Liquid biopsy in the cancer testing is the next big investment opportunity


Multiple companies are working on next-gen blood biopsies tech to detect cancer  

The potential market size is big according to most estimates and analysts

Mergers and acquisitions seem to suggest that the era of liquid biopsies has arrived

The frontrunners highlighted in the article could provide excellent returns for investors

Liquid biopsy a small background

I wrote an article a few months ago about liquid biopsies with a detailed analysis of Guardant health (GH) and this emerging healthcare tech space is turning out to be a massive disruptive opportunity.  If readers want to understand the liquid biopsy, please read my previous article. I will analyze the emerging players in this market in this article and, which of these companies could be potential multi baggers in the next 5 years. I will do this without getting bogged down by the nomenclature, and claims, that are yet to be validated, but rather looking at the front runners and extrapolating the performance based on their financials and  the total addressable market(TAM) that each of them could eventually claim.

Tissue biopsy, commonly used for cancer testing, is a procedure performed by removing a small amount of tissue, usually via needle aspiration. This invasive procedure can be painful (lung, liver etc) and is frequently repeated since about one in five such procedure fails to obtain sufficient material for analysis. Liquid biopsy overcomes these drawbacks by virtue of using a blood sample (blood draw). It is virtually painless and can be quickly obtained using standard materials and, is less expensive. This approach has been touted for the last few  years and is starting to gain significant traction due, in large part, to advances in detection technology. Despite the advantages, though, tissue biopsy will likely remain for the foreseeable future but liquid biopsies should reduce the demand for tissue biopsies if clinicians have confidence in the results.

Reason for Liquid biopsy taking off

Traditional cancer tests require invasive and expensive tissue samples as I wrote in my earlier article but we’re nearing a future in which a blood draw will tell us everything we need to know about cancer.  The advantages of liquid biopsy include screening for cancer, therapy selection (companion diagnostics), monitoring treatment response and drug resistance and detection of minimal residual disease (MRD) after surgery or recurrence.  The diagnostics testing also enables current therapies to drive better outcomes by personalizing the treatments and constant monitoring of the patient with minimal procedures and costs. Besides, studying a tissue sample can help physicians understand which mutations within the tumor cells might make one drug more effective than another for that patient. ARK Invest’s analyst Barnett says, in many cases a so-called liquid biopsy could yield the same or richer information with non-invasive tests. “To use a patient’s biological profile and the biology of their unique disease to craft a personalized treatment plan that matches patients to specific drugs that target the unique characteristics of their cancer is a big benefit”  according to the ARK analyst.

Genetics, pharma and affiliated companies are pulling out all the stops to stay ahead of cancer. There have never been better times for the fight against cancer and the chart below shows the survival statistics over the last few decades.

The market size

Public companies like Roche (RHHBY), Guardant Health (GH), Exact Sciences (EXAS), Natera (NTRA) and Personalis (PSNL) and many in the private space like GRAIL (which has been acquired by Illumina)  are creating this market for genetic testing. Some companies like GH, NTRA and EXAS have been in the market for the last few years and I see this market size expanding as these companies prove their merit and get more studies out the door along with more FDA approvals in the pipeline.

These companies, besides working with pharma companies on the medicine, are also rolling out a series of genetic tests that can help detect cancer indicators early and these testing kits are being used extensively in the doctors’ offices and clinics. According to investor presentations from these companies and looking at analyst research testing services is a huge market and analysts agree this could become a USD $50+ billion market within a few years, from its current size of approx. USD 6 billion. Recurrence monitoring alone is a $15 billion potential market, according to Guardant Health and the recurring opportunity assumes that every one of the 15 million living cancer survivors receives one $1,000 test per year (US only) and then, there is the rest of the world to add to the total addressable market, The current penetration adding all the revenue from these companies is less than 5% and therein lies the massive opportunity for these companies in the next decade.

The front runners

Doing repeat biopsies of the traditional tissue is quite onerous and this is where Natera and Guardant shine. Natera started with a non-invasive prenatal testing (NIPT) to detect fetal aneuploidy (abnormal number of chromosomes) and recently introduced a  diagnostic test called Signatera that monitors the potential for cancer relapse well before a tumor would ever show up on a traditional scan. Another blood test available for patients later this year can detect cancerous cells before they group together to form a mass and this Natera product will monitor for recurring colon cancer. Pseudo-progression is a phenomenon whereby the tumor appears larger on an initial scan during treatment before shrinking on subsequent scans, and it has been reported in up to 1 in 10 patients treated with immunotherapy. The ability to distinguish true progression from pseudo-progression earlier in the course of treatment, has emerged as a significant unmet clinical need, according to Natera If a patient is not responding to treatment, one would expect the tumour to get larger on a scan over time, however up to one in 10 immunotherapy treated patients see their tumor get bigger before it gets smaller, as it’s filled with lymphocytes and swells up under attack from the immune system. With a CT scan, this swelling looks like disease progression, which it’s not, hence the term pseudo progression. Natera hopes to expand its market share with its offerings that could constantly keep track of any recurrence. It is also entering the transplant market with its Prospera line of tests and expanding into China. So there are multiple expansion possibilities for Natera.

Guardant Health also hopes to follow with a blood test that monitors for recurring lung, breast, colon and ovarian cancer as I had mentioned in my previous article. Guardant is conducting a trial called Lunar-1 for the same purpose and it would be completed by late 2021 according to their report. These tests are less invasive, and don’t expose patients to excess radiation often associated with scans. Both companies also sell their products to pharmaceutical companies for clinical research as well, hence there is a 360 feedback loop for these companies to go through continuous improvement and innovation. I have already written extensively on Guardant in a previous article and they recently got approval for Guardant360 a complete genomic profiling test to optimize treatment selection that has added to their overall TAM. Guardant’s Softbank overhang has still not cleared out, but business is humming along though I have to admit, there has been a COVID bump that has hit growth rates for the year but should clear out by early 2021.

Another company which has put its hat in the race is PSNL, which has recently launched its own liquid biopsy platform called NeXT. PSNL has been engaged in whole genome sequencing (WGS) services for the VA (Veterans Association) for last several years, and has used this data to take its offerings to the next level. Drug developers could use the NeXT Platform to establish relationships between immune responses and tumour mutations and incorporate the findings into drug discovery and clinical trials and PSNL had a 20% sequentially increase in the most recent quarter for its NeXT platform. PSNL claims, its NeXT platform can identify biomarkers including neoantigens for all cancers with comprehensive data across all 20,000 human genes from a small tissue sample. They are still early in this space but I would encourage the readers to monitor their progress.

EXAS a market leader with its stool based colon testing kit, is also progressing on other cancer testing fronts. I will analyse EXAS in a later article as more data on their liquid biopsy trials come out, after their recent acquisition of privately held Thrive.

Illumina has also thrown its hat in the ring with its acquisition of Grail which it partly owned,  at a rich valuation of $8 Billion but it may take a few years before we can evaluate the value generation potential of this deal. Grail plans to launch its test for early detection of cancers next year.

There are others that have been making a foray into this space like, NeoGenomics, Freenome and many more, which validates, that the era of liquid biopsies has arrived. I will let readers know a bit more on the others as and when I get verifiable data.

Financial data

I will limit my analysis to the 3 companies for which we have adequate data on liquid biopsies and will do a follow up with an update on the others.

Looking at the metrics data a reader can gauge, the reason Guardant is assigned a higher valuation of USD 10~ billion and a 35 P/S multiple, though its revenue is lower than Natera but has a higher growth rate and GM. Let us also take a further look at the expected revenue in the next 2- 3 years based on the pipeline, the TAM in the investor presentations and competitor data where available. I have used a combination of data and heuristics to extrapolate the indicative and achievable revenues for each of these companies assuming no hiccups on the FDA trial outcomes  and the execution of their marketing plans

Source – Authors analysis based on company website, analyst and earning reports

Source – Authors analysis based on earnings data and investor presentation

Source – Authors analysis based on earnings data and investor presentation

Picking a winner

Illumina’s (NASDAQ:ILMN) $8B takeout of liquid biopsy developer GRAIL, may be a watershed moment for use in cancer detection and management which was followed by Exact Sciences (EXAS) with its acquisition of Thrive. .  It is developing a multi-cancer early detection test that detects very small amounts of tumor-associated molecular material in the bloodstream.

According to my own analysis, the large TAM, and having read about the Goliath and David stories, there could be multiple winners in this space as it is too early to predict the stock that will dominate this market niche. This is a huge unfolding market, and it may be daunting to give a definitive perspective for an investor to play the market but I suppose, there could be multiple approaches that could succeed. The data suggests, GH as a first mover with its high growth rates could maintain its leadership position as the medical fraternity begins pervasive use of blood biopsies. The changing narrative with multiple factors like trial outcomes , increasing reimbursement coverage, and Operating leverage would also suggest that they could hold on to that advantage, and if  the Lunar trials get approved in the forecasted timelines others may find it difficult to catch up.  Natera would work to improve its margin with its new line of products and that would propel it to catch on the multiple expansion gap with Guardant. Personalis on the other hand is the wild card in the mix and the pace of its NeXT platform ramp up holds the key to the stock being propelled forward.  A prudent investor would start positions in all of the above companies with different allocations, and closely watch the developments on these multiple fronts. As the companies compete to provide users with better health care outcomes, it also offers many of us new ways to receive health care that is far more efficient and less invasive.

The author is an analyst and runs an investment consultancy called – Sequity advisors ( Sequity has been developing focused equity strategies and generating 35% returns for investors in the US stock markets. Sequity also mentors and provides strategic advisory and funding services for start-ups in the APAC region to scale their business in emerging economies like India, Vietnam and Indonesia.

How to invest in US stock markets from anywhere in the world


When we think about diversification in stock investments, we think about investing across different sectors, industries, and market capitalizations. However, very few investors tend to look beyond the country borders for investment opportunities. For e.g a retail India investor, there are several investment opportunities available in the US markets. They can choose between investing in mutual funds, ETFs or even use the LRS route to buy direct equities in the US markets.

Why Do People Invest in the US Stock Market?

Diversification with Global Investments:

US listed companies have the largest total market cap by far. Many of the big US firms get their revenues from across the world (almost 40% of S&P 500 revenue is from outside US). So you are really getting a global exposure, and not domestic.

There is a vast universe of stocks available in US markets. Some of those are not compliant with Indian regulations. Winvesta has excluded such stocks and ETFs containing such stocks from their selection so you will not have to worry.

US equity indexes has beaten every other global index in the last decade and over the past five years given 92% gain in the S&P 500, crushing the world benchmark’s 64%, the widest gap since 1970. 

Rupee-Dollar equation:

Investing in the US also means you are investing in USD as a currency hedge , so you will get all the upside (or downside) from USD-INR appreciation. Every time the rupee falls against the dollar you’ll know you have some wealth that’s growing. In July 2010 the dollar was equal to around Rs 46, which is now around Rs 75 a decade later. Therefore, an Indian investor who invested in the US markets a decade back would have seen phenomenal returns.

Taxes for Investing in the US Stock Market?

Tax in Foreign Country:

There is no capital gains tax for foreigners. The dividends are taxed at flat 25% for Indians, and tax is withheld by the broker, so there is no need to file tax in the US.

Fortunately, the US and India have a Double Taxation Avoidance Agreement (DTAA), which allows taxpayers to offset income tax already paid in the US. The 25% tax you already paid in the US is made available as Foreign Tax Credit and can be used to offset your income tax payable in India.

Tax in India:

The amount of taxes you have to pay in India depends on how long you hold the investment. The threshold for long-term capital gain is 24 months, with the rate of 20% with indexation benefit. If you sell a stock in less than 24 months, capital gains are considered short-term and are taxed according to your income tax slab.

How Can You Invest in The US Stock Market From India?

You need a broker to help you trade US stocks from India. You will have to create a trading account with a brokerage house and get your KYC done by giving your PAN, Bank Account, Voter ID, Bank Statement, etc. Post this you’ll need to transfer funds into your account to trade US stocks.

Routing your international investments through brokerage firms is a better approach as they offer investment packages based on different themes. A few international brokerage firms like Interactive BrokersTD AmeritradeCharles Schwab International Account etc permits Indian citizens to set up an account and trade in US stocks, mutual funds, etc. In fact, US-based brokerage like ‘Interactive brokers’ also has an office in India where you can open your overseas trading account.

You need to be conscious on brokerage fee levied by brokerage firm. Some brokers have complex fee structures that make it harder to figure out what you’ll be paying. 

How do I Fund my account?

Before you consider investing in global stocks, you need to be aware of the RBI’s Liberalized Remittance Scheme (LRS). LRS determines how much one can invest abroad by converting Indian rupees to US dollars and how exactly the transaction has to take place.  RBI allows investing in shares outside India up to a certain limit. According to this article, Indians can invest up to $250K annually overseas.

For remitting the money to your brokerage account, you may need to visit your bank branch (depending on the bank, ICICI is fully digital).  And fill the relevant form (A2 for outward remittance). That is the only physical step required. I had to go to IDFC First branch, but my money was remitted the same day and I was able to start trading the next day after downloading the Win-vesta app.

Contact us if you need any specific answers or add comment below

Zscaler – A disruptor in the cloud security business


Zscaler – A disruptor in the cloud security business

Zscaler is a recent IPO and the valuation could be deemed high by traditional metrics given its early stage. Zscaler has a big TAM and can grow into its multiples. The company’s billings accelerated from 49% last year to 73% this past quarter. It is a leader in its category defining a new set of product offerings.

An introduction to Zscaler

Zscaler is a company in the leader’s quadrant with very few real competitors. It is rapidly growing in a market ripe for disruption. Zscaler (NASDAQ: ZS) enables the world’s leading organizations to securely transform their networks and applications for a mobile and cloud-first world. I state what the company website highlight- “Zscaler’s flagship services the Zscaler Internet Access™ and Zscaler Private Access™, create fast and secure connections between users and applications, regardless of device, location, or network. Zscaler services are 100 percent cloud-delivered and offer the simplicity, enhanced security, and improved user experience that traditional appliances are unable to match”. Zscaler operates a multi-tenant distributed cloud security platform, protecting thousands of customers from cyber-attacks and data loss in more than 185 countries.

According to the company, Zscaler’s award-winning web security solutions have been 100 percent cloud-based since the company’s inception in 2008, and boasts the world’s largest cloud-based security infrastructure built from the ground up, with innovations derived from more than 60 patents.  Zscaler’s security cloud processes over 35 billion transactions per day, for more than 5,000 organizations around the world. The Zscaler™ platform protects employees and data and users in 185 countries across 100 data centers with near-zero latency, and no requirement of on-premises hardware or software.

Zscaler advantage and offerings

“Security has always been based on our control of devices and networks,” says Michael Sutton, CISO at Zscaler. “Zscaler has turned that upside down. We enable companies to secure users, no matter where they work, what network they use or what devices they’re on.” 

Zscaler has been radically rethinking cloud security approaches for its clients and calls itself the World’s largest pure-cloud security platform. It  stands out in terms of Design, performance, and scalability,  and provides a great ROI compared to traditional security approaches… It does not matter if an organization is small or big, they receive the same security with much lower investments. One on the main benefits ZS claims, is protection “all time from anywhere “ because the cloud is always up to date. In terms of management and visibility, there is a single panel where one can configure the policies for the  entire organization worldwide, and ​after a proper implementation, the maintenance is very low.​

ZS cloud platform eliminates the need for traditional on-prem security appliances that are difficult to maintain and require compromises between security, cost and user experience. Zscaler platform offers two complementary services for enterprises who want to access applications on the public cloud without having to go through their data center –

  • 1. Zscaler Internet Access or ZIA for secure and fast access to SaaS applications and the internet. ZIA is designed to ensure malware doesn’t reach the user and valuable corporate data does not leak out.
  • 2. Zscaler Private Access or ZPA for secure access to internal applications in enterprise data centers or the public cloud. ZPA connects a specific user to a specific application based on business policy, without bringing the user on the network, resulting in better security while delivering the best user experience.

The ZIA product line has been their bread and butter for last few years and in addition, ZPA which was released last fiscal year, has been driving upsell activity for high-end transformation bundles, which includes the Cloud Firewall and Sandbox functionality.

How does the Competition stack up

OpenDNS founder David Ulevitch runs Umbrella as a SVP for Cisco Security, and he called the current competition “a race between ” between Cisco, Zscaler and Symantec. Ulevitch sees a multibillion-dollar opportunity as more companies move to cloud based security , explaining the difference between the newer and older approaches  as the difference between closed-circuit cameras at a club and a bouncer at the door.  Here is a comparison with Cisco and Blue coat ((provided above)) which was acquired by Symantec.

The market for Secure Web Gateway (SWG) solutions is traditionally characterized by legacy on-premises appliances, but as businesses increasingly look to securely transform from the old world of IT to the new world of cloud and mobility, it becomes apparent that security needs to move to the cloud as well. According to Gartner, “while SWG appliances still represent approximately 71% of the market share (as measured by revenue), the historical five-year compound annual growth rate (CAGR) of cloud services is 32% (as compared to the five-year CAGR for appliances at 5%)”. Enterprises are implementing the cloud-based SWGs to provide security protection for remote offices that are connected directly to the internet.

According to my analysis and validated by a few fellow contributors the solutions from companies like Symantec, run via virtual appliances in a data center ((DC))  and as a result  every call  has to go to the data center then back to the edge or access device. ZS has a wide moat letting SDNs to run on the internet without any redirects or VPN’s, and makes it unique in the market TODAY. This is possible because, they have set up their server software cross 100’s of locations, around the globe. It could be monopoly for a few years like  ANET was in the last few years or NEWR is today.

According to a pre IPO report Cisco offered a hefty price for a takeover and Symantec has a law suit against them.  This leads me to believe that  ZS has a highly disruptive take on the  traditional perimeter defense security model, and  represents the future of cloud based security that can easily deliver 30%+ growth for next 5 – 10 years.

Financial History and Future prospects

Revenues in the latest 3Q 2018 (the first one since going public) grew to $49.2 million, keeping pace with Zscaler’s 49% y/y  growth rate in prior quarters when the company was still private, and surpassed estimates by a nine point difference.

Zscaler has a typical contract of 1-3 years, hence new deals in any given quarter are typically not fully recognized as revenues upfront. Billings, which measures the quarter’s revenues plus change in deferred revenues, is a better metric to assess longer-term revenue growth and the billings results were superb. Zscaler exceeded expectations with 73% y/y billings , surpassing revenues from both a growth rate and absolute dollar  standpoint. This indicates that the company has added more revenues to the longer-term pipeline than it has recognized in the quarter, a strong signal for continued revenue growth. ZS will thus have a lot of deferred revenue with many of its multi-year contracts paid up front, and this gives them a great cushion to invest for the future, and protect their moat.

Remo Canessa, Zscaler’s CFO, commented that the company enjoyed a strong mix of longer-term deals that were billed upfront. Canessa notes that Zscaler’s billings would still have grown by 60% y/y, even when extracting for the contribution, of these longer-term billings.

Gross margin in the quarter was 80.8% on a GAAP basis, up 200bps from 78.8% in 3Q of 2017. I believe it is too early for me to speak on cost efficiencies and I would like to keep an eye on how it moves. I will delve into it after a couple more quarters once we see a pattern emerge.

3Q operating expenses grew 9% sequentially, and 38% year-over-year to $42.8 million, of which Sales and marketing increased 9% sequentially, and 43% year-over-year to $28.4 million. R&D increased 3% sequentially, and 20% year-over-year to $8.9 million, as the company continues to invest to enhance product functionality and to offer new products.

Consensus is $246 million for 2018, and I assume they should achieve close to $300 million given the 60% billings growth.  They have an amazing ARR of 120% and I believe their ZPA product line will increase that number substantially in the next few years.

Outlook and Valuation

A lot of pros on seeking alpha have been speaking about ZS being overvalued,  and I would agree with them but only partially.  As I wrote in one of my earlier blogs on how to value and  invest in cloud based businesses, the basic premise is , once a company has spent the costs on infrastructure and building the product or services, and the sales cost to acquire a customer, it’s just a matter of expanding the client numbers, to start seeing the effect of scale. And if it comes with little to no debt, and high inside ownership, I would jump on that bandwagon without anchoring to a price, which will eventually fetch great returns.

The IPO prospectus reads that an amount of $17.7 billion, is annually spent  on security applications, and  as per Zsacler, this amount  can be directly served by Zscaler’s disruptive products. When a company has such a big TAM,  I believe it will grow into its valuation, and companies like ISRG and NFLX have made that abundantly clear in the last decade. 


The big risk with any new technology is time needed to get it accepted, and get to an inflection point, and if some new entrant comes during this gestation period the sales multiples may come down. According to an eminent Investment analyst and former Managing Director at World Quant LLC Ishpreet Pandher, this cloud based architecture could be  a business risk for ZS, since switching costs would  be lower for a company to move for Zscaler to another newer innovation as there is no embedded devices and stickiness in his model.  Though that could happen , I believe that since ZS has so many locations with their servers  up and running it will take time for the new player to get to this breadth of the service infrastructure needed.

One can definitely expect to see some volatility with the impending lock in period expiring in Oct 2018, and the regular ups and downs with high growth mid cap stocks, post earnings releases.

In Conclusion

I would probably wait until the lock in period expires before I get a truckload of this company stock just in case we get a head fake.  In the meanwhile I would also be accumulating it in small quantities when the market gives an opportunity to pick it up on a lower sales multiple of 10 -12 X.

The author is an investment analyst and runs an investment advisory and consultancy – Sequity advisors ( Sequity has been developing investment strategies helping generate 25% returns consistently in the last decade for investors in the US stock markets. Sequity also mentors start-ups in the APAC region to scale up their business in emerging economies like India, Vietnam and Indonesia.

Metrics to evaluate the new set of cloud and 5G Digital Economy investments



Massive transformation of the Digital space and the entire business commerce model is being disrupted by the COVID crisis

Traditional metrics like Price to Sales(P/S) and Price to Earnings growth (PEG) have to be tweaked to look at revenue growth, Sales and Marketing (S&M) costs/Revenue, ARR(annual recurring revenue) and NER(Expansion, retention rate from existing clients) to identify  the best of breed stocks

Investing in best of breed component and cloud providers, service and monitoring, remote work and health providers requires a different mind set

Identify the winners with potential for high growth and market expansion and pick a bundle of 4 -5 stocks for the best returns in the next 5 years

A massive transformation is taking place in the Digital space with an entire spectrum business commerce being disrupted and COVID could bring forth a sea of change in how the business will run in the future.  In the olden days we had monolithic software providers wiring the internet 2.0 with a complete stack for instance an Oracle or Microsoft or IBM. Today the play has changed to best of breed providers who are working with each other to simplify client solutions as, the demand for specialized software has never been higher.  In the past few years, the number of enterprise Software-as-a-Service (SaaS) companies going public has increased significantly and I believe SaaS has become the de-facto business model.  While not new, its addressable market and growth seems to have caught many investors by surprise. These include component providers, cloud providers, the service and monitoring providers including software app providers and it is leading to disintermediation on a massive scale and better digital experiences and efficiencies.  There are some industries like insurance or banking where the next set of products is yet to surface and a Square (SQ) could eventually force that change. I am not privy to who will be the winners but I can definitely pick up a few players who may be in the reckoning and place my bets on them with my analysis.

What is unique to this new breed of companies is, they spend a significant amount of capex upfront to capture the market but the revenue comes over a few years as they install and service the client. So traditional metrics like P/S and PEG have to be tweaked and instead we need to look at Sales growth, S&M costs/Revenue and ARR and a few other metrics.  Let’s try to understand what is happening in each of these business layers and look at mission critical providers that have a strong recurring revenue model, akin an utility which you cannot stop and let go without any fuss. As an e.g BITCOIN may be an outcome short lived on hype but the underlying technology Block chain, may have a strong long-lasting impact and service industries for the foreseeable future

Component providers

At the top of the list here are companies like ANET, NVDA, MDB  and a host of others who are providing the mix of hardware and software for the cloud to be created and ready for consumption .  These underlying components help lay out the Digital Fiber and help the service providers operate the cloud. What I would look at here is volumes and scale though a company like NVDA or ANET probably have a moat, which increases the CAP (the competitive advantage period) and ability to keep prices from dropping.  When volumes or margins start dropping for these players, one would need to quickly reassess and change investments decisions at a macro level.

The Cloud providers – use the above component to create the cloud services as an e.g. AWS is a dated story and we already the winners but it does not mean they will stay at the top forever.  You will have new upstarts trying to disrupt the incumbents but we are yet to see that happen.

Service and Tool providers – If you look at a company like NTNX, DDOG, OKTA, SPLK, they are providing add on tools or services to make the cloud experience user friendly  and cost effective both for consumers and companies providing those services.  Market share, moat and margins matter in this space.

Software App providers like AYX, PEGA, DOCU , SHOP, LVGO etc. are the final list that provides the apps that help consumers enjoy the service . Companies here provide the last mile service or information needed to automate or deliver the services.

How to invest in cloud based businesses.

Since most of these companies are less than 10  years old,  many still don’t have earnings  and it is difficult to use the traditional metrics like PE  (price to earnings) to make investment decisions.  Valuations are generally   very high but one needs to focus on a few key things and look at measures that are fundamentally different.  I would look at these questions –

    How mission critical are the product or services offered?

    Are they a leader, disrupting a model or creating a new one?

    What is the TAM and SAM (serviceable market) for the products offered? Is it increasing YOY?

    What is the revenue growth and are they increasing revenue YOY ?

    What is the moat or switching costs? Is there stickiness – i.e.  Companies cannot throw them during a downturn without disruption.

    How long will Markets/clients exist and how do they stack up to competition?

    What is the company plan to profitability?  Are they sticking with the plan and showing progress.

    Do they have a recurring revenue stream? What is the ARR (Annual recurring revenue)?

    Are they able to leverage their sales and marketing to increase the DBNR ($ based net expansion)?

    Are the customers are happy?  What is their NPS (net promoter score)?

While analyzing these stocks, I look at sales growth over a period of time as that is the most critical factor and determines whether I should invest in the story. Look at the winners in the last decade like AMZN , APPL, ISRG, NFLX  and many more and one would realize revenue growth determined the  stock price trajectory and profitability followed. Profitability is important as to know when it would start but one can estimate it based on other factors, which indicate a path to profitability. Consider a stock trading at 15 X sales and  growing revenue 50% a year for 3 years  –  this  stock will trade for 3 times sales  if stock price is at the same point 3 years later. Imagine if the company can grow 25% on average for 10 years and what will be the price  . It’s obviously very difficult to predict growth accurately beyond a short time horizon but what one can do is Look at sales growth guidance over the next 2 -3 years

    A large TAM and SAM that will grow significantly

    A product that is loved and businesses keep buying more OR more number of businesses are buying (ARR and client growth)

    Light asset with High gross margins

    Recurring revenue

    Operating margins expansion which shows path to profitability and pricing power

If you want to look for more, check the CAC (client acquisition cost) and the number of years customer will have to stick for the company to make the money back from sales or better still find the TLV (total Lifetime value).  If one can estimate an X times the CAC (x being  based on factors like industry, deal size , margins etc.) could be  another way to analyze the investment worthiness of a company.

It’s a big change for the traditional value investor but if you can learn  to change your outlook and not focus on valuation and price but instead on the foreseeable 3 -5 years and how realistically  the company can make it and the probability of it succeeding .  It is hard for us to sell the APPL, ORCL, ISRG and MKL and pick up AYX and NET or LVGO.   The point to note is if these new age picks  grow revenue and double it every two years  for 3 -5 years , one would still make more money even  if they  fail to spot the imminent crash of high value stocks as  Wall street is so attuned to QoQ numbers .  Let’s take an example if one of these stocks crashes 40% and one sells the stock you would still get a good return.  Assume $100 becomes $600 USD in year 4 for a growth stock with the P/S about constant and price crashes to 360 after a bad earning, one would still get a 35% return  if you had picked it up as a mid-cap in year 1 or year 2 (AYX  is a recent example that comes to mind and  I think it has a long runway).

The basic premise  is once a company has spent the costs on infrastructure and building the product or services, and the sales cost to acquire a customer , it’s just a matter of expanding  the  client numbers to start seeing the effect of scale as incremental cost of sales is meager and this is called operating leverage. And if this comes with little to no debt and high inside ownership jump on that bandwagon without anchoring yourself to the current price as it will eventually fetch you great returns. 

I am sure by traditional metric  Zoom  (ZM) is probably a candidate for the dot come type of bust but what if someone told you that eventually Zoom could  have as many  subscribers as Netflix.  It may not be unreal that in the future everyone will have a personal Zoom room, and if we do a simple math: US $10 per month x 12 months x 200 million subscribers = 240 billion dollars in revenue.  If you look at Zoom with this lens then it’s a buy since at a P/S of 12, Zoom could be a 300+ billion dollar company and suddenly there is still plenty of growth yet to come.

The author is an investment analyst and runs an investment advisory and consultancy – Sequity advisors ( Sequity has been developing investment strategies helping generate 25% returns consistently in the last decade for investors in the US stock markets. Sequity also mentors start-ups in the APAC region to scale up their business in emerging economies like India, Vietnam and Indonesia.

Veeva Systems Growth Curve Is Tapering


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Investing in Mid caps


Finding the right set of stocks and investing at the right time to get the maximum growth curve is always a challenge.  This data below shows how stocks have done and therein lies a secret that we will discuss

Blackstar Funds reviewed the historical distribution of 8,000 stocks trading on the NYSE, AMEX and NASDAQ over 23 years (1983-2006). The results 

  • Only 25% of all stocks were responsible for all of the gains 
  • The takeaways are fascinating:
    • 2 out of every 5 stocks are money-losing investments.
    • 1 out of every 5 stocks is a terrible investment (losing 75% or more)
    • Only 6% of stocks significantly outperformed the index (500% or more)

What this shows, if one could pick the best 10 mid cap stocks of the era and hold it thru a period of 10 years it would give better returns that any other form of investing.  But of course you need to stay put through a few dozen sell offs and noise and volatility.

The Sequity analyst team has been helping clients find those midcaps and help them  stay the course to achieve market thumping returns over a 10 year time frame .

Happy investing

These are personal opinion from Sequity , an investment advisory and consulting business that creates investment strategies and helps investors in generating market beating returns Yoy .Reach out to them at or add comment below