Monthly Archives: November 2016

Integrated Model for Investing

drawit-diagram

Taken from McKinsey, Valuation

Consider competitive retaliation in response to new tactics
Creating new services / products have the highest value creating potential (versus taking share from others)
Higher value add is persuading consumers to buy more of a product / service
High growth is difficult to sustain

Several Key Focus Areas, pulling from Margin of Safety and Common Stocks, Uncommon Profits and the Most Important Thing

Typically would ask: What’s wrong with it? (if presented an undervalaued asset)
Need to assess the market’s apetite for risk, and stance towards risk aversion (with respect to the capital market line)
Observe core / systemic business weakness versus market over-reactions: why are companies undervalued? When will they rebound?
Constantly evaluate: what is the business worth?
Recall that markets are infefficient (institutional constraints)
Understand credit cycles
New product initiatives are a good time to continue increasing observations of a company
Evaluate management incentives
Evaluate market and relevancy of products vis a vis market
How sensitive are customers to pricing?
What will competitors do in reaction to different courses of action?
What is the volume outlook for a business?
Analytical observe market sentiment for industry and individual company
Observe: capitalization, financial position, breakdown of sales, competitors, insider ownership, margins

General Themes

Red Hat

Amazon

Mix shift to higher profitability cloud, which is expected to be the highest portion of revenue
Moving upstream from SMB to enterprise
At recent event, had GM, Coca Cola speak, speaking to effectiveness of enterprise strategy
Most developers prefer AWS
Aurora is gaining traction (SQL database)
RedShift has solid traction (data warehouse)
Workspaces competes with VMWare and Citrix
Solid security in public cloud
Roll-out of QuickSight
Chosen by GuideWire for IaaS
Chosen by Salesforce as preferred IaaS hosting

Best-In-Class Offerings

ServiceNow: opportunity to also penetrate ITSM market; very strong customer renewal rates
ServiceNow: current beachead in service management (incident, problem, service catalog); moving to operations management (servers, application, storage, virtualization, cloud, network) – this model enables ServiceNow to penetrate a business model typically dominated by incumbents (IBM, CA, Microsoft, BMC)
Workday: opportunity to move down-stream to penetrate SMB market; incumbents (Oracle, SAP) slower to move to cloud)
Other higher growth opportunities include marketing / customer service targeting SMB space: Hubspot (inbound marketing); Zendesk (leader in customer services software)

Slow GDP growth resulting in investments in front office
- Accounting / Enterprise / ERP
- Productivity Applications
- Sales and Marketing Applications

Market has had a defensive posture this year, positively benefiting infrastructure players

Value Play: BI / Analytics Uncertainty

Larger players increasing competition for the likes of Tableau with fears of Microsoft, Qlik, and Amazon (QuickSight) getting in the way

Industry

Positives

Unique open source business model
Low cost technology
Anchor: Red Hat Enterprise Linux
Growth lever is OpenStack adoption + storage / middleware (JBoss) + PaaS (OpenShift)
Positioned to be leader of OpenStack movement
Positioned to deliver OpenStack across AWS and Azure
Increasing deal sizes
High renewal and fast growing renewal rates

Risks

Updates