Motley Fool Hidden Gems Investing - Platforms, Platforms, Platforms

Episode Date: February 29, 2024

For Snowflake, Okta, and Snowflake, growth may come from more products not just more customers. (00:21) David Meier and Deidre Woollard discuss: - The power of a great CFO. - What a change in leadership means for Snowflake. - Why growing revenue isn’t just about new customers. (17:00) Gary Stevenson, author of “The Trading Game,” explains what it was like to be one of the world’s top financial traders. Companies discussed: CRM, OKTA, SNOW, C Claim your Epic discount: www.fool.com/epic Host: Deidre Woollard Guests: David Meier, Gary Stevenson Producers: Mary Long, Ricky Mulvey Engineers: Dan Boyd, Desiree Jones Learn more about your ad choices. Visit megaphone.fm/adchoices

So many platforms, so little time. Motley Fool Money starts now. Welcome to Motley Fool Money. I'm Deidre Willard here with Motley Fool analyst, David Meyer. David, how are you today? I'm doing very well. How are you? So good. Seems like this is a tech Thursday, a SaaS Thursday. Want to dive in on companies that are really kind of making the news today, which are Salesforce, Snowflake, and Okta. Let's start with Salesforce. Dividend. We're starting to see dividends pop up. You know, Meta did it. Now Salesforce is doing it. 40 cents a share. Yeah, that's all right. It's a start. But to me, I'm

looking at this as a signal. How should we be thinking about this? Last quarter, we definitely had Salesforce being more cautious. They're not going off and buying things anymore. Is this company growing up? Definitely. The dividend, if you go back 10 years, there's no way a dividend was anywhere near anyone's radar. That's a function of Mark Benioff, quite frankly, being Mark Benioff. He's a visionary. He's a technologist. He wanted to put together all these pieces and create a great company, which he did. But I think that where the credit needs to really go is CFO Amy Weaver. In 2021, she became the CFO, and she had the unenviable task of trying to rein Mark Benioff in to bring more fiscal discipline to the company, to say,

hey, if we're going to do an acquisition, it really has to meet these certain requirements, not only from a strategic standpoint, but from a fiscal standpoint. With Salesforce generating significantly more profit and cash flow than it ever has before, it's able to not only invest for growth and do it in a disciplined way. But now, being a bigger, more mature company, it can actually fulfill its promises of returning excess capital to shareholders in different ways. We're seeing it in buybacks. We're seeing it in dividends. And quite frankly, this is exactly the trajectory the company needs to go on. Well, good on her for doing what a couple of co-CEOs were not able to do. I want to talk just a quick sec about that buyback, because

But stock-based comp has always been an issue with Salesforce. They're going after it. $10 billion buyback program, they bought back about $7.7 billion last year. It's going in the right direction. Yeah. Again, this is a complete change in the way the company operates. Stock-based compensation for a company like Salesforce is going to continue to be an important part of attracting and keeping the talent that they need in order to take the company in the direction they want to go. Again, it's good that they have this excess cash flow where at a minimum, they can offset the dilution. Hopefully, they're making opportunistic purchases with that capital at times when the stock price looks attractive.

Yeah. It's interesting because they bought a lot of things and now they've been trying to figure out how to knit them all together. And so looking at that, you know, it's not just a maturing company. It's still looking for growth. The big swing that Benioff spent so much time talking about on the earnings call was the Einstein platform sees it as sort of like AI ecosystem. Platform keeps coming up in the conversations that you and I are having. We talked about it with Palo Alto Networks. We're going to talk about it a lot today. So is this a true platform because I worry that people are using the word platform and maybe as a catch-all that's not necessarily a platform. Benioff talked about islands of trap data. I'm not quite sure

what that means, but maybe you can explain. Yes. Like we did with Palo Alto, let's step back and think about where Salesforce has come from real quickly. So again, Salesforce, It's in the ticker, CRM, customer resource management. That was what they were focused on, helping salespeople become more effective by giving them tools to figure out how to manage all of their contacts, to land new customers and talk to prospects, et cetera, et cetera. But we've added, you have the CRM component, you have marketing component, you have Slack productivity component, you have all these different components.

right? And what they want to do is to, again, bring them together and say, hey, if you want your business to run efficiently and effectively on the customer-facing side of things, come to us. That is now the platform. It's not just CRM, right? It's how do I do all of that well? And the thing that they want to stitch it together is Einstein, which is the AI, machine learning, all the analytics that can basically say, hey, you're doing all these things from a sales perspective, from a marketing perspective, communications perspective. What can we learn from all that data that we're creating? Becoming even more of a platform is what they are doing, and it is the right thing for them to do. Let's talk about these

Islands of trapped data. Essentially, there are many ways and many places where businesses store data. It doesn't all just go to Salesforce. There's so many different areas where data can be. And the idea is, for AI to work efficiently and effectively, we would like all the data to be in one place. So, it makes the computations more efficient. And if I can bring in more diverse groups of data, let's say sales data, marketing data, operations data, things like that, maybe I'll get a better insight. So, what they're trying to do is a very worthwhile problem to go find a solution for. And they believe that their platform, all the services they have, as well as the data cloud says, hey, if you want, you can bring all of your data to

Salesforce, and that will actually make the job easier. Those are all going in the right direction as long as we assume that AI is going to continue to be an important part of it. I think that's true. I like all the things they're communicating about Einstein, data cloud, the platform, et cetera, et cetera. Yeah, I like the vision. I think there is something that so many companies are wrestling with, is that they're generating more data than ever. Generative AI is pushing out more data. Everybody's got too much data. A few years ago, there was the whole data is the new oil thing. We don't know what to do with the oil. So what I'm curious about is, how does it play into the sales? Because you're selling the CRM, you're selling Slack and other things.

How does Einstein factor into the future? An excellent question. Early on, when they were first rolled out Einstein, again, it was a way to basically get more out of the tools that you were already using. I don't know the specific pricing structures, but maybe you paid a little bit more for your CRM, and you got Einstein on top of it. Maybe you didn't sell Einstein directly early on, you just had to pay to unlock it, let's say. But now, if you take this different approach, it's not necessarily the software underneath, the CRM, the marketing, et cetera. That's important, but if I can get customers to essentially pay for the value add as opposed to just access, that's a different way of selling things and a different way

of pricing things. I don't think they've quite figured out all their business processes to basically put Einstein front and center. How do you incentivize the sales force? How do I make sure that all my billing software can handle these things? I think they're working on that. That's the way I would say, hey, maybe Einstein is not factored into the guidance yet. I think they're still trying to figure out how they're going to do it. If I had to really guess, I would say maybe that might be a little upside surprise, either later in fiscal 25 or into fiscal 26. Well, let's move on to sort of the big wow moment after market closed yesterday, which is that Frank Slootman, CEO of Snowflake,

he's retiring. Now, he's not leaving the company. He's going to stay on as the board chair. But this really shocked people. I mean, you've got Sridhar Ramaswamy. He was the senior president of AI. He's been with the company a couple of years, came in through an acquisition. This feels like a signal that AI is running the show, but the market got pretty riled up by this one. I have a little bit of a different thought here. There is no question, again, we talked about it with Salesforce, there's no question that AI is front and center and that a lot of what Snowflake is trying to do, is basically be an enabler of AI for businesses all over the world. But I don't think Sridhar became president just because of what he's done in the AI segment.

We have to remember, he actually came from Google, where he spent many years in both commercial leadership roles as well as engineering leadership roles. So, Snowflake is a complicated technical company, and not only do you need someone who understands the changing commercial landscape, but you also need someone who understands the changing technological landscape. I believe that's the big reason why Sridhar was promoted. He has all the chops. It's going to be a big challenge going forward. This stuff's going to only get more and more complicated. So, having somebody with his background, as well as his ability, given he was an entrepreneur, to have a vision as well, I think those are

the qualities they were looking for in a CEO to take Snowflake to the next level, so to speak. One of the things I've heard people talk about is that Slootman, more of a sales guy, Ramaswamy more of a technologist, as you put it. But this is a company that seems to be in an interesting spot. Growth is still strong, but it's slowing a little bit. They talked about changing the forecast process to be more receptive to current trends. That seems like some sort of doublespeak for things aren't going to get better. What's happening with this? Yeah, that's a whole lot of word salad right there. Here's my interpretation. We're seeing this across a number of larger SaaS-oriented companies, this idea that customers are still

optimizing their spending. What that's meaning is, we know the things that we want to do from a technological standpoint are important, and we customers are willing to make these investments, but how do we ensure that we get the right return on the investment, and how do we make sure that our spending levels don't get out of control? What I think that word salad is trying to say is they don't have enough evidence to say customer buying behavior has flipped back to times when they were more willing to spend. As a result, if we're not confident that that's happening, you can't really put that in your guidance to show that the demand levels are changing, the buying habits are changing, and as a result, we're going to resume faster growth.

That's what I think that means. Growth is expected to slow on a quarterly basis for Snowflake across calendar year 2024. I think that statement was necessary as a justification about why that's going to happen. I think we're hearing a different type of reasoning for the slowdown than we were a couple of quarters ago, because we were hearing before, the sales cycle is slow, this is what we're experiencing. Now, I feel like with Snowflake and with Okta, too, I'm hearing more about, the customer base isn't going to grow dramatically, but we're going to make more products. We're going to get more out of each customer. On the Okta call, they talked about this, the hunter and farmer model. So, hunter goes out,

gets new clients. Farmer basically gets more out of the land. So, is this a theme we're seeing? Is this the next trend of what we're possibly going to see from some of these SaaS companies? So, it's very interesting from an Okta standpoint that that's what they brought out in their call, because this model is already being used by lots and lots of different SaaS companies. And the reason is, just as you said, once you get through that big push of adoption and you become a mainstream product, customers are going to come in, yes, we want it, we want it, we want it. But investing in sales and marketing that gets your customers to buy more is potentially

a way to get more return on those dollars. Good companies have figured out how to do both. It's good that both of these companies have recognized it. Okta brought it to the conference call with some fanfare. But as a SaaS company, you needed to be doing this a couple of years ago. Let's put it that way. This should have been your model from day one. And it seems like the platformatization is part of a way to bundle that up as a sales tool, but also as a framework. Oh, 100%. Because if you can figure out, let's say a customer has a need for one product, you can get them in the door that way. But once you learn more about that customer, once you develop a relationship with them,

once you figure out more about what their needs are, that's the perfect opportunity to say, hey, by the way, we also have product X and product Y and product Z, and we can bundle them together, and you can get them on our platform. It's seamless in terms of, since we're a SaaS company, we can flip a switch and you can get access. So, yeah, that's spot on. Well, thank you for breaking it down with me today, David. You're very welcome, Deidre. Thank you. We talk about a lot of stocks on the show, but it's just a peek at the Motley Fool's investing universe. This year, we're rolling out a new offering. It's called Epic Bundle.

The service includes seven stock recommendations every month, model portfolios, and stock rankings, all based on your investor type. We're offering Epic Bundle to Motley Fool money listeners at a reduced rate as a thanks for listening to the show. So for more information, head to fool.com slash epic. We'll also include a link in the show notes for you. We've got another perspective from an author who broke away from the world of high finance. I caught up with Gary Stevenson, author of The Trading Game, about his time at Citibank and the disconnect between traders and the real economic world. I want to get a little bit into your story because there are these moments in the story where

where, you know, you're trading and there's that tension, there's this, you had a few, like, I'd call them like stomach flip over moments. One for me is when you realize the Swiss National Bank's offering negative 4.5% interest on three-month swaps. There's this kind of moment where I think people who have less tolerance for risk might have pulled out their money. You went the opposite way. And it reminds me of this, there's a saying from the economist Keynes about, you know, the market can stay irrational longer than you can say, stay solvent tell us a little bit about what happened there yes it's a very big learning experience so that was my second full year trading so i started working as a short-term

rates trade in 2008 which is obviously the year of the lemur crisis it became enormously profitable business because we were making short-term loans of dollars everybody needed dollars basically we could we could borrow them from the central bank at zero and lend them out two percent it was like a lot of easy money basically when you do it in the fx swap you have to lend one currency and borrow another currency so at the time i was a swiss franc trader i was lending dollars and borrowing swiss francs and it was kind of an easy ride to be honest everybody was making a lot of money i made a lot of money in my first year when i was extremely young didn't know what i was doing and i was just kind of copying everybody really lending dollars

borrowing what in my case was swiss francs every trader has their own currency and then suddenly one day out of nowhere i sort of refresh my pnl and it shows it's my pnl's profit and loss for those who don't know and it shows down half a million dollars and i'm sort of thinking what's going on here i'm trying to look for the reason i asked one of the brokers and the broker says oh swiss national banks put something up on their website and i look on the website and the swiss national bank is offering this unbelievably cheap foreign exchange swap where they essentially lend out swiss francs for negative four and a half percent which is i don't need to tell you an extremely negative rate yeah because you know the swiss franc position was kind of an incidental

part of my dollar position i was i had an fx swap i was lending dollars you have to borrow swiss francs against it that's the way the fx swap worked and suddenly i was just getting absolutely hammered and i lost something like a million dollars in that first day basically so you know i described it to you before when you trade interest rates it's realizable right you do the trade now you wait a year and you see was i right or not and um immediately instinctively and we discussed in the book whether this is real or whether it was an emotional reaction i thought minus four and a half percent is an impossibly low interest rate you simply cannot keep rates at minus four and a half percent you know if you if you charge the banking system

minus four and a half percent they'll start trying to charge that to their customers the customers will take their money out of the bank because you can get zero percent with your money under your pillow you know and i just thought it's wrong you know it's never going to stay at minus four and a half percent so instead of you know i lost you know in the first couple of days i lost a couple of million dollars and instead of stepping out i sort of stepped in and backed it up you know it turns out i was right you know in the long run those interest rates were not sustainable and they came all the way back relatively quickly but because i was like stepping into the position quite aggressively despite losing money i managed to lose eight million dollars pnl within a week

which is an enormous amount for at the time that was early 2011 so not early 2010 so i would have been 23 still it was enormous amount of money for me and i eventually ended up getting stopped up by my management i went from up four million dollars for the year to down four million dollars for the year and then obviously i had to watch the trade come all the way back so this is just you know of anyone who has been trading for a long time will know this you know it's it's not enough to just be right you need to be able to to survive you need to be there by the time you're actually right so it's it's about you know sometimes being right is the easier part of the trade sometimes the tricky part is knowing how much to do especially if you're basically certain

you're right because if you're certain you're right you want to do everything but if you do everything then even if it goes against you for you know a month or maybe even a week if it's a big move you'll get stopped out it doesn't matter whether you're right so i think i describe it in the book as basically two rules for life be right in the end be alive at the end yeah sizing is is super important and um i tried to stand up to the swiss national bank and in that one instance You know, it's one of the things I found interesting in the book that, you know, I feel like sometimes people who come in from the outside, like you did, they're often able to see beyond the status quo. And one of the things in the book, it's kind of this juxtaposition of institutional and university knowledge and economic theory versus like, the ability to risk, go the opposite way, follow your gut, which it seems like it's an advantage when the economy doesn't perform the way that everybody expects it will. uh like so during the time period where you just you just keep betting on interest rates staying suppressed so you were very young uh was your was your youth your your outsider status kind of an

advantage at that point it was in the end yeah it definitely was in the end because i think one of the beautiful things about trading is there's not many spaces in this world that reward you for turning around to all of the people around you and saying you guys you're all wrong yeah and you know you know our society you know human societies are not generally built to reward those people if you turn around and tell everybody around you you're all wrong then you know you you'll become quite unpopular very quickly and i think this causes problems of intellectual group thing you know and it causes problems in cause problems in politics it causes problems in academia it causes problems in economics because because we as humans don't like it when we're

called wrong and we tend to punish people who say we're all wrong we can end up in situations like where we are now where the economy just gets worse year after year after year and the economy the economists are wrong year after year after year and nobody can nobody can basically call them out you know i tried to be in academia and it's basically impossible to challenge these people whereas in trading if everyone around you is wrong and you notice it you are going to make an absolute fortune it's this it's music to my ears as a trader when everybody around me says no, Gary, you're wrong, because I know everybody thinks I'm wrong. I'm going to make an absolute fortune. And I think this is where, you know, we talk about class a lot in the book, right?

Here in London, there's very much a, there's a stereotype of the cockney, wide boy, market boy trader, you know, this kind of artful dodger type character, because back in the 80s and 90s, we, you know, the financial area is in the east of London, which is where these people used to live. and in the 80s and 90s there were a lot of these people going into training you know in the early 2000s things massively changed and by now basically unless you're from a very rich family went to elite schools you're almost it's almost impossible to get in there once you're in there there is actually like a massive sameness about these people you know they all they might not come from the same country it's very international but they all come from rich families elite

schools elite universities elite jobs and they basically don't know anyone who is poor and this is you know these guys job is economic analysis right how much can you realistically know about the economy if you don't know a single person in an average financial situation this is the situation both in the in the universities you know and in most of politics and in the trading you know so the big thing for me so you know after 2008 markets predicted that interest rates would go up in 2009 and they didn't and then 2010 they didn't and then 11 and then 12 and then 13 and then 14 so every year these guys predicted essentially an economic recovery and you know after sort of two and a half years of this you start thinking these guys are just clueless they're

just wrong right but the biggest the big advantage i had is i could go out and ask people right and And, you know, I studied economics at the London School of Economics, so, you know, I know the theory. The theory is basically low interest rates are supposed to get you spending. But, you know, go out, you know, at the time when rates are very low, you go out and ask people, why don't you spend? Everyone will say exactly the same thing. You don't have any money.

You don't have any money, you know. And then you sit there pondering this idea, like, we know, like, billions, hundreds of billions are being poured in, yet nobody's got any money, you know. And I was sort of balancing this around in my head, and I was trying to work out, you know, where's this money going? And then, you know, one day you look around and you realize everyone in this room is a multimillionaire. And you think, okay, this is where the money's going.

And, you know, it's not going to get to ordinary people. And I think that was sort of the penny drop moment for me when I realized what we have is a fundamental crisis of inequality. And, you know, nobody's seriously talking about fixing that. You know, everybody wants growth and productivity. The problem is inequality. Nobody's fixing that. so I sort of realized this is not this is not a recession this is not one week here this is not

two week years this is a downhill slope all the way to hell you know and I started betting on that and by the end of the year I was Citibank's most profitable trader in the world so say what you will about that well that's that's sort of the turning point in the book is you're trading all the time you're you're betting on this this situation you as you said one of the top traders in the world these are just massive numbers shifting back and forth on your profit and loss sheet at that point were you still aware of like the numbers the money behind it or was it did it just become pure numbers for you you know this is the thing about games you know we've spoken about the positive side of games and i love games i still love games now game theory

is my big subject university and i still play games when i have a little bit of time and i want to zone out games are very engrossing right and they can suck you in and they can they can become addicted and you know the big game that we we play all of us in this world is the game of money you know the game of money we're all trying to make money we're all trying to make money listen you know i've got a youtube channel and i put videos every week saying listen if we don't deal with this growing inequality our society will collapse and your kids will be heartbreakingly poor and the number one most common message i get sent on that channel is gary how do i make money so this this is the this is the dark side of games right the dark side of games

you know i um i put as the like the epigraph the quote at the beginning of the book a quote from my friend's granddad used to sort of wander around his house when we were kids and used to say to us he was indian and he only didn't speak much english and used to just say life is life games again and we never really understood what he meant but i think i've come to understand i think what it means is if you focus too much on the game then you can easily forget about what's important and you know the book i think has that comment about society but it absolutely definitely has that comment about me and you've read the book there is without a doubt i became so engrossed with this game and so obsessed with this game and you know i was very good at the game but it was

It absolutely consumed me and overwhelmed me and it just became everything that I did. So, you know, games are great, but if you lean too much into them, there's obviously a dark side to it as well. As always, people on the program may have interest in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. I'm Deidre Willard. Thanks for listening. We'll see you tomorrow.