In December of 2017, I wrote a special report for Zacks Confidential titled The Technology Super Cycle. My goal was to answer two burning questions I had:
1. Why was government productivity data so muted in a world of hyper-speed technological efficiency and disruption?
2. Why was inflation so tame when stock market capitalization and investor wealth were soaring?
I dealt with both questions by searching for simple, convincing data and reliable economic sources. Once I found those answers about "weak" productivity and "missing" inflation, I used them to support my personal theory that we were in the midst of a Tech Super Cycle, driven by areas like advanced "big data" and mobile computing, Artificial Intelligence, networks and sensors (IoT), and Biotechnology.
My rough estimation of how long this innovation momentum would continue since it began in the late 1990s -- even with occasional recessions or black swan events -- was another 15-30 years. And that meant investors could stay the course long-term with many wealth-building industries and companies.
The four growth stocks I recommended spanned an array of industries, including two in the Healthcare sector. You can find that report, and my latest update this week focused on Software, via the archive link above or just email Ultimate@Zacks.com for access.
Software Valuations Are Like Biotech’s
In the video that accompanies this article, I highlight two Software IPOs from 2018 that you should know about: Smartsheet (SMAR - Free Report) and Domo (DOMO - Free Report) . Smartsheet is a $4 billion provider of enterprise software solutions that help companies integrate data, tools, and projects across platforms. SMAR provides mobile applications, pre-built templates and integrations with cloud applications such as Box, Dropbox, Salesforce, Google Drive and Zapier. It trades at 14X sales that should break $300 million in the next year.
For a company that just IPOd 11 months ago, Smartsheet just delivered a "phenomenal" quarterly report according to William Blair analysts. Revenue grew 58%, well above the Street expectations of 51% growth. Billings growth at 63% was above 60% for the second quarter in a row, far surpassing Street expectations of 50% growth. SunTrust analysts raised their PT from $38 to $56 citing continued acceleration in billings growth and a 126% year-over-year increase in $100,000-plus ACV (average contract value) customers. There is also a large federal opportunity to be unlocked by FedRAMP authorization.
You could think of Domo like a mini version of Tableau in terms of information integration and visualization. It trades at just 5X sales that should break $200 million in the next year, as the company grows the topline at 22-24% over the next two years.
I took an online demo of the Domo platform last year before they IPO'd and it was really powerful how it could organize, analyze, and visualize company and market information for improved business intelligence.
This barely $1 billion Zacks #2 Rank went public last summer and has just come off of new highs above $45 after a strong Q4 report on March 13 which delivered its second consecutive double-digit positive earnings surprise, averaging +23.5%.
The earnings reaction volume on the stock's 22% gap higher was over 4 million two days in a row, which lends itself to much more than short-covering -- implying strong bullish institutional involvement.
That inspired me to look for any recent SEC filings and sure enough I found a 13G by Morgan Stanley buying over 869K shares in late March and increasing their position to 1.2 million, for a greater than 5% stake (the threshold triggering the 13G filing).
The fact there are no other filings means that no other funds exceeded a 5% stake. And the fact that the company only has a 17 million share float explains why demand has exceeded supply this year.
Domo was founded by the software wunderkind Joshua James who dropped out of BYU in 1996 to create Omniture, the web analytics company which he later sold to Adobe (ADBE) for $1.8 billion.
In the video, I also describe the biggest software deal of 2019 you probably never heard of when Ultimate Software Group , a cloud-based human resources applications developer, announced in early February that it agreed to be bought by an investor group led by private equity firm Hellman & Friedman for about $11 billion.
The $331.50 per share all-cash offer was a premium of 19% to the HR software provider's closing share price on Feb 1, and essentially takes the public firm private.
HR software platforms, like ADP, WDAY, PAYC, and PAYX, have done well as they "instruct" enterprises how to shift to cloud-based applications -- be it Software-aaS, Infrastructure-aaS, or Platform-aaS -- in a huge efficiency revolution to manage their payroll and human resources.
The size of the industry, known as cloud human capital management (HCM), is expected to breach $22 billion in sales by 2023 from $13 billion in 2016, according to a report by Allied Market Research.
What's the Take Away from ULTI?
The main lesson should be that private equity players were willing to pay 8X sales -- in CASH -- for a SaaS-based HR platform.
To me, this puts a floor in valuations for the frothy Software space.
Why? Because CRM, ORCL, MSFT, IBM, AMZN, GOOGL, and even AAPL will have no trouble paying more -- maybe 1.5X to twice that rate for the right SaaSy-HR/Fin-Tech provider.
Because they have the luxury of their market cap at all-time highs, where the stock valuation currency goes very far. Not only is there good will granted about future growth and stock appreciations, but there is also the notion that the strategic M&A must be able to bear fruit and help dominate their industry.
Buying an innovative platform with strong sales growth for $10-20 billion is much cheaper than trying to buy Square (SQ) for $40 billion, for instance.
Now for the introduction to my latest report on what I call The Softosphere...
Why Software is Still, More Than Ever, Eating the World
In August 2011, Marc Andreeson (co-creator of the Mosaic Internet browser and co-founder of Netscape, which later sold to AOL for $4.2 billion) wrote a piece in the Wall Street Journal titled "Why Software is Eating the World." Here was his opening...
This week, Hewlett-Packard (where I am on the board) announced that it is exploring jettisoning its struggling PC business in favor of investing more heavily in software, where it sees better potential for growth. Meanwhile, Google plans to buy up the cellphone handset maker Motorola Mobility. Both moves surprised the tech world. But both moves are also in line with a trend I’ve observed, one that makes me optimistic about the future growth of the American and world economies, despite the recent turmoil in the stock market.
In short, software is eating the world.
More than 10 years after the peak of the 1990s dot-com bubble, a dozen or so new Internet companies like Facebook and Twitter are sparking controversy in Silicon Valley, due to their rapidly growing private market valuations, and even the occasional successful IPO. With scars from the heyday of Webvan and Pets.com still fresh in the investor psyche, people are asking, “Isn’t this just a dangerous new bubble?”
I, along with others, have been arguing the other side of the case. (I am co-founder and general partner of venture capital firm Andreeson-Horowitz, which has invested in Facebook, Groupon, Skype, Twitter, Zynga, and Foursquare, among others. I am also personally an investor in LinkedIn.) We believe that many of the prominent new Internet companies are building real, high-growth, high-margin, highly defensible businesses.
More and more major businesses and industries are being run on software and delivered as online services — from movies to agriculture to national defense. Many of the winners are Silicon Valley-style entrepreneurial technology companies that are invading and overturning established industry structures. Over the next 10 years, I expect many more industries to be disrupted by software, with new world-beating Silicon Valley companies doing the disruption in more cases than not.
(end of excerpts from Marc Andreeson's 2011 WSJ essay)
Would that I had really understood what Marc was talking about even 5 years ago, I would be a much richer man.
But the good news is that what he's talking about, and that he has continued to successfully invest in, is still true and still powerful for wealth-creation right now.
I will try to sum up this very big idea: Since software is the brains of computing and specialized problem-solving/data manipulation, there are nearly infinite brains which can be created to run our world and all its parts.
Besides that, software code has always broken the bounds of time and space by being invisible, easily transferable, and ideal for automation. And now with cloud computing advances and hyper-speed broadband/wireless networks, software applications are more mobile and real-time than ever before.
Think about that. Meaningful hardware inventions and innovations will come and go -- from computers and cars to furniture and fashion -- but the Software possibilities are endless, just like songs, stories, and scientific experiments.
Physical things demand and consume time and space, while the software instructions that control many of them are rarely limited by time and space, and may actually seem to create more of these dimensions for us in our daily lives.
In short, Software is making companies and individuals more and more productive, at lower and lower costs. And that is what keeps driving the Tech Super Cycle.
Be sure to watch the video and learn more about Software valuations, including the rising star Veeva Systems (VEEV - Free Report) which focuses on serving Biotech companies.
Disclosure: I own shares of SMAR and DOMO for the Zacks TAZR Trader portfolio and VEEV for Healthcare Innovators.
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