In this episode of Industry Focus: Tech, host Dylan Lewis and Motley Fool contributor Brian Feroldi revisit all the newly public businesses the podcast looked at in the first half of the year and talk about what’s going on with them.
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This video was recorded on July 16, 2021.
Dylan Lewis: It’s Friday, July 16th, and we’re doing a speed round of S-1 catch-ups. I’m your host Dylan Lewis, and I’m joined by fool.com’s eager entrant of entertaining, easy at earnest asset examinations, Brian Feroldi. Brian, how are you doing?
Brian Feroldi: Dylan, I am doing great. Not only do we have a fun show plan for today, but right after this, I am heading out on a weekend vacation to Long Island, so I am going to have a good day. How are you, Dylan?
Lewis: That’s much deserved, Brian. You’re a hard working guy and I think anyone that follows you on Twitter knows that. I feel like you are all over the place and constantly doing stuff. I’m glad you’re taking a break.
Feroldi: I’m not taking a break from any of that. I’m just got to be physically somewhere else.
Lewis: I guess that’s a break in its own way after spending so much time at home over the year and a half. Well, that’s awesome. I’m happy to hear it. I am looking forward to doing a little grilling after work today. I can have a couple of friends come over, do a little outside hang. Very excited about that. Love to get into the summer tradition of standard at the grill hanging out. Always a good time. Before we get to our weekends though, Brian, we’ve got to talk tech stocks as we often do on Fridays. On today’s show, we’re going to be talking about eight different businesses that we have done S-1 shows on. I don’t know that we intentionally planned it this way, but we’re basically the first half of July, so we have a good chance to look back over the first six months of 2021. Nice time to check-in. We’ve done eight different shows on S-1 teardowns, which in some ways feels like a lot. In some ways, it doesn’t feel like very many at all.
Feroldi: Eight S-1 shows, there is one SPAC in here, but importantly, that’s all just in 2021. I don’t even know how many we did in 2020, that was another 20 or so. If you like this catch-up, please let us know. We were happy to do this for the 20 or so we did in 2020 as well.
Lewis: We’ll be doing speed rounds trying to get through eight as quickly as we can. Then we’ll also be talking about of these eight, there’s one in particular that is quite high on my list and Brian’s list, we both own it. But which ones seem like the most interesting investable ideas and what we’re looking for from this list going forward? Brian, the first business we’re going to talk about is Affirm (NASDAQ:AFRM). This is one of those companies that people have probably seen online, even if they’re not an investor, just as a consumer.
Feroldi: The company is Affirm, the ticker symbol is AFRM. We covered this in our January 15th episode. This is a company whose mission is to deliver honest financial products that improve people’s lives. For me, the wow moment about this company was the Founder/CEO, Max Levchin. If you’ve heard that name before, it’s because he founded another franchise company you may have heard of, PayPal. This company is squarely focused or was initially squarely focused on the “buy now, pay later” market. If you have a product out there that costs several hundreds or $7,000, Affirm can help you take that product, break it down into bite-sized manageable chunks, remove paying interest or getting worried about overages, and that really has caught fire. This company now has 5.4 million active customers. Those customers are doing about 2.3 transactions each. That figure was up slightly over a year. This product is now accepted at thousands of merchants including Peloton, Walmart, Shopify, Eddie Bauer, Purple, Kate Spade, etc. The company earns revenue in a couple of different ways. First, they earn a fee whenever a transaction is completed. Second, they earn fees whenever the loans that they make are sold to their partners, and they also have some other businesses that are emerging there. The exciting thing about this business is that only 1% of transactions that take place digitally are using “buy now, pay later.” That’s proven to be an extremely important feature that is really catching on. In theory, this company has a long way to grow.
Lewis: I think one of the main partners that Affirm has is really illustrative of how this is helpful for consumers, that’s Peloton. That was a very large revenue base for them when they debuted. You can see the use case is fairly simple, particularly if financing is very cheap or totally free for that option to pay later. There’s a lot to like about this business, even in just describing it, you can imagine digital tailwinds, more e-commerce activity. All of those things bode well for this business. On top of that, Brian, you have a founder-led company and in fact, a founder with a pretty awesome tech background and a really good pedigree. It’s easy to get excited about that. The numbers when it comes to what they are shipping around in terms of gross merchandise volume are absolutely impressive, up 83% year-over-year to $2.3 billion. They’ve got merchants flocking into the platform, almost doubling and it’s a very high-growth business, as you might expect, up just under 70%. Lots to like here. It seems like a pretty mission-driven company to which we always like to see as well.
Feroldi: This company checked a ton of boxes and you just listed many of the things that I think both of us found really attractive about this business to say nothing of the belief that if you believe that “buy now, pay later” is going to grow, grow, grow, this company should be a prime beneficiary of that. On the flip side, there were a couple of things that we didn’t like about this company. First off, the market is extremely competitive and becoming even more so. For example, PayPal launched a “buy now, pay later” feature, and that is really what this company became known for. The question that both of us had is, how replicable is that? How unique to this company is that? Will people be really excited to do that feature with Affirm or they just want the feature and will do it on any platform that they want? Another thing to note is that they did have pretty high dependence on one customer. 30% of their total sales were spent on Peloton products. Now that makes a ton of sense because Peloton has products that cost a few thousand dollars and they really fit neatly into that buy now, pay later category. But what happens if Peloton sales slow down? Is that going to blow a hole in the revenue growth for this company?
Third, the company has some pretty serious customer concentration. Whenever they made that loan, they had one bank partner, Cross River Bank that bought the majority of the loan or lion’s share of the loan. That is going to be something for investors to watch. As for the stock itself, this company exploded on the first day of trading, trading at a very high valuation. Investors have not won by buying this thing very early. If you bought in the secondary market, the stock is currently down about 41% from its initial trading price, even though it reported really good numbers with its first report. A lot of that is just due to valuation. Even today, the stock trades at 19 times sales. Lots to like here, also some question marks.
Lewis: I think the big question mark from you with this one is how it plays out long-term being a feature on a website that lends itself into a business rather than something that is part of an ecosystem like you might see from a PayPal, from a Square. It is really hard to compete when you have people that have really built out user bases and ecosystems. That’s always been my hesitation with this business. Then other companies that had a lot of activity pulled forward with what we saw with the pandemic and the switch to digital, I think it’s going to probably wreak havoc on some of the year-over-year growth rates for a while. Something to keep an eye on.
Feroldi: Something to watch for sure.
Lewis: The second business we’re going to talk about is one that is near and dear to our hearts. Our money is where our mouth is on this one, Brian. We both own the stock, and it is Olo, the ticker here is OLO, short for online ordering. That’s where the company squarely sits. Their mission is to help restaurant customers thrive by best meeting the needs of on-demand consumers. I think the easiest way to think about this business is they put restaurants in the position to own more of the relationship with their customers digitally. Instead of being so reliant on the likes of Grubhub, Uber Eats, DoorDash, etc, they are more in charge of their digital presence. Basically, it’s a SaaS company that has all of these on-demand restaurant commerce options for restaurants. What we liked about this, Brian, is pretty clear, industry tailwinds here. We have seen an absolute explosion in digital restaurant activity. A lot of that has been thanks to companies like Uber, making it easier for food to get delivered during the pandemic. But I would say what I also like is this seems like a much more restaurant-friendly way to tackle that issue. We’ve seen a lot of headlines about how a lot of these meal delivery companies have a friendly relationship with the restaurants that they serve, which I don’t think it’s particularly sustainable long-term. I think more and more, we’re going to see businesses try to take charge of their digital presence, and this company that helps capitalize on that.
The eye-popping number for me when we looked at this business, triple-digit revenue growth at the time that they went public. It’s on a small base. Even now, they only have just under 120 million in trailing 12-month revenue, but at a five billion dollar valuation. It’s a little bit easier to get excited about that. The dollar-based net revenue retention for this company, also super impressive, 120%. A lot of strong key business metric growth. Active locations were up 40% year-over-year, and particularly strong margins for this business. 82%, that leaves a lot of money left over for reinvestment in the business long-term, Brian.
Feroldi: That is a big reason why when this company came public, it was already profitable, which is something that you can’t say about many businesses. Personally, the thing that blew me away about Olo, was just how little it had to spend on sales and marketing to drive all of that growth. As a reminder, Olo’s strategy is to really go after the big franchise companies like say an Applebee’s and sell it at the corporate level. If they can sell at the corporate level, that again gets pushed out to all of the company’s franchise partners essentially at once. That’s going to make the business a little bit lumpy, but that means that the company doesn’t have to spend a lot and then it can really extend its reach, and that’s a big reason why the growth was so high. There were a few things that we didn’t like that were definitely worth keeping an eye on. First-off was just a natural competition of the meal delivery companies. They’re competing with the DoorDashes and Uber Eats of the world. Yet, they’re also depending on them to actually fulfill the delivery orders themselves. Remember, this is just a software company that plugs into all those different orderings. The other thing that we didn’t know was that yes, their 2020 numbers were fantastic as many software companies were. But was that going to be sustainable? So far their first earnings report in the first quarter of 2021 is, as you said, triple digit growth. It was very clear that the answer there was yes. However, as the world starts to open up, I think it’s fair to say that this company’s growth is going to slow. How much is it going to slow? We don’t yet know, but that is something to watch. As for the stock itself currently trading at a $5 billion valuation or about 43 times sales, so lots to like but man, is it pricey.
Lewis: I have decided that the valuation is worth it and bought in small positions twice. Brian, you’re a shareholder of this company as well, right?
Feroldi: I am. I think there’s enough to like about the business and again, I was really impressed with the profitability. This is the company that I do own.
Lewis: This next business we’re going to talk about Global-E (NASDAQ: GLBE), Brian, which operates in a space where I own some companies. However, I don’t specifically own a business in the segment that they are in. You want to talk a little bit about who they are and what they do?
Feroldi: Sure. Global-E, the ticker is GBLE. This company’s mission is to make Global E commerce border-agnostic. This is an online e-commerce platform that helps retailers and other merchants to do business internationally. You can use Global-E’s platform to customize your website in a country that you want to sell in. It helps you accept hundreds of local payment options. It enables you to do customer support in them. It helps you do easy returns, it helps with the shipping. That is a market that is definitely in growth mode and Global-E is approaching it from a unique angle. This company has reported earnings since it first came public and the numbers were fantastic. Gross margin title volume grew 133% to $267 million. Revenue grew 134% to $46 million. Gross margin here expanded by 390 basis points to 33%. They did produce a small net loss, but that was just $2 million. The big takeaway though, was after this company went public, it signed an exclusive service and partnership agreement with Shopify to be essentially the platform provider of providing this service to Shopify. That is a major feather in this company’s cap.
Lewis: That’s about as good as it gets when it comes to social proof. We’ve seen how wildly successful Shopify has been. I’m a proud shareholder as are you, Brian. Really, I think probably the company that people look to in the e-commerce space that isn’t named Amazon. When it comes to figuring out how to master that zone, they’ve done an incredible job. It’s always helpful to see that a smaller company is getting partnered up with them.
Feroldi: It certainly is. There was a ton that we liked about this company. The total market was enormous. The growth is huge. The company’s net dollar, net revenue and retention rate was over 140%. It was profitable although it dipped into unprofitable in the most recent quarter. The stock-based compensation was low and it was growing very fast. On the flip side, there were a few things that we said were worth watching. First off, the company’s No. 1 customer was 18% of revenue. That was down year-over-year, but that’s still some serious customer concentration. The other concentration risk is on the supply side. This company is reliant on DHL, the global shipping company for 59% of its transaction. If that relationship went sour for any reason, this company will be scrambling. On the flip side, DHL is a 5% shareholder of Global-E, so those two companies do have an economic incentive to continue working together, but it is something worth noting. The other thing was the gross margin here was pretty low. As I said, gross margin rose almost 400 basis points and yet was just 33%. That’s not very high and is far lower than Shopify, but overall there’s lots to like about this business.
Lewis: Lots to like and shareholders have probably been pretty happy since the company has gone public. I think it’s up over 100% in the short amount of time that it’s been publicly traded. It’s done pretty darn well. As you might imagine, with that, it is priced for huge growth. It’s about an $8 billion business these days trading just under 60 times sales, so rich valuation here, Brian. But I think that there is a lot to like about the space that it’s in, the margin profile. The huge stamp of approval for me is the net dollar retention rate number with this company. We always look for that “aha” moment when we’re looking at a company’s financials to show customers really like this thing. That is that moment for me with this business.
Feroldi: Yes. Absolutely. That number blew us away. You’re right, this company is very expensive at 59 times sales and 160 times gross profit. But as reminder, triple digit revenue growth plus the exclusive agreement with Shopify, I understand why this stock has more than doubled since coming public.
Lewis: We couldn’t talk about our 2021 debuts without getting us back in there, Brian. We had to sneak one in. The third company we’re going to be talking about is Berkshire Grey. We talked about them back in March. There is the ticker that they are now, and then there is the company that they will trade under as a SPAC. Still waiting on that part of the deal but we can at least look at the books and track the business.
Feroldi: The ticker here is RAAC. The SPAC is expected to be completed; a transaction is expected to complete sometime in the third quarter of 2021. This is a company that’s focused on warehouse automation and operations. The easy way to think about this company is they help everybody compete with Amazon. Amazon has a massive warehouse. They’re taking advantage of the latest and greatest robotics. It’s really hard for a smaller company to compete with that, because Amazon has so much scale. But Berkshire Grey’s system includes robots, sensing system, gripping systems, machine vision, AI, automation, all of that put together so that smaller companies can hire Berkshire Grey and compete. There were things that we really liked about this company, but I think the company’s early customers were really what caught our eye. As a reminder, this company’s major early customers include Walmart, Target, FedEx, and TJX. That is a major plus for this company.
Lewis: I always worry a little bit as I start reading into things like robotics as a service or the next company we’re going to talk about UiPath (NYSE:PATH). As I start to get a little bit outside of my comfort zone, always looking for those moments where I can check-in and say, I don’t know a ton about this space, but it seems like these people do and they spend a lot of money there. If they’re a customer, it’s probably a good sign. I would say Walmart, Target, FedEx, and TJX are about as good as you can get for social proof for a company in this space.
Feroldi: Especially given how early this company is. As a reminder, this company is essentially in stealth mode for a period of years. But it did attract some pretty impressive VCs behind it including: Coastal Ventures, Steve Case, who is the co-founder of AOL, Chamath, SoftBank. Those are the people that are investing in this company. I really like that the company is approaching this clear opportunity as a service business model. They call it robotics as a service. That tells me that this company is going to be having recurring revenue as it goes deeper and deeper with these customers. Importantly, the TAM here, the potential here is massive. The company believes that its current opportunity is $280 billion and growing. That is a huge opportunity that this company is staring down.
Lewis: Of course, there are going to be some things that we didn’t like. This is an emerging company. There’s probably some lumpy growth with this business. It is losing money, will continue to do so though. It does seem, I think management had reiterated that they are basically funded until they’re hitting profitability at some point later in their roadmap, I think 2024. There’s a good amount of runway for this business. This is a big problem and one that a lot of people are spending money investing in, Amazon being front center there, but Shopify is working on their own logistics, there’s Cognex in this space as well. Brian, I look at this as pretty decent upside business, but the floor is also pretty low.
Feroldi: This is an evolving stock we’re going to talk about. The one that is the most swinging for the fences of any of them. If this works, 10, 20, 30, even 50-bagger returns are entirely possible. But what are the odds of that working? I don’t know. We do have a little bit of social proof at this time, but we definitely don’t have the financials that back up the story at all just yet.
Lewis: I think this next company we’re going to talk about is also a high upside business, and that’s UiPath, and the ticker symbol here is P-A-T-H, PATH. It’s a software company that’s also focused on robotics in a sense, but in a different world. They are focused on robotic process automation. Their mission is to unlock human creativity and ingenuity by enabling the fully automated enterprise and empowering workers through automation. Basically, layman’s terms, they are providing automation software solutions that can be deployed by non-technical people, and so making it easier and easier for people who don’t necessarily have a coding background or technical background to automate wrote repeated tasks that happen over and over again and realize efficiency really for companies and for individuals. What I liked about this business, Brian, was there’s no shortage of opportunity here. There’s a lot to like, there is a lot of greenfield here.
Feroldi: Yeah, there really is. The opportunity in AI, and I think everyone understands that the opportunity there is just huge. One thing that we both liked about this business is, a lot of third parties essentially identified UiPath as the leader. That includes Gartner. If you look at the company’s net revenue retention rate, which to me is like the ultimate sign of customer appreciation, that number at the IPO was 145%. Nothing says that customers love this product than the same exact customer spending more, and why were they spending more on UiPath?
Lewis: It’s easy to understand why when you look at what we get from the industry and folks that follow this space. You mentioned before, if you look at Gartner’s ranking, they are the top dog in RPA. But if you look at some of the other ways that they’re assessed they’re best-in-class. In April 2020, they were named the top tech company and the No. 2 overall in Financial Times FT 1,000 Ranking of the America’s Fastest-Growing Companies, they are on CNBC’s 2020 Disruptor 50 List, ranked on No. 3 for Forbes Cloud 100 List for the second consecutive year. People in the industry seem pretty excited about this business. There’s a lot here, Brian.
We actually have an earnings report from this business, which I would say looking backwards, very strong; looking forwards, created some uncertainty for the business and for investors just trying to make sense of how management is going to be talking about things looking forward and that kind of stuff. Revenue came in quite strong, 65% growth ahead of expectations. In that sense, it absolutely crushed the earnings report. But they made a point to say that they manage and measure success based on annualized renewal-run rate. Which is basically their annualized invoiced amounts from term subscription licenses and maintenance obligations. That doesn’t assume any increases or reductions in those subscriptions. That grew 64% this quarter, so more or less in line with the revenue that we saw. 80% of that is from expansion, which you love to see. However, if you look forward, they’re guiding for more impressive ARR growth, about 55% for this quarter. Where revenue is only supposed to come up about 31% at the midpoint of guidance. Management in their commentary continues to emphasize ARR, and they seem to be focused on that for how they are going to be measuring themselves, how they’re going to be planning for the business. Investors analysts are going to have to figure out whether that’s worthwhile for them because you’re starting to see a little bit of a disconnect between those growth rates and that’s OK for short periods of time, but Brian, the question is always why, when that happens?
Feroldi: It sure is. But if management is really saying we want you to focus on this number, this is the number that we focus on, and given the dichotomy between those two, they’re guiding for ARR of 55% growth, revenue is only going to go 31%. I understand why they’re emphasizing that now. The question, I have no problem with that as long as management is consistent with that over a period of quarters and years and really says, “This is the number that we are guiding for.” That’s something that you just have to accept if you’re an investor. But I was really impressed with this company’s earnings reports. Revenue was up 65%, gross margin is still very strong at 74%, and the company is profitable on an adjusted basis. Combine that with the net revenue retention rate in the fact that this company is founder-led, there’s a lot to like about this business.
Lewis: There is a lot to like. I think having read through the conference call, I like the way that management is approaching guidance. My hunch is that it’s going to be one of those businesses that tends to be a little bit more conservative on the guidance side and provides positive surprises rather than negative surprises because they’re a little overly ambitious or overly rosy in their outlook. One of those companies where I think you get a good feel for management by reading the call and starting to parse through it. I didn’t see a net retention rate number in there in the call. That 145% we’re talking about is from the prospectus. I’d like to see that regularly reported, but you can’t have everything, Brian.
Feroldi: You can’t have everything, Dylan.
Lewis: The next company we were talking about is KnowBe4 (NASDAQ:KNBE). A cybersecurity company, Brian, kind of, but also a little bit of a knowledge company.
Feroldi: Yeah. The ticker here is KNBE. We talked about this company in April. Their mission is to enable employees to make smarter security decisions every day. This company was founded in 2010 by Stu Sjouwerman, a longtime cybersecurity executive. The opportunity that he saw was that the answer to cybersecurity was always the same thing, he was focused on the technology. Let’s make our firewall better, let’s protect our products better. However, Sjouwerman realized that more often than not, this real cybersecurity risk wasn’t the technology, it was employees letting bad guys into their systems by falling for fishing hacks or things like that. KnowBe4 is a company that is focused on training employees to make themselves better at cybersecurity. The company does that by using modules and risk assessment tools to basically go into organizations to do a complete risk assessment, they actually do some fishing scams internally to see if their own employees fall for them, and then they make suggestions saying, “We recommend making these changes to make your security better.” There was a lot that we liked about this company going in, including the fact that the growth was pretty good. In the most recent quarter, their revenue grew 37%. The gross margin here is outstanding at 85%. The culture here was off the charts good, Stu Sjouwerman is one of the most beloved CEOs in tech, and this company produced $21 million in free cash flow during the first quarter. Financially, this company is a powerhouse.
Lewis: It is. Yeah, there’s a lot to like there. I think one thing that was interesting after we looked at this business initially with the S-1 show. Tim Beyers, one of our colleagues made the point that like, “Does this business deserve to be valued the way a SaaS stock would be valued? Or should this be more of a consulting company?” I’m still trying to figure out the answer to that question. The more time I spend with it, the more it feels like a consulting company that happens to have SaaS economics. Brian, I’m curious. Have you spent any time with that?
Feroldi: Yeah, I understand that question. For those that are curious, consulting businesses get much, much, much lower valuations than SaaS businesses. But I’m just looking at the business itself and I see high-margin, recurring revenue, same customers spending more. Based on the financials that I see, I see way more SaaS-like qualities than I do consulting qualities.
Lewis: In your opinion, Brian, just call it what you want, I like the numbers.
Feroldi: Call it what you want, I like the numbers. I like that.
Lewis: The next business we’re going to talk about is Squarespace (NYSE:SQSP). Brian, you and I actually didn’t talk about this company. I talked about it with a colleague Anand, because I think you were on a much deserved vacation. This is a late-May IPO, probably a name that a lot of people are familiar with. If you listen to the podcast you’ve undoubtedly heard an ad for Squarespace at some point. We don’t have a new set of financials to look at yet beyond what we got when we did that perspective show. But Brian, I think there aren’t going to be a lot of surprises with what we liked about this company, digital business, good brand recognition, they provide an all-in-one platform for creators to build out their digital presence, transact, and also market themselves. They have a ton of different services that they offer related to the websites domains, help a social, professional email, they’ve commerce operations, scheduling, paywall member area access, marketing campaigns, all that kind of stuff. This is a high subscription revenue business. I think about 94% of Squarespace’s revenue comes from the subscription side. High-gross margins over 80%. The thing that I think is maybe most interesting with them is the growth rate is going to sound a little bit lower than some of the other companies we’ve talked about. This company has been around a little bit longer, so 28% revenue growth more recently, not quite as high-growth as some of the other names. One of the things I do love about this business, Brian, is founder-led and it’s got one of those classic founding stories of it was born out of a dorm room at University of Maryland, which I always love. It’s nice to have that lower. But it’s always more importantly, nice to see a founder at the helm.
Feroldi: That is great to see. Just reading over some of the notes that we have in this company, the gross margin here seems good, the revenue growth seems good. My exposure to the space though, is mostly because I’ve been studying Wix for a long time. I really like that Wix’s business model has come to Wix.com, build the website for free, and then they convince a small number of their users to upgrade overtime for their premium platform. Is that what Squarespace is doing too?
Lewis: No, they are more of a premium model. I mean, it’s still very accessible with what they’re trying to do in terms of, I forgot exactly what their monthly charges are, but it’s not crazy. But I don’t think they’re as premium focused as Wix is.
Feroldi: Got you. Well, they are, according to this, according to what I’m looking at, very profitable and that includes spending heavily on selling general administrative, which makes sense given the fact that like you said, I’ve heard Squarespace ads on podcasts for years. But clearly given the numbers we’re seeing, those are investments that are well-made and they’re paying off.
Lewis: Yeah. I think the concern with them is they have a lot of customers that really like them. They have like 3.6 million customers. I think the upside in this space is layering in functionality beyond what the core person who wants to host the portfolio or something like that might want to do. That’s where you see a lot more competition. When you start getting into commerce, when you start to get into more integrated solutions, I worry that Shopify and BigCommerce already have a huge part of the more interesting parts of the market. Then within the more basic website builder, they have Wix. I don’t know, I haven’t really had that aha moment with Squarespace yet. But it seems like a pretty well-run business.
Feroldi: It does. Like you said, I know Wix is better, so that’s the company that I’m more interested in. But our first glance at Squarespace looks pretty darn good.
Lewis: Yeah. We’ll be tracking it. It’s always nice when you don’t have to spend 20 minutes trying to figure out what a company does. In Squarespace’s case, a little different from SentinelOne (NYSE:S), the next business we’re going to be talking about. This is a June show we did. In a word, SentinelOne does cybersecurity. Specifically, they are doing endpoint-focused cybersecurity. I’m going to take it directly from the company here because they’re going to do a better job explaining this than I will. They say, “We pioneered the world’s first purpose-built AI-powered extended detection and response or XDR, platform to make cybersecurity defense truly autonomous from the endpoint and beyond.” Basically, they are positioning themselves as using technology and machines to fight back against highly resourced military-grade cybercrime operations, fighting machines with machines, which, Brian, conceptually makes a lot of sense to me. If I get too deep in the tech, it’s going to go over my head.
Feroldi: Yeah. The way I visualize this company is basically CrowdStrike, but smaller. They’re very much along that same veins, they’re hyper-focused on endpoint security, they use AI and machine learning to make their platform better and better. They just don’t have the size scale or growth as CrowdStrike does. However, the numbers that we’ve seen thus far are pretty darn impressive, 124% net revenue retention rate in the most recent quarter. That’s very strong. It’s below CrowdStrike, but it’s still very strong. Revenue growth up over 100% year-over-year, very strong cash position, very little debt, founder-led management team that gets very high marks. If you are into cybersecurity, SentinelOne is definitely worth a look.
Lewis: Yeah. I think you mentioned CrowdStrike before, and it’s impossible not to compare them when you have the two together because they operate in the same space with endpoint protection. If you look at, we mentioned Gartner before and I think it’s a helpful check for us anytime we’re looking at some of these sub-industries, the Magic Quadrant for endpoint protection has SentinelOne up there, but they are not the leader in the space. They’re a leader in the space. The companies that are ahead of them are quite a bit bigger as well. Microsoft and CrowdStrike are really two of their main competitors in this industry. I would say, Brian, that those are two businesses that have a lot more resources at hand. Even when we did the show on them, we noted that on SentinelOne’s website, they specifically call out comparisons to Microsoft and to CrowdStrike. They are trying to invite that comparison, I think, because they know they need to take it on from a marketing and a messaging standpoint.
Feroldi: I’m sure they hear it every single time they go out there and try and sell, “Well, how do you compete with CrowdStrike? Well, how do you compete with Microsoft?” Again, for a sense of scale here, CrowdStrike is about a $56 billion business. SentinelOne is an $11 billion business. That $11 billion that it has earned, holy cow, is that off of a rich valuation. This is a company with 112 million in trailing 12-month sales. That means this stock is trading at 95 times sales. It’s not like there has that massive gross margin to go along with this, the gross margin for this company was 55%. I mean, that’s good in absolute terms, but it’s nowhere near the 70% or 80% that we see with other software companies. For whatever reason, the market really likes this thing and it’s rewarded a massive valuation.
Lewis: Yeah, I think that’s one of the hardest things for me to get over with this business is just how richly valued it is. I think maybe some of it is that people look at business like CrowdStrike and see the opportunity in front of it saying, “Well, this is what SentinelOne could blossom into.” It feels a little rich given the margin profile and the growth story. What I do like about this business is incredibly high marks for leadership and it’s a founder-led business. CEO gets 4.7 stars on Glassdoor, 97% approval rating. I don’t know if this is necessarily at the top of my investing list. There’s a lot to like here. But it certainly seems like a good place to work in a quality business. It might not just be the top one of the ones we’ve talked about today for me.
Feroldi: That’s fair enough. Dylan, we just covered eight stocks in about 30 minutes. Yes, both of us are shareholders of Olo, so I think it’s fair to say that we like that one the best. I’m curious about the other seven, which one are you most interested in researching more now?
Lewis: If I had to bucket the way that I’m looking at these companies range of outcomes, I think Squarespace is probably one of the ones that is easiest to look at sealing floor and say this is probably a bigger company in a couple of years than it currently is and probably a market beater. I don’t know if it’s got like 5X or 10X potential in it in the next couple of years. But if that’s more your speed from an investment standpoint, that’s probably the company that I will be highlighting here. Affirm is interesting to me. I like the consumer space that they’re in. Global-E is also very interesting to me. I tend to anchor to the net dollar retention rate numbers that we see from some of these businesses. When they’re really impressive, that is almost a triumph card and one of the things that I just immediately latched onto the most. With Global-E, that immediately gets it to the top of the list for me. What about you, Brian?
Feroldi: I think there’s lots of reasons to like Berkshire Grey, I think both of those companies have huge upside. But when I take everything into account, I think the one I’m most interested in continuing to follow and maybe you can buy shares of is KnowBe4. Because again, the numbers out of that company are really impressive. I really like that it’s already free cash flow positive. I just like the fact that they are approaching cybersecurity from a non-technical angle. I really think the need for that kind of product is there. The mistake I could be making is, is that product easy to replicate? Is the moat there not all that wide? That I don’t know. But given the review here, I think I want to dive deeper into KnowBe4.
Lewis: I don’t want to disparage the consulting industry, by the way. I mean, there have been some very good performing stocks that work more as consultants than their SaaS providers. If that’s the bucket that KnowBe4 happens to fall into, take a look at the stock chart from Accenture. None of their shareholders are disappointed. The consultant style model is certainly a good one. In terms of valuation, Brian, that’s probably the most reasonably priced company we talked about today.
Feroldi: I’ll even one up you there. Don’t look beyond Accenture, checkout Globant, checkout EPAM Systems, checkout Endava. All four of those companies are tech consultants. All four of those companies have smashed the market returns. If KnowBe4 falls into that category, I welcome it.
Lewis: There you go. I’ll put it out there. I mean, listeners, I’d love to get your sense on which of these is most interesting to you and maybe just which one you’d like for us to do a follow-up on at some point once we have a couple earnings reports to look back on. Twitter, @MFIndustryFocus sounds off there. Or you can reach Brian Feroldi, @BrianFeroldi. Catch him there. I am @WilyLewis. Brian, before we get started on our weekend, any parting thoughts?
Feroldi: Have a great weekend.
Lewis: I love that. You can tell, Brian, was ready for that question. Brian, as always, such a pleasure getting to talk with you on Friday afternoon before we head into some relaxation on Saturday and Sunday. Hope you have a good one.
Feroldi: You too, bud. See you soon.
Lewis: Listeners, hoping you guys have a good weekend too. That’s going to do it for this episode of Industry Focus. If you have any questions or you want to reach out and say “Hey,” like I said, shoot us an email firstname.lastname@example.org or tweet us @MFIndustryFocus. If you are looking for more of our stuff, subscribe on iTunes, Spotify, or wherever you get your podcasts. As always, people on program may own companies discussed on the show and The Motley Fool may have formal recommendations for or against stocks mentioned, so don’t buy or sell stocks based solely on what you hear. Thanks to Tim Sparks for all the work behind glass today. Thank you for listening. Until next time, Fool on.
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