For my original Monday Thesis, see here

For my pair trade concept reasoning, see here

I presented a theory a few months ago remarking on going long the #1 player in a niche category, and going short the #2 player in the same type to produce super pure alpha.

If you have two companies in a competitive landscape, of which the outcome will be winnings accumulating to only one winner... then this concept should work. For instance, technology companies and especially innovative companies are ripe with such opportunities.

The idea is: if two companies are trading at similar valuations, and one is better, bet on the spread of valuations between the better company and worse company widening.

Long Monday $MNDY; Short Asana $ASAN

Monday has a soft product edge, perhaps a major one, but I couldn't tell. Most customer review sites place the workflow software category leaders as Monday and Asana among public companies. That said, Monday had been growing faster on YoY against Asana and was seemingly on a trend to capture market share faster.

The more critical element of the thesis, however, was cash. Monday's cash flow management has been smarter, and more efficient. Considering the company is HQed out of Israel, they simply had lower engineering salaries to deal with leaving more cash flow for capturing growth. Asana is a fast-growing but cash-burning behemoth operating out of Silicon Valley. Now that cash is important, companies need to make compromises on reducing profitability or capturing market share. The outcome? Monday can outspend Asana on Sales and Marketing execution, for a roughly equivalent product.

That original theory seems to have played out across 2-3 quarters. Monday has kept the gas on the pedal, while Asana has seen a moderation in its sales growth with far weaker guidance. The market generally acknowledged these fundamental changes as I write this. Earnings results produced the results which I was hoping for.

So, price action has followed post-Q3 earnings results for both companies.

This was never a smooth ride, but as mentioned in my last article, one can pick levels and position size appropriately into such a concept. As it stands, since the original idea was posted here on June 8 2022, The spread is now at an all-time high of ~+30%. With valuations now sufficiently different and reflective of risk/reward (6x vs 4x on sales), I'd personally close the trade here to record a profit. That's if I did trade in the first place.

Unfortunately in India, where I'm based, I have restrictions on foreign market trading. I basically can't go short, use leverage, or meddle with derivatives. That makes this whole exercise just a fun thought experiment. But it's worth thinking about it anyway since you keep learning.

I'm far from a trader - just a fundamentals-long guy with the occasional "Tactical" long. But I've heard of hedge funds that work on such stuff with super tight correlation/risk/alpha constraints. Citadel and prop firms that aim to compound capital every single year in every environment, deserve serious credit. There's a reason they have the kind of insane AUM and insane fees they do. Their investors would be thanking their stars this year. Apparently, their flagship fund was +32% YTD in 2022 a few weeks ago.

As recently turned profit-sensitive tech investors who love complaining about stock-based compensation expenses, I have a suggestion:

Consider Israel for tech stock picks. Many are US-listed anyway.

Now some of you might ask, why on earth should I consider investing in Israel? Frankly, the last 5-10 years have shown some excellent businesses popping out of the country with "extremely hardcore" engineering pedigree to quote Chief Twit and Internet Daddy, Elon Musk.

There are more reasons I'll get to, though.

While Silicon Valley has been getting used to micro-roasted cafe lattes, reservations at the finest sushi joints, and afternoon sleep pods, a handful of geographical locations outside the United States have gotten seriously competitive, very quickly, on the global tech front. India seems to be picking up on effective global SaaS operating out of Bangalore, Southeast Asia's startup scene is thriving in Jakarta and Ho Chi Minh, and Israel has outright been competing with US-based tech for a long time.

Look at $SEDG , $MNDY, $FVRR, $CHKP, $INMD, $GLBE

I just named a solar tech microinverter leader, a B2B workflow SaaS, a leading gig-economy platform, a leading cybersecurity company, a medical device innovator, and an e-commerce cross-border enablement platform. All are multi-billion $ players that are HQ-ed in Israel. Why have they made it to the global scale and are minting money in the United States and beyond?

I'll be a bit crude now. Engineering salaries are cheap in Israel. At least, a lot cheaper than in Silicon Valley. In any major technology company, more so in software and high gross margin platforms, the bulk of expenses on the income sheet comes through in engineering salaries and sales/marketing expenses. Silicon Valley employees have had to be compensated for astronomical home/rent prices in the region, compounded by the fact that the suburbs are built flat, rather than upwards such as in a place like Hong Kong. Add up commuting expenses, cars, and gas, and it adds up a lot. This salary weight on the income statement eventually drags on re-investing in growth and market capture for an innovative player.

Post-pandemic, distributed workforces, Zoom calls, and working from anywhere have become the norm. With California as the historical epi-centre of tech innovation, there's been a steady trend to now favour Austin or Miami in recent years as upcoming tech hubs offering better salary/lifestyle balances and lower taxes. I won't even get into the decline of San Francisco. To add, great tech education is freer and increasingly commoditized now, and the Stanford+Berkeley 1-2 punch is perhaps not the exceptional relative engineering advantage that it once was. That said, Technion and Tel Aviv University in Israel do seem to be cranking out some exceptional engineers and business leaders.

Monday(dot)com ($MNDY) has been a long favourite holding of mine, it arguably offers a better workflow platform compared to Asana ($ASAN) going by my analysis, is growing sales faster, and is doing so with significantly less cash burn. It's not just salary arbitrage, it's also about quality engineering and business execution that clearly exists in places like Israel. Community review platforms rate Monday higher on most criteria too.

As someone who studied mechanical engineering in London, lived in Jakarta/Singapore and is currently operating out of India, there's an immense focus on work ethic in emerging markets that I've come to deeply respect when comparing things to the West. By observation, Asia is "extremely hardcore" when it comes to just working long hours. Now they have foreign returning partners operating the growing local branches of Sequoia, Accel, Lightspeed, and other venture capital funds offering crucial know-how on how to build the local next big thing. And for that reason, Asia will have market pockets that are worth investing in for years.

For now, with the global public markets, I find Israel to have the right qualities of high engineering and global execution that make it a very investable tech geography. With the renewed focus on free cash flow and earnings, it's only rational to see that Israeli tech just has an operating leverage advantage that is going to prove to be very useful in this difficult macro where profitability has taken the reigns again.

What do you think? Drop a comment

Planet Labs ($PL) is a publicly traded satellite company that sells geospatial data through its own software and various APIs etc. They do it cheaply and efficiently, enabling completely new buyers of geospatial data to actually access it without paying for it with extremely expensive licenses. That opens up new government use cases, agriculture, forestry, disaster response, and more... see some customer stories on their website here.

Their last big customer win was the German government, which bought data for about 400 federal locations and access points to monitor a variety of things from space, daily.

Yeah, about 200+ and counting proprietary satellites in orbit right now that provide high-frequency imagery of the earth every day, beamed down to their central repository of data, which is then sold to customers via third-party platforms, APIs, and their own software. As you might've figured, one image can be sold multiple times. So data and $$$ revenues are scalable as long as # customers scale. That is inherently gross margin expansionary as costs for taking new images are incrementally small once a satellite is in space. That said, Planet Labs is still investing in launching more sats of varying capabilities offering a stronger network coverage and value proposition to customers.

While their satellites vary in complexity, many of their satellites are actually the size of shoeboxes, weighing about 5kg a piece. When launching objects into space is extremely expensive, weight and size matter a ridiculous amount. The company is led by an ex-NASA guy, a chap who happened to do his PhD at Oxford under Roger Penrose, and he has seemingly put together an all-star team. The unit economics on satellites seem to work, and they've been showing a steady trend toward a high-gross margin business. From my research, no competitor has got their tech/cash/team balance right for exponential growth. I analyzed BlackSky, Satellogic, and Maxar, among other established geospatial players like Airbus and software-only platforms like Orbital-Insights. I was also particularly impressed with Planet's own software product providing an all-in-one solution that's not just data, but a piece of interactive UX design too:

Source: Investor Presentation

It's not quite a Bloomberg Terminal yet, but more like a cheaper dashboard like Koyfin. I had free access to the Beta and checked out satellite shots of a snowy landscape I crossed through in April 2022, when I was on a trek at the Annapurna Sanctuary in Nepal. It was very impressive.

Pair that product quality, vertical integration, and unit economic strength with a good salesforce. The ex-go-to-market head of Autodesk is the main sales lead, and recent sales momentum is showing. In addition, the company has a healthy enough balance sheet with years of cash funded, and the pieces of the puzzle have come together for a potentially exponential pure growth company.

The following charts show revenue, revenue growth trends, gross profits, free cash flow, and balance sheet cash across the past few quarters.

Revenues have accelerated marking 59% YoY last Q, Free Cash Flow burn is completely under control considering the balance sheet of $450m in liquidity, and as I said, the gross margin is expanding. Apparently, the 3-4 year target is aimed at 70%+ or so. That'll enter into software-like margin territory.

On the downside, revenues are dependent on big contract wins. It's not a pure subscriber-based SaaS, due to the complexity of the product and varying data stacks or features that are needed by customers. So they have varying sales models and are relatively hush about prices. This is understandable when dealing with governments and policy-like corporations. Other downsides include cash burn, which of course, meant a valuation rerating downward this last year considering interest rates. Competition seems covered but can always be a negative factor in the near future considering the pace of innovation in the geospatial satellite industry.

Alright, so 4.2x on the Next Twelve Months' EV/Sales is not the cheapest ask for a cash-burning, tech company in today's environment. I think the differentiator for me was entirely the competitive analysis where Planet seemed to be the best positioned across product quality, unit economics, financials, management, and more. And with that, the geospatial data market is expanding rapidly, thanks to a massively declining cost curve on satellite launch costs (thanks to daddy Musk, RocketLab, and other launchers). The declining satellite launch costs help make this new data avenue available to far more use cases than before due to previously prohibitive licensing costs.

Planet Labs seems to be leading the charge in this new part of the opportunity as geospatial data moves towards that mid-market. The tech isn't the highest or most sophisticated, but it is exceptionally innovative on the baby satellite front that "does the job". The company's mission is to democratize earth data after all, and that starts with costs. The team is quality all around and is targeting the right part of the market at the right time, offering the right product.

I am factoring in a high probability of multi-year 40%+ CAGR on sales, and a pathway to 65-70% gross margins in coming years. By 2025, FCF generation is entirely possible. It's not bad now, and there's enough runway to expand even in this environment. Importantly, Planet was extremely lucky to raise capital at the right time during the market euphoria of 2020-2021.

So high risk, high reward. Many unknowns, specifically the exact cost advantage vs competitors and revenue predictability. But this small company is my bet for the entire geospatial data space, which is surprisingly crowded. Here's a summary of my bullish points:

I'm long $PL. Very cool company, somewhat punished by markets, but is more than holding ground in this environment. In fact, it's one of the rare businesses delivering better-than-expected performance compared to its original SPAC ambitions. I think it's a compelling opportunity in small-cap tech. About <$1B in enterprise value about now. Potential 5x in 5 years in my view if things go well.

One of the most interesting corporate characters over the last decade has been Robert Iger. I've read his book, Ride Of A Lifetime, and found it to be an excellent insight into his values and profession. He came across as driven, hard working, extremely humble, and the results of his tenure as CEO have been exceptional.

You'd think that for a guy who had the perfect career, he'd like to spend his 70s with the family.... in perhaps not an extreme-stress job managing one of the most complex media companies in the world. But it looks like the player can't get away from the game, and he might have the same feature/bug that Tom Brady has.

Anyway, 8.5% up pre-market on the announcement.

For tech investors and maybe all investors. This isn't the time to blame the Fed, CEOs, geopolitics, or inflation. It's time to roll up your sleeves and work on picking investments. There'll be stock picks in today's market that will multi-bag in 3-5 years. Others might deteriorate and become acquisition targets. Either way, the market is moving on macro concerns more than fundamentals. We're now at very exploitable dislocations in value IMO.

Founded by literally two bros of Dutch descent in 1992, Dutch Bros ($BROS) compounded its coffee shop chains over years and went public in 2021.

Source: Earnings Presentation

I looked into what makes the company tick and it looks like they've found an "aha!" customer experience formula they've been able to replicate and multiply over and over. Now with over 600 stores across the US, they grew sales last quarter at 44% YoY and they're borderline profitable.

So here are their core tenets:

That doesn't mean much until you figure out what the experience is like. Dutch Bros are drive-through shops. A runner comes out to you as you queue up in your car with a tablet, captures your order, sequences it, and by the time you're at the store window, coffee's ready. Now drive off and go on with your day.

While I rarely go to Starbucks in my country - sometimes for the WiFi and the temporary workspace for the price of a coffee, it's easy to see the stacks of people on a workday queueing up to grab a few orders in paper cups and go off. Dutch Bros seems to directly appeal to that rapid service system. And the interesting thing is that since they're not large outlets, and the new shops are about 850-950 square feet, the rent isn't that big a cost. Starbucks would just have bad economics on average compared to pure drive-throughs. The locations are selected near 25,000 square feet or so lots so the volume of cars driving by is relatively large. The unit economics, on a high enough volume, work really well given the low real-estate prices per branch. That could help with the price of coffee/beverage which may keep customers loyal and recurring.

Fun fact: The servers are called "Broistas" (I know!) and seem to be aggressively happy - but hey some of that mildly cult-like culture works when you're expanding fast.

$BROS is on par for EV / Gross Profits vs Starbucks. However, BROS is on a 40% YoY growth rate, and SBUX is relatively flat but pretty FCF generative. Assuming you do your research and find a quality company in BROS, the current price could be really attractive. Dunkin, Starbucks, Mcdonald's, Wendy's... these stocks have all worked on simple quality + compounding over the years. Many have beaten the S&P 500 over the last decade.

Dutch Bros also seems to be a fast-food reasonably priced coffee proposition and while downmarket consumers may start making their own coffee at home, upmarket customers may move downmarket to Bros instead. At least that's a working recession theory. Worth a look!

Here's something funny. Or perhaps tragic. Or both.

If you look into these now multi-billion dollar dating app businesses, you'd notice they make money on premium and paid features - but for them to generate revenue, they need you to first keep using those apps.

In other words, they're financially incentivized by you searching for love, but not finding love. If you find love, they're losing you as a customer.

This has to be really bad for society.

Free markets lead to competition, and in order to compete, one needs to follow financial incentives to build shareholder value. As much as the Zuck harps on about human connection, Facebook and Instagram have become very profitable dumpster-fires of tik-tokified perpetual scroll addiction content.

I pulled some data from Koyfin to determine where average software multiples for growth stocks lie against their 7-year history. Jamin Ball from Altimeter Capital had been putting up similar graphs on Twitter, but I thought I'd compute the numbers from my personal investment universe of software stocks.

I included the Median EV/Sales (Next Twelve Months) multiples from about 29 existing public names in growth-oriented software. These span applications, SaaS, cybersecurity, infrastructure, productivity, etc. Compared to software ETF indices, I'd say that my list leans towards more growth-biased businesses. There's no $IBM and $CSCO here.

Some of these names were not public in 2015-2017 and were excluded as data points for this graph. Anyway, here it is:

I recall 2017 being a goldilocks period for the market where multiples were neither too expensive nor cheap. Since then, however, there's a very strong argument for higher valuations considering the sheer speed and execution of growth for the cloud transformation crop.

Interest rates might be high, and inflation could continue to be painful, but I'm pretty confident investing in this space - partly because so many names have shown remarkable fundamental resilience in the last earnings season. The reinforcing theme is that a lot of software is mission critical and isn't just complementing operations - it is operations for any modern enterprise.

It's time to get greedy here for long-term investors. Software is eating the world.

Salesforce ($CRM) has been the singular fortress and gatekeeper of the Customer Relationship Management industry for over a decade. Through the years they've broadened their product portfolio with an ecosystem comprising every sales and marketing app and use case imaginable relating to software. M&A has pushed the business beyond its core competence to encompass apps like Slack (workflow communication) and Tableau (analytics and visualization).

​

There is however an argument to be made against the now $150B market cap giant. We've seen time and again that nimbler solutions that were designed from the ground up every few years provide a value proposition that can justify switching costs for even mid-large enterprises. It's hard to keep the innovation alive at scale and thus M&A helps entangle customers and build dependence when a company can't quite re-design its software as the latest best practices flourish.

​

HubSpot ($HUBS), by most market share metrics, is the #2 CRM Platform now and is doing extremely well. By the company's own metrics, a team of 50 may incur an estimated cost of $75,000 a year with Hubspot vs. an equivalent $236,800 from Salesforce for equivalent services. Take it with some salt, but when cost cutting is on the horizon, such a difference for enterprises not requiring advanced Salesforce functionality makes switching extremely attractive.

​

​

HubSpot began as a marketing automation platform and has since evolved by branching out into Sales and CRM use cases. With a "land and expand" model, they last recorded 41% YoY growth on a constant currency basis, growing their customer count by 25% YoY. Not hyper-growth by any means, but commendable business execution.

​

To add, they're scoring Free Cash Flow generation, which is a strategic advantage. When younger competitors in specific use-case domains have to fire off employees, while reducing their S&M spending, HubSpot doesn't have to do the same and can continue on its current trajectory. This theoretically, should leave financially unsound innovators in the dust amidst this tricky macro.

​

In summary, HubSpot appears to be at a fortunate size along its S-curve cycle. Innovative enough to drive serious growth through product expansion, and profitable enough to not be bothered by cash-flow consequences in a delirious macro environment. As a result, it's worth investigating further.

​

To contextualize:

​

If one finds high-quality and best-of-breed solutions in Hubspot, there's a long runway to go with broad revenue drivers against a massive market opportunity in the $30B+ range. One will also have to pay a premium on EV/S valuations but that should be worth it considering the runway ahead.

​

​

At an NTM EV/S of 7.8x, HUBS is not priced like a value stock, nor should it be. But it is cheap enough for investors with a long-term horizon to dig in and consider it as a potential investment in the rather macro-resilient software space.

​

Under investigation for my portfolio. No position yet.

Disclaimer: This post might only appeal to investing nerds like myself. It's more of a philosophical rant with little practical value.

In Tech, winners take most or all in an emerging growth opportunity

So theoretically, it makes sense to go long the perceived winner, and short the losers for some purer, market uncorrelated, alpha. A similar idea has manifested in the famous "long disruptors, short disrupted" as a generalized hedged investing strategy.

The problem with the generalization is that it can occasionally crush you as styles of stocks deviate from long-term trends and go in and out of fashion. For example, long renewables, and short oil & gas. Or long any high-growth software, short boring old $IBM in the software space (that would have truly sucked this year). For the disruptor/disrupted trade, one has to often go long a traditionally expensive stock and short a traditionally cheaper stock - hoping that the valuation spread would widen as the disruptor further takes over the disrupted. The market is often efficient in this way of thinking in my opinion.

Leader #1 and #2 in a closely related disruptive space often trade in a highly correlated manner, with multiples that are not that far apart. Often, the valuation is not working deeply against you, and thorough research might provide you with a trading opportunity that brings on lower risk, and purer alpha. I say purer because the closest competitors move very similarly in various macro paradigms. The soul-crushing deviations in value/growth we saw this year wouldn't be nearly as prominent.

On June 8, I wrote a post here stating that I liked $MNDY in the workflow space where it was a winner for me against $ASAN and $SMAR. In my view, the three were #1, #2, and #3 leaders in the hotly contested Workflow Software space. ASAN was the closest competitor, and it was trading at a minor discount on sales multiples to MNDY at the time. I also mentioned that going short $ASAN would make a good hedge. I personally was only long $MNDY throughout this period.

Here's how that long-short trade would have evolved (about +18% so far):

Now, this is just one example, and it doesn't prove anything. Furthermore, Asana is yet to report on earnings while Monday already did with strong results. To add to the complexity of it, the discipline of entering and exiting positions is a whole different game of skill. But to me, good areas to double down on the trade are when the purple and yellow lines trade closely or surpass each other, such as June 10th, or mid-August. I say this with the comfort of hindsight bias, of course. At the current spread, I'd reduce the trade exposure.

I imagine firms like Citadel play such games and amp up the leverage on these spreads. Super hard to do, but for those that like the purest equity-based alpha available without macro pain, the strategy is really worth exploring. If you can push a 10% CAGR annually on such a strategy pre-leverage, you have my respect. For the kind of pension funds that invest in the Citadel types, this is incredible from a risk management standpoint. As it happens, Citadel's flagship fund was 20%+ YTD as of July end.

Unfortunately, my country's laws don't let me go short or use leverage on (foreign) US market stocks. For now, I'm long $MNDY and pretty happy with my cash long-only position.