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Vonage Pays Homage To Online Trading

Vonage, the pioneering Voice-Over-IP (VOIP) service provider, announced today that it had raised a whopping $105M in new venture financing, bringing its total funding to a cool $208M. Many in Silicon Valley are scratching their heads wondering what in the world Vonage is going to do with another $105M.

At a high level it appears that Vonage is simply taking a page from the online brokerage play-book, a play-book that the CEO of Vonage, Jeff Citron, knows incredibly well as he built one of the most successful companies in the online brokerage industry, Datek Online, from scratch. In that industry, Ameritrade, Datek and E*Trade were able to pull away from the competition by dramatically ramping their customer acquisition spending and that appears to be exactly what Vonage plans to do in the VOIP space. In fact, the financial language that Vonage is currently using to talk about their business where they claim to be “cash flow positive before customer acquisition costs” is a carbon copy of how many online brokers talked about their own financials back in their heydays of online trading.

Why would Vonage dramatically ramp customer acquisition spending? It all comes down to a simple calculation: if the lifetime Net Present Value (NPV) of a newly acquired customer is in excess of the cost to acquire them, then it makes financial sense to spend as much money as you can, as fast as you can (even, say, $105M). The problem for Vonage is that, according to some analyses , they are currently spending about $450 to acquire each customer which means that at a $25/month subscription price it would take 18 months just to pay off the customer acquisition costs, let alone pay for any operating expenses.

Normally it would be crazy to scale up a business with that long a “pay back” period, but Vonage is once again likely looking back at the history of the online brokerage industry and making a calculated bet. Online trading entered a period of explosive growth in early 1998 thanks to a huge marketing bet by Ameritrade. In late 1997, Ameritrade cut its commission prices to the shockingly low price of $8/trade and then launched a massive $25M mass-market marketing campaign in Q1 1998 (up from $1.9M in Q4). In Q1 of 1998, Ameritrade’s cost to acquire a customer soared to $508, up from $271 the quarter before, however by Q2 of 1998 Ameritrade’s cost to acquire a new customer was down to $137 and they added 21,000 more customers than they did in Q1 thanks to lingering benefits of their huge national advertising campaign. The bet had paid off handsomely. Thus by going first and going “large”, Ameritrade was able to legitimize online trading in the eyes of the mass market and firmly and establish its own brand as a leader. As a result of this effort, it enjoyed faster growth than many of its competitors for several quarters to come and guaranteed itself a spot as a long term survivor.

It would appear that Vonage is betting that VOIP is at a similar “mass adoption” inflexion point, and that all it will take is a massive, mass market advertising campaign to push lots of followers over the edge to adoption. Thus, I would expect them to launch a bunch of flashy, irreverent TV commercials (probably making fun of traditional phone companies) shortly and to fire up a massive direct mail push as well. It’s a very risky bet, but Vonage is clearly hoping that they’ve been to this movie before and they know it has a Hollywood ending.

Some believe even if Vonage can benefit from a large marketing campaign that rampant price cutting in the VOIP space will undermine its growth prospects, but once again the online trading industry provides some evidence to the contrary. The average commission charged by online trading companies fell from $52.89 in Q1 1996 to $15.53 in Q1 1998 yet companies like Datek and Ameritrade were still able grow and build sustainable businesses despite this price competition. In the case of Vonage, lower prices won’t necessarily increase revenues (as they often did in online trading), but they will increase the number of “crossed” calls on Vonage’s own network (which cost them almost nothing to complete) which means that their operating cost per customer will fall as they grow their customer base.

So what should Vonage be concerned about? Using Online Trading as a guide, Vonage and the other VOIP start-ups will not find either marketing costs or pricing to be insurmountable obstacles. As long as Vonage can get out in front of its competitors in building a national brand, they should be able “ride the wave” of VOIP adoption long enough to build a large sustainable business. However, unlike the online trading space, Vonage faces two factors that online trading firms did not. The first factor is government regulation and the second is competition from access providers. In terms of government regulation, while online brokers were subjected to standard industry regulations, the overall “regulatory risk” they faced was quite manageable. Not so for Vonage and the other VOIP start-ups. The telecommunications industry is heavily regulated at both the state and federal levels and established interests (mostly the RBOCs) are mobilizing their formidable political resources in an effort to severely hobble new entrants like Vonage. Winning this fight will be very tough. The other factor that Vonage has to deal with is that while internet access providers (primarily the RBOCs and the MSOs) welcomed online trading because it created demand for their access services, most see VOIP as either directly competitive to their existing business or as a highly logical area for them to expand into. This means that Vonage will have to compete with the very companies that it relies on to provide it with access to its customers. A very awkward situation at best and, as many independent DSL providers found out, a very difficult battle to win.

So while Vonage still faces some pretty significant hurdles to becoming a long-term winner in the VOIP space, the $105M they just raised guarantees that they will be able to take a legitimate shot at the crown. Given the regulatory and competitive complexities it’s really to early to tell if Vonage will succeed, but one thing is for sure: we will see a bunch of amusing VOIP commercials on national TV shortly, so if anything the $105M will be good for a few laughs.

August 26, 2004 | Permalink | Comments (1)


Google’s IPO Disaster: At $10BN, The World’s Most Expensive Roadshow

With the news this morning that Google has slashed the size of its IPO almost in half, it’s fair to say that the Google IPO will go down as one of the worst managed in history. With Google’s brand cachet and stellar financial performance, its IPO road show should have been the equivalent of a glorious victory parade complete with fawning crowds and thunderous cheers in which moving $3.5BN worth of stock at a fair price was a piece of cake. Instead, the IPO has been a comedy of errors and hubris in which the company has violated almost every principle of how to complete a successful IPO.

A few of the IPO commandments that Google has violated include:

1. Thou Shall Show Respect For Institutional Investors: IPO’s are not bought, they are sold. This means that a road show is actually a series of sales meetings. If you are selling something it is generally a good idea to A) show your potential customers respect and deference B) go out of your way to address their potential concerns and issues. I have talked with a number of institutional investors that attended the Google road show and the feedback was uniformly negative. One investor went to a lunch presentation. She was told to show up an hour before the lunch started (which is ridiculous given how busy buy side people are and shows a complete lack of respect for their time). She was also required to show her driver’s license when signing in (something unusual and largely pointless). After all that, the meeting started about ½ hour late (once again showing no respect for people’s time) and the management team started off by making a number of lame jokes that clearly were not appropriate. During Q&A, the management team responded to a question about their relative lack of disclosure compared to their competitors by basically saying “we really don’t care what are competitors disclose and we don’t feel the need to give you any more information”. Now I am not a salesman, but I don’t think that the Google roadshow team is going to be writing a book on the “10 Habits of Highly Successful Salespeople” anytime soon.

2. Thou Shall Make Everyone Money: Google’s auction approach has some merit for certain types of deals, however the company made a huge error by presenting the auction within a “holier than thou” context basically holding Wall Street in contempt and implying that they wanted to make sure no one made any real money on the IPO. An IPO is just the beginning of a long term relationship with Wall Street. As such, it is highly advisable to make sure that those investors that take a risk and buy your stock at the IPO receive at least a modest immediate reward. That way, whenever you come back to market, chances are that everyone in the institutional community has a good feeling about your stock. Most IPO’s try to target a 10-15% increase the first day. They do this not only to build good will with the institutional community, but to give people a reason to buy shares in the IPO as opposed to waiting for the aftermarket. In Google’s case, while it was always believed that they would set the actual IPO price 10-15% below the clearing price, they never really came out and said that. This created great uncertainty in terms of how the IPO would trade, especially given the large retail component of the offering. Because of this situation, most professional investors seemed to believe that the offering had very little aftermarket upside. Even if they thought that the deal might trade up 5-10% that kind of edge still didn’t fully compensate for the uncertainty, so most appear content to just wait for the aftermarket (if they intend to buy at all).

3. Thou Shall Not Price An IPO In The Latter Half of August: This is a pretty basic tenant of the IPO market. The latter half of August is the unofficial vacation period for most of the investment community (and all of Europe). As a result, the market in August is typically very thin, choppy and usually quite weak. (I had the misfortune of being involved in an IPO that priced in the second week of August and I will never make that mistake again.) While Google clearly had the raw talent to get a deal done in the latter half of August, this would only work if they showed respect for the rest of the IPO process. With the convoluted auction process, the non-sales oriented road-shows and the lack disclosure, I think it’s safe to say they did not show a lot of respect for the process. Instead, most people in the investment community took their determination to price a deal in latter half of August as simply one more sign of the company’s hubris.

The lesson in all of this is that no matter how “hot” you think your IPO is, it’s important to remember that as far as investors are concerned all stocks make the same thing: money. While I doubt there has been any concerted attempt to coordinate a boycott of the IPO, I think it’s pretty clear that Wall Street is sending a collective message: We don’t care how “hot” you think you are, we have over 10,000 stocks to choose from and unless you show us some respect you won’t be one of them.

A couple months ago I wrote a piece in which I theorized that Google would likely be worth more than Yahoo! based largely on Google’s equivalent profits, but higher growth rates and margins. At the time I said, the only thing that would prevent this is if the company did a poor job on the road show and if investors found fault with Google’s disclosure and guidance policies. With the IPO valuation at the top end of the range now down from $36.6BN to $25.8BN it looks like Google’s “quirks” will cost its shareholders, at least temporarily, over $10BN. The irony is that if Google just played by rules (like Microsoft, Cisco, EBay, and Yahoo did) there’s a strong chance they would have priced at the top of their initial range. I guess this makes the Google road show the most expensive in history. I hope they enjoyed it.

August 18, 2004 in Wall Street | Permalink | Comments (4)


The Perfect VC: Operator or Investor?

Conventional wisdom has long held that the best background for a successful Venture Capitalist is that of a hardened industry “operator”. The reasoning behind this wisdom is that a VC with operating experience should be much better equipped to help portfolio investments deal with the day-to-day challenges of running a start-up and can therefore better help manage an investment to a successful outcome.

Indeed, when you ask someone to give you their impression of what a week in the life of a successful VC must be like, most people paint the picture of grizzled operator, sleeves rolled up, dispensing pearls of managerial wisdom as they make the rounds of their investments. Relying on their vast operating experience, these VC supermen are able to take fragile start-ups and through shear managerial brilliance mold them into the Ciscos, Ebays and Goggles of tomorrow.

This caricature, while flattering to VCs, is deeply flawed for two main reasons: First, as almost every VC will tell you, picking the right investment is much more important than correctly managing an investment. Second, generally speaking, the more involved a VC is in a company’s daily operations, the more screwed up the company is.

Nature vs. Nuture
In terms of the first flaw, when you catch most VCs in a moment of honest reflection they will tell you that while they enjoy working with their investments and trying to “add value” by using their operating experience, the single most important action that they take is deciding whether or not to invest. This is because a start-up’s initial “genetics” in terms of market opportunity, technology and founding team are typically the biggest determinants of investment’s success. Put another way, it’s almost impossible to turn a start-up with bad genetics into a good investment, no matter how good an operator you are. Thus, if the initial investment decision is so critical, than it stands to reason that investment skills are potentially more important to VC success than operating skills.

Doomed Rescue?
The second major flaw in the “operator hero” caricature of VCs is that in most cases whenever a VC is required to provide a company with significant operating assistance, it’s generally a warning sign that the investment is headed in the wrong direction. VCs hire management teams to run companies. If these teams do a good job, there is often little need for VCs to supplement the operating skills of the existing management team with their own. However, if the existing management team performs poorly, VCs often find themselves spending an inordinate amount of time at those companies. For “operator” VCs, these poorly performing companies can present a perversely seductive opportunity to try and “rescue” the deal with some VCs in this situation even becoming temporary CEO’s of such investments. Many Limited Partners, other VCs and outsiders applaud such rescue missions as the highest calling of a VC, but these efforts are usually misguided. Companies that are failing generally have one of two problems: either their initial “genetics” are wrong, in which case no amount of tinkering with the operations will help and the whole focus should be on an exit strategy, or the management team is wrong, in which case the correct response is to quickly hire a new team.

Taken together, these flaws seem to suggest that seasoned operators don’t automatically make the best VCs for not only are investing skills more important than operating skills when it comes to picking the right investment, but the more a VC uses their operating skills, the more likely they are making a mistake by not addressing more fundamental issues.

Recipe for VC Success
All this is not meant to say that operating experience is of no value to becoming a successful VC, indeed many of the world’s most successful VCs have highly distinguished operating backgrounds. However it is meant to suggest that the recipe for VC investment success may be a bit more complicated than conventional wisdom might suggest.

At a high level, it would appear that VC’s must be good at a number of things including:

1. Gaining market “perspective”: VCs must be able recognize and understand investment opportunities “ahead of the curve”. This not only requires domain knowledge (either as a result of experience or education) but also some kind of vision for the future of a given industry. That doesn’t mean that VCs need to be clairvoyant, but that they need to be able to place new ideas into a forward-looking context founded on domain knowledge.

2. Investing: Being a good investor takes training and experience, just like any other skill. Investors not only need to understand how to legally and financially structure investments, but more importantly they must learn how to evaluate multiple investments within a consistent and disciplined framework. Risks, rewards, and opportunity costs must all be considered in a disciplined and dispassionate manner.

3. Judging People: Evaluating the character and experience of the managers and founders of a potential investment is critical. As is the ability to detect when changes need to be made in the management team. To this end, VCs not only need to be experienced in judging management performance but also need experience with hiring and firing people as these will be the single most important decisions that they help make.

4. Generating Deal Flow: VCs must be able to generate quality deal flow and must have a strategy for building deal flow over time. Some VCs develop deal flow by employing a classic networking strategy while others hunt for deals in specific sectors. In either case, VCs need focus on generating deal flow or they run the risk of being adversely selected.

5. Avoiding and Spotting Trouble: VCs can use their experience to help their investments avoid common pitfalls and deal with classic start-up issues such as organizational “break points” and founder turmoil. More importantly, VCs should have a finely tuned “spidey sense” that can identify potential problems within an organization before they become a major issue.

While it’s clear that operating experience can help significantly in many of these areas, especially when it comes to HR issues and spotting trouble within an organization, it’s also clear that there are other skills which either aren’t necessarily unique to operators (such as judging people) or aren’t even typically developed by operators (such as investing or deal flow generation). In fact, it’s apparent that a wide range of experiences might make someone a good VC, everything from journalist, to consultant, to investor, to operator.

All this said, there’s a saying in the VC industry (which is periodically adjusted for inflation) that “it takes $30 Million to train a new VC”. The implication is that all new VCs, no matter what their backgrounds, will more than likely make a number of costly mistakes on their first few deals. Viewed from this perspective, it really doesn’t matter what background a VC has, as nothing really substitutes for on-the-job training.

August 17, 2004 in Venture Capital | Permalink | Comments (1)


Software Stocks: July Update

July was a flat out ugly month for software stocks thanks to a large number of pre-announcements and generally lackluster earnings guidance for the rest of the year. The average software stock was down a whopping 13.7% in July, compared to a 7.9% decline for the entire NASDAQ. However, the pain was not evenly spread around. Small Cap software stocks (stocks with market caps under $1BN) were down 12.4%, while large cap software stocks were only down 4.4% (handily outperforming the broader NASDAQ). In fact, the software index itself was only down 4.9% thanks to the relatively strong large cap performance.

In terms of my hand picked virtual software stock portfolio, the portfolio once again outperformed both the NASDAQ (down 7.9%) and the software stock index (down 4.9%), but the average stock in it was still down 1.2%. The performance is a bit better than it looks given that the portfolio had only 1 Large Cap stock (which I was short) and was still 20% net long, but it was a loss none the less. On an overall basis, the portfolio is now up 11.8% YTD vs. a 12.4% decline on the NASDAQ, so it continues to out perform the market by 20%+ despite having been strongly net long for the first 7 months of the year. Still 11.8% is down from last month's 14% net gain.

I've taken some steps this month to rebalance the portfolio towards more of a market neutral stance given that Q3 is typically weak for software stocks (although I don't know how much weaker it can get). I think I will ultimately end up net long again, but my wonderings around Silicon Valley didn't generate any compelling long ideas this month.

Details on the specific stocks in the portfolio:

Long Picks
Company: Actuate Ticker: ACTU
Sub-sector: Business Intelligence
Investment Thesis: I continue to like the turn around story here and their Q2 report suggests that are making good progress at becoming solidly profitable again. It will probably take another quarter for this story to play out.
Performance: Since 1/26/04: +2%, Jun vs. Jul: -9%
Comments: Had a bad month (like most small caps), but a decent report held up the stock somewhat.

Company: Blue Martini Ticker: BLUE
Sub-sector: Vertical Solutions
Investment Thesis: A stock in transition from a middleware play to a vertical app play. I made money with a similar trade on ARTG in 2001. The stock is very cheap at 1.1X tangible book, but that's because the market doesn't have any confidence the company can successfully negotiate the transition. After looking over their Q2 earnings report, neither do I.
Performance: Since 1/26/04: -44%, Jun vs. Jul: -37%
Comments: In April I said this was the stock I had the least conviction about. At the end of June I said it was likely to come out of the portfolio and now, at the end of July, I am taking it out of the portfolio, but not after having the stock get killed with a 37% loss this month. If I day traded the portfolio I would have limited this month's losses to about 20%, but lesson learned here is that I should have pulled them out in April when I said they were at the bottom of my portfolio. I think I will do a force ranking each month from now on and kick out the stock I have the least conviction on as a matter of good management.

Company: SumTotal Ticker: SUMT
Sub-sector: E-Learning
Investment Thesis: SumTotal was formed by the merger of Docent and Click2Learn which closed in mid-March. I liked Docent before the merger because as it was relatively cheap, had good products, and was in a space still seeing good corporate spending (E-Learning). The combined companies promise to be solidly profitable after the debris from the merger clears which should help the overall valuation as they cement their leadership position in the e-learning space.
Performance: Since 1/26/04: -23%, Jun vs. Jul: -35%
Comments: Stock got killed this month, most of it before they reported a decent but not spectacular quarter. Still seems well positioned to become solidly profitably in the 2nd half of this year but it is testing my patience.

Company: SPSS Ticker: SPSSE
Sub-sector: Business Intelligence
Investment Thesis: SPSS is another player in the business intelligence space with a particular emphasis on predictive analytics, something that is particularly hot right now. The stock has been battered by a restructuring that the company went through last year as well as an accounting restatement. As the “E” at the end of the ticker suggests, SPSS is in danger of being delisted because they didn’t file their 10K on time due to the accounting problems. The stock now trades at an attractive 1.0X enterprise value to sales. My thesis is that the new product set is strong and the accounting trouble is overblown. In addition, the stock will not be delisted because SPSS is a real company with real revenues ($50M+/quarter) and NASDAQ needs every listing it can get right now.
Performance: Since 4/30/04: 4.1% Jun vs. Jul: -18%
Comments: Tough month in general, but the stock had some good news at the end of the month when finally it filed its 10K and the NASDAQ indicated that it was not going to delist the company. All eyes are now on its August report. If the report is decent, the stock should really start to move in the right direction. Still feel like this is the best value in the business intelligence space by far right now.

Company: Stellent Ticker: STEL
Sub-sector: Content Management
Investment Thesis: Stellent is a relatively sleepy, but well established, content management company that is attractively priced. Q1 was the first quarter of positive cash flow in awhile and Q2 saw pro forma, but not GAAP positive, EPS. With $20-25M/quarter in revenues, Stellent has a lot of room to work on expenses and should be able to return the company to solid GAAP profitability at which point the stock should recover from its current 1.3X ev/sales to something much closer to 2X.
Performance: Since 6/30/04: -19% Jun vs. Jul: -19%
Comments: I was worried about adding STEL at the end of June because it had such a great month (up 25%). Predictably the stock gave up most of that ground in July, but the earnings report was good enough to limit further damage. Still like the stock, but a 20% hole is not how I wanted to start!

Company: Neteller Plc. Ticker: NLR.L
Sub-sector: Internet Payments
Investment Thesis: Every portfolio needs a flyer and this sure counts as one. Neteller is Europe/Canada’s answer to PayPal and it has been making a killing by servicing markets, particularly online gambling, that PayPal has been pressured into exiting by the US Justice Department. I know, I know, this is not a software stock, but I still follow online financial services quite closely and I feel compelled to point out this stock because it is such an attractive buy. After going public in London on 4/14, the stock is now trading at just 10.5X estimated 2004 EPS and yet is growing like an absolute weed. Neteller has got to be the best and only Internet “value” stock out there. Sure the stock trades at a steep discount due to the regulatory ambiguities of online gambling, but hey, it's worth taking a gamble on.
Performance: Since 6/30/04: 14% Apr vs. Jun: 14%
Comments: Best long performing stock of the month. Had an interim report which showed a slight slowdown in new sign-ups/day, but still added another 125K new members in Q2 plus announced some new partnerships which should drive more sign-ups. With a little exposure in the US this stock will triple.

Short Picks
Company: Autonomy Ticker: AUTN
Sub-sector: Content Management
Investment Thesis: Autonomy is a UK based purveyor of advanced enterprise search software a space I know well based on my VC investment in Stratify. The enterprise search space is crowded and getting even more competitive with the entry of folks like Google. Autonomy’s secret sauce, its categorization software, is increasingly being duplicated by it competitors. Autonomy trades at a huge premium to the market at 6.3X enterprise value to sales vs. a 1.8X average for the rest of the content management group. This premium appears to be largely an artifact of the fact that autonomy is a bit of a cult stock in its home country of the United Kingdom as well as the small float due to its meager cross listing on NASDAQ. It makes it a tough stock to short, but the valuation and market dynamics remain compelling.
Performance: Since 1/26/04: +45% Jun vs. Jul: 36%
Comments: This month's #1 gainer. A lackluster earnings report + wildly bear market = signifcant share price declines and that's just what happened to AUTN. I said I thought there was a floor at $20, looks like I was wrong. Still trades at a relatively pricey 3.8X Enterprise Value/Sales, so I will remain short during the summer doldrums which hit European companies, like AUTN, especially hard.

Company: Commerce One Ticker: CMRC
Sub-sector: Supply Chain
Investment Thesis: I know CommerceOne well as I was the analyst on their IPO in the summer of 1999. CMRC has lost over $3BN in the last 3 years and while it has reduced the size of the losses, it looks like it will be too little too late. I have watched a number of high flyers implode under the weight of the infrastructures that they built and I think CMRC will succumb to that same fate. With all the institutions long gone, it looks like a bunch of clueless retail investors are currently holding the bag unaware that it contains a ticking bomb. With $12.5M in preferred stock and another $5M in bank lines ahead of the common there’s a good chance that the common stock will get nothing if this company is even sold.
Performance: Since 1/26/04: +65% Jun vs. Jul: +18%
Comments: CMRC remains, yet again, the best performing pick in the portfolio. It would have been even better, but the stock actually traded up strongly at the end of the month despite getting a delisting notice from the NASDAQ. Q2 "earnings" report should make it clear that there is no way for the common holders.

Company: Redhat Software Ticker: RHAT
Sub-sector: Operating Systems
Investment Thesis: Redhat is the Linux poster child and has the largest independent distribution of open source Linux-OS. As the poster child for all things Open-Source, Redhat has been the recipient of tremendous investor interest and its valuation, the best in the software sector, reflects it. Investors apparently are expecting RedHat to take over the world, despite the fact that Redhat sells just one of several Linux distributions and faces competition from IBM, NOVL, and possible folks like SUNW and HP. I have heard an increasing number of people complain about RHAT’s pricing schemes and it remains an open question as to whether any Linux distributor will have any kind of pricing power.
Performance: Since 1/26/04: 25% Jun vs. Jul: 25%
Comments: RHAT announced that it had to restate its earnings due to an accounting charge and the stock promptly dropped 30%. I actually think the reaction to the announcement was way overdone as it doesn't appear to be material, but this just goes to highlight how sensitive richly valued stocks are to even the slightest bad news, which was basically the idea behind shorting it, so I feel partly vindicated by the drop. I struggled with the idea of simply covering this and moving on, but I am going to keep it in place a little bit more as it remains the most richly valued company in the space and its recent moves into the app server market may seriously piss off some of its biggest proponents and channels to date (IBM and HP).

Company: Concur Ticker: CNQR
Sub-sector: Vertical Applications
Investment Thesis: Concur is a nifty little ASP that let’s companies do time and expense management. I used Concur when I was at Mobius and it’s a very good application. The only real issue I have with Concur is valuation. Concur trades at 16X tangible book, almost 6X ev/sales, and 100X 2004e EPS. Now if Concur were on the front end of potentially world changing trend in software (like RedHat) I might not find this to be too expensive, but Concur is niche application focused on corporate expense management. It also happens to face competition from all the big ERP players who all have this capability on their “to do” list at some point in the future. Perhaps Concur is benefiting from the “halo” or perhaps everyone thinks will buy them (they do seem like a good fit), but at this valuation just about everything is going to have to go right for right them.
Performance: Since 1/26/04: 0% Jun vs. Jul: 0%
Comments: As I pointed out last month, CNQR is a sleepy stock and that sleepiness, plus a good Q2 report allowed the stock to remain flat during a terrible month for software stocks in general. While I still feel that Concur is way overvalued, the stock's performance this month suggests that it is a bad short as I need a short with much more beta to offset my long losses in a bad month. Given this I am going to cover this and move on.

Company: RSA Security Ticker: RSAS
Sub-sector: Security
Investment Thesis: I have always wanted to short RSAS. I covered the security sector when I was an analyst and basically came to hate the sector due to the fact that almost every company blows up once every 12-18 months and does so with no warning whatsoever. RSA used to be called Security Dynamics and its main product remains a "hard token" called Secure ID which they already have sold to just about everyone on the planet that is going to buy one. The stock's last major blow up was on it's Q3 report last year. I am thinking it's due for a repeat. Even if it doesn't, the stock tends to trade along with the boarder tech market and I need some shorts that more closely follow the market, so this will have to do.
Performance: Since 1/26/04: NA Jun vs. Jul: NA
Comments: Trades at 7X tangible book and 3X enterprise value/sales putting in the top quartile of software stock valuations.

Company: Ticker: CRM
Sub-sector: Vertical Applications
Investment Thesis: is a, mostly, hosted sales force management application. It's a good product, most of my start-up companies used it, but it is expensive the longer you use and the larger your company gets. CRM is 2nd most highly valued stock in the software space despite the fact that it is facing increased competition from the big boys of enterprise software and that its very hard to rapidly grow subscription-based revenues. Any mis-step and this stock will down 25% in a heartbeat.
Performance: Since 1/26/04: 0% Jun vs. Jul: 0%
Comments: I thought awhile about adding this stock to the portfolio last month and decided against it because I didn't see a near term negative catalyst. Whoops, I was wrong. At an analyst meeting they slightly adjusted their outlook (but just a penny or so) and the stock got clobbered. It's still very expensive though and it will be tough to please investors that have already been burned.

August 3, 2004 | Permalink | Comments (0)