Slack - WORK - An alternative to email, finally?

For years, companies have been trying to solve the "alternative to email."  Noone's been able to solve it.  The closest to try?  Google's Gmail with more efficient cataloguing of emails, a redesign of email threads which consumers grabbed onto as a last resort.  When I learned about email way back in the early 90s, it was a revelation, an amazing technology that allowed messages to be sent to anyone in the world for free.  Only a few years earlier, I had been studying in Mexico as part of my graduate program's study abroad - and remember having to communicate with my friends and family back home with fax or snail mail.  And years earlier - it was mail.  So, how amazing when email came and also MUDs - multi-user dungeons.  Do you remember the commands?  N, S, E, W for directions.  "Pick up axe", "Attack"  "Pick up stone", etc. this was before the first Graphical Interface, Mosaic which was also a mind-blown event.

But, over the years, email has gotten tired - we lose emails - spam is still a major problem - its time consuming - remember, "Send signature Receipt" - a lot of attempts to improve email have failed.

Its because technology and information has surpassed what email as an app can handle.

And, along comes Slack - most IT professionals use it - its got the brand and the users and the functionality AND, seems to be the best yet alternative to Email.

I've owned it for several months as one of my smallest positions, and now I'm watching closely as it hit 29.57 today so far - its tested its previous 6 month high of 30.47.  It's done this twice in that time frame - that's a good sign, but not a buy sign until it breaks 30.47.  If so, it has room to run to 40.

So, I've put a Stop Limit Buy Order to double my position, Stop at 30.48, and Limit of 30.48.  This means if it trades 30.48, automatically place a limit order for 30.48.

Why don't I just buy it now?  I'll be buying it $1 lower - isn't that better?  Not in my mind.  If we buy it here and it doesn't break 30.47, then it could fall again - I have my money at risk without technical confirmation.  If I wait to buy it if it hits 30.48, then my Expected Return increased substantially, because the probability of increased returns increased from an unknown, or 50% chance to, because of technical confirmation of breaking out above 30.48, of >75% in my opinion.

Slack - let's keep an eye on it!

Gilead's rare bullish chart -- Zoom light years ahead.

Two days ago I posted,  that the .SPX was at a critical point that if it broke through 2879, then there seemed to be 10%-15% upside before resistance sets in.  Yesterday it broke through early in day and seemed to lose steam, but still closing above 2879.  Today we hit a big rally, so that call seemed to become a reality today with the .DJI up 2% and Nasdaq +3.5% and .SPX up 2.5%.  That's a good beginning but seems we have more to run until about 3,100 on the .SPX - so it's more like from 2850 to 3,100, and then 3,400 is next resistance level.

I own Gilead - they seemed to be on a good track toward treatment and other covid-19 drugs, but moreson, this was complemented by a phenomenal chart that seems to be setting the stock up for multiple returns going forward.  Looking at the 2 year chart below, you can see an extremely long base and accumulations of stock with increasing volume over the last month or so - it almost looks like an old-school steam locomotive, gathering enough power and then its unstoppable (would it be steam or diesel, or both?, hmm). And finally, Gilead's P/E ratio is about a 12, which is extremely low for a company that is already quite profitable, with a good pipeline of drugs, even before the Covid-19 opportunity.  This combination of positives in a stock analysis is what I strive for in choosing a company to invest in.  When there's a combination of "good factors" that potentially could hit a homerun for the stock, its time to load up.

Gilead is showing a 2-year base and it has recently broke above that base.  And is rallying due to Covid treatment drug promising results.  Gilead leads the pack of several pharma companies working on treatment, testing and immunization products.  

The longer the base of a chart, the stronger the rally that follows...usually...there's always a usually.

Gilead released positive results toward an effective treatment for Covid-19.  They are in Stage 3 and the closest to an FDA fast track toward approval of their medicine.

Funny enough a few days ago, a leaked report from WHO about a chinese study of Gilead's remdesivir was published and the market punished Gilead - Gilead immediately made a statement that it was not accurate.  Its important not to fear a stock selling off short term and to learn why it is selling off or rallying before taking any action.  I decided to add to the position when it sold off because it didn't make sense and Gilead responded positively.  It seemed like a hedge fund leaked information for some reason.

Zoom
Zoom is selling off because Google is entering online video conferencing and ramping up efforts.  Facebook said they were also and this hurt Zoom.

Zoom enables 50,000 attendees on a zoom call.

"While video Hangouts for personal users is limited to 10 users, the current limit is 15 simultaneous users in Google Hangouts for Business Apps. The new video calls limit for Google Apps for Work (Work, Gov and Edu) is now 25." Stack Exchange.  

Zoom is so far ahead of the competition 

Let that sink in.  Facebook can handle 50, Google 25 - yes, 25

That's a big difference.  Imagine you're on the product development team at Facebook and Zuck calls you in - "We're gonna build a great product to rival Zoom.  The time it takes Facebook to get a beta out and coordinate all the bureacracy of a large company is very long.  Zoom's light years ahead and they will stay that way.  Its very hard for anyone to catch up.

I like Zoom. When I listen to Eric Yuan, I smile.

When I listen to Zoom's CEO, speak about the company, and his hyper focus on making his users happy, it makes me smile.  I like when certain people, sports stars, entrepreneurs, ceos, and products cause me to have an emotional response.  Something good is happening there where I want to pause, spend time with it, and try to understand it better.

I've been thinking a lot about Zoom lately.  Zoom is a rare company that is in the right place at the right time, with the right product, and right management team.  They've been able to accomplish what few network effect companies have been able to do.  This is a rare breed that includes the likes of Google, Facebook/Instagram, Tesla, Apple (iPhone, Mac cult-like following), LinkedIn (Microsoft) [although Microsoft acquired LinkedIn and owns it along with Skype, and Teams, incredible online communication assets, I put Microsoft in parentheses because LinkedIn had achieved the network effect and user following prior to Microsoft's acquisition], WhatsApp, and maybe a few others that I'm not thinking about now.  When this happens to a company, user growth is always far beyond expectations.  The market has shown that humans and investors (are they different entities?)  almost always fall short of predicting the growth that occurs when certain requirements are met,

1. Users love a particular product and word of mouth causes growth of users

2. Not only do the users love the product, they love it so much, that they feel some kind of emotional connection to the product.  We can try to define that in other companies,

  - Google - was so google and the first search engine that was exceptionally better - people loved Google - creative, unique "Better World" brand and engine that was bar-none the best.
  - Facebook - connecting with friends and family stickiness from bar-none best social network software - make connections closer and open world
-  Instagram - similar
- Tesla - good for environment and cult-like following, word of mouth - change the world for the better - super cult-like following to Tesla brand and founder/ceo Elon Musk
- Microsoft - legacy software company that has adapted to Web 3.0 better than any other, except perhaps Apple - Microsoft built and acquired key online communication assets with exceptional user growth,
- Apple - cult-like following due to best in breed software stemming from trickle down of Steve Jobs effect - still best built software and hardware, though Microsoft, with Surface starting to compete effectively.
- Zoom - people of all ages need to communicate with video, audio and text and Zoom has built a superior, easiest to use, product, even compared to that of much larger and successful software companies.  "Zoom It / Do a Zoom / Still developing branded, consumer defined, verbiage"  similar to "Google It"  - In an era where people cannot meet face to face, this is an unprecedented and undefinable advantage that Zoom is benefiting.

3. the public is of the right mindset that fits with the product and the times - Zoom fits this characteristic better than all the others listed above, imo.

Forecasting Revenues and Net from
- Individuals $180/yr, this is the number I believe will come in much higher than expected over the coming 12 months - this is the number that's hard to measure for investors - that number I referenced above that is beyond our grasp - because even with 10% conversions, that's $7 billion, reflecting the incredible spike of users Zoom has experienced
- Universities - 5,000 paying at $1800 per year - $9 million
- Fortune 500 - 300 at $100k+ each is $3 billion

Even if conversions from DAUs is 5%, that's $3.5 billion from individuals and so, about $10 billion in revenues. gross margin of 80% gives them $8 billion in Gross profit and $100 million net income (10% net margin).


In the past 1 month, from the low price during that month, Zoom is up only 30%.  In the last 3 months, it up an impressive 100%, or 2X.  The stock is forecasting that revenues and earnings will be up 200%, but growth of users in last 2 months from February to March of 1000%, 5x higher than the stock is forecasting.  Even though Zoom is showing a P/E of 500, that P/E is not reflecting the growth of users month over month, and expected growth of earnings, because the growth has happened just over past 2-3 months (not sure I'm writing this clearly).

The other important advantage of building a loyal user base as demonstrated by increasing and sticky active users, is that these users will buy other related products to expand Zoom's future revenue streams and margins.  The key is to build great product to gain the users, as shown in the companies listed above.

Given this, I am still an owner of Zoom long term and will continue to buy more shares on pullbacks or key breakout patterns.

This is consistent with investors and analysts typically underestimating the growth potential of a company with a strong network effect, like Zoom, and a select few other companies.

"Zoom Me!"

Joe

Today's allocations

1042am, Monday, 4/27, Market Observations and trades -

The .SPX has been in a trading zone for several weeks after a pretty swift rebound off the lows due to what I like to call the "Covid Crash".  The .SPX is at 2865.  The .SPX hit 2879 on 4/17.  If it breaks 2879, then I see a 8%-10% upside short term potential for the .SPX, at which time I will likely reduce equity exposure.  I am accumulating current positions in the portfolio that are breaking new 52-week and all time highs. 

DOCU - Docusign - Increase by 30%, new all-time high, positioned well in remote environment

MSFT - Microsoft - New Position - pre-earnings, I want to have a position in this Top 10 software company which should due well post-earnings due to low expectations via Corona.  With Microsoft Teams, Skype, and Office 365, gaming and others, Microsoft should be a winner medium - long term in this environment.

Current portfolio includes Link To Be Updated Soon

The Unimportance of Turkey Size - I mean Stock Price

One fine day, a mother is preparing for her Thanksgiving dinner for her husband and children.  She goes into the supermarket and walks up to the poultry section pondering how big of a turkey she should buy.  She knows she wants 10 pounds, but doesn't know if they'll have that large of a turkey.  As she approaches the turkeys, she ponders, "Oh, what am I going to do if they are all out of big turkeys?" When she gets there, sure enough, they are all out of 10-pound turkeys, so she decides to buy two 5-pound turkeys instead.  

With the exception of a little more cleaning of the turkeys, does it really matter if she buys one large turkey or two medium size ones?

Bar none, the price of the stock is by far the most common misconception I have heard from inexperienced investors who are considering buying a stock.  

The conversation invariably goes something like this,

Me:  "Take a look at Apple - they are really growing their earnings, etc. etc."  

Investor:  "Hmm, what's the stock price now?"

Me:  "$250"

Investor: "Hmm, that seems very expensive to me."

Me: "It really makes no difference what the actual stock price is.  You have to look at how that price compares to their earnings, and how fast they're growing their earnings."

Investor:  "What do you mean?"

Me:  "Well, does it matter if you buy 1 share of apple for $250 or 2 shares of another stock selling for $125?  Or think of it another way. Does it matter if you buy 1 10-pound turkey or 2 5-pound turkeys if the price per pound is the same?"

Investor: "Silence. "

What's not to understand about a seemingly simple concept?  Many very smart people who I've explained this to repeatedly, who are inexperienced investors, seemingly have the most difficult time understanding this. or practicing their understanding of this.  I've concluded over the years, that they understand it, but just have a difficulty putting that understanding into practice.

****

StockA=$125    StockB=$250

2 shares of StockA = 1 share of StockB -->  $250=$250

**

1 10 lb turkey = $50     1 5lb turkey = $25

1 10lb turkey = 2 5lb turkeys   --> $50=$50

****

Here's the thing about trading or investing - even if you understand that something makes sense, when it comes to giving up your money for the possibility of either making more money or losing that money, investors don't always act rationally.  So, even though this is a very simple concept, when it comes time to write the check, or buy the stock, investors may be irrational.  

This happens even with experienced investors in other parts of the market.  Even when I'm trading options, or talking with another very experienced trader or investor while we are both trading in real time, I may hear myself say, or see my self message him something that goes like this, "I'm such an idiot - why didn't I sell it when it broke below 110 - I had just told you support was at 111 and I was gonna sell."  And the experienced investor friend knowing exactly that I'm not an idiot - I'm just an experienced investor who happens to be human, with real emotions, fears and greed, all of which get in the way of making consistent rational decisions.

I am close friends with one of the smartest people I know who has 30 years experience trading options and investing in stocks.  He will rationalize, as all of us can do, about why he made a decision regarding buying a stock that's been out of favor for years - and I'm certain we both know that it's a bad decision, yet, he does it anyway.  Human - irrational.

**

I think it just feels better to own more shares.  But, this is a very flawed reason for choosing a stock as I explained above.  This is why many investors are attracted to lower, priced, stocks.  I have heard this conversation before also more than a few times, 

Investor: "I bought XYZ stock.  I own 100,000 shares!"  

Me: "What price is it trading at now?"

Investor: "11 cents per share.  If it just goes to $2, that will be like a 2000% return!!"

That's true.  However, there are so many more important determining metrics to consider before investing in the company besides a speculative future price based upon no information at all, or how many shares am I able to own.  

 

**

Let's consider Amazon, AMZN.  As of today, the stock is at $2,400 per share!  Wowwee !!  That's a big number!

Let's also consider Zoom, ZM.  As of today, the stock is at $160.  

(Full disclosure: My portfolios own both AMZN and ZM).

Just because AMZN is almost 20x the price of ZM, that does not mean Amazon is more expensive!

In fact, ZM is much more expensive when looking at the Price/Earnings, P/E ratio.

Stock                    Stock Price                Trailing 12 month earnings                Valuation (P/E)               

AMZN                  2,400                          $23                                                        104

ZM                        160                             35c                                                        457

Consider that I have $20,000 to invest.  Does it make any difference which stock I buy based upon the stock price?  No.

If I buy AMZN, I can buy $20k/2400 or 8 shares.

If I buy ZM, I can buy $20k/160 or 125 shares.

It seems sexier, more fun, richer, more impressive - MORE SHARES - pick your jargon - to own 125 shares, rather than just 8.  But there's really no difference, they both equal $20,000.

If AMZN increases by 100%, you still only own 8 shares at a price of $4800.  Your $20k grew to $40k.  If ZM increases by 100%, you still own 125 shares at a price of 320.  Your $20k grew to $40k.

Don't consider the stock price, AT ALL, when deciding if you should buy the stock.

Much more important is to consider the quarterly and annual growth rates and how those growth rates compare to the P/E ratio.  You can read this post for more information about that.

So the next time you pull up a quote on a high priced stock, before reacting to that price irrationally, take an extra moment to think if it matters if you buy two 5-lb turkeys or one 10-lb turkey.  

Gobble! Gobble! 

Calculating Simple Returns, Market Capitalization and Company Growth Considerations

I had been intending to write a post about the misconceptions of stock price, but this morning a friend shared with me a stock he had recently invested into and we had a conversation about it.  I thought it was valuable information to share here.  I'm not including the actual stock now, but may do so later.  I suppose I would call this an explanation with examples of calculating simple return, that is one initial investment held over a period of time with that equity investment sold at a termination price or expiration date, with no withdrawals or deposits or dividends along the way.

He invested $1200 into 150 shares of a biotech stock at $8/share.  The stock recently increased to $15 before settling in at $13.  He was wondering how much money he would make if the stock rose to $50.  He was expecting that would be a pretty big figure, after all an increase from $8/share to $50/share was a large increase.  So, let's look at how to exactly calculate his return in this case, how much actual cash profit he will receive.


150 shares purchased at $8/share and sold for $50/share. 150*(50-8) = $6300 Profit

on a $1200 investment, so his total return is (50-8)/8 = 5.25, 525% Return or $6,300

It was surprising to him that it wasn't more money.

Looking at it in a different way - He bought 150 shares at $8 ($1200 cost).  If stock doubles to 16, 150*16=$2400, or 2x return.  If stock goes to 32, then 150*32=$4800, or 4x return, and all the way to 50, then 150*50=$7,500, less his $1200 investment is $6,300 profit.

There's usually at least 2 different ways to look at any math problem.

Now that's a great return on investment!

**

He had been reading that a teacher made 17,000% return by investing in 1 stock.  Not 525%, which was his initial expectation, but 17,000% return.  Was this possible with his investment?  How can we know?  And what stock price does that imply and most importantly, how much moo-lah could he expect to cash in on?!

That return would give him $204,000, and the stock would need to rise to a price of $1,360 per share.

How do we know that?

8*17,000% is 8*17,000/100 or 8*170 or a 170x multiple to the original price of 8.
8*170=1,360.  So an increase from $8/share to $1,360 per share.  Shown another way, $204,000/150 shares is also 1,360/share.

Is that possible with this company?  How large of a company will it be if it grows by 170x over the next several years?  That's a pretty large return to be sure, but we need to look at the Market Capitalization, or Market Cap of the company and compare that to others in the pharma and biotech  industry in order to really get a how large the company could actually be.  That gives as a broad big picture of the company's current size vs peers, what kinds of drugs is management expecting to produce, what stage of development and fda approval are those drugs and if the market cap grows how does it look versus competitors.

Market Cap = (# shares outstanding) * stock price, so this particular company is trading at $13 per share and there are 146 million shares outstanding!  That gives the company a 13*146million = 1.9 billion market cap - let's round that to $2 billion.

If 2 billion grows 170x, then the future market cap at 17,000% return is $340 billion ! Thats 50% larger than Pfizer!  Now that is an unlikely scenario with an almost impossible probability.  And even if that were the case, it would be a multi-year process with more fundings and dilution along the way.

Its important to look at as many different perspectives when analyzing a stock and company, and through some simple calculations of return and performance, as well as taking a broad look at the size of the company measuring market capitalization versus peers in the industry helps to provide some perspective.

The importance of earnings on stock price

The most important metric to consider when considering a stock price's future direction is the growth rate of earnings.  From a big picture, it's certainly valuable to consider How Much Money a company earns over a period of time, but more important is at what rate the earnings of the company are growing.  This is more important than the valuation of a stock, what they actually make or do (although that is important as well to consider where we are in history, technology, science, or any other industry you feel as a potential investor will reflect the future), and certainly more important than the stock price itself.  The stock price, whether it is a big number, or a small number, has been the most misunderstood, yet the simplest concept, I have seen by people who have not experienced very much investing in the past.  Despite explaining what a stock price means to friends, family, and clients, I am always a bit confounded as to why, after explaining it, people seem to continue to misunderstand it.  But stock price, and what it means, is for another post.

Earnings, or Earnings Per Share (EPS), represent the profit of a company.  The Earnings are the absolute number, like $50 million.  The EPS is simply the Earnings / Shares Outstanding.  It's a way to represent the profit in relation to 1 share of stock (equity). 

So with $50 million in annual earnings and 25 million shares outstanding, the EPS is $2.  If next year the EPS will be $3, the earnings have increased by 50%, (3-2) / 2.  That number is the growth of earnings, or how fast a company is growing.  This is the number which I believe is the most important number to consider, of hundreds of other considerations. 

A company that is growing their earnings at 50% per year, will reflect a better investment opportunity in that company's stock, everything else held constant.  It doesn't mean it will actually outperform the other stock, but there's a better chance of that happening, than another metric we observe changing.

The profit of a company is equal to the overall Sales, or Revenue of that company (all the sales without considering any costs of running the company) minus the overall Expenses of the company. Profit = Sales - Expenses.  How much of the Earnings a company decides to keep or retain or invest back into the company is called Retained Earnings.  Retained Earnings directly increases the Equity in the company.  So, another way to consider this, or an additional element of understanding Earnings and how it affects stock price (in addition to whether earnings are increasing or decreasing over a period of time) is to consider how much of the profit or earnings are retained inside the company, thereby increasing the equity of the company. 

There are many metrics to consider when considering whether to invest in a company.  Earnings growth is the most reliable metric.  When a company is growing at 50% per year, theoretically, the stock will grow at a similar rate, in order for the valuation (Price/Earnings) P/E to stay constant. 

For example, consider the case above with the stock that has earnings growth of 50% from one year to the next, and consider that this has been the case for the last several years - that's pretty smooth earnings growth.  If the Price of the stock is currently at $200, and EPS is $2, that defines the P/E, Price-Earnings Ratio at $200/2 this year, which is 100 P/E.  If that valuation of 100 P/E stays constant, then if Earnings grow 50% next year, the price of the stock needs to also grow at 50%, to keep the P/E at 100.  In this case, the math is: $200*(1.5) / $2*(1.5) = 300/3 = 100 P/E.  In contrast, if the stock grows at 100% from this year to next, and the earnings only grow by 50%, what happens to the P/E.? ($200*2) / ($2*1.5) = $400 / 3.5 = P/E = 114.  The P/E, or valuation has increased from 100 to 114, making the stock more expensive relative to its profit or earnings.  The stock price has increased faster than the 12 month trailing earnings (the earnings for the past 12 months). 

Another related consideration, and some might argue a more important consideration than 12 month trailing earnings, is the forecasted next 12 months of earnings, because the stock market is a leading indicator of the future, or expectations about the future is what really drive the stock market.