00:00 Intro 02:20 GuruFocus Manual 04:30 AI & Software Pullback – General Thoughts 09:55 IGV Index Stocks: ACIW ADBE …
Transcript
Welcome, welcome, welcome. How's everybody doing? Hope you are doing well. My name is Andrew with Focus Compounding on air live with Jeff Gannon. Jeff, how's it going today? It's going very well, Andrew. How's it going with you? It's going great. We hope it's going great with everybody else as well. If this is the first time you are tuning in with us, thank you so much for joining us. Be sure to go check out all of our content with that we push out into the investing universe. The best way to do that is to follow me on X at @focuscompound. Go to focuscompounding.com to get access to investment write-ups from Jeff going all the way back to 2005. And of course, if you're interested in learning about our money management services, uh you could reach out to me at andrew@focuscompounding.com. So, in today's podcast, Jeff, we are going to be going over the IGV um uh ETF and spend some time looking through a bunch of software-related, technology-related companies uh to see if there's anywhere, you know, that we think there's uh an interesting opportunity. Uh if you're watching the screen right now, you can see that the IGV is off about 20%. Well, let's see right here. Yeah, 20% year-to-date. Um 1 year down about 13%. 3 year, you're still up 41%. Uh but year-to-date, everyone listening is um you know, aware of what's going on in software and technology. Uh the whole AI craze is really calling the terminal value of a lot of these software companies into question and the market has been pricing a lot of these companies down um you know, because of that. So, what I did was through Coifin, I pulled all of the companies that are in the IGV ETF and I put it into my new favorite feature uh through GuruFocus. Um and what it does is it produces almost like a um a manual. >> Okay. I'm not going to say the name. Do not say the name of the a manual, yeah. Yeah, yeah. It pro- it produces a manual that's easy on the eyes that you could flip through yourself. Everyone listening is very aware of what I'm talking about. Uh not going to say the name uh to be able to quickly, you know, go over it. Um I don't even know how I found this, quite honestly, Jeff. I think I just Google like manual of something or whatever and and GuruFocus, they have their own version, which is incredible. Um so, I am a GuruFocus subscriber for the first time ever um and it's solely because of this feature, right? I guess I should pull it up. And and to people, I mean, we don't even have a a link or anything like that, so we're not getting, you know, compensated to to talk about this, but I just really love the product. you know, you could type in the tickers and you could either download it, which I usually do, uh but we are going to do the web app for for this podcast. Um but you could do the S&P 500, you can do by region and market cap. Um and I have found for international stocks, uh particularly like smaller companies, like micro, small, mid, whatever, this is a great feature to be able just to quickly flip through uh companies, right? OTC market, obviously, have done that. Um but you know, like if you're going to go A to A to Z, right? This is just a quick way to do it instead of like getting the name, having to put it in whatever you use to pull financials and then look at it, you know, that way. So, my eyes, candidly, are still getting used to like where to look and and and getting used to the >> uh the manual itself, but I thought, "Hey, this is great for us to go over on the podcast. We could look at different sectors, we could look at different countries. I mean, we got everything." And we did get approval from GuruFocus uh to do this. Uh but we aren't compensated for that. So, but you know, if you like the product, of course, just go and sign up and you could use this yourself. But you know, I came across this feature and I thought this would be great, you know, for me personally, um but just as great for the podcast as well. So, put in all the companies that are in the IGV and we could go through it and see if anything is interesting. Um you know, I will say, you know, from the start, I I guess I don't pay for this uh plan on on Coifin that tells you what multiples uh the IG average stock in the IGV is trading at, but you could see, you know, it's it's 30 plus times EV to EBITDA um for for the average company in this ETF. Uh but it's come down a good amount from it looks like, you know, close to 50 times. So, I guess before we jump in and do that, do you have any judge general thoughts on you know, what has happened? I think it's, you know, in my mind, these companies were the most dominant, long-duration, high-quality companies ever, right? And the market put that valuation on these companies by rewarding it with a very richly uh you know, valued multiple. And for the first time ever, that terminal value, which if you ever do a DCF, Jeff, the bulk of of a value in a company comes after 10 years, right? Which is why how you could have these companies, you know, miss by a penny or they, you know, change their guidance for operating margins to be lower by, you know, 1% or whatever and the stock gets crushed. Well, it's because a lot of people they're betting, you know, 10, 15, 20, 30 years into the future. And historically, Mr. Market has has rewarded these companies with a very expensive terminal value. Um and for the first time ever, that is coming under threat uh because of AI. And people don't, you know, have a good idea about where a lot of these companies will be, the use case for the companies uh because things are just changing so fast um in in the AI world and and for the first time ever, those the moat of these companies, if they have a moat, uh is being called into question. So, you're being you're seeing that properly, I guess, priced by the market. Um kind of funny, Buffett, you know, he's always talked about how he he doesn't understand technology and software and all that sort of stuff. Of course, he understands like software and technology generally. Um but I feel I always felt like when he would say that, he was just saying he doesn't have a good idea about, you know, the durability of these companies and the competition of these companies. And and here we are, you know, presumably at the end of his life and and that's uh you know, kind of those chickens are coming home to roost. So, I guess what are your thoughts on just what's going on in technology and software in general and then we could start to flip through this manual. Sure. So, one is just the high prices like you talked about. So, EV to EBITDA and things like that being high. Two is these businesses are generally um high fixed costs and low um you know, gross low marginal cost businesses. So, they're very dependent on volume, so they have huge amounts of operating leverage, you know, all software companies tend to have that. Which means that, you know, people talk about how great the gross margins are, how great the operating margins are when they're really big, but it also means that those can change a lot. So, that in valuations relative to sales, it's it's um they can uh that can be readjusted a lot. And then some of these have very high enterprise value to sales like we talked about. The ones that we're going to look at today don't fall into this category uh like at all, basically. But um also when we talk about private credit, some of it is for software um specifically. Like they're over uh they private [clears throat] credit lends more to um software than really software as a category in those size businesses usually. Software is really big in like indexes from because of huge giant companies, but it's not usually a big borrower across the economy except in things like private credit. Mhm. Mhm. What do you think about a lot of these technology companies in in in software businesses that historically have paid, you know, huge chunk of an employee's compensation through stock-based compensation, right? And that was a great way, you know, for the employee as long as the stocks, you know, continued to go up. Um and I guess just what if that doesn't happen going forward for a lot of these businesses? >> Well, usually they readjust it to give them more and more stock when that happens. I mean, that that was kind of what happened in like the um 2000 period and stuff that you can see. So, um some companies even bought back around the dot-com time and they would have that was kind of the worst is when they had huge buybacks when their stock was really expensive to offset dilution. And then they adjusted things to give more and more shares to try to get to the kinds of dollars that they were giving in dot-com era when their stocks were a lot cheaper. So, it depends, but that is what a lot of them do. Uh they adjust it um so that they're they have higher So, good news is you don't have as high a dilution necessarily when your stock's really expensive and you have higher dilution when it's really cheap. And you know, uh having less dilution when you're expensive, I guess, is good, but it, you know, it's kind of worse to do the reverse there. Um and then also that is a factor because one thing is you do see on a lot of calculations of free cash flow that I see anywhere um that there is that is not with a steady state for the business and a steady state for the number of shares often. Some of these companies, you're really that would be as if you're selling off 3% of your company every year to get that free cash flow amount because it is recorded in terms of income things and sometimes it's recorded depending on what source you're using in terms of certain EBITDA calculations, but it's almost never um done in terms of cash flow things. They're pulling from the cash flow statements that usually um are realized are not adjusting for the fact, obviously, cuz it's non-cash of that. That matters to a lender, it matters to other people who care about the cash, but to an investor, free cash would really mean you kind of have to uh take out the the amount that are given to employees because you either have to buy that back or you have to lower your return by being diluted every year, you know, either one. Mhm. Got you. Okay, so let's go through ACI Worldwide, ticker ACIW. So you're a bit familiar with you know, the scores and whatnot that GuruFocus puts out. But $4.4 billion market cap, you could see the warning sign right here, gross margin percentage declined. I always think about how somebody that was purely a or invested a lot in software and actually ran a technology and software company. He said whenever one of his a company that he owns software tech company, the second that gross margins decline, he always sells out immediately. Sort of like a quick and fast rule. Um but good signs, Altman Z-score strong. Let's see. Let's see, anything else stand out to you? EV to EBITDA currently 10 or basically 11 times. Revenue per share has gone up, EPS has gone up, free cash flow per share, all those numbers have gone up basically every single year. Let's see, what else? Anything jump out to you on this page? Yeah, so I mean in terms of valuation, you're back to where you were at several times in the past. For a software company, this is very low valuation. And then of course the returns on capital and everything are high. So it looks good on that basis. The issue is of course what the business is and understanding that. So it's ACI Worldwide. Yeah, I understand it, but Yeah, develops markets, installs a portfolio of software products focused on facilitating electronic payments. The firm's products are sold and supported directly and through distribution networks covering three geographic regions. Okay, blah blah let's see. ACI software products process payment transactions for retail banking clients, billers such as utilities, and health care providers, and community banks and credit unions. Yeah. So the problem with this is I mean that's fine. It's great to learn about that. And I think a lot of these software companies will be in these. Certainly the private equity ones are definitely in these kinds of categories. Where you have to learn about it as a user of it. Like there's another one on here AppFolio or something that I I know and I've looked at. And um it's the same sort of thing where I would have to learn more about so AppFolio it says for real estate industry. So like apartment management type stuff. Yeah, it says property management software. But it it's used a lot and it could be integral to their operations and they don't want to switch and they love it. I don't know cuz I don't own apartments you know or manage them. And same sort of thing here since I don't have anything to do with the software that's running a retail bank. Um then you know, we don't we don't know enough about those things the way that we would about if someone asked opinions about Adobe or Intuit or something. You know what I mean? That we have more experience with directly, right? Um so that's always the issue and I think that's probably what scares people sometimes when we talk about AI and everything. It definitely seems to be in categories where a lot of the people wouldn't know anything about the the business very much about what function is performing sometimes. That's where I've seen some of the biggest changes, right? Because then people are like, well can't you replace this and stuff? But when it's something that they do every day, they go, well I don't know if you could replace replace that. You know, so the a lot of these are things that people don't have experience with that are business to business type things. Mhm. You know, the part that would scare me about owning any company in this basket going forward is basically whenever there's a new model that's going to come out or or you know, hype about a new model or just you know, whatever. I feel like these companies are just all going to sell off. So like as a stock, I mean as a business it's one thing, right? You you value the business, but then also like from a valuing or thinking about how the stock's going to trade, right? If you're going to own it, I just feel like the they're always going to be sort of I don't know fighting with two hands tied behind their backs going forward. As these models continue to get better. That may in terms of the stock performance that you see in the patterns of the stock. >> Yeah. Right. I do think that might change after you have publicly traded AI companies. Cuz if the IPO and stuff is supposed to be as big as you know, as predicted and everything, we might start to see different things once you actually see AI companies trading day to day, right? That's going to affect people's perceptions a lot because they're going to get re-rated every day. It's going to be a lot harder for them to kind of present a narrative about the company that is you know, uniformly positive or you know, you might have a negative or whatever, but it's going to be something that every day people are talking about more. These are publicly traded companies, those aren't. I think that has a big impact on people's perceptions. Um and it'll be interesting when when you can say, oh AI stuff was down 30% this you know, year to date or whatever or up 30% and then people will try to come up with more of a narrative about that. Whereas right now, you know, they only get pricing when there's some round of something and they're a lot of the times the companies investing in it are want to present in the best way too cuz they're kind of at least tangentially related to it. So it just I think will be different once those stocks are public. They'll have to kind of open the kimono and stuff and we'll know a lot more about them. Mhm. Okay, Adobe Inc. ADBE. Um this one's been you know, in in the news a lot I would say. At least amongst like value investors, they're sort of circling the wagons on this company. Down 35% year to date. So huge dispersion. So IGV's down 13 and Adobe's down 35. I don't know if you're exactly seeing it in the numbers yet, right? It's more so just like the perception of the multiple on this company. Seen a lot of back and forth. You know, for me personally on this, I don't feel any you know, confidence one way or the other. We use Adobe, right? So we edit this podcast through Premiere Pro. Um Yeah. I know. >> Adobe in a lot of different ways. Teams that I work with use Adobe all the time and have asked to use it more for different things. So yeah, it has a suite of different things that are used all the time for stuff and is very standard for those things and you know, but on the other hand, you know, some of the things that we use don't actually cost that much and yes, there are other ways of doing all of them. Um I guess one thing is whether they'll integrate these things into being a beneficiary of them, Adobe, or whether they're going to have competition on a lot of things for that. I don't know. It's kind of always my thinking about like you know, there's a Google Sheets thing and there's a Microsoft thing, but I don't want people using Google Sheets. So you know, and and so Google can't charge us for things if they wanted to I mean we don't even use them if they don't charge us. So there are things like that where that's probably going to be the case. Here I think that it's a it's a which is some of the other ones in here that are this extreme. I really do think this is a multiple issue that the multiple got absurd. >> I mean look at this. So I'll just read it. So from I'll read it from 2020 onward. So PE 44 times, 67 times. That's crazy. 34 times, 52 times, 42 times and then in 2025 19 times and now we're currently at 14 times. Yeah, it it got as silly as Yeah, it got as silly about 5 years ago as like FICO got a couple years ago, which is about 50 times EBITDA almost and about 10 times sales, which is an insane amount for a mature company of any kind. It's just a you know, I mean I know they don't have much in the way of CapEx that they have to do, but you have to pay tax, you have to do things like that. We're talking about you have like a 2% type yield, right? And then in 20 you have a price to sales like 10 times, that assumes that you're going to always have these extraordinarily wide margins, which they have very very wide margins. They're they're not probably quite FICO margins, but it just you are priced like a monopoly that can charge anything. Um and then for some of these other issue is and this might have been part of what was their issue. I know that when we talk about like FICO or something, it was their issue. It also matters how optimized the business was already. Like how much have they jacked up prices already? You want to have like a a buffet type thing with See's Candies where you buy it and then you raise the price for 10 years. You don't want to want where they've been raising the price for 10 years and then you buy it, right? Um you want on tap pricing power. You don't want the pricing power that is already evident in the earnings, right? Cuz the one way to justify a really high EBITDA or price to sales or something is we don't have to do much except raise the price every year for years going forward. We don't actually have to invest that much back in the business or change things or whatever. That is usually the safest kind of future growth. Or the other one is we just have many we just do the same thing, but our users are growing virally, right? But they're too big for that part of it. But a different part in the growth rate, that would be the same thing. Cuz for a software company, the number of users doesn't really it's just profit at that point, right? Like if it's just organically growing on its own without a lot of effort that way to launch new products. Um yeah, I I just you know, probably got too expensive and it's probably you know, cheap now. But if I mean the market cap 5 years ago was 300 billion or something, right? Am I reading that right? Mhm. Yeah. So we'd have to check what Berkshire's market cap was in 2021, but that was getting awfully close to it. So Yeah, I mean from a quantitative perspective, if you're just looking at this, this would stand out to me like, hey, do more research on this. I don't know, you know, exactly how you can get comfortable or what you could do from there. Cuz you're probably going to have to have a an extreme variant view, right? On this company from what's currently being priced in. But this is everything you would want to see, right? Price earnings has has really come down. All the financials have gone up every single year. Um This is exactly what you would want to see. So, this is something that would be on my short list. It's just what type of research would you have to do or how would you get to the point of even being comfortable that, you know, this isn't a melting ice cube. Yeah, it looks a lot like Microsoft looked about 16 years ago or something. Yeah, mhm. I remember that. Yeah. And sometimes people are right, the investors are right about it. They can detect like a BlackBerry or whatever before it all falls apart or something. And sometimes they're wrong and they assume that, you know, the way that they're pricing this and the way they were pricing Microsoft then probably not that different the way that they assume that about lots of other things. So. Mhm. Got it. I don't know if we're going to be able to go through every company in this podcast, but we could just do like a three-part podcast or however long it takes us to go through this. Um okay, next one A D E A. What is this? Adea? >> That one's hopeless for me. Yeah, if you read the business description I don't know the company and do not understand from that what it is. It has one operating system one operating segment which is intellectual property licensing. Yeah. I had no idea what that means. It doesn't own a bunch of patents and sue people and license the patents or something. I I don't know. Yeah. Yeah, we'll skip. Easy skip. Autodesk. Okay, let's see. I've seen this one written up a bunch too recently. Yeah, this certainly historically this is a very wide moat. This is like an Adobe. Uh yeah. We got 49 billion market cap. Um let's see. Currently trading still 44 times Um which has come down from it looks like in 2022. I don't know if that's like a accounting thing cuz it looks like they're running a loss before 111 times earnings high >> No, no, they were their EV to EBITDA from 2020 to 2022 was 70 to 90. Okay. Which is insane. Their price to sales was over 10 for all those years. Their price to sales was like five or six times. It was an incredibly expensive stock. One of the most high-quality type things. And if you talk to people about it the the um business would be considered incredibly wide moat, right? But those are just such insane prices. Yeah, mhm. Let's see. It is somewhat down 15% year-to-date. Yeah, I mean it is somewhat if you if you look at that it is some 21. It is somewhat like um this could give give a good idea for it if we look back like the early 2020s this might help explain it. So, if you look the price to sales then were let's see. Um yeah. So, you have a market cap that is like 40 60 50 billion which sounds like a big stock, but in reality you have sales numbers obviously from there in terms of revenue if you're looking at it that are a few billion. It's not a huge company. So, that's why this one again is like a FICO type thing. Like it is a it may be very strong what it does, but it is not uh it's not, you know, Apple or or YouTube or Google or something. I mean like this is not a huge part of of the overall economy or something. It's a small business that's just a very very good um uh highly profitable wide moat type thing. Mhm. Um Still expensive. And then I don't know. Yeah, it's still expensive and I also don't know what AI's effects will be on on CAD. Right? But look at the price to free cash flow. It's 21 times. That's not too bad for a wide moat business like this. No, no, no. That's not bad at all. Several of these are at prices that aren't bad right now. I'm just saying if you tell me that a stock is like in this case it's multiple from the early 2020 from COVID to now it's multiple in many ways has contracted by almost three quarters by between half and three quarters easily. Uh you're not expecting to see that it's still uh you know, at not very low prices. Price to sales of seven is not low. That's not what you're expecting when someone says the stock is down a huge amount, right? That that's all that I'm saying. But yeah, I mean it had good revenue growth in the last 10 years and stuff. I mean it's grown almost 15% or something. Mhm. K A G Y S. I'm not even going to try pronouncing that company. Uh provides hospitality software delivering cloud native SaaS and on-premise solutions for hotels, resorts, cruise lines, casinos, corporate food service management, restaurants, university stadiums, and health care facilities. Company's software solutions include point of sale, property management, inventory and procurement, payments. Okay, you get the point. Yeah. And that is 100% of the business. Currently trading 36 times EV to EBITDA. Again, another case. Look at 2023. 104 times EV to EBITDA. 2024, 84 times. 2025, 57. Um price to free cash flow 31 times. Um let's see what else. Let's see the warning signs from GuruFocus. Sloan ratio, poor poor quality of earnings. Severe and asset growth faster than revenue. Hey, who does that sound like? Asset growth faster than revenue growth. Yeah. Um so, on this one I would say um it has to have something new happening that's going to grow it a lot faster. Yeah, I mean if you look at price to sales price to sales is too high for something that's been growing this slow. It this is actually grown like 6 to 9% a year from in terms of top line for more recent things. You can't have something that grows that slow that has these kinds of multiples unless you know there's going to have a bright future because, you know, something about the technology and stuff that I don't. So. Mhm. Yeah, growth rate right here. Revenue growth 10 years 6.4 uh CAGR 5 year 9.4 1 year 17% top team, but Yeah. Got you. Okay, let's go to the next one. AI. Yeah. C3 ticker AI. Yeah, that that's a good ticker. Uh C3.ai Inc. Uh enterprise artificial intelligence company. The company provides software as a service applications that enable customers to rapidly develop, deploy, and operate large-scale enterprise AI applications across any infrastructure. 1.2 billion dollar market cap. Uh looks like it went public in 2021 at oh my gosh, very high valuation and it's done nothing but sell off. Um this would be an easy pass for me. Just kind of probably in my mind too hard. Uh don't want to really even spend time on it. Can look at the warning signs. Altman Z-score distress. How do you pronounce it? Pi- Piotroski Piotroski. Piotroski F-score low. Sloan ratio, poor quality of earnings, gross margin percentage decline. Um yeah, for me easy pass. Even look at the quarterly right here. It's just gone down. Um Yeah. Easy pass in my mind. What about you? Yep, and it's not even that cheap versus liquidation as far as I can tell here. Looks like it's twice the price of like net nets and things like that. So, it's not really a value stock. Mhm. Okay, let's go on. A L K T. Alkami Technology Inc. 1.7 billion dollar market cap. Uh let's see. They are a cloud-based digital banking solutions provider. Um let's see. Just looking at it. EV to EBITDA all messed up. Price to earnings at I think that's messed up I think because the EBITDA is negative not because the EV is negative, right? Yeah, you have to check, but it is negative. >> like it has operating losses, yeah. Yeah. Mhm. Okay, let me see. Revenue is growing. Yeah. Gross profit has gone up. Um Yeah, revenue has grown like every year and by quite a bit, yeah. It has had strong growth, yeah. Mhm. Yeah. This would be an easy pass for me, too. Probably. I mean I can't I mean it has negative operating income for each of the last like 6, 7 years. So, I can't really evaluate a business like that. It's hard to do. Mhm. Okay. A L A L R M Alarm.com Holdings. Uh cloud-based platform that offers an expensive suite of IoT solutions addressing worldwide opportunities in the residential, multi-family, small business, and enterprise commercial markets. Um let's see. 2.1 billion dollar market cap. Trading 10 times EV to EBITDA. Price to free cash flow 19 times. Revenue per share has gone up. Shares outstanding has also gone up. EPS has gone up. Warning signs asset grows asset growth faster than revenue growth. Yeah. What do you see here? Um I mean 10 10 times EV to EBITDA is not bad. Um I'm surprised at how expensive it got. I did not know that or did not remember that that it got as expensive as it did in 2020 2021, yeah. Uh yeah. Um >> [clears throat] >> So, I can't say much about that. It I do notice that institutional ownership is 97%. Um so, this is probably not going to be a low beta um a lot of insider ownership whatever type thing. So, um it it probably all floats this this stock. Um yeah. Yeah, market cap is 2 billion now. Yeah? Okay. Now, AppFolio I know was always a super expensive, yeah. Yeah. Yeah, it still is, right? It it's always one of the biggest moving stocks up or down like every day. Yeah, we're at 38 times price to free cash flow. 36 times even to EBITDA. Let's see. Yeah, price earnings >> I I honestly don't understand what the company does and I've looked into it a little bit. So, it's just a lot of stuff that I don't understand obviously cuz even when I've read what it says it does and what that means uh I really don't understand it. It's a massive company, too. 146 billion-dollar market cap. Yes, it is only uh less than 6 billion in revenue. Say on only 6 billion in revenue. Yeah. Yeah. Um Gross margins have gone up. Look at that. It's right gross margin of 87%. It's gone up. Yeah, although when you're doing advertising-related things that way that is a little confusing because they don't put like um billings as your revenue. So, your gross margin often is close to 100% uh depending on how they calculate it for companies. If we were looking at other like ad agencies and things like that, things that buy for other people could look weird. Um but the operating margin, I think, if um let's see. You got the chart? Yep. Operating margin 71% 72%. Yeah. So, that's fascinating. Um yeah. Um it seems very expensive to me. Uh so, I would I mean, I just say I would pass on anything that's 25 times sales, you know, >> Mhm. So. More than down more than 35% year to date. Yeah. Yeah, and like I said, I don't understand what the company does. And I've actually talked to plenty people who um should know about it, you know, but Like in the industry? Yeah, in the industry. So, I mean, we can say what it says. It says it acts as a demand-side platform for advertisers, a supply-side platform for publishers, and an exchange facilitating transactions between the two. In theory, I understand what all those things mean. Um but, you know, um I just yeah. But I again, I'm not talking to people at the biggest companies doing this and everything. So, I I really don't know. Um Yeah. It It's definitely a stock that gets mentioned to me a lot by people who are um who manage investments and stuff. It's It's a better-known stock than a company at this point, that's for sure. Interesting. Okay, we can move on. AppFolio, APPF 5.8 billion-dollar market cap AppFolio provides cloud-based software solutions for the real estate industry. Okay, let's see. Even to EBITDA 39 times. The multiples really come in for this company. Um price to free cash flow 26 times. Revenue's gone up. Mhm. Revenue per share, I guess I should look at the growth. Revenue growth, 10-year number 25%, 5-year number 26, 1 year 23. Um Yeah, if you just don't look at the price and you look at everything else about this company, it looks great. You look down at the revenue from 20, you know, revenue per share from 2016 to today, every year is up and it's up by a nice chunk. Like I said, I looked into the company years ago thinking, "Oh, here's a technology company I can understand and whatever." And probably when I looked at it, you know, on those multiples, I was blown away that it was I know it was double-digits price to sales. So, we're talking about me looking at this probably sometime between 2017 and 2021 or something. Or since Yeah, that would have been when it was. And you know, I saw a bright future for it, but >> [snorts] >> you know, I mean, their sales have tripled the per share in that time probably, but that still leaves them at a very high, you know, I mean, the multiple the price to sales multiple and stuff has come down, but you can have your sales triple and not be an amazing stock at a something like this. Mhm. Yeah, to be fair, they have it their shares outstanding is pretty much the same. I was going to say, total shares outstanding hasn't like ballooned like a lot of these companies you look at. No, I mean, it It is really good on and that part of it. Like if you just didn't see the price and you just saw the other numbers that we're talking about here, you would you would think that you'd have to be making a fortune if you were in the stock over that time. The only question is what the what was priced into it already, right? You know, that's kind of the the issue that way. So, and you can see that um it is not you have, you know, not made a fortune if you if you owned it since um that period, it's probably about the same. I'm going to guess like around the like say the start of COVID to now or something, it's probably like the same price on the stock, I would guess. Mhm. Okay, we can move on. Appian APPN is a low-code enterprise platform as a service company focusing on business process management. The company's Appian platform is an integrated automation platform providing tools for organizations to design, automate, and optimize end-to-end processes in complex business operations. Okay, whatever that means, right? Sometimes you read these business descriptions and it's like very, you know, vague. Um Like you read it and you're like, "I still have no idea Yeah, what they do." Yeah, I've had ones where I read a business that I thought I understood and or do understand and then they the way they present it is in the most confusing way possible. Um See, this is funny. Look at this. AppFolio, GuruFocus has significantly undervalued. Then you go to this one, Appian, and it says possible value trap, think twice. Yeah. Yeah. So, I guess we should look at those two stocks. >> of many software companies that are there. Yeah. So, that is interesting. It Where is the but software companies can look bad on the Altman Z-score, but does it show the Z-score somewhere on the actual uh Um it's flagging the Z-score here. I know I just meant like yeah, if you just look on it if it shows up anywhere on the um on the form. Yeah, there's the uh F-score. So, it's not showing me the Z-score, but uh the Z-score is for, you know, if we haven't talked about this recently, but the Z-score is a measure of the likelihood of bankruptcy within the next like year or so, basically. Um and it it depends. It's not always the most accurate for like It's meant for like manufacturing companies and stuff originally more like um it's not as much meant for software, certainly. But um it would indicate financial distress. And then like the F-score that it has here also is not anything amazing, but it's not terrible. Um the F-score isn't necessarily good um which just is financial trends one way or the other. It's a checklist. Um for value stocks, these are both important scores. So, if you're looking at something that's really cheap on like tangible book um or a net net, having a high F-score is critical. In fact, like if you have a high F-score and you're very cheap, you it it's probably going to go well. Um it is less important sometimes for for big uh asset-light companies that are like high growth, but their assets aren't so good or anything cuz it's not usually how they go broke. They go broke from like uh their business suddenly getting a lot worse, their the things like that. It's not from like balance sheet deterioration as much. Um yeah, and then the and then we haven't talked about the M-score is just a measure of possibility of financial fraud. I wouldn't worry too much about it cuz it's a statistical thing and companies could end up on it just because they have certain things that are not indicators of the company actually engaging in fraud or something. But it is true that it that it is capturing like what companies have a higher likelihood of that. So, it would be those the three things together are pretty good things for someone to look at if they're like shorting a stock. It's to look at the F-score, the Z-score, and um the likelihood of financial fraud, the the M-score there, you know. This M-score is fine. Okay, Asana >> Asana, another one I use every day. Yeah. Possible value trap, think twice. Uh a one What do you use this for? So, it's really like a project management um in terms of team collaboration. Uh so, it says like agents can collaborate and AI agency and humans and AI agents, we use it for humans, can collaborate effectively so that individuals work smarter, teams, and faster organizations deliver results. So, what we do is we have people in Asana internally and then we also share that externally with people who would be working on the same projects. Let's say an ad agency and an internal ad team or a whatever. It could be It could be lots of other things. They use a lot of marketing type things, but it could also be if I was doing things that were insurance or whatever, things that you send back and forth. Um and then you can observe what people are actually finishing, what tasks, and posting the tasks, and assigning people to the tasks, and sorting it for the team high low priority and stuff. It's um very good. We pay very little for it. Um it's one of the most helpful sorts of things we have in the company and it's quite cheap. Um And it's easy. Well, stock stock has gone up, too. >> but could you create something like it um and replace it? Yeah. But does that matter? I don't know. I mean, historically, it hasn't even been like having enough users and charging enough to make money, I think, right? Um but and and, you know, people I also, you know, everyone that I've hired and stuff has worked with Asana at used Asana at other agencies and clients and things that they've used in the past. Um but just because something is very useful, you know, it is easy to replace definitely. But it's kind of like saying a a to-do list and a calendar and stuff is recreating that easy? Yeah. Um but I don't know that someone will switch, right? Excel is critically important to people, Word is critically important to people. Uh they're probably very easy to to come up with an alternative to. I don't know if people will switch to them. Um this one I don't know that we people wouldn't switch if you charged them a lot for it is kind of the issue, right? And this company, I have they ever It does say they've turned free cash flow positive in the last year or two. Whenever I looked at them, they were burning money and reporting losses. Mhm. Yeah. Yeah, I mean, operating margin, they're still losing money. Uh on a gap, I mean but free cash flow it's a price to free cash flow 19 times. If you saw this thing I the thing that I would say about it is that it's not a >> year. 76 mil 77 million. I would say the thing is um that people would as this is the kind of thing that you could probably ask AI to write for you um and it could do like right away and stuff. Um but honestly it's the kind of thing that I feel like humans could have created for you too or you could create internally um to use too. But of course like I said we use it externally and internally so it's kind of like well I mean how hard is Dropbox or something but if everyone's using Zoom or Dropbox or something um we're not going to have six different ways to share files, you know. Um so same thing here. We're not going to have six different ways to to track tasks and things like that. But where it says workflows and you know that stuff that's what it does. Um and it's very useful for doing that and it's a pleasure to deal with it but uh I don't know that I would buy the stock. Got you. Great. Okay, let's see. A10 Networks, ticker ATEN. GuruFocus says significantly overvalued. It's a provider of secure application and network infrastructure solutions for enterprises and service providers across on-premise, hybrid cloud, and distributed environments. Okay. Uh let's see. >> Sounds like secured cyber security things cuz it says include application delivery traffic management, denial of service API that's that's some sort of um cyber security stuff. Mhm. Mhm. EV/EBITDA 24 times, price to free cash flow about 30 times. Um let's see. No not no revenue growth but like companies that have not to do with technology have had more revenue growth in the last 10 years than this company. Mhm. Shares outstanding have gone down a bit. Gross margin has kind of bounced around a little bit. Operating margin similar thing. Uh yeah. Let's see. Warning signs Sloan ratio poor quality of earnings. Uh severe asset growth faster than revenue growth again. Good sign. Altman Z-score strong. Yeah, I I wouldn't pay like 20 times EBITDA or something for something like this that doesn't grow and stuff. I just wouldn't pay for something that doesn't grow even at really low prices because this kind of thing has the possibility for disruption unless you're going to have lots of revenue growth over time. I would much rather pay this for some boring real world company because it would have the same numbers and be much much safer, right? I mean the five-year revenue growth 5.7%. It's not exponential. >> No, you could buy things at half the you know the same EBITDA or half the the price that grow 6% a year and are based in real world things that aren't going to change no matter what. Mhm. So. Uh Aurora Innovation Inc., ticker AUR. 9.8 billion dollar market cap. Delivers self-driving technology safely, quickly, and broadly. It has the F score of three which is quite terrible. Yeah. >> happen but >> Not a lot of history here. Operating income negative 901 million. Yep, easy pass for me. Obviously. It's a startup type thing, yeah. Yep. Okay. With the 10 billion dollar market cap. Yeah. Mhm. AvePoint Inc., ticker AVPT. Provider of modern data protection enabling organizations to secure, govern and operationalize data at scale across cloud ecosystems. Okay. Is this another like security type company? It says security type stuff but then it also talks about AI and and uh don't know what any of those things mean after that. Uh um I it since it stresses indirect sales channels there might be something different about its sales than we expect like it's repackaged and sold by resellers and stuff. You know what I mean? Um for IT things but it also could just be that someone wrote it that way and it's not really a big deal that it's through indirect channels sometimes. Yeah. GuruFocus says modestly undervalued. Um let's see. EV/EBITDA 42 times, price to free cash flow 29 times. Yeah, obviously we'd have to learn more about the business but nothing really standing out to me on this page. Yeah, I mean I don't understand this kind of thing that it does probably so it would be very hard for me to get comfortable with it and not at those prices. Yep. Wow, BlackBerry. Ticker BB. 3 billion dollar market cap. Says the world's largest smartphone manufacturer is now exclusively a software provider with a stated goal of end-to-end secure communications for enterprises. Uh price to free cash flow 75 times, EV/EBITDA 34 times. Revenue I mean is is you know the growth of it is is not been good both on a 10-year, 5-year, and 1-year basis. Um going through some sort of change. You could see that in the numbers. That or dying. Um one of the two. Um warning signs revenue per share decline, Altman Z-score gray. Price close to 1-year high. Um yeah. Which is sometimes a warning sign cuz GuruFocus is tracking certain other things that we wouldn't necessarily care that much about like >> pay any sort of dividend. Yeah. Yeah. Um obviously it has three different segments there and it talks about licensing, you know, as like 4% there which maybe is significant profit driver. So they could have different margins in each of the businesses that it's in and so we're seeing a mixed thing from that. Um yeah, I know some value investors are on it and stuff. I don't know much about it. Uh obviously it did have valuable intellectual property in the past which it talks about there that it end-to-end secure communications and had that with BlackBerry and has long history in that so. Um yeah. It still exists which might surprise some people. Yeah. Yeah. Okay, let's see. Bill Holdings Inc., ticker BILL. Possible value trap, think twice. Market cap 3.7 billion. Bill Holdings Inc. is a provider of software as a service, cloud-based payments, and spend and expense management products which allow users to automate accounts payable and accounts receivable transactions, enable businesses to easily connect with their suppliers or customers to do business, eliminate expense reports, manage cash flows, and improve back office efficiency. Is that like a a Ramp? Um Oh, yeah, Ramp. Mhm. I don't know. Yeah, that So Ramp is kind of I guess they'd say spend management accounts payable. Ramp is mainly an accounts payable company really like historically what what that is. It presents itself differently or um it advertises a lot Ramp, right? So um yeah. Uh I looked at Ramp. Um I mean as a the service not as a a business obviously. Not as an investment stuff cuz Ramp's privately held, right? Um It is, yeah. I thought it was. Yeah, yeah. Okay. Um yeah. I don't know from what they described that would be interesting but they don't stress the accounts payable part of it. Um so Yeah. BlackLine Inc., ticker BL. Providing financial accounting close solutions delivered as software as a service. The company's solutions enable customers to address various aspects of their critical processes including financial clo- financial close and consolidation, intercompany accounting, and invoice to cash. Uh let's see. Price to free cash flow 15 times. Revenue per share good growth. Um total shares outstanding has gone up a bunch as well. Um let's see. Operating margin has gone from losing money to looks like they are generating a little operating income. Yeah. Um Altman Z-score distress, severe gross margin percentage has declined. And then another warning sign asset growth faster than revenue growth. Um What do you think about this ranking system, right? You're familiar with with the ranking system. Financial strength five out of 10, profitability four out of 10, growth eight out of 10, momentum four out of 10. Possible value trap, think twice. Yes. I was going to say just for the software companies I don't think it's that important to look at things like the Altman score and stuff generally. Like if you look at this like it's fine in terms of the current um you know I mean it has a slightly its current ratio actually is it's uh it's sorry its total liabilities are actually more than its current assets which you know for a lot of companies isn't a big deal but is kind of a big deal for software companies and stuff cuz generally they have very strong ratios in that way and everything. So I can see why it's not scoring that great on like Altman but um that's you know that's that's for other kinds of businesses really so we shouldn't stress that too much. Um Yeah. Uh it's I you know it it it actually is kind of interesting um as compared to most of the things that we've talked about. Well, the price and the historical revenue growth is kind of pretty interesting. Um from this point on, you know, like like obviously you know it's whatever it was in the past but you wouldn't expect it to go back to the margins they had before when it was a smaller company at that point. So that is interesting. Um uh you know you're talking about you know like here price to sales of three or something, EV/EBITDA of 20. That's actually, you know, those are reasonable for a company that has these kinds kind of growth. And then some of the measures of profitability and everything, it depends if those increase with scale. I don't know if the profitability is necessarily that important for the profitability as of today versus what the profitability will be in the future. Um, you know, its gross margin has always been high and about the same. It was better at one point than than now, but so that's been the same sort of thing. And then as it got bigger, its operating margin turned positive. So, you know, if you were really interested in the um software and um thought that it had a good future to grow from there. I mean, you could project quite a bit higher operating margin in the future, which given the reasonable price very reasonable price to sales, gets you to a much better place. So, I mean, a software company with a bright future is reasonably priced at three times sales, no doubt. Mhm. Mhm. So, yeah. Got it. All right, we got to at least get through B's for today. Then we'll start at C for the next podcast. Okay. Ticker BLKB. Uh, they provide software solutions designed to serve the social good community, including nonprofits, foundations, corporations, educational institutions, health care institutions, and individual change agents. Current price to free cash flow, nine times. EV to EBITDA, about 10 times. Uh, and that multiple has come in a good amount as well. Uh, growth rank GuruFocus has at five out of 10. 10-year revenue growth, 5%. 5-year, 4.7. 1-year, 1.9. Uh, let's see. Free cash flow has had some growth for the past 10 years and 5 years. Uh, let's see. Warning signs, financial strength poor. Altman Z-score distress, which you talked about maybe before software not as important. Long-term debt, keep issuing new debt. Uh, shares outstanding it looks like have trickled down a tiny bit, but has stayed relatively stable. >> stock the last few years, yeah. They weren't before then, but it seems like they bought back stock the last few years. And they haven't grown those few years. So, if you look when they started buying back stock, it's about the time that they're well, their growth had already slowed a lot before then. So, they've had minimal growth, no real growth for like six or seven years at least. Uh, let's see. Seven years, probably. So, they haven't kept pace with like the economy overall or anything like that. Um so But free cash flow, you could look at I mean Mhm. cuz so we're talking a $1.7 billion market cap. Uh, I wish I could do the math, but that takes too long. I wish they broke out enterprise value somewhere on here, which I don't think they do. Oh, yeah. They Yeah. Um, let's see. Yeah, they have a significant amount of debt is the thing. Yeah, so their debt is almost the size uh, what is it? Like 40 Let's see. 40% or something of their enterprise value. What was the market cap again? 1. 7 billion. >> and the and the and then debt less um, it's a little hard because I have to add in the short-term debt and the long-term, but if I add that together, it's about a billion still. Uh, because there's almost no cash and no short-term. So, it does have a very significant amount of financial engineering. So, on a leverage basis, it obviously looks attractive. It has a double-digit free cash flow yield on a leverage basis. But on an uh, on leverage basis, yeah, it's a bit lower. Not too too low. It's still attractive that way. It has negative tangible book value because this one actually is kind of um uh, a high risk financial engineering that they're doing here. Having said that, like we said, the uh, the F-score is actually an eight, which is quite good. Um, so, you know, it it has high quality of earnings, basically. I mean, that's not directly a quality of earnings measure, but compared to most of the stocks we've looked at today, almost it has much higher quality of earnings than they do. On the other hand, it isn't growing and almost all of them, you know, most of them weren't growing. And it has significant amounts of debt, whereas they generally did not have significant amounts of debt. So, that's where that's why it's like think of it as is it a value trap or not, but it's more of a value stock. Oh, here's one that we could say a lot about. >> Yeah. Bitmain Immersion Technologies, BM NR. Uh, they're Bitcoin and Ethereum network company with a focus on the accumulation of crypto for long-term investment. Okay. Um Currently, well, $11.7 billion market cap. >> It's good what it says in the rest of it. Whether they're acquired by its Bitcoin mining operations or from the proceeds of capital raising transactions, meaning I assume it issues stock and then buys Bitcoin. Yeah. >> Uh-huh. Interesting. Um, poor quality Yeah, I mean, I I really have nothing to say on this. We could just go to the to the next one. >> I just like that it in 1 year it's had as low as a stock price of three and as high as 160, apparently. Yeah. Yeah, that's funny. Okay. Box Inc. Yeah. Uh, cloud-based content management platform that provides storage and workflow collaboration services for enterprise customers. Uh, this guy the founder of this is on Twitter or X. Uh, says mostly undervalued. >> I have used the service. >> No, I haven't. >> Okay. So, I've used this service and Dropbox, both yeah. They just compete with each other. They're the same thing. What do you think is I mean, I I use Dropbox and that's all I've ever used. Everyone uses Dropbox because everyone else uses Dropbox. Yeah, exactly. Uh-huh. Yeah. But I don't know that Dropbox was better. No. But but yeah, clearly it's my bad. >> I I got a great idea. Ready? Ready? I'll give this idea to you for free. Dropbox and Box should merge. Should merge, yeah. Boom. Uh, let's see. 12 times price to free cash flow. Um, let's see. Do they generate a good amount of free cash flow? Yeah, they do. About 300 plus million a year. >> is very weird though because I did look at them many years ago. They always were reporting pretty high free cash flow, but my memory is they had an unusual um, commission arrangement, which showed them generating positive free cash flow, but like I mean, like an incentive sales team type thing. Um, but did have something in terms of um, future obligations that they would have to to sales employees on the business um, like longer term. So, uh, I don't know if that's still the case and I I can't really remember all the details of that, but I remember it being quite significant back then in that they didn't when you closed a deal, you didn't necessarily get a ton of money for doing that when you signed up a major organization, but like you had kind of an interest in them renewing for a while, you would keep getting money on it if you were a salesperson. Um, so Got you. Interesting. Um, on a free cash flow basis though, I mean, you're right around 10 times. Um, let's see. Do they have debt? Yeah, they have a good amount of debt though. Well, not a good amount, but 527 million. >> yeah, but it's offset by their cash, yeah. Mhm. Mhm. Um, it says modestly undervalued. Yeah, it's always looked modestly undervalued that way, but it is um I I feel like not that popular with um investors. Surprised by that. Oh, it trades right in line. Look at that. Yeah. Um Yeah, so what's the let's see. Um Okay. Uh >> [groaning] >> I mean, it's not cheap. It's down half, but it's you know, it is I mean, the lowest EV to EBITDA it's had is like 25 or something. I mean, yeah. Um, that's hard. Yeah, it's always been valued, you know, pretty highly. And it still kind of is. So, I don't have a good answer to that. Institutional ownership is over 100%, which I assume means there's some shorting there or miscounting. Mhm. Okay, let's see. Braze Inc. Um, this probably going to be a pass. It looks like they don't really generate I mean, they they lose money operating income. Yeah. >> Yeah. Uh Yeah, we could skip that one. Yeah, we could skip that. Our final one for today, Bentley Systems Inc. Ticker BSY. It's a software vendor that caters to civil engineers, uh uh, the civil engineering industry is a pretty interesting industry. Oh, yeah. Constructors and geospatial professionals by enabling design, simulation, and data management of infrastructure assets such as roads and bridges. Um, $9.8 billion market cap. Wow. >> Price to free cash flow, 20 times. Um, let's see. Revenue growth, 10.7% over 5 years. EBITDA growth has been strong. Everything's been pretty strong. Uh, warning sign, asset growth faster than revenue growth. Uh, yeah, what do you think? >> predictable compared to most of the companies that we've been looking at. So, GuruFocus actually has a predictability score and stuff, but just in terms of if you compare certain numbers, margins, how much they're varying, you can do this based on like um, you know, like coefficient of variation or something like that if you like that kind of measure, but you could just eyeball it and see this that their margins are much more um, stable and predictable from year to year, even if they're going up or down over time. They're they're um uh, you know, so when we're talking about the growth, it is true that we saw some other companies that had about the same amount of growth, but you can just see the stability in the growth from year to year is very different here. Um, and so it does look much more like a blue chip type company than some of the other ones that we've been looking at. Um, it it is also you know, it has a F-score of nine, which basically means a lot of good momentum this particular current year. The F-score involves a lot of that. It's it's partially measures of of um a sort of earnings quality, but mostly what it's saying is that they're headed in the right direction with a lot of earnings quality measures. So, um this just looks very different than most of the others. Um it looks less like a growth stock and more like a high predictability stock. Um we haven't covered companies like that, but you know, like I guess Adobe, maybe some of their things would have fallen in the same category as this actually. Um but I just didn't talk about it cuz probably everyone knows that Adobe's kind of a high quality type thing that way. And maybe Autodesk too might have I I didn't, you know, bring it up with either one. Mhm. Mhm. Yeah. >> Cool. Well, we'll we'll we'll stop there. Where do you think, I mean, going A through B what we looked at today, if you had to hone in and spend some time on one stock, maybe two stocks, if if if any, what would it be? If any is a good question. Um let's see. Let's scroll down slowly so I can see. Um let's see. Okay, so we got through two letters. Um I guess well, so for me probably BlackLine, I would say. It's a BL. Um but I would have to know more about that. So, a few things. One, you know, I'm a little more comfortable with that because what it's describing um is something that I understand well, right? So, financial accounting close solutions and then talks about how it does that, consolidation and a company accounting and invoice to cash. Okay. So, that's easy to understand. Majority of revenues from the United States. So, already business description, it feels like something you can understand. Reports in one segment, right? And then you just look at the numbers and the numbers statistically are very interesting that if you didn't know what this company was and what it did, if you just had the last few years of numbers, they look interesting. It doesn't look overpriced on things like price to sales today. It has good numbers in the past few years that are gradually going up with all the things we want to see go up where like operating income generally is going up each year, gross profit's going up each year, revenue's going up each year. Not at a phenomenally fast rate, but at a rate that could show that it had reached a a scale where it's making money that way. Um you know, of course, it says possible value trap think twice. So, of course this is the value stock type one in there. I don't know how much of a value stock it is at, you know, what is this? Uh you know, the the P is astronomical, but like the even EBITDA's like 20 times, price to sales is three. Um 15 times price to cash flow, though. Yeah, I we would have to look more into um how how that looks in terms of like where with all that with free cash flow of dissecting the cash flow statement, right? Um but it it does look interesting that way. One thing we didn't talk about is it does have um mhm it probably has more debt than cash or about the same, which is not ideal breaker or something, but is unusual among the companies we looked at. You know, software companies generally have cash and not debt. Uh it has a poor rank on the value rank actually. Um I noticed from from that. Um yeah, but it's just other things. Like if you look like book value growth is like nothing, but like revenue growth is positive over that time, which um you know, it does say here faster asset growth than revenue growth. I'd have to look carefully at what GuruFocus is calculating for that and what period, but over a longer period it doesn't look like that's very true actually. Um but like it looks like it was growing revenue faster than it was growing assets during that period, but it could mean some intangible things I'm not seeing here or something. Um So, uh and then, you know, it's spotty, but that, you know, I'm not sure what was going on with the shares outstanding exactly, but they jumped up at a couple different points, so they don't have constant dilution the last few years anymore. So, you know, I'd have to learn more about that. It's just something that I could actually learn about and figure out of the ones that we talked about probably. Cool. Well, with that, I want to thank everybody so much for tuning in with The Disciplined Investor on the Focused Compounding Podcast. Uh we're at an hour and 3 minutes and that went pretty quickly. Uh next week we will start at C and work our way through. It looks like I'm starting to sort of recognize more of these companies. You got your Salesforce, CrowdStrike, uh Dropbox, DocuSign, uh Electronic Arts Electronic Arts, FICO. Um so, we'll work our way through and uh keep on going and try to get through as many stocks as we possibly can and see how far we get. So, I want to thank everybody so much for tuning in with The Disciplined Investor. Make sure you hit that subscribe button wherever you're watching or listening to be notified every time we upload a podcast. And of course, if you're interested in learning about our money management services, you can reach out to me at andrew@focusedcompounding.com. I want to thank everybody so much for the support and we will see you in the next podcast. Take care.
Ep 478. A-Z on IGV: Value Hunt in Software
Summary
00:00 Intro 02:20 GuruFocus Manual 04:30 AI & Software Pullback – General Thoughts 09:55 IGV Index Stocks: ACIW ADBE …Transcript
Welcome, welcome, welcome. How's everybody doing? Hope you are doing well. My name is Andrew with Focus Compounding on air live with Jeff Gannon. Jeff, how's it going today? It's going very well, Andrew. How's it going with you? It's going great. We hope it's going great with everybody else as well. If this is the first time you are tuning in with us, thank you so much for joining us. Be sure to go check out all of our content with that we push out into the investing universe. The best way to do that is to follow me on X at @focuscompound. Go to focuscompounding.com to get access to investment write-ups from Jeff going all the way back to 2005. And of course, if you're interested in learning about our money management services, uh you could reach out to me at andrew@focuscompounding.com. So, in today's podcast, Jeff, we are going to be going over the IGV um uh ETF and spend some time looking through a bunch of software-related, technology-related companies uh to see if there's anywhere, you know, that we think there's uh an interesting opportunity. Uh if you're watching the screen right now, you can see that the IGV is off about 20%. Well, let's see right here. Yeah, 20% year-to-date. Um 1 year down about 13%. 3 year, you're still up 41%. Uh but year-to-date, everyone listening is um you know, aware of what's going on in software and technology. Uh the whole AI craze is really calling the terminal value of a lot of these software companies into question and the market has been pricing a lot of these companies down um you know, because of that. So, what I did was through Coifin, I pulled all of the companies that are in the IGV ETF and I put it into my new favorite feature uh through GuruFocus. Um and what it does is it produces almost like a um a manual. >> Okay. I'm not going to say the name. Do not say the name of the a manual, yeah. Yeah, yeah. It pro- it produces a manual that's easy on the eyes that you could flip through yourself. Everyone listening is very aware of what I'm talking about. Uh not going to say the name uh to be able to quickly, you know, go over it. Um I don't even know how I found this, quite honestly, Jeff. I think I just Google like manual of something or whatever and and GuruFocus, they have their own version, which is incredible. Um so, I am a GuruFocus subscriber for the first time ever um and it's solely because of this feature, right? I guess I should pull it up. And and to people, I mean, we don't even have a a link or anything like that, so we're not getting, you know, compensated to to talk about this, but I just really love the product. you know, you could type in the tickers and you could either download it, which I usually do, uh but we are going to do the web app for for this podcast. Um but you could do the S&P 500, you can do by region and market cap. Um and I have found for international stocks, uh particularly like smaller companies, like micro, small, mid, whatever, this is a great feature to be able just to quickly flip through uh companies, right? OTC market, obviously, have done that. Um but you know, like if you're going to go A to A to Z, right? This is just a quick way to do it instead of like getting the name, having to put it in whatever you use to pull financials and then look at it, you know, that way. So, my eyes, candidly, are still getting used to like where to look and and and getting used to the >> uh the manual itself, but I thought, "Hey, this is great for us to go over on the podcast. We could look at different sectors, we could look at different countries. I mean, we got everything." And we did get approval from GuruFocus uh to do this. Uh but we aren't compensated for that. So, but you know, if you like the product, of course, just go and sign up and you could use this yourself. But you know, I came across this feature and I thought this would be great, you know, for me personally, um but just as great for the podcast as well. So, put in all the companies that are in the IGV and we could go through it and see if anything is interesting. Um you know, I will say, you know, from the start, I I guess I don't pay for this uh plan on on Coifin that tells you what multiples uh the IG average stock in the IGV is trading at, but you could see, you know, it's it's 30 plus times EV to EBITDA um for for the average company in this ETF. Uh but it's come down a good amount from it looks like, you know, close to 50 times. So, I guess before we jump in and do that, do you have any judge general thoughts on you know, what has happened? I think it's, you know, in my mind, these companies were the most dominant, long-duration, high-quality companies ever, right? And the market put that valuation on these companies by rewarding it with a very richly uh you know, valued multiple. And for the first time ever, that terminal value, which if you ever do a DCF, Jeff, the bulk of of a value in a company comes after 10 years, right? Which is why how you could have these companies, you know, miss by a penny or they, you know, change their guidance for operating margins to be lower by, you know, 1% or whatever and the stock gets crushed. Well, it's because a lot of people they're betting, you know, 10, 15, 20, 30 years into the future. And historically, Mr. Market has has rewarded these companies with a very expensive terminal value. Um and for the first time ever, that is coming under threat uh because of AI. And people don't, you know, have a good idea about where a lot of these companies will be, the use case for the companies uh because things are just changing so fast um in in the AI world and and for the first time ever, those the moat of these companies, if they have a moat, uh is being called into question. So, you're being you're seeing that properly, I guess, priced by the market. Um kind of funny, Buffett, you know, he's always talked about how he he doesn't understand technology and software and all that sort of stuff. Of course, he understands like software and technology generally. Um but I feel I always felt like when he would say that, he was just saying he doesn't have a good idea about, you know, the durability of these companies and the competition of these companies. And and here we are, you know, presumably at the end of his life and and that's uh you know, kind of those chickens are coming home to roost. So, I guess what are your thoughts on just what's going on in technology and software in general and then we could start to flip through this manual. Sure. So, one is just the high prices like you talked about. So, EV to EBITDA and things like that being high. Two is these businesses are generally um high fixed costs and low um you know, gross low marginal cost businesses. So, they're very dependent on volume, so they have huge amounts of operating leverage, you know, all software companies tend to have that. Which means that, you know, people talk about how great the gross margins are, how great the operating margins are when they're really big, but it also means that those can change a lot. So, that in valuations relative to sales, it's it's um they can uh that can be readjusted a lot. And then some of these have very high enterprise value to sales like we talked about. The ones that we're going to look at today don't fall into this category uh like at all, basically. But um also when we talk about private credit, some of it is for software um specifically. Like they're over uh they private [clears throat] credit lends more to um software than really software as a category in those size businesses usually. Software is really big in like indexes from because of huge giant companies, but it's not usually a big borrower across the economy except in things like private credit. Mhm. Mhm. What do you think about a lot of these technology companies in in in software businesses that historically have paid, you know, huge chunk of an employee's compensation through stock-based compensation, right? And that was a great way, you know, for the employee as long as the stocks, you know, continued to go up. Um and I guess just what if that doesn't happen going forward for a lot of these businesses? >> Well, usually they readjust it to give them more and more stock when that happens. I mean, that that was kind of what happened in like the um 2000 period and stuff that you can see. So, um some companies even bought back around the dot-com time and they would have that was kind of the worst is when they had huge buybacks when their stock was really expensive to offset dilution. And then they adjusted things to give more and more shares to try to get to the kinds of dollars that they were giving in dot-com era when their stocks were a lot cheaper. So, it depends, but that is what a lot of them do. Uh they adjust it um so that they're they have higher So, good news is you don't have as high a dilution necessarily when your stock's really expensive and you have higher dilution when it's really cheap. And you know, uh having less dilution when you're expensive, I guess, is good, but it, you know, it's kind of worse to do the reverse there. Um and then also that is a factor because one thing is you do see on a lot of calculations of free cash flow that I see anywhere um that there is that is not with a steady state for the business and a steady state for the number of shares often. Some of these companies, you're really that would be as if you're selling off 3% of your company every year to get that free cash flow amount because it is recorded in terms of income things and sometimes it's recorded depending on what source you're using in terms of certain EBITDA calculations, but it's almost never um done in terms of cash flow things. They're pulling from the cash flow statements that usually um are realized are not adjusting for the fact, obviously, cuz it's non-cash of that. That matters to a lender, it matters to other people who care about the cash, but to an investor, free cash would really mean you kind of have to uh take out the the amount that are given to employees because you either have to buy that back or you have to lower your return by being diluted every year, you know, either one. Mhm. Got you. Okay, so let's go through ACI Worldwide, ticker ACIW. So you're a bit familiar with you know, the scores and whatnot that GuruFocus puts out. But $4.4 billion market cap, you could see the warning sign right here, gross margin percentage declined. I always think about how somebody that was purely a or invested a lot in software and actually ran a technology and software company. He said whenever one of his a company that he owns software tech company, the second that gross margins decline, he always sells out immediately. Sort of like a quick and fast rule. Um but good signs, Altman Z-score strong. Let's see. Let's see, anything else stand out to you? EV to EBITDA currently 10 or basically 11 times. Revenue per share has gone up, EPS has gone up, free cash flow per share, all those numbers have gone up basically every single year. Let's see, what else? Anything jump out to you on this page? Yeah, so I mean in terms of valuation, you're back to where you were at several times in the past. For a software company, this is very low valuation. And then of course the returns on capital and everything are high. So it looks good on that basis. The issue is of course what the business is and understanding that. So it's ACI Worldwide. Yeah, I understand it, but Yeah, develops markets, installs a portfolio of software products focused on facilitating electronic payments. The firm's products are sold and supported directly and through distribution networks covering three geographic regions. Okay, blah blah let's see. ACI software products process payment transactions for retail banking clients, billers such as utilities, and health care providers, and community banks and credit unions. Yeah. So the problem with this is I mean that's fine. It's great to learn about that. And I think a lot of these software companies will be in these. Certainly the private equity ones are definitely in these kinds of categories. Where you have to learn about it as a user of it. Like there's another one on here AppFolio or something that I I know and I've looked at. And um it's the same sort of thing where I would have to learn more about so AppFolio it says for real estate industry. So like apartment management type stuff. Yeah, it says property management software. But it it's used a lot and it could be integral to their operations and they don't want to switch and they love it. I don't know cuz I don't own apartments you know or manage them. And same sort of thing here since I don't have anything to do with the software that's running a retail bank. Um then you know, we don't we don't know enough about those things the way that we would about if someone asked opinions about Adobe or Intuit or something. You know what I mean? That we have more experience with directly, right? Um so that's always the issue and I think that's probably what scares people sometimes when we talk about AI and everything. It definitely seems to be in categories where a lot of the people wouldn't know anything about the the business very much about what function is performing sometimes. That's where I've seen some of the biggest changes, right? Because then people are like, well can't you replace this and stuff? But when it's something that they do every day, they go, well I don't know if you could replace replace that. You know, so the a lot of these are things that people don't have experience with that are business to business type things. Mhm. You know, the part that would scare me about owning any company in this basket going forward is basically whenever there's a new model that's going to come out or or you know, hype about a new model or just you know, whatever. I feel like these companies are just all going to sell off. So like as a stock, I mean as a business it's one thing, right? You you value the business, but then also like from a valuing or thinking about how the stock's going to trade, right? If you're going to own it, I just feel like the they're always going to be sort of I don't know fighting with two hands tied behind their backs going forward. As these models continue to get better. That may in terms of the stock performance that you see in the patterns of the stock. >> Yeah. Right. I do think that might change after you have publicly traded AI companies. Cuz if the IPO and stuff is supposed to be as big as you know, as predicted and everything, we might start to see different things once you actually see AI companies trading day to day, right? That's going to affect people's perceptions a lot because they're going to get re-rated every day. It's going to be a lot harder for them to kind of present a narrative about the company that is you know, uniformly positive or you know, you might have a negative or whatever, but it's going to be something that every day people are talking about more. These are publicly traded companies, those aren't. I think that has a big impact on people's perceptions. Um and it'll be interesting when when you can say, oh AI stuff was down 30% this you know, year to date or whatever or up 30% and then people will try to come up with more of a narrative about that. Whereas right now, you know, they only get pricing when there's some round of something and they're a lot of the times the companies investing in it are want to present in the best way too cuz they're kind of at least tangentially related to it. So it just I think will be different once those stocks are public. They'll have to kind of open the kimono and stuff and we'll know a lot more about them. Mhm. Okay, Adobe Inc. ADBE. Um this one's been you know, in in the news a lot I would say. At least amongst like value investors, they're sort of circling the wagons on this company. Down 35% year to date. So huge dispersion. So IGV's down 13 and Adobe's down 35. I don't know if you're exactly seeing it in the numbers yet, right? It's more so just like the perception of the multiple on this company. Seen a lot of back and forth. You know, for me personally on this, I don't feel any you know, confidence one way or the other. We use Adobe, right? So we edit this podcast through Premiere Pro. Um Yeah. I know. >> Adobe in a lot of different ways. Teams that I work with use Adobe all the time and have asked to use it more for different things. So yeah, it has a suite of different things that are used all the time for stuff and is very standard for those things and you know, but on the other hand, you know, some of the things that we use don't actually cost that much and yes, there are other ways of doing all of them. Um I guess one thing is whether they'll integrate these things into being a beneficiary of them, Adobe, or whether they're going to have competition on a lot of things for that. I don't know. It's kind of always my thinking about like you know, there's a Google Sheets thing and there's a Microsoft thing, but I don't want people using Google Sheets. So you know, and and so Google can't charge us for things if they wanted to I mean we don't even use them if they don't charge us. So there are things like that where that's probably going to be the case. Here I think that it's a it's a which is some of the other ones in here that are this extreme. I really do think this is a multiple issue that the multiple got absurd. >> I mean look at this. So I'll just read it. So from I'll read it from 2020 onward. So PE 44 times, 67 times. That's crazy. 34 times, 52 times, 42 times and then in 2025 19 times and now we're currently at 14 times. Yeah, it it got as silly as Yeah, it got as silly about 5 years ago as like FICO got a couple years ago, which is about 50 times EBITDA almost and about 10 times sales, which is an insane amount for a mature company of any kind. It's just a you know, I mean I know they don't have much in the way of CapEx that they have to do, but you have to pay tax, you have to do things like that. We're talking about you have like a 2% type yield, right? And then in 20 you have a price to sales like 10 times, that assumes that you're going to always have these extraordinarily wide margins, which they have very very wide margins. They're they're not probably quite FICO margins, but it just you are priced like a monopoly that can charge anything. Um and then for some of these other issue is and this might have been part of what was their issue. I know that when we talk about like FICO or something, it was their issue. It also matters how optimized the business was already. Like how much have they jacked up prices already? You want to have like a a buffet type thing with See's Candies where you buy it and then you raise the price for 10 years. You don't want to want where they've been raising the price for 10 years and then you buy it, right? Um you want on tap pricing power. You don't want the pricing power that is already evident in the earnings, right? Cuz the one way to justify a really high EBITDA or price to sales or something is we don't have to do much except raise the price every year for years going forward. We don't actually have to invest that much back in the business or change things or whatever. That is usually the safest kind of future growth. Or the other one is we just have many we just do the same thing, but our users are growing virally, right? But they're too big for that part of it. But a different part in the growth rate, that would be the same thing. Cuz for a software company, the number of users doesn't really it's just profit at that point, right? Like if it's just organically growing on its own without a lot of effort that way to launch new products. Um yeah, I I just you know, probably got too expensive and it's probably you know, cheap now. But if I mean the market cap 5 years ago was 300 billion or something, right? Am I reading that right? Mhm. Yeah. So we'd have to check what Berkshire's market cap was in 2021, but that was getting awfully close to it. So Yeah, I mean from a quantitative perspective, if you're just looking at this, this would stand out to me like, hey, do more research on this. I don't know, you know, exactly how you can get comfortable or what you could do from there. Cuz you're probably going to have to have a an extreme variant view, right? On this company from what's currently being priced in. But this is everything you would want to see, right? Price earnings has has really come down. All the financials have gone up every single year. Um This is exactly what you would want to see. So, this is something that would be on my short list. It's just what type of research would you have to do or how would you get to the point of even being comfortable that, you know, this isn't a melting ice cube. Yeah, it looks a lot like Microsoft looked about 16 years ago or something. Yeah, mhm. I remember that. Yeah. And sometimes people are right, the investors are right about it. They can detect like a BlackBerry or whatever before it all falls apart or something. And sometimes they're wrong and they assume that, you know, the way that they're pricing this and the way they were pricing Microsoft then probably not that different the way that they assume that about lots of other things. So. Mhm. Got it. I don't know if we're going to be able to go through every company in this podcast, but we could just do like a three-part podcast or however long it takes us to go through this. Um okay, next one A D E A. What is this? Adea? >> That one's hopeless for me. Yeah, if you read the business description I don't know the company and do not understand from that what it is. It has one operating system one operating segment which is intellectual property licensing. Yeah. I had no idea what that means. It doesn't own a bunch of patents and sue people and license the patents or something. I I don't know. Yeah. Yeah, we'll skip. Easy skip. Autodesk. Okay, let's see. I've seen this one written up a bunch too recently. Yeah, this certainly historically this is a very wide moat. This is like an Adobe. Uh yeah. We got 49 billion market cap. Um let's see. Currently trading still 44 times Um which has come down from it looks like in 2022. I don't know if that's like a accounting thing cuz it looks like they're running a loss before 111 times earnings high >> No, no, they were their EV to EBITDA from 2020 to 2022 was 70 to 90. Okay. Which is insane. Their price to sales was over 10 for all those years. Their price to sales was like five or six times. It was an incredibly expensive stock. One of the most high-quality type things. And if you talk to people about it the the um business would be considered incredibly wide moat, right? But those are just such insane prices. Yeah, mhm. Let's see. It is somewhat down 15% year-to-date. Yeah, I mean it is somewhat if you if you look at that it is some 21. It is somewhat like um this could give give a good idea for it if we look back like the early 2020s this might help explain it. So, if you look the price to sales then were let's see. Um yeah. So, you have a market cap that is like 40 60 50 billion which sounds like a big stock, but in reality you have sales numbers obviously from there in terms of revenue if you're looking at it that are a few billion. It's not a huge company. So, that's why this one again is like a FICO type thing. Like it is a it may be very strong what it does, but it is not uh it's not, you know, Apple or or YouTube or Google or something. I mean like this is not a huge part of of the overall economy or something. It's a small business that's just a very very good um uh highly profitable wide moat type thing. Mhm. Um Still expensive. And then I don't know. Yeah, it's still expensive and I also don't know what AI's effects will be on on CAD. Right? But look at the price to free cash flow. It's 21 times. That's not too bad for a wide moat business like this. No, no, no. That's not bad at all. Several of these are at prices that aren't bad right now. I'm just saying if you tell me that a stock is like in this case it's multiple from the early 2020 from COVID to now it's multiple in many ways has contracted by almost three quarters by between half and three quarters easily. Uh you're not expecting to see that it's still uh you know, at not very low prices. Price to sales of seven is not low. That's not what you're expecting when someone says the stock is down a huge amount, right? That that's all that I'm saying. But yeah, I mean it had good revenue growth in the last 10 years and stuff. I mean it's grown almost 15% or something. Mhm. K A G Y S. I'm not even going to try pronouncing that company. Uh provides hospitality software delivering cloud native SaaS and on-premise solutions for hotels, resorts, cruise lines, casinos, corporate food service management, restaurants, university stadiums, and health care facilities. Company's software solutions include point of sale, property management, inventory and procurement, payments. Okay, you get the point. Yeah. And that is 100% of the business. Currently trading 36 times EV to EBITDA. Again, another case. Look at 2023. 104 times EV to EBITDA. 2024, 84 times. 2025, 57. Um price to free cash flow 31 times. Um let's see what else. Let's see the warning signs from GuruFocus. Sloan ratio, poor poor quality of earnings. Severe and asset growth faster than revenue. Hey, who does that sound like? Asset growth faster than revenue growth. Yeah. Um so, on this one I would say um it has to have something new happening that's going to grow it a lot faster. Yeah, I mean if you look at price to sales price to sales is too high for something that's been growing this slow. It this is actually grown like 6 to 9% a year from in terms of top line for more recent things. You can't have something that grows that slow that has these kinds of multiples unless you know there's going to have a bright future because, you know, something about the technology and stuff that I don't. So. Mhm. Yeah, growth rate right here. Revenue growth 10 years 6.4 uh CAGR 5 year 9.4 1 year 17% top team, but Yeah. Got you. Okay, let's go to the next one. AI. Yeah. C3 ticker AI. Yeah, that that's a good ticker. Uh C3.ai Inc. Uh enterprise artificial intelligence company. The company provides software as a service applications that enable customers to rapidly develop, deploy, and operate large-scale enterprise AI applications across any infrastructure. 1.2 billion dollar market cap. Uh looks like it went public in 2021 at oh my gosh, very high valuation and it's done nothing but sell off. Um this would be an easy pass for me. Just kind of probably in my mind too hard. Uh don't want to really even spend time on it. Can look at the warning signs. Altman Z-score distress. How do you pronounce it? Pi- Piotroski Piotroski. Piotroski F-score low. Sloan ratio, poor quality of earnings, gross margin percentage decline. Um yeah, for me easy pass. Even look at the quarterly right here. It's just gone down. Um Yeah. Easy pass in my mind. What about you? Yep, and it's not even that cheap versus liquidation as far as I can tell here. Looks like it's twice the price of like net nets and things like that. So, it's not really a value stock. Mhm. Okay, let's go on. A L K T. Alkami Technology Inc. 1.7 billion dollar market cap. Uh let's see. They are a cloud-based digital banking solutions provider. Um let's see. Just looking at it. EV to EBITDA all messed up. Price to earnings at I think that's messed up I think because the EBITDA is negative not because the EV is negative, right? Yeah, you have to check, but it is negative. >> like it has operating losses, yeah. Yeah. Mhm. Okay, let me see. Revenue is growing. Yeah. Gross profit has gone up. Um Yeah, revenue has grown like every year and by quite a bit, yeah. It has had strong growth, yeah. Mhm. Yeah. This would be an easy pass for me, too. Probably. I mean I can't I mean it has negative operating income for each of the last like 6, 7 years. So, I can't really evaluate a business like that. It's hard to do. Mhm. Okay. A L A L R M Alarm.com Holdings. Uh cloud-based platform that offers an expensive suite of IoT solutions addressing worldwide opportunities in the residential, multi-family, small business, and enterprise commercial markets. Um let's see. 2.1 billion dollar market cap. Trading 10 times EV to EBITDA. Price to free cash flow 19 times. Revenue per share has gone up. Shares outstanding has also gone up. EPS has gone up. Warning signs asset grows asset growth faster than revenue growth. Yeah. What do you see here? Um I mean 10 10 times EV to EBITDA is not bad. Um I'm surprised at how expensive it got. I did not know that or did not remember that that it got as expensive as it did in 2020 2021, yeah. Uh yeah. Um >> [clears throat] >> So, I can't say much about that. It I do notice that institutional ownership is 97%. Um so, this is probably not going to be a low beta um a lot of insider ownership whatever type thing. So, um it it probably all floats this this stock. Um yeah. Yeah, market cap is 2 billion now. Yeah? Okay. Now, AppFolio I know was always a super expensive, yeah. Yeah. Yeah, it still is, right? It it's always one of the biggest moving stocks up or down like every day. Yeah, we're at 38 times price to free cash flow. 36 times even to EBITDA. Let's see. Yeah, price earnings >> I I honestly don't understand what the company does and I've looked into it a little bit. So, it's just a lot of stuff that I don't understand obviously cuz even when I've read what it says it does and what that means uh I really don't understand it. It's a massive company, too. 146 billion-dollar market cap. Yes, it is only uh less than 6 billion in revenue. Say on only 6 billion in revenue. Yeah. Yeah. Um Gross margins have gone up. Look at that. It's right gross margin of 87%. It's gone up. Yeah, although when you're doing advertising-related things that way that is a little confusing because they don't put like um billings as your revenue. So, your gross margin often is close to 100% uh depending on how they calculate it for companies. If we were looking at other like ad agencies and things like that, things that buy for other people could look weird. Um but the operating margin, I think, if um let's see. You got the chart? Yep. Operating margin 71% 72%. Yeah. So, that's fascinating. Um yeah. Um it seems very expensive to me. Uh so, I would I mean, I just say I would pass on anything that's 25 times sales, you know, >> Mhm. So. More than down more than 35% year to date. Yeah. Yeah, and like I said, I don't understand what the company does. And I've actually talked to plenty people who um should know about it, you know, but Like in the industry? Yeah, in the industry. So, I mean, we can say what it says. It says it acts as a demand-side platform for advertisers, a supply-side platform for publishers, and an exchange facilitating transactions between the two. In theory, I understand what all those things mean. Um but, you know, um I just yeah. But I again, I'm not talking to people at the biggest companies doing this and everything. So, I I really don't know. Um Yeah. It It's definitely a stock that gets mentioned to me a lot by people who are um who manage investments and stuff. It's It's a better-known stock than a company at this point, that's for sure. Interesting. Okay, we can move on. AppFolio, APPF 5.8 billion-dollar market cap AppFolio provides cloud-based software solutions for the real estate industry. Okay, let's see. Even to EBITDA 39 times. The multiples really come in for this company. Um price to free cash flow 26 times. Revenue's gone up. Mhm. Revenue per share, I guess I should look at the growth. Revenue growth, 10-year number 25%, 5-year number 26, 1 year 23. Um Yeah, if you just don't look at the price and you look at everything else about this company, it looks great. You look down at the revenue from 20, you know, revenue per share from 2016 to today, every year is up and it's up by a nice chunk. Like I said, I looked into the company years ago thinking, "Oh, here's a technology company I can understand and whatever." And probably when I looked at it, you know, on those multiples, I was blown away that it was I know it was double-digits price to sales. So, we're talking about me looking at this probably sometime between 2017 and 2021 or something. Or since Yeah, that would have been when it was. And you know, I saw a bright future for it, but >> [snorts] >> you know, I mean, their sales have tripled the per share in that time probably, but that still leaves them at a very high, you know, I mean, the multiple the price to sales multiple and stuff has come down, but you can have your sales triple and not be an amazing stock at a something like this. Mhm. Yeah, to be fair, they have it their shares outstanding is pretty much the same. I was going to say, total shares outstanding hasn't like ballooned like a lot of these companies you look at. No, I mean, it It is really good on and that part of it. Like if you just didn't see the price and you just saw the other numbers that we're talking about here, you would you would think that you'd have to be making a fortune if you were in the stock over that time. The only question is what the what was priced into it already, right? You know, that's kind of the the issue that way. So, and you can see that um it is not you have, you know, not made a fortune if you if you owned it since um that period, it's probably about the same. I'm going to guess like around the like say the start of COVID to now or something, it's probably like the same price on the stock, I would guess. Mhm. Okay, we can move on. Appian APPN is a low-code enterprise platform as a service company focusing on business process management. The company's Appian platform is an integrated automation platform providing tools for organizations to design, automate, and optimize end-to-end processes in complex business operations. Okay, whatever that means, right? Sometimes you read these business descriptions and it's like very, you know, vague. Um Like you read it and you're like, "I still have no idea Yeah, what they do." Yeah, I've had ones where I read a business that I thought I understood and or do understand and then they the way they present it is in the most confusing way possible. Um See, this is funny. Look at this. AppFolio, GuruFocus has significantly undervalued. Then you go to this one, Appian, and it says possible value trap, think twice. Yeah. Yeah. So, I guess we should look at those two stocks. >> of many software companies that are there. Yeah. So, that is interesting. It Where is the but software companies can look bad on the Altman Z-score, but does it show the Z-score somewhere on the actual uh Um it's flagging the Z-score here. I know I just meant like yeah, if you just look on it if it shows up anywhere on the um on the form. Yeah, there's the uh F-score. So, it's not showing me the Z-score, but uh the Z-score is for, you know, if we haven't talked about this recently, but the Z-score is a measure of the likelihood of bankruptcy within the next like year or so, basically. Um and it it depends. It's not always the most accurate for like It's meant for like manufacturing companies and stuff originally more like um it's not as much meant for software, certainly. But um it would indicate financial distress. And then like the F-score that it has here also is not anything amazing, but it's not terrible. Um the F-score isn't necessarily good um which just is financial trends one way or the other. It's a checklist. Um for value stocks, these are both important scores. So, if you're looking at something that's really cheap on like tangible book um or a net net, having a high F-score is critical. In fact, like if you have a high F-score and you're very cheap, you it it's probably going to go well. Um it is less important sometimes for for big uh asset-light companies that are like high growth, but their assets aren't so good or anything cuz it's not usually how they go broke. They go broke from like uh their business suddenly getting a lot worse, their the things like that. It's not from like balance sheet deterioration as much. Um yeah, and then the and then we haven't talked about the M-score is just a measure of possibility of financial fraud. I wouldn't worry too much about it cuz it's a statistical thing and companies could end up on it just because they have certain things that are not indicators of the company actually engaging in fraud or something. But it is true that it that it is capturing like what companies have a higher likelihood of that. So, it would be those the three things together are pretty good things for someone to look at if they're like shorting a stock. It's to look at the F-score, the Z-score, and um the likelihood of financial fraud, the the M-score there, you know. This M-score is fine. Okay, Asana >> Asana, another one I use every day. Yeah. Possible value trap, think twice. Uh a one What do you use this for? So, it's really like a project management um in terms of team collaboration. Uh so, it says like agents can collaborate and AI agency and humans and AI agents, we use it for humans, can collaborate effectively so that individuals work smarter, teams, and faster organizations deliver results. So, what we do is we have people in Asana internally and then we also share that externally with people who would be working on the same projects. Let's say an ad agency and an internal ad team or a whatever. It could be It could be lots of other things. They use a lot of marketing type things, but it could also be if I was doing things that were insurance or whatever, things that you send back and forth. Um and then you can observe what people are actually finishing, what tasks, and posting the tasks, and assigning people to the tasks, and sorting it for the team high low priority and stuff. It's um very good. We pay very little for it. Um it's one of the most helpful sorts of things we have in the company and it's quite cheap. Um And it's easy. Well, stock stock has gone up, too. >> but could you create something like it um and replace it? Yeah. But does that matter? I don't know. I mean, historically, it hasn't even been like having enough users and charging enough to make money, I think, right? Um but and and, you know, people I also, you know, everyone that I've hired and stuff has worked with Asana at used Asana at other agencies and clients and things that they've used in the past. Um but just because something is very useful, you know, it is easy to replace definitely. But it's kind of like saying a a to-do list and a calendar and stuff is recreating that easy? Yeah. Um but I don't know that someone will switch, right? Excel is critically important to people, Word is critically important to people. Uh they're probably very easy to to come up with an alternative to. I don't know if people will switch to them. Um this one I don't know that we people wouldn't switch if you charged them a lot for it is kind of the issue, right? And this company, I have they ever It does say they've turned free cash flow positive in the last year or two. Whenever I looked at them, they were burning money and reporting losses. Mhm. Yeah. Yeah, I mean, operating margin, they're still losing money. Uh on a gap, I mean but free cash flow it's a price to free cash flow 19 times. If you saw this thing I the thing that I would say about it is that it's not a >> year. 76 mil 77 million. I would say the thing is um that people would as this is the kind of thing that you could probably ask AI to write for you um and it could do like right away and stuff. Um but honestly it's the kind of thing that I feel like humans could have created for you too or you could create internally um to use too. But of course like I said we use it externally and internally so it's kind of like well I mean how hard is Dropbox or something but if everyone's using Zoom or Dropbox or something um we're not going to have six different ways to share files, you know. Um so same thing here. We're not going to have six different ways to to track tasks and things like that. But where it says workflows and you know that stuff that's what it does. Um and it's very useful for doing that and it's a pleasure to deal with it but uh I don't know that I would buy the stock. Got you. Great. Okay, let's see. A10 Networks, ticker ATEN. GuruFocus says significantly overvalued. It's a provider of secure application and network infrastructure solutions for enterprises and service providers across on-premise, hybrid cloud, and distributed environments. Okay. Uh let's see. >> Sounds like secured cyber security things cuz it says include application delivery traffic management, denial of service API that's that's some sort of um cyber security stuff. Mhm. Mhm. EV/EBITDA 24 times, price to free cash flow about 30 times. Um let's see. No not no revenue growth but like companies that have not to do with technology have had more revenue growth in the last 10 years than this company. Mhm. Shares outstanding have gone down a bit. Gross margin has kind of bounced around a little bit. Operating margin similar thing. Uh yeah. Let's see. Warning signs Sloan ratio poor quality of earnings. Uh severe asset growth faster than revenue growth again. Good sign. Altman Z-score strong. Yeah, I I wouldn't pay like 20 times EBITDA or something for something like this that doesn't grow and stuff. I just wouldn't pay for something that doesn't grow even at really low prices because this kind of thing has the possibility for disruption unless you're going to have lots of revenue growth over time. I would much rather pay this for some boring real world company because it would have the same numbers and be much much safer, right? I mean the five-year revenue growth 5.7%. It's not exponential. >> No, you could buy things at half the you know the same EBITDA or half the the price that grow 6% a year and are based in real world things that aren't going to change no matter what. Mhm. So. Uh Aurora Innovation Inc., ticker AUR. 9.8 billion dollar market cap. Delivers self-driving technology safely, quickly, and broadly. It has the F score of three which is quite terrible. Yeah. >> happen but >> Not a lot of history here. Operating income negative 901 million. Yep, easy pass for me. Obviously. It's a startup type thing, yeah. Yep. Okay. With the 10 billion dollar market cap. Yeah. Mhm. AvePoint Inc., ticker AVPT. Provider of modern data protection enabling organizations to secure, govern and operationalize data at scale across cloud ecosystems. Okay. Is this another like security type company? It says security type stuff but then it also talks about AI and and uh don't know what any of those things mean after that. Uh um I it since it stresses indirect sales channels there might be something different about its sales than we expect like it's repackaged and sold by resellers and stuff. You know what I mean? Um for IT things but it also could just be that someone wrote it that way and it's not really a big deal that it's through indirect channels sometimes. Yeah. GuruFocus says modestly undervalued. Um let's see. EV/EBITDA 42 times, price to free cash flow 29 times. Yeah, obviously we'd have to learn more about the business but nothing really standing out to me on this page. Yeah, I mean I don't understand this kind of thing that it does probably so it would be very hard for me to get comfortable with it and not at those prices. Yep. Wow, BlackBerry. Ticker BB. 3 billion dollar market cap. Says the world's largest smartphone manufacturer is now exclusively a software provider with a stated goal of end-to-end secure communications for enterprises. Uh price to free cash flow 75 times, EV/EBITDA 34 times. Revenue I mean is is you know the growth of it is is not been good both on a 10-year, 5-year, and 1-year basis. Um going through some sort of change. You could see that in the numbers. That or dying. Um one of the two. Um warning signs revenue per share decline, Altman Z-score gray. Price close to 1-year high. Um yeah. Which is sometimes a warning sign cuz GuruFocus is tracking certain other things that we wouldn't necessarily care that much about like >> pay any sort of dividend. Yeah. Yeah. Um obviously it has three different segments there and it talks about licensing, you know, as like 4% there which maybe is significant profit driver. So they could have different margins in each of the businesses that it's in and so we're seeing a mixed thing from that. Um yeah, I know some value investors are on it and stuff. I don't know much about it. Uh obviously it did have valuable intellectual property in the past which it talks about there that it end-to-end secure communications and had that with BlackBerry and has long history in that so. Um yeah. It still exists which might surprise some people. Yeah. Yeah. Okay, let's see. Bill Holdings Inc., ticker BILL. Possible value trap, think twice. Market cap 3.7 billion. Bill Holdings Inc. is a provider of software as a service, cloud-based payments, and spend and expense management products which allow users to automate accounts payable and accounts receivable transactions, enable businesses to easily connect with their suppliers or customers to do business, eliminate expense reports, manage cash flows, and improve back office efficiency. Is that like a a Ramp? Um Oh, yeah, Ramp. Mhm. I don't know. Yeah, that So Ramp is kind of I guess they'd say spend management accounts payable. Ramp is mainly an accounts payable company really like historically what what that is. It presents itself differently or um it advertises a lot Ramp, right? So um yeah. Uh I looked at Ramp. Um I mean as a the service not as a a business obviously. Not as an investment stuff cuz Ramp's privately held, right? Um It is, yeah. I thought it was. Yeah, yeah. Okay. Um yeah. I don't know from what they described that would be interesting but they don't stress the accounts payable part of it. Um so Yeah. BlackLine Inc., ticker BL. Providing financial accounting close solutions delivered as software as a service. The company's solutions enable customers to address various aspects of their critical processes including financial clo- financial close and consolidation, intercompany accounting, and invoice to cash. Uh let's see. Price to free cash flow 15 times. Revenue per share good growth. Um total shares outstanding has gone up a bunch as well. Um let's see. Operating margin has gone from losing money to looks like they are generating a little operating income. Yeah. Um Altman Z-score distress, severe gross margin percentage has declined. And then another warning sign asset growth faster than revenue growth. Um What do you think about this ranking system, right? You're familiar with with the ranking system. Financial strength five out of 10, profitability four out of 10, growth eight out of 10, momentum four out of 10. Possible value trap, think twice. Yes. I was going to say just for the software companies I don't think it's that important to look at things like the Altman score and stuff generally. Like if you look at this like it's fine in terms of the current um you know I mean it has a slightly its current ratio actually is it's uh it's sorry its total liabilities are actually more than its current assets which you know for a lot of companies isn't a big deal but is kind of a big deal for software companies and stuff cuz generally they have very strong ratios in that way and everything. So I can see why it's not scoring that great on like Altman but um that's you know that's that's for other kinds of businesses really so we shouldn't stress that too much. Um Yeah. Uh it's I you know it it it actually is kind of interesting um as compared to most of the things that we've talked about. Well, the price and the historical revenue growth is kind of pretty interesting. Um from this point on, you know, like like obviously you know it's whatever it was in the past but you wouldn't expect it to go back to the margins they had before when it was a smaller company at that point. So that is interesting. Um uh you know you're talking about you know like here price to sales of three or something, EV/EBITDA of 20. That's actually, you know, those are reasonable for a company that has these kinds kind of growth. And then some of the measures of profitability and everything, it depends if those increase with scale. I don't know if the profitability is necessarily that important for the profitability as of today versus what the profitability will be in the future. Um, you know, its gross margin has always been high and about the same. It was better at one point than than now, but so that's been the same sort of thing. And then as it got bigger, its operating margin turned positive. So, you know, if you were really interested in the um software and um thought that it had a good future to grow from there. I mean, you could project quite a bit higher operating margin in the future, which given the reasonable price very reasonable price to sales, gets you to a much better place. So, I mean, a software company with a bright future is reasonably priced at three times sales, no doubt. Mhm. Mhm. So, yeah. Got it. All right, we got to at least get through B's for today. Then we'll start at C for the next podcast. Okay. Ticker BLKB. Uh, they provide software solutions designed to serve the social good community, including nonprofits, foundations, corporations, educational institutions, health care institutions, and individual change agents. Current price to free cash flow, nine times. EV to EBITDA, about 10 times. Uh, and that multiple has come in a good amount as well. Uh, growth rank GuruFocus has at five out of 10. 10-year revenue growth, 5%. 5-year, 4.7. 1-year, 1.9. Uh, let's see. Free cash flow has had some growth for the past 10 years and 5 years. Uh, let's see. Warning signs, financial strength poor. Altman Z-score distress, which you talked about maybe before software not as important. Long-term debt, keep issuing new debt. Uh, shares outstanding it looks like have trickled down a tiny bit, but has stayed relatively stable. >> stock the last few years, yeah. They weren't before then, but it seems like they bought back stock the last few years. And they haven't grown those few years. So, if you look when they started buying back stock, it's about the time that they're well, their growth had already slowed a lot before then. So, they've had minimal growth, no real growth for like six or seven years at least. Uh, let's see. Seven years, probably. So, they haven't kept pace with like the economy overall or anything like that. Um so But free cash flow, you could look at I mean Mhm. cuz so we're talking a $1.7 billion market cap. Uh, I wish I could do the math, but that takes too long. I wish they broke out enterprise value somewhere on here, which I don't think they do. Oh, yeah. They Yeah. Um, let's see. Yeah, they have a significant amount of debt is the thing. Yeah, so their debt is almost the size uh, what is it? Like 40 Let's see. 40% or something of their enterprise value. What was the market cap again? 1. 7 billion. >> and the and the and then debt less um, it's a little hard because I have to add in the short-term debt and the long-term, but if I add that together, it's about a billion still. Uh, because there's almost no cash and no short-term. So, it does have a very significant amount of financial engineering. So, on a leverage basis, it obviously looks attractive. It has a double-digit free cash flow yield on a leverage basis. But on an uh, on leverage basis, yeah, it's a bit lower. Not too too low. It's still attractive that way. It has negative tangible book value because this one actually is kind of um uh, a high risk financial engineering that they're doing here. Having said that, like we said, the uh, the F-score is actually an eight, which is quite good. Um, so, you know, it it has high quality of earnings, basically. I mean, that's not directly a quality of earnings measure, but compared to most of the stocks we've looked at today, almost it has much higher quality of earnings than they do. On the other hand, it isn't growing and almost all of them, you know, most of them weren't growing. And it has significant amounts of debt, whereas they generally did not have significant amounts of debt. So, that's where that's why it's like think of it as is it a value trap or not, but it's more of a value stock. Oh, here's one that we could say a lot about. >> Yeah. Bitmain Immersion Technologies, BM NR. Uh, they're Bitcoin and Ethereum network company with a focus on the accumulation of crypto for long-term investment. Okay. Um Currently, well, $11.7 billion market cap. >> It's good what it says in the rest of it. Whether they're acquired by its Bitcoin mining operations or from the proceeds of capital raising transactions, meaning I assume it issues stock and then buys Bitcoin. Yeah. >> Uh-huh. Interesting. Um, poor quality Yeah, I mean, I I really have nothing to say on this. We could just go to the to the next one. >> I just like that it in 1 year it's had as low as a stock price of three and as high as 160, apparently. Yeah. Yeah, that's funny. Okay. Box Inc. Yeah. Uh, cloud-based content management platform that provides storage and workflow collaboration services for enterprise customers. Uh, this guy the founder of this is on Twitter or X. Uh, says mostly undervalued. >> I have used the service. >> No, I haven't. >> Okay. So, I've used this service and Dropbox, both yeah. They just compete with each other. They're the same thing. What do you think is I mean, I I use Dropbox and that's all I've ever used. Everyone uses Dropbox because everyone else uses Dropbox. Yeah, exactly. Uh-huh. Yeah. But I don't know that Dropbox was better. No. But but yeah, clearly it's my bad. >> I I got a great idea. Ready? Ready? I'll give this idea to you for free. Dropbox and Box should merge. Should merge, yeah. Boom. Uh, let's see. 12 times price to free cash flow. Um, let's see. Do they generate a good amount of free cash flow? Yeah, they do. About 300 plus million a year. >> is very weird though because I did look at them many years ago. They always were reporting pretty high free cash flow, but my memory is they had an unusual um, commission arrangement, which showed them generating positive free cash flow, but like I mean, like an incentive sales team type thing. Um, but did have something in terms of um, future obligations that they would have to to sales employees on the business um, like longer term. So, uh, I don't know if that's still the case and I I can't really remember all the details of that, but I remember it being quite significant back then in that they didn't when you closed a deal, you didn't necessarily get a ton of money for doing that when you signed up a major organization, but like you had kind of an interest in them renewing for a while, you would keep getting money on it if you were a salesperson. Um, so Got you. Interesting. Um, on a free cash flow basis though, I mean, you're right around 10 times. Um, let's see. Do they have debt? Yeah, they have a good amount of debt though. Well, not a good amount, but 527 million. >> yeah, but it's offset by their cash, yeah. Mhm. Mhm. Um, it says modestly undervalued. Yeah, it's always looked modestly undervalued that way, but it is um I I feel like not that popular with um investors. Surprised by that. Oh, it trades right in line. Look at that. Yeah. Um Yeah, so what's the let's see. Um Okay. Uh >> [groaning] >> I mean, it's not cheap. It's down half, but it's you know, it is I mean, the lowest EV to EBITDA it's had is like 25 or something. I mean, yeah. Um, that's hard. Yeah, it's always been valued, you know, pretty highly. And it still kind of is. So, I don't have a good answer to that. Institutional ownership is over 100%, which I assume means there's some shorting there or miscounting. Mhm. Okay, let's see. Braze Inc. Um, this probably going to be a pass. It looks like they don't really generate I mean, they they lose money operating income. Yeah. >> Yeah. Uh Yeah, we could skip that one. Yeah, we could skip that. Our final one for today, Bentley Systems Inc. Ticker BSY. It's a software vendor that caters to civil engineers, uh uh, the civil engineering industry is a pretty interesting industry. Oh, yeah. Constructors and geospatial professionals by enabling design, simulation, and data management of infrastructure assets such as roads and bridges. Um, $9.8 billion market cap. Wow. >> Price to free cash flow, 20 times. Um, let's see. Revenue growth, 10.7% over 5 years. EBITDA growth has been strong. Everything's been pretty strong. Uh, warning sign, asset growth faster than revenue growth. Uh, yeah, what do you think? >> predictable compared to most of the companies that we've been looking at. So, GuruFocus actually has a predictability score and stuff, but just in terms of if you compare certain numbers, margins, how much they're varying, you can do this based on like um, you know, like coefficient of variation or something like that if you like that kind of measure, but you could just eyeball it and see this that their margins are much more um, stable and predictable from year to year, even if they're going up or down over time. They're they're um uh, you know, so when we're talking about the growth, it is true that we saw some other companies that had about the same amount of growth, but you can just see the stability in the growth from year to year is very different here. Um, and so it does look much more like a blue chip type company than some of the other ones that we've been looking at. Um, it it is also you know, it has a F-score of nine, which basically means a lot of good momentum this particular current year. The F-score involves a lot of that. It's it's partially measures of of um a sort of earnings quality, but mostly what it's saying is that they're headed in the right direction with a lot of earnings quality measures. So, um this just looks very different than most of the others. Um it looks less like a growth stock and more like a high predictability stock. Um we haven't covered companies like that, but you know, like I guess Adobe, maybe some of their things would have fallen in the same category as this actually. Um but I just didn't talk about it cuz probably everyone knows that Adobe's kind of a high quality type thing that way. And maybe Autodesk too might have I I didn't, you know, bring it up with either one. Mhm. Mhm. Yeah. >> Cool. Well, we'll we'll we'll stop there. Where do you think, I mean, going A through B what we looked at today, if you had to hone in and spend some time on one stock, maybe two stocks, if if if any, what would it be? If any is a good question. Um let's see. Let's scroll down slowly so I can see. Um let's see. Okay, so we got through two letters. Um I guess well, so for me probably BlackLine, I would say. It's a BL. Um but I would have to know more about that. So, a few things. One, you know, I'm a little more comfortable with that because what it's describing um is something that I understand well, right? So, financial accounting close solutions and then talks about how it does that, consolidation and a company accounting and invoice to cash. Okay. So, that's easy to understand. Majority of revenues from the United States. So, already business description, it feels like something you can understand. Reports in one segment, right? And then you just look at the numbers and the numbers statistically are very interesting that if you didn't know what this company was and what it did, if you just had the last few years of numbers, they look interesting. It doesn't look overpriced on things like price to sales today. It has good numbers in the past few years that are gradually going up with all the things we want to see go up where like operating income generally is going up each year, gross profit's going up each year, revenue's going up each year. Not at a phenomenally fast rate, but at a rate that could show that it had reached a a scale where it's making money that way. Um you know, of course, it says possible value trap think twice. So, of course this is the value stock type one in there. I don't know how much of a value stock it is at, you know, what is this? Uh you know, the the P is astronomical, but like the even EBITDA's like 20 times, price to sales is three. Um 15 times price to cash flow, though. Yeah, I we would have to look more into um how how that looks in terms of like where with all that with free cash flow of dissecting the cash flow statement, right? Um but it it does look interesting that way. One thing we didn't talk about is it does have um mhm it probably has more debt than cash or about the same, which is not ideal breaker or something, but is unusual among the companies we looked at. You know, software companies generally have cash and not debt. Uh it has a poor rank on the value rank actually. Um I noticed from from that. Um yeah, but it's just other things. Like if you look like book value growth is like nothing, but like revenue growth is positive over that time, which um you know, it does say here faster asset growth than revenue growth. I'd have to look carefully at what GuruFocus is calculating for that and what period, but over a longer period it doesn't look like that's very true actually. Um but like it looks like it was growing revenue faster than it was growing assets during that period, but it could mean some intangible things I'm not seeing here or something. Um So, uh and then, you know, it's spotty, but that, you know, I'm not sure what was going on with the shares outstanding exactly, but they jumped up at a couple different points, so they don't have constant dilution the last few years anymore. So, you know, I'd have to learn more about that. It's just something that I could actually learn about and figure out of the ones that we talked about probably. Cool. Well, with that, I want to thank everybody so much for tuning in with The Disciplined Investor on the Focused Compounding Podcast. Uh we're at an hour and 3 minutes and that went pretty quickly. Uh next week we will start at C and work our way through. It looks like I'm starting to sort of recognize more of these companies. You got your Salesforce, CrowdStrike, uh Dropbox, DocuSign, uh Electronic Arts Electronic Arts, FICO. Um so, we'll work our way through and uh keep on going and try to get through as many stocks as we possibly can and see how far we get. So, I want to thank everybody so much for tuning in with The Disciplined Investor. Make sure you hit that subscribe button wherever you're watching or listening to be notified every time we upload a podcast. And of course, if you're interested in learning about our money management services, you can reach out to me at andrew@focusedcompounding.com. I want to thank everybody so much for the support and we will see you in the next podcast. Take care.