7investing Lead Advisor Anirban Mahanti’s June recommendation is a pick and shovel play for the software as a service arena. This company has been a fantastic holding for those that got in at its IPO several years ago with the stock up roughly 1800% since then. But this company’s best days are still ahead of it, thanks to high switching costs, growing network effects, and a large addressable market. This is a business with a rock solid balance sheet, one that is growing quickly whilst generating strong free cash flow margin. The recent market correction offers us the opportunity to buy a slice of this business at a discount to the usual premium we have seen on its shares in the recent past.

Transcript

We are in the midst of a major market correction. The S&P 500 and Nasdaq 100 are down. And they are down significantly. Along with that we know that some of the growth stocks are down significantly, some are down 80% from their highs. 

This is not to say that stocks are cheap but at the same time there is something about cloud computing that is important to observe. If we look at Azure’s results, we know it is growing strongly. If we look at GCP or AWS we know they are growing strongly. The results for cloud computing and software as a service companies have generally been really really good. 

So this month, I went for a pick and shovel play. A company that benefits from the cloud computing trend. A company that benefits from the uptake of software in the cloud. This company usually trades at a premium. It has billions of dollars in revenue. Growing quickly. It is a company with lots of free cash flow. And its free cash flow margins are pretty strong. Operating margins are pretty strong. This company normally trades at a premium during normal times. This time in the market crash we have an opportunity to buy this company at a good price. 

Hi, I am Anirban Mahanti. Lead Advisor for 7investing. We are here to empower you to invest in your future.

Already a 7investing member? Log in here.