The average cloud software company reported 10% growth during the 2008-2009 recession. Meanwhile, we’ve seen the market react harshly towards companies guiding for 25% growth (such as Elastic). We know the winners from shelter-in-place but we are still sorting out what growth should look like in the middle of the category. My guess is that 25% is going to be higher than average by the time we exit this year.

I spoke about this and other topics this week on a podcast with Simon Erickson from 7 Investing. Simon Erickson is the CEO and Founder of 7 Investing, a company that releases stock tips for long-term investing. The monthly recommendations come from a team of four advisors with a track record of beating the market.  

We discussed how cloud software is hot right now but that there are issues boiling beneath the surface. For instance, the upcoming renewal of large annual contracts that may be negotiated down in price or term, which payment model will be more resilient (usage based or per employee), and whether a cloud software company appeals to new subscribers or existing subscribers for upgrades (the latter may be stronger this year). We also discuss how to look for key metrics to help maintain conviction, such as Slack’s engagement 90 minutes per user.

Simon and I cover another topic around IPOs and why a buy and hold investor has different goals than a venture capitalist who is bringing the company public. In many ways, we are in the middle of a grand experiment where VC firms grow the top line at the expense of the bottom line with hopes the revenue growth will drive the public market interest. Over the last ten years, growth hacking has become a popular way of mechanically pumping the numbers through marketing rather than R&D. Uber was a supreme example of this as venture capital dollars were used to subsidize the rides rather than focus on achieving product-market fit, which is often determined by an equilibrium between supply and demand in the pricing.

We also discuss what’s next in tech investing with a discussion on connectivity. In order for most emerging technologies to become a reality, we need a better network layer. I believe we will be lay the groundwork for faster speeds and lower latency this year and next year to prepare for artificial intelligence and machine-to-machine communications. While some will call this 5G, I believe it also includes last mile connectivity and virtualizing infrastructure with software to lower capex.

Lastly, we talk about Roku, a stock that I covered very early after the company IPO’d and well before the market saw the potential. I explain why my conviction on Roku remains steady. Although Roku is an excellent operating system, a full tech stack, and an option for cord cutters, I see the real sticking point being the influx of pay TV advertising dollar over to Connected TV advertising.

View the full 30 minute video here.

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Interview timestamps:

0:00 – Introduction: Beth’s “micro trend” investing philosophy
3:00 – Valuation for cloud computing companies
7:56 – Net Retention Rate metrics and Slack
9:28 – Product-Market Fit and Investing Internationally
11:07 – Venture Capital and the Current IPO Market
16:17 – The Importance of Developers: “Bottoms Up” Investing
18:50 – Roku and the Shift to Digital Advertising
24:36 – Trends Investors Should be Watching: Connectivity and Chipmakers

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