Telemedicine has exploded during the pandemic. That makes sense since it was risky to go to a doctor’s office and that’s not something people ever enjoyed doing. What will telemedicine look like in the years to come? Dana Abramovitz joins Dan Kline to share her thoughts. Then, Anirban Mahanti joins us to break down what’s happening in the software as a service (SAAS) space. These companies have been struggling but that does not mean that many of these aren’t good long-term investments.

Companies Mentioned

Teladoc (NYSE:TDOC)

CVS (NYSE:CVS)

Target (NYSE:TGT)

Cigna (NYSE:CI)

Slack (NYSE:WORK)

Salesforce (NYSE:CRM)

Disney (NYSE:DIS)

Verizon (NYSE:VZ)

Transcript

Sam Bailey  0:14

Welcome to 7investing Now, a show that teaches you how to take a long term view on investing by better understanding what’s happening in the market now.

Dan Kline  0:23

Good afternoon 7investors and welcome to the Wednesday edition of 7investing Now. My name of course is Daniel Brooks Klein and you’re in for a treat today I am being joined for the first time solo by Dana Abramovitz. Dana, welcome to the program.

Dana Abramovitz  0:38

Hey, Dan

Dan Kline  0:39

So we’re doing a show today, we’re going to talk a little bit about healthcare, telemedicine. And then I’m going to talk to Anirban Mahanti, about software-as-a-service stocks. But I wanted to give a little note at the top of the show, we understand that the market is a sea of red today, that that’s been the case for a lot of days this week that there’s a lot of volatility. There’s a lot of fear. And I promise on Friday’s show special time 12:30pm with Simon Erickson and Matt Cochrane, we will address that. I’ll take any questions you have today in between segments, but we can’t do every show about market volatility. We’re trying to hit that once or twice a week. And it makes sense when we have Dana on to talk about things that Dana is an expert in. But Dana, before I get to that, how are you? Have you done anything fun? Have you gone outside without a mask on and twirled around like anything enjoyable at all?

Dana Abramovitz  1:32

That would be lovely. Um, so it’s been raining here in Houston. So haven’t been able to spend too much time outside. But I’m absolutely just, you know, trying to go out. I met with some vaccinated friends over the weekend. So that was that was really nice to see people and hug people again.

Dan Kline  1:50

I am looking forward to a world where we don’t have to say that we’re just vaccinated is the assumption. And we could just go about our normality. I’m not going any farther into that question. I understand that as a political time bomb, we’d love your questions in your comments, you want to say hello, Dana, of course, covers very broadly the healthcare space, maybe not as specifically into the biotechs as Maxx Chatsko. More sort of broadly and we’re going to talk about the future of telemedicine, so feel free to ask your questions there.

Let me ask you, Dana, before we start, I’ve talked about on the show, I’ve done multiple telemedicine appointments, one wasn’t that successful during the beginning of the pandemic, I was straining my voice and I had to send pictures of like, like, like to the doctor and basically it was useless. I’ve had other telemedicine appointments where it was like, Yeah, my wife just got diagnosed with this. I have the same symptoms. Can I get the same prescription? By the way? I’m allergic to penicillin, so don’t give me the same prescription. Have you had any telemedicine appointments? You don’t have to be specific about whatever ailments they were mine just happened to be pretty generic ailments.

Dana Abramovitz  2:52

So actually, I have not, I so you know, I work out. I’m pretty healthy, and I haven’t had the opportunity to use telemedicine, but I’ve worked at a company that incorporated telemedicine in their products. So I really understand the value of it, and how it is useful for for people.

Dan Kline  3:16

I promise we will take your questions on Teladoc (NYSE:TDOC) we’ve got a couple in it quickly. Dana, you run a bar studio as well. Are you also doing teleclasses?

Dana Abramovitz  3:26

I am. I am. Um, yeah, when the pandemic hit, we had to switch pretty quickly to find some way to live stream our classes. And so I teach in studio and on live stream and it’s actually working out well for people who are traveling or don’t live close, but want to continue taking our classes so it works really well.

Dan Kline  3:49

Yeah, I have to say I’ve done a couple of yoga classes with my old studio in West Hartford, Connecticut, which I recommend highly. We will tweet out from the 7investing Twitter, if Dana shares how you can take remote classes on her Twitter. We will retweet it from the 7investing Twitter, let’s get to it. I’ve got a few questions here Dana about telemedicine. So, as I see it, we’re in the early innings of telemedicine. How do you see it changing in the next few years?

Dana Abramovitz  4:16

So so I’m gonna step back and say, you know, I guess it depends on how you define innings. But, you know, kind of like with the vaccine people have, we’ve been working on telemedicine and making that possible so that when the pandemic hit, it was really easy to pivot and make that that available. Um, so yeah, so, you know, it’s, it’s taking off. And I think that you know, all that early work, um, you know, figuring out, you know, making sure that it works, figure figuring out the technology, but the most important thing and this is, you know, for better or for worse in healthcare reimbursement, so making sure that you know, providers get paid.

Dan Kline  5:01

So I look at that Dana like let’s talk about earnings. When I say innings, obviously, I’m referring to a baseball game, baseball games of nine innings. But a lot of things have to happen before the baseball game, you have to hire an umpire you have to build a stadium. I feel like we’ve done that. And the actualities of telemedicine are still sort of being sorted out, like during the pandemic, there was a drive to do everything via telemedicine, but I would argue, so so let’s say I have my annual physical do that it might make sense to do part of my physical via telemedicine, part of my physical is getting blood work, which you usually are doing someplace other than the doctor anyway. And a third part might be having a nurse practitioner, take, you know, take my blood pressure and other things like that, do you see sort of an evolution where we have this just really hybrid healthcare system.

Dana Abramovitz  5:51

So telemedicine is obviously just a tool in the toolbox. And you know, just the goal being providing the best possible care. And so, you know, I don’t think that it’s going to replace in person visits, especially for certain things. But you know, for, you know, for, you know, basic checkups, or you know, like I’m having this cough or I have a sore throat or can you look at this, you know, certainly you can make that with a tele-visit without, you know, needing that, you know, in person visit and you know, the waiting rooms and then backing up, you know, the doctor’s office, and it’s just, you know, there are all sorts of issues with actually physically going to the doctor.

Dan Kline  6:35

And we have a comment here from Donovan Paul Thomas, who says, If you work out, you won’t get sick, I’ll jump in and say you get sick less. I am nowhere near the shape Dana is. But for the past two years, when I’ve been working out very regularly with a trainer during the period of my life where I did yoga almost every day. Yeah, I think it’s fair to say, the data shows, Maxx Chatsko sent me all sorts of stories, that if you work out, you get sick less often your thoughts Dana.

Dana Abramovitz  7:02

Yeah, so it actually helps with your immune system, right. So when you exercise, you’re reducing levels of cortisol and all sorts of other things that are going to, you know, stress out your immune system, so that when your body is exposed to all sorts of things, your immune system is able to fight it off. And I think it just you know, helps you feel good. And that helps, too.

Dan Kline  7:24

So let me put this in investing terms, I think of it as infrastructure investment. So if you look at what Amazon (NASDAQ:AMZN) did with building out its whole, you know, delivery pipeline that then paid off every time I go to the gym and put in a little workout, you know, it may be you know, lowers my blood pressure takes a little stress off my organs, you know, maybe actually makes you feel good, which is which is actually good for your for your long term health. So we don’t want to belabor this. But we do recommend that everyone go outside, take a walk, get a little exercise in.

So Dana, let me throw out the second question here. And it’s kind of a two parter. But the big question is, do you think where we get our healthcare will change? and I ask this, because I’ve gone to the CVS (NYSE:CVS) minute-clinic, for little things, my wife and son got vaccinated at a CVS, I assume, but when I next get a flu vaccine, I’ll probably do it at CVS in the Target (NYSE:TGT) that’s walking distance from my house. These are things we used to go to a doctor’s for, do you think there’s going to be a wholesale shift? Obviously, CVS wants there to be?

Dana Abramovitz  8:21

Yeah, I like that. Actually. The the minute-clinics and CVS, even CVS is rolling out some mental health solutions, which I think is great. And, you know, it’s, it’s really convenience, right? So if you are able to get the care that you need, even, you know, so like preventive care, even more importantly, um, then you’re actually going to access it, right? It has to be convenient. And, you know, as we have, you know, Amazon and Whole Foods, delivering all the things to us, you know, we’re gonna we want all of all of that care as well.

Dan Kline  8:58

Yeah, I will argue that there’s also just little conveniences, like I have what’s known as white coat syndrome, when you go to the doctor, I just assume I have everything. And it makes me very nervous and my blood pressure tests high. And I will go to the CVS minute-clinic afterwards, and have my blood pressure taken when I’m not nervous when I’ve learned that I I don’t have you know, a disease that would soon be named after me. And my blood pressure tests normal, you know, which is obviously something that my age I’ve been working on quite a bit. So if you’re aware of it, you can sort of communicate to your doctor like, Hey, here’s how I’m gonna get some alternate checks or alternate care. And there’s lots of places you can do that. And obviously, there’s an entire disenfranchised part of the country that might have better access to a CVS than they do to a hospital or a doctor’s office and certainly the prevalence of walk in clinics. I don’t know if they’ve grown in Texas, but my god in Orlando, we’re obviously I’m a massive tourist population. It feels like every third building is a walk in clinic.

We have a ton of good questions here. We’re gonna take all the questions at the end, that’s partly the factor. I can’t see the question. So my, my screen is not set on big enough at the moment. Dana, this is one we talked about all the time. So you know, I’m a huge believer in technology, I’m wearing an Apple Watch (NASDAQ: AAPL), I use it almost too much I get worried if like, my heart rates at like 90 instead of 70. And sometimes it just because I read something exciting, or who knows what, you know, you really have to look at the trends, not the in-the-moment data. But that being said, Do you think that big tech can disrupt or be part of a disruption of the healthcare industry?

Dana Abramovitz  10:31

I think it can be part of the disruption. And most certainly, and you know, you were talking about your blood pressure, right. And so there are now you know, at home measurement devices, and you can communicate that to your doctor’s office, right. So, you know, I mean, like, you know, all the, you know, that that personalized tech, you know, from you know, your bed to your toilets, you know, you can send all that information to your care team, so they know what’s going on. But yeah,

Dan Kline  11:03

Steve Symington, and I actually did an episode where we talked about the smart toilet, that will actually tell your doctor, that’s obviously very specialized. What we have $25 patches, that will tell you, if you’re dehydrated, I pointed this out, they’re made by Gatorade, so I’m not entirely sure that like, I feel like Gatorade is gonna err on the side of you’re dehydrated, go have a Gatorade, but that technology exists. My brother wears a band that gives him all sorts of information about his health, his health info, his sleep rate, I had a hard time sleeping in a watch. And I found it just stressed me out to know if I’d slept enough or not enough. And then it wasn’t really a good thing. I’ve worked on meditation and things like that.

Now, obviously, you wrote about this here, Dana, we failed on some of the big collaborative issues with healthcare those, those haven’t worked. But I do think Apple, Amazon, Google (NASDAQ:GOOGL,GOOG) are going to have a role. And obviously, some of that just starts with when you have tens of thousands, or even hundreds of thousands of employees, you have an efficiency in how you do healthcare. And that’s what we’re seeing with Amazon.

But I’m gonna I’m gonna segue to Amazon. That’s actually my next question here, a final one. And then we’re gonna go to all of your questions before we bring in Anirban Mahanti on software-as-a-service stocks. So that is, “What’s your thoughts on the report that Amazon is going to offer at home medical tests, including a COVID-19 test”, I’m a sucker for this, I have to admit, I’ve taken the like, at home gut biome test, and I’ve never actually gotten anything useful out of it. I’ve had very conflicting reports on what I’m allergic to, and what I’m not allergic to. So I tend to go by a how do I feel more than any of these tests? But can Amazon become a big player in this space?

Dana Abramovitz  12:45

Um, well you know, I think they can become a big player by, you know, providing the market space. And they’re already doing that, like, if you look, you know, on Amazon, so so one of the, at home testing companies that I follow is Everlywell. So they’re based out in Austin, I’m a big fan of their CEO, Julia Cheek. Um, and yeah, so you can go to the Everlywell store in Amazon and order all, you know, like food sensitivity kits, the COVID-19 test. You know, it’s, you know, so I’m a small company person, you know, like, small business person, I don’t have the, you know, large company mindset that that Jeff Bezos and Amazon have. Science is hard, though. And I don’t I don’t know if, if it were up to me, if I would switch, you know, create labs and set up a diagnostic company, just, you know, just dealing with the FDA alone. And I think they’re in a position to work with some of the companies that have already done the science already gone through the regulations and just working to help them.

Dan Kline  13:53

So part of the reason they’re offering COVID-19 tests is because they actually had to set up that technology for testing their own employees. So they actually pivoted one of their labs to do that, but they are working heavily with third parties, I don’t think Amazon is going to become full on in the testing space. But I do think there might be testing that makes sense in the workplace, like COVID-19 testing, there might be other things, and they’ll be able to roll that out as a business solution.

We have a lot of questions, and we’re going to take them, but I’m not always promising you an answer, because on some of these Dana, and I have only done a couple of these shows together, and I don’t necessarily know what she’s an expert on. So we’re going to take Sandeep David’s question, Sam, if you want to throw that up, “Has Teladoc become a commodity”. I just want the first part of it. And the second part is “or does Livongo add unrivaled value?” I’ll take a little bit of this. I think the jury is out on the Livongo that’s different, definitely a differentiator, but I think you need a bunch of differentiators. I absolutely worry that Teladoc is a commodity because I have no idea if I’m using a white label version of Teladoc or I’m just using somebody else’s I can usually tell if it’s a bad experience that it isn’t Teladoc your thoughts on this Dana?

Dana Abramovitz  15:06

Um, yeah, it’s interesting. Um, so my new insurance company offers Teladoc. And, you know, so I love that, you know, that insurance, payers are providing telemedicine medicine services. Is it a commodity? I don’t know.

Dan Kline  15:30

Dana are they branding it as Teladoc? Or are they? Are they actually just saying telemedicine?

Dana Abramovitz  15:36

No, no, they’re branding it as Teladoc. So yeah, so with with my insurance company, I actually got my Teladoc card. Yeah.

Dan Kline  15:42

That’s really interesting, because that shows that your insurance company sees some value in the brand name. I know my insurance, which I have insurance through my wife’s job, does not brand specifically and I have no idea what I’m using. I think it’s I think Cigna (NYSE:CI) is my healthcare provider. And I’m going to guess it isn’t Teladoc because it wasn’t a, it wasn’t quite as good as experience as when I actually went directly to Teladoc.

We’re gonna take Sam E. Brewster’s comment next. And this is one that I’m not sure you know about, “Is 23andMe going to be a big player in this space”. I think 23andMe is a novelty company. And, and anything else is kind of a pretty big pivot, Dana?.

Dana Abramovitz  16:19

Yeah. So you know, the things that 23andMe is doing, you know, it’s, um, you know, so they’re, they’re not even looking at your genome, they’re looking at snips that are looking at variations, you know, and different, you know, different people. So, it’s really hard to specifically test for things. And that, you know, I’m a fan of 23andMe. Um, I don’t know, if they stay in this space, just because they’ve had problems with the FDA in the past. And, you know, if they, if they stay in their lane, then I do not see them, you know, going into the same level of testing.

Dan Kline  16:59

Yeah, 23andMe, and I hate to, you know, downplay a company, but 23andMe feels to me like, it’s like, sort of for fun. Like, you know, I know, I do have someone in my world that found a half brother. And that turned out to be a positive story. But that could also turn out to be a negative story. And, you know, there’s, there’s some people that probably don’t want to know about all of their, their part siblings and other things like that, I think genetic testing, is that is absolutely going to grow. But it’s one of those where you’re probably going to want to involve a doctor and not necessarily just like a kit, you sign up for on a website.

Dana Abramovitz  17:35

And, and so 23andMe it’s not really genomic testing. So the science, the technology that they’re using is different, you know, so like, you know, comparing you I’m sure we’ve talked about, you know, other genomic companies on on this program before, you know, it’s it’s, you know, looking at just variations across people, so it’s not diagnostic.

Dan Kline  18:02

We’re gonna take Max Lucas’s comment before we move into the software-as-a-service, part of the segment, “Telemedicine seems like it will be the most useful to rural communities that could be hours away from a doctor, even for a basic checkup”, your thoughts Dana?

Dana Abramovitz  18:15

Absolutely. And that’s where, you know, we seen a lot of that working, you know, even if, you know, you’re working at, you know, so you’re living a rural community and you have cancer, you know, I don’t mean to diagnose anyone, right. Um, but you know, like, having access to a big hospital and, you know, like a big research hospital, you know, it’s helpful to have that. So, um, yeah, it’s, and we’ve seen that, you know, so I’m in Texas, and I know a lot of people that have been working on the policy components, and they’ve really seen the benefits of telemedicine in rural communities.

Dan Kline  18:55

Yeah, and I think we’re gonna see it work in rural communities in a similar way it can work in business. So let’s pretend that my family has a home in Peterborough, New Hampshire, not not completely rural, fairly dense community, but not a lot of hospitals nearby, probably about a half hour from medical facility. So in theory, I could go online, have my telemedicine appointment. And it turns out that, gee, I need a blood draw, I need a I don’t know a kidney function test, who knows what it is. And maybe there is a healthcare company that’s collecting, okay. In two weeks, we’re going to send out a nurse and they’re going to hit all the homes in this community. So it’s going to be very efficient. Well, that will work in an office setting as well. So you know, 100 people on an Amazon campus need their blood pressure checked as a second part, or need a blood draw as a second part. I think this is an evolving model. And obviously, you know, in rural communities, we’ve seen drone deliveries of drugs. We saw that during the pandemic. Now, does that work in Manhattan or in Houston or even here in West Palm Beach? No. Might it work in Peterborough, New Hampshire, where you know, my family has all you know, all sorts of land as do most of have our neighbors. So I’m really excited to see how the technology is going to work out.

Mike Fee, we see and appreciate your question might be a little more specific than we’re going to get into here. But it’s certainly one Dana can can copy and pass on to Maxx. And we can we can all talk about that offline as a team? And certainly, if it’s one, we know, we’ll bring it up on a future show. We appreciate you for being here. I think every day watching us. Dana Abramovitz, you have to go clean the studio. So while you do that, give me 30 seconds here, because let me give a quick pitch. Friday is a big day for 7investing.  At 10:00am in the morning, we do our new subscriber call that is people who’ve just joined our service, we walk them through the service, we walk them through the basics, how to open a brokerage account, all sorts of really, you know, things you assume people would know, that’s wrong to assume we always talk about being too inside baseball, we try to break down all the terminology give you everything you need.

Then at 11 o’clock, we have our members call, there’s a 90 minute call goes till 12:30pm. And we’re going to talk about what are our favorite picks now among all the pics we’ve made. We’re going to update our most recent pick. And then we are going to update another pick and take a ton of questions. So that is a great call. And that of course pushes back the start of 7investing Now to 12:30pm. But it’s 12:30pm and you’re going to get me, you’re gonna get Simon Erickson, you are going to get Matt Cochrane, you might get Maxx Chatsko and Steve Symington, you might get Dana for a bit, probably not. It’s late in the day for her. Maybe Anirban will will be up and join us as well.

If you’d like to become a member, it is not too late to become part of those members-only calls that is www.7investing.com/subscribe. It is really easy to join $49 a month, or $399 for a 12 month subscription. You are crazy if you don’t join. With that I’m going to bring an Anirban Mahanti. Taped this interview a few days ago, he is talking about software-as-a-service stocks you’re going to want to stick around, feel free to ask questions as it goes, I will either field them or send them to him. And then Dana and I will be back to quickly hit our finisher and close the show. Sam Bailey if you want to play that video, we appreciate it.

Welcome back to 7investing Now. I am joined today once again by our very own Anirban Mahanti, Anirban, how are you? How are things? What day? Is it? What time is it? I don’t even know what time it is here. I can’t tell you what time it is there.

Anirban Mahanti  22:30

Well, probably Thursday for you. And Friday morning for me. It’s just a little past 6:00am but I’ve been up since 4:00am. If people have seen my tweets today.

Dan Kline  22:40

Yes, we have noticed that and I saw you pretty active on our Slack board just to give people a peek behind the curtains. So we have a really active Slack and and poor Matt Cochrane who, who has a regular job in addition to this, and, and poor Anirban, who’s on a different timeframe, I was gone for an hour, I went to the gym for an hour and I came back and just one thread had 61 messages in it like before we taped this, I was just taping something. So before we taped this, I literally throw up a note and just said, Hey, if I didn’t respond to something you expected me to respond to, you’re gonna have to draw my attention to it. So all of this like great communication, we almost need a tool to prioritize some of these great tools we have like, it can be overwhelming.

And I only mentioned that because we’re going to talk about software-as-a-service. And that is absolutely something that could happen. It wouldn’t shock me if somebody created something I could subscribe to, that organized my Slack and looked for, you know, things where I’m expected to respond. But they didn’t message me like so. Let’s talk about software-as-a-service. You frame this. You said my software-as-a-service. That is some people go by SaaS businesses currently losing money. Yes, they all right now, they’re all getting hit in share price there. When you say losing money, do you mean share prices dropping? Or do you mean that the companies aren’t making money?

Anirban Mahanti  24:03

Well, right now they’re losing money both ways. Like a lot of the software-as-a-service, SaaS business are actually losing when I say losing money, I mean, on an operating basis, like look at their operating earnings is negative. Right? So they’re not, they’re not positive operating earnings, they might have high growth, but they have negative operating earnings, which basically means they’re losing money right now. And the stock stocks are down. So it’s losing money both ways. So I meant the former but yeah, it’s true that they’re losing money both ways right now.

Dan Kline  24:32

Now, is that largely because you’re taking whatever you would make an investing? This isn’t a pizza place, the goal isn’t to get to a million dollars and make $300 grand, it’s to get some to some sort of grand scale, right.

Anirban Mahanti  24:45

Absolutely, so one of the things with with software, right, and it’s different for different types of software, right. So if you think about software that serving consumers that’s different from serving enterprises. If you serve enterprises, typically it means you’re getting into the workflow of the enterprise, I tend to take Slack, Slack (NYSE:WORK) is an enterprise software, we have so much data on Slack. Like it’s really hard right now. And instead of investing as a young business right, but for 7investing to actually change from Slack to something else, as their primary comms tool is really hard. And that’s the beauty of, of enterprise software is that it’s very sticky, likely that over time, we’re going to use more of it. And that’s what the enterprise software guys are gunning for. They’re basically saying, Well look, our opportunity is is huge, humongous long runways, we can invest, as you said, for growth, we can get more of that, you know, greenfield opportunity, and then we’re gonna make money in the future, right? So it’s all about growth and scalability. And they all have high margins, right, they support, gross margins, typically around 75%-80%, maybe in some cases, 85%. So there is opportunity to make money,

Dan Kline  25:57

But they also have a significant marketing cost, which you know, the goal is attract customers. And in theory, you keep them like, yes, we’re not going to switch from Slack, I they’ll be very difficult to do. But Slack can attract us, because they have a free product, we can upgrade to a low cost product. But for Slack to get a giant organization that already say has Microsoft, you know, in some of its other areas, that’s a big get, that’s an expensive thing. And that’s dragging on profits for all of these as well right?

Anirban Mahanti  26:24

Absolutely, so look, you’re right. So if, if it’s to go to market strategy that you’re talking about, and really, for some companies, they so I mean, the way to think about Slack, we will be using Slack as an example, right. But Slack is now owned by Salesforce (NYSE:CRM). But But Slack is basically thought of as an email replacement, it’s basically going for that it’s killing email or is right trying to kill supplant email with something else. Now, of course, there are organizations which are going to not use Slack, but they think about the number of organizations that have email that want to reduce their email usage, and then essentially, change Slack to be the new email, lots of opportunities. So this can be competition. But yes, you need marketing to, to get there.

You know, one of the things that, you know, I was going to talk about here is this idea. So I once spoke with, actually, I’d interviewed once a CEO of a small software company, listed here in Australia, and he used a nice analogy. His analogy was that you can think of the sales and marketing as consisting of two parts. One is you’ve got hunters, and then you’ve got gatherers, right. And hunters, the idea is a hunter space to go and find new customers, right. And the idea behind gathers, these are people who actually sell existing to the existing client, basically keep them happy, and upgrade them to new things. This is the big deal. With most of the enterprise software-as-a-service businesses, right, they’ve got multiple modules that they can sell. And once you’re in, the idea is to sell you more, I will get you to buy more seats get you to buy new modules, but it gets you to buy something else. You think about Slack as an example, Slack is now owned by Salesforce, well, if you already had Salesforce marketing software, maybe we can sell you Slack as well. If you own already Slack, maybe we can sell your Salesforce marketing or something else. Right. So Salesforce has got a wide range of products that can sell.

So another way to think about profitability, which I think people generally don’t do, is, is to think about dollar based retention, which is basically saying, Well, how much money did I make off the customers that I had last year, this year. So we basically those customers that they did not lose? What is the extra money I can generate from them. So that is the money that you’re actually generating from your gatherers, right? These are people who are expanding your sales. And if your expansion is 20%, typically 15% to 20%, that’s basically let’s call it, half of your salesforce is basically generating that the remainder is generating the sales. So you could in theory, reduce your sales and marketing expense, by say, 30%, and you’d compromise on your growth rate, but you could all of a sudden become profitable. Right. And I think that’s the that’s the I think, as long as the retention rates are high, and the dollar based expansion rates are high, I think they actually have the license to lose money, which is, you know, I think it’s counterintuitive, but at scale, these things will make money.

Dan Kline  29:26

There’s also a customer number, where they take their foot off the pedal, right like so if your Amazon, which is obviously not a software-as-a-service business and their core business, but a lot of their early money was spent on just getting your credit card, getting you into the system, once they hit, I don’t know what the number is, but let’s say it’s, you know, 150 million people in the US, you know, as regular members and maybe two thirds of those as Prime members. They’re going to see diminishing returns on their marketing dollars. I think we’re seeing Netflix (NASDAQ:NFLX) in the US getting to the point that customer retention is more important than customer acquisition, obviously, with software-as-a-service companies like Slack, they must know what the penetration point is, right? And when it becomes defense, when they can start saying, okay, we want to keep these people, and that just becomes a business. And they’re the stock story is what else can they sell you? What else can they add? Where can they expand?

Anirban Mahanti  30:19

Absolutely. So, great example with Netflix, and this is not really, I mean, technically Netflix is a subscription service, right? It’s not a software service, it’s a subscription service, like many of the software businesses. And if you look at how Netflix reports, its numbers exactly to your point, when it reports US numbers, it says, well, we’re making a profit in the US, they have a contribution profits, if you think about, you know, the cost to sell to US, the products that they’re actually streaming in the US, or the video shows that they’re showing in the US, for that they’re actually making significant profits. They’re not making profit on the international component of the business, but that’s where the growth is. Right?

So exactly, you know, you figured out very quickly where you’re, you know, the tipping point is, and in many of these software businesses are very early in that game. So therefore, they you know, even a company like Salesforce is a very big company. You know, it’s, it’s about $22 billion, or $22 billion, it’s projected to $25 billion this year in sales, it’s still growing at 25%, 20% to 25%, right? So think about that, at $25 billion, you’re growing at 20% to 25%, new roughly doubling every maybe four years, three to four years, right, your sales, you could easily stop spending money on acquiring new sales, and just basically say, Well, I’m gonna generate a 30%, 35% operating margin on that, on that $25 billion, right. That’s, that’s a lot of money that you could be generating. Right? Right there. So I think again, these companies know what the opportunity is exactly to your point. And they’ll switch whenever necessary.

Dan Kline  31:51

So let’s close on a theoretical question here. So high flying software-as-a-service company stock at crazy multiples, but really valuable, really easy to raise capital. Stock prices down 60%, 70%, 80%, whatever the numbers are, it’s not that much for everybody. At some point, as a CEO, do, you have to flip the switch and say, Hey, right now, it’s not going to be easy to raise money, we need to slow down growth, which is then going to make it harder to raise money. But we need to actually think about survivability, like you can be a really big company with a lot of customers. And if you run out of money, you still go out of business.

Anirban Mahanti  32:28

Yeah, so that that’s a fantastic, I love that question. So here, so we’ve been talking about operating profits, right? And operating profits depend on you know, how, for example, you’re recognizing revenue. Now software, businesses typically would sell a contract say, or the you know, or sell a contract for three years out, they might actually receive the funds well ahead of time, but they might not have actually recognized it because they can’t recognize revenue. Well, in most companies would would say like a business like Salesforce would say, we have what’s called remaining performance obligation, it’s almost a direct visibility into what the future revenue is, because they have basically been contracted to receive those funds in the future. Either they received it or they’re going to receive it.

I think what’s what’s interesting for many of these software companies is to think about free cash flow, just cash from operations, how much money is coming into the door, and how much money is going out in say, capex, right? If you look at that, for most software businesses can run at breakeven. And many of these companies that high flying stocks were very smart, they raise capital when the stocks were high. So most of these businesses are cashed up, they have a billion dollars plus, in their balance sheet, they actually don’t need money right now, and they can continue growing, losing money, because you’re technically not losing money, because you know, they’re breakeven in a cash flow basis, or they’re even cashflow positive.

So there’s a lot of nuance going on here. Which, you know, what, if people are looking just at, you know, earnings per share, they’re just missing that out, because they’re missing the nuance that, well, this is actually generating a lot of money, they don’t need to raise capital. If there’s a business that needs to raise capital, though, that’s in a tight spot. And if their shares have been battered, they’re in a tight spot. And you usually see some strong correlations as a high short interest in those cases, because even the people shorting it know that their balance sheet is in a, in a tight spot. So yeah, I mean, there’s a point to that.

Dan Kline  34:22

Yeah, and there’s some nuance and it’s, you know, it’s something that we look at, like there are often non-cash expenses booked as cash expenses, like executive compensation through stock, it doesn’t actually cost you any money, but it’s booked as cash I, I always go back to my days at the toy store, where, technically when you sell a gift card, you have the money, but you’re not actually supposed to record the revenue until the gift card is redeemed. The problem is a crazy percentage of gift cards don’t get redeemed. That’s why Starbucks (NASDAQ:SBUX) really wants to sell you a gift card. Because you know, not that they hope it won’t get redeemed but they know it’s gonna get forgotten, that the $10 gift card, somebody is going to use $7.83 and they’re not going to get the whole thing. It became very tricky from an accounting point of view, especially at Christmas, we might sell $100,000 worth of gift cards. And the reality is those are a liability to a point. But technically you can take a percentage of them over. There’s a lot of different accounting tricks there. I won’t belabor it

Anirban Mahanti, we will talk about software-as-a-service. We will revisit these companies on a specific basis. In a segment we are taping later. Thank you for doing this.

Thank you Anirban Mahanti, Thank you, Dana Abramovitz, for sticking around. Thank you person in the comments who’s clearly spam. We’re not going to take that one. We appreciate so many of you watching the show. Sam Bailey before we hit our finisher. Let me ask a question. Dana, do you pay for any streaming services?

Dana Abramovitz  35:51

Uh, no.

Dan Kline  35:54

Yeah, I don’t picture you, I don’t know, sitting around watching a lot of television, I will say I do watch a fair amount of television, a lot of it in the background or a lot of it post 10 o’clock at night, my wife and I usually have something we watch together. And then we watch things, you know, apart when I’m traveling, for her or for me when she falls asleep before me.

But Sam, let’s get our finisher here. “Which streaming player can compete with Netflix and Disney (NYSE:DIS)?” This was obviously inspired either the Warner Media, Discovery (NASDAQ:DISCA) deal. We talked about this earlier in the week, I like Discovery better on its own than being tied up with Warner Media, which has to be a more expensive thing. Only 6.2% said Paramount+, yeah, and I apologize to our friend Alan Sokoloff, we’ve talked about Paramount+ on the air, when your best franchise is Star Trek, and your commercials are touting that you have SpongeBob SquarePants, you’re not competing with Disney’s IP, or Netflix having a massive advantage in terms of establishing some shows.

And Peacock, I just think NBC owns a whole lot of nobody cares. And maybe the Olympics will help a little bit. But an awful lot of Comcast (NASDAQ:CMCSA) subscribers had access to Peacock and didn’t turn it on. So you know, if I tell you you have something for free, and you don’t go get it when you don’t actually have to leave your house, you have to do very little. I don’t think that’s very good.

So about 67% of you said none of the above. I’m actually 100% a believer that none of the above I think we’re gonna have Disney we’re gonna have Netflix. I’m not including Amazon Prime because I understand that some of you are getting Amazon Prime because of the shows. Most people are getting Amazon Prime because of delivery. So I look at Amazon Prime as a as a vanity play right now and perhaps not a great investment for Amazon though maybe at some point they’ll need the differentiator.

So yeah, I don’t think there is anyone who could compete I think you’re gonna see a lot of consolidation. And I think it’s going to be a mistake owning thirty 2nd-tier franchises you know, Amazon buying MGM which you know, gives it some some rights to old James Bond movies, but not new James Bond movies. Doesn’t seem all that valuable to me. So I think you’re gonna see a lot of mistakes here. You’re going to see a lot more “go90’s” if you remember that one. That was the Verizon (NYSE:VZ) take on short term videos, you’re gonna see a lot more Quibi’s, companies where people who have no clue just try to chase after kids.

With that we have reached the end of the show. Dana has a class to teach. If you want to get in touch with us, it is info@7investing.com. That is our email, usually Steve Symington. That’s for questions about the service, questions about your membership. Questions about sort of anything other than individual stocks, don’t send us “Hey, could you research this stock that you know that you haven’t researched or maybe have been but have only talked about to members?”

If you would like to follow us on social media that is @7investing, we appreciate you for doing that. We thank all of you for watching today. We’ll be back Friday at 12:30pm for Sam Bailey behind the glass, for Dana Abramovitz. I am Dan Klein. We will see you Friday.