mYCharts - August 18, 2020
Finding a Competitive Edge in Tech Stocks with Beth Kindig
FEATURING: BETH KINDIG
$TTD $SNAP & $PINS have each seen multiple expansion of 15%+ over the last year & trade at a premium to $ROKU. Their growth rates have declined significantly over the same time frame. ROKU’s multiple has contracted from 12.8x to 10.9x despite posting consistent 40-55% growth. pic.twitter.com/WtSfhwGmXu
— Beth Kindig (@Beth_Kindig) August 13, 2020
Q: As tech stocks have been especially newsworthy in 2020, tell us about your analysis site, Beth.Technology, and what you look for when researching a stock.
A: We look for product-market fit, as determined by underlying key metrics, and we invest in micro-trends driving the technology industry. For instance, I’m more likely to choose a stock that has a high average revenue per user (ARPU)—like Roku Inc. (ROKU)—than a stock that has a lower ARPU but is more profitable.
Profitability in tech companies is secondary to strong key metrics that will lead to profitability over time. In the case of ROKU, connected TV ads are the micro-trend. With the recent influx of pay TV ad dollars coming into the space, we are very early to this trend. It’s a very different approach than believing every factor is priced in by the market and seeking out stocks that are breaking resistance or moving averages. Most investors became aware of ROKU after it broke through several technical price barriers, but we’ve been ROKU investors since early 2018 and doubled down during the launch of ROKU’s ad platform.
More than anything, what differentiates Beth.Technology is that we jump on trends early rather than waiting for price movements to validate that a stock is a good investment. This is a differentiator for our readers because maintaining confidence in a position is easier when your cost basis is established before the market becomes aware of the stock. Because growth stocks are heavily influenced by market sentiment, we continue to run very in-depth technical analysis and gauge sentiment even after a nascent stock becomes more well-known.
Q: What are the most important metrics for tech stocks? With so many people thinking the market is overvalued, how do you look past that to find worthwhile investments?
A: I don’t focus on valuation very often as the best tech stocks are rarely cheap due to monster-sized addressable markets that they tackle with high margins. I look past valuations and focus on products instead.
For example, I’ve remained bullish on Slack Technologies (WORK) because their app’s engagement is double that of Facebook’s (FB). WORK may have ups and downs, but the users are clearly very loyal. Every company is different.
Another important factor is competitive positioning. We got into Advanced Micro Devices (AMD) early-on because the company consistently released better CPUs than Intel (INTC). We were also bullish on Zoom Communications (ZM) very early based on its viral adoption—every user who tried Zoom Video was sharing the product at a 1:3 or higher ratio. ZM executives repeatedly said that many of their customers began as a single employee with a free plan that later converted the office to an enterprise plan. Then, the coronavirus happened and adoption took off even more.
More dangerous than not investing due to high valuations is confirmation bias in tech. I see a lot of investors going after momentum-based cloud stocks because they’re following price (and convincing themselves it’s sustainable growth).
We have some cloud software names in our portfolio, but semiconductors have consistently outperformed cloud software over the past two years. You don’t see semiconductor names trending on Twitter very often by independent analysts (i.e. outside of institutions) because they’re challenging to grasp. Essentially, we look for great investment opportunities with competitive positioning and operate in areas of tech that require serious time and in-depth analysis to understand.
Q: The tweet above shares your analysis of Ad-Tech stocks and where ROKU fits in. What’s your view on the Ad-Tech market? Why are you bullish on ROKU versus its peers?
A: I’m bullish on ROKU because they own the streaming tech stack from hardware to operating system to ad platform. There is no moat in advertising as advertisers will simply work with whatever ad exchange is the most competitive that week or that month. It’s very easy for advertisers to run campaigns with competitors and drop platforms that aren’t performing well on metrics like cost per impression (CPI), completion rates, or lifetime value. ROKU’s investments will stand the test of time because the company has consistently beaten out its rivals as the top hardware/OS in the United States. Even if ROKU becomes the second place hardware/OS, the trend in connected TV ads is continuing to grow.
For instance, many investors like The Trade Desk (TTD) and we have recommended it in the past. Looking at TTD’s financials, it’s easy to see their top growth segment is connected TV ads. So why not go after this micro-trend via a pure play that has more experience? ROKU was first in the connected TV ad space and that’s one reason why they’ve overcome challenges.
Readers of my free newsletter started receiving coverage of ROKU when it was trading around $28, shortly after its IPO. When it later fell from $60 back down to $30, I assured readers it was still a good opportunity. Then, when ROKU hit $160 in 2019, and this is also key, we told our readers to hold off because of the technical signals we saw in the stock’s price movement.
Q: What’s your take on the “work-from-home” companies whose market caps have skyrocketed this year? What trends are here to stay and what companies are well-positioned to succeed in that realm?
A: I prefer the “work-from-home” companies that are increasing subscribers and head count rather than those that have increased only in terms of usage. For instance, I continue to be long ZM because it has an enormous addressable market, the viral mechanic and low friction, and is increasing its subscriber numbers. We also recently recommended Bandwidth Inc (BAND) in our free newsletter as they provide the Tier 1 network for cloud-native communications including Zoom, Microsoft (MSFT) and Google (GOOG). When I evaluate these companies, it’s easy to envision them taking market share from telecom companies since their offerings greatly undercut the cost of a phone line.
I am not too bullish on companies that require people to spend an unnatural amount of time at home in order to grow their revenue. My hope is that with an improving employment situation, usage and other behaviors around online shopping, for instance, will return to pre-covid norms. I’m more likely to invest in a cloud productivity tool than an online website.
Q: As you’ve been using YCharts to research stocks for a few years, can you share your favorite ways for using the platform and the ways it has improved your analysis process?
A: We’ve used the Fundamental Charts for years to quickly pull metrics and compare companies. But recently, we upgraded to YCharts Professional, which has been a game changer. We used to build comparison tables manually and this took a lot of time. The Comp Tables tool on YCharts has helped us identify stocks that are growing rapidly but we previously overlooked. We also use the Stock Screener to find companies with accelerating growth.
Additionally, my partner, Knox Ridley, leverages Technical Charts to double check any stocks in our coverage area that are making price movements. This helps guide our readers on entries and exits. The historical calculations of year-over-year (YoY) and quarter-over-quarter (QoQ) growth also save us a lot of time and reduce user error when comparing companies. We also really appreciate our “custom colors” on our Fundamental Charts for increased branding on social media.