Long-Term Investing Ideas in a Volatile Market
Simon recently spoke with a $35 billion global asset manager about how they're navigating the market volatility. The key takeaways are to think long term, tune out the noise...
Healthcare is going digital! In an exclusive interview with 7investing, Saga Partners' analyst Richard Chu describes several of the higher-level trends taking shape in the healthcare industry and three specific companies he's watching. We also chat about important recent developments in cloud computing and how beginners can get started with investing.
December 15, 2020 – By Simon Erickson
The healthcare industry has a notorious reputation for being slow to innovate. And the reasons are probably fully justifiable.
There of lots of regulations surrounding patient data, and doctors have spent decades in training to optimize their specialties. It’s not always so easy to pivot to things that are less familiar, especially when you consider the sensitivity of information and that lives are at stake on a daily basis. This has made healthcare a difficult sector for tech companies to get a foothold in.
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COVID-19 has thrown the world into a tailspin this year, and things are rapidly changing as a result of it. Patients still need quality health care, but it’s much more challenging for them to physically get to the hospital. Telehealth consultations and wearable devices are making it easier for patients to check-in with doctors remotely. Perhaps there are ways that technology can reduce the $3.6 trillion that America spends each year on healthcare, while also providing a better overall experience.
But why now?
This could also provide for some incredible investment opportunities. Are there specific companies who are leading the charge in this new patient-focused future of healthcare?
To help us answer that questions, we’ve brought in an investor with his sights set on the healthcare industry.
Richard Chu is an analyst at Saga Partners and Luca Capital. He’s been recently following the digital health and cloud computing industries, finding the category leaders who could be well-poised to capitalize on the industry’s recent changes.
In an exclusive interview with 7investing CEO Simon Erickson, Richard describes several consumer-facing trends taking shape in healthcare that investors should be paying attention to. He explains the importance of consolidation in telemedicine, how prescription drug pricing is becoming more transparent, and why wearable devices could use sensors to create the “hospital of the home.” He shares one company in each of these healthcare subsectors that he is interested and actively invested in.
In the second part of the interview, Simon and Richard change gears and focus on recent developments in cloud computing and enterprise software. The two discuss whether Alteryx’s recent selloff was justified, whether Agora is a sleeping giant in videoconferencing, and whether Zoom Video Communications’ momentum can continue.
And as a closing, Richard shares a few ideas that people who are new to investing can use to navigate the stock market.
00:00 – Introduction to Richard and how he got started investing.
07:53 – Overview of digital health’s trends taking shape
10:49 – The rise of telemedicine and Teladoc (TDOC)
15:11 – Transparency in drug pricing and GoodRX (GDRX)
22:05 – Wearable devices for healthcare and Huami (HMI)
27:59 – Pivot to cloud computing and enterprise software. Was Alteryx’s recent selloff justified?
34:15 – Who is Agora and why is this company so interesting?
37:53 – Can Zoom’s videoconferencing empire continue its momentum?
43:12 – Advice for beginners who are new to investing
Publicly-traded companies mentioned in this interview include Agora, Alteryx, CrowdStrike, DataDog, FitBit, GoodRX, Huami, Teladoc, and Zoom Video Communications. 7investing’s advisors and/or guests may have positions in the companies that are mentioned.
This interview was originally recorded on December 8, 2020 and was first published on December 15, 2020.
Simon Erickson 0:00
Hello, everyone, and welcome to our 7investing podcast. My name is Simon Erickson (and) here at 7investing we are here to empower you to invest in your future. Today we’re going to be looking at a couple topics, mainly digital health and cloud computing, which have been hot markets for investors recently. We think that there’s a lot more growth and plenty of runway ahead for them, and I’m very fortunate to be joined by Richard Chu. Richard is an analyst at Saga Partners and Luca Capital. He focuses on investing in a variety of different topics. He’s based somewhere, I think, Richard, between Ontario and Cleveland, Ohio. So thanks very much for joining 7investing here today.
Richard Chu 0:36
Thanks for having me, Simon.
Simon Erickson 0:38
Richard, we’re going to talk a little bit about digital healthcare, and then also cloud computing in a little bit. But let’s get started with kind of your journey, and how you got into investing in the first place. I read your story, but I’d love to hear you tell. It seems like there’s a lot of reading and really getting into the nitty gritty of the details.
Richard Chu 0:54
Sure. So I’m definitely, I’m sure that many of your viewers already familiar with sort of my Twitter profile, it’s Richard_297. And I have my own Substack newsletter where I go into more depth. To give you sort of the high level, basically, like, I am sort of a year out of school right now. I recently started at Saga Partners, and it’s an investment advisory based in Cleveland. And before that, I was really working at EY. And I was doing technology consulting. Not your traditional background for some working in the finance industry right now. But I was fortunate enough, because I always had an interest in investing to really, at the start of the year, sort of start posting my thoughts on Twitter and sort of writing some in depth articles on Seeking Alpha. And I figured that that was sort of a really good way to really build my own track record and get my own thesis out there and talk with/connect with other like minded investors. And so I’d say like, that’s where, like, my professional journey really started. And from there, I was introduced to Saga Partners who had owned a position in the longer the time. And we’ve been talking ever since. For in terms of my own investing, I started around like mid 2018. And like one of the first sort of resources that I really felt helped me was The Motley Fool. And I know you guys yourself, you definitely sort of made a big impact because like you were some of the first people that I followed on Twitter. So definitely, like, it’s great to be joined by you guys. And ever since then, like I’ve really branched out and sort of read as much as I can (from) everything from annual letters to certain investing books, both on investing philosophy as well as within tech investing itself. And I’ve learned so, so much over sort of the past year, and I’m continuing to like learn so much every single day. So I’m sort of excited to share my knowledge so far.
Simon Erickson 3:25
Well, thanks very much Richard, and to return the compliment back to you, I think that just the insight that you have, you’re so detailed, so thorough in the research that you do. That’s such an advantage for investors, you leave no stones unturned. I know that you said in your background, you just kind of started reading on Reddit, a bunch of different online forums posting to Seeking Alpha, posting to Twitter, I really have enjoyed a lot of your work. And I guess before we jump into the first topic that we’ll talk about, which is digital healthcare, I wanted to kind of ask about your investing approach. How do you start looking for companies? Do you look at the top down where you’re looking at markets and you find opportunities from there? Or you just go out and start reading a whole bunch of annual reports and find the right companies?
Richard Chu 4:04
Yeah, so definitely I’d say it really helps to sort of narrow my focus. Currently, my focus has been built up in SaaS and digital health. Mainly the sort of the reason behind that, I suppose because I find that these are some of the areas where (both are) huge in terms of the tailwinds behind them in terms of sort of the macro move. With companies shifting from on prem to the cloud, as well as you look at digital health, like especially with COVID, like ever since COVID. That’s where I’ve sort of really focused a lot of my energy and the reason behind that is I feel that COVID really opened the door in terms of a lot of these opportunities, both in terms of regulatory changes, as well as sort of societal shifts in attitude. And these companies. I feel like they’re disrupting healthcare which is something that both really needs to be disrupted and is one of the largest industries in the world. So that’s where I focus most of my energy. And within those trends, I really pick out those companies that I feel are best positioned. So I’d say like, it’s really important. Not for me personally. I don’t like sort of investing in sort of like a bucket of companies within a potential trend that I like. I like sort of really diving deep into each different company and sort of picking out the leaders. And that’s some of the criteria that I look for. In my Twitter as well as my sub stock, I’ve posted an investing checklist that I really look for in companies, including: making sure that they are a category leader, making sure that they have a wide moat, that they’re continuing to build upon that moat by continuing to innovate, continuing to really have sort of that visionary leadership to know where they’re heading and just continuing to sort of build like a more advantaged competitive position. I also really prefer companies that have recurring revenue, you know, like, the elevator versus the typical staircase. And I also look for companies within large markets. So of course, digital health and SaaS, like they are huge industries, but like within them, you really have to sort of pick out which trends are going to be most durable. For example, in digital health, I prefer remote monitoring companies much more than sort of telemedicine pure place, and that’s the reasoning behind my investments within Teladoc, and Huami, which we’ll talk about later. And within SaaS typically, you can look at all of these different sectors and trends within fast like a couple of the companies that prefer the most, again, cybersecurity, like I think that typically cybersecurity is an area where it’s hard to build durable competitive advantages. But you look at CrowdStrike and what they’re doing with the threat graph, I feel like definitely a net, the data network effects from that, in terms of aggregating our data, and using it to stop breaches, is definitely something that makes them special. I also think that Data Dog, which I think we’ll talk about later, is really well positioned within the trend of observability. So really sort of aggregating all those different previously siloed monitoring tools together and helping sort of be the picks and shovels to companies move to the cloud.
Simon Erickson 7:43
That’s fantastic. Richard, I would encourage anyone watching or listening to this podcast to rewatch that section, at least four or five more times. A ton of insight on on how Richard’s finding companies. Let’s talk about the first one of those sectors that you mentioned, which is digital health. Just at the highest level, America alone is spending more than three and a half trillion dollars on healthcare every year. We know it’s expensive. We know it’s got problems, and it’s inefficient. But you mentioned in something that you wrote earlier that you thought that COVID-19 was an inflection point in the adoption of telemedicine. Can you start out by kind of explaining what that means and why that would be?
Richard Chu 8:16
Sure. So I feel like COVID opened up a universe of opportunities with healthcare, telemedicine is one. I was actually watching this Beth Kindig interview yesterday, and she said how VC’s are dumping so much money into telehealth right now. I feel like this trend is sort of just beginning. And when you look at sort of telemedicine itself, like version one is companies like Teladoc, companies like Amazon, what were they doing? They were basically providing an additional access point for consumers to reach doctors by. And when you look at sort of where that’s going in the future, Teladoc’s recent acquisition of Livongo should give you a clue to that. I feel like telemedicine itself is going to sort of really be integrated with remote monitoring in order to really form this new sort of preventative care delivery model. So what I mean by that is, a lot of people say how telemedicine will never replace in person visits because there’s so much stuff with an in person visit like the doctor. They have to use the stethoscope, really sort of interact with you in person and get readings from there. That can’t really be done over video. And while that’s true, you have stuff like remote monitoring, which is something that Livongo provides. What that basically means is that you have sort of some continuous monitoring using sort of connected devices like connected glucose meters, connected heart rate monitors within your Apple watch or like all that there. That sort of integrates with telemedicine, and basically the doctors, they have that continuous stream of data. It may not be as accurate as the stuff that you can get within sort of a medical setting. But you have sort of that continuous stream of data, which can really give you a much wider picture than what you would be getting from a single visit. Like you look at sort of the data from an Apple Watch, for example, like it can detect diseases that you may not have even been aware of to know to go into a doctor’s office. So that really shifts the equation from more of an acute care model to more of a preventive model. And what that creates is a better, more cost effective health care system that produces better outcomes.
Simon Erickson 10:49
That makes a lot of sense. We’ve talked a lot about technology and healthcare over the years. Several years back, America pushed past the HITECH Act, which was really kind of more focused to hospitals where they were trying to get them to adopt technology. It seems that to your point about COVID accelerating this trend, we’ve now got an opportunity to introduce technology to the consumers, to the patients themselves, and let them to start adopted. Richard, you actually at the end of 2019, pick Livongo as your top stock pick for 2020. First of all, congratulations. Fantastic return that that companies had this year. Excellent choice. They got acquired by Teladoc, as we all know, just a couple of months ago. How do you view this combined company? You know, Livango, as you were mentioning just a minute ago, was kind of more preventative? It was a hardware device that’s actually continually monitoring. And that seems to be a little bit more proactive than Teladoc, which was before just using kind of virtual health visits. Do you think these two companies are going to be really a lot stronger together? Or is this like acquisitions can be tough to swallow?
Richard Chu 11:49
Yeah, so I think like, so far, definitely, I’ve been really bullish on the merger of increasing my position. It’s now a significant portion of my portfolio. And I think that the market sort of hasn’t been as appreciative of the merger. I think there are two main reasons for that. First, basically, is the merger overhang. Like a lot of people have been sort of concerned about the fact that Teladoc may be buying their growth. They’ve made like 12 acquisitions over the past eight years. And the Livongo merger is by far their biggest one. It came out of a very, very costly price. And a lot of people have said that, hey, like Teledoc has run out of growth opportunities. So that’s why they’ve been forced to pay up for Livongo And the second reason being that COVID really is going to go away soon with the vaccine and potentially see like a big drop in visits. So I think on the second point, I’ve already explained how I see it as more of a durable trend. Combined with the fact that again, Teladoc gets like, like 75-80% of its revenues from subscription. So visit fees that don’t, that doesn’t like really affect their revenue as much as someone like AmWell. But then you look at sort of the the first point and I think that the synergies from the acquisition are definitely going to be really game changing. Teladoc is launching virtual primary care next year. And what that basically is, is they can sort of integrate their full suite of services to really sort of help sort of the 25% of Americans who don’t have a primary care doctor. When you think about what kinds of opportunities that provides, it provides really an end to end virtual experience, where you first see your doctors through Teladoc for your annual primary care visit, they prescribe you maybe Livongo. If you have diabetes, track you year round, bring you in only if you really need it – only if the data shows that you need it, and then pair you up with Teladoc therapists, Teladoc nutritionists, like their entire suite of multidisciplinary care team. And they work together to really form a really holistic view of your health. It’s breaking down all those preexisting silos in health care that were preventing better outcomes, and only adding to the costs. And I think that is sort of a model that health plans and employers will really appreciate. And they will sort of embrace virtual primary care in the future and Teladoc can potentially even share in those savings with like new value based care models. On the other hand, with their virtual primary care offering, it’s like, incredible. Like 95%, like plus 95. net promoter score. So I’m really bullish on that opportunity. And I think that the market will soon sort of come around once they sort of see it.
Simon Erickson 14:55
A net promoter score of 95 is incredibly high by the way. NPS can run from negative 102 to plus 100. What Richard saying is very well received by the patients that are using it. Okay, great. So Teladoc, sounds like you think there’s still plenty of room to run after this acquisition. Let’s talk about another company on your list for digital health care, because somewhere else we’re spending a lot of money on is prescription drugs. And there’s a company that you liked called Good RX. Tell me a little bit about this one.
Richard Chu 15:20
So like, basically, I think that to summarize the theme behind Good RX, the theme behind Teladoc, as you mentioned, is the fact that healthcare these days is so expensive, right? Like you mentioned that $4 trillion, 25% of that is considered waste. And what Teladoc is doing is they’re sort of changing the entire underlying infrastructure behind health care fundamentally from like more of acute care perspective to more of a preventive model. And what you’re looking at with Good RX is they’re helping patients to make sense of healthcare today. And like, these days like 70% of consumers don’t even realize that the prices between of drugs between different pharmacies, even like a block away, can vary dramatically, like upwards of like hundreds of percent. And what Good RX does is they have a multifaceted platform, but their primary objective is to really help consumers access affordable health care. So they do that through their primary prescription tool, prescription comparison tool, which really allows consumers to go onto the website and compare drug prices across a variety of different pharmacies in their local area, bring the good RX app, the coupon on the app, or they can have a savings card. From there, they can get up to 90% discounts on almost all drugs across almost all pharmacies in the country. So that’s their primary platform. In terms of technicalities of how that works, I’ve written sort of a direct article. And they also do telehealth. So what telehealth is, is basically like, they have like a marketplace, and they have their own pay doctor platform. So in terms of their marketplace, again, they aggregate all of the different telemedicine providers, and they allow consumers to have sort of the increased transparency to really see how much these different options cost and go from there. What they’re doing as a whole as you can see, it’s really empowering sort of the consumers to really have the tools in order to get the best deal for themselves. Like, I’d say like healthcare itself is a very weird industry becuase when you look at prescriptions, especially like, it doesn’t operate like a free market. The fact is, and I get into this more in the article, the fact is, is that sort of the PBM’s, like, they obviously want to benefit from the spread. So like, what they do is they have these knockoffs, which are the prices that is set for each drug. And they give like a different list to the pharmacies. They reimburse the pharmacies less than what they buy, then the price they charge to the actual insurers, and they benefit from that spread. So really, it’s not sort of a free market. What GoodRx does is by bringing that increased transparency, the consumers have the choice to be able to really find the best deals, and as a result, it will sort of bring down prices across the board.
Simon Erickson 18:52
I’m glad you mentioned the PBM’s. The Pharmacy Benefits Managers, because this is an incredibly complex – I might even call it a blackbox industry, that for so many decades, nobody had any idea what drug prices were. The PBM’s kind of sat between the drug makers and the pharmacies, and then they were getting paid by the insurers at the end of the day. It was tricky. It was very complex on how all of this was taking place. Can you tell me a little bit about how Good Rx is actually making money? How are they monetized? I can see how this is very good for consumers at the end of the day, because they’re saving money, there’s more transparency into the drug pricing. How are they actually getting paid?
Richard Chu 19:25
Sure. So um, basically, what Good Rx does is the aggregate the prices across all the different PBM’s. The PBM’s see and negotiate their in network cash prices with all the different pharmacies under their networks. What their incentive is, is that because they want to access the increased volume from Good Rx, like Good Rx, if you guys don’t know, it’s the second most popular medical app on the App Store. It has 4.9 million monthly active users. That’s huge. They want to access that demand because it basically like it’s an incremental source of margin. It doesn’t come as any cost to them. They want to maximize the price of that they negotiate. So they partner with GoodRx, and GoodRx then allows different PBM’s to compete against each other to access GoodRx’s user base. Like I may have the best price for this drug, while you may have the best price for the other drug. So GoodRx customers get the best prices across the board. That’s also another reason why I don’t really see Amazon really competing with them in terms of prices in the near term, because Amazon only partners with one PBM, Express Scripts. So GoodRx has the advantage here by being independent. PBM’s also don’t want to work with Amazon, because they have their own pharmacy. They’re pushing their own sort of mail order pharmacy. So what GoodRx does is they argue those prices, and for every time a consumer goes to a pharmacy, the pharmacy charges sort of a transaction cost per drug. So half of that goes to the PBM. The other half goes to GoodRx, so they make money off of each prescription. The cool thing about that is that, like 80% is repeat activity. So like 80% of that prescription revenue is repeat. So it’s kind of that very predictable recurring revenue. Sort of a SaaS model. And really sort of the reason behind that is because like, it’s really safe. The coupons are safe, so that consumers don’t have to like show their coupon every single time that goes to the pharmacy. It actually produces repeat foot traffic to the pharmacy so the pharmacy can benefit from that as well.
Simon Erickson 21:56
Sounds good. Yeah. Yeah, great data advantage. I mean, so much information going is I can see the appeal immediately for something like this. Okay, great! GoodRx. You know, let’s move to the third company that you’re watching in this space. This is what was new to me, Richard. This is one that was definitely not on my radar before. I believe it’s pronounced Huami. HMI is the name of the ticker for this company making wearable devices in China. Tell me a little bit about this one?
Richard Chu 22:19
Sure. So um, this idea I got recently from Subid’s Cap on Twitter. And what it basically is, is that it’s sort of a smartwatch maker in China. They accounted for around mid 20s percentage in terms of the shipments of the total smartwatches in 2019. So they account for almost a quarter of global shipments of smartwatches, yet very few people have heard of them. When you look at sort of the future of preventive health, like as I mentioned, I’m very bullish on remote monitoring and Livongo again. It produces the devices that Teladoc physicians can track patients by, but outside of the glucose meters, like outside of the devices specified for people with chronic conditions. Regular people can be monitored too. So when you look at sort of a smartwatch, like I think that a lot of people are missing the fact that a lot of people think that hey, a smartwatch is disruptive to what? Is it disruptive to the traditional watch industry? I don’t think so. Is a smartwatch just an extension of the smartphone? I don’t think that’s it either. Really sort of the potential with a smartwatch is that it can track it like (inaudible.) Like it really enables this idea of like hospital in the home. Like you can have your smartwatch track, an increasing amount of metrics, like you look at Apple’s EKG center, you look at their new blood oxygen sensor. There’s been studies that have proven that smartwatches can detect COVID before you have symptoms. So that’s one example of the fact that smartwatches can have these – it generates a huge, huge amount of health data. We aren’t even close to being able to mine that. And what Huami is, is it’s a play on that health data. So like they have all this (info) they’re collecting, like they have all of these cheap devices, they’re sort of one of the leaders within sort of the low cost segment of smartwatches. And they’re sort of the leader in that they have this huge amount of data. They partner with Xiaomi. And they have this huge amount of data, data they’re collecting. And like all the sensors on each of these different watches, like they’re all standardized, like they’re all at the same quality. Doesn’t matter if you have a $30 watch. Does not if you have a $200 watch. The founder has this vision to really collect all that data, and then sort of partner with these insurers, with these employers, and they have like their own sort of PAI health, which is their own sort of digital health sort of guide, which gives consumers a score of a out of 100 to tell you, where sort of their health is, based on the quality of their heart rate data. So it really sort of nudges consumers to better health, and that can really improve sort of the outcomes by shifting us against that sort of preventative health care model. Like you look at Singapore, they’re partnered currently with Apple to give Apple Watches to people and people can earn rewards by achieving certain metrics on your Apple Watch that’s keeping people healthy. And that is going to reduce the burden of the healthcare system as a whole.
Simon Erickson 26:02
When we think about smart devices, or wearable devices, a Fitbit immediately comes to mind in the United States. A very difficult investment. It was always kind of stuck as just a hardware provider. But it sounds like Fitbit never really had those kind of close integrations with the insurers, with the hospitals, with the health care system itself. It sounds though, though, that Huami is, or does have those kind of relationships. Was that one of the key selling points for you on this investment?
Richard Chu 26:26
Yeah, I mean, it’s so important to note that it’s very, very early. They said that they don’t expect any sort of meaningful benefit or like revenue contribution in terms of this health services opportunity anytime soon. So they already have, like 20 plus partnerships with different academic institutions. They have a partnership with Prudential, Asia, which is this big insurer. And they have sort of their own sort of PAI health algorithm incorporated into their digital health app, and consumers can buy their watches directly from there. So in terms of that, like, that’s something that they’re doing, I really feel like their pace of innovation is extraordinary. And that’s something that I want to bet on. I also think that’s great that they’re profitable already. That’s something that Fitbit still doesn’t have. You’re also looking at the fact that, again, you’re sort of building out these recurring revenue models, and they have sort of this greater vision which they’ve been great at executing at. And I feel like that’s sort of a differentiator here, but again, they need to be more than what they are today. Which is just sort of a commoditized hardware manufacturer in order to be in order to be a successful investment.
Simon Erickson 27:48
Yeah, great. Thanks very much, Richard. So three ideas that Richard has there within digital healthcare: Teladoc $TDOC, GoodRx $GDRX Huami $HMI. Richard, while I have you on the show here with 7investing you know I’ve got to ask you about cloud computing and about enterprise software. Again, another area that I know that you focus pretty closely on. I’m a big fan of your research in that place. I have more targeted questions on this on. These are kind of some of the stories we’ve seen in 2020, that I’d really like to hear your opinion on. Are you ready to jump into Cloud Computing and Enterprise Software?
Richard Chu 28:20
Simon Erickson 28:21
Okay, okay. But the first one that I wanted to set you up with on this one was Alteryx. Because Alteryx is not technically a SaaS company, but this is a company that’s really trying to embrace-I think they’re calling them citizen data scientists. So it’s making it low code, very easy for people to use things like artificial intelligence, and jump into the data that these companies have. We saw Alteryx a couple of months ago in August give up a third of its market cap on week guidance. It said that, you know, a lot of people were seeing longer sales cycles and smaller deal sizes. Of course, the market just cut this one by a third really quickly. Do you have thoughts on Alteryx as a long term investment? Is this short sighted or is there still the long term thesis intact?
Richard Chu 29:04
Sure. So I think it’s important to note that I personally have sold out of Alteryx recently, and I’d say it’s really, really hard to tell if they will get back on track. Like I think it’s easy right now to say that, hey, a pandemic has slowed them down. They reported, like 25% growth last quarter. They’re guiding for around like negative 4% growth next quarter. And they expect a year over year decline in revenue in 2021. Last quarter again, despite the fact that they reported like 25% growth, which is a real acceleration. They did report the lowest customer growth since 2017. And that is sort of a point of concern. When places everything else like I think that a lot of sort of the volatility has come from the fact that, and people have noted that is the fact that they weren’t really communicative of sort of the impact that 606 accounting had on their revenue. So basically, for on premise software, they have to recognize like 35 to 40% of your total contract value upfront. And after COVID, like what happened that resulted in shorter contract durations. And Alteryx wasn’t exactly a top priority for many of these organizations. So you really saw a very, very steep drop in revenue, and when you look at sort of the AR front, that picture is a little bit brighter. They reported like 40% growth last quarter, and they’re guiding for at least 30% in 2021. And management has indicated that this is a better way to measure the business. But I think sort of, that’s not my main issue. My main issue was basically with the fact that I feel that the company is is a less better position today than it was before COVID. And first of all, like, I’d say that what really got me was the fact that the CEO transition from Dean to Mark Anderson, I like it didn’t really feel that was well handled. It seemed like Dean was even ousted, almost. And, like, he’s been running the company for over 20 years. He’s the founder. And he recently announced like, all these different new initiatives like Analytic Process Automation. And that’s a huge initiative. He’s been saying how Alteryx has innovated the most in the past couple of months than they have ever before in its life. And now, when you’re looking back and asking how is this new CEO, Mark Anderson going to take that vision and sort of carry that torch forward? I don’t know if he can. And it seemed, in retrospect, that this was more of a defensive move, if anything seemed that they were falling behind the curve. The fact that they chose to remain on premise as opposed to embrace the cloud. I feel like another part is really, when you look at sort of the wider environment now that snowflake is public, we know a lot more about how fast it’s growing. And when you look at Snowflake, like, I think the vision with Alteryx is that, hey, like data is going to continue to remain in silos. But now when you have these centralized data lakes, what does that mean for Alteryx? Is place like, Is it going to get this intermediary? So if you look at Designer, like it allows users to sort of loads clean, prep and blend data together, and then sort of analyze it, apply machine learning, create visualizations. Snowflake takes a chunk out of that lake? What place left is there for Alteryx? Is it just like, it’s just going to be handling sort of the allakes almost. So I think that definitely Alteryx has tried to partner with Snowflake, but I don’t think that they have a partnership yet. I just see Snowflake as being better positioned on the value chain. So that’s another point that really sort of scared me away. I think that overall the investment could turn out successful. They could definitely have, again, that reacceleration 2021. I feel like the comps right now they’re quite favorable. And if they can really accelerate their contracts, and the customer growth, then they could very well again see that impact of very, very fast revenue acceleration.
Simon Erickson 33:48
I think that’s some great insight there, especially when you see that everyone is kind of saying the same thing in their conference calls. Oh, it’s COVID. Oh, the deals are smaller. Oh, you know, it’s harder to close. But then you see the reality of kind of the must haves and the nice to haves that CIOs or decision makers are having to be faced with right now. Some companies are really growing quickly, even in the time of COVID and others are, are decreasing in the revenue contribution. So interesting points about about Alteryx there. When asked about another one, Richard, Agora out in China. Ticker on this is API. It’s been called by a lot of people to Twilio of China. I know you don’t really like that description so much. But tell me a little bit about kind of what this company is doing.
Richard Chu 34:28
Sure. So on what Agora is that, again, like I like I feel like you could like with the knowledge of Twilio you could also understand, of course, because again, like it’s that idea of programmable video. And that’s a component of what Twilio does as well, but I think like what really differentiates Agora is the fact that they are really focused on live streaming. They’re focused on sort of bigger audience sizes like Twilio, it’s mainly for group chats like it’s up to 50 people, whereas with Agora, you can have around like 15 to like 18 or something hosts, and you can have up to a million audience members. So that’s something that really differentiates them. They have their own sort of specialized edge network, which is which which they call, like, like, again, like a network of 250 points of presence all over the globe with their software defined real time network layered on top. And that allows them to really sort of improve latency, improve video quality, and sort of deliver that superior customer experience, then someone with fewer points of presence. Like you look at Twilio, but I they’ve done sort of, like, pretty well so far in terms of revenue growth, but definitely, they took sort of a big deceleration last quarter in terms of their revenue growth and gross margins, which is quite concerning. Along with the fact that Zoom recently announced a programmable video product where they’re allowing Google to have their own customizable software development kit, and Twilio is again moving more and more into video. So right now, even though they don’t have sort of the same capability as Agora in terms of live streaming, I feel that, again, like technology isn’t a moat, and Agora will need to compete more favorable in order to retain sort of their value in the future. I feel like they need something else to differentiate them. And I’m not really confident that they really sort of have that yet.
Simon Erickson 36:47
So not super bullish on Agora. There’s an opportunity for live streaming and video in China. But still, there’s some question marks it sounds like you have about this company
Richard Chu 36:54
Yeah, it’s it’s a huge opportunity. With live stream shopping, like you look at the fact that Shopify recently announced like they’re a partner of Tech Talk even. It’s a huge opportunity. But so far, the results haven’t come down to their financials yet. I was sort of disappointed to see sort of the pace of revenue deceleration. And they mentioned that their biggest opportunity isn’t education. They don’t have that many live streaming customers. I mean, that livestream e-commerce customers. So it’s still sort of a question mark on me with that investment.
Simon Erickson 37:39
That’s an interesting segue for the next topic that I want to get into because Agora was found in 2013, out in Silicon Valley by Tony Zhao, who also worked at WebEx with Eric Yuan, who went on to, you know, found Zoom (and) has been very successful with that. But you know, I’ve seen some of your analysis, kind of suggesting there might be a decoupling or debundling of Zoom, where these companies that kind of go out and they say, okay, we’re an opportunity for any industry out there. But then you’ve got kind of things like Agora that are allowing industry specific verticals to pop up that are specific for certain spaces. You mentioned education. I know another one is gaming. Gaming is really big on livestreaming right now. The relationship between a company like Agora and something like Zoom is certainly interesting, and one to keep an eye on. So Zoom is my next topic I guess I wanted to ask you about Richard, because zoom stock is up over 500% in 2020. It’s generally recognized as the poster child of the work from home COVID beneficiary out there. But again, I mean, we’ve kind of seen Zoom grow so quickly, and it seems like there might be other competitors that are at least interested in this space. Do you think that Zoom’s momentum that they’re on right now can continue?
Richard Chu 38:48
Yeah, so with Zoom, I feel like, of course, like their Q2 was amazing in terms of the acceleration there. Q3, it saw more of a of a sequential slowdown. And I feel like sort of the main components of the thesis, again, is the fact that because of the fact that in the beginning, they didn’t really have switching costs, they didn’t have much of a moat in terms of that, which allowed them to go viral very, very quickly. Because it was so quickly to – it was so easy to just install. And once sort of COVID hit, it was sort of the go to solution for both enterprises and consumers, which was really interesting to see. Now, like, is it sustainable is the question and I think that mainly, it’s great to see the fact that they’re taking advantage of their network effects because I don’t feel like network effects in themselves without sort of switching costs as well aren’t much of a moat because if a new solution that’s a a better technology comes along like those can reverse really quickly. Can Zoom maintain that technical advantage? I don’t know if they can for the next like 10 years. Even though Big Tech has historically not done so well in this category, could they eventually sort of match Zoom’s capability? Maybe. It’s quite possible. So what really excited me was the fact that they were sort of branching to become more of a platform play. And that was seen with on Zoom, which is their events marketplace. And the fact that they opened up their platform to be sort of a customizable SDK. And I feel like, Zoom Phone is also another big driver. And I feel like really, sort of, it’s those opportunities that will really push them into that next leg of growth. But again, like sort of last conference call, even though the numbers were great on the surface, like it was kind of disappointing that they mentioned that they don’t expect to be a material revenue driver in 2021. It also take time for Zoom Phone to really take off as well, it’s not going to be driving top line anytime soon. So again, it’s really really hard at this point to predict where the revenue growth will clock in at next year. Some people have said negative growth, some people have said upwards of 50% growth. So I feel like a lot of it still depends on how like, like, like the overall macro works from home trend. So in terms of data, like there’s been like, recently, like some great articles, like not boring wrote, like, good one recently, and in that he really talks about how work from home is not going to go away quickly. Because it’s not sort of a dichotomy between, you know, like, you either spend, like 100% of time on zoom, or you spend half your time in VR, in the office, companies are going to be forced to up to like, really offer that opportunity in the future, to work from home if you choose. And that opens up a new opportunity in terms of not only increased adoption of zoom, but like also you can look at people leaning around to like different countries, more travel in terms of like going to like these places, these all these different locales to work. And I feel like that could definitely benefit the staying power of zoom. But it’s not like a company that I would sort of bet all my horses on right now. Like, like, I still feel like they do well, like I still feel like work from home. It’s has staying power. And it’s not, like like that on off shift that people think that the vaccine is gonna make it out to be but I really like I’m still need to see, I guess more evidence of that playing out.
Simon Erickson 42:52
It’s the land and expand software model, right. It’s amazing what they’ve accomplished this year, they got a lot of users on the platform. Now it’s that expand like you were saying the staying cost, the switching costs, the new zoom phone, the software development kit, whatever it is the platform to build things on top of it, to see if they’ve really got legs behind this. Yep. Yeah, great, Richard. Well, you know, just to wrap this all up, our mission here at seven investing is to empower others to be more involved with investing. I know, that’s something you’re very passionate about, as well. And so kind of just an open ended. Final question for you is, if you’re new to investing, or you know, you’re trying to learn about the stock market, and how all this works, you have a couple ideas or tips for people that are that are starting to figure out this whole crazy thing called the stock market.
Richard Chu 43:34
Yeah, so I’d say like, people should definitely read as much as possible. Like, I feel like, it’s super, super important to really open your mind to all these different perspectives. You don’t really have to lock yourself in. I feel like, sort of a mistake that maybe a lot of investors make is the fact that they like read one guy like that, like they maybe have first exposure to Warren Buffett. And they sort of embrace Warren Buffett’s philosophy without sort of considering all the other ways to invest. Like everyone has different – you should definitely read Buffett, of course, you should definitely read Phil Fisher, you should definitely read Peter Lynch. One book I recently recommended was Seven Powers, and that really talks about competitive advantages. So you should read that too. Like there’s also a ton of great fund managers to follow. I feel like Joe, of course, I work for him, but even if I didn’t, I feel like he’s one of the best investors and Matt, (with) his philosophy really resonates with me. So Joe at Saga Partners. There’s also a bunch of other great resources like of course, like some of the investing you guys provide, it doesn’t cost that much per month either. So like I feel like readers, listeners,f you haven’t subscribed to 7investing it’s definitely a great resource. Their write ups (and) sorts of ideas are really helpful for new investors. And, like, there’s also like some other sort of great resources on Twitter, like, I have my own sort of growth investing resource list, which is my pin tweet. So definitely go and check that out as well. But yeah, just make sure that you have sort of the open perspective, like, I’m really like a fan of having this multidisciplinary approach to investing. There’s this book that I was reading recently called Range. And that book, it basically talks about the importance of having sort of a multidisciplinary approach, and the ability to, like, think, and connect the dots across like different, different sectors. So like, with closed source environments, like chess, like, you know, like, you make a move, and you immediately get feedback, but it’s different ininvesting. In investing, you could get lucky for like, a long time, and you think that your investing strategy is right for a long time. But you really need to bring sort of that holistic approach. (What) personally helped me to, like, have that background in history, how’s that background technology, how that background in accounting and finance, how’s the background in marketing, that background in psychology even to determine having that temperament. So bring all those together. I feel like you’re really makes you to be a better investor because it allows you to think in a different way than most other market participants would. So definitely absorb as much as possible, read as much as possible.
Simon Erickson 46:40
Well, if I can summarize that, Richard by saying stay hungry, read and absorb as much as possible and keep a holistic and open mind. That’s probably a good start for getting investing. Well, great. Thanks very much again to Richard Chu, our guest this afternoon. He is an investment analyst at Saga Partners and Luca Capital, joining me from Toronto. Richard, it was really great chatting with you. Thanks for joining me at 7investing.
Richard Chu 47:00
Thanks for having me, Simon.
Simon Erickson 47:02
And it’s our mission here at 7investing to empower you to invest in your future. Thanks for tuning in. We’ll see you next time.
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