Wednesday, May 31, 2017

"How to Find the Next Tech-Stock Superstars"

Mr. Ray presents a sound screen for publicly traded portfolio investments.
The trick with public stocks, as opposed to venture capital, is to follow Buffet's first two rules of investing:
Rule No. 1: Never Lose Money.
Rule No. 2: Never Forget Rule No. 1.
This minimum revenue screen gives a small margin of safety which aids in following rule #1.
To that, adding a profitability requirement is probably prudent for most portfolios. Just to lower the odds of total wipeouts.
You'll miss some moonshots but there can still be plenty of upside, witness NVDA $20 to $120 in 18 months 2015-16.
(and $25 higher since)

From Barron's Technology Trader, May 29:
By
Firms often reach critical mass when revenues approach $1 billion, clearing the path for more growth.

Selling technology is more complicated than selling burgers and fries, so with that in mind, I propose a simple measure for tech investors. Call it the Dave & Buster’s rule. Once a tech company achieves the same annual revenue as the casual dining outfit, momentum is most likely on its side.

Dave & Buster’s Entertainment (ticker: PLAY) last fiscal year passed a billion dollars in annual sales, and it’s always intriguing when small- and mid-cap tech companies approach that same mark. In fact, Microsoft (MSFT) founder Bill Gates is said to have been preoccupied early on with how to reach the first billion dollars. His firm had only $198 million in revenue at the time of its 1986 initial public offering.

Indeed, the billion-dollar mark—the D&B line, if you will—looms as an important milestone for smaller companies, and one worth paying attention to. Unlike Dave & Buster’s fare, selling computer chips, selling software contracts, and selling networking equipment is an extremely complex business that few people really understand. These are sales that can run to tens of thousands of dollars, sometimes into eight-figure prices for each contract. They take time and effort for a sales team to put together. They don’t happen by volume of sales, like selling beer at D&B.

So any company that reaches that level may have a certain momentum that points to it being a future winner, even though that doesn’t mean the company is assured of long-term success.

Some young companies have already crossed that threshold and stand out. Arista Networks (ANET), which competes with networking bellwether Cisco Systems (CSCO), is one such firm. It reached $1.13 billion in sales last year, which is a lot less than the $49 billion Cisco booked, but still a near-doubling of Arista’s revenue in three years.

A CASUAL GLANCE at the companies listed on the Nasdaq and the New York Stock Exchange reveals roughly 3,000 with revenue of a billion or less, across all industries. Within that collection are some promising tech names that suddenly seem to be at a meaningful point in their revenue growth, where the billion-dollar mark is conceivable if not yet within reach.

In the field designated broadly as “electronic technology,” a grab bag of software and hardware, Pure Storage (PSTG) is noteworthy. It handily beat expectations for quarterly results last week. Its sales, which were $728 million last year, may rise to $999 million this fiscal year, which ends in January. With its pattern of beating expectations, you’re basically looking at a company that could pass the billion mark by January.

Pure sells equipment that combines flash-memory chips and software into systems that can replace hard-disk-drive storage for corporations. It faces competition from a raft of companies, including privately held Dell and Hewlett Packard Enterprise (HPE), which just bought Pure’s closest competitor, Nimble Storage. With sales up from $175 million just three years ago, this company is certainly finding demand. But it will have to continue to innovate to keep ahead of the pack, and it’s done a good job of that thus far.

IN CLOUD COMPUTING, selling software as an annual subscription can be an even tougher route to the billion mark. Unlike in the old days, when Microsoft and other traditional firms could sell a multiyear software license that was paid for in advance, selling software subscriptions means there’s less revenue initially. Wall Street actually likes the subscription route, because it implies a certain consistency to revenue, assuming customers do, in fact, come back each period and renew.... MORE
AGAIN, NOTHING ABOUT A BILLION in sales is magical. Such companies can still flounder, and their shares are often pricey. But history has shown that cruising toward a billion dollars tends to change the discussion in the stock market about a company because it’s an achievement that both industry and investors take note of.

The success of these companies thus far does mark them as something even a casual observer can recognize: The dollars are going their way because the trends in tech are going their way.