Investing Unscripted Podcast 90: Stocks in 2024: Knowing What You Don’t Know

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Note: All transcripts are edited for clarity. We may earn commissions from some (not all) links. Thanks for the scratch.

Jason Hall: [00:01:00] Hey everybody. Welcome back to Investing Unscripted, where we ask and answer the hard questions about investing. I'm Jason Hall joined as usual by the voice of the people, Jeff Santoro. Hey buddy. Hey, how are you? I'm good. F leg day. I'll just, I'll say that. I like, I need more leg day in my life. 

Jeff Santoro: I like that you're in this short phase of your life where you're working out.

Jason Hall: Short phase. No, no. I've always been active. A runner. Playing sports and things like that. Never really been much of a weightlifter, but I'm 47 and I'm realizing I need to start, like, retaining and building muscle. 

Jeff Santoro: Yeah, yeah, they, that's what they say. Senior citizens like you need to do is continue to, to build muscle mass as you get older.

Jason Hall: I caught that. That was good. That was really, really good. 

So we have a fun show planned for today. I mean, we always have fun shows planned for today. But today is exciting because we're going to talk, we're going to talk a little stocks. What's our, what's our subject for, what's the topic, the title for today's show?

Jeff Santoro: We're doing a [00:02:00] new- I'll get to the topic in a second, but we're doing a new thing. We have certain structures that we like to use for the podcast. And we came up with a new one-

Jason Hall: Frameworks as it were.

Jeff Santoro: Yes, we came up with a new one that we're trying. The episode is called Knowing What you Don't Know. 

And we are going to highlight two stocks. One that we each own that we own, we like, but we admit we probably don't know as well as we should. And we've come up with a little construct. We're going to ask each other questions and see how it goes. 

So if you like this new format, if you think this is an interesting episode, or if you hate it, you can let us know. And the places you can let us know are our Twitter account @InvestingPod. You can email us at [email protected]. You can comment on our YouTube channel. You can subscribe to our newsletter and then immediately reply to it and tell us how great this or terrible the show was.

And as always, if you could give us a rating and a review in the podcast apps, that would be, that's the number one thing you could do to help support what we're doing here. We really appreciate that.

[00:03:00] So we're going to dive in and talk through two different stocks. Before we do that, we have another sponsor of our podcast. In addition to the Public.com/unscripted ad, which you heard before We came on here. 

We have a new sponsor named FinChat.io and here are a few words about them.

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All right, we are back. Please check out FinChat.io. We're going to use it throughout this episode to talk about our stocks. 

Jason, I think it makes sense for us to go through each one of these stocks fully and then switch. So would you like to go first or would you like me to go first? 

Jason Hall: Sure. I'll go first.

And a couple of things I want to say before we get into it, like I said, we'll be using, and by we, I mean you, because I'm a senior citizen and you know [00:05:00] how tech challenged us senior citizens are.

 We are going to be using FinChat and doing some screen shares. So if you're listening to the podcast, we're going to explain what we're showing on the screen. So there's not going to be any loss there for you. But if you do want to watch it, go to our YouTube channel. You can find the link to our YouTube channel on the show notes. You can find it on the newsletter as well. Go to InvestingUnscripted.com  and you can get all that kind of stuff. So just wanted to put that out there for everybody. 

And the other thing too, I, I committed to not doing any additional, once we picked this topic and picked our stocks, I committed to not reading anything more about this company. I want to go into it relatively cold. 

Jeff Santoro: Well, let's be honest though. You don't you don't commit to doing a whole lot of prep for any of our podcasts. So this is not 

Jason Hall: Touché. 

Jeff Santoro: Not much of a stretch for you. 

Jason Hall: Touché, Jeff Santoro. 

Jeff Santoro: I did a similar thing. I jotted down a couple notes so I would remember what I wanted to say, but I didn't do any advanced research, because that's the whole point of this, is to talk about the things we don't know.

All right, so we'll start with you. Why don't you start off by telling us the company that you want to talk about, the stock that you own, [00:06:00] and then, I guess, go right into why you own it. 

Jason Hall: Yeah. The stock is Confluent, which it may be surprising. May sound a little disingenuous to people out there that have heard me talk about this company or seen videos or read articles and write ups I've done about Confluent. 

Because, I mean, I do know the company relatively well. And as we get through this, I think it'll be more clear like where my weak spots are. Because I think that's one of the things that's really important, is as much as you might think you know a company really, really well, you might know the company well, there are always places you can be really weak. 

And with Confluent, it's going to become pretty obvious. You know, senior citizen. Technology.

Jeff Santoro: Well, and also, regardless of how much time and prep and research you do before you buy a company for the first time, you're always going to learn more about it as time goes on. Or you're always going to be presented with different factors or new competitors, or someone brings up a question you hadn't thought of, and now it sends you on a different path.

So I think that's what we're trying to get at here. Like both of us know enough about these companies that we were comfortable buying them [00:07:00] and making them, I don't know, we can talk about maybe how big of a position this is for you. I

Jason Hall: think maybe we haven't specifically said it. I want to make clear is like we both picked companies that we have pretty high conviction in. And anybody that's heard me talk about Confluent, it's one of my most high conviction investments. 

Jeff Santoro: I would say mine's a medium conviction, but they're definitely not companies that we have low conviction. And I think that's the that's the biggest point. 

All right. So why do you own Confluent, Jason? 

Jason Hall: So we're in this interesting transition with a lot that's going on in technology. And the cloud is part of it. And artificial intelligence is part of it. 

But there's this transition in the way that a lot of companies are utilizing technology to become more nimble, more efficient, reduce costs, improve profitability, help them respond more quickly to demand, help them address customer needs more quickly. Like all of the things. 

Where the reality is, I think technology broadly has let companies maybe [00:08:00] react more quickly, historically, but we're getting to the point where technology can help companies proactively make decisions. And where Confluent fits into that is Confluent's founders developed a product called Apache Kafka, which is an open source application that's used for data streaming. 

And what data streaming means, is the ability to take data in real time and perform analytics and get something useful out of that data that you can act on very quickly, as opposed to the historical utilization of data. Which your information, your data comes in somewhere. Customer data, transactions, inventory, whatever it may be, and then it goes and lives in a server somewhere, right?

It sits in a database and then you run these batch reports at the end of every sales day or once a month or once a quarter, whatever, right? You run those reports after the fact. Hours to weeks after the fact get data and then [00:09:00] use that data somewhere in your business. 

It's about taking- and the other thing too, is that companies are getting more and more data all the time, right? And taking that data that's increasing in volume and velocity, and increasing your ability to utilize that data. 

So they built Confluent. They were at LinkedIn. They left LinkedIn to found Confluent, because a lot of companies started using Apache Kafka. But at a certain point, there's a resource limitation where companies they don't want to build things on their own. They just want somebody else to have something off the shelf that works really, really well, and they can implement it and scale it. And they can focus on whatever their business is.

And Confluent is the business built on deploying Kafka at scale, either on the cloud, which is their fastest growing part or companies using it, on site and in their existing data centers, that sort of thing.

So again, the conviction is based on the fact that this transition is happening. Businesses are collecting more data. They're collecting data more quickly and they want tools to be able to put that data to use in ways [00:10:00] to help them do whatever they do as a business better. 

Jeff Santoro: So the next question I was going to ask was, what does the company do? But I think you answered that in the, why do you own it question.

But here's my- You and I talked about Confluent a few weeks ago. And I was pushing back at you cause you were acting very bullish about it. And we were going back and forth like we sometimes do. But one of the things that I struggled with when I read through the business description on the 10 K was it's a lot of technology buzzwords that we hear a lot. Like data and real time and streaming and cloud and silos and all those things.

And I don't really understand what the hell all that means sometimes. 

Jason Hall: Yeah, me neither. 

Jeff Santoro: So well, can you, do you have an example of like a, here's an example of how a company would use Confluent to be able to access and utilize and look at data in real time versus waiting for it to sync overnight or however it used to be used.

Jason Hall: Well, an example is a company that sells, let's use an e commerce company, for [00:11:00] example. That physical good sitting in a warehouse somewhere. They have a supplier that they order those goods from. And they have orders coming in in real time. And they're pulling them out of their own inventory.

So using data streaming, you can more quickly identify we're about to sell out of this good in real time. Or, you know, there's strong demand and the West Coast and 75 percent of your inventories in New Jersey, right? Not sitting in a warehouse in Colorado or Arizona or whatever. Right.

Jeff Santoro: If it's in New Jersey, it's falling off the back of a truck. Let's be honest. 

Jason Hall: Touche. Yeah, so you're screwed either way. But but the the key the key there is that you can literally in real time you can identify an opportunity to get product that's going to generate income for you, right? Versus a legacy system where you have to close your system out. You have to close your books out, you know, before you can get that data. Right? A day goes by before you [00:12:00] can respond to this opportunity. 

And now this opportunity becomes a problem, right? Because the opportunity is that you can leverage those sales. And then the problem is you didn't know it was happening. And, well, now the problem is that you can't meet demand and you have customers that want this product, right?

So I mean, that's just a low hanging fruit example. If you're an auto supplier or you manufacture parts, being able to respond to those sorts of things in very quick real time can be really, really, really important. So just some simple- go ahead. I think you have a question.

Jeff Santoro: No, I was just going to say now that's really helpful. And I think that's, I find that just sort of a tangent, but related to this. Yeah, I find solid examples of what some of these tech, non consumer facing tech companies do to be super helpful. Because if you don't work in that industry or if you've never been in a data field, it's really hard to sort of wrap your head around what all that means.

So even if that's just a low hanging fruit, easy example, I think it helps people wrap their head around what the company does, why it's important, why businesses would [00:13:00] pay to have it. 

Jason Hall: And this is, I want to point out like the weakness for me when it comes to this.

I think conceptually, I understand what Confluent is trying to do really, really well. What I don't know is, compared to legacy systems, because they talk about the size of the addressable market and how quickly it's growing and I just take them at face value. How much of the existing legacy products are starting to address that, right? They're building in data streaming into existing products that are out there or replacements for those existing products.

 I just, I don't know, like the real competitors in terms of the legacy stuff. 

Jeff Santoro: One of the things I wonder too, as it relates to that. And this is the case with almost every business to business company, is what's the benefit compared to the cost as it fits into any business's overall cost structure?

 Having all of these software that are out there is probably nice. And if you have unlimited resources, and maybe during the zero interest rate [00:14:00] era companies thought they did. Yeah. But in a world where you're trying to be a little bit more careful about your spending, where does a company like Confluent rank in the list of things you can cut immediately versus things you would cut last?

Like that's one of the questions I have about a company like Confluent. And also related to that is like, once you're in and using it, is it super sticky? Would, would unsubscribing to it make everyone in your business angry? So those are some of the things I think, getting to your point, it's really hard to know those things unless you're in that industry.

Jason Hall: Right. And I think that's the key is that when it comes to these sorts of companies, unless you have a tech background or you've followed companies that do this sort of thing, the legacy companies, the upstarts. And that includes like following Amazon, because with AWS, they have a proprietary streaming product. And I'm sure Microsoft has something with Azure is Azure as well that's proprietary. 

They're not open source built on [00:15:00] Apache Kafka, which I think is one of the big draws, is that you don't have to be married to Confluent. And with open source, a lot of off the shelf stuff gets built on top of it that creates some sort of added value that's worth paying for.

 And then of course the question becomes, well, like you were talking about, how sticky is it? What is your moat that makes it worth whatever the cost is? 

Jeff Santoro: Yeah. And I, I wonder if we're going to have some of the same advantages or questions with the company I'm going to do. Because it seems like a lot of these disruptor cloud based software companies have APIs and abilities to integrate what they're bringing to the table with legacy systems.

And I think that's probably smart because you don't want to make people feel overwhelmed and oh, I have to scrap everything I'm doing and use a whole new system. But then it also makes me wonder how essential is it? Could these legacy companies that you're integrating with just do what you're doing? And I'll talk about that a little bit, I think, with my company.

So you said you're not really sure exactly who they compete with in terms of these legacy companies. But do you know the legacy companies? And you mentioned a few, I think, that they might [00:16:00] be competing with? 

Jason Hall: Well, I mean , it's every database software company that's existed over the past 30 years that still has deployments out there, right? And then the tools to be able to batch report from those legacy products. And of course the new stuff too. Companies that are building their own open source. 

And then when you move into the cloud, like that's one thing that they've really- the business has been around for a decade, but more it's more recently they built Confluent Cloud. Which basically, they took Apache Kafka and built a version of it that lives in the cloud. So they're frenemies with AWS and Google and Microsoft Azure. Because, well, that's where most companies, that's the cloud. For most companies, is one of those three.

The thing that's interesting too, is that one, I know this one things I've talked about, and this is typical of a lot of these sorts of things. Is you end up with silos within companies. Because you've got your, you know, your front end customer facing system where you do order management, you [00:17:00] place your orders and you collect the customer data. So you have your application, your software that you bought, so when customers order something from you, right, here's how you input the order and you process the payments and all that kind of stuff. So the data comes in that way. 

 But then you have your CMS, your, your, your Salesforce or whatever program you're using for that. So you have data coming in another way for, for managing your customer accounts. And then you have whoever you use for inventory management, you have all your data for that. So you have all of these silos around how all of this data, a lot of it, that's really interrelated. 

You can, using that example of the order comes in, the inventory is going out. You've got multiple distribution centers. Like you might have data from three or four or five different, different sources that don't, they don't play well together that you're, you're dealing with.

And one of the things that Confluent that's with Apache Kafka is the ability to handle lots of different kinds of data streams, and make something useful out of it. So I think [00:18:00] that's a differentiator. 

But maybe that's just becoming table stakes for data streaming, you know, in the, in the modern cloud based world.

Jeff Santoro: Yeah. So let's backtrack a little, and let's talk less about the things that you don't know, which is part of this conversation, but let's talk about the things you're watching. 

So, when quarterly earnings come out, and I believe we talked about Confluent should be releasing Q4 results the day that this podcast goes out. So if you're watching, if you're listening to this the day it gets released, you might have some timely information here.

So when you check out the 10 Q, the 10 K, whatever it happens to be, what are some specific things you're looking for? And I'll screen share them here using FinChat and we can talk through them.

Jason Hall: So one of the things that I really focus on a lot is revenue growth. And there's one of the KPIs they have right there is Confluent Cloud revenue. It's definitely the fastest growing part of the business, because so many companies are transitioning more and more of what they do out of local data servers, proximate servers, and [00:19:00] moving things to the cloud. So building, uh, having your data streaming happen in a cloud based way makes sense because that's where all your data lives anyway. So this is really important to see this continue to grow. 

I also focus on overall revenue growth. Because we're seeing a slowdown in growth of their main Confluent platform. As Confluent Cloud grows, and becomes larger and larger- but again, that base customer, that base Confluent revenue is still really, really important, right?

 It provides a substantial amount of cash flows. I think the margins are actually still higher in that part of the business. So that's, you know, looking at total revenue, I think is really important. The vast majority of their revenue is from subscriptions. They get a little bit of services revenue. But it's almost all subscription revenue. So I don't really focus specifically on breaking that out. 

Jeff Santoro: Yeah. I just want to pause for a second here. Cause I just put up a chart showing both total revenue and also the cloud revenue. And one of the cool things that FinChat will do is it'll [00:20:00] tell you the compound annual growth rate for whatever time period you've chosen. Yep. 

So the cloud revenue is growing at a CAGR from March '20, that quarter, '20 through Q3 of '23, which is the last reported quarter as of this recording. Confluent Cloud revenue is growing at 116% compound annual growth rate. Overall revenue only 48%, which is still excellent.

So there's those two, the difference between those two that you were talking about. 

Jason Hall: Well, and if you look on, the, on the chart too, I'll describe it for listeners at home. You'll notice too that on the far left , the Confluent Cloud revenue is just like itty bitty fraction. It was $6 million of revenue on a $51 million total. And now it's $200 million total revenue, $92 million of that is cloud. And now it's almost half of revenue. Right. And back then it was 10 percent 11, 12%. So it is quickly becoming a more important part of the revenue. 

Jeff Santoro: And I would assume that that is more margin accretive then, like the [00:21:00] more cloud revenue there is, the higher you're going to see gross margins kick up.

I would imagine. 

Jason Hall: Surprisingly enough. No, the Confluent Cloud margin is a little lower. It's in the high seventies versus the low eighties. 

Jeff Santoro: Oh, interesting. 

Jason Hall: But again, it's, it's going to be a much larger portion of the business. So maybe at some level of scale that starts to pick up. But the difference, and this is really important, is with Confluent Cloud. They're not the cloud provider, so they don't get that operating leverage pickup from that incremental revenue that Azure gets or AWS gets. The more volume that's happening on Confluent Cloud, the cost for the cloud, from the cloud service provider also goes up as well. So again, I expect that that's going to change at some point. We're going to see it become margin accretive over time. But we're not quite there yet.

I also really pay a lot of attention to cash flows. Because like a lot of tech startups that go public, they go public to raise a bunch of money and then continue to generate losses as they're scaling up. [00:22:00] Because it's the land grab period where the idea is to take as much market share as you can and aggressively grow.

But following that transition of cash burn and watch the cash burn reduce is something I really like to see. And this is something that we've really, really seen begin to happen over the past year, the past three quarters. And it'll be interesting to see when they report the fourth quarter. It's like you said, Jeff, we'll see after the podcast actually comes out.

 Their goal is to try to get to cashflow neutral next year. So that'd be a really positive sign. Because with other companies that you and I both know and love we've seen do that, like CrowdStrike. It's kind of our, that's our easy one we go back to.

When they make that transition, the cash flows, you know, assuming growth continues, the cash flows get really big, really quickly. And that's where my conviction lies with this business is because that trend looks like it's, it's playing out. 

Jeff Santoro: So I know you don't, you probably don't have any direct anecdotal evidence with this cause you're not a business. But do [00:23:00] you have anything to bring to the table in terms of, or does this help you with your process at all, like knowing anyone who uses it? Have you heard anything about the product itself? Or is this based on potential, what you see in the earnings releases, and things like that? 

Jason Hall: Yeah, I've done zero work to go out there to try to find people in, in the professional world, the tech world that have experience with the... Well, that's not true. I've done a little bit of work. In early January, I spent an hour online, trying to find some forums and that sort of thing to find some reviews. And I couldn't find anything that I really felt comfortable was a hundred percent legitimate. But the little bit of things that I did find out there, kind of the general comments did seem to be fairly positive. 

But I understood none of the technical stuff. Yeah. Which, honestly, that was a big eye opener for me, it's like, you know what? You really don't know anything about how this company does what it does, and who else out there is doing it. 

Jeff Santoro: Yeah, so it sounds like your blind spots are just that. That you don't really understand the industry as well as you could, or as well as someone else would. [00:24:00] And, and I guess also, would you say that that's also tied to the, what would go wrong? Or are, do you, are there specific things that could go wrong that you feel like you could keep an eye on just through results? 

Jason Hall: I think the way I try to solve for my, the big blind spot that I have there in terms of technical knowledge and expertise is trying to understand the customer growth.

So all of these SaaS companies love to talk about customer growth, and customers that spend more than a hundred thousand a year, a million a year, whatever those buckets they put it in. And when they're touting those, it's because usually they're growing faster than the core business than like the whole business. And if they change those metrics, it's probably because something's not as good as it was. 

So if they started changing the metrics that they were breaking out, I would be very concerned that they were trying to wallpaper over weakness, right? Or if there was a clear slowing in growth of cloud. That's really what I'm focusing on.

I think that's about the only way most people would be able to identify maybe some cracks in the armor.[00:25:00] 

Jeff Santoro: Yeah. No, agreed. 

All right, so I think that's all of the questions for your company, Confluent. 

Jason Hall: So you are you gonna buy some Confluent, Jeff?

Jeff Santoro: I, so I looked into it a little bit.

Jason Hall: And then he fell asleep.

Jeff Santoro: For me, it was like, I want to see a little bit more of, you, you described it to me as being on the precipice of being about to turn the corner on profitability and cash flow and things like that. And I'm just not like excited enough about the company to take the plunge now. But I do think it's interesting.

I do think that if they're able to do all the things that they're telling us they're going to be able to do. And if our understanding of how critical this ability to use data in real time really is for businesses, then that's interesting. But it doesn't jump out to me to want to get in like super early on it.

So I'm going to keep an eye on it. It's on my watch list. And now that I know enough about it, then that I can have a semi intelligent conversation with you about it, I'm sure it's one we'll keep [00:26:00] talking about as time goes on. And especially in the next week or so when the Q4 results come out.

Jason Hall: Let's talk about Procore.

Jeff Santoro: Yes. So I brought to the table Procore. If you listened to the episode where we revealed the 2024 portfolio contest, I mentioned that one of the reasons I included it, in addition to just feeling like I have a decent amount of conviction. And it was I wanted to use the fact that we were talking about it throughout the year as a as a way to learn more about it because I do realize I have some blind spots.

And it's funny. I didn't think about this until you started talking about Confluent. I think a lot of the things I struggle with are going to be very similar. Because this is also a industry I don't work in and a software that is business to business and faces people that don't do anything that I do.

Although I do have a little bit of anecdotal evidence, which I'll get to. 

So I own Procore because it was put on my radar around the time that I was working in my school district where I [00:27:00] have my day job. I was in a lot of construction meetings because we were building onto some of the buildings and some of the spaces that were being built involved what I do.

So I was going to weekly construction meetings for about 2 years. And it was interesting to see how that industry works. And how much of it is email this. Did you email that? Oh, yes, I got that email. I have to download the attachment. I have this program that I, the software to open the file doesn't work, you know. People taking paper notes. The notes for the meeting were distributed on a PDF each week, but people were submitting things in different platforms. 

It was very bifurcated. And when Procore came on my radar as a stock, and I read the description in the 10k, it seemed to be designed to reign all that into one platform.

So I immediately had a reference point. Like I mentioned earlier with yours, needing an example of what Confluent does. I had this example in my everyday life. And then when I looked at the actual results, I saw a [00:28:00] company that was young and new to the public markets, but growing pretty strongly and, you know, still has some work to do as a, as a company. But I saw enough potential and I thought it was interesting. And it seems like a space that needs to be disrupted a little bit.

So I bought some, I bought some shares and wanted to learn more about it. And there we are. 

Jason Hall: So you own it because it can solve the problem of taking all of these disparate parties that are working on the same projects with different pieces of data and different ways they manage that information and they can solve that problem.

So what exactly do they do? How do they solve it? 

Jeff Santoro: So basically they, it's a, it's a subscription, as a subscription product that either a owner of a construction project, so that could be like in our instance, the owner was the school district because they were the ones paying for the work to be done. Or it could be a developer, or general contractors can buy a subscription, or specialty contractors, or architects or engineers.

Anyone who works in the construction space could have an account, pay for the subscription, [00:29:00] and then they have unlimited seat licenses as I understand it. So if you connect, if you're a GC and you connect with a specialty contractor, they don't have to have their own Procore subscription to be on the platform. You can just invite them and have them submit paperwork through this platform. 

 So it's basically like a one stop shop for all the different parts of a construction project from the first day of planning through the day that it, you sign off and turn it over to the owner. Uh, so… 

Jason Hall: Project management here.

Jeff Santoro: Project management. Yep. And- 

Jason Hall: Anybody in the tech world out there that's familiar with Basecamp, this is probably like, they don't do this. I don't think. 

Jeff Santoro: Same idea though. Yeah. So that's what they do. And that actually is, that's who their customers are. It's owners of these projects. It's general contractors, specialty contractors, engineers. Architects. Anyone who works in the construction space. 

Jason Hall: So you're an educator by trade and an administrator in the education field. You're not an architect, you're not a general contractor, you're not even an [00:30:00] electrician. I'm not on purpose anyway. So like you said, a lot of the same kind of potential blind spots.

What do you follow? What do you follow and what are you looking for? 

Jeff Santoro: So I have my spreadsheet that I talk about all the time for all the companies that I own and I'm looking at all of the normal, I call them normal financial metrics. Revenue growth. Gross profit, net income, cashflow, all those things. And then I have my own little section of KPIs that I track and this is what's nice about the FinChat platform we've been talking about, is I used to pull all these numbers manually out of press releases and 10-K's and 10-Q's but you can get them straight from FinChat.

So one of them, for example, is total customer count. Obviously, right? You want to be growing that. Here's the total customer count for Procore going back to December of 2019. And as you can see up until the right is what is on the screen here. So I'll describe it for the listeners and it's grown at a compound annual growth rate of about 19%. Which is [00:31:00] not bad. 

This is in a, this is a massive market. I don't think they're, I don't even think they have to capture the majority of it to be a successful business, to be honest. So if they can keep chugging along at a CAGR of 19%, I think that'll actually be fine.

So that's one thing. I'm just looking for total customer counts.

Jason Hall: So it's one thing to go get the customers. It's another thing to keep them and increase their spend. Is there anything you're tracking there? 

Jeff Santoro: Yeah. So they report a metric called gross retention rate, which is kind of like churn. It's not number of customers churn. It's the it's based on annual recurring revenue So it's how much how much revenue drops off and it don't the data here only goes back to September of 2019, but it's been 95, 94 percent every single quarter.

So clearly the people who subscribe to their platform stay with it. So it seems like it's pretty sticky. 

One other metric that they do report that's not in FinChat, unfortunately is organic revenue growth, [00:32:00] which they also report. Just to show, cause I think they've been acquisitive in the last couple years. So I think they want to differentiate like what they're getting from their own platform versus what they're buying from other platforms. I mentioned it's a huge industry, but it's also a very fragmented industry. Everything from paper and pencil and Excel spreadsheets through something like Procore.

Jason Hall: So who do they, who do they compete with? 

Jeff Santoro: This is where, I don't think, I don't know if there's a direct competitor, I don't know if there's a company that does exactly what they're doing. But all of the other companies that have a hand in the construction industry, especially the large, well capitalized ones, I think are competitors, and I think probably bigger threats.

So, for example, in their 10k, they list Oracle, Autodesk, and Trimble as three companies that do what they do to some degree. And even if none of them have an exact competitive competing product, you can imagine a world where I don't know much about Trimble, but Oracle and Autodesk are [00:33:00] enormous companies.

 And you can imagine a scenario that they see Procore nipping at their heels and say, hold on, we can do this because everyone already has Autodesk, you know? Like, so that's who they, and then I think there's also like accounting software vendors that they compete with, right? Because you can do accounting through the their solution.

There's point solution vendors in all different categories, like, analytics, bidding, compliance, scheduling, materials, financing. So like all those separate pieces of the industry have software competitors right? So there's all these- now they integrate with a lot of them. They say that, I mentioned this earlier, they say that in their 10 k, that if you already have these, you can integrate them with Procore, integrate them with Procore.

I think that's smart because there's, I agree dozens of them out there. 

Jason Hall: I think one of the challenges. I'm guessing, and I'm sure you've thought about this too, but like one of the things they probably deal with is if, let's say you've got the general contractor that's running this project. And they like Procore and they want everybody on board. 

But if [00:34:00] somebody at, let's say the architectural firm's like, no, we're not going to double enter this data. We're not going to plug it into your system and then they go plug it into ours. We'll send you a report from ours and then the answer is guess what? You can set it up. You don't have to do that. 

Jeff Santoro: Right and I so like just to kind of blend into the question about blind spots and what I know, what I don't know, is like I love that you brought up that specific scenario because I don't know how quickly those integrations can happen.

And one of the things they mentioned in their 10k is that they're also competing against firms or businesses that might have built their own management software. So you could go work with, let's just say New York City's biggest commercial real estate company that's well capitalized, and they built their own, you know, construction project management software called Jasonsoft. And you want to work with them. So how quickly can you integrate Jasonsoft into Procore?

So that's just something I don't know. But yeah, so [00:35:00] they have a lot of different competitors, but I don't know that they have a competitor that does exactly what they do. And if, if they do, I haven't come across it yet, which also is one of the reasons I want to learn more about the company. 

Jason Hall: So you kind of hinted about one of the things that led you to it. Do you have any direct experience with the product or any of its competitors products? 

Jeff Santoro: Not, not really. Like I have the year of meetings I went to where I just watched the insanity of all these different ways of doing business sort of every week.

But I did ask one of the architects that was working with our school district if he had heard of Procore and what he thought of it. And he said he had, and he was actually currently using it on another job. And he was nice enough to even screen share with me and kind of show me how it worked and stuff. 

And I mentioned that I was interested in it from an investing standpoint. I was just curious what his thoughts were. And he said he liked it. He, he wasn't down on it, but he also wasn't like, oh, this is changing the world. Everyone's going to be (using it). He was not effusive in his praise. And that could just because [00:36:00] he's only used it a little bit, or he hasn't come across enough people that use it.

And he also did mention there was another software that he's used that does a similar thing. And I don't know what it was called or who makes it. I didn't get the vibe that it was a problem, but I also didn't get the vibe that it was about to take over the world. 

Jason Hall: So besides the lack of knowledge, or maybe you can kind of build on that. Where do you think your blind spots are? 

Jeff Santoro: So I don't know if, I don't know how much of the market they need to take to be a successful investment. I think they could be a small company that carves out a niche and has loyal customers and be fine as a business for the next 30 years. I don't know if they're going to be a market beating 10 X kind of investment like that. That's the piece I'm struggling with. 

And this is one of those lessons I'm trying to learn separating the business from the investment, you know, like we've talked, so, so much over the past year and a half [00:37:00] about, investments that have not worked out, but that are tied to strong companies. Like I think from a-

Jason Hall: We find great ideas that are terrible businesses.

Jeff Santoro: Well, like, here's a great example, cause I think they just read reported recently, which is Peloton. If you're just a Peloton user, nothing has changed with this business since you started it. It's still you, you log on, you get on your bike, your favorite-  

Jason Hall: It's gotten better. Like you can do stuff on your phone now.  

Jeff Santoro: And it's gotten better. Yeah. But your favorite instructors are there. Your friends that you ride with are there. Everything's- and it could do that forever and be a great business. I mean, a great, you know, business for the consumer. And never be a great investment. 

Right? So, um, so that's, that's the big thing is I don't know. How much they have to capture to be a winning investment. And I don't, I don't know if they're going to be the top dog.

I don't know if Autodesk or Oracle or any other company that already has a lot of businesses using their software says like, hey, we made this software management construction management software. Why don't you try it out? Like that could kill them. In a [00:38:00] heartbeat. 

Jason Hall: So the Microsoft-ization of so many, so many great applications out there, right? I think that's a good point. That's a really good point. 

And anecdotally, I want to mention this one before I ask you these last couple of questions. You and I, with the podcast, we've spent some time trying to identify different tools to help us with managing all of our social media accounts. And we were a little bit feature driven and very much price driven, when we were doing it.

So it is, I am curious to see if they're going to be able to build any moats or if it's always going to be a dog fight, right? 

Jeff Santoro: Yes, and we might not know that for a long time. But I will say this. I could see a world where, for the companies that use it and learn it, I could see it being sticky. 

Because I think, just to bring the podcast example back, as you and I have developed workflows with the software we use and the things we do, the more you do those workflows. The more you're like, I don't have the mental capacity to try this other software that could be [00:39:00] better and cheaper. Let's just keep going. 

Right? I think that inertia is a moat, honestly.

Jason Hall: It really is. It really is. Yeah. 

Jeff Santoro: So if they, if they are able to capture a large chunk or a big, you know, a decent chunk of the market and they become the top dog, the leader. And maybe they already are like, there could be competitors that do exactly what they do, but maybe they are the leader, and maybe this is just the beginning of building that moat.

Their gross retention rate would surely indicate that for their customers. It is sticky. And I would imagine too, over time they'll add features and make it more compelling and all that kind of stuff. So I think if it can get there, I think it's probably. Gonna be sticky for the customers.

I just, the question is can they get there? Can they get there and be big enough to make it a good investment? 

Jason Hall: So let's look on the other side of the coin and let's say you're wrong. If you're wrong, where do you think you'll be wrong? 

Jeff Santoro: I think it's exactly what I just said. Like, I think if I'm wrong, it's there's not enough people that need this specific product to run their business, you know?

So like, maybe- 

Jason Hall: Just It's a [00:40:00] solution in search of a problem. 

Jeff Santoro: That's what I, I do wonder. And I, cause like, here's the example. I, I watched these year, these weekly construction meetings and guess what happened? All the stuff that was supposed to get built got built. And I don't think we were largely over budget or very behind. So it's not like the business, the industry can't go do what it needs to do without this. 

And I think if you're any size business, if you're a small business, or if you're an enormous business, you're going to look at the cost of this software versus the benefit you're going to get from it. And if it's like, okay, so maybe we save X percent in cost and X percent in time of project, is that, is that worth the cost of this software? You know, like, that's the calculus they're all going to have to do.

So I think if I'm wrong, it's just that there isn't a, it is what you said. There's a, this is a solution in search of a problem. And I just hope that I'll be able to see it in the financial results so that I know that the investment is not going to work out. But I think if it goes wrong, that's what it'll [00:41:00] be.

Jason Hall: All right, Jeff, this was fun. 

Jeff Santoro: It was. So if you liked this, uh, or have any suggestions for it, I mean, the questions we decided to ask each other were just our first thought questions. So, um, if this format is interesting to you as a listener or you have other questions we should ask each other as we, because we do more of these.

You know, one thing that we initially kicked around, but we left out is like, we never talked about management just as an example.

So if anyone has any suggestions, we're open to, to tweaking the format, but we're going to try to do some of these conversations about stocks we own. And I like the focus of what we don't know, because I think it allows us to ask each other questions and replicates kind of the. Conversations we have off the air.

Yeah. So we'd love the feedback.

Jason Hall: I agree. And I think that's something more people should focus on with their, with their investing, is what they don't know. Because all the other stuff is just a form of confirmation bias. 

Jeff Santoro: Yeah. Agreed. All right. 

Stick around for the next part of the show. Cause after this short break, we are going to take a brief look at the first month of the 2024 portfolio contest.

[00:42:00] So we will be right back.

Jason Hall: Hey, Jeff. We are, we're a month into the 2024 Investing Unscripted Portfolio Contest. 

Jeff Santoro: We are. And just because it will drive some of our colleagues crazy that we're spending any time talking about 30 days of results. Let's do it.

Jason Hall: Absolutely. We, we, maybe we should take this and make it the first part of the show and really spin them up. I see you, Jim Gillies. 

Jeff Santoro: Yes, we had, Jim is the most vocal one, but we did have a few people be like, you know, what are your contests? It's silly.

And we agree. This is, you know, one year is not enough. So certainly one month is not. But we're going to have some fun and not get into any specific companies here, I don't think, but just talk big picture.

So here's the first thing I notice, Jason, as I look through the spreadsheet, and by the way, anyone can get this spreadsheet at any time it's in the show notes. The first tab of the spreadsheet is all of the guests from last year that submitted portfolios including Jason and I. And the second tab [00:43:00] is audience listeners who, submitted their picks.

And the third I haven't done the math here, Jason, but just eyeballing it, it appears that the audience is crushing the guests from our podcast from last year, at least after a month. 

Jason Hall: I think three of the top four are guest portfolios, and I'm gonna say it out loud here. The best performing portfolio up 7. 3%. That is Lance. That is Lance with a five stock portfolio. 

Jeff Santoro: Yes, Lance, our listener is, is the early winner or the early leader, I should say, not winner of the contest.

And, uh, yeah, he's beating everyone on both, both tabs here. 

Jason Hall: Yep. Hey, who's doing the, who's doing the absolute worst, and it ain't even close, Jeff? 

Jeff Santoro: Well, as I look, 

Jason Hall: off the top of your head?

Jeff Santoro: Off the top of my head, I believe it is you, sir. You are getting absolutely crushed here. 

Jason Hall: I'm getting the crap kicked out of me.

Jeff Santoro: Now, I [00:44:00] don't want to, I don't want to pick on you too much. Because I want to pretend I'm more gracious than that. 

Jason Hall: So you want to pick on me too much. 

Jeff Santoro: No, but here's my, this is an honest question about this. So, because let's, let's pretend that you are, this is a, your portfolio, or this is part of your portfolio, or you have a bigger portfolio.

And this is what happens after a month of a year. Knowing how the math works, it's a lot. You need more than a 27 percent gain to dig yourself out of a 27 percent hole. 

Jason Hall: Yeah, it's gotta go up like 40 percent just to get, just to get back to even. 

Jeff Santoro: Right, so if this were your actual portfolio, that was down in just one month, 27%, how do you, what do you do?

How do you handle that? How do you think about that? You know, framework mindset wise so that you don't go crazy. 

I mean, this is just a fun experiment game, right? But if this were, if this really happens to someone that quick in a year, how do you think about that?

Jason Hall: So this is, I mean, honestly, this is like pandemic level one month down, like for a full portfolio. [00:45:00] Like I think it's one of those things where we get, so my portfolio is what, seven stocks, one, two, three, four, five, six, eight stocks. I think number one, you have to, if you're going to run a concentrated portfolio and you're going to own these kinds of companies. Enphase, Outset, QuantumScape, SoFi. 

Jeff Santoro: Yeah. You went, you went all. I think they're all high beta, super volatile. 

Jason Hall: High volatile stocks. Yeah. And I was bottom fishing too, right? These were, these were losers last year. Except for SoFi, it's kind of roared back. You have to find your conviction again.

I think you have to do that. And you have to one by one, why did I buy this stock? What am I anticipating? Why did I buy this stock? And what happened and then look through them and say realistically what went wrong? 

So like outset medical, for example, we talked about that ad nauseum. I'm not going to get into details It's down 42 You and I talked about some like the reasons why that that is is happening despite the business being like maybe okay, certainly not meeting expectations. Yeah, [00:46:00] I think sit on your hands though, right? I think that's what you... 

Jeff Santoro: it's hard because, like, I think the reason I asked the question is this. It comes back to one of the things that we talk about a lot, which is, first of all, you shouldn't have just eight stocks unless you really know what you're doing.

And I think if you have eight stocks because you know what you're doing, it would never be these eight. 

Jason Hall: No. This is probably not your eight. Right. Yeah. Like you said. 

Jeff Santoro: So it's an extreme example, but I do think they're even in a well diversified, larger portfolio with a mix of risky and less, you know, or, or more volatile, less volatile kind of stocks.

Maybe you have some blue chip dividend payers in there. Maybe you have some, some, some WolfSpeeds and some Enphases like you have. It can still, you can still see it go sideways in a short amount of time. 

And I think I like the two things you said, which is sit on your hands and then, but also go through each one and ask yourself why. And see if it's market sentiment entirely, or if there's something fundamentally wrong with the business.

But I think [00:47:00] this is a great example of why we are proponents of larger portfolios. Especially the less experienced you are, the more stocks to have probably. 

 And also just, you know, you got to spread around those risky bets a little bit. But other than your terrible performance and the fact that everyone's really, most people are okay, or down a little bit. There's nothing else that like really jumped out at me after just one month here. 

Jason Hall: Yeah, my favorite observation, I mentioned it on the first Friday, as we talked very, very briefly about it. Of our celebrity pickers, pseudo celebrity pickers, prior show guests, that the best performing, at the time, he's, it's not now, but it was Mitch Fatel, um, who is an, uh, avid amateur, right?

Where everybody else on here is picking stocks because it's part of what they do for a living. 

Jeff Santoro: Yeah. I would encourage everyone, as you look at these results and look at each portfolio, on the spreadsheet, there's a link to each person and [00:48:00] what they do in life. So for Mitch, it's like a link to his website and for some of our other guests, it's maybe their Twitter accounts.

But in addition to checking them out and just seeing what they do and if. You know, if they're in the financial world, checking out their offerings, I would also say go back and listen to the episodes where we had these guests on. Mitch goes back a while. I think we had him on an early 2023. He might have been one of our first guests of the year, a year ago.

Um, I would say go back and listen, because that was a really fun, interesting conversation. And, and I mean this not in a pejorative way. He's definitely the most amateur guest we had on in terms of, of his investing. He's just, 

Jason Hall: he's a professional comedian. 

Jeff Santoro: Yeah, he's a comedian, but he's enthusiastic about investing.

Like he, he is more interested when we got him on the, on the show, he was way more interested in talking to us about stocks than he was about his career or being a comedian or anything like that. Um, so yeah, so that's kind of it for, for January. There's nothing, you know, too crazy here to dive into other than how bad Jason is.

But we will, we'll do these shorter monthly updates as the, you know, the B segment of, [00:49:00] of our weekly pod.

And then when we get to the end of Q1 and we crown a, a first quarter winner and start giving money to that person's charity, we'll do a little bit of a deeper dive. And, you know, because three months is a little bit more to have. You know, we should have an earnings result for all these companies by then a more of recent one that we can dive into a little bit and we'll go a little more in depth on some individual companies as we get to the end of Q1.

Jason Hall: I'm going to, I'm going to make a commitment. I'm going to do something, Jeff. 

Jeff Santoro: Okay. 

Jason Hall: And Lance, I'm going to, when you listen to this episode, I want you to reach out to us. I think you've DM'd us on Twitter before, but reach out, reach out to us.

I want to give 50 bucks every month to the month's winner. To the charity of their choice. So I want to count listeners in that. Lance. You won. Send us your charity, send us your charity. I'm going to send 50 bucks to your favorite charity. And it can't be the Lance needs 50 bucks from Jason charity. 

Jeff Santoro: All right. Well, before we do that though, I'll have to go back, and I didn't actually put the end of January results into the spreadsheet.

Jason Hall: I'm committing, I'm [00:50:00] committing to do it for Lance. 

Jeff Santoro: Okay. We'll do it for Lance. 

Jason Hall: You're getting it. And if somebody else gets screwed. Get over it. 

Jeff Santoro: I love it. 

You're 

Jason Hall: not getting the money anyway. 

Jeff Santoro: And I'll do my job moving forward and actually update the spreadsheet with the end of the month results. I'm five days late here.

So that's my bad. 

Jason Hall: It's all right. Hey, Jeff, we, uh, we did it, buddy. 

Jeff Santoro: We did it. 

Jason Hall: Words about stocks. All right. As always, we love to share our insights, give our observations and give our answers to those hard questions about investing. Companies where we have conviction, but maybe not so much knowledge. And that my dear friends, listeners out there is a very important reason why you got to find your own answers.

Answer your questions for yourself. You can do it. I believe in you. All right, Jeff, we'll see you next time. 

Jeff Santoro: See you next time.