 From theCUBE Studios in Palo Alto in Boston, bringing you data-driven insights from theCUBE and ETR. This is Breaking Analysis with Dave Vellante. By the dip has been an effective strategy since the market bottomed in early March last year. The approach has been especially successful in tech and even more so for those tech names that, one, were well positioned for the forced march to digital, I sometimes call it, i.e. remote work, online commerce, data-centric platforms and certain cybersecurity plays. And two, already had the cloud figured out. The question on investor's minds is where to go from here? Should you avoid some of the high flyers that are richly valued with eye-popping multiples? Or should you continue to buy the dip? And if so, which companies that capitalized on the trends from last year will see permanent shifts in spending patterns that make them a solid long-term play? Hello and welcome to this week's Wikibon Cube Insights, powered by ETR. In this Breaking Analysis, we shine the spotlight on three companies that may be candidates for a buy the dip strategy. And it's our pleasure to welcome in Ivana Dilevsko, who's the chief investment officer and founder of Spear Alpha, a new research-centric ETF focused on industrial technology. Ivana is a longtime equity analyst with a background in both long and short investing. Ivana, welcome to the program. Thanks so much for coming on. Thanks for having me, David. Yeah, it's really our pleasure. I want to start with your ETF and give the folks a bit more background about you. First, we got to let people know, I'm not an investment pro. I'm not an advisor. I don't make stock recommendations. I don't sell investments. So you got to do your own research. I have a lot of data, so I'm happy to share it, but you got to understand your own risks. You, of course, Ivana, on the other hand, you do offer investment services, and so people before investing got to carefully review all the available investment docs, understand what you're getting into before you invest. Now, with that out of the way, Ivana, I have some stats up here on this slide. You have Spear, your newly launched female-led firm that does deep research into the supply chain. We're going to talk about that. You try to uncover, as I understand it, underappreciated industrial tech firms in some pretty cool areas that we list here. But tell us a little bit more about your background and your ETF. So thanks for having me, David. My background is in industrial research and industrial technology investments. I've spent the past 15 years covering this space, and what we've seen over the past five years is technology changes that are really driving fundamental shifts in industrial manufacturing processes. So whether this is 5G connectivity, innovation in the software stack, increasing compute speeds, all of these are major technological advancements that are impacting traditional manufacturers. So what we try to do is speak to these firms and assess who is at the leading and who is at the lagging end of this digital transformation. And we're trying to assess what vendors they're using, what processes they're implementing, and that is how we generate most of our investment ideas. Okay, great. And we show on the bottom of this sort of intro slide, if you will, one of the processes that you use. And one of the things that is notable, a lot of people compare you to Cathy Wood's art investments when you came out. I think you use a different process. I mean, maybe there are some similarities in terms of disruption, but that the bottom of this slide, it shows a McKinsey sort of graphic that I think informs people as to how you really dig in to the supply chain from a research standpoint. Is that right? Absolutely. So for us, it's all about understanding the supply chain, going deep in the supply chain and gather data points from primary sources that we can then translate into investment opportunities. So if you look at this McKinsey graph, you will see that there is a lot of opportunity for these companies to transform themselves both on the front end, which means better revenue, better products, and on the operation side, which means lower cost, whether it's through better operations or through better processes on the back end. So what we do is we will speak to a traditional manufacturing company and ask them, okay, well, what do you use for better product development? And they will give us the name of the firms and give us an assessment of what's the differences between the competitors, why they like one versus the other. So then we're gonna take the data and we will put it into our financial model and we will understand the broader market for it, the addressable market, the market share that the company has and we'll project the growth. So for this higher growth stocks that you cover, the main alpha generation potential here is to understand what the amount of growth that these companies will generate over the next 10 to 20 years. So it's really all about projecting growth in the next three years, in the next five years and where will growth ultimately settle in the next 10 to 20 years. Love it. We're going to have a fun conversation because today we're going to get into your thesis for Coupa, Snowflake and Zscaler. We're going to bring in some of our own data, some of our data from ETR and why you think these companies may be candidates for long-term growth and be by the dip stock. So to do that, I hacked up this little comparison slide that you're showing here. Do this for context. Our audience knows I'm not a CFA or an evaluation expert, but we like to do simple comparisons just to give people context in a sense of relative size, growth and valuation. And so this chart attempts to do that. So what I did is I took the most recent quarterly revenue for Coupa, Snowflake and Zscaler, multiplied it by four to get a run rate. We included service now on the table just for baseline reference because Bill McDermott, as we've reported, aspires to make service now the next great enterprise software company alongside with Salesforce and Oracle and some of the others. And all these companies that we list here, the three here, they aspire to do so in their own domain. So we're displaying the market cap from Friday morning, September 10th. We calculated a revenue run rate multiple and we show the quarterly revenue growth. And what this data does is gives you a sense of the three companies. They're well on their way to a billion dollars in revenue. It underscores the relationship between revenue growth and valuation, Snowflake being the poster child for that dynamic. So Vanna, I know you do much more detailed financial analysis, but let's talk about these companies in order, maybe start with Kupa. They just crushed their quarter. I mean, they blew away consensus on the top line. What else about the company do you like and why is it on your buy the dip list? So just to back up David on valuation, these companies investors either directly or indirectly value on a DCF basis. And what happened at the beginning of the year as interest rates started increasing, people started freaking out. And once you plug in a hundred basis points, higher interest rate in your DCF model, you get significant price downside. So that really drove a lot of the pullback at the beginning of the year. Now where we stand today, interest rates haven't really moved all that significantly of the bottom. They're still around the same levels, maybe a little bit higher, but those are not the types of moves that are gonna drive significant downside in this stock. So as things have stabilized here, a lot of these opportunities look pretty attractive on that basis. So Coupa specifically came out of our, if you go back to that chart of like where the opportunities lie in across the manufacturing enterprise, Coupa is really focused on business spend management. So they're really trying to help companies reduce their cost. And they're either in the space, they're unique in that they're cloud based. So the feedback we've been hearing from our companies that use it, JetBlue uses it, Train Technologies uses it. The feedback we've been hearing is that they love the ease of implementation. So it's very easy to implement and it drives real savings for these companies. So we see in our DCF model, we see multiple years of this 30, 40% growth and that's really driving our price target. Yeah, and I can confirm that. I mean, just anecdotally, we serve a lot of the technology community and many of our clients are saying, hey, okay, when you go to do invoicing or whatever, we'll work with procurement, it's Coupa. This is some of Reba, it's kind of the legacy, which is SAP, we'll talk about that a little later, but let's talk about Snowflake. Snowflake, we've been tracking them very closely, we know the management there, we've watched them through their last two companies now here and have been following that company early on since really 2015. Tell us why you like Snowflake and maybe why you think it can continue, it's rapid growth. Thanks, David. So first of all, I need to compliment you on your research on the company, on the technology side. So where we come in is more from understanding where our companies can use Snowflake and where Snowflake cannot value. So what we've been hearing from our companies is the challenge that they're facing is that everybody's moving to the clock, but it's not as simple as just send your data to the cloud and call AWS and they're gonna generate more revenue for solve your cost problem. So what we've been hearing is that companies need to find tools that are easy to use where they can use their own domain expertise and just plug and play. So Ansys is one of the companies we covered that does simulation. They have found Snowflake to be an extremely useful tool in sales lead generation. And within sales, CRM systems have been around for a while and they've really been implemented, but analyzing sales numbers is something that is new to this company. Some of our companies don't even know what their sales are even when they look back after the quarter is closed. So tools like this help companies do easy analytics and therefore drive revenue and cost savings growth. So we see really big runway for this company. And I think the most misunderstood part about it is that people view it as a warehousing, they have a warehousing play while this is all about compute and the company does a good job separating the two and what their customers like or like the companies that we cover like about it is that it can lower their compute costs and make it much more easily manageable for them. Great, and we're going to talk about more about each of these companies, but let's talk about Zscaler a bit. I mean, Zscaler is a company we've been very excited about and identified them kind of early on. They've definitely benefited from the move to cloud generally and specifically the remote work situation with the cyber threats, et cetera, but tell us why you like Zscaler. So interestingly, Zscaler, we like the broader security space, the broader cybersecurity space and interestingly, our companies are not yet spending to the level that is commensurate with the increase in attack rates. So we think this is a trend that is really gonna accelerate as we go forward. My own board, 20% of the time on the last board meeting was spent on cybersecurity, what we're doing. And this is a pretty simple operation that we're running here. So you can imagine for a large enterprise with thousands of people all around the world needing to be on a single, simple system, Zscaler really fits well here. Very easy to implement. Several of our industrial companies use it, Siemens uses it, G uses it, and they've had great, great experience with it. Excellent. I just want to take a quick look at how some of these names have performed over the last year and what, if anything, this data tells us this is a chart comparing the past 12 months performance of those four companies that we just talked about and we added in service now. Zscaler, as you can see, has outperformed the other despite your commentary on discounted cash flow, Snowflake has underperformed really precisely for the reasons that you mentioned, not to mention the fact that it was pretty highly valued. And you can see relative to the NAS, but it's creeping back lately after very strong earnings even though the stock dropped after it beat earnings because the street wants the CFO to say the guide even higher than maybe as Mike Garpelli feels is prudent. And you can see Cooper has also underperformed relatively speaking. I mean, it absolutely destroyed consensus this week. The stock went up, but it's been off with the weaker market this week. I know you like to take a longer term view, but anything you would add here? Yeah, so interestingly, both Zscaler and Cooper were in the camp of, as we went into earnings, expectations were already pretty high because few of their competitors reported very strong results. So Zscaler yesterday, their revenue growth was pretty strong. The stock is down today. And the reason is because people were kind of caught up a little bit in the noise of this quarter growth is 57, last quarter it was 60, like is this a deceleration? We don't see it as that at all. And the company brought up one point that I thought was extremely interesting, which is as their deal sizes are getting larger, it takes a little longer time for them to see the revenue come through. So it takes a little bit of time for you to see it from buildings into revenue. Same thing with Cooper, very strong earnings report, but I think expectations were already pretty high going into it, given the service now and Anaplan as well reported strong results. So I think it's all about positioning. So we love these setups where you can buy the deep end on this opportunity where like people get caught up in short-term noise and it creates good entry points. Excellent. I want to bring in some data from our partner ETR and see if you have any comments, Ivana. So what we're showing here is a two-dimensional chart. We like to show this very frequently. It's based on a survey of between 1,000 and 1,500 chief information officers and technology buyers every quarter. This is from the most recent July survey. The vertical axis shows net score, which is a measure of spending momentum. I mean, it measures the net percentage of customers in the survey that are spending more on a particular product or platform. In other words, it essentially subtracts the percentage of customers spending less from those spending more, which yields a net score. It's more granular than that, but basically that's what it does. The horizontal axis is market share or pervasiveness in the data set. It's not revenue market share like you'd get from IDC. It's a mention market share. And now that red dotted line at the 40% mark in the vertical represents an elevated level in other words, anything above 40%, we consider notable. And we've plotted our three by-the-dip companies and included some of their competitors for context. And you can see we added Salesforce service now in Oracle and at Orange Ellipse because they're some of the bigger names in the software business. So let's take these in alphabetical order, Ivana, starting with Coupa in the blue. You can see we plotted them next to SAP's Ariba and you can see Coupa has stronger spending momentum but not as much presence in the market. So to me, my inference is, oh, that's an opportunity for them to steal share, more modern technology, more facile, and of course Oracle has products in this space but the Oracle dot includes all Oracle products, not just the procurement stuff, but maybe your thoughts on this. Absolutely, I love this chart. I think that's your spot on, this would be the same way I would interpret the chart where increased spending momentum is a sign of the company providing products that people like and we expect to see Coupa's market share grow over time as well. So let's come back to the chart and I want to really point out the green ellipse. This is the data zone, if you will. And we're like a broken record on this program with Snowflake has both performed unbelievably well in net score and spending momentum. Every quarter the DTR has captured enough end sample in its survey holding near or above 80%. Its net score consistently has been up there and we've plotted data bricks in that zone. It's been expected that data bricks is going to do an IPO this year, late last month, company raised 1.6 billion in a private round. So I guess that was either a strategy to delay the IPO or raise a bunch more cash and give late investors a low risk, bite at the apple pre-IPO as we saw with Snowflake last year. What we didn't plot here are some of Snowflake's biggest competitors, Ivana, who also happen to be their partners, most notably the big cloud players, all who have their own database offerings, AWS, Microsoft, and Google. Now, you've said Snowflake is much more than a database company. I wonder if you could add some color here. Yeah, that's a very good point, David. Basically the driver of the thesis in Snowflake is all about acceleration and spending. And what we're seeing is the customers that are signed up on their platform today, they're not even spending, they're probably spending less than 5% of what they can ultimately spend on this product. And the reason is because they don't yet know what the ultimate applications are for this, right? So you're gonna start with putting the data in a format you can use and you need to come up with use cases or how are you actually gonna use this data? So back to the example that I gave with Ansys, the first use case that they found was trying to optimize leads. There could be like 100 other use cases and they're coming up with those on a daily basis. So I would expect this score to keep up pretty high or go even higher as we, as people figure out how they can use this product. You know, the buy the dip thesis on Snowflake was great last quarter because the stock pulled back after they announced earnings. And we reported, we said, you know, the company, well, Cleveland Research came out, remember they got the dip on that. And we looked at the data and we said, Mike Scarpelli said that, you know, we're going to probably as a percentage of overall, customers decelerate the net new logos, but we're going deeper into the customer base. And that's exactly what's happening with Snowflake. But okay, let's bring up the slide again. Last but not least is Zscaler. We love Zscaler. We named Zscaler in 2019 as an emerging four star security company along with CrowdStrike and Okta. And we said these three should be on your radar. And as you see, we've plotted Zscaler with Okta who with its recent move into converging identity and governance, it gets kind of interesting. We plotted them with Palo Alto as well, another cybersecurity player that we've covered extensively. We love Okta in addition to Zscaler. We great respect for Palo Alto. And you'll note, all of them are over that 40% line. These are disruptors, they're benefiting, well, not so much Palo Alto, they're more legacy, but the other two are benefiting from that shift to work from home, cloud security, modern tech stack, the acquisition that Okta made of Auth0. And again, Zscaler, cloud security, getting rid of a lot of hardware really has a huge tailwind at its back. If on a Zscaler, they benefited from the huge cloud migration trend, what are your thoughts on the company? So I actually love all three companies that are there. And the point is people are just gonna spend more money whether you are on the cloud, off the cloud, the data centers need more security as well. So I think there's a strong case to be made for all three. With Zscaler, the upside is that it's just very easy to use, very easy to implement. And if you're somebody that is just setting up infrastructure on the cloud, there's no reason for you to call any other competitor. With Palo Alto, the case there is that if you have an established security platform, if you're on their security platform, the data center side, they did introduce through several acquisitions a pretty attractive cloud offering as well. So they've been gaining share as well in the space and the company does look pretty attractive on valuation basis. So for us, cybersecurity is really all about rising tide lift all boats here, right? So you can have a pure play like Zscaler that benefits from the cloud, but even somebody like Palo Alto is pretty well positioned to benefit. Yeah, we think so too. Over a year ago, we reported on the valuation divergence between Palo Alto and Fortinet. Fortinet was doing a better job of moving to the cloud and obviously serves more of a mid-market space. Palo Alto had some go-to-market execution challenges and we said at the time, they're going to get through those. We talked to Chief Information Security Office, Palo Alto is like the gold standard, they're the thought leader, they want to work with them. But at the same time, they also want to participate in some of these modern cloud stacks. So we agree, there's plenty of room for all three. Just to add a bit more color and drill into the spending data a little bit more, this slide here takes that net score and shows the progression since January 2019. And you can see how Snowflake just incredible in terms of its ability to maintain that elevated net score as we talked about. And the table on the insert, it shows you the number of responses and all three of these companies have been getting more mentions over time. Snowflake and Zscaler are now both well over 100n in the survey each quarter. And the other notable piece here, and this is really important, you can see all three are coming out of the isolation economy with the spending uptick. Nice uptick shown in the most recent survey. So that's, again, another positive. But I want to close, Ivana, with kind of making the bull and bear case and have you address really the risks to the buy the dip scenario. So look, there are a lot of reasons to like these companies. We talked about them. Kupa, they've got earnings momentum. You know, management on the call side had very strong end market demand. The stock, you know, has underperformed the NASDAQ, you know, this year. Snowflake and Zscaler, they also have momentum. Snowflake got this enormous TAM, although they were punished for not putting a hard number on it, which is ridiculous in my opinion. I mean, the thing, it's huge. The investors were just kind of, you know, wanting a little binky and baby blanket, but they all have modern tech in the cloud. And really importantly, this shows in the ETR surveys, you know, the momentum that they have. So very high retention is the other point I wanted to make, the very, very low churn of these companies. However, Kupa's management, despite the blow-up quarter, they gave kind of underwhelming guidance. They've cited headwinds with the Lamasoft migration to their cloud platform. Snowflake is kind of like price to perfection. So maybe that's an advantage because every little negative news is going to cause the company to dip. But it's, you know, it's pretty high value because Slutman and Scarpelli, everybody expects them to surpass what happened at service now, which was a rocket ship. And it could be argued that all three are richly priced and overvalued. But Ivana, you're looking out, as you said, couple of years, three years, maybe even five years. How do you think about the potential downside risks and you buy the dips in our, you buy every dip? You're looking for bigger dips or what's your framework there? So what we try to do is really look every quarter the company reports. Is there something that's driving fundamental change to the story? Or is it a one of situation where people are just misunderstanding what the company is reporting? So in the case, we kind of addressed some of the earnings that were reported, but with Koopa, we think the management is guiding conservatively as they should. So we're not very concerned about their ability to execute on the guidance and to exceed the guidance. With Snowflake price to perfection, that's never a good idea to avoid a stock because it just shows that there is, the company is doing a great job executing, right? So we are looking for reports like the Cleveland report where there would be like negative on the stock and that would be an entry point for us. So broadly, we apply by the deep philosophy, but not if something fundamentally changes in the story. And none of these three are showing any signs of fundamental change. Okay, we're going to leave it right there. Thanks to my guest today, Ivana, tremendous having you. We'd love to have you back. Great to see you. Thank you, David. And you definitely want to check out SPRX and the Spear ETF. Now, remember, I publish each week on wikibon.com and siliconangle.com. These episodes, they're all available as podcasts. All you got to do is search breaking analysis podcasts. You can always connect with me on Twitter. I'm at dValente or email me at david.valente at siliconangle.com. Love the comments on LinkedIn. Don't forget to check out etr.plus for all the survey action. This is Dave Vellante for theCUBE Insights, powered by ETR. Be well and we'll see you next time.