Investing in Secular Trends and Fundamentals With Dillon Valdez - 7investing

Investing in Secular Trends and Fundamentals With Dillon Valdez

April 19, 2022

– By Simon Erickson

The stock market is filled with noise these days. Whether it is the obsession with meme-stocks, the focus on momentum-based swing trading, or the hype cycle driving valuations up to ridiculous levels, there are a lot of speculative (and potentially problematic) factors that are influencing investment decisions.

Our podcast guest today is someone who’s helping to cut through that noise and help investors focus on the more important signals. Dillon Valdez (@BluSuitDillon on Twitter) in an individual investor who’s searching for the business world’s most important developing trends, then digging into fundamentals to uncover the companies who will most profitably benefit from them.

In this exclusive interview, Dillon chats with 7investing CEO Simon Erickson about the specific things on a company’s financial statements he looks for in his investing process. He describes why full-stack monitoring and international e-commerce are two secular trends that investors should be aware of, and why Datadog (Nasdaq: DDOG), DLocal (Nasdaq: DLO), and Global-e (Nasdaq: GLBE) are three companies of particular interest to him.

Publicly-traded companies mentioned in this interview include Datadog, DLocal, Ford, Global-e, MercadoLibre, SentinelOne, and Snowflake. 7investing’s advisors or its guests may have positions in the companies mentioned.

Transcript

Simon Erickson  00:00

Hello, everyone, and welcome to today’s episode of our 7investing Podcast. I’m 7investing founder and CEO Simon Erickson. And our mission at 7investing is to empower you to invest in your future.  There are a lot of headlines going on out there right now there’s a lot of doom and gloom in the market just today we saw that inflation is at a 40 year high. There’s a lot that’s probably going through your investing mind. But perhaps it’s a great time today to look back at fundamentals.  There’s some stability that can cure this rocking ship. And it’s called looking at the actual performance of companies, looking at their financial statements and make long term objective decisions based upon that.  As such, I’m really excited to welcome Dillon Valdez to our program today. He’s our guest, he’s an individual investor, does medical sales as a full time job, but he’s really, really embraced investing, especially from a long term perspective, in addition, as a great supplement to the income that he’s got Dillon , hey, thanks for joining me on the 7investing podcast this afternoon.

 

Dillon Valdez  00:57

Hey, Simon, thanks for having me here today. Really, it’s a big honor to be a part of your podcast.

 

Simon Erickson  01:01

Well, Dillon, we’re gonna jump into the financial statement piece in a little bit, and kind of things that you look for when you’re sizing up a company and making investment decisions.  And even later on, we’re gonna talk about a couple of stocks that you actually are very interested in. But maybe it’s best to kind of frame this. Can you tell me a little bit about your background and kind of the approach that you take to investing? Yeah, I

 

Dillon Valdez  01:20

Yeah, I really liked this. i Yeah. So when you think about me, right, I don’t know exactly how I ended up getting the following I did. Truthfully, I think I just really liked to post about stocks. But I am an independent investor, right. And I do have a business background.  So I’ve always been a lot more focused on the business and the business fundamentals even before I was even a stock picker in itself. So brief background, right. So I have a business management degree. So I have a BS. I’m not an MBA, I’m not a PhD or anything like that.  But I ended up joining or I ended up being a part of a company called Gartner where I really learned a lot about ticker symbol $IT. So where I really learned a lot about the business and the business function because of how our sales process was. And that’s really what laid the framework, it’s always weird that you look back and the dots always connect. But that’s where I ended up receiving my framework for how the business operates, and the importance of cash within that business model. So and then over time, I know that I ended up finding a passion for both software and medical sales, but medical sales, I believe it’s a better fit. But that’s when I ended up encountering the opportunity here, right, where you start getting a little bit more of disposable income. So you start asking yourself, what am I going to do with it? So I think that this is really, really important. And that thing that a lot of millennials ask themselves, today, right? So if they do have 200-300 extra dollars, what are they going to do? Are they going to buy a new truck? Are they going to buy a new vehicle? Are they going to buy a new couch? Are they going to finance this or finance that? Or are they going to try to invest into the future, and a lot of us, we don’t necessarily have that same opportunity to put it into a savings account to buy government bonds, because even after the bonds have been, quote, unquote, selling off, right, but the yields have gone up, it’s still going to be below inflation expectations. So for us as investors, we have to think to ourselves, what are the assets that we can actually invest into? And not just speculate? And for me, I really find two different avenues for that. And that’s going to be real estate and stock picking. Majority of investors could realistically put their money into the s&p 500 and do very well, because historically, the s&p 500 has been an inflation hedge.  But for me, I know that because of the business background, and because of how I focus so strongly on the financial statements, and really get that full picture of the business model, through the financial statements, that I can really pick stocks effectively. And I do think that especially within today, right, so we ended up I think, I think the NASDAQ is down 15% year to date, it’s probably gonna hit 20% again.  And I believe that a lot of investors are asking themselves, like, which companies can I actually pick that are going to go back up long term, right. And that’s really where you find so much clarity in these financial statements and running through them effectively, to actually get that picture that you’re looking for in the business and build that conviction. And it really has all sorts. It really has everything to do with cash and cash flow. So that’s what I’m really excited to talk about here today.

 

Simon Erickson  04:33

Absolutely. Well, Dillon, let’s let’s jump into that in a minute. Just a reminder that anyone that does want to follow Dillon, you know, he posts quite a bit on stocks. That’s actually how I found him was on Twitter. He’s @BluSuitDillon and I encourage everybody to follow him. He’s posted some fantastic things for several years now. And that’s kind of how I’ve met with you in the first place, Dillon.  Speaking of Gartner. Gartner also takes a very realistic approach to speculation and the Stock market, right? A lot of people might be familiar already with the hype cycle that gets published all the time. There’s more to investing in stocks and just kind of seeing something that’s exciting. It has a lot of momentum.  I think a lot of times retail investors follow that. But there’s definitely an underlying business in any company that you’re buying into. A new mission, financial statements, and cash and cash flows is a great way to objectively evaluate that. Tell me a little bit about how you look at financial statements and how that influences your investing process?

 

Dillon Valdez  05:31

Well, it really comes down to when you make things really simple. So you ask yourself, why do stocks go up in the stock market? And why do we always see those little tick upwards and tick downwards? And really, in my opinion, this is just the theory that I have, and I think that we can probably agree on this, that all stocks move based upon future earnings expectations. So if that’s going to be the realistic thing that pushes the American stock market up intrinsically over time, then we must be asking ourselves, what are the things that we’re going to be looking at that support the thesis of earnings growth over time, and that’s with both the s&p 500 on a macro perspective, and then even on a micro perspective, the individual businesses that we actually ended up picking.  So during periods of really turbulent times in the macro environment like today, when you have inflation, and when you have recession fears, and you have war, and you have all sorts of macro economic instability factors that could potentially impact the future earnings, and the earnings expectations of these businesses, you have to narrow down and focus on a couple of key details to these businesses. Number one, are they recession proof? You start asking yourself what’s the durability of the business model, and that’s where I really find a lot of those software stocks that do have those. They do have contracts, and they have typically have like 1, 2, 3, 4, and even 5 year contracts, like Datadog (NASDAQ: DDOG).  So they end up actually giving these contracts to their customers. Their customers are required by law to pay these, which creates a stickiness to the business. And then when you really narrow things down specifically, remember, the overall objective here is to find a company that has earnings, or has a high likelihood of future earnings within the very near future, at the very least, right? Otherwise, you start becoming too speculative.  So when you really look at that income statement, there’s a couple key things to really look for specifically like that gross margin, the operating margin, and even EBITDA, right? And you ask yourself, like what are those actually mean? Well, if you take a look at just that, like every dollar a business spends, if they have like a 70%, or 80%, gross margin, that’s like them keeping 70 or 80 cents of every single dollar that they make.  And then I like to think of it as like a rule of thumb that the company is better the furthermore you can go down the balance sheet and start valuing the business based upon that income statement. Right. So you got gross profit margin, and then you have operating margin. And then you even have something like EBITDA.  And EBITDA and operating margin are relatively similar. But there’s all sorts of different tax deductions. I feel like I can talk about this forever, right. But the the objective of this is to really find a company that can produce earnings effectively, or is at least trending towards it.  So I think one company I can talk about specifically is going to be Sentinel One (NYSE: S) I own that stock, but they’re currently unprofitable. And a lot of people would say, well, Dillon, why would you own that stock? And that has everything to do with the fact that they’re actually within two years of breakeven as far as the operating cash flow goes. So when you use the income statement with the cash flow statement, this is typically when you can reconcile both of them. So you can take a look at their operating margin. But then if you look over the cash flow statement, if they have a positive operating cash flow, that essentially means that they’re trying to reduce the amount of realized, quote unquote, income to write that off in taxes, so they don’t have to pay taxes on that income. So that business is operating profitably. But you got to look at those cash flow statements to justify that investment thesis. So every single stock I have is they have operating cash flow breakeven or positive, or are projected to at least. So when you take a look at Sentinel One, they don’t have positive operating margin, and they don’t have positive operating cash flow. But when you take a look at the trends, and how fast the trends are moving, you can actually see that they’re projected to be positive here, they’re trending towards EBITDA breakeven or positive very, very quickly, right and their gross margins expanding as well.  And then you can even take a look at a lot of other companies like Datadog or Dlocal (NASDAQ: DLO) or like Global-E (NASDAQ: GLBE), like, these are all hyper growth companies, but they don’t need to be speculative. So essentially, I really try to focus on these hyper growth companies that are growing profitably. And that really destroys any sort of thesis that you have towards these otherwise known as like value investors, right?  Where they are always saying like, Oh, you invest in the growth stocks, because you should be thinking to yourself, like, hey, are they operating profitably? Are they not operating profitably, but they are. So they actually have, it’s called non GAAP. So non generally accepted accounting principle, they have earnings, and they’re growing 50, 60, 70, 80, 90% a year. And even an economic slowdown, like Datadog is still projected to grow over 50% this year. Dlocal is projected to grow well over 50% this year. Global-E is expected to grow 70% This year, and all three of those, and then you got other companies like Zscaler (NASDAQ: ZS). And then you have, like Silvergate Capital, and it’s also expected to grow. And I mean, like the list goes on and on about all these stocks that I do own and every single one of them are operating profitably with over 50% growth in an economic slowdown. So let me circle this back here, when it comes down to the stock picking process. When you look at companies like when you look at the macro environment, it can be cloudy, and it’s very cloudy right now. And it’s raining outside. And this is very difficult for a lot of retail investors and a lot of individual investors to really focus on the idea and the objective of long term investing.  And they don’t know, they’re, they don’t always know what good looks like, like, what are we actually supposed to do. But there’s businesses that are out there. And that’s essentially what I focus all my all my research on. There’s businesses, there’s individual businesses out there that are still growing despite the macroeconomic environment, and they’re growing profitably as well. These are superior businesses, superior business models, and then their their management teams are operating these companies extraordinarily efficient. There’s a

 

Simon Erickson  12:03

ton of great points in that I want to make sure that I just double back and circle a couple of them that you made there, Dillon, that, you know, we’ve been in, basically a 14 year bull market, right, and it’s made a lot of companies look to it, you kind of have to go back to 2008, the last time that we had a serious recession in this country, to really see what tested companies, but now we’re getting hit, we’re getting slammed pretty hard, you know, 2021, and 2022, has certainly taken a toll on a lot of those growth companies that were getting a lot of love from the market in the middle of when times were fantastic. And now it’s kind of a testament, you know, the judgment day for a lot of them of who can endure. And I think that the points that you make, which is who is recession proof, who’s got these these sticky contracts that are long term with their customers, and who’s growing profitably, not just top line revenue growth, but who’s showing the operating margins, the EBIT, does, even in the last quarter, or two or three quarters, that’s kind of built to to to endure, you know, the tough times like this, is that a fair recap of kind of your, your strategy and the specific metrics, you look for anything on the balance sheet to that you wanted to include, along with the cash flow statements or the income statements that you’re looking for?

 

Dillon Valdez  13:13

Absolutely. I think balance sheet is probably one of the most important things because so what I like to think about it as is that the balance sheet is the otherwise known as like health report of the business. So if you go to the doctor, and you get that physical, and then if doctor comes back and says, Well, guess what? Today, Simon, you have high blood pressure, right? And then you get all right, well, we invest in, right. But that’s essentially like the health report of the business. And it really gives you a good understanding of how durable is the business going to be during times of economic uncertainty. So there’s a couple businesses that I can really point out here, snowflake has an A plus plus plus balance sheet, they got like, I think it’s either 4 billion or $6 billion in cash, cash and cash equivalents. And zero debt. Right? That means that that company is so not only are they growing through this economic uncertainty, and they’re growing exponentially at like 80 or 90%. But they also have this really durable balance sheet that that they can realistically operate on. Like they don’t even need to grow and they’re going to be operating cashflow positive here pretty soon. But if there’s any sort of like economic turbulence, I like let’s say maybe growth comes in a little bit lower than expected, maybe interest rates go up to 6%. Snowflake is virtually unaffected by that in every way because they don’t need to raise any more capital, right? So like when you find those companies finding a company that has a strong cash position. Remember, it’s all about the cash in the business, right? Strong cash position, and then low debt position. Now, there is a difference between current debt and long term debt. current debt usually needs to be repaid within 12 months and could put potentially be a little bit more higher interest, or long term debt that can be. That’s like the perfect thing that retail investors use is this long term debt, which typically has a lower interest and can be used to buy assets, like otherwise no one has like property, or it could be commercial buildings or whatever it might end up being, it could even be like another business, and they could use debt to funnel that purchase to the business. But as long as the business is operating and growing profitably, then that would be an otherwise known as like good investment, right. But the number one thing that I hate about having companies with extreme amounts of debt, so like, there’s a couple balance sheets that I’ve looked at, like Ford is, and this is why I’m not a value investor is because I cannot, I have a difficult time looking at these balance sheets and justifying the investment thesis, when it looks like that they’re never ever, ever going to be free from debt in any way, shape, or form, that’s going to cut into the the returns that we end up getting as investors, right. And then even like data dog, I think that so they are incredibly profitable. They are a cash flow machine, like operating cash flow and free cash flow. So they’re just producing copious amounts of cash, but they still have that $700 billion in debt on their balance sheet. And that that typically is to me as an investor says, Okay, what I’d like to see is that to not get any worse than it is right now, I know you guys are operating really profitably right now, maybe pay some of that back. Because the way that I like to look at debt is that it’s a way for the business to borrow from themselves in the future. Just like for us as individuals, right, when we use a credit card, every time we swipe a credit card, and we actually cannot pay our credit card back within the next couple of days or a couple of weeks, whatever it might end up being, we’re borrowing from ourselves from the future. Well, when you start borrowing from yourself in the future, the more you borrow from yourself in the future, the worse it looks, right. And that’s the way that I like to look at debt, it doesn’t even matter. Because I know that even in corporate finance one on one, you can say as well, doesn’t matter because the cost of debt is cheap, especially when you can service it, and you got to pick between, you know, raising corporate equity, yeah, raising or selling equity or actually having this extracting debt because the cost of capital is going to whatever, right? It still looks the same to me because it you still have that GAAP earnings at the end of the day, right? You’re still affected by that interest rate. And you’re still going to be strapped later on down the road. So in times of economic uncertainty, just like how I ended up mentioning, like snowflake has a plus balance sheet. Palantir is the same way they got like two or $2.5 billion in cash, no debt. But when you see companies, they have large amounts of debt, like, I think a lot of the value companies have massive piles of debt, but when the interest rate goes up, and they’ve been buying back stocks, so essentially leveraging their balance sheet up, so they’ve been taking out long term debt to buy back stock. This doesn’t seem like sure Wall Street might like this. But as a long term investor, is this really where I want to put my capital, if I’m going to be investing for the next 510 15 years? What happens if this company like what happens if interest rates do start to go into like maybe the the secular bull market in bonds is done? Right? Maybe the structural changes end up happening in our economy enough to actually support higher interest rates for a sustainable period of time. You know, there’s all sorts of different factors that you can think to yourself, that debt probably isn’t going to be one of the best things. And I always look at that. And, you know, making sure the rule of like, my general rule here is that they got to have enough cash on their balance sheet in order to pay it off. And that’s, so I know that Mercado Libre is going to be one of the favorite ones out there. Right. And Mercado Libre, they’re profitable. They’re expected to grow earnings 100% year over year for the next two or three years. So that’s an amazing company, right. And I think that they’re projected for 30 or 40% growth over the next three years, but they still have a large pile of debt. And that’s a big reason why I don’t actually own them, I have own them. And I ended up having a quick little, it wasn’t meant to be a trade. But I just moved my capital, I bought it at 800 something dollars, and I sold it at 1200. And I allocated more capital to a lot more of my higher conviction stocks. But in that particular case, it’s a great company. It has everything that I’m looking for. It has a durable economic or it has a durable moat. They may be cyclically exposed to some economic risks to some not a lot, because they are just like the main player there. But they do have a little bit more debt than I’d like on their balance sheet. So that is essentially where I really make my a lot of investment thesis is, is that at the end of the day, the only thing that matters is is the business growing revenue. Is the business growing earnings. And is the business growing and managing their capital efficiently. You know, like are they generating cash, you know, because that’s the intrinsic value of the business. The intrinsic value of the business as defined by Warren Buffett is their expected future cash flows over time, like the discounted cash flow model. So that would be the intrinsic value, right. And that’s the way I really look at a lot of these businesses and make a lot of my investment choices.

 

Simon Erickson  20:12

We’ll chat about those investment choices in just a minute Dillon, just just to avoid overly simplifying this, but to kind of condense it down. It sounds like you’re really a fan of organic, profitable growth, stay away from financial shenanigans. And certainly you don’t want to invest in any company that’s got too much debt on the balance sheet. Fair, a fair assessment of your investing style, if not over simplified there.

 

Dillon Valdez  20:32

I think that you’re spot on.

 

Simon Erickson  20:35

Fair enough. Well, let’s talk about a couple of those companies. And we had three that we wanted to chat about a couple of them. We’ve kind of mentioned here a little bit earlier on the program. But the first one the move was data dog, that’s D, D. O G, for anyone who wants to follow that you called it a cash flow generating machine. Yeah. Tell me a little bit about what you like about this company.

 

Dillon Valdez  20:51

So this is it’s not just this company. It’s like a lot of the companies that I go through, and I pick, right, it really has a lot to do with cyclical and secular forces. Right. And I think that this is way too often overlook, overlooked. So it’s like, what is it a cyclical force in the economy? Well, this is something that is going to be prone to the economic booms and busts. So the way I like to look at it is that over time, there’s, there’s massive waves. And that’s exactly what they look like, is that there’s going to be cyclical waves where they’re a lot smaller, and timeframe. And they’re secular waves where there’s going to be a lot more, it’s essentially the market cycle, right? There’s a bunch of little market cycles. And then there’s one big market cycle called the credit cycle. Well, whenever I’m trying to look at these investment, my potential investments, so I’m looking at the ones that are grasping that secular growth, right, so like the ones that are the E commerce players, the ones that are going to be the software players, and in data dogs, and data, dogs niche, it’s going to actually be application monitoring for a lot of these companies. So essentially, what they do is they allow companies to monitor their applications, and even provide a security component to it. And then you can select them from there, you think to yourself, Okay, well, knowing what I know about the businesses and thinking about the tech stack. Do I think that a lot of these applications are going to grow over time? And what is the value behind that as well. And then you could even look at the Gartner Magic Quadrant to see where they fall in, in relation to their competitors. And then what really got me with data dog, so I knew data dog was a cash flow machine, I knew that it was growing really quick. But the only thing that really got me was actually on this latest earnings report. So all of their competitors like Dynatrace. And then I believe Splunk is another one of their big competitors. They actually showed a decline in revenue growth. But data dogs showed an acceleration. So this is you don’t always need to know. And this is what I think a lot of investors overcomplicate sometimes is like, and I see a lot of, you know, tech, technical people do this, where they really focus so much on the tech, right? They say the tech does this, and the tech does that. And I like the tech more. Therefore, I can build my investment thesis on top of that. But the thing is, is that at the end of the day, Tech is one component to the business model, right? You got sales, and you got marketing. So that means that so like snowflake, for example, has a mazing sales and marketing team, which is why they continue to grow. And data dog isn’t extraordinary. They just execute on all levels. They’re executing new products. So they’re they’re really doing great with the product product development. So they’re even developing new products over time. They’re selling their products efficiently, which is essentially creating this, this accelerated revenue growth and accelerated earnings growth and cash flow growth. So it’s like when you think to yourself, Okay, what do I like about data dog? I like the fact that they’re catching the secular growth trend of application monitoring, right, and cloud computing. And then why do I like it even more on top of that, because they got a great balance sheet, they have more cash and they do debt? I think they have like 1.1 or $1.2 billion of cash and then 700 or 800 million billion, no seven or $800 million, definitely have long term debt and very little current debt. And then they’re cashflow positive. I think that their cash flow margins like the free cash flow is like 24% or 22. Very high. Fantastic. Yes. Which basically means that you don’t even need to care about that debt, really, because it’s just like, it’s just a cash flow machine. So when you take all three of those components, like is it catching a secular growth trend? Yes. Does that secular growth trend? Is it prone to the cyclical economic booms and busts? Not really. Right. And then is it still? Do they have strong cash position? Yes. Are they growing? Yes. And how about their operating and free cash flow margins? And if all of those turned out really great, then it seems like that that would increase your odds of success when you’re stock picking.

 

Simon Erickson  24:55

Let’s talk about another one of those secular drop growth trends because you mentioned e commerce in there. That’s something that certainly catching on internationally. Dillon, you mentioned D, local and global E, which are both kind of tangential to this space, right?

 

Dillon Valdez  25:07

Yep. So I can actually talk about both of these interchangeably. And I’ll talk briefly about their business model and what makes them unique. And then even talk about like, the markets that they’re going after, and then briefly about their financial statements. So let’s talk about globally. So the growth story around this, what I think is, it’s actually one of my largest positions, and I really, really, like globally. So they’re an Israeli company. And they are they just came on everybody’s radar, I think that they IPO to like 24 or 25 bucks a share. They’re currently trading at about 30 or 31. Right now, obviously, because the growth stocks sell off. And what ended up happening when they when they IPO is that Shopify actually took a vested interest within globally, they originally purchased about 5%. But now they ended up I think that the exercise the options are not options, but a warrants to buy a larger portion of globally, and now they own about 10%. So roughly in that area, don’t quote me on exactly that. 10% It’s probably somewhere up there. That is black market. Yep. So global II, what they do specifically is remember once, like I mentioned data, dog, you think about the secular growth trend. And in this particular case, it’s international ecommerce, right? When you look forward, and you look future in your future, like what do you think that international e commerce is going to be a relevant theme moving forward for the next 510 15 years, and in this particular case, and both D local and global ease case? Cross Border ecommerce, because that’s exactly what both of them do. Right? So global E, what they actually do is they help out e commerce partners like Nike, or like Netflix and other vendors like that. And what they do is they actually close the gap on these borders. So, uh, so a player in the United States like Nike, like ended up mentioning before, there’s all sorts of complexities that they might end up having, if they want to sell to a different market, right. So if they wanted to sell to like France, or if they wanted to sell to Singapore, or if they wanted to sell to Japan, there’s a lot of complexities that go on into that, which include regulation, currency exchange, Marketing, Local language barriers, so they would have to hire out a whole different team, right. And that’s expensive for that company. Otherwise, the alternative to that is going to be global E. And they’re the dominant player in this space. So you can either partner with global E, or you can hire your own sales team to try to do these international ecommerce efforts. So global E, they’re actually helping out. And then you can even look at their customer testimonial stories. A lot of these customers, they’re having like well over 100% and 100% year over year revenue growth on an international basis. So international revenue growth. And then when you narrow it down, you know, they’re operating cashflow positive, I think that they have free cash flow and they’re growing 70%. And what makes it even a stronger thesis of mine? Is that that 10% ownership in Shopify, they are actually being given clients, Shopify is largest clients are transferring on over to the global ease platform. So this is going to be a growth engine for the next 123 years is Shopify as partners, just Shopify as partners, and then everybody else after that, so and then they’re just a tiny little company right now to like a $4 billion company, and then the local, so they’re gonna be a lot like, I think you pronounce the name adean. Is that does that sound right?

 

Simon Erickson  28:37

European? Yeah, financially, right, the payment processor? Yep.

 

Dillon Valdez  28:40

So you got adn and then over there in Europe, and then you have new new day, and Canada, and then you’re gonna have stripe and the Americas, or North America, specifically, United States. And all of these companies and T local. And all these companies have a very similar model, and in the sense that they’re providing payment infrastructure. So I don’t actually own ad and I don’t own on eBay, and I don’t obviously, we can’t own stripe in the public markets. But I chose the local for one very reason like one specific reason is that they specialize in emerging markets. And one second here, I gotta get some water. I’ve been talking so much.

 

Simon Erickson  29:22

I won’t give you a breather there. So there’s something new for drinking water, not coffee, which is my go to all the time. Too much caffeine from my own.

 

Dillon Valdez  29:32

Yeah. So de local. And I’m specializing in emerging markets. This provides very, very unique growth opportunity. And the reason why that they do this is that they do partner and you can actually look at their current their clients, they partner with Microsoft. They’re partnered with Amazon and they’re partnered with like Diddy, the ride hailing network, and a lot of these other major players, right. So these major companies are picking D local for a reason. So their customer base is one part of that thesis And then you think to yourself, Okay, they’re specializing in emerging markets, which is specifically Latin, Latin, and then even like Asia Pacific, so yeah, see us over there. But let me let me break these things up here real quick. When we’re talking about payment infrastructure, what we’re talking about specifically is from a commerce perspective, not ecommerce, commerce. So all transactional flows in and out of that company or out of that country. So that’s why you end up having these two different categories of this payment infrastructure, pay ins, and payouts. So pan’s is essentially when the consumer so like, let’s just run this scenario here, let’s say a consumer. So there are you’re there from Uruguay. So let’s say somebody wants to do business in Europe, Amazon wants to do business in Uruguay, Amazon can host their platform over there and their e commerce website in Uruguay, and somebody from Uruguay can go onto Amazon and buy something on amazon.com. And then that is essentially going to be a pay in, right. So that goes up to the company. And then when you think about DTS perspective, which is basically the Uber of China, this is going to be the best example. So like, let’s say DD wants to come over to Uruguay again, and, and they want to host the ride hailing solutions there, they want to host their platform there. So then when somebody goes into the to the DD driver, essentially, what they can do is, is that they can pay the driver, or they can pay on their app, that’s gonna be the pan, right, that goes up to Diddy. But now Diddy needs to pay that driver, that’s gonna be a payout. So this is essentially enabling all commerce transactions. So and then you can think to yourself and even speculate that this allows companies to build in other countries, and then pay in and pay out their employees, right. So they can even pay out their employees that work over there through the locals infrastructure in emerging markets. So now, now, you’re not only just getting the locals revenue growth, but now you’re getting the revenue growth of the individual businesses in the emerging markets. And then you’re also getting the GDP growth in the emerging markets, because they’re smaller. So like, just how you ended up witnessing China does go through one of the craziest periods of growth and economic growth that we’ve ever seen any country ever do? Well, if the local was around, and if the local was doing business in China, we would have seen that emphasis, they would have been the infrastructure of choice, because they would have been an emerging market player. And then they would have grown with all the companies that were in China or the international businesses doing business in China. So essentially, D local and global e are both my top they’re my number one and number two positions. My conviction in those two companies is probably higher than most companies that I even like the software giants that that we all know and love, like snowflake or data dog or Z scalar all those guys, but D local and global year, my highest conviction plays because of this idea of a more global commerce network. Both of them are plays on on the globe being more interconnected, even on a transactional and a commerce perspective and E commerce perspective.

 

Simon Erickson  33:10

Fantastic secular trends, like you said, just e commerce and just globally connected commerce is one of those that you mentioned. And then kind of continuous monitoring. for app development. Like you had mentioned earlier for data dog, you’re getting the companies that Dillon mentioned data dog, D, D, O G, D, local Dlo, global E, G, l, B, E, some others. You mentioned, that program to salt snowflake was mentioned as well, kind of staying away from Ford and Mercado Libre, because of worries about debt. But do I maybe one last question I have for you. Because before we break here is is how do you think about risk with these? Right? We’re looking at emerging markets, you know, we’re looking at things that are that are innovative, right, but they’re still profitable, organic, we’ve certainly shown the things that you want to look for rising margins, you know, the secular trends and stuff like that. Is there anything that you would look at in an investment that would maybe consider you would consider to be a big risk? That would be a turn off? You say, Oh, you know, maybe it’s time for me to sell a position or reevaluate my thesis? What would be a red flag that you would see for something like this?

 

Dillon Valdez  34:08

That’s a wonderful question. I feel like we never talked to we should probably talk more about that as investors, right? There’s risk and how do you define risk? So when I think about risk, I like to think about what Peter Lynch originally said, where he said that if you’re, if you’re batting 60%, you’re doing great, right? So I’m not always trying to be right all the time. And I think that that is what what is one of the most important things the stock picking is that when you do find your one company, and that one company really does become that multi bagger over time, it recoups a lot of the losses that you’ve had in the losers over time. So if you have 10 stocks, ideally, you’re thinking yourself like let’s just say you equally allocate $10,000, and you’re running $100,000 portfolio Right? you allocate $10,000 in 10 different businesses. And if you just left them alone, like let’s say you do all your research great and you left it up on for the next five to 10 years, what you’re basically gonna get, you’re gonna get two or three major winners, right, and then you’re gonna get probably another two or three, maybe four, just moderate gainers, maybe they get a couple of 100%. And then you’re gonna get about four different duds. So you’re gonna basically see these companies, maybe they’re gonna be down 20 3040 50%, some of them 90%, whatever might end up being. And the idea of this is that, when we’re trying to control risk, that’s why I have that process, right, is, I just at least want to know that from a cash flow perspective. And from from a health perspective of the business, that that’s going to be healthy, right. So that’s one area where I define that risk. And that’s why I focus so much on the financial statements is to increase my odds of success later on down the road. But when you’re thinking about a lot of E commerce players, like I mentioned, with global e and d, local, obviously, we’re going to be in that war time. So there’s always going to be macroeconomic risks, data dog, the risk, right there that I can identify clearly is it’s actually going to be their valuation, because they’re trading at such a high valuation, you essentially are banking on them here at the stock price. And they’re not a full position of mine right now, to be perfectly clear, because of that valuation risk, I’m much more happy, continuously adding to them over time, after their earnings report earnings reports to to continue to validate that thesis because they’re trading at like a 32 price to sales right now. And that’s, that’s a risk, right? And I want to make sure that we’re controlling that risk, where d, local and global E, their valuations are both compressed. I think the local is trading at like, some people can say, yeah, it’s trading expensive, because it’s 20 or 23, price to sales, whatever, right? But they have 40% EBIT margins, right, and their GAAP profitable, and they have no debt on their balance sheet. They’re worth every last portion of the evaluation anyway. So like, let me simplify here, data dogs risk is probably going to be competitive risks. And competition is always going to be a risk. And every investor should always think about competition, because that’s one of the biggest risks, there’s always going to be different player can be like, even big tech that gets into their space, and it’s completely disrupts them. And then you even think about like the macro risks, as far as the global e commerce goes, like Russia and Ukraine, like, how big does that war actually become? Is it going to become world war three, because that’s going to change the investment thesis all around, because it’s going to be very difficult to close the borders of commerce, if World War Three is going on. So then in that particular case, I probably would sell both of them if if more nations got involved. But as it stands here today, there’s not a significant amount of risk. In order for me to change my thesis as it stands here today, then you’re basically predicting the war, you know, like, what is really going to happen? In my theory, my this is my investment thesis, as you would say, my investment thesis in this particular case is I believe that it will stay isolated to the region, because nobody wants the war to become bigger. So that’s essentially how I’m defining risk in those three stocks specifically.

 

Simon Erickson  38:03

He’s a lot of sense Dillon, kind of recapping the approach. I like it. It’s a good one look for the secular tailwinds that are out there, look for the organic, profitable growth and the long term business models that can capture that through long term contracts. Once again, Dillon Valdez at blue suit doing if you want to follow him on Twitter, do I appreciate you being on our 7investing podcast this afternoon?

 

Dillon Valdez  38:23

Yes, I mean, it was absolutely my pleasure, man. I appreciate you have me here and let me talk stocks.

 

Simon Erickson  38:28

Absolutely. And also, we talked a lot about financial statements on the podcast today. Just reminder for anyone who’s listening, that we are partnering with why charts and they offer some fantastic services for tracking financial statements, tracking metrics, like a lot of the things that we were talking about. You’re on today’s podcast, you can check them out at why charts on Twitter or why charts.com They do offer a free trial to get started today. So thanks, everybody, for tuning in. This is another episode of our 7investing podcast. My name is Simon Erickson. We’re here to empower you to invest in your future. We are 7investing.

 

7investing Operations  38:58

Datadog (NASDAQ: DDOG) Sentinel One (NYSE: S) Dlocal (NASDAQ: DLO) Global-E (NASDAQ: GLBE) Zscaler (NASDAQ: ZS)

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