Cybersecurity Supremacy
Cybersecurity spending isn’t slowing down!

Palo Alto Networks $PANW reported earnings yesterday posting:

  • Adj. EPS of $1.79 vs. $1.68 expected
  • Revenue of $1.39B vs. $1.36B expected

A rare double beat for this earnings season. As a result, $PANW was up over 12% after-hours.

The cybersecurity industry is projected to be worth around $146B by the end of the year. Statista expects this industry to grow at an annual rate of 9.7% until 2026.

With tailwinds like these, cybersecurity stocks are in a great position over the next few years.

We can see this stability ourselves by looking at revenue growth for companies in this sector.

Crowdstrike $CRWD is the only stock to see its revenue growth decline over the past two years, but it is still at 63%!

Even with these tailwinds, cybersecurity stocks have been hit hard in the recent sell-off. Only Check Point $CHKP has stayed out of a bear market level down 19% from previous highs.

After this sell-off here is how these stocks currently compare based on revenue multiples and their respective growth rates.

Do you have a favorite cybersecurity stock? Which one? Tell us below!
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Fincredible MacroTalk: Remote Work
Remote work is likely here to stay. Employees are demanding it and, in the midst of the great resignation, many companies are seeing the necessity to offer remote or hybrid work arrangements to attract and retain talent. The latest Fincredible MacroTalk offers several quotes from company earnings calls on the benefits and challenges of remote work.

Talent attraction and retention is one of THE biggest benefits of remote work for many companies:

  • $OSTK "The ability to offer remote work has improved our attraction and retention efforts, both of which are important during the nationwide great resignation. Our workforce continues to be engaged and productive working from home.”
  • $DBX "Virtual First has been really positive for us. I mean, last year, we saw a 126% increase in offer accepts. That's nearly double the number -- and then also nearly double the number of candidates for op enroll and even an uptick in what we call boomerang candidates, like folks that might leave the company and then come back within a year. So we're finding that from a hiring perspective, it's really resonating and unlocking new pools of talent. And I think more broadly, what you're seeing is that employees once they have the flexibility or when companies like ours offer this flexibility, they then -- employees demand it."

And companies like $UPST have shown that you can run a successful business remotely:


Not all jobs can be performed remotely at the moment, but over time, the trend is clear: more employees will migrate to remote or hybrid work.

If you'd like to read the whole post for free, here's the link:

Quotes from from $UPWK $IT $OSTK $FVRR $DBX $ZIP $UPST $PANW
Trading Journal 23rd Feb 2022
Situational awareness:

#futures are green but I am bearish overall. Maybe we get a rally. Will be focusing on #SIPs mainly to the short side.
Pre Market Work:
$MELI, $PANW and $MNDY stand out as the best #SIP plays. Fade the gap up and press the gap down is the plan. $LOW also looks a potential 10ema tap and red type play. Especially with #HD dropping so much yesterday. $SEAS looks a good long setup #Swing

Trading day:

Tried to short $OSTK, Some of the others dropped too quickly for me to have any sort of Risk. In hindsight $OSTK was too strong, possibly should be avoiding these when it wasn’t from night before. I got in twice. Not awful ideas and risk but probably too much size for such a high beta stock. Shorted $CWH after. Worked but again size too high and too keen to get going. Short $MES now working well but not happy with the day. Not great performance, I think I need to really parse the faster moving stocks. I am not good at trading things like $OSTK. Had a nice trade in $MA. That is more my style. Stick to it.

Also hiding the P&L was double edged today. Will see on that one long term. Started using chart based limits and stops on IBKR it is very good. Will continue to use this for visuals.

$MES trade going well and good movement of stops and limits. Final runner now to $4260.

Took another $MES trade, the setup was there but in hindsight I should only be looking at futures level to level. I was in no man’s land.

End of day Thoughts:

Poor day in terms of profit, some mistakes in the morning but nothing terrible. Need to make sure I am more settled with my decision making at open if I am to day trade gap ups. Pushed $OSTK and ultimately that tainted the day regardless of work after.

Market breaking to new lows. Let’s see what happens tomorrow. Reset, refresh. Good trading.

Notes & Open Trades:
N/A
Upcoming Earnings Calendar (Feb 21th - 25th)
Hey guys! Here's the upcoming earnings calendar! Several very interesting reports coming up. Here's what I'll be looking forward to.

  • $MELI - How much did inflation impact their logistics margins?
  • $SQ - Cash App Users and Revenue Growth
  • $COIN - I think they will deliver a monster quarter. Crypto volatility should incentivize trading, driving commissions revenue above forecast.

If you'd like an easier way to track earnings dates, you can automatically sync your portfolio's earning dates to your personal calendar with just a couple of clicks here.

TUE:


WED:


THU:


FRI:
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Cybersecurity is in the early innings of a long run!
The market Cap of cybersecurity companies has increased 4 times in the last 5 years.


Cybersecurity startup funding has increased 3 times in the last year.

Currently, cloud and internet companies are the biggest spenders on cybersecurity, this is just the beginning, the opportunity is incredibly huge.

Big spenders prefer cybersecurity platforms as compared to one-trick products to solve all their problems with one platform.

What are some of your favorite cybersecurity names?
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That's some crazy growth!

Okta and Crowdstrike are my favorites at the moment.

But I can also tell you my least favorite: FireEye $FEYE

If you've ever looked into them, I'd be curious to hear your thoughts on why they've done so poorly.

(They recently rebranded and changed their name to 'Mandiant' and changed their ticker to $MNDT)
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Cybersecurity Industry Breakdown: One of my focus for 2022 and Q4 Earnings Report
This is a breakdown of the entire security industry:

The most popular sectors are Cloud Security and Endpoint protection security.

I am looking forward to the reports for each of these players within each category to extrapolate which sectors will grow the fastest.

Key companies to watch: $NET $CRWD $S $FTNT $ZS $PANW $MSFT $PLTR

Hope this breakdown helps people!
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Thanks for the breakdown! From an enterprise client standpoint, maybe even from a smaller sized business, one would think they wouldn't want three different security products, they would prefer one that has what they really need and covers the other service areas as adjacent service offerings?

When I try and analyse stocks in the space, I am always trying to think through this. Yes some of these services are 'mission critical' and attract higher spending than the rest, but would you rather pick the one that is the best in a specific cybersec offering, or maybe rank them based on how good all of their offerings are and choose the one which is okay in most of them?
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Upcoming Earnings Calendar! (Nov 15th-19th)
Earnings season is slowly coming to a close, but there are still several highly interesting events coming up. Here's next week's earnings calendar and what I'll for looking forward to.

  • $SE: insights on their global e-commerce expansion.
  • $NVDA: comments on their product availability and supply.
  • $WMT: Update on their Walmart+ membership and comments on inflation/labor shortage/supply chain issues.
  • $DLO although this stock is too richly valued for me, I like their business and I'm following it in case there's a good buying opportunity post-earnings.

Comment below which earnings report you are looking forward to the most!

Friendly reminder: you can automatically sync your portfolio's earning dates to your personal calendar with just a couple of clicks here.

Monday
Tuesday
Wednesday
Thursday
Friday
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3Q 2021 Investment Letter & Results
Below is the 3Q 2021 Letter that I sent to clients.

Performance Analysis
During the third quarter of 2021, our aggregate managed capital (the “Portfolio”) returned -1.17% net of fees, versus the S&P 500 Index (the “Index”) return of 0.58%.

Our aggregate performance metrics can be accessed here

The past couple of weeks were challenging on our portfolio. Out of the +126 months we’ve been in business, September 2021 ranks as the 8th worst monthly performance. As I write this, the start of October is showing signs of turning around. Historically, these corrections usually last between 2 - 3 months. It is not uncommon for corrections of 8% to 15% to occur.

While we don’t manage the portfolio with short-term monthly, quarterly, or even a single year’s performance in mind, it’s important that our partners understand the context for these last few months.

Looking at the last six months, we have seen a rather notable rotation into cyclicals, traditional financial services, and commodity-driven stocks such as energy. Ironically, we believe that these two sectors are most likely to be disrupted by innovation during the next five years.

It just proves that predicting the market's short-term future behavior is impossible. Instead, our goal is and always will be to optimize for long-term wealth creation, and part of the trade-off is short-term volatility along the journey.

Currently, there are strong and disruptive secular forces at play, and we would prefer to own businesses that are disruptors rather than those that are being disrupted. The Portfolio remains well-positioned for long-term growth. It appears that secular tailwinds, which have accelerated during the pandemic, will continue to persist, mainly because they offer a better value proposition. We have focused on companies that move technology infrastructure to the cloud, as well as enable mobile services, new payment methods, big data, and internet security.

Market Environment
A material number of economic events have transpired that point to a breakdown in the notion that inflation will be “transitory.” Inflation has rapidly accelerated this year, and there seems to be no policy urgency to stop it.

  • Over +10 million job openings, hires of 6.3 million, and quits of 4.3 million
  • Energy commodity costs have risen over 40%
  • Food costs are up 4.6% YTD
  • John Deere unions are striking for “insufficiently increasing wages…”
  • The spot price for sending such a box from Shanghai to New York, which in 2019 would have been around $2,500, is now nearer $15,000
  • Social Security Administration will increase benefits +5.9% in 2022
  • Henry Hub Natural Gas Spot Price is up +100% YTD
  • US natural gas rotary rigs in operation have decreased ~50% since January 2019
  • The copper spot price is up +50% since January 2021

Further increases in energy inflation are inevitable in the coming months given the recent surge in wholesale gas prices and the spurt in crude oil prices.

The long-term impact of inflation and supply chain disruptions
Due to a constrained labor pool and high wages, companies will be forced to rely less on hiring low-paid workers and more on automation and artificial intelligence. Jobs such as supermarket check-out clerks and assembly-line workers in manufacturing plants can both be automated away.

Who will fare better in an environment of rising wages and supply chain stress?

(1) Companies that are able to invest large sums of capital into automation will perform better than those that are capital constrained. (2) Businesses that operate in an environment where the inputs are constrained but have the technical and capital capabilities to vertically integrate, thereby, securing supplies and resources to produce outputs.

Portfolio Management
Turnover was above average during the quarter. We initiated positions in Okta, Elastic, Palo Alto Networks, Upwork, Fiverr, Square, and Ondas. We sold off our position in Bristol Myers Squibb and SailPoint Technologies.

Elastic ($ESTC)
Elastic is a search company that builds self-managed and SaaS offerings for search, logging, security, observability, and analytics use cases. I’ve been waiting for quite some time for an entry point. We got that entry point and executed the trade.

Palo Alto Networks ($PANW)
Palo Alto Networks is a leading cybersecurity vendor, transitioning successfully from a hardware-led to a subscription-led revenue model. We purchased the stock recently and it has blown past what we consider fair value. Growth, margins, and the balance sheet are all very strong. Cyber intrusions are occurring more frequently and companies need to protect their data, driving the industry to a secular growth trajectory. If it continues to appreciate throughout the year, we would consider reducing our position.

Upwork & Fiverr ($UPWK & $FVRR)
They are both considered to be at the forefront of the future of work. $FVRR is productizing jobs and $UPWK is making it more efficient to hire longer-term freelancers across the world. These companies are breaking down the boundaries of geography. As marketplaces, $UPWK and $FVRR are affected by network effects. I believe these companies will continue to grow, innovate new products and services, and ultimately be the place where you go to find short-term and long-term employment.

Square ($SQ)
Square's ($SQ) original focus was on merchant services and mobile POS hardware, but the company has arguably created a peer-to-peer payment conqueror with Cash App, similar to PayPal's (PYPL) Venmo. While Square began by offering a broad range of merchant services, Cash App is now its primary source of revenue. Square can take advantage of Cash App's expanding ecosystem and growth to accelerate revenue growth after the merchant side recovers from its Covid slump.

In August, Square announced that it intends to buy Afterpay for $29B. The deal will be completed by Q1 2022. “Buy now and pay later” is a story that will largely play out in emerging markets, where credit card penetration is low. Growing in countries with established credit cards will require a lot of effort. My bet is that this deal could be beneficial to both companies in driving international growth where the financial system is still in development.

Okta ($OKTA)
During our review of SailPoint, we decided to invest in Okta and divest from SailPoint.

Okta is the leading independent provider of identity for the enterprise. The Okta Identity Cloud enables organizations to securely connect the right people to the right technologies at the right time. In other words, it manages how users access applications, data, and other enterprise resources. Okta verifies your identity, determines what you have access to, and helps an organization manage policies and processes at scale for its networks and systems. The Company also provides enterprise tools for access governance and administration. Tasks include advanced controls, monitoring, logging, reporting for compliance, analytics, and audits.

The incumbent, SailPoint Technologies, has a large customer base with their software installed on-premises. However, the move towards the cloud has opened up the space to new entrants. Okta’s products and services are structurally better. As far as functionality, Okta has a broader range of cloud capabilities, especially when you factor in their new offering. Additionally, the cost of implementation is significantly lower with Okta. These structural benefits will likely provide a lasting advantage that will be reflected in revenue growth.

Okta’s products and services are divided into two solutions:
  1. Workforce Identity - Protect + enable your employees, contractors + partners
  2. Customer Identity - Create frictionless registration + login for your apps

These solutions are essentially a bundle of platform services.

Okta Valuation
Despite the fact that Okta shares have never been particularly cheap, the combination of a stagnant share price, paired with a negative reaction to what was a positive quarter, provided investors with an entry point that had not been available in some time. With an expected CAGR of 40% for the next year, the EV/S should be ~20x (FY 2023), slightly below average for the company's growth cohort.

Okta Acquires Auth0
Okta’s acquisition of Auth0 was a “forced chess move.” Auth0 was Okta’s primary potential competitor. There were rumors that Salesforce, an investor in Auth0, was eyeing it as a potential move into cyber-security. By acquiring Auth0, Okta eliminated the direct competitor and gained additional firepower from their customer identity product, increasing the addressable market and a new way of reaching out to customers. Auth0 was built on a “developer-first” sales strategy.

Their go-to-market strategies are different. Auth0 targets a wider audience and offers a freemium model (a business model in which a company offers basic features to users at no cost and charges a premium for supplemental or advanced features). Developers have access to a good portion of their services free of charge and this is a reason why Auth0 is popular amongst developers. The strategy is built to acquire, expand, and extend amongst the masses. With time, they have acquired a large pool of clients and this allows them to perform sales at a lower price.

Okta’s goal is to target large clients with big budgets. They target companies with large IT departments that can use their platform very frequently and increase their spending/usage on the platform.

Other Readings You Might Enjoy
Crytpo / NFTs - Getting Acquainted with the Terminology and the Ecosystem

  • The marketplace behind NFT mania (Link)
  • The NFT ecosystem explained (Link)
  • DeFi deep dives (Link)
  • Starters guide to crypto (Link)
  • ProShares Bitcoin Futures ETF Starts Trading on Tuesday 10/19/2021 (Link)

The Future of Lasers // Used in cameras, and in the car’s auto-pilot systems.

  • Why lasers are so brilliantly useful (Link)

Firm Update
I am excited to share some details of the next chapter for my firm. I am rebranding the investment arm as Strategic Investors. This will be more in line with the vision I have for the firm as an asset management firm. In our work with private clients, I have come to believe that it is not enough for investment managers to have conviction in their portfolio positions. Clients must also have conviction in the investment manager and the investment process. In addition to producing high returns for the accounts that I manage, my goal is to help clients maximize their personal returns by helping them keep their convictions during the inevitable challenging periods we are sure to face.

Final Thoughts
Having a patient and long-term-minded investor base is a huge advantage as it allows me to think about our portfolio on a multi-year horizon. This requires trust and patience on your end, and I am thankful that you extend that courtesy to me.

So again, thank you.

Gabriel Kaplan, CPA CFP®
Strategic Investors // Wealth Habits

PS: I will be starting my own substack in the near future
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