Podcast #29: High Growth Software Investing | 7investing
7investing

Podcast #29: High Growth Software Investing

Advisor: Austin Lieberman

Our guests this week are Peter Offringa, the author of softwarestackinvesting.com and Muji, the author of hhhypergrowth.com. Peter has been leading software engineering teams for internet-based companies for 20 years serving in VP of Engineering and CTO roles in organizations ranging from fast-growing startups to publicly traded companies. Muji has been a lead software developer at various companies for more than two decades.

These technical experts rely heavily on their industry experience to analyze high-growth software companies and ultimately guide their investing process.


On their blogs, they do deep dives into modern software development, trends in innovation, and the companies that enable it. We highly recommend Peter’s article on Cloudflare’s (NYSE: NET) Serverless Week and Muji’s article What are Edge Networks?

During our exclusive 7investing interview, Peter and Muji both shared their lessons learned investing through the “.com bubble”, “The Great Financial Crisis”, and COVID-19 so far. As investors, they both take a fundamental approach. They study company leadership, their products, customer stories, earnings calls, investor presentations, and have found great success investing in what they know.

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Interview timestamps:

00:00 – Introductions
01:30 – Peter Offringa’s professional background and investing style
08:45 – Muji’s professional background and investing style
14:30 – How .com, great financial crisis, and COVID-19 has impacted their investing
20:00 – How software companies have empowered businesses to adapt during COVID-19
22:00 – Are tech companies in a massive bubble right now?
30:30 – How writing has impacted their investing
41:30 – Resources to find investing ideas and deeply research companies
55:00 – Peter’s excitement for Fastly’s quarter
57:00 – Peter’s cautiousness on Datadog over near-term
58:30 – Muji’s disappointment in Alteryx’s most recent quarter
59:30 – Muji’s excitement for Datadog and Cloudflare
01:04:00 – Fastly and Cloudflare similarities and differences
01:12:00 – What happens to Zoom when the world “goes back to work”?
01:16:39 – Listener questions
01:16:57 – How do you think about companies being disrupted vs high-valuation?
01:21:20 – What are the chances a company like Fastly or Cloudflare gets acquired by a big cloud vendor like Amazon?
01:24:22 – 5G and Future use-cases for edge computing?
01:27:20 – Is Agora considered an edge play? Who do they compete with?
01:34:00 – What do you buy tomorrow if you have to sell Fastly and Cloudflare?

Publicly-traded companies mentioned in this interview include Agora (API), Alteryx (AYX), Cloudflare (NET), CrowdStrike Holdings (CRWD), Datadog (DDOG), Elastic NV (ESTC), Fastly (FSLY), and Zoom Video Communications (ZM). 7investing’s advisors and/or guests may have positions in the companies that are mentioned.

This interview was originally recorded on August 18, 2020 and was first published on September 7, 2020.

Transcript

Austin Lieberman

Hey, everyone, welcome to the 7investing.com Podcast. Our mission at 7investing is to empower you to invest in your future. We do that by providing a ton of free educational content, like this podcast and by offering a monthly subscription service where our team of advisors provides our seven best ideas in the stock market each month for just $17. Today is a pretty exciting episode and conversation for me personally, and we did a little poll on Twitter. I said I was on the edge of my seat and we had a couple exact guesses of the people that I was going to be talking to really excited to introduce from that clue. Some people were giving us way too much credit. They were they were saying I was we are going to talk to Warren Buffett and Charlie Munger. They were saying we’re going to talk to Artur Bergman and Joshua Bixby but we had to settle for you two. Just kidding! I told Warren Buffett and Charlie Munger no! We were booked. So yeah, without further ado, we’ve got Peter Offringa from SoftwareStackinvesting.com. He is @ stackinvesting on Twitter. And we’ve got Muji who @hhhypergrowth on Twitter, Peter, if you could just spend a few minutes introducing yourself and a little bit about your professional and technical background. And then towards the end of that what inspired you to get started investing in the first place?

 

Peter Offringa

Hi, everybody. I’m Peter Offringa. I’m the author and primary contributor to SoftwareStackInvesting.com. In terms of background, let’s see I got started in college in computer science. And after that I’ve worked for a number of years leading software engineering efforts that a lot of different internet companies kind of started doing that in the late 90s. Mostly in San Francisco. Examples are CNET, CBS Interactive, one of the Comcast properties Zoosk and most recently as CTO of the Airbnb of boating called Boat Setter. My roles were usually VP of engineering or CTO. And I’ve worked in both startups and large internet properties. I guess through that career and through those roles, I’ve always kind of been responsible for leading technology or software development teams. So that’s given me a lot of perspective on how to build high scale websites, you know, and really delving into decisions around databases, search, you know, application monitoring, big data analytics, you know, CDN, identity, just security, all of those different things that go into, you know, being a CTO and leading efforts around supporting and building large scale websites. So that’s really helped  inform  the type of companies that I invest in. I got and got into stock picking in 2015. I found it was interesting because initially, you know, I was just reading a lot of third party blogs, or sites like you know, Yahoo Finance and are familiar with all those names and was trying to glean information from those and then kind of, it clicked for me that maybe I would actually improve my returns if I tried to invest in things that I understood. And that’s when I shifted into into software engineering investment. And so that kind of spawned the idea the blog, which forced me to start kind of doing a lot of research on the companies that I wanted to invest in and then actually write about those. Wrapping up the career, I worked as the CTO of Boat Setter through the end of last year, and then I left that company and since then have been doing some consulting, some advisory board work, and just started doing some angel investing which has been really insightful. Then really just spending a lot of time on the blog. And then I guess on the personal side, I live in Florida with my wife, five cats. I try to get outside as much as we can get this part of Florida. It’s called the “salt life.” Whatever that means. And I grew up all over my, my dad was in the army and I actually also spent four years in the Army. I went through Princeton on an ROTC scholarship. So I know, Austin, you’re in the Air Force.

 

Austin Lieberman

Yeah. Thank you for your service, Peter and your dad’s service you know, a lot of times I think people don’t realize the sacrifice and what families sacrifice and how much families support military members. So thank you to your family as well, because because I know what that life is like, and I’m a big fan, obviously.

 

Peter, how would you describe your investing style? Is it kind of long term buy and hold and then would you say, do you have more of a concentrated portfolio? Just rough number of companies that you own and you list them on on your site. But for people that might not have read it yet

 

Peter Offringa

Yeah, I have a very concentrated portfolio, I usually hold eight to 10 names, all in the software space, very much, very focused on companies that provide tooling for software development teams, because that’s really the things that I’m most familiar with because those are the decisions that you know, I had to make in the past. So I feel like you know, I’m well empowered to kind of sort through, you know, the pros and cons the competitive landscape, the value proposition examples of, you know, holdings in terms of seeing just largest to smallest Fastly, Twilio, DocuSign, CloudFlare, Elastic MongoDB Okta. Those are my big names and those are the type of companies that I invest in in terms of things I look for, you know, the the, you know, the main things are really around just a lot of the time, more or less financial to start and more along the lines of kind of fundamentals as it relates to technology. So I really look at like the product suite. Customer use cases are important to me. And I really like reading about like customer stories and then trying to understand like how, you know, the technology company’s solutions fit into that, you know, really looking at, like developer adoption and developer almost evangelism and excitement around solutions, you know, large addressable market, you know, that’s growing, trying to pick the leader or at least the disrupter in that space. I really like companies with like fast product development velocity, you know, and like DataDog where they’re cranking out like five products a year. You know, competitive moat, that kind of stuff, strong leadership to like technical founders important to me. So those are the things I usually lead with and then you know, the typical financial metrics you know, usually looking at revenue growth. Over, like 30% dollar-based net expansion rate over 120%-130%, increasing profitability. I like to see a company you know that like going from maybe losing money to you know that that inflection point where they hit profitability. You know, it’s really refreshing like to see Fastly do that in the last quarter.

 

Austin Lieberman

You hit on a couple things there that I think we’ll we’ll come back to as far as what we can watch for to see if those things are trending in the right direction. But let’s jump to Muji. I’d love to have you share a little bit more about your professional background and then same thing what, what inspired you to get started investing?

 

Muji

Well, I have a very similar path of Peter. All the same but different. I was a software consultant for decades. I was a database and web developer. I was always immersed in that kind of those same technologies. Peter was talking about web development, database development, now into more clustered systems and cloud infrastructure versus on premise.

 

Always around data, data streaming, data storage data, querying data analytics, data visualization. So all those are kind of swirled around. I’ve been investing for decades, I’ve been an investor since before the .com era. I was actually living in the Bay Area at the time. All that was going down. And so started investing then and kind of was tech heavy and ran right into a lot of the fun overextended companies there and had a tumultuous little time with the .com era, but found The Motley Fool pretty early on. And so I’ve been a Motley Fool customer for a long time and been subscriber to their newsletters and especially on their boards. So their forum is kind of an antiquated software but there’s a great place for a lot of like-minded investors. So I, I’ve been on the boards for four years and always kind of collecting data and been a presence there. And that’s kind of how I knew you Austin is from The Fool an now 7investing.

 

I’ve been writing about tech stocks, I think for a while now I finally honed my investment and finally took it seriously. I was always relying on others for recommendations for companies and that I did extremely well with that. Netflix in particular is one that erases a lot of other mistakes. Okay, it was up to 140 bagger on that ultimately. Um, so had a lot of success with some of those services and finally took things into my own hands. A real weird little nexus about a year ago, a little over a year ago, where I realized that because of my work, I’m a I’m a lead architect now. So lead data architect is my official role. But I’m a lead developer, I choose architectures, exactly as Peter was talking about, from more of a CTO role, but I’m constantly evaluating new software and determining the path that the organization I work for is going to go towards and start and come hands on with a lot of implementation. And so I am an investor, a software developer, and also a technologist. I’m interested in the future of technology and where it’s going. And so all those kind of swirl around and I realized that my work that I am constantly explaining technology to the audience of customers. So people I’m building these solutions for and explaining how the architectures work, and also for upper management is gonna make decisions around it. And so I’ve always explained technology and so I kind of finally figured out how to harness that in the direction of investing in the exciting companies. I consider it the, you know, kind of next generation of technology. And so I somehow wound my way into being adept at explaining things I think for non technical folk. It’s kind of my expertise of my blog. You know, diving into either product lines explaining why these things criss cross But I think more especially where you know where the leverage is and the platform, you know, where these things can go from here, how the total addressable market is going to expand, you know, as people add new product lines, or how they can take an existing platform and pivot into entirely new direction. That’s the exciting stuff that I’m most interested in as an investor. But all the things that Peter said, completely resonate, you know, but that’s the naming of my of my blog, and my Twitter persona, is hhhypergrowth. That’s, that’s the kind of companies I’m interested in.

 

I just like I like the word hypergrowth. I adopted it as part of my investing thesis. That’s, that’s the entry point into my investment thesis is hyper growth. So it has to be a company that is growing the top line rapidly. And then from there, I look at, you know, several other things after that. Sure. We’ll cover that. Yeah. But, uh, so, you know, I kind of adopted hyper growth. That’s the entry point into the companies I’m interested in and got it. That became my, my avatar.

 

Austin Lieberman

Yeah, so you both hit on something that I think is important. Really, for investors, right. And you both have been you have experience as investors and you have experience investing through three pretty large pullbacks. The .com bubble, 2008-2009, and this year, so I would love for you to just both of you share a little bit your experience going through those types of events and how, especially as tech investors or growth investors, whatever bucket people like to categorize that in how you were able to not get scared out of investing and continue investing in, you know, some of these companies that people call overvalued, bubble, whatever the term is, how were you able to stay focused, and keep investing after events like like those three pretty huge and terrifying events?

 

Peter Offringa

Yeah, it’s temperament is everything.

 

Muji

You have to understand that volatility is not risk volatility is a normal occurrence. A huge fan of Morgan housel in his writings and I’ve had the pleasure of meeting him. He said at one point, you know, this is this is normal you can expect 15% pullbacks every three years you can expect 30% pullbacks every five years or whatever the exact ratio is, but this is a normal occurrence. It’s a little bit as we’re finding this summer a little bit of a popularity contest at times, I think with certain companies, or certain trends and waves. I try to look through all of that and look at the company itself. I evaluate the execution of the company itself, where I think the technology has got going, I don’t feel the need to go hop onto every hot name I see bandied about on Twitter. But if it’s enough to grab my attention at a cursory glance, I will definitely investigate further. But I also like Peter, carry a very concentrated portfolio now, I used to have 60 plus stocks. I’ve turned that down. That was years ago, but over the last few years trimmed that down to a much more concentrated portfolio and because of that, I follow and know the companies extremely well that I hold, and so have confidence in them. It’s not that I’m in love with them, I feel that they’re the best places for my money, rather than scattering it around, you know, 20 or more companies, but it does not have to be very strict. I’m very strict about what I own.

 

Peter Offringa

Yeah, I would, I would echo everything that he said, that’s particularly around the volatility. And I guess what gives me confidence in like, my portfolio and what I’m what I invest in is, is just confidence in the secular trends that are occurring, you know, so like restaurant reservations, you know, we’re not going to go back to calling the restaurant we’re going to do that through Open Table, you know, eCommerce, you know, the Zoom call, ride sharing, all of those things, I think are going to continue to progress and if we’re invested in the companies that are doing those things, Or, in my case, providing the picks and shovels are the technologies to enable them, then, you know, I just I have confidence that those aren’t going to go backwards, those are going to continue. And as long as I’m thoughtful around the companies that I’m selecting, and, you know, certainly applying the criteria, I talked about them, you know, yeah, if there’s some near term pullback because of something on a macro level, or, you know, because, you know, a bunch of, I guess, big investors or banks decides that multiples are a little inflated, you know, that’s fine. I mean, that, of course, you know, that happened, like in the second half of 2019, with all the oldest SaaS companies, all the companies, the software companies, we follow for no real reason, you know, but I just kind of wrote through that. And of course, we, you know, we came out better this year. So for me, it’s Yeah, that confidence in the secular trends, and then just being and then understanding what I’m invested in. So that, I think, and I think that that is important for investors, to try and to take the time to at least do the research to understand What are the companies that they’re invested in, like, what they do, why, why they’re valuable, you know, what, how their services compete, because when the market, you know, swoons, and or goes down, and those those companies, you know, lose value, that’s what’s going to give you the confidence that you know, you shouldn’t sell, you know that, you know, the Twilio or the DataDog or that any of those names we talked about are going to be just fine. And then when there’s that multiple contraction, you know, you can just you have the confidence to kind of ride through it.

 

Muji

Yeah, pick picks and shovels. I couldn’t agree more. I mean, that’s that I gravitate exactly towards that and myself here. The companies that are the building blocks for doing business at this point, and it’s not just niche a certain direction. These are very cross applicable, building blocks. Twilio, everyone needs communication. Everyone needs cybersecurity. Every company has to adopt these things so it’s wide applicability in addition to being picks and shovels building blocks to being a business not to being a tech business. Yeah.

 

Austin Lieberman

Yeah restaurants in my in my local community that had to shut their doors in their dining rooms because of Coronavirus. You know, in a week or two weeks, we saw them offering delivery and order online and text updates and all of all of that, like both of you are saying was facilitated and built on top of things like Square payments and Twilio SMS text communications and all of that stuff. So it’s pretty incredible the the adaptability and the innovation, flexibility, whatever you want to call it that that these software companies are providing to the businesses that build on them and and our economy. Just think about the damage that would have happened to the economy if we didn’t have software that could that could facilitate some of these changes so fast. You both hit on,

 

Muji

I flip that over just a little bit flexibility from the businesses perspective, yes, I think on the other side, so I’m constantly looking through the lens of the technology side, obviously, flexibility on the other side exists to, you’ve got instant scale capabilities now with cloud platforms that you never had before. And so when a company has 10 times the traffic in two months due to the pandemic, they can handle that it’s going to cost them more they have to ramp up, what infrastructure they do use, but it’s all right there and available as a platform that they’ve already built their business on. They just are flipping a switch. It’s a pretty incredible time.

 

Austin Lieberman

It’s a great point Zoom would have never been able to handle the 10 x increase in meeting participants if we weren’t in the cloud era. There’s this argument on whether or not these companies are overvalued and in a bubble right now, I personally don’t think they are. But I’d love for both of you to just share your thoughts on the concept going around that we’re in some type of tech bubble and there’s about to be, you know, this massive drop just like 1999 and 2000.

 

Peter Offringa

Well, 1999-2000 was kind of funny, because back then, you know, as I’m sure he recalls those, those a lot of those companies, you know, didn’t even have didn’t even have revenue. You know, they I and I even invested in some like CMG, I was just like a holding company for for a bunch of other companies that you know, basically had like PowerPoints and ideas and maybe a little bit of software but no come no customers. They were obviously far ahead of that. But I think your point relative to you know, valuations and whether you know, the stocks that we invest in are overvalued or or you know, whether we’re in the bubble, I guess first I just look at history, I mean, post 2001, let’s say, you know, all of these tech providers, software providers, you know, you talked about Amazon and Netflix and such now have have generally grown. And yes, you know, they there were certainly dips at times. But, you know, over the long term, as long as you know, you were invested in the right ones, you kind of generally were able to, you know, see appreciation. Also, I think what is important about the type of companies that that we pick in is certainly always kind of a screening. criterias is what movie was talking about the revenue growth, I think that, you know, as long as revenue growth continues to be, you know, above let’s say, 40% a year then, you know, it as you almost have like a good likelihood that the company like you said, will grow into whatever you know, valuation is set currently. And yeah, I know we all look at like price to sales, you know, you know, those kinds of multiples versus necessarily multiples off of profitability like PE ratios, but honestly, that seems to be what the markets been doing for a while. So, you know, I don’t necessarily have a problem with that if they compress, fine, but, you know, I generally have confidence that if, you know, a company is growing at 30% a year revenue, in five years, it’s just tripled in value, assuming that, you know, those ratios stay constant. And so if they dip a little bit, you know, okay, so instead of tripling, they double, that’s still you know, a pretty reasonable return is probably going to beat the S&P 500. So, you know, so I look for that or that gives me confidence and and I do agree with the notion that these companies do eventually need to be profitable. And that’s why I think it is important, you know, as we look at companies that while they’re in this high growth mode, they do demonstrate, you know, year over year, incremental improvements in operating margin, free cash flow margin, you know, those other metrics around profitability. And as long as I see that, you know, they’re each quarter each year, you know, ticking up op margin by a couple percent. That’s great. And I have confidence that over the long term, you know, they’re going to be profitable as well.

 

Muji

Oh, yes, all of that a completely agree and very similar take a having been exactly through the .com era and riding this fun roller coaster called JDS Uniphase where fiber is going to change the world and 99% loss later

 

Peter Offringa

Pets.com

 

Muji

Yeah, Pets.com. Those are just a completely different realm. Those are all what I like to label aspirational. They’re just a dream. They’re a story. They’re not investing in a company that is executing now. Whereas we’ve got proof right in front of us in the financials. These companies are executing Zoom is not a dream, it is not something that’s going to exist in the future, it just grew 169% and is likely to grow 250% in the upcoming earnings is a very exciting time for that company in particular, but other companies DataDog, CrowdStrike, they’re all performing incredibly well right now. They’re not aspirational. However, in me looking at the technology, and the technology story, I do see the potential for them to become more than they are right now. And so that’s it’s a good melding for me. And that’s the pics that I’m most confident in is when I see the operational excellence hit the ability to what I call the ability to scale. So this is the signs of operational leverage. I don’t care about profitability in particular, I don’t really care about valuation because I think it’s a little bit of an old fashioned notion. It doesn’t factor in scale, and it doesn’t factor in technology. And to me, there’s a little more intangibles, so I look at the, you know, financials, proof of the execution, but I need to see signs of operational leverage. And so it doesn’t have to be profitable, but it has to be showing signs that they can swing profitable at a moment’s notice, I want them to be using a higher level of expense. Now, if their modus operandi is land and expand, they need to be expanding as much as humanly possible right now, so they can take advantage of the expand. And so that’s exactly what you want to see is that the signs of operational leverage, but it doesn’t have to be profitable to be. But then I look at the other side, the technology platform, and I need to see signs of scale there. I need to see customers coming flowing in rapidly. I need to see them spending more and more in the in the net state expansion rate. And then I need to see ways that this is where it gets a lot more intangible ways that their existing platform I’d like to, like Peter, I like to see evidence of a platform, an ecosystem is developing ways that that platform can be leveraged in future directions. And to me, we just saw that with CloudFlare. You know, bolting on a whole different category of cybersecurity, nearly doubling their Tam, that’s exactly the kind of exciting points I’m looking for, in evaluating companies. So I see no relevance to.com at all, totally different era of pipe dreams, and gambling, versus we’ve got proof and execution. Certainly, there’s always risks. But the risks now are because there’s such wide applicability and these are the picks and shovels. It is going to be you know, catastrophic if there’s if there’s risk, meaning that businesses have to be dropping like flies as their customer base, but the existing customers are going nowhere. They’ve adopted this platform. It cost less for them to adopt this platform. They’re going to stay on that platform. You know, there’s no motivation for them to leave and spend more doing it the old way.

 

Austin Lieberman

Yeah, Cathie Wood, founder and chief investment officer of ARK, which I know all three of us are fans of, and if you’ve never heard of them, look them up ARK-Invest. Fantastic stuff very transparent. They do weekly, or maybe they’re monthly webinars in the most recent one. She actually talked about how, because of how low interest rates are. The market in general is actually right around the kind of over the last, I think two decades or three decades, the minimum P/E ratio that is that’s kind of the threshold when you compare it to interest rates. And so her argument is actually that with where interest rates are and how fast, we’re innovating, and what these companies have been able to do and how fast the economy can adapt and grow and things like that, were actually towards the minimum and of what that range could be. And they expect multiple years of kind of good outperformance or good performance from even S&P 500. And then so when you think about these types of companies, if we’re investing the right companies, and we have the right behaviors, we should be able to do a lot better than that. So we have a bunch of questions for both of you. And we’ll get to those but I would love for each of you to share. And we’ll start with Muji. On this a little bit about you learn about a new company. At a high level, how does that filter through your investing process and how has your writing process and your own blogs? How has that impacted your investing process because one of the biggest things I want people to take away from this is whether you start a blog or write or make your own notes. Or whatever I think one of the best things you can do for investing is to begin writing your thoughts out. Great, great question, Austin. And may I say Austin Lieberman is a is a mentor. He’s, I’ve watched him, you know, get into that room, he was just discussing of writing a lot documenting his process. And it made me do the same.

 

Muji

I’m definitely I’m prolific with the writing. I’m verbose in describing things. I’m a note taker, and so I whether it’s work or studying something, I’m an engineer at heart, okay, so I’m a software developer and a research things all the time. So I jot down rough notes, and I kind of constantly coming back and refining them into an outline and I’d like to weave a little bit of a story to, certainly to my blog posts. And so, you know, when I was on the fool and on the boards, and kind of part of a community there of like minded individuals that were all studying hypergrowth and I really started adopting hypergrowth as a as an investment strategy meaning hyper growth is really the proven execution. You know, it’s proof this company is doing so well. They are growing hand hand over foot. But I really that’s when I wrapped it up into my tech and research abilities, but I spent a lot of time on my posts. It’s a very involved process. And then I’m also working full time and I’ve got a family and young daughter trying to remain involved in their lives and I’m actually a little bit of an adventure so we go on trips a lot, I scuba and sail and ski and have fun with life as well.

 

In my evenings, I kind of take the time to jot my thoughts down. And I completely agree with you it is a rewarding experience just for any investor to jot their thoughts down and have an investment log of what you’re doing and what you’re thinking in a given moment, because things fluctuate so much, and especially around earnings, and you can get a glimpse at how the company is performing. And then, you know, product news and things, things are the speed of things. These are very rapidly developing companies that are product lines that are being renewed, they’re exploring new product spaces, they’re, they’re they’re, they’re moving quickly. But I keep jotting that down and just kind of refine, refine, refine. And once I’ve got the major points down as like, I’ve got a new company. I’ve looked at their financials. I see the growth that I like to see right off the bat and I see the signs of operational levers, meaning See a nice swing in one of the operating margins or the cash flow margins, I can see it swinging, it’s still negative, but at least it’s trending the right direction. I want to see a positive trend. Once I’ve got that I will dive deeper into the into the story and document kind of what the platform is, what is the ecosystem meaning what, you know, here’s the platform of their particular product line, and kind of the walls around what it’s defined as the ecosystem which is how they interact with partners and integrate with others.

 

Are they that picks and shovels play? You know, what category do they fall in? picks and shovels and they development tools? Certainly, my my main categories are now development tools. cybersecurity, observability edge networks that are all new platforms that people can be developing their own applications on. That’s data and storage analytic You know, those are all topics that I’m pretty tuned to and excited about. And so, you know, once I’ve got all those notes down, I kind of weave a story a little bit about how, how to better understand it. And it’s really for me, so these are all notes for me. And I, you know, with a little bit of extra effort, I package them up and be able to make them consumable by other other investors to get to know these stories to get to know Elasticsearch. I had a huge read up on elastic, I had a huge write up on cybersecurity, edge networks. You know, I’d like to explain what the excitement is around these particular platforms and technologies. And it makes me excited as an investor, but really, it’s it. That whole research process bolsters my own knowledge. I don’t go personally use edge networks, you know, so when I write it up, I am exploring The technology where it stands and then where I feel the potential is. And so yeah, it’s all kind of a win win for me, I become a better investor, I keep track of my notes of my investment moves, and why I’m doing what I’m doing. I keep track of the earnings, which Peter is excels at, love his earnings reports. And then these other deep dives into the into the industries like edge networks. And just to better explain why these are at the forefront of the next wave of solutions.

 

Peter Offringa

Yeah, and I guess for me, so yeah, I adopt a lot of the tactics that he does and take a lot of the same approaches. I guess what I would add is one in terms of evaluating companies. I do, I guess, for me, I leverage a lot of my past experience in terms of technology choices. So in some ways, apply the same paradigms to India. besting So, if, back in the day I were, you know, running a website and you know, we had identity as, you know, as a component of it, let’s say, you know, for a dating website, you have to create, you know, you have to create an account you log in, you know, you get authenticated, you have access to certain permissions. We used to roll our own for that at Zoosk, but now there’s the softest solution. So for me evaluating knocked is like, well, what is the benefit to my organization of, you know, taking an off the shelf identity management solution and through API’s incorporating that into my application? And how much is that going to cost me and is that is there a value proposition there? And, you know, what are the additional benefits in terms of maintainability and security and those kinds of things. And if opt in that case, or any company I’m looking at kind of passes that sniff test, and to me that’s almost the the biggest validation of my interest in the company, because I know that other CTOs and other customers, you know, would probably have a similar reaction, you know, and I go through that process with, you know, any company I look at whether it’s like elastic or Mongo or Twilio, or fastly, you know, you could certainly make the argument with fastly and CloudFlare like, Okay, well, why would I move off of optimized, you know, DDoS solution or their, for their CDN? Or why wouldn’t I use CloudFront for CDN, which I used to, you know, five years ago, or that another company, but, you know, now there’s this new CDN, why is that better? And as a CTO, what what, you know, advantages with that have from a, from a performance and from a cost point of view, and from a programmability and flexibility and all those criteria, that then would make me a buyer, which then I assume, would make, you know, other companies buyers. So that at least for me, that that paradigm or that that decision making process, you know, it’s helped me with kind of investment as well. And then yeah, there’s the, you know, the financial metrics and also I really like how Mooji kind of modeled, you know, the consideration around the platform and extensibility of that, and operational leverage. All of those things are really important points as it relates to the writing. That has actually been probably the biggest relevation, for me and contributor to, you know, my investment, I guess, performance and Aleksei success this year, is forcing myself to write about the companies that I’m invested in. And the reason is that if you have to write a thesis about a company, whether it’s a review of the past quarter, or simply why you’re invested in it, it forces you I’ll say me to really go into a lot of detail and research in terms of all the whys. Well, what do they do? Can you explain to that to someone, why is it better? How does it relate to this competitor? And those are things that at least for me, personally, I found I would just skip over when I was not forcing myself to write about this. You They just kind of take it for granted. Or you might read somebody else’s review and say, Okay, well, so and so said, you know, fastly was a good buy, so I’m not gonna bother, like spending the time to understand it myself. But, like going into that much depth to really understand what these companies do, and having to write it down, I think is a really good exercise. So, sure, I don’t think everybody needs to go out and start a blog, but certainly doing what Mooji is describing, which is, I think every investor, if you’re putting real money into a company, at the very least, I’d say every quarter like write your own personal review of how they did that quarter, you know, if you just start on your own hard drive, and don’t share with anybody, that’ll make you a five times better investor, I think, because you’re forcing yourself to really, you know, justify that investment for yourself and do the due diligence that you know, is necessary in order to really understand what the company does. So I’d think for anyone you know, who’s wondering about like, writing If nothing else, just write your own notes, like he said, and put it on your hard drive. And if you don’t share it with anybody, it’s still

 

Austin Lieberman

That’s really valuable. We can find this information and we can dedicate five or 10 hours a week or whatever it is. And when you look at the ROI on that time spent over, you know, multiple years of investing, it’s hard to beat the the return that you get on on those hours of investing. So that where do you Where do you find this information? Or are you both in executive level meetings? Do you have companies telling you about their new products and their customers? Where do you get this this info?

 

Muji

I’m always open to new ideas. And so Twitter is great for that. Some things will crop up. There’s excitement about a certain company. seem Limited is a company out of Singapore that excitement on Twitter. And so, you know, you start following certain people that can do those sorts of initial deep dives. That is a really good short shortcut into learning about companies that are triggering my interest. The Motley Fool, as I mentioned, is another one and services like yours, Austin, as as idea spawns, but as Peter mentioned, I run a very concentrated portfolio, but eight to 10 companies right now. And I’ve really taken over the past few years, the approach of deeply researching and understanding those companies, so following the earnings, so I’m always looking at the financial statements. Again, for signs of operational leverage or whatnot. The conference calls listening to them or looking at transcripts normally trying to do both. I don’t really listen to them live all the time. to them after the fact with the transcript so I can pause and take notes. It’s a little hard to do when it’s all rushed through in an hour. So I really trust on the company, I like to see the execution. I’d like to see it in the financials. So I’ll spend a lot of time there. In particular, when I’m investing in technology, then it’s a little more wide ranging, trolling through all their product pages, their marketing, I am not privy to those executive meetings, and those secret handshakes, those top secret clubs out there, if anyone wants to invite me you

 

Especially if it’s on a big boat somewhere sailboat.

 

But I and I’m not a user of many of these technologies. I am tangential to them. I’m certainly in the data space. So definitely utilize Elastic Search, elastic product MongoDB. Some of those things, but I’m an open source developer. So I’m constantly in the open source tooling. But as far as the applicability of products, say, CrowdStrike I don’t have a direct involvement with that company. I don’t know anything about them. I just see the execution first and foremost, locked in Wow, this company is performing extremely well, I need to know why. Then I start taking deeper looks understand the technology. In the case of cybersecurity and technology, one thing I noticed in that particular company immediately is I was evaluating them with Elasticsearch. So as an Elasticsearch investor, Elasticsearch is getting into cybersecurity. One of the direct competitors would be CrowdStrike for Endpoint Protection, protecting the device itself. They acquired a company. And so I’m looking at these two companies and realizing Oh, this CrowdStrike has a secret sauce. And that is the fact that it is cloud based. Meaning it can look over the entirety of its customer base at once. Anything on prem, aka the legacy solutions, or anything really elastic is doing is solely looking at just that company’s endpoints, not the entire globe of endpoints. And so one inherent advantage that these CrowdStrike would have over legacy players. And unfortunately, in this case, Elasticsearch, and their endpoint acquisition is that they can see and react over any breach of across their entire globe of customers. And so they can spot it immediately. They can patch it immediately. And they can save every single customer at once with that patch. And so it’s just a really interesting dynamic that you’ve got under this cloud paradigm of SaaS providers providing this tooling. They’ve got some inherent advantages that didn’t exist back in the days of gold, you know, whereas 20 years ago, I was looking at product are looking at companies that were making products. And so they had to sell that number of products again that the next year plus more, again and again and again, whatever widget they sold. SAS is a totally different paradigm where you are locking in a customer and they are recurring revenue every year unless they leave. And so it’s just seems to be a different time. I’m not gonna say everything’s different, of course it’s not. But I feel like these concerns about valuation and things like that. Don’t take these things into account the extreme lock in that some of these companies have, and then how much they can scale from here and into new directions. It’s all I don’t know, it’s a very exciting time to be an investor in this particular space.

 

Peter Offringa

In terms of, I guess, sources of information for me, so you know, as I said, I kind of start with or my focuses on the The building block companies. So what I look for is sources of information about companies that are using those building blocks. So places I go are first there’s a few podcasts I listen to regularly that are associated with software engineering. My favorite is software engineering daily that’s been going for like several years, but there’s a guy Jeff Myerson, who, you know, interviews, kind of tech leaders from various companies like he does a podcast every single day. And you know, he asked him about like their tech stack and what technologies they’re using, and you know, how they solve certain problems. So I listened to those and of course, look for companies that are getting talked about as it relates to you know, solving problems. Another interesting source of information I found is reading the company engineering blogs for a lot of the innovative, you know, companies that are more on kind of the consumer internet space. So, my favorite engineering book are like Uber Airbnb like stripe square Shopify Pinterest. So I read those engineering blogs. I also follow them on Twitter. They all have like Twitter accounts when they publish a post, you know, so an example would be like, a couple weeks ago, I was reading the Airbnb blog. And I saw that they announced that they’re, they relaunched their Airbnb experiences product with the zoom API in order to facilitate kind of hosts presenting an Airbnb experience to guests, and they’ve rolled that out to like, 50,000 hosts worldwide. And I was like, Whoa, well, that’s probably good resume, maybe I should look into that a little bit more. But, you know, I’ve uncovered a lot of, you know, I guess insight in terms of my investments by, you know, trolling those kinds of sources, you know, and then of course, I’m like preparing the, you know, the blog posts or the quarterly reviews. Now, all that information is, of course, as we know, available online. You know, I’ve listened to the conference. calls, you know, read the transcripts, pull up the go to the investor relations site, pull up the presos go through that. I mean, the company websites themselves usually have a lot of information about, you know, the products and you know, their own blogs themselves. Like I read the blog and a fascinating blog, like, like, constantly, every time they post something, you know, I’m like reading about that. I think that if you get into that habit, you just, like, are constantly ingesting this information over time that just allows you as an investor to become more familiar with, you know, what the company is doing. That’s more like Once you’ve selected one. Another source of information that I found is just super rich, is YouTube for tech talks. So again, I mean, this is specific to technology, but like there’s a number of conferences like velocity conference, and, you know, there’s several others where, you know, technology kind of thought leaders talk about different trends and technology, but what I also find is that a lot of the tech leadership from the companies that you know, I write about, or that we’re talking about here, you know, often speak like I, I’ve listened to, and it’s very easy if you want to go like, put Tyler mcmillon, the CTO of fastly in YouTube, you’ll see a whole bunch of talks come up in our arts, or Bergman or, you know, a list goes on. And if you watch those talks, you get a lot of insight into how the company is thinking about, you know, the problems that they’re solving and the approaches that they take. You know, I even got, like, when I was deep into my family research, I get into a bunch of tech talks from an organization called webassembly. sf, which is basically a meetup in San Francisco to talk about webassembly and CloudFlare. And fastly both present, you know, at that at that meetup pretty frequently, you know, so if you listen to those talks, you actually learn a lot about what they’re doing now. I mean, it’s time consuming. Of course, but you know, those are I’ve also found that to be a pretty rich source of information, because a lot of those, you know, those conferences and those those meetups, they actually publish the tech talks, and I find them very, very valuable. But I think, you know, I just, it’s, I agree, it’s important to spend the time doing the doing the research, whether you’re going to blog about it, or certainly if you’re just making an investment, and what is like Peter Lynch, you know, kind of quips, like, you know, most investors spend more time like researching a washing machine or a refrigerator than like, you know, the stocks that they’re putting their life savings into. I think in some some cases, it’s like accurate, so that would be my little bit. Yeah.

 

Austin Lieberman

Yeah. Awesome. points. And that’s kind of both of you hit on exactly what I was hoping you know, all this stuff is available to the public. You just have to be a little bit resourceful. Google it, the company websites CloudFlare has their own. It’s like a 24/7 TV network now. All kinds of stuff that’s available in two awesome resources, software stack investing.com and hyper growth.com. to other places where you can, you can steal from the time that Peter and Mooji put into studying all these companies and learn about him that way

 

Muji

That’s why I blog is to let the investors who don’t know those things who aren’t technically inclined to be able to put some of those pieces together. So exactly like Peter was talking about. He’s looking for those building blocks, he sees evidence of a company using those building blocks in ways he didn’t anticipate, you know, that’s that those are always interesting to surface or what I was talking about with CrowdStrike. You know, it’s like putting pieces together, because you’re familiar with the technology deeply. That, you know, maybe the typical investor can’t and so I do, you know, throw stuff out there to try and be part of, I don’t want to be an investment service. But I want to be part of people’s due diligence for sure.

 

Austin Lieberman

I so, I use, I don’t know if you either of you have heard this, I use Feedly.com. And it’s like 90 bucks a year, you can make create a feed, and I pull from Fastly, CloudFlare every company you could think of, and it automatically updates your feed anytime any of those companies make a blog post and then it provide you this, you know, this streamlined feed where you can view it inside Feedly and you can click to go to the company’s external websites, you can tag stuff and tell it what you like and what you don’t. So it’s a great service. It might make both of your lives a little easier to because I think we follow a lot of companies widely. So We’re gonna get to Twitter questions in just a second. You both have been very generous of your time. This is one of the longest episodes, but I’m super excited about it. I want to put you both in a little bit of an uncomfortable. Let’s keep going a little bit of, well, you have families and I am thankful for your time and it is late at night. So I want to be respectful of that. I’m gonna put you both in an uncomfortable situation as much as I’ve just complimented both of you. That I didn’t really tell you I was going to do so. We it is we’re taping this on August 18. There’s a lot of the companies we follow have reported earnings. Some have not. So the companies that have reported DataDog Alteryx, Fastly, CloudFlare companies like that. Some that haven’t CrowdStrike, Zoom from the companies that have reported. I would like each of you to tell me which one you’re most impressed with. And which one maybe you’ve got some you’re a bit more cautious on or maybe some yellow flags, but and tell me why But you’re not allowed to use numbers. So it just has to be, you know, understandable terms in general terms in a story way. Why? Why are you excited about a company? And then Which one are you a little bit more cautious on maybe than you were before?

 

Peter Offringa

Ah, yeah. Well, I think in terms of the one that I was excited about, obviously, Fastly, I think that’s because I like the accelerated revenue. I like the discussions around customer ads. I like the customer growth. I like the move towards profitability. I like the potential, the market potential. I know it they didn’t deliver quite at the level that I think investors were anticipating but of course, you know, it has gone up by at the time of earnings like five x, year to date or it had. So I’m still pretty bullish on fastly particularly going into next year. I think Q4 for Fastly is going to be really interesting. I mean, if you are not supposed to say numbers, try and project what Q4 growth is going to look like it comes in, rather favorably. And I think Q4 is going to be big across the board for a number of the building block companies primarily because of all the activity that is moving online. I think anything related to e commerce in Q4 is going to benefit and I even sent out my kind of weekly email an example of how there are these like investment funds that are going around buying all the bankrupted retailers like Pier1 and Dress Barn and you know Odelle Sports and a number of others, and they’re basically shutting down all the stores and moving all the operations online. And lo and behold, just barn just moved like 65 million a year of sales on the Shopify plus, and they’re going to probably do the same. This holding company is going to do the same with Pier One and a bunch of others. So you kind of wonder what is going to what are the ramifications of that. But to answer your question, so I’m bullish on Fastly, I guess one that I was, as I’m a little more cautious on would be DataDog. And that’s mostly around just the revenue kind of slowed down. I’m still confident in them long term, but I think going from 87%, year over year growth to 68%, to projecting 50% for Q3, and if you do Q4, it’s like 38%. I just I worry about where that’s going to land. I think over the long term, they’ll be fine. The 40% growth over time and I was encouraged by their product releases subsequent to earnings. But I’m going to have to kind of dig into that one a little bit more before I kind of initiate a position but I’ve been covering it favorably, you know, for the last couple quarters but that was one where I know I’m a little more hedged right now then, you know, then kind of strong bullishness from from before.

 

Muji

The company I’m disappointed with is Alteryx. They’ve really hit a wall. Some of it due to the way revenues recognized up front under 606 accounting rules. But I’m surprised how little strength they had going in. Certainly they were in impacted industries but they even said impacted industry. were buying them strongly. So they saw a lot of interest that impacted industries as they were trying to improve operations and really slim down and using analytics for that. But I really like where they’re going as a platform, a little bit of risk and where they’re going into the platform because they’re, it’s a pretty market change in their technology. So they’re going from pretty windows centric, client, server based technology to more cloud based and having a lighter designer on the browser. There’s a little bit of risk there too.

 

But I’m pretty disappointed and Alteryx all around.

 

DataDog I was actually pretty pleased with. The one thing I guess I would highlight for Peter is that they sauce a lot of strength in their in their top customers where they saw the numbers change was that those top customers really streamlines their operations. And so because they’re not usage based per se, but they are number of a amount of infrastructure based I guess I’d say. So you know, the number of containers, the number of servers. So as companies really tightening their belts, I think they reduced the number of servers they tried to make, do more with less. And so I think that really impacted data dog a little bit in a surprising way, but I’m still pretty bullish on them. So I wasn’t really just pleased there. But I would say I am pleased with both fastly and CloudFlare in general CloudFlare doesn’t quite have the splash right now. I think some of its muted because they’re, they’re bolt on clone of ZScaler. So they’ve they’ve gone and developed a kind of end to end security for network traffic for enterprise users, called CloudFlare for teams, and it is a seemingly exact clone of ZScaler. Obviously, I don’t use these products. But technology wise, it works. exactly the same as the scaler currently does. And the setup is the same. They released that in January, right into the pandemic, and then made it free for users to really ease that transition. So great move as far as, you know, corporate brand and kind of the ethics of their brand. But they made it free through September one. And so we’re really not going to see the benefit of that until later. But they’re showing such strength now and aren’t nearly as usage based as on the pricing as fastly is, and so it’s just, you know, remarkably solid company, that very solid performer, but I’m seeing some interesting things from their technology that Peter covered their server this week. seeing some things there I like and it’s interesting watching fastly and I just studied up on the fast Lee’s call last night. I’m a little slow to catch up on earnings reports, and even some shade was being thrown both directions. from both of these companies talking, you know, CloudFlare is pointing out speed isn’t everything which is fast Lee’s claim to fame really. And then fastly really highlighting that their usage based focus on their go to market which is focusing on enterprise customers. And usage based pricing is better than the small to medium business and focusing on a lot of little customers, which was obviously a shout out to CloudFlare. So, a little shade being thrown both ways, because these companies are very much going head to head in their respective space. And it both is next gen edge platforms and please do not think of them as CDN audience. Because they are not that is one application on their on their platform. But that’s the companies I’m most excited about, but it’s not so much from this earnings. It’s it’s great to see fastly has, you know, some momentum but it’s more the I mean just massive potential. They’re having Success now. And I see a lot more coming for both companies in different ways over the next few quarters.

 

Peter Offringa

Yeah, I would definitely echo that. I mean, I opened a position in CloudFlare now it’s almost my now I’ve got my fastly and CloudFlare on, it’s called the edge compute play button. You know, that’s like a third of my portfolio now. And, and I would agree, I think that it’s interesting how fascinating CloudFlare I think are attacking the huge market, but from different ways. You know, I mean, you could segment by or look at how they segment by customer type, you know, fastly focus on enterprise. CloudFlare focuses more on SMB CloudFlare has many more customers. fesler has fewer, you know, in terms of the product positioning, you know, CloudFlare seems to be a little more network and this dabbles in enterprise security, whereas, you know, fastly is kind of trying to be very clear that they’re going after developers, you know, even the differences in kind of the serverless product positioning in our cloud flares. accommodative. of many different languages and it’s extending the, you know, the longer runtimes, whereas Fastly is trying to constrain them or to perform performance. I think they’re just going to cater to different different audience segments, different buyers, different use cases, and both will benefit. I think this can be fascinated to see how they play. But I’m on like, major kind of bullish on both.

 

Muji

Yeah, I do think the market got a little ahead of itself. Certainly on vacillate for sure. But yeah, General. It’s been weird this season of you know, every company is rising, or every company is falling kind of with this market. You know, alteryx, which has extremely disappointing performance rose, remarkably between quarters for who knows why. Yeah, I took advantage of that, personally to exit most of my position. But I’m really excited. I do agree data dog, you know, surprisingly had a little more headwinds than expected. I’m looking for To the ones you just mentioned, Austin that are coming up still CrowdStrike, Zoom, both of those shown a lot of headwinds or tailwinds going into going into the, into the pandemic. And so you know, that whole work from home is really going to feed into both of those. And so I’m really looking forward to the next couple weeks of earnings reports.

 

Austin Lieberman

Yeah, so interesting points there is, is that, you know, a lot of people I think, look at companies that can be seen as competitors or in the same industry as kind of a it’s a zero sum game, but what I think I’m hearing from both of you and I think you both own fastly and CloudFlare is that there’s a way and if the edge computing becomes as large as what these companies are saying and I think is what us three think it can become. You could be very successful owning Both of those companies in in there’s there’s plenty of room and I, the thing that I, where I learned that from or I guess the model I follow with that is if we look at the big cloud vendors, Microsoft Azure, Amazon Web Services and Google Cloud Platform, those are three monster businesses if they were just businesses by themselves, and they’ve all done extremely well. So if you think about the opportunity that’s gonna be there for fastly in CloudFlare in edge, especially as they’re both disrupting and taking customers from Akamai. A lot of opportunity there.

 

Muji

Um, I like to say in my in my write up that CDN is just how they got there. It’s just the first app that that they had success with that funded their architecture, but they designed a better way to network, the globe. And they’re taking advantage of that and made it programmable and so now it’s one of the building blocks and that I can see why Peter likes them so much. If you around the building blocks, because that’s what they are now that they’re only going to power the next wave of innovation for for internet traffic, both directions, so CDN is very, you know, coming from the core out to, to kind of publish data that’s goes out to the scattered users. Whereas, you know, both of these solutions can really be handling traffic from any direction. So it’s pretty, pretty exciting. One interesting.

 

Austin Lieberman

One interesting difference that I heard in the two earnings calls cloud or cloud flare in fastly. CloudFlare really emphasized that compliance could be a huge area for them. And I believe that’s because their network in terms of points of presence and where their servers are, and stuff like that is much larger, in terms of raw numbers and the countries that they’re they have servers in is much larger than fastly. So what that means as and we’re kind of seeing it with TickTock potentially in the US is more and more countries maybe get concerned about doing business, either within their own country or not doing business and certain other countries are not crossing lines. CloudFlare does have the ability to, to offer that compliance to companies because of how many servers they have around the world. To keep it, you know, within those confines, that would that was my understanding, I could be way off know that. But that was how that was how I took that.

 

Muji

So CloudFlare is in 100 to 150 countries. Fastly 55 different number of PoPs, but they got the same general strategy there. But I think what you’re finding is that they’re feeling each other out in terms of what their strengths are clearly fastly is really getting a lot of these next gen companies, Shopify, Pinterest, TickTok, it’s all these, you know, really future forward companies that are Really at the cutting edge of software development right now and taking advantage of how data streams across the globe CloudFlare is really taking the tact towards security focus. Although I will point out fastly one takeaway I had that I haven’t written up yet. But they’ve mentioned security way more often in their recent blog posts and on the latest call than they ever have before. And there was a lot of hints that something’s coming soon. But they, I think, actually glean this from Peter, that the CEO in one of the later interview presentations talked about how he’s not going after Point to Point cybersecurity. He’s more going after security in terms of app security. And so I think they are going to start taking advantage of maybe do something similar to Okta start entering octave space, where they’re doing identity management with the edge or something like that. So there’s some clues in there about where they’re going, but they’re really staking out what domains they want to think and so compliance perfect one for CloudFlare they’re in more countries, but they can hone services that are specific to the laws and data retention policies, every company. Absolutely. But and long, I guess with these is, I think they really get dismissed as aspirational place. It’s like, Oh, it’s great. It’s going to be it’s providing something in the future. But I don’t personally invest that. These aren’t aspirational bets for me, this isn’t what you know, fastly is gonna have some magic next year with compute for edge. I’m not, that’s not a part of my thesis capacity at all. I do want them to have compute. It’s a necessary component for for them, but they’re having success today with their plan. And so this is the combination that was exactly talking about the beginning. I want to see execution today and ways to leverage that on the platform going forward and both of those two companies have in spades.

 

Austin Lieberman

One of the really interesting things that Joshua Bixby the CEO of Fastly said, when he was asked about kind of their, their sales approach in terms of small and medium sized businesses, is they almost use their partners. And so this is companies like Shopify, I think Wix,

 

Peter Offringa

Adobe, yeah.

 

Austin Lieberman

To help them bring in the business and the impact from all of those different shops being opened up and stuff like that. So it’s just really cool to see both of these companies know what they’re good at right now. And then kind of like toy with the, with the idea of, of either for CloudFlare, expanding more into enterprise or with fastly expanding more into small and medium business, but it’s nice to see they’re they’re self aware and they know what they’re good at right now. All right, let’s jump into questions. And then We will end this thing and I will let you go back to your lives and your families. I didn’t want you to share a bunch of numbers and stuff because I want people to go to your respective blogs and see your numbers on the write ups. I just wanted you to get people excited about the results of some of these companies. Moody, you said one thing you’re excited about zoom. Peter, I think you’re excited about Zoom too. What about when this work from home thing ends, and everybody just goes back to work and life goes back to normal like it was in 2017 and 18. Isn’t Zoom, just not going to be important anymore?

 

Muji

Certainly to some degree. I mean, of course, once we have more human interaction in our lives, yes. Of course, that’s part of what is making them successful right now. But no, at the same time, it’s not going to go down there. It’s a new it’s a new world. People are realizing That in person conferences, to gather 30,000 people in this location is extremely expensive for all the participants, and it’s so much easier to do virtually.

 

Peter Offringa

I would. Oh, and I would I would add that I think people are maybe thinking a little one dimensionally when they think about Zoom. You know, they’re thinking about an experience like this, you know, or when they’re when we’re in lockdown. And you know, it’s like, oh, my family gets on Zoom, or, you know, all my college buddies get together on zoom. And, yeah, I mean, those use cases will continue to exist, or, you know, my companies work from home. And when we all go back to work, what we need so many more, but I think that misses the opportunity to an extent, which is that now that people are more familiar and comfortable with video interactions, I think we should think about the opportunity for Video Interaction to kind of transcend into other common day to day experiences. So dating is a good example. You know, why should you necessarily have to go on a bunch of physical At least at the beginning, when you might be able to do some initial kind of screening over Zoom. The, you know, so that, you know, that could be one example of, you know, more usage of zoom. I mean, tele telemedicine is, you know, an obvious one, which is just, you know, taking off substantially and obviously, Twilio and, you know, Agora to an extent are getting into into that, but I think that’s a big opportunity for zoom. But I think what what investors should think about are what are what are other video driven experiences that could, you know, then be leveraged? You know, through or I guess distributed to other channels in online shopping would be another one. I mean, if I’m like wayfarer and I’m want to look at like how a couch looks and I can’t you know necessarily discern that from the pictures. What if I could actually do like a video showroom with you know, that salesperson, you know, over like, well over video and whether Zoom powers centers or some other provider, I just think there’s a big opportunity for this, you know, for video streaming in general.

 

Muji

Yeah, I think their consumer user is the one that’s going to drop, not the enterprise user necessarily. I think that’s the one that went from 20 to 30% of their customer base. And so there’s maybe a 10%. A little bit that might be ones to discard a little sooner. But I think it’s Zoom hasn’t been standing still, they’ve got rooms and so once things go back to more centralized workplaces rooms is going to start really taking off. They’ve got zoom phone, and they just recently just this week expanded that to number of countries. Plus the fact that their, their API’s do provide those building blocks to being better integrated into more custom solutions for whatever verticals exactly like Peter was talking earlier. So there’s a lot of irons in the fire. And so I personally don’t put much weight into The fact that they’re, you know, they might do some of the consumer that really isn’t their primary focus anyway. They’re not a consumer.

 

Austin Lieberman

Yeah. I think they have a huge opportunity to displace phone and communication providers that are legacy kind of like we talked about. It’s just crazy how people just struggle to wrap their mind around how fast they’ve grown and how big of a company it is when they put it in at its only video teleconferencing box. Awesome. Okay, so we’re excited about Zoom and CrowdStrike. And I’m sure you will both cover those those earnings once they come out. And we’ll probably all be tweeting about it. So just look for any of that stuff to hear about how Zoom in CrowdStrike do. All right, let’s get to questions. We got some good ones. You both have a lot of fans Sam Sharples said super excited for this one doesn’t have any questions, but he can listen to you to ramble about edge computing. learn a ton. I can’t wait.

 

Irnest Kaplan question for hyper growth. For me a big challenge with hyper growth tech is getting comfortable. The tech won’t be displaced soon by something better. Because you’re paying for many, many years of growth in the future. So how do you assess that? How do you think about that,

 

Muji

uh, it’s ignoring scale. I really don’t put much weight in valuations in general. It’s the last thing I look at, and really don’t play chart games at all about entry points. Once I’m interested in a company I dive in. And, but we’re individual investors. I’m not signing up to CloudFlare for the next 10 years. If something better comes along, I’m going to take a deep look at it. And so I I do because I run such a concentrated portfolio. I feel like you know, I got my ear to the ground as far as like Peter was saying, you know, following the engineering blogs, I do follow CloudFlare and Fastly. And so I’m kind of keeping up to date with where they’re going and you know, seeing the tip between them. And one of those two might emerges as the stronger eventually. But in general, I stay with the market leader, the category killer, or the leader as far as being the lead disrupter like data dog is being compared to DinaTrace or New Relic, I look for the leader, and I’m going to stay with them until I see evidence that they are faltering. And that I feel like I would see that evidence in the execution.

 

Peter Offringa

Yeah, and I would just add, I think it’s really important particularly with some of these, you know, companies that we follow that are what I call it, you know, the independent service providers who are often then, you know, the question investors often ask us, what’s, you know, one of the cloud vendors is just going to come along and kill that category. I, I still think that you know, first talent is is gravitating towards these companies and as long as You know, the companies that that we’re investing in are attracting the best talent, you can tell by just looking at, you know, the management team that’s going to define their success over time product development velocity, you know, it’s important to make sure that, you know, they’re continuing to crank out new innovations, new releases, you know, I mean, like I said, data dog, you know, they put out like, five new products a year, it seems or elastic does a major release every two months. I mean, if you dig into that, it’s like a lot of stuff, you know. So like that, that product development velocity is just going to keep them, you know, ahead of, you know, these these these big cloud vendors over time and the focus, you know, just just staying in a niche and getting constant feedback from their customers. Again, it’s just gonna allow them to continue that that loop, that feedback loop. Now that just drives the product development cycle.

 

Muji

Yeah, that’s the funny thing is you watch. You know, I was an investor in MongoDB last year, and there’s a lot of fun around Amazon, entering The space quote unquote, Amazon had actually been in this space for a number of years, just trying to highlight it more. And the same with Amazon versus elastic. Amazon came up with an open source version of elastic that they’d forked these Mongo and Elastic, we’re not standing still, you know, they’re not letting the cloud provider catch up. They’re adding new features and products and solving things for their customers. And so there it makes them hard to catch. So it really is going to take gonna take a new paradigm to upset them, not a competitor.

 

Austin Lieberman

Yeah, I think there’s something to be said for companies that they’re focused on a few things and their livelihood depends on it versus like a MongoDB or Twilio versus Amazon or Microsoft who might have database products or edge products. But they’ve got most of their revenue comes from other things. They’re just, you know, not going to focus on it as much and Focus on those customers as much. So brings us to a next question and peer, maybe your experiences in CTO type role would would be good to answer this question. What possibilities exist of acquisition from market leading edge players or of market leading edge players from the likes of Google, Microsoft and Amazon? basically just a question around? What are the chances that, you know, a CloudFlare or Fastly gets acquired?

 

Peter Offringa

I don’t know that I have a good answer for that. You know, I think that acquisition is always kind of out there. I think that you know, I guess where it’s where a cloud vendor might find one of these solutions to be a creative, they might be interested. Certainly, I mean, there’s always a possibility and you know, on some I’m surprised you know, when you look at like some of the acquisitions Salesforce has done and I mean God, even data dog got a spike class rate because there was speculation that they were going to get acquired. I’d say it’s possibly I just I guess, as an investor, I just try not to try not to play to that, you know, I would never make an investment because I think it’s an acquisition play. You know, and if it works out, like they get acquired for a price that, you know, is greater than their valuation. Great, although it makes me sad, because I used to hold these companies for for many years. So in some ways, I’m hoping offensively or CloudFlare, or any of the companies we’re talking about actually don’t get acquired. enough that that’s not a very good answer. Maybe he has better insight into how he thinks about acquisitions or

 

Muji

I don’t see it being a fit. I certainly don’t see any of those cloud providers being acquisitive in that way. As far as bolting on some new paradigm. That’s not exactly a disruptor but kind of sits alongside cloud Certainly they’re going to take steps towards those companies. So AWS is already doing it, they have landed edge doesn’t seem like a particularly compelling product and is extremely expensive, from what I can tell. But they’re going to take baby steps to be more like the edge companies rather than acquire the edge companies. But what they what they are going to lack is the programmable network. And so they’re never going to be on par with CloudFlare. Or Fastly. And so, but, you know, there’s there might be some use cases still where they’ve got existing customers, and they just want, you know, a little more compute closer to customers or something like that. But I don’t see being acquired, at least not by by cloud providers.

 

Austin Lieberman

Yeah, I think a, you know, benefit of using an edge provider could be that you’re not as reliant on your major cloud vendor, so their customers might prefer that they’re standalone to AWS or Microsoft or whatever. So I think that’s probably, you know, who knows, maybe they will, but not banking on them being acquired. And then also that competitive risk is maybe a little less than we think it is. Because there’s a lot of good reasons that customers would want a different edge provider, then their cloud provider.

 

A couple more questions we had from at RobertWeirMD. What do you expect the impact of 5g on the edge computing market?

 

Peter Offringa

I think will be good for edge. I mean, because really, if you think about 5g, it’s really just increasing the amount of bandwidth Between the cellular network, let’s say endpoint or entry point and the actual cellular device, you know, so it’s, it’s making the amount of data that can be transmitted from someone’s phone, you know, into the entry point of the cellular network, you know, increased by 10 X, but it’s not going to automatically increase the pipes between the edge of the network and the origin, those are probably going to stay the same, or maybe they increase a little bit, but you know, it’s like 10 or 20% a year. So when new applications roll out, that make use of that higher bandwidth, it’s going to become even more important that content and compute and processing can be performed at the edge so that the user doesn’t experience some sort of, you know, extra latency because they’re waiting for, you know, their their content requests or their processing to go all the way back to origin in order to get it response. So I think 5g will actually be good for for edge.

 

Muji

Yeah, I agree. I think it’s going to actually hurt. Maybe CDNs a little more. Maybe not. Maybe it’s a little more neutral there. But I completely agree with what Peter was saying. It’s, it’s, it’s really lopsided, it’s increasing the bandwidth way at the beginning of the request. But what it’s going to do is allow IoT to really explode, you know, it’s the key that’s going to unlock the potential of having way more devices be transmitting to the ISP. And then once it’s at the ISP, then you know, it’s going to be on the regular backbones of the internet. So it’s not it’s not all the way to origin. So I think it’s a it’s absolutely a positive for edge networks. And that something needs to be handling that traffic that increase in traffic on one end of the The global communication spectrum, it can be handling at much closer to to it, and greatly reducing the amount of bandwidth that is needed to the origin servers. You know, those don’t have to scale up to the same degree that 5g is scaling the number of requests.

 

Austin Lieberman

Awesome. Okay, we are down to our last two questions, and they both are related to Agora ticker symbol is API. I do not follow this company very closely. Is Agora considered an edge play? I’ve seen it being compared to Twilio, Fastly, CloudFlare and even Zoom. Which one would be a fair comparison, if any?

 

Muji

All of the above.

 

I, in my latest edge network right up, kind of cover some of the basics of what edge network is and talk about some of the way the traffic flows that we were just discussing with 5g with some really awesome hand drawn graphics. I hope everyone liked those. That’s a new to my, my, my blog style. Um, I do briefly mentioned Agora. I consider them a specialty edge network and so a little look into Zscaler. So Zscaler is a specialty network for cybersecurity Point to Point traffic encryption. And Agora is all about real time streaming and video and audio streaming. However, they’re a little like all the companies you just mentioned. So I do equate them to something like Twilio And that they are a building block company. They are a set of API’s you can use to embed, like zoom embed video capabilities but also audio capabilities into your products directly. And then they have built an edge network behind it to serve up that content. And so they are trying to take that away a little bit from Fastly, I think in particular is maybe a little more of a competitor because fastly is and and Limelight are both a little more video focused than CloudFlare. But they are interesting play and I’ve been researching them and my write them up further and may actually buy them. My one hesitation is that they’re domiciled in China and I am very hesitant to believe the numbers coming out of Chinese domiciled companies. So that’s my one hesitation.

 

Peter Offringa

Yeah I would echo what Mooji said, I think, I mean, they’re interesting in that, you know, they essentially have, I mean, if you look at the architecture in the footprint, I mean, they’re essentially they have the equivalent of pops, you know, data center, prevalent presences all across, you know, the globe. And they currently leverage those to facilitate, you know, web RTC connections, basically, video, voice and real time chat. And, and so I guess in that context, you could say, Okay, well, those services are things that that zoom does or enables. And that’s all done through API’s, and of course, zoom enabled video teleconferencing through API’s. So you could say, well, a gore could compete with zoom in that context. Twilio does the same thing for voice and video. Of course, Tony also has you know, SMS so it has ties into the actual physical networks and they do email too. So you know, the the The product offerings a little broader with with Twilio. And then and then I think the interesting comparison is Yeah, what Muji was talking about with, with the edge networks with fastly and CloudFlare. Because the, the piping is the same, it’s just that they’re focusing on maybe a different set of use cases. And I think what is going to be fascinating to see if we start to see, you know, more of these companies that essentially build these kind of networks of compute, you know, presence and then leverage them for for different use cases, you know, and in gore’s case, it’s it’s obviously being applied to video and voice. But I with all that said, I wouldn’t necessarily immediately jump to the conclusion that a gore is gonna be a big competitor for any of those companies we just mentioned, I just think that they’re, you know, taking a different slice of the pie. And it’s I think it’s just interesting looking at how the markets evolving and I agree with Mooji like, I will take a look at a Gora at some point. I tend to shy way a little bit from brand new IPOs, at least from an investment point of view, and then, you know, in may cover them, you know, after a couple of quarters.

 

Muji

Yeah, my two hesitations are again, their specialty edge network. I like the more generalized place. So CloudFlare and Fastly are able to build things on their own platform exactly like CloudFlare for teams. They built it on their own platform and can take and create new product lines from it, but also their customers are going to be doing the same thing in specialized cases, but people are going to be building products on those edge networks. That’s not that’s also going to happen with Agora but it’s it’s very specialized is in terms of video and audio delivery. Um, but it’s that it’s that one little hitch that they’re a Chinese based company. There’s there’s headquarters in Silicon Valley in China, but they’re their primary success right now is driven from Southeast Asia. In particular, I think it’s the rise of e commerce. There’s a lot of e commerce that has a live video interaction. And so it’s I guess I equate it to the QVC style of selling in America where they are showcasing a product. And that is gives people confidence to buy. So I think they’re having a lot of success right now with that particular model. Yeah, I think like, like Peterson. Let’s wait and see what else they’ve got under their sleeves.

 

Peter Offringa

Yeah, no, that is a good important distinction from Fastlane and CloudFlare. Because a gore is not putting up a programmable environment. I can’t take code in JavaScript code, webassembly code, whatever that isn’t uploaded to a gorras environment and run it there. And that’s obviously what festing CloudFlare are enabling, or, you know, a programmable network. You know, they’re offering a service expose through API’s that’s targeted at video and voice and chat. So in that regard, it is distinct from the edge networks, maybe something they decide to do in the future, but I mean, they’re still pretty small. So That would probably be several years out.

 

Austin Lieberman

Awesome. All right, we’re winding down. Thank you both for your time and we went way longer than I told either of you. You’re going to go awesome sports. Follow these two at stack investing in at hypergrowth on Twitter, and then there’s links to both of their websites. We’ll provide those in the show notes as well. I’ll put you both on the spot one more time with another question I didn’t prepare you for and these are not investment recommendations. You both own Fastly and CloudFlare. Tomorrow, you have to sell them and you have to buy something else. What do you buy tomorrow? If If you had to sell Fastly and CloudFlare

 

Peter Offringa

Well, my pitch was gonna be for Elastic. I think Elastic is going to have an interesting trajectory coming out of 2020 into 2021 if they can get back to the growth that they experienced in Q1, I think they’re going to see a big multiple expansion in ’21. I think going into 2021, their revenue could be growing back at 40 to 50% a year. So, I’m bullish on Elastic for the long term. I guess, you know, if I were to buy something tomorrow, I think that would be and I couldn’t buy more Fastly That would be my answer.

 

Muji

Can I make it an existing company? Probably turned around and put it in Zoom and CrowdStrike those are the two that have my attention, I mean, that’s fair. As far as ones on my watch list, Sea Limited that already mentioned, a gore is also in my watch list. Mercado Libre, which I have owned in the past, but is showing the remarkable strength. Hold all those ecommerce platforms like Shopify, or do extremely well, Shopify, Etsy Sea Limited are all knocking it out of the park right now. So those are all pretty interesting how long the last is the question, but I do think it’s a paradigm shift with e commerce. So I’m starting to get out of my boundaries of picking shovels, plays maybe and start exploring particular see limited just to add earnings yesterday that were really strong, or today, I’m really strong. So we established a position there.

 

Austin Lieberman

Thank you both for your time. I appreciate this. And this one, I think is the first time you two have actually talked to each other via video.

 

Peter Offringa

That’s pretty cool. Yeah, that was fun.

 

Muji

Yeah, super fun. We’re ending on an interesting note that’s that’s kind of where I’ve been my thoughts have been lately is that I’ve been so focused on the picks and shovels place over the past year, that’s where all the hyper growth has been. But the pandemic has really brought hyper growth to a lot of different industries obviously impacted a lot negatively. But I was already in a in a mindspace. And my portfolio was always towards the SAS providers exactly, because of how recession proof I felt they truly were. They were the building blocks of other companies. And they’re saving those up. They’re saving them money and giving them a new way of doing things like cybersecurity, that they didn’t have before. And so these weren’t going to be easily replaced. So it’s just interesting to watch. A lot of other industries really catch these same wins. And so now I’m kind of expanding my horizons a little bit and starting to look beyond the pick and shovels.

 

But thanks, thanks for having us. Super fun.

 

Peter Offringa

Yeah, I would agree. That was a lot of fun. It was great meeting you. imperson Muji. Thank you, Austin for sponsoring this. And, you know, certainly a shout out to  7investing, I think it’s great service. And, yeah, really appreciate you just making the effort to kind of get people like us together to share knowledge with, you know, the investment community and, you know, I’m just, I’m just happy that, you know, Mu and I can can help other investors, you know, navigate kind of what can be a pretty difficult market and help them, you know, make informed decisions relative to well, you know, consideration for these software companies. So, just appreciate you getting us together. And I suppose getting the word out.

 

Austin Lieberman

Yeah. And that’s what I want to end on is just to both of you. I think you too, are part of why now is a better time than ever before, to be an investor because people have access to great experts in fields that you you’re sharing your information for free out there. So thanks for your time and thanks for both of you for the time that you put in to both of your your writing. So let’s end on that. Thanks everyone for joining and we’ll catch you next time.