Introducing Valuations.cloud
This article will cover the why and the goals of Valuations.cloud. Our main focus is growing cloud and SaaS (Software as a Service) companies. Throughout the article, "tech" companies will mainly refer to cloud/SaaS companies.
Goals of Valuations.cloud
Investor Education
By providing users with education materials on investing in tech companies, Valuations.cloud seeks to empower users to create customized portfolios that will both beat the market indexes and meet personal financial objectives. Using a fundamental and data-driven approach, investors can avoid the mistakes investors at large commonly make.
The confusion between chasing hype and finding great opportunities is, in part, due to a misunderstanding of the relationship between price and value. "Price is what you pay, value is what you get" is the common phrase heard among value investors. In practice, knowing the difference is difficult. Great companies, more often than not, trade at high valuations and almost always appear "overpriced". Passing on many of these has only led to missed opportunities and regrets.
Data
Models, including Rule of 40 and Rule of X, rank companies and reduce noise when searching for opportunities. With this site, users can easily monitor tech companies and monitor their performance.
What Valuations.cloud is NOT
This site is not intended for short-term trading strategies. The main strategy is to buy and hold long-term, allowing compounding to do its magic. This will not involve trading on sentiment, technical analysis tools, or popular narratives.
Tech and Traditional Value Investing
The nature of tech-related industries and industry groups has led to the need for different approaches to valuing companies. Traditional value investing tools and metrics will lead the investor to believe that all good tech companies are always overpriced. However, there are timeless value investing principles that still apply:
- margin of safety
- price vs. value
- concept of Mr. Market
- avoid chasing hype/narratives
Price vs. Value
Legendary investor Howard Marks always drives home the point of knowing the difference between true worth and price. A company's intrinsic value is a function of business fundamentals. Often times, there's a wide divergence between price and value. As investors, we want to find situations where the price falls below the intrinsic value.
Since stock markets are future-oriented, we want companies that have great long-term growth potential and wide moats. Selling software, for instance, can be done at declining marginal costs with fat profit margins. What Valuations.cloud seeks to find is companies that have this outcome even if they're not profitable yet. Amazon.com was unprofitable for many years as it tried to capture market share and scale. By calling it "the river of no returns", many investors passed on this opportunity because they didn't understand how financially dominant and durable the company would become.
Part of figuring out true worth involves being able to figure out whether a company has long-term growth potential, durability, and pricing power. This is what the Rule of 40 model seeks to help investors accomplish. By combining both growth and profit margins, we aim to find the best companies of tomorrow. The likelihood of a company achieving this should be considered when attempting to calculate intrinsic value.
Concept of Mr. Market
In The Intelligent Investor, Benjamin Graham introduces an imaginary investor he calls "Mr. Market". Being a manic-depressive, Mr. Market's mood swings from extreme optimism to pessimism. This creates higher volatility in stock prices. And you can always ignore Mr. Market because he will return tomorrow offering a new price. Tech stocks especially have erratic swings due to market psychology, which we can use to our advantage.
Optimism, usually driven by greed (and FOMO), presents good selling opportunities while pessimism presents the opportunity to buy at a reasonable price because valuations will be favorable. Unlike technology, human psychology doesn't change over time. Which is why opportunities will be plentiful in the future.
Why Tech Companies Always Seem Expensive
Many tech companies are deemed to be what's called "capital efficient". They have high returns on capital and the cost of adding additional customers is very small. Since software only needs to be written once, it is easy to scale. This is obviously an oversimplification. In practice, scaling often requires changes at the infrastructure level and, possibly, modifications to the product. But the point is that scaling software is much cheaper than in more traditional industries.
BVP Nasdaq Emerging Cloud Index
Most of the site's coverage will involve companies that belong to the BVP Nasdaq Emerging Cloud Index. This index consists of cloud and SaaS growth companies. Some of these companies are already tech dominators and others will emerge as the dominant tech companies of tomorrow.
EMCLOUD Performance
The BVP Nasdaq Emerging Cloud Index (EMCLOUD) alone has crushed the S&P 500 since its creation. Even after accounting for the tech slump of 2022, EMCLOUD is up 666.5% vs. 217.3% for the S&P (since late 2013).
Source: BVP