Software Is (Still) Eating the World
Money still doesn't grow on trees, but it does in the cloud... The first-mover advantage... The world has too much paperwork... A 130% return in six months from Stansberry's Investment Advisory... A 355% winner from Bryan Beach... Software is (still) eating the world...
Money might not grow on trees, but it does in the 'cloud'...
We, and others, have talked about how the coronavirus pandemic has accelerated previously existing trends, particularly in technology.
A number of tech companies have proven largely immune, resilient, and even stronger in the face of an invisible, globetrotting airborne virus... It makes sense, as the machines can't get infected – with COVID-19, at least.
Satya Nadella, CEO of tech giant Microsoft (MSFT), aptly described the shift to all things quick, easy, digitally accessible, and virus-free on the company's first-quarter earnings call at the end of April...
We've seen two years' worth of digital transformation in two months.
Technologies, products, and services involved in people working from home, buying from home, selling from home, and communicating and interacting from a distance became "essential" literally almost overnight.
As we wrote back in the February 27 Digest, before all hell broke loose...
Think about it: Amazon (AMZN), as well as other online retailers and related web-based platforms, do an insane amount of business... in part because of the convenience they provide.
In a world where parts of the U.S. would be under quarantine with folks working from home for a long period of time, those businesses become a necessity.
Zoom Video Communications (ZM) has become the poster-child for this story...
The subscription- and cloud-based video-conferencing company grew from 10 million users in December to 300 million daily meeting participants in April. And the instant growth happened with surprisingly few hiccups (aside from "Zoom-bombing" becoming a verb).
The company's shares are up more than 250% this year.
Zoom's valuation – about 71 times sales, bigger than do-it-all juggernaut Amazon's (AMZN) has ever been – is extreme. And its long-term prospects can be debated... As we wrote in the June 4 Digest, Zoom seems to be reliant on just one product right now, doesn't have ads, and larger players like Facebook (FB) have already knocked off its easy-to-use and scalable technology.
But there is no doubting the power of the underlying technology behind Zoom's platform...
It's all in the cloud, which is essentially a virtual data-storage and transfer universe that connects customers, businesses, computers, and other devices anywhere with an Internet connection.
The cloud probably isn't a new concept to you, but we take it for granted today...
Demand for this type of business was growing even before the pandemic struck. And now, it has never been higher. Here's precisely how much demand for cloud-based technology has exploded over the past few months...
It might not be an intuitive label, considering we're talking about a largely invisible technology (unless you live near a server farm). But think of Amazon, Microsoft, and Alphabet/Google (GOOGL) in particular as owning the cloud "hardware" market right now...
This is Microsoft's Azure technology, Amazon's Amazon Web Services ("AWS"), or Google's cloud division – services that other companies, governments, and schools use for their own cloud-based businesses.
In the first quarter of 2020, Microsoft's cloud service grew 59% year over year. Amazon, the market leader, has lost a little dominance this year, but AWS generates 77% of the company's total operating income.
Let's be clear...
These Big Tech players have their own software, like Amazon's Audible audiobook app, Microsoft's Teams, or Google's Gmail, but the point we want to get into today is that they also provide the same services they use to thousands of other companies that rely on the cloud.
These businesses can range from your local beer and wine store to a COVID-19 era darling like Shopify (SHOP), which reached a deal with Google in 2018 to host its data. Even Apple (AAPL) has used Google's, Amazon's, and Microsoft's data-storage platforms for its popular iCloud software.
And importantly, companies that were already first-movers in the cloud in their specific sectors before the pandemic struck, like Shopify, have benefited massively from the quick shift to increased reliance on all things socially distant and virus-free...
We all know the world has too much paperwork...
Here's an example...
Over the past few weeks, I (Corey McLaughlin) visited three different places (with a mask worn when inside) just to get a few signatures. And all I needed to do was get an old brokerage account transferred from a "former minor" designation to the possession of the adult.
The process is outdated and unnecessarily time-consuming. Plus, in today's world, it's potentially a health risk. It's actually still ongoing, too... I haven't resolved the issue yet. And you probably haven't even heard of the companies I've dealt with, primarily for these reasons.
The same can't be said for forward-thinking, front-edge companies like e-signature software pioneer DocuSign (DOCU), which cuts out a lot of the red tape. (If only my local bank and the brokerage I was dealing with were smart enough to use it...)
Today, DocuSign is a household name in the documents world, which touches pretty much every industry. Its documents are admissible in court, accepted in 180 countries, and available in 43 languages.
And the company's cloud-based software is easy to use...
It allows people and businesses to save time, energy, and stress... and securely sign all their legal documents from anywhere with an Internet connection, like home... while their children are crawling around the floor during a stay-at-home pandemic.
This, of course, is a valuable thing.
So is the Software as a Service ("SaaS") business model that DocuSign and a host of other big-time software providers use. It's a ridiculously profitable subscription model. ("Ah, like newspapers or magazines once were," says a former ink-stained writer.)
DocuSign recently reported blowout first-quarter numbers...
And its CEO Dan Springer sounded a lot like Microsoft's Nadella on the company's earnings call with Wall Street analysts and investors. As Springer said...
We don't anticipate customers returning to paper or manual-based processes. Once they take their first digital transformation steps with us and they realize the time, cost, and customer-experience benefits, they rarely go back.
The company's sales grew 39% from the same quarter a year ago – well ahead of Wall Street's expectations. Billings – the amount the company invoiced customers, which will be recognized as revenue over time – grew 59%.
DocuSign added more than 70,000 new customers in the quarter, the most it has ever added. And it did something that few companies have been doing of late... It increased its full-year sales guidance.
This makes sense... The SaaS model brings in more money when it has more users. Because the costs are largely fixed, profits tend to be spread out across months or years... and revenues tend to be extremely "sticky," with renewal rates of more than 90%.
In other words, once it works, you forget about it and keep paying. Good luck to the competition that is years behind.
We bring up DocuSign specifically because one of our research teams recommended the stock last November...
Longtime Digest readers know that, out of fairness to subscribers, we don't typically reveal our editors' stock picks for all the world to see.
But since subscribers have already banked more than 100% gains in a little more than six months, we wanted to share the broader theme and lesson connected with this pick... and give some kudos to the team behind our flagship Stansberry's Investment Advisory.
In November 2019, Mike DiBiase was prescient when he wrote about the opportunity in DocuSign. As he said...
Shares are up 125% in the past 18 months, but we believe it's just getting started.
The company is a pioneer in an early stage market it dominates and has many years of solid growth ahead.
It's so dominant that its name is becoming a verb... It's already cash flow positive and will earn its first profit this year.
The "verb" DocuSign, of course, is better than Zoom-bombing. It's more like Googling or Windexing...
This is a prime example of why buying high-quality, capital-efficient companies – the ethos of our research focus – is a smart long-term strategy, in good times, worse times, and "Battle for America" times.
Free cash flow monsters – whichever sector they are in and especially if they have market-leading "moats" like DocuSign – are best-positioned to take advantage of whatever comes their way... pandemic opportunities and Federal Reserve induced rock-bottom interest rates included.
And as Mike wrote in that November 2019 issue, software companies are some of the most capital-efficient businesses in the world today, which eventually benefits shareholders...
Software is nothing more than computer code. The "cost" of producing another copy of a software program is next to nothing. It's virtually the same cost to produce 1 million copies as the cost to produce one copy.
You can see this in their gross margins – the profit after subtracting all direct costs of generating sales. The average gross margins of all software companies in the S&P 500 last year was 81%. That's almost double the 44% average for all other industries.
This is important. Producing high gross margins means more is left over to go to the bottom line. It translates into high profits. And because software companies' capital needs are low, most generate lots of cash.
No matter what's done with the cash, it benefits shareholders. In virtually any period you look at, software companies produce market-beating returns.
We reread this issue of the Investment Advisory today and were blown away by a few things...
Mike's attention to detail is incredible... as is his simple-yet-comprehensive breakdown and origin story of the SaaS model (which we can't do justice here)... and all the tailwinds DocuSign had going for it back then.
The thing is, it's an even better story now...
As our Investment Advisory research team updated subscribers in June, released earlier this month, DocuSign wants to be even more than the clear runaway leader in e-signature software. (It has a roughly 60% market share.)
Its goal is to automate the entire contract process, from drafting and executing contracts to managing, storing, and searching for completed contracts. We can hear the lawyers and real estate agents in the crowd applauding.
In May – while a lot of other businesses were wondering what the world will look like in the future – DocuSign was already moving ahead... buying Seal Software for $188 million.
Seal uses artificial intelligence to search large collections of contracts by legal concepts (rather than just by keywords) and compare critical clauses and terms side-by-side. This might not be sexy stuff, but it costs a lot of money.
And only companies with gobs of cash and long-term visions can do this sort of thing. But wait, there's more...
On Friday, the Nasdaq announced that it will add DocuSign to the Nasdaq 100 Index starting next week...
The company will replace United Airlines (UAL), which as we covered most recently on Monday, is burning cash at a faster rate than jet fuel at the moment.
The Nasdaq 100 – which was the first index to hit new highs earlier this month – tracks the 100 largest nonfinancial stocks trading on the Nasdaq exchange. And whenever a company is added to or taken off an index like this, it's significant beyond the symbolism...
This change means that any index funds tracking the Nasdaq 100 would now need to buy shares of DocuSign, pushing the shares price even higher.
Kudos to Mike and his team for spotting this opportunity – and recommending it way ahead of the curve...
Subscribers who took their advice are already up 146% in the position. And for all the reasons we've explained today, there's still room for this stock to run higher.
If you want to get all the details on the company – and more great research from our team as soon as its released – click here to sign up for a risk-free trial to our flagship Stansberry's Investment Advisory newsletter right now. (Even better, we're currently offering one year at 75% off the regular price.)
Some 'little' cloud companies have also been the biggest winners...
Stansberry Venture Value editor Bryan Beach has recommended several "smaller" SaaS stocks over the years as well, for many of the same reasons that Mike laid out for the larger-cap DocuSign...
However, Bryan's investing universe focuses on younger companies that might carry more risk, but also potentially bigger rewards.
One of Bryan's software picks is up a whopping 355% since last October, and he has identified a handful of other SaaS companies with great potential, too.
As noted venture capitalist Marc Andreessen said more than a decade ago, "Software is eating the world." It still is, and the Las Vegas-style buffet is fully stocked.
Click here right now to learn more and give Bryan's Venture Value service a try today.
CEOs and the Power of Words
After the CEO and founder of CrossFit stepped down following a tweet about George Floyd's death, Empire Financial Research's Enrique Abeyta joined our colleague Jessica Stone to talk about the power of words in a digital world and how it can impact companies and investors.
Click here to watch this video right now. And for more free video content, subscribe to our Stansberry Research YouTube channel and follow us on Facebook, Instagram, and Twitter.
New 52-week highs (as of 6/16/20): DocuSign (DOCU), JD.com (JD), KraneShares MSCI All China Health Care Index Fund (KURE), Lonza (LZAGY), Sea Limited (SE), and The Trade Desk (TTD).
In today's mailbag, more thoughts on the response to COVID-19... a reply to a subscriber letter from yesterday... and feedback on True Wealth editor Dr. Steve Sjuggerud's housing boom thesis. Do you have a comment or question? Send your notes to feedback@stansberryresearch.com.
"My understanding is that the quickest vaccine brought to market in the US was in 1967. This vaccine took over FOUR (4) YEARS to develop and make available to the public. [Editor's note: Correct, that was the mumps vaccine.] WHO keeps saying that a vaccine should be available in 12 to 18 months???? Herd immunity appears to be our best (and quickest) chance to get back to normal in a reasonable period of time." – Paid-up subscriber Fred D.
"Why is such a simple thing like requiring a mask by everyone indoors being made into a mountain?
"Protection for the wearer of a mask is secondary!!!! The primary purpose of a mask is to reduce the viral load put into the air by an infected individual!!!!!!!!!!! It has been proven that masks significantly reduce the virus carrying vapor expelled by an infected individual and since we can't always tell who is infected everyone must be assumed to be infected.
"The lack of leadership regarding the requirement for masks to be worn indoors is appalling, especially from the healthcare community and politicians." – Paid-up subscriber Brad C.
"Sirs, As one of the hated and satanic boomers, I'd like to comment on the opinions expressed by David H's son and his colleagues [in Tuesday's Digest];
"1) Their bleak future and nothing to look forward to: Perhaps they would prefer to exchange places with their grandfathers or great grandfathers who grew up dirt poor during the Depression and found themselves riding in a landing craft into Anzio, Normandy or Iwo Jima? Or with their mostly poor fathers or grandfathers of all races who smelled the wonderfully tropical humid air when disembarking in Da Nang on their all-expense-paid, involuntary vacation in Viet Nam?
"2) The 'social contract': They are inheriting the rights and freedoms their ancestors fought and died for. Whether they will do a better job preserving, protecting, defending and enhancing them than the boomers have remains to be seen (I readily admit that our performance has been uneven at best, while also being pretty sure the answer isn't more lawyers and bankers). Rights, properly understood, are restrictions on government actions, not entitlements to a guaranteed, prosperous and easy future with lots of free stuff; that's up to them, individually and collectively.
"3) shared wisdom and perspective from a dead white guy: 'It's not about what you expect from life, but what life expects from you' – Victor Frankl." – Stansberry Alliance member Mike L.
"Steve, I completely agree with RE boom! I have been investing in RE for over 30 years. Moved out of DC area in 2015 to the Outer Banks of NC.
"My comment on article: I believe the boom is occurring in the suburbs and not major cities. Seeing lots of folks wanting to move out of cities to escape violence & COVID. We are RE booming in our community. Lots of escapees!
"My suggestion: 1. Get out of city residential property... 2. Buy & hold non-city residential properties. Homes selling quickly here... Rentals in very short supply... Rents are rising quickly." – Paid-up subscriber George B.
"Closing on my first house next week. Preliminary rate was 2.35%. As I was reading [Tuesday's] Digest I got an email from my broker saying that my rate ticked down another 5 basis points! Can't complain about the mortgage rates in Canada!" – Paid-up subscriber Beau E.
Corey McLaughlin comment: As a reminder, if you're interested in learning more about the opportunities that Steve sees in real estate investing right now, be sure to catch his free presentation next Wednesday, June 24, at 8 p.m. Eastern time. We're excited about it...
This is a topic Stansberry Research has never covered in our 20-year history, and we believe you'll find the insight from Steve and a panel of real estate experts (including a former winner of The Apprentice!) incredibly valuable.
Sign up here now to make sure you don't miss it.
All the best,
Corey McLaughlin
Baltimore, Maryland
June 17, 2020