Category: Uncategorized (Page 3 of 10)

The Invisible Hand of Product Agility and TAM Expansion

October 20, 2021 / poffringa

The agile software development process is based on four time-honored, yet simple, tenets codified in the Agile Manifesto. They emphasize responding to change, actively soliciting customer feedback and most importantly, shipping software as early as possible. The expected outcome is to speed up software development cycles and get relevant product into the hands of customers. Then, the cycle repeats. Test, observe, iterate and release again, always striving to increase the output of each subsequent “sprint”. Leading software infrastructure companies have taken this approach to heart, exhibiting a strong bias towards rapid product release cycles. This allows them to continuously expand their product footprint, enter new markets and stay far ahead of competitors. Agility is the beating heart of their product cycle.

The concept of a total addressable market (TAM) is well-understood by investors. It provides an estimate of the revenue opportunity available for a product or service. Companies often include this estimate in their S-1 filing, investor decks and quarterly reports. As investors, we will usually take a summary view, sometimes skeptical, of management’s sizing of the market and how they calculate that. As long as the TAM is big, we usually check the box and move on to historical financial indicators like revenue growth and profitability to evaluate our potential holdings.

Yet, product agility and addressable market expansion can have an impact on stock valuation, primarily for the forward view. These influences can manifest when the market perceives that a company’s TAM has expanded. This may be the result of a product announcement or strategic partnership. Even if the underlying stock’s financial metrics haven’t changed in the interim, the perceived potential associated with an expanded market opportunity can drive up valuation.

Similarly, when a company is rapidly launching new products and extending the functionality of existing ones, investors gain confidence that the company will successfully fill the addressable market. Agile companies always seem to have a new product announcement (or clusters of them), with beta customers lined up to use them. Even if the initial version isn’t complete, agile companies work with users to quickly flesh out the features that are important and discard those that aren’t. The team repeats the process, incorporating learnings and software components from the prior cycle into the next build. Because of this re-use, more customer value can be crammed into each cycle.

While some software companies embrace product agility, Cloudflare provides a textbook example. They are delivering the fastest product release cadence in software infrastructure, dazzling investors with each subsequent “Week” of releases. Not only are they rapidly iterating on existing platform capabilities, but they are entering new billion dollar markets with alarming frequency. Birthday Week delivered several major releases, which in aggregate likely doubled their TAM. And leadership claims the product development pace is accelerating from here.

In this post, I will explore the signals that investors can watch that indicate a bias towards shipping product and TAM expansion. I will conduct this investigation using Cloudflare as the example, providing updates on their recent product announcements and what this implies for future growth. In the abstract, these principles can be applied to any software infrastructure company, generating insight into why some maintain hypergrowth for years and others just seem to be plodding along.

A Warehouse for Warehouses

October 3, 2021 / poffringa

Conventional paradigms for data management are being disrupted. Collecting data in silos for single purpose analysis captures only a portion of its value. Increasingly, large data sets will be combined across companies and industry ecosystems to generate a higher dimension of insight. These data sets will span enterprises, their suppliers, partners and customers. New businesses will emerge to provide third-party data sets to supplement and enhance data aggregations by industry. These will power the next generation of AI-driven data applications and services.

At the core of multi-party data sets will be a system for controlled, performant data sharing. Such a system must have governance and access control at its core, and utilize materialized views to prevent copying of data. It must be easy to configure and manage, without requiring extensive coding or provisioning new infrastructure. It should also incentivize independent data set creators with a means to market, distribute and monetize their data.

Snowflake is building such a system with their Data Cloud, enhanced by Data Sharing and the recently launched Data Marketplace. While the features and capabilities of their core data management platform are important to consider relative to other providers, the curation and management of industry specific data sharing ecosystems could represent an end-run around competitors. As the number of participants in data sharing and distribution webs increases, network effects will kick in that create stickiness for their core Cloud Data Platform. Participation in the sharing ecosystem could become the primary driver of platform usage over time.

In this post, I will dive into these trends and how Snowflake is well-positioned to capitalize on them. I won’t spend much time detailing Snowflake’s core data platform and how it relates to competitive offerings. Other analysts, particularly Muji at Hhhypergrowth, have covered that extensively (see additional reading at the end). I will focus on the next big wave of growth for Snowflake, centering on their data sharing capabilities and the rapidly developing ecosystem of participants by industry. This opportunity encompasses an enormous addressable market and will drive future expansion of SNOW’s already large market cap.

Twilio (TWLO) Q2 2021 Update

September 12, 2021 / poffringa

Twilio released their Q2 2021 earnings report on July 29th. The results were mixed. Twilio outperformed significantly on the top-line, but gross margin and operating margin were lower than investors had hoped. TWLO stock dropped 5% the day after earnings and has sunk almost 13% from the pre-earnings price to date. Looking forward to Q3, Twilio’s total and organic growth should accelerate slightly, but additional headcount and acquisition absorption will keep operating margins under pressure.

At a high level, Twilio is continuing their rapid expansion trajectory, marked by organic growth over 50% and significant uptick in international activity. These are being driven by the broad enterprise migration of offline customer experiences into new digital channels. This digital transformation often takes the form of building custom applications, for which Twilio’s programmable communications APIs provide key building blocks. I expect these secular tailwinds to continue and provide ongoing demand to drive Twilio’s future expansion.

Datadog (DDOG) Q2 2021 Update

August 28, 2021 / poffringa

Datadog released Q2 2021 results on August 5th. The report was exceptional, demonstrating a return to the high revenue growth trajectory investors became accustomed to before COVID. Datadog beat expectations for Q2 on the top and bottom line by a significant margin, and raised projections for Q3 and the remainder of the year. The stock surged 15% following the results, after generally flatlining for the past 12 months. DDOG is now up over 35% in 2021 and I project it will end the year even higher. With this performance, DDOG is now the largest position in my personal portfolio.

Examining Application Data Platforms – Part 1

July 29, 2021 / poffringa

At their recent user conference, MongoDB positioned themselves as the first “Application Data Platform”. Their vision is to address all data storage workloads that developers typically need to build a modern, scalable software application. The scope of this goes far beyond their previous niche as a document-oriented database, to span caches, search indices, mobile app interfaces and even basic analytics for data visualizations. The premise is that developers prefer to focus on building features, versus worrying about data storage infrastructure. As cloud data solutions proliferate and IT roles converge, MongoDB wants to reduce overhead for developers through a unified data storage platform. Their goal is to increase developer productivity by eliminating the “tax on innovation”.

Decentralization Effects

July 7, 2021 / poffringa

Internet usage patterns and delivery of software applications are undergoing major paradigm shifts. Decentralization is the primary pattern – transitioning away from fixed network entry points, concentrated clusters of compute and single data stores. These changes are being driven by the rapid evolution of work habits, software architectures, connected devices and data generation. After years of Internet resource convergence, we are witnessing a shift towards the broader distribution of compute, data and network connectivity.

Software applications are pushing processing workloads and state outwards towards the end user. This transition began to lower response times for impatient humans, but will become a necessity to coordinate fleets of connected devices. With work from anywhere, network onramps cannot all be routed through central VPN entry points protected by firewalls. Distributed networks backed by dynamic routing will increasingly facilitate point-to-point connections between enterprise users, their productivity apps, corporate data centers and local offices. Massive troughs of raw IoT data have to be summarized near the point of creation before being shipped to permanent stores.

These changes are being driven by exogenous factors, reflecting the same bias towards decentralization. Workers are less likely to concentrate in large office campuses where their network connectivity can be protected by closets of security hardware. The proliferation of connected devices and high-bandwidth local wireless networks are creating new opportunities to streamline industrial processes and enable machine-to-machine coordination. Privacy concerns are prompting government regulations to keep user data within geographic boundaries. The convenience and efficiency of digital engagement are forcing enterprises to move consumer touchpoints onto virtual channels.

Overlaying these trends is an increasing need for security. While hackers have existed for years, the decentralization of defenses and migration away from physical engagement are creating new opportunities to exploit vulnerabilities as technology tries to catch up with consumer habits. Information sharing, corporate-like organization and untraceable payment systems are propelling the practice of hacking into a thriving business function. This has thrust digital security from the back of the enterprise to the front office, layering over every corporate activity. Digital transformation extends the same risks to the enterprise’s customers.

These forces are creating significant opportunities for nimble software, network and security providers. Entrenched technology companies are responding, but existing business incentives and fixed system architectures are creating inertia. Foundations in centralized compute infrastructure, big data stores and network hardware sales are difficult to evolve. Newer companies grounded in a distributed mindset are better positioned architecturally, commercially and culturally to address the new landscape. Focused independent players will carve out large portions of the growing market for distributed Internet services.

In this post, I explore these trends in network connectivity, application delivery and data distribution, and then link them back to the independent, forward-thinking public companies that are capitalizing on them. While many companies are lining up against these trends, I will try to limit my focus on the implications for a few high growth software and network infrastructure companies tracked on this blog. Specifically, these include Cloudflare, Zscaler and Fastly. I will also use this narrative to weave in updates on each company’s recent quarterly results, product developments and strategic moves.

Twilio (TWLO) Q1 2021 Update

June 9, 2021 / poffringa

Twilio released Q1 2021 earnings results on May 5th. They continue to demonstrate strong revenue growth at scale, with both Q1 actuals and Q2 estimates coming in well ahead of expectations. The continued delayed progress on gross margin improvement is causing some consternation for investors. Twilio has plans for this, but they are taking time to ramp. Additionally, rapid headcount growth is putting pressure on operating margins for the next quarter, but I expect this to be transitory as Twilio absorbs and optimizes staff from recent acquisitions.

Overall, Twilio is continuing their consistent expansion trajectory. The key to appreciating Twilio’s potential is to consider the enormous TAM that they occupy, their leadership position within it and the multiple product expansion vectors still available. Platform growth is coming both from organic product development and strategic acquisitions. Segment in particular adds a whole new dimension of insight to Twilio’s communications capabilities, allowing the combined company to close the loop on customer preferences and optimize marketing performance in a way that CPaaS competitors cannot match. Twilio is quickly evolving beyond just providing communications plumbing to enabling data-informed applications that drive enriched customer engagement for enterprises.

Datadog (DDOG) Q1 2021 Update

May 19, 2021 / poffringa

Datadog reported Q1 2021 results on May 6th. Overall performance was strong and the market rewarded the stock with a 8.3% boost the next day. Datadog is demonstrating a return to high revenue growth coming out of the one-time, COVID-impacted engagement dip in Q2 2020. This provides a favorable set up for the remainder of 2021, as the customer expansion flywheel keeps spinning and revenue growth re-accelerates. The stock has largely consolidated for almost a year, with the current price below the peak reached in June 2020. As with all growth stocks so far in 2021, valuation multiple compression is limiting price appreciation. Even taking this into account, my end of year price target is higher than current levels and I have increased my portfolio allocation to DDOG.

Building for Developers

March 31, 2021 / poffringa

Recently, I had the pleasure of speaking at the FinTwit Summit 2021. If you didn’t attend, it consisted of 16 speakers presenting on a variety of investing topics over the course of March 20-21, 2021. My talk was entitled “Ask your Developer… For your Next Investment Idea”. It focused on the premise that developers are key to enabling the digital transformation we all hear about and increasingly have influence over software purchase decisions. By observing how developers evaluate the software providers that cater to them, investors can gain signals to pick the probable winners in the software tooling and infrastructure space. Many of these providers are publicly traded companies.

As I had dedicated the last couple of weeks preparing for that talk, I wanted to share my take-aways in a blog post. For those who didn’t have a chance to attend the Summit, you can still register and get access to all the recorded sessions. This post will explore the points I made in more detail and share how I am positioning my portfolio for the year. This is grounded in the trends I continue to see for the companies providing the building blocks for developers to deliver the next wave of digital experiences.

Datadog (DDOG) Q4 Recap

February 25, 2021 / poffringa

Datadog announced Q4 and full year 2020 results on February 11th. They handily surpassed expectations for Q4 revenue and earnings. Similarly, they set initial guidance for Q1 and FY 2021 revenue above analyst estimates. In spite of this, the stock dropped about 4% the next day. This is likely attributable to continued concern for deceleration of the annual revenue growth rate and initial FY 2021 revenue guidance.

In spite of this, I think the results were strong. If we dig a little more deeply into quarterly trends, sequential revenue growth has been increasing since the COVID-driven Q2 dip and reached almost 15% for Q4. This trajectory implies that annualized revenue growth could inflect to the 60% range or higher as 2021 progresses. Customer metrics, both in new additions and spend expansion, further support the recovery case. Additionally, Datadog’s product development funnel continued to produce new revenue streams, bolstered by organic product extensions and a couple of acquisitions. Datadog now has 10 monetized product offerings and customers continue to adopt the newer ones.

Following these results, I have accumulated a mid-sized position in DDOG in my personal account. I have been covering the company for almost a year, waiting for a favorable entry point as Covid paused revenue growth. While Datadog had been executing well, I wanted to see revenue growth normalize before starting a position. I believe that has happened. Looking forward, I think 2021 will see Datadog return to its normal cadence of predictably high revenue growth combined with improving operational leverage. Additionally, rapid product expansion is presenting new market segments to drive growth. In this post, I review the Q4 results, product development progress and what we can look for in 2021.

Tags

Recent Posts