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Most objections to the Saul Stocks board on TMF center not on the companies themselves, which frequently offer important services and compelling business models, but rather on the assumption that shares of such companies can/should be bought virtually without regard to price. Questions concerning valuation are not only unwelcome but almost always expunged. That's unfortunate. Investing by its very nature entails making at least some rough estimate of the future returns one may plausibly receive relative to the price one pays.

With this is mind, I note that reputable, fairly independent analysts (such as Morningstar and CFRA) are of the view that a number of the so-called 'Saul stocks' (past and present) have fallen to values that may make them attractive to investors with reasonably long investment horizons and some willingness to accept a moderate measure of risk in at least a portion of their portfolios.

One of such stocks is that of Datadog, which I've been eyeing for some time and in which I finally took a small position this morning as a sort of Christmas present to DW and myself--or perhaps to our heirs. We'll see how things develop.

Cheers!

One of such stocks is that of Datadog, which I've been eyeing for some time and in which I finally took a small position this morning as a sort of Christmas present to DW and myself--or perhaps to our heirs. We'll see how things develop

Great post. These exciting firms that are priced for relatively distant future earnings, that are much larger than the present, have even *more* importance placed on the durability of their sales - that is, subscription customer retention, compared to firms accumulating much more equity per dollar invested, such as when buying a bridge yielding 8%.

We need to look out 20 or more years (but start with imagining 20) with these SaaS firms of given their high very price to sales ratios (even with such high margins) to have a good return relative to the quote today, thus we have a *heavier* burden of proof regarding exceptionally strong cases/reasons for sales durability.

Could you give your insights as to why DataDog will reasonably certainly retain customers without a competitive technology taking sales after year 7 or year 13 for example.

And what other insights do you que that make this the SaaS firm to own? Thank you!

- Manlobbi

Could you give your insights as to why DataDog will reasonably certainly retain customers without a competitive technology taking sales after year 7 or year 13 for example.

I cannot. Actually, I expect that, as is the case historically for most companies in this field, Datadog will be acquired by a larger firm well within the time frame you mention. I also expect that acquisition will occur at a healthy premium to the quoted price. M* and CFRA use standard valuation methods based on projected future revenues and margins to produce (12-month) target share prices in the $120 to $157 range--a big premium to the price I paid (~$71) but less than what others paid within the past year.

And what other insights do you que that make this the SaaS firm to own? Thank you!

I wouldn't claim that Datadog is the SaaS firm to own but rather that it's pretty clearly one of them. Perhaps its closest competitor, Splunk, lags Datadog in key areas for customers migrating to the Cloud. Datadog's most recent Q report indicates that the company continues to attract new customers at a very healthy pace and also succeeds in retaining and upselling to its customers, including big customers. Datadog's R&D division rolled out several new offerings recently, and indications are that customer reception has been very positive.

In any event, my DDOG investment is merely a toe in the water at this point.

Thank you for your ideas, and it is understandable. I apologize that my response below is rather general, as I have not studied Datadog's competitive/inherent market position well all, but it could be useful.

I also expect that acquisition will occur at a healthy premium to the quoted price. M* and CFRA use standard valuation methods based on projected future revenues and margins to produce (12-month) target share prices in the $120 to $157 range--a big premium to the price I paid (~$71) but less than what others paid within the past year.

You are right that these types of firms usually merge or are bought our, so the holding name doesn't always continue, even though the customers and products can.

The multiple that the private purchase is made with is nearly always a reflection of such questions relating to the durability of their customer relations. Sometimes you have an enthusiastic buyer that purchase a flop (such as Murdoch purchasing MySpace) but normally the high purchase multiple is only because the buyer thinks they are getting in future earnings more than they are paying today.

One should have real reasons and conviction that the underlying business is unusually durable.

The 'price targets' by analysts are far more a reflection of the multiple selected. If we project the sales extremely, even with foresight, accurately, even then one private owner might assign a 5x multiple and another 50x.

- Manlobbi

The 'price targets' by analysts are far more a reflection of the multiple selected.

True. But, at least in this case, the multiples are broadly consistent with expected growth over at least the next 3-5 years (i.e., around a 40 multiple on EPS with revenues growing at 35-40%/annum). Typically, such growth projections would be implausible, but arguably they're not if the focus is the security of machine data, which is quite likely to grow at such rates for a good while yet.

MisterFungi...isn't Saul's model that of buying and holding exponential sales growth stocks until such growth subsides and then those stocks are immediately sold and replaced? There's no intrinsic value in the model, nor any interest in such. Am I correct?

You may have already stated this, but Saul's has rules stating many of things Manlobbi is mentioning aren't allowed in the discussion...correct? Or not?

MisterFungi...isn't Saul's model...

I'm not going to speak for Saul as to what his model is or what he allows. You can read his various FAQs and rules.

Interesting Saul post yesterday.

It's evident now that our companies were probably way overvalued a year ago. But it's also clear that a lot of things have occurred that could not possibly have been anticipated or foreseen, all leading to the the wildly risk-off mentality in the market that we are seeing now.

https://discussion.fool.com/t/my-thoughts-on-this-...

Has Saul ever admitted something was overvalued? Or that there is such a thing as valuation?

As to MF Saul's board just follow the 'likes' and cringe when they get in the several hundred mode. In late October 2021 Saul's posts revealed cult behavior I'd not seen since the late 1990's. Interestingly posts get censored and in 100% of those cases the most accurate were removed.

I note the conclusion of Saul's post: 'If you think you can predict all that, the rise, the pandemic, the container ships, the war, the inflation, the interest rate rises, the fear of a recession, etc, more power to you. I sure can't. So I just stay with high confidence companies, and I don't try to time the market.

I take this to mean that he continues to conflate discussions and projections of valuation with efforts to 'time the market.' If Saul's comfortable with that, then there's little more to say. It's unfortunate, though, that folks who don't know any better have lost 70, 80, 90 percent of their money in the past year by following Saul's dictum.

I definitely disagree with the idea that you couldn't predict the stocks were over valued or that they would crash. I think in most cases you can see when a stock is very over valued, now what you can't predict IMO is how long and how far the over valuation will continue. We've seen for decades. The Internet stocks were over valued, many had no profits at all, and then they crashed in 2000-2001. Anyone claiming Saul's stocks were not over valued is just not being honest with themselves.

Amazon had a long, strong run with seriously high valuations until now. Dropped 50% and still trades around a PE of 77. Some will continue to hope those stocks get back to what they think is normal prices but that rarely happens.

My biggest flaw is I always under estimate how long and high fads will go so I usually miss out on them but at least I don't have to deal with the severe drops. Sure someone who got in at the ground floor may still have a big profit but that is a rare individual. There was a person that posted over at Bogleheads about a year ago with his run of Tesla options and what his goal was before he would sell and retire. I want to say $10M. Obviously he has lost of ton from his peak. Unlike many posters he has provided updates at times.

For those curious the link is:
https://www.bogleheads.org/forum/viewtopic.php?t=3...

Rich

Saul controlled the narrative, valuation wasn't available on his list of acceptable topics. Now most are down 70% and he himself pens that these stocks were overvalued.

Saul repeatedly uses binary illogical thinking in that he posts incessantly that his skills attained the October 2021 gains in his SAAS endeavor, then disassociates himself by blaming the irrational market and oddball events for December 2022 prices. Absolutely irresponsible and illogical and obviously a huge support group-- who have lost a lot of money that they expect to make back plus a lot more.

I note the conclusion of Saul's post: 'If you think you can predict all that, the rise, the pandemic, the container ships, the war, the inflation, the interest rate rises, the fear of a recession, etc, more power to you. I sure can't.

What a strawman argument. Nobody is expecting anyone to predict pandemics, wars, container ships and whatnot.

But anyone with a few years of investing experience could see that SaaS stocks were clearly extremely overvalued, and had been for a couple of years.

The problem is that the burst of the bubble is almost impossible to time. I came across Saul's board in 2017-18. In 2019 I made the conscious decision to not touch these stocks, because at some point they were bound to drop 70% and NOT bounce back. Could have been the next day, or years later.

In retrospect of course I was way too early, but like Buffett says, sometime you need to feel like an idiot for a couple of years.

--

BTW I actually lost some money on UPST last year, trying to be smart on the way down selling some puts. That's another lesson, if you don't ride them on the way up, don't give into the temptation to dabble with them on the way down.

I see your point. But it's difficult to know when over-valued stocks will be punished. Eventually, they will be (unless they grow into that valuation). Could be tomorrow. Or next year. Or five years from now. I read Saul's board, but I don't converse with him at all (I'm not one of the "cool kids"). But from my reading, I think this is what he means about timing the market. So he sells (or buys) based on financials, not stock price. As he said, he stays with "high confidence companies".

My portfolio is composed of several companies like that. For example, COST and V. I have high confidence they will be solvent long after I'm dead, so I do not fret fluctuations in their prices. I don't even notice them. I have two Saul stocks, and while they have been beaten-up, I think they are still good companies. So I'm not bailing. Then I have a couple of speculative stocks. I'm more prone to bailing on those if I think they aren't going to do well (and I did bail on a few over the past year). The speculative stocks are the only ones I lack "high confidence" in. Like QS. I know they are a few years away from a product, but I'm betting (literally) that they will have it, and there will be demand (e.g. VW is heavily invested in them). I do not have the same confidence in them that I have in COST. Or DDOG (a Saul stock).

I'm certainly not going to hop in and out of stocks based on fluctuations, or even fear (e.g. Goofyhoofy sold almost all this positions when Trump won because he thought the economy would tank...turned out that was a bad decision, as he freely admits). Mostly I own good companies with good financials, and then I don't sweat it.

FWIW.

onepoorguy

...it's difficult to know when over-valued stocks will be punished. Eventually, they will be (unless they grow into that valuation). Could be tomorrow. Or next year. Or five years from now. I read Saul's board, but I don't converse with him at all (I'm not one of the "cool kids"). But from my reading, I think this is what he means about timing the market.

Perhaps that is what he means, but that doesn't make it an appropriate use of the phrase. Nor does it justify taking the extreme position of declaring any and all mentions of valuation verboten (unless he's doing it, such as declaring some of his stocks as being "oversold," repeatedly.) Moreover, one is not even permitted to ask a question about what rates of revenue growth, net margins, share counts, etc., would be required over the next 5, 10, of however many years in order for the current share price to be even remotely justified.

Bottom line: Taking valuation into consideration when buying or selling a stock is entirely distinct from attempts to "time the market."

As I said, I do see your point. I even agree with it somewhat. My issue is that I've never seen a really good way to assess value. DCF is probably the best, but it depends on inputs that you can't know (so you have to guess/estimate). If your inputs are off, your valuation will be off.

Usually I try to follow solid businesses, and if the stock dips I will say to myself "it's on sale". Sure. Good time to buy, unless the entire market goes down. Then the "sale" shares might appear to be expensive. Obviously, we're speaking in generalities. IMO, TSLA became ridiculously expensive. But it just kept going up anyway. I wish I had bought the expensive shares at $200 before they shot up to $1000. But I didn't. (And it's split since then.) The most I believe I can do reasonably reliably is assess the business as it stands today, and invest based on that. COST will never give me 50% returns, but it is -for now- a juggernaut. Whatever the stock price is doing, the business is going well. So I'm long COST. (for example) I take on more risk with something like DDOG, but it's business seems to be solid also. So I'm long DDOG with the knowledge that it will be subject to more volatility as a growth play.

I can't and won't speak for Saul. He's all growth plays, and on his board he makes his own rules. Just like TMF makes their own rules on their boards (e.g. salty language, politics and OT posts, etc). FWIW, over the past 5 or so years, Saul has produced impressive returns. Even with the recession last year. He's doing what's right for him, and more power to him. As I said in my previous post, I have a couple of Saul stocks, but most of my portfolio is not-Saul stocks. It's what I'm comfortable with. Which everyone has to determine for themselves. I spend very little time worrying about valuation because, almost without fail, when I did that I ended up "missing out". YMMV.

I've never seen a really good way to assess value. DCF is probably the best, but it depends on inputs that you can't know (so you have to guess/estimate). If your inputs are off, your valuation will be off.

True. But you can run the DCF "backwards," too: i.e., what revenues, net margin, share count, and P/E would be required (say) 3 or 4 or 5 years from now in order to make the stock at today's price even remotely plausibly a decent investment? Simple math shows that even hyper-growth companies with (someday) fat margins don't make sense when they trade at 30x, 40x, 50x revenues, irrespective of macro considerations. A brief discussion along such lines would have saved a lot of relatively new investors a lot of pain. I tried, politely. My posts got deleted.

I think if you had provided company analysis (e.g. DDOG), and then added a bit about revenue multiples, that probably would have passed muster. Posting only about valuations would have been deleted, yes.

I have only been on the Saul board for <2 years, so I don't know their history. If I were to guess, I would say that they experienced people saying "I told you so" over valuations on so many occasions that they banned the topic. Kinda like TSLA. You can't discuss TSLA there, even though it is a valid company with metrics one can analyze. But it generated so much emotion (apparently) that they forbid it entirely.

I get that they want a clean board with informational posts, but I agree with you that they are a bit too touchy about that (I infer that's what you think also). I think her name is Wendy who polices the METAR board, and from what little I've read, she seems not to be too heavy-handed. Maybe Saul could hire her for his board. :-)

On Saul's, if you could regain the deleted posts you'd find them spot on for making or saving the most money. If you want to self-destruct then follow the posts with several hundred likes.

It is much like this throughout the MF boards, but particularly that one. Posters compete for the most likes and the outcome of following such feel-good isn't surprising.

I just follow it for the deep-dive analysis, and ideas. I never heard of those companies until I read about them there.

To follow up on this topic, Saul made a large investment in Enphase and susequently his notification post - that he had moved out of some SAAS stocks like DDOG into Enphase - got 1,100 "likes". As I've said so many times on these boards, if you want to find some high probability outcome just go to the most liked comments on these boards and think negative.

In any event almost immediately Enphase fell 24% on one day.

I'll have to confess I too was a little enamored by Saul's picking capabilities. At one point I had almost 10% in his picks but despite a significant effort I was never able to find any way of projecting long term success relative to their price.
On 7/2020 I gave up and posted this on the MI board:

The question is not whether or not there are SAAS companies with useful products and explosive growth
but weather their potential earnings will be capable of supporting their current prices. Same well hashed
problem Tesla has. Square, Spotify, Shopify, Tesla, and Zoom have the same market cap (combined) as
Berkshire Hathaway even though Berkshire's trailing net income is 297 times higher.

Saul started his board at the beginning of 2014, the first year there were less than 5000 posts on his
board and he reported a loss of 9.8% looking into different types of fast-growing companies.

End of 2015 there were ~10,000 new posts that year and he reported gain of 16.7% while the S&P was
down 0.7%. SAAS were not yet a topic.

End of 2016 there were ~9,000 new posts and he reported a gain of 2.5%, S&P500 up 9.5%. Companies
invested in LGI Homes, Signature Bank, Shopify, Amazon, Synchronoss, Ubiquti . . . Looks like he is just
starting to discover cloud based SAAS companies.

End of 2017 the discovery year >8700 new posts and a reported gain of 84.2%. Now in companies like
Shopify, Arista, Hubspot, Alteryx, Nutanix, Square. Saul is very open about how his stock selection
criteria change over time based on his experience. Example: https://boards.fool.com/reflections-on-investing-r......

End of 2018 the explosion almost 11700 new posts and another big gain of 71.4% in a volatile +96 up -26
down year. A mid year post on his investing criteria evolution: https://boards.fool.com/why-my-investing-criteria-......

End of 2019 another ~14500 new posts and a gain of 28.4% in another volatile year up +77% mid year
with a drop down to +10% at one point.

Over the last 5 years Saul's board has attracted some excellent talent including individuals with direct
expertise and/or experience in the companies being evaluated. There is no doubt they find companies
with explosive growth. In my view (with no solid evidence other than past experience) it is more than
likely that the prices of many of those companies have become overvalued relative to their actual
earnings capabilities. However, Saul appears to be one of those individuals that as the saying goes is fast
enough on his feet that will quickly adapt and move on to other profitable opportunities.

I do have concern that he has become too focused on SAAS companies with little concern for any
diversification. Posts on any valuations are discouraged. Good luck to the continuing players and thanks
to Saul for a good run but at this point I've pulled my play money out. Probably means a long and
profitable run for those still in.

http://www.datahelper.com/mi/search.phtml?nofool=y...
There were words of caution from several others if one had looked for them

RAM

I think we may look back and see that Saul threw in the towel (somewhat) on the hypergrowth firms (e.g., Snowflake, Datadog, Crowdstrike, and maybe some others he ditched earlier) just as M* and others are opining that their valuations have dropped into the realm of the plausible. Also, Google and Microsoft have plenty of cash, and more than one of the former high-flyers could get snapped up.

I'm a straight value investor, and I'm looking hard at some of them. The major cloud hosts (Amazon, Microsoft, Google) may find bottoms this Q, esp. if the Fed says its work is done.

Saul seems disillusioned as his companies have not snapped back as quickly as in previous downturns,

His thesis always was that these companies could generate earnings at any time by cutting back on R&D and S&M, which, relatively speaking, is now happening, so it's puzzling to see him throw in the towel now.

Then again, I figure he is around 80 years old, so he may just be tired of it all.

I find it odd that NOW he's talking about looking at valuations, as if there had never been any reason to look at valuations because he was making outsized returns, as if the outsized returns justified ignoring the valuations. For a well educated man (much smarter than me, no doubt) to have gotten so annoyed in the past when people brought up any whiff of valuations and now only at the bottom to be discussing them -- and portfolio management...I don't know. Maybe if he hadn't been so tough on anyone who questioned things when valuations couldn't be justified or explained or on anyone who wanted to better understand how to manage their own portfolio risk, I'd be more comfortable with his change of heart. Glad his 'my way or the highway' attitude turned me off from venturing too far into fantasyland. I feel for those who came to his party too late.

As far as Saul, to me no matter what returns he claims in the past he simply comes across to me as incredibly naive and inexperienced. His insistence on reminding his following in every post of his super-human investment past is to me a huge warning sign both as to his credibility and more importantly his assumption that anything like this is sustainable.

In the late 1990's our investment club had a 10 year record of 35% annual returns because we waded into Cisco, EMC, Intel, Microsoft, etc. at the "right" time. We began selling all of them, but within a month or two our portfolio fell from $1.3 million to less than $400,000. Unlike Saul, we knew we were on shaky ground, we just didn't move fast enough.

Saul's hyper moves from stocks to other stocks is praised by his following but to me is yet another sign of something not so good. One month he won't even let a poster mention anything about some stock he's saying had endless growth ahead, then the price plummets and he's off to another planet stating the former stock has problems- the very problems he would not allow to be discussed a month before.

Saul's is fun, actually delightful, cult to watch. But it is clearly a controlled substance and if you gotta play that game you've got to allow Saul to be your superior. He owns the game and has some serious backup supporters.

It comes across to me as nothing but silly and outrageously immature. Nothing more and nothing less.

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