10 years it's become just a much much bigger business the issue is that their workforce was in ukraine yeah so the war yeah tough so it's really affected this business they relocated a lot of them but i just wouldn't be surprised if a lot of the projects are being delayed people are afraid to work with them uh because the employees are busy concerned right yeah yeah the looks like here they're profitable every year since 2014 uh enterprise

Starting point is 00:45:03 value says here's 8.2 billion i wonder that's pretty that's a lot lower than the market so i I wonder if they have a heavy cash position here. If you look at last 12 months, earnings, $575 million. So not too expensive on an EV to operating earnings. And their peak was in the fiscal year 2022 at $713 million. So if you believe that they can get back to that $713 million and keep growing it, well, they could be well on their way to a billion dollars in earnings with $8 billion EV. I wonder how they've been on returning capital to shareholders.

Starting point is 00:45:38 Maybe they've been hesitant, but I'm not sure. They're standing, haven't really been moving in the right direction, actually the wrong direction. So it could work if you believe there's a change coming here and they're going to get past this. But yeah, like Ryan mentioned, if they got all their assets in Ukraine, that's a tough one. Yeah, that's all 10. What would be the most attractive to you? let me go through the list here there's snowflake atlasian paycom and viva yeah i'd say paycom is probably number one for me right now gonna do some more work on that after this after this chat

Starting point is 00:46:18 now before we move on i want to give another word from our sponsor here earlier in the show you heard us talk about the investing platform public.com that's where you can get that's where you can trade options with no commissions or per contract fees, and you get a rebate of up to 18 cents per contract traded. NerdWallet recently gave public five out of five stars for options trading. If you want to see why, go to public.com and start getting a rebate of up to 18 cents per contract traded. This is paid for by public investing. Options are not suitable for all investors and carry significant risk. Full disclosures are in the podcast description, u.s members only you also saw us share our fin chat charts there if you want to get 15 off use

Starting point is 00:46:58 code chit chat or sorry finchat.io slash chit chat go to that url and you will be able to get 15 off the link is in the show notes just use that you're not going to be able to remember the the url the link is there all right what do we want to talk about next let's go through some questions people have um do you guys have any thoughts on facebook dating versus match facebook dating likely won't work even if they give a lot of numbers about usage that's probably just because people click on it uh facebook meta is a little bit liberal with how they define users sometimes when they send you an email and you click on it and that's the only thing you do that month that is still kind of an active user uh someone says have you looked at genk g-e-n-k uh to me

Starting point is 00:47:46 I did a little bit Korean barbecue brand that's trying to grow throughout the U.S. It could be an interesting one to look at. I didn't want to do it right after Portillo's because I didn't want to do restaurants back to back. But I think I will get that some point this year. Other questions. Do you guys think he'll be prosecuted? No. OK. Do you guys think the hyperscalers will slowly create free versions of all these cloud software offerings and just bundle them inside of Azure, AWS and GCP, similar to what Microsoft did with Office?

Starting point is 00:48:14 Yeah. Look, I look at all these and I say. At the right price, of course, I'd rather on the cloud. Those three companies. Right. Yeah. OK. Other ones, but it's wrapped up in something bigger. That's true. That's true. Right. Where you kind of want, you know, one of those situations where people talk about AWS for free at Amazon. right you know those situations make sense or when no one was counting on google cloud to ever be profitable stuff like that um anything else on that run no the hyperscalers are just such an awesome business it's a good business it's a good business um let's see do you guys think the bank is that the bank of canada voc and the european central bank cuts could lower

Starting point is 00:49:08 u.s inflation rates due to more goods being produced overseas no clue and i don't care sorry i'm sorry i don't know no idea all right let's look at a few we got a few on twitter so let me look at those as well see if we got any i just i know that sometimes they're not the best questions but uh i want to look at i don't know people are trying to interact with us so they say is paycom worth the risk of the pullback or the better options in that field to invest hey all right we already talked about that lamb weston seems like an interesting play with their drop due to crm software changes um okay what sass at expensive tech slash expensive stocks would you buy at the right price all right ryan maybe that's a good one for you both of us

Starting point is 00:49:56 what software stocks would you buy at the right price uh well i got kind of a loud noise going outside my window so i apologize in advance but um there are a lot of software stocks that buy at the right price i want one that matters a lot to the customers and not something that's like a super competitive space something that's hard to replace like an adobe just because of the bundle there autodesk uh kind of the stuck with it for life type of softwares i really like yeah i'm trying to think of all of them off the top of my head but yeah the autodesk makes sense uh we had a comment here that says crm i mean salesforce does make sense at the right price if the thing is a lot of these

Starting point is 00:50:44 management teams have they have not cared about shareholders for 10 years and it didn't matter because or even longer 15 20 years they did not care about shareholders but it didn't matter because the the growth was so strong when you're growing revenue at 15 a year for a decade no one cares that you actually don't treat shareholders properly but now that might start to matter as these businesses mature um trying to think of other software there's not there's just not that much that that i like mongo db made a little bit of sense to me because of i was read a lot about um how it's different than oracle but then i saw all the cloud providers copied them as we as we already talked about someone said shopify i think that makes sense a lot

Starting point is 00:51:31 reminds me again wix at the right price i think makes sense um because just because you can it's not like you can predict it but the reliability of the existing customer base is fairly predictable as long as they don't botch things with new product rollouts because they're going to stick around. And there's going to be some churn, but it's not going to be high and there's cash flow coming in. Intuit, maybe?

Starting point is 00:51:57 Someone did say Intuit. Now, FedNow, the direct thing is growing, but we'll see. We'll see. All right. Let's get off software. Too much software for one company. Sorry, sorry.

Starting point is 00:52:11 For one podcast. Why don't we talk... Here's one I thought was interesting, Ryan. This is a fun fact. Now, this is right. Maybe we're going to save your debut if we don't get to it. So for this new segment on micro caps and small caps until next week. But that's OK. But I have my winners and losers from the week. I'm going to try to do this every week. First one I have here. Winner of the week is never sell investors. David Garner. This one is right for you. um here's a pull out from a lindsell train report something i read it it said as of the 2006 when this work was published if you bought the original s&p 500 at launch in 1957 and then did nothing you'd have beaten the actual refreshed s&p 500 by more than half a percent per year

Starting point is 00:53:06 good i wonder how much phil morris was in that you know exclude phil morris what do we do but it forced you to hold the biggest winner of that time period so i think it's quite interesting where forcing yourself to never sell or at least understanding that this can happen can keep you from being too active in your portfolio do you think there's any situation where you would just buy the index and just that's it uh not my whole account no you're talking about uh i don't know like a little bit of the account maybe but the whole account no or my whole retirement no no too boring no too boring um also don't like the risk of the passive bubble people being right because i think there is i know it's not a black swan

Starting point is 00:54:06 because we're all talking a lot of people talk about it but it is maybe a white swan not to anger uh to leb there but i i do i do and plus the market's at 30 times earnings yeah it's a little outrageous okay we got we got people in the comments saying they want your segment ryan they don't care if we go over an hour so why don't we let's wait let's wait because i still got this noise in the background so all right i'll do my loser of the week and i should say any listeners tell ryan if the noise does anything because i never hear it so i don't think it's actually picked up and it yeah okay let's see oh my loser on the week this is a fun one. Berkshire Hathaway, buy the dip, people. Did you see this where there was a glitch

Starting point is 00:54:58 and the A shares traded at a 99.9% discount for a small moment there? For those that don't know, the A shares traded like 600,000 bucks because they'd never done a split, but you can buy the B shares as an individual if you don't have $600,000 lying around. And according to the New york stock exchange they said traders who scooped up warren buffett's berkshire hathaway shares at a massive discount during the glitch will have their deals canceled by the new york stock exchange they're just ruining us value investors lives you know we're just trying to buy the dip what about this new exchange the texas exchange yeah it actually kind of makes sense to me that for someone to try something like this just because you i don't i'm not very fond of the idea of like

Starting point is 00:55:44 exchanges exerting too much power well okay in this case it makes sense right someone that said they're going to sell at market order and it was seven hundred thousand dollars or whatever and the next day it's down 99 because you messed up you would be screwing over those customers in a huge way so that makes sense for any of those orders to be canceled but some of this other stuff like setting requirements for like board diversity right at the exchange i i just don't think that's your role right exactly exactly yeah there's some jokes to be made here you know texas exchange is gonna i don't because it was like because woke things but yeah look there hasn't been a competition for a long while new york stock exchange nasdaq otc markets

Starting point is 00:56:40 that's pretty much all there is out there i remember like five or six years ago they were trying to get the long-term stock exchange going but i don't know if that's actually it's kind of like that real yeah it's like that be real uh social media one where it's like just come on one a day or one time a day and it's like how are you making any money but uh yeah this hey competition is great let's see if it works i thought what was interesting reading it though is that Citadel and the other market makers were part of the backers here. So I feel like the market makers, and I don't think they're evil, but I think they're trying to consolidate their position

Starting point is 00:57:21 and earn a little bit, get a better competitive edge in this space. Yeah, it's certainly possible. All right, let's do this section. New segment. For anyone who's made it this far, I guess you earned it. Thank you for listening this long. uh i'll re-announce this next week probably but my goal is to research one smaller micro cap stock every week that i find interesting so micro cap of the week i'm gonna call it micro cap but

Starting point is 00:57:49 basically the goal is that it's like 500 million dollars or less i don't know if that's really micro cap but that's 500 million dollar market cap or less um you could do a fun uh meme about you know like a micro cap used to be 100 million dollars now it's 500 million dollars what happened to the country i used to know like those dipole ones yeah yeah that's true uh yeah if i think of something good there maybe i'll tweet it out but for the time being yes micro cap of the week that is the new segment i'm going to try to do one every week the stock for this week is good Hart Wilcox. They are an educational products provider that specializes in career and technical health and PE subjects. So note that is not the most competitive or the mass market textbook

Starting point is 00:58:43 subjects like math, language arts, science. It's kind of the more, like I said, technical stuff. And they're making a transition to digital. So COVID kind of forced their hand a bit here, although they already had some efforts going on, but the companies, here's a quote from a new investor hedge fund manager that I started reading his letters. He does a wonderful job. He says the company's digital. No, it's not going to be on there. Brett's sharing his screen. It's not going to be on there. I'll explain why here in a second. It's yeah. The latest they have is revenue from 1998, I think.

Starting point is 00:59:21 So I'll talk about why in a second, but the company's digital revenue started to gain significant traction in 2018 and have only accelerated further post-pandemic. They now make up almost 40% of revenues and still grow 35% per year. Operating margins are now 30% and climbing and cash is quickly piling up despite paying a large special dividend at the end of 2021. And they pay out the majority of their net income as a dividend. So I guess the interesting thing here, they don't have an investor relations page. They don't file with the SEC. They have their financials on OTC markets. I had to email their investor relations to get updated financials.

Starting point is 01:00:05 So it's a pain, but it looks like a pretty solid business. This digital revenue is more recurrent, so it's less cyclical than this business used to be. They pay out a ton of dividends and it's really run like an old school company where the CEO writes a letter every year just describing the progress in the business, what he likes, what he's seen, and they return a ton of cash to shareholders. I believe it's around a 6% dividend yield, but the business is actually growing. So I like it. The other good thing about businesses like this is when there's – when it's almost run like a family-run company, they prioritize shareholders because they are shareholders. So they just pay out the dividends and it feels like you're maybe blending some growth here with steady capital allocation, which I really like. The ticker is GWOX.

Starting point is 01:01:04 It's up a lot in the last year, but I just kind of like some of these that are trading with completely irrespective of what's happening in the market. Yeah, and it's interesting. You can't really get it on a screener, right? Because it's not going to show up there. And the digital, I'm assuming it's just digital textbooks? They still have traditional textbooks too.

Starting point is 01:01:23 That's 60% of the revenue. Okay, but the digital is digital textbooks. Correct. Okay. And what kind of earnings ratio are we at right now? i believe it was low teens the thing is they do like billings now because they order a lot up front and it's like amortized over seven or eight years but it doesn't really cost a lot to serve so uh or sorry the revenue is recognized over seven or eight years i think and cash flow

Starting point is 01:01:52 could be higher yeah yeah i saw something that it was trading at like three times for cash flow so the dish the the issue here is that it's super illiquid like if you go to the one week price chart nothing's happened um you have to i'm sure the commissions are fairly high to order this if your broker even allows it so not an easy find or an easy buy yeah i guess that's a good question as we wrap things up here maybe final question on this before we get out of here what is your you're saying you're going to do one of these a week hold we'll hold you to that listeners will as well get on ryan if he doesn't what is your planned research process because i know one of the maybe the almost most important thing within small microcaps is how the hell do you find them

Starting point is 01:02:45 okay yes that is the biggest thing first of all i was looking for a modern moody's manual there really is not much you can maybe do value line but it's hard to do um or it's expensive talk to finchette you you know maybe maybe talk to the team there you guys could do something yeah it's a it's a number of different things so microcap screener i've been doing uh there's a couple of accounts i now follow on x or twitter that do a really good job and because they've been following them for a long time and they're new to me. I'll have some easy ones to pick up here. Value Investors Club and then a lot of hedge fund letters you can find.

Starting point is 01:03:33 There's a couple of hedge funds that are just purely micro-cap hedge funds, which are just easy to find and they have good write-ups on them. So that's probably going to be the bulk of where I find these. I've got a few already on the docket for the next upcoming weeks. All right. Beautiful. Yeah, I was going to say. That's good. i think honestly this takes a lot of time too but doing a screener of i know not all of them are going to show up but just for tiny size and you had to go each through each one because the numbers are probably not going to be that that good compared to the large caps but

Starting point is 01:04:05 yeah not bad i think it's a fun there are a lot of ugly ones exactly you have to find the diamonds in the rough and what's the the classic saying i'm not i'm not this is not i'm not coming up with this on my own here but a micro cap or a small cap doesn't always want to be that small so there's a reason it's small they probably struggled for a long time and a lot of the managers there have minimal scrutiny from the news whoever from anyone there's probably just a few analysts and shareholders that follow them and sometimes they act as we've seen not too epically sometimes. All right.

Starting point is 01:04:45 I think that's it. Ryan, anything else before we close out? I will say, Tyler said here in the comments, I don't hear, it's quiet for me, especially when he talks. So I don't think the listeners pick up that noise. All right. Let's wrap this then. All right.

Starting point is 01:05:04 Let's get the disclosure. We are not financial advisors. Oh, actually before, we haven't said this in a while. if you like the show give us a review on spotify or apple podcast we really appreciate that best way to grow the show best way to support us follow us there these go live every week thursday morning on the west coast about thursday noon eastern time noon uh or excuse me 12 30 on the youtube channel you can watch them there watch the replays there or listen to the replays on spotify or apple podcast and the best way to do that again is to give us a review on apple

Starting point is 01:05:37 podcast or Spotify, but let's hit the disclosure. We are not financial advisors. Anything we say on this podcast is not formal advice or recommendation. Ryan, I, or any podcast guests may hold securities in this podcast, or excuse me, not in this podcast, talked about on this podcast, may have held them in the past and may buy, sell, or hold them in the future. Thank you everyone for tuning in. I'll see you next time. We'll be right back.

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