This is Part 6 in a series about analyzing growth stocks. I had intended on Part 6 being about various financial and other metrics that are important for monitoring the progress of a growth company. However, when thinking about this next post, I decided to first write how to analyze a business’s progress in scaling and transitioning to a profitable enterprise. An investor’s capability to assess a business really is dependent on analyzing the company’s income statement for progress to profitability; this post should provide those who don’t already know how to do this with an important foundation. Therefore, this post will be categorized in both the Growth Stocks and Financial Freedom categories of the Blog section of the GauchoRico website. Below are the past posts in the series on analyzing growth stocks:
Part 5: Numbers into the Google Sheet
Part 3: Journalist Lawyer Scientist
A new business starts small and grows. In the beginning, the business operations need to be established and developed. People must be hired to build products and services. Administration staff are required to lead, manage, and grow the organization and set up human resource, finance, accounting, sales, marketing, and other departments. When the products or services are ready, sales and marketing groups need to convince customers to adopt. All of these efforts take time and investment capital. Starting a business is an investment by the founders as well as the investors who provide the funding. And investors expect a return on their investment which means that our young, hyper growth company must transition from a company that periodically requires more funding to one that is self-sustaining and then to one that is eventually profitable, scaled, and throws off excess cash from its operations. The entire process from the founding of the business to a scaled, profitable enterprise can take a decade or longer. I like to invest in fast growing companies, but I also want to invest in companies that I believe will be able to scale and turn into a money-making machines. The former is the prerequisite to investing in hyper growth companies, while the latter is a second requirement that isn’t always as clear. This post is about examining the financials to determine the point and progress of a company’s scaling effort.
INCOME STATEMENT
We will primarily be looking at income statements to assess a company’s journey to a profitable, scaled business. The example below is the income statement from Q4 FY2021 (1Nov 2020 through 31Jan 2021) for CRWD.
Income statements always cover a period of time, typically 3, 6, 9, or 12 months. Income statements also restate the comparable period from the prior year so that we can see the progress. Many businesses have seasonality with respect to revenue and/or some of the expenses so the comparison to the same period in the prior year usually provides the best comparison. For example, some companies, particularly those in retail, have very strong sales (i.e. revenue) in the fourth calendar quarter; many companies often have a big trade show or conference which leads to a higher sales and marketing expense during that period.
Revenue
Revenue, also referred to as “the top line”, appears at the top of the income statement. I consider revenue (and revenue growth) to be the single most important metric. You will notice that CRWD separated “Subscription” revenue from “Professional Services” revenue as two line items. It’s often important to analyze different types of revenue separately. In the case of CRWD, Subscription Revenue is more important and more valuable because it’s recurring and higher margin (see Gross Margin below). Professional Services Revenue has a lower margin and requires a consulting team to deliver/earn the revenue; therefore, this revenue is less scalable because the company needs to hire and train new employees to increase this revenue in future periods. However, professional services can lead to more customer adoption and help to elevate CRWD’s standing in the cybersecurity world.
Revenue Growth
To calculate revenue growth, we compare the revenue to the same quarter in the prior year. This is called year over year (Y/Y) growth. Sequential quarter growth (e.g. Q1 to Q2) is called quarter over quarter (Q/Q) growth. Revenue growth (Y/Y) is calculated using the following formula:
Y/Y Growth = (Revenue in Most Recent Q – Revenue in Same Q of the Prior Year) / Revenue in Same Quarter of the Prior Year
In the example Income Statement above, CRWD grew total revenue by 74.2% ((264.929-152.109)/152.109). CRWD grew Subscription Revenue by 76.6% and Professional Services Revenue by 49.3%. Later, we will examine how revenue growth compares to growth in operating expenses.
Gross Margin
It’s very important to distinguish the cost to deliver revenue from all the other expenses that are incurred for operating the company but are not directly attributable to delivering the revenue. If we were examining a company that sells physical goods then the direct costs for making those goods would be called Cost of Goods Sold or COGS. A simple example would be a reseller that buys T-shirts for $5 each. The COGS are $5. If the reseller sells each T-shirt for $20 then the gross margin (also called Gross Profit) is $15 or 75%. The formulas to calculate Gross Margin and Gross Profit are as follows:
Gross Margin = (Revenue – COGS) / Revenue
Gross Profit = Revenue – COGS
CRWD defines their cost of revenue in their 10-K:
Subscription cost of revenue consists primarily of costs related to hosting our cloud-based Falcon platform in data centers, amortization of our capitalized internal-use software, employee-related costs such as salaries and bonuses, stock-based compensation expense, benefits costs associated with our operations and support personnel, software license fees, property and equipment depreciation, amortization of acquired intangibles, and an allocated portion of facilities and administrative costs.
Definition of Subscription Cost of Revenue line item; source FY21 10-K, page 61
In the CRWD example, the Gross Margin is 74.8% ((264.929-66.732)/264.929). As noted previously, Subscription Revenue is higher margin so we want to calculate it separately. Subscription Gross Margin was 77.8% ((244.662-54.348)/244.662). These calculations are GAAP and thus the cost figures include Stock Based Compensation, Amortization of Acquired Assets, and Acquisition Related Expenses. We need to back out these costs to arrive at non-GAAP expenses. The reason for reporting non-GAAP numbers is to give a better comparison of the ongoing operations so we back out the non-cash (mainly Stock Based Compensation or SBC) and any other expenses that are considered one-time (non-recurring). I will make similar adjustments when we cover the operating expenses later in this post. Upon examining the Income Statement closely, you will notice references to three footnotes on some of the line items. These footnotes (see below) detail the non-cash and non-recurring portion of the costs and expenses, and I will refer to these footnotes again later in this post.
I will show how we calculate non-GAAP Gross Margin. I will use Gross Margin on Subscription Revenue as the example. If you recall, we calculated Subscription Gross Margin (GAAP) to be 77.8% (see above for the calculation). This is the calculation to get GAAP Gross Margin; the Subscription Revenue line references footnotes 1 and 2 of the Income Statement. Non-GAAP will exclude non-cash and non-recurring costs from the calculation, so we need to back those out of the $54.348M in costs. In footnote 1 (above), we see that SBC attributed to Subscription Revenue cost for Q1 FY2021 was $3.849M. In footnote 2 (above), we see that Amortization of Acquired Tangible Assets Attributed to Subscription Revenue cost) was $0.66M. After adding back these non-cash and non-recurring costs to the $54.348M, we get non-GAAP costs of $49.839M on the Subscription Revenue. Using our formula to calculate Gross Margin, we calculate a non-GAAP Gross Margin of 79.6% ((244.662-49.839)/244.662).
Why Revenue, Revenue Growth, and Gross Margin Are Important
Now that we know where to find and how to calculate Revenue, Revenue Growth, and Gross Margin, let’s consider why they are so important. Recall that investors become shareholders (i.e. partial owners of a business) when they deploy capital into a business. A capitalist investor will only invest if he believes that the business will become more valuable. That business will eventually need to generate excess cash that can be returned to the investors. A business that cannot generate cash will eventually go out of business or be sold for its residual value; these two scenarios will usually make the company a bad investment. Young businesses that enter a new or existing market rarely start off as profitable. They need to develop their presence in the market to gain share, but they also must build the functions that are needed to operate the business. In the beginning, the revenue less the cost of the revenue (i.e. gross profit) cannot cover the cost to operate the business, so the business is said to be burning cash or operating at a non-GAAP loss. To overcome this operating loss and begin to generate positive cash flow from operations, the business must grow the revenue so there is enough gross profit to cover all of the operating expenses (and hopefully increasingly more left over as the quarters pass). Meanwhile, in order to grow revenue, the business will need to make further investments into its operations (i.e. more headcount to support the larger operation); this rate of growth of investment in additional operations to support the now larger business would ideally be smaller than the rate of growth of the revenue (more on this later). Thus, the higher the revenue, the faster the revenue growth, and the higher the gross margin will determine the gross profit amounts and the pace at which the business moves toward being able to self-fund its growth (i.e. no more outside capital is needed to grow). Revenue, revenue growth, and gross margin are critical drivers for how quickly a business can scale, become profitable, and grow cash flows.
Operating Expenses
Looking back at the Income Statement for CRWD (above), we will notice that a company’s operating expenses are placed immediately below the Gross Profit line. Again, Operating Expenses are expenses that are not directly attributable to generating revenue. An additional unit of revenue would not materially increase the operating expenses, and a small reduction in revenue would not materially lower operating expenses. Most companies bucket their operating expenses into three categories: a) Sales & Marketing, b) Research & Development, and c) General & Administrative. However, there are some exceptions to these three categories depending on the type of business. Let’s look at the three categories.
Sales & Marketing
Sales & Marketing expense, as described by Crowdstrike, is below.
Sales and marketing expenses primarily consist of employee-related expenses such as salaries, commissions, and bonuses. Sales and marketing expenses also include stock-based compensation; expenses related to our Fal.Con customer conference and other marketing events; an allocated portion of facilities and administrative expenses; amortization of acquired intangible assets, and cloud hosting and related services costs related to proof of value efforts. We capitalize and amortize sales commissions and any other incremental payments made upon the initial acquisition of a subscription or upsells to existing customers to sales and marketing expense over the estimated customer life, and amortize any such expenses paid for the renewal of a subscription to sales and marketing expense over the term of the renewal.
Definition of Sales & Marketing expense line item; source FY21 10-K, page 62
Looking again at the Income Statement from Q4 FY2021 (above), the line item for Sales & Marketing was $112.449M. This is the GAAP figure which we will now adjust to get non-GAAP. The line item references footnotes 1 and 2, which contains expenses that we will back out. Footnote 1 contains the Stock Based Compensation (SBC) of $15.456M and footnote 2 contains the Amortization of Intangible Assets of $0.209M. Note: I typically just back out the SBC when the other non-cash and/or non-recurring components are small, but, for the purpose of this exercise, I will back out all the expenses in the footnotes. The non-GAAP S&M expense was $96.784M. We use this figure to calculated S&M expense as a percentage of revenue and the percentage increase in S&M expense from the comparable quarter (Q4 FY2020 versus Q4 FY2021). Non-GAAP S&M expense as a percentage of revenue was 36.5% (96.784/264.929). Non-GAAP S&M expense grew 43.7% ((96.784-67.364)/67.364)). Note: I also adjusted Q4 FY2020 from GAAP to non-GAAP (calculation not shown). While the S&M expenses grew Y/Y by 43.7%, it did not grow as much as total revenue grew (total revenue grew by 74.2%). The other way to look at the improvement is to calculate the S&M expense percentage of revenue in the comparable quarter (Q4 FY2020): S&M expense was 44.3% (67.364/152.109) in Q4 FY2020. Thus, the S&M expense as a percentage of total revenue dropped from 44.3% down to 36.5% in the Y/Y comparison. This concept of revenue growth outpacing operating expense growth is called Operating Leverage and will be discussed in more detail later in this post.
Research & Development
Research & Development expense, as described by Crowdstrike, is below.
Research and development expenses primarily consist of employee-related expenses such as salaries and bonuses; stock-based compensation, consulting expenses related to the design; development, testing, and enhancements of our subscription services; and an allocated portion of facilities and administrative expenses. Our cloud platform is software-driven, and our research and development teams employ software engineers in the design, and the related development, testing, certification, and support of these solutions.
Definition of Research & Development expense line item; source FY21 10-K, page 62
As we did with S&M expense (above), we will convert the Research & Development expense to non-GAAP. We get $51.496M after adding back the SBC (note: Amortization of Acquire Intangible Assets was zero in Q1 FY2021) to the $66.07M GAAP R&D expense figure. Non-GAAP R&D expense was 19.4% (51.496/264.929) of total revenue. Non-GAAP R&D expense grew by 53.1% ((51.496-33.631)/33.631) compared to total revenue growth of 74.2%. In the comparable quarter (Q4 FY2020), R&D expense was 22.1% (33.631/152.109) of total revenue. Again, we are seeing an improvement from 22.1% down to 19.4% so R&D expense contributed to improving Operating Leverage.
General & Administrative
General & Administrative expense, as described by Crowdstrike, is below.
General and administrative expenses consist of employee-related expenses such as salaries and bonuses; stock-based compensation; and related expenses for our executive, finance, human resources, and legal organizations. In addition, general and administrative expenses include outside legal, accounting, and other professional fees; and an allocated portion of facilities and administrative expenses.
Definition of Research & Development expense line item; source FY21 10-K, page 62
Again, we look at the Income Statement for the General & Administrative expense and see that we need to back out the values in footnotes 1 and 3 from the GAAP G&A expense of $35.481M. Upon doing this calculation, we arrive at a non-GAAP G&A expense of $22.065M and $17.443M for Q4 FY2021 and Q4 FY2020, respectively. Non-GAAP G&A expense grew by 26.5% ((22.065-17.443)/17.443) from Q4 FY2020 to Q4 FY2021, which is again smaller than the 74.2% total revenue growth. The percentage of non-GAAP G&A expense drop from 11.5% (17.443/152.109) to 8.3% (22.065/264.929).
Operating Profit or Loss
The Operating Profit to Loss is the Gross Profit less all of the Operating Expenses (S&M, R&D, and G&A). On the Income Statement (see above) this is called “Loss from operations” and it’s a GAAP figure. If it’s positive then the company is showing a GAAP Operating Profit, and if it’s negative then the company is exhibiting a GAAP Operating Loss. The Income Statement will always show the GAAP figures. For Q4 FY2021, CRWD posted a GAAP operating loss of $15.803 or -6.0% of revenue.
I prefer to use non-GAAP figures when assessing and monitoring the company and its progress. Adding back all the non-cash and non-recurring expenses in footnotes 1-3 to the Operating Loss of -$15.803M, we get a non-GAAP Operating Profit of $34.491M or 13.0% (34.491/264.929) of total revenue. This 13.0% figure is also referred to as Non-GAAP Operating Margin. As a hyper growth company continues to scale and exhibit improving operating leverage (i.e. the revenue growth rate exceeds the growth rate of the operating expenses of S&M, R&D, and G&A), it’s Non-GAAP Operating Margin increases and moves toward the company’s Long Term Target Operating Model.
Long Term Target Operating Model
A company’s Long Term Target Operating Model is the company’s goal that it shares with investors. It represents the company’s view of what the income statement will look like (in percentage of revenue terms) once the company has fully scaled its operations and it has finally squeezed out all of the operating leverage. Not all companies will share a Long Term Target Operating Model externally. CRWD first released its target model when it went public in June 2019. The Company reaffirmed that target model after each quarter until an Investor Briefing held on 8April 2021 when it increased its target (see the figure below):
As investors, we can monitor and track a company’s progress and where the company is on is journey toward achieving its Long Term Target Operating Model. And if a company does not have a stated Long Term Target Operating Model then we can still make our own judgment by examining the company’s progress and current state; after looking at both nascent and mature companies with similar business models in the same sector, we can often make a pretty good prediction of where a successful company will end up in terms of operating margin. Note that the S&M, R&D, and G&A expenses are a percentage of total revenue (not only subscription revenue); the blended gross margin (subscription revenue and professional services revenue) is lower than the subscription revenue gross margin shown in the above figure, and, thus, the operating margin target isn’t 25%+.
Below is a figure that shows a five-year history of each of CRWD’s operating expenses as a percentage of revenue.
The figure shows the full fiscal year for each of the past five fiscal years as well as the most recent quarter (Q4 FY2021). First, we notice that the last quarter’s figures match our calculations (above) for non-GAAP expenses for S&M, R&D, and G&A. Second, we can see that the Company made significant and steady progress toward its Long Term Target Operating Model each year. Third, the Company showed its first full-year non-GAAP operating profit in FY2021. Fourth, CRWD is now very close to achieving its Long Term Target Operating Model. In fact, as of Q4 FY2021, Subscription Revenue Gross Margin, G&A expense, and R&D expense are already within the target range while S&M expense is only 2% above the target range. CRWD still has a few more percentage points of operating leverage to squeeze out before it’s fully scaled.
Making such progress on attaining operating leverage and achieving profitability is something that not all companies will achieve. Many companies will never achieve profitability. In fact, finding companies that are as successful as CRWD during the past five years is rare and something that we seek as investors.
Quarterly Tracking
The five-year improved operating leverage figure for CRWD (above) shows how far the Company has come in realizing operating leverage and moving to non-GAAP profitability. I like to track this progress for all of my hyper growth companies. Quarterly tracking allows for better detection of progress as well as signs of trouble. In addition, quarterly tracking allows investors to see any seasonality such as revenue seasonality and expense seasonality (e.g. large expenses for an annual customer conference such as Fal.Con for CRWD or Octane for OTKA). The table below shows the quarterly progress.
| Q4’18 | Q1’19 | Q2’19 | Q3’19 | Q4’19 | Q1’20 | Q2’20 | Q3’20 | Q4’20 | Q1’21 | Q2’21 | Q3’21 | Q4’21 | |
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Rev | $39 | $47 | $56 | $66 | $80 | $96 | $108 | $125 | $152 | $178 | $199 | $232 | $265 |
| Sub Rev Growth | 124% | 116% | 98% | 98% | 90% | 89% | 89% | 87% | 77% | ||||
| Sub GM | 56% | 62% | 71% | 71% | 70% | 73% | 76% | 76% | 77% | 78% | 78% | 78% | 80% |
| GM | 51% | 59% | 67% | 67% | 67% | 70% | 73% | 72% | 73% | 75% | 75% | 76% | 77% |
| S&M (%Rev) | 87% | 76% | 70% | 67% | 60% | 58% | 54% | 49% | 44% | 45% | 41% | 40% | 37% |
| R&D (%Rev) | 40% | 36% | 33% | 30% | 27% | 24% | 25% | 25% | 22% | 20% | 21% | 20% | 19% |
| G&A (%Rev) | 15% | 14% | 14% | 14% | 15% | 11% | 13% | 11% | 11% | 10% | 9% | 8% | 8% |
| Op Margin | -92% | -66% | -50% | -43% | -35% | -23% | -19% | -13% | -4% | 1% | 4% | 8% | 13% |
The above chart really is a thing of beauty. If all our hyper growth companies can grow into profitability and realize such a pace of operational leverage then we will have very successful investment returns. Let’s look at some of the specifics in the above table:
- Very fast revenue growth: While revenue growth has been slowing down (from 124% to 77% in the most recent quarter), 77% growth is still blistering. Remember that companies must invest in their operations so revenue growth must be high, ideally higher than growth in the operating expense line items; otherwise, attaining profitability may take a very long time or not be achievable at all.
- High and stable gross margins: Gross margin provide gross profits which are needed to cover the operating expenses and to provide excess cash flow to investors. Declining gross margins are a sign that the company must discount prices to get sales, and discounting is a sign that the company’s products and services are not differentiated enough from competing products and services. High and stable gross margins indicate that the company has pricing power and is evidence that the company’s offerings are not being disrupted. Rising gross margins could be an indication that the company is benefiting from some economies of scale (i.e. a lowering of its costs due to higher sales volume).
- Declining operating expenses (as a percentage of revenue): Companies must invest in the operations and these investments must be increased so the company can grow. For instance, if a company expands into a new geography then it must start operations in the new territories: such investments include hiring new staff, leasing new offices, etc. However, as investors, we want to see the company’s growth in operating expenses be a lower percentage than its growth in revenue. CRWD has done a phenomenal job in this respect.
- Reaching the target operating margin: As a reminder, operational leverage is achieved when operating expenses grow more slowly than revenue. This should continue until the company has reached its Long Term Target Operating Model. For CRWD, its operating margin target is 20-22% of revenue. In the most recent quarter, the operating margin was 13%. CRWD has been steadily marching toward its target. The company still has some operational leverage to squeeze out (specifically, the 20-22% target less the current 13% leaving 7-9% more leverage to realize).
CASH FLOW FROM OPERATIONS AND FREE CASH FLOW
Looking back at CRWD’s Long Term Target Operating Model, we see that it includes a Free Cash Flow percentage of 30%+. That means 30% of revenue. In essence, the company, when it has fully scaled its operations, should be generating more than 30% of its revenue as excess cash that is available to investors.
Free Cash Flow (FCF) is not on the income statement, but, rather, it can be calculated from the information provided on the Statement of Cash Flows. Below are CRWD’s Statements of Cash Flows covering the quarterly periods from Q1 FY2020 through Q4 FY 2021. We will want to focus on the far right column: Q4 FY2021 (covering 1Nov 2020 through 31Jan 2021).
The Statement of Cash Flows is divided into the three areas from where cash can be generated or expended: Operations, Investing, and Financing. We care most about the operations section and such we will take our first number from “Net cash provided by operating activities”. This is also referred to as Cash Flow from Operations or CFFO, and it refers to the cash that the operations of the business generated during the period. The CFFO for Q4 FY2021 was $114.463M. CFFO doesn’t include any reinvestment (for growth) into the business operations; we need to subtract this reinvestment. We find this investment on the Statement of Cash Flows under the Investing activities section. “Purchase of property and equipment” and “Capitalized internal-use software” need to be subtracted from CFFO ($114.463 – $12.554 – $4.519 = $97.39) to get FCF of $97.39M for the quarter. FCF Margin is the FCF as a percentage of total revenue: 36.8% (97.39/244.929).
CRWD’s FCF Margin in Q4 FY2021 was 36.8% which is well above their long term target of 30%+. However, CFFO and FCF can fluctuate wildly from quarter to quarter because spending on operations can fluctuate from quarter to quarter. Therefore, we shouldn’t look to a single quarter to make any major determinations; instead, we should look at either trailing twelve months cash flow or a longer series of quarter cash flow figures to recognize the overall trend. We will be looking for TTM FCF increasing and quarterly FCF generally trending upward.
| Q1’19 | Q2’19 | Q3’19 | Q4’19 | Q1’20 | Q2’20 | Q3’20 | Q4’20 | Q1’21 | Q2’21 | Q3’21 | Q4’21 | |
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Rev | $47 | $56 | $66 | $80 | $96 | $108 | $125 | $152 | $178 | $199 | $232 | $265 |
| FCF | -$16.7 | -$35.7 | -$13.1 | -$0.1 | -$16.1 | -$29.2 | $7.0 | $50.7 | $87.0 | $32.4 | $76.1 | $97.4 |
| FCF Margin | -35% | -64% | -20% | 0% | -17% | -27% | 6% | 33% | 49% | 16% | 33% | 37% |
| TTM FCF | -$66 | -$65 | -$58 | -$38 | $12 | $116 | $177 | $246 | $293 |
We can see from the above table that FCF and FCF Margin did fluctuate wildly as is common. However, continued hyper revenue growth combined with operating leverage pushed TTM FCF from negative $65M to nearly positive $300M in the span of two years. Thus, CRWD has become a cash generating machine with 7-9% of operating leverage yet to realize. The $293M in FCF is the cash generated above and beyond cash needed to both maintain the existing business as well as support future growth!
Why Cash Flow is Higher Than Operating Income
Some may have noticed that Operating Income and Operating Margin was lower than Free Cash Flow and Free Cash Flow Margin. This was true in both the above historical quarters as well as in the Long Term Target Operating Model. In CRWD’s case, the model is targeting for a 20-22%+ Operating Margin target and a 30%+ FCF Margin target. It’s a significant difference. It means that the company can deliver 8-10% more cash than operating profit. How is this possible? A large portion of the discrepancy is due to the income statement being based off of the company’s revenue. There are accounting rules for how much of actual cash received from a customer can be recognized as revenue upon receipt. Part of the cash received from a customer is recognized as revenue whereas the remainder cannot be immediately recognized and instead appears as Deferred Revenue on the company’s Balance Sheet. Yes, this Deferred Revenue was received as actual cash and therefore is included in CFFO. There are other accounting rules that explain differences between what is counted on the Income Statement as an expense and what is the actual cash flowing out. Such differences can be seen in detail on the “Operating activities” section of the Statement of Cash Flows. The main thing to remember is that it’s typical and completely normal for companies, particularly SaaS companies with lots of Deferred Revenue, to have much high FCF Margins than Operating Income Margins.
SUMMARY
This post is intended to demonstrate how investors can examine, track, and analyze a hyper growth company’s path to operational profitability. The CRWD example used here is an exceptional one as it’s very rare for companies to become as successful as CRWD. Specifically, CRWD’s realization of operational efficiency was rapid and very well executed. Some of the hallmarks of this success can be attributed to a) very rapid and sustained revenue growth, b) high gross margins, and c) rapid introduction of new modules into adjacencies which not only contributed to CRWD’s strong revenue growth but also enabled CRWD to increase efficiency leading to lower COGS and an expansion of gross margins (see CRWD’s 8April 2021 investor conferences during which the Company increased its target gross margin for subscription revenue). As investors analyze more and more companies, they get a feel for the signs of success. In the SaaS sector (or any other sector of interest), it’s useful to compare Long Term Target Operating Models across a number of individual companies. It’s also useful to look to the more mature companies like CRM, WDAY, and NOW as a guide for where the successful companies might land after they’ve scaled into profitable, cash-generating machines. The smaller (still scaling companies) like CRWD, DDOG, NET, and others in this cohort are faster growing but have yet to realize their full potential. And the attainment of potential is far from a certainty. Some hyper growth companies will scale and join the CRMs and WDAYs of the world, while others will stagnate and never reach profitability. Our job as investors is to select and invest in the companies that will succeed while avoiding those that will not. Some of the analysis tools introduced in this post should help with the assessments. But there are also many other aspects to our analysis, some of which will be covered in future posts. Analysis and monitoring of the companies is an ongoing process, and, as investors, we are never permanently locked into our previous investment decisions: we can change our minds at any time and switch from one investment to another as the incoming information and our ongoing analysis dictate.
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