This week in Stansberry Investor Hour, Dan and Corey are joined by their Stansberry Research colleague, Bryan Beach. Bryan is the editor of Stansberry Venture Value, which is Stansberry's small-cap value newsletter. During their conversation, they discuss how to find the best value out there today.
But first, Dan and Corey kick off the podcast by dissecting the latest in the market, starting with the recent Republican political debate and Federal Reserve Chair Jerome Powell's presence in Jackson Hole, Wyoming. Corey discusses how the interplay between politics and the markets is a recurring theme – particularly with the current injection of inflation into the presidential race.
Bryan then joins the conversation to break down his value-investment approach. This approach extends across industries and is guided by the pursuit of "value nuggets." One of Bryan's central investing tenets involves identifying companies that have experienced significant declines in value. And right now, the Software as a Service ("SaaS") space is a prime example of such undervaluation.
The conversation then shifts to Bryan's previous role as an accountant. He recalls Wall Street's historical inclination toward upfront software-purchase models, which encompassed future maintenance packages and fees. But Salesforce changed all that in the early 2010s by reshaping the software landscape. The transition toward the SaaS model gained remarkable traction between 2015 and 2021. As Bryan notes...
The [Marc] Benioff model, the SaaS model – Wall Street immediately fell in love with it. And they realized that after six or seven years, it's much, much better to be a SaaS company than trying to sell perpetual licenses.
More recently, SaaS companies have experienced a downturn in popularity. But Bryan sees this as an opportunity. Bryan and Dan go into how if Warren Buffett were a young investor today, he would likely be captivated by the software sector. The two draw connections between Buffett's historical interest in newspapers and the appeal of software business today. Bryan highlights their affordability and upward momentum, making them prime investment candidates.
Editor, Stansberry Venture Value
Bryan is the editor of Stansberry Venture Value, an advisory service focused on small-cap value investing. He is also a senior analyst and contributor to our flagship product, Stansberry's InvestmentAdvisory, and the bond-focused Stansberry's Credit Opportunities.
Dan Ferris: Hello and welcome to the Stansberry Investor Hour. I'm Dan Ferris. I'm the editor of Extreme Value and The Ferris Report, both published by Stansberry Research.
Corey McLaughlin: And I'm Corey McLaughlin, editor of the Stansberry Digest. Today, we talk with Bryan Beach, editor of our Stansberry Venture Value newsletter.
Dan Ferris: Today, Corey and I will talk about the Republican presidential debate, Jackson Hole, Wyoming, and long-term investing.
Corey McLaughlin: Remember, if you want to let us know what's on your mind, e-mail us at [email protected].
Dan Ferris: That and more right now on the Stansberry Investor Hour.
Dan Ferris: Well, I have to ask you straight up. Did you watch the debate? Do you care at all about the Republican presidential debate?
Corey McLaughlin: I do care. I did not watch any of it for two reasons. One, it's very early on in this whole process, and politics is just – there's never none of it. So there's plenty of time to get involved in it further. Second, I've been away for a couple days and trying to tune out a little bit, but not tuning out enough to skip our episode here.
So yes and no. I read a couple things on the debate. Without Trump there though, it's kind of – who is still the leader in polling by a wide margin, which people still seem to not want to acknowledge. I mean acknowledge that that's the obvious elephant in the room. I know they talked about him a lot, but without him there it's a seems like having a playoff game with one team or something in this big sporting event.
Dan Ferris: Yes. As far as the actual outcome of the election goes, I agree with you. It's early on. Who cares. I'm not even thinking about it. To me, I don't think it matters who gets elected anyway. I honestly don't.
But I will say this. Vivek Ramaswamy has a snowball's chance in hell of getting elected. He said, when he wasn't being shouted down, that he wanted to dismantle the administrative state. I think, in my view, that is the only legitimate primary focus of any presidential candidate at this point in our history.
It's out of control. It costs too much. It makes life much harder for people who can afford it least. It's just gone too far. It's very obvious that we've created this enormous central power, and that everybody with connections and money wants to get their hands on it and serve themselves and their own interests with it. Way too many people have succeeded at that and it's kind of a mess.
So if he actually got elected, there might be a chance that he would leave office after four years with a smaller government, which I think nobody ever does. I don't know if that's ever happened. It certainly hasn't happened in my lifetime.
Corey McLaughlin: Yeah. I can't remember it.
Dan Ferris: Yeah. So that's my little fantasy. I know it's never going to come true. I don't worry about it. I don't think about it too much. I just don't like any politicians, and when he says these things I think, "Oh, that's not bad," sort of like Thomas Massie. He says things and I automatically cancel or, you know, block them all in my Twitter feed, because I just don't want it in my feed.
But he says things and I think, "Oh, I should block him." It's always a knee-jerk block with any elected representative, but not him. So we'll see. I have like 1% hope or 0.1% hope of this sort of thing happening. Otherwise, I'm not sure I care about it.
Corey McLaughlin: Yeah. I mean he was the guy that it seemed like everybody wanted to attack, from what I heard and read. So that should tell you something, that they're a little – usually how these debates go, in the past, you gang up on one guy or girl who has a popular message, and try to get them out of the race as early as possible so they don't catch a heater like Trump did, right, and go off polls and win the primary when nobody was expecting that.
I did find it interesting... I did watch a clip of the first five minutes – or the first 30 seconds. The first question was about that song, "Rich Men North of Richmond," which has been going viral all over the place. The guy – honestly, I forget his name. I'm sorry – but in the woods, in front of a tree hunting stand and playing his song.
I do think the fact that that was the first thing asked on a debate, that just tells you about the climate that we're going to be in, in the next year or two as this continues. I mean this is real. This is real stuff. Inflation is being inserted the race for president here.
So politics and the markets are going to be intertwined one way or another. They always are to some extent, but with this political cycle it's very clear that there's going to be some economic impact from it. It's still a polarized world. I don't know. Some weird things are happening in politics again right now.
Trump's got a mugshot now that he's now selling on T-shirts. So it's like what is going on here? It's hard to make sense of it and know what's going to come next, but you know that politics is going to be volatile over the next year or two is the short thought there.
Dan Ferris: Yeah. As far as if you're an investor looking at this, as usual, like most elections, you don't really care. I don't think this one is terribly different, but I do think that if we wind up with Democrats in office again, we would probably get more green energy funding than if Republicans wind up in office. Either way, I don't think either one of them can turn oil into a bad bet, because the more they do to push green energy and inhibit the creation of new fossil fuel supply, the better the fossil fuel trade gets.
Then you look at things like copper as well. The Pebble Mine in Alaska has been killed by the Biden administration at this point. They say it's a terrible place for a mine because of the salmon population and all this stuff. Everybody is like that all around the world. I mean it's even difficult in Chile and Peru, the two biggest copper-producing countries.
So the worse that governments get with all this stuff, the better the trade gets for investors, and I think that will continue. We'll see.
I remember when Trump got elected. I was sitting there watching Mexican peso futures, because I thought being short Mexican peso was a great trade, and it was and just being short stocks. The futures overnight just caved in – just caved in. Then, by the next morning, by market open, it was all over. That was it. Best crisis ever. Done.
Then it was off to the races because of all the tax cuts and everything that people liked about him. I don't think we're going to see anything like that this time.
Corey McLaughlin: Yeah.
Dan Ferris: It'll be interesting. But I've got to ask you about something else though. I think we're going to have to let people in sort of behind the curtain here. As we record, Jerome Powell is speaking in Jackson Hole, and so far the market actually seems to like it.
What I wonder is – I've been thinking about this a lot lately and, as you know, I've written about it in a recent Stansberry Digest. What – I don't know. I can't let go of my higher for longer viewpoint. I don't have a transcript. I don't know what he's saying, but I just don't think that things are going to be very different. I don't see any big changes in what's happening with the Federal Reserve.
The most different thing I see them doing is leaving rates unchanged here and there, but they overshoot everything. They overshot their 2% target from the bottom to the upside. I mean 9% on the CPI, 5% on core PCE. I think they overshoot probably to the downside. I think at some point they do cause a recession by pushing rates higher and higher, and keeping them higher for longer and longer.
But right now, as we speak, the market is complacent, doesn't seem to care. Nasdaq is up 1% or whatever.
Corey McLaughlin: Yeah. It looks more of the status quo going into this as far as Fed policy. It looks like, as you were saying, inflation is too high and we are prepared to raise rates further, which means not that we're going to definitely raise rates further, but at the same time, you have to remember that they've already kind of penciled in another 25-basis-point hike the rest of the year.
So I think people are looking at them to maybe pause the rate hiking again at the next meeting, and then maybe hike again after that, if needed. That's what it looks like to me.
He's also saying there's risks of doing both too much and too little. So they are hedging completely, which is different than what he said in the past, which was always the risk of doing too little is greater, basically, than the risk of doing too much. But now he's saying doing too much could also do unnecessary harm to the economy.
So it shows you, again, they're near the end of the road here with the rate hikes, for now, as far as what they're seeing now with the inflation numbers and allegedly going back to 2% is their goal. So to me, that looks like that's what the market is doing as we speak. I'm kind of seeing that as nothing really changing materially, in my view at least.
Dan Ferris: Yeah. I guess I have a whole viewpoint about Fed behavior and how they go too far, but maybe I won't belabor that because –
Corey McLaughlin: Well they definitely went – no, no, go for it. They definitely went too far not doing anything. Well depending on what you want to say, they went too far with the zero rate and stimulus in 2021.
This isn't hindsight. I was saying this at the time. It was like six, months, almost a year too long of that. So that's overshooting that way, and now – I don't know what they're doing now. Neither do they apparently. They're just watching these inflation numbers like everybody else and seeing what happens.
Dan Ferris: Yeah, that's exactly right. They're as reactive as all the rest of us.
Corey McLaughlin: They're more reactive.
Dan Ferris: Which is funny because –
Corey McLaughlin: I think they're more reactive than people actually trading in the markets every day. They look at old data all the time. They're the last to kind of acknowledge something that's going on, and the market is always ahead, trying to predict what's going to happen next.
Dan Ferris: Yeah. To be fair, that's an institutional thing, like Wall Street, ratings agencies, big banks, everything. We heard all this stuff about BlackRock and ESG. Now the headlines a year later are they're backing off from this because obviously it's a horrible way to allocate capital.
The ratings agencies are now downgrading banks. They weren't doing it a year ago. They weren't doing it before the banks failed. They're doing it now. Now the rates even higher and the asset values are even lower.
So yeah, they're all late to the party. I agree. The Fed is late to the party. Wall Street is late to the party. When the Wall Street big banks are shutting down their commodities, units, that's the time to buy commodities. So it's just par for the course. We'll see.
I think it's sort of like the election. Overall, nothing fundamentally changes as long as the economy stays what I would call free and open enough. As long as it's free enough and people can trade and do business, and afford to pay for all the regulations and get around them and do whatever they have to do to do business.
It's still a great idea to own great businesses, to gush free cash flow and have good balance sheets. My caveats about holding plenty of cash and plenty of silver and gold, arguably that's a good idea all the time, not just now. I contend that now it's an even better time, but still, I don't see ...
It's funny, isn't it. I spend a lot of time – and I know you spend some in the [inaudible] too. We spend a lot of time considering big risks that maybe people don't talk about enough, the risk of a sideways market or a bear market, or the fact that Nvidia is 240 times earnings or something, and that means that we're still in kind of a mega-bubble situation.
I feel like I spend a lot of time talking about that, but the truth is those are the outlier events. I'm just trying to bring them into your consciousness because I feel like nobody else is. But the truth is that most of the time just be prudent. Buy good companies. Hold them for the long term. That's the way to make a lot of money in the stock market, is to let the compounding work for 20, 30, 40 years.
Corey McLaughlin: Yeah, asset allocation, as far as you were saying, yeah, it's always a good time to have cash, gold, for whatever reasons you want, if that makes sense to you.
Dan Ferris: Yeah. I've seen people over the years, and now and then, myself included, react to elections and to Federal Reserve moves and financial crises and things. I hope I'm done with overacting. We've continued finding good businesses in the two newsletters that I write. The basic thing is to find good businesses and to invest prudently for the long haul. That hasn't changed.
I spend a fair amount of time here on the podcast and then in the daily Digest talking about this other stuff, and people think I'm a permabear, and I'm sure you've been labeled with that once or twice.
Corey McLaughlin: Yeah. Yes, I have, which I'm not. I'm definitely not. I can say that, yeah.
Dan Ferris: Exactly.
Corey McLaughlin: Which might surprise people, which is interesting to me. We were just talking about the risks and things that – absurdities and things that you won't hear elsewhere.
Dan Ferris: In the context too for all of this, I guess what we're saying is the context for all of this is always be a prudent investor. Invest for the long haul. Don't overreact to the headlines. The context feels to most people, I understand, very different from the content.
I just feel like the context that I described here, where you should be a prudent investor, etc., for the long haul is very different from the content that I provide and that you provide, too. Maybe we need to say this once or twice a year. I don't know.
Corey McLaughlin: Yeah. I guess so, or maybe we need to do a better job otherwise. But within that context of – going back to the politics, to relate this to the political conversation, whoever wins, Democrat, Republican, whoever the Republican nominee is, whoever the Democrat one is, what's not going to change is what I like to think about.
So what's not going to change? Defense spending. We see all these different – we have the war in Ukraine, which we've talked about. We have escalating things with China and Taiwan. Those things aren't going away. If anything, the conflicts with China are going to escalate even more, I fear, in the years ahead, and who knows what that leads to.
So that's looking beyond a headline, a short-term headline of what may be happening in the Taiwan Strait or whatever. That's not going to change is one way to think about how to ignore these types of headlines.
We're all emotional. It's easy to be sucked into whatever is happening any day and forget about long-term returns over time. It's hard to do. That's one thing I try to do, what won't change, what matters from this and what doesn't.
Dan Ferris: And don't let Dan and Corey stoke your emotions into making you sell everything and go to cash. Just keep being prudent. Keep these things in mind. We're trying to look around corners to see if there's anything big and scary.
Most of the time, even if we see something that's a potential problem, like we're saying, the context is always, eh, probably not going to change that much. Stay focused on the long term. That's a good place to end. Stay focused on the long term.
All right. Let's talk with our good friend and our colleague and a fellow value investor, Bryan Beach. I love talking with Bryan. It's been a year. It's been a long time since he's been on the show.
He's of the true diehard value crowd. He's one of the smarter folks I know. He digs in deep, deep into these small-cap companies, many of which you've never heard of, and does an excellent job of finding some really great undervalued stuff.
So let's talk with Bryan Beach. Let's do it right now.
Dan Ferris: Nvidia may be America's top-performing stock after more than doubling this year alone, but if you're holding Nvidia or thinking of buying it to get a stake in the $7 trillion AI market, you're going to want to see what Marc Chaikin's new AI prediction is first.
Marc is a regular on many major news outlets, from Fox Business to CNBC. He built the stock indicator Wall Street uses to find winning stocks. His award-winning system flashed buy on Tesla before it climbed 335%, Moderna before it climbed 300%, and Riot Blockchain before it climbed 10,090%. It also found Nvidia at the start of 2023, before its massive bull run.
But right now, Marc is stepping forward to warn people to stay away from Nvidia. "My system has indicated that Nvidia is no longer the best stock to buy to profit from AI," Marc says. "In fact, it just flashed buy on a totally different AI stock."
Today he'd like to hand you the name and ticker symbol of his No. 1 AI stock to buy right now. For a limited time you can get this this information for free at www.AIfrenzyReport.com. Again, that's www.AIfrenzyreport.com for a free copy of his new report.
Dan Ferris: All right. It's time for our interview. Today's guest is my friend and colleague, Bryan Beach. He is the editor of the Stansberry Venture Value newsletter. It's a small-cap value newsletter, which I think is really cool. I love small-cap value.
So, Bryan, welcome back to the show. It's been a while.
Bryan Beach: It has been a while, Dan. Thanks for having me. I look forward to seeing you again in person soon, but it's good to catch up here on your podcast.
Dan Ferris: Yeah. I can't remember the last time we were in the same room together.
Bryan Beach: We were at a dinner and you had too much wine. That's probably why you don't remember. It wasn't that long ago.
Dan Ferris: [Laughs] there you go. All right. Well that explains that. Now everybody knows a little bit more about Dan.
I think the best thing that you and I can do is get right into it. I do talk about macro things with some guests, but I don't want to waste one minute on that with you because your thing is digging in deep to all these little companies and the industries that they're in.
I just looked at your last, I don't know, five, six, seven issues, and it seems like there's no industry you won't look at. It seems like you'll look at anything.
Bryan Beach: Yeah, anywhere where I can find a little value nugget here or there. I prefer operating companies that produce cash flow, but I find special situations here and there. You can scour the market for basic screening tools sometimes, but often I look at what hedge funds are buying and look at what other value guys are talking about, and that can be a source of some pretty cool ideas to research further and write up for my file.
I've been pretty conservative in 2023. There's been a lot of picks that you might even call income picks. No matter what happens with the market, you get a nice, safe, yielding dividend. That's not really how we launched this product back in 2017, thinking about income, but '23 is a weird year.
I don't know what's coming. So I wanted to just kind of spend a couple of months maybe getting some ballast in the portfolio with income. But to your point, generally it's operating businesses that are in lots of segments, lots of different sectors.
Dan Ferris: I noticed at the beginning of one recent issue you said you spend all your time looking at beaten down – I forget the phrase you used, but it was like beaten-down small-cap companies. Is what you're – do you look at like 52-week lows and you're looking for everything that's had the crap beat out of it?
Bryan Beach: That's a good starting point, yeah. I look at 52-week lows. Lots of people, anyone can screen on that. But I also look at hated sectors in general. We've talked about some of those over the years. I think last time we were talking about opportunities in SPACs, which were beaten down, and are still beaten down, but there are some pretty good companies in the SPAC world, and it's been interesting to try and find some of those. If you look at my portfolio, I've done OK with that, but there have been some misses as well.
So I look at sectors. I also run the screens that everyone else runs, looking at 52-week lows, like you said, but when you're a value guy that's a really good place to look.
Dan Ferris: I'm just curious about one little detail. When you run screens, what's like the top market cap? Below what market cap are you calling small cap?
Bryan Beach: I like to go, well, $3 billion if I'm doing a screen, but almost everything in my portfolio I recommended below $500 million, and some of them significantly less than that. Market cap is not really the big, constraining factor for me. It's the daily liquidity.
You can have an $80 million company with plenty of liquidity for me to recommend to a file of thousands of people. What I can't do is if a company has got $25,000 of daily trading value, I can't recommend that in the newsletter.
Market cap is a good starting point, but really, the bigger issue is daily trading liquidity. I really need about a million dollars' worth of daily trading value to not disrupt the market with a write-up.
Dan Ferris: Right. So share price times average daily volume is at least a million.
Bryan Beach: Yes, exactly.
Dan Ferris: All right. So let's talk about what you are interested in nowadays. It's an area that you have a history in, which is software.
Bryan Beach: Yeah.
Dan Ferris: This is a deep subject for you. This is an industry you know well, from the inside out.
Bryan Beach: It is. You brought this up when we were talking about it beforehand. What sectors are the most beaten down? If you want to know what sectors are beaten down, look at the hottest sector from two years ago at any given time. That's what happened with SPACs, when you and I were talking a couple years ago or whatever. Right now, Software as a Service, I'm really finding some interesting companies there.
To just go back into my background, I'm an accountant. I still maintain my CPA designation, but I was a controller at a publicly held software company for years and years, working pretty closely with our good friend and colleague, Mike DiBiase. I don't know if you knew that. We worked together for a lot of years in the software industry.
It was funny, Dan, back in those days, and I'm talking about kind of the mid-2000s to early 2010 kind of time frame. I had a consulting company for software companies for a little while, to help them. The big thing, Dan, was we would sell perpetual licenses. That's how you sold software. You would sell the software.
The customer would get a license. Then they would have to buy hardware, and they would have to sign up for an annual maintenance contract. That was the old methodology. So you might sell a million dollars' worth of software. That's a big deal. Then you would have maybe $150,000 of that would be recurring maintenance revenue, support revenue for future upgrades, stuff like that.
Then they would probably have to buy $150,000 worth of hardware or $200,00 worth of hardware. So it's a $1.3 million cash outlay for your customers.
What Wall Street wanted at that point for publicly traded companies was to recognize as much revenue as possible upfront. What Wall Street wanted to see was the big, chunky, million-dollar orders.
So fast-forward to really the early 2010s. Marc Benioff at Salesforce.com had transformed the way software is sold, and it's really a better model. That's where Software as a Service came from.
So what's different about that, Dan, is you're leasing it instead of buying it, just like with a car. You can lease or buy. So with that, there's no hardware to buy. You don't pay a separate maintenance contract. They own the license. Salesforce.com owns the license. They'll host it on their servers, and they'll charge you 200 grand a year.
I'm making that up. I have no idea what Salesforce charges. It depends on the size of the client. But in my example, instead of a million dollars upfront for a license and maintenance, and services on top of that, and hardware on top of that, there's just one monthly fee. It took about 10 years, but Wall Street fell in love with the model, because the way the math works is there's nothing else to sell five years later.
Under the old way, Dan, we had to constantly – after five years, we were in another sales battle, right, trying to sell another million dollars' worth of software.
So the Benioff model, the SaaS model, Wall Street immediately fell in love with it and they realized that after six or seven years it's much, much better to be a SaaS company than trying to sell perpetual licenses.
Dan Ferris: Bryan, just for our listeners' sake, SaaS, S-A-A-S, Software as a Service. That is software subscribed to as a service.
Bryan Beach: I'm sorry.
Dan Ferris: That's OK. You're good.
Bryan Beach: Yeah. I should have thrown that out there to begin with, but that's leasing. That's the leasing model. SaaS is leasing the software.
Dan, you're a value guy. Through all this time I was a value investing junkie just on the side, including reading this newsletter called Extreme Value occasionally. I don't know if you knew, but I accused you for years about being a subscriber before we ever met. I learned a lot from your stuff, the Buffett letters and all the things that value guys read.
I was very interested in what was happening in my professional life with these software companies versus what was happening in my kind of hobby, which was studying value investing. It was just an interesting juxtaposition. What's happened is from about 2015 to 2021, Dan, the market fell in love with Software as a Service and it became the hottest thing out there. I had a lot of software in the Venture Value portfolio because that's where I was comfortable. That's what I understood.
You can describe what happened next, even if you weren't paying attention. It blew all the way up and it came all the way back down. What's interesting to me right now with these SaaS valuations is they're kind of creeping back up, which is showing that the favor – it's not hated anymore. As our friend Steve Sjuggerud said, it's in an upturn, cheap, hated but in an upturn.
That's a really interesting sector for me. It's funny for me personally because I've watched the cycle go all the way around. Wall Street went from hating the idea of subscription-based revenue, to loving the idea of subscription-based revenue, and now they kind of hate it again. So here we are and that's what I'm sifting through right now.
Dan Ferris: Good. One of the things that you learn about, because you and I of course work for Stansberry Research, which is a subscription-based business, and it is wonderful. Subscription-based businesses can be quite wonderful.
One of the things you learn about is that as soon as somebody signs up – speaking of revenue recognition, as soon as somebody signs up and their subscription is $100 a year, even if they start by paying you $100, you're not going to deliver 12 issues of a newsletter to them in the first month. You're going to deliver one. You recognize the revenue for one, because that's all you've fulfilled. So there's a liability that comes with that subscription. That was something that I never thought about, ever.
Bryan Beach: Yeah, OK. You're talking about my old job. I had to make sure that the lawyers were structuring these software contracts in such a way, so that the accountants would acknowledge that most of the value is related to this software license that we're delivering right now, that we're e-mailing you right now. That's what most of the value relates to.
It doesn't relate to this maintenance contract that we will be providing you over 12 months. It relates to this – I had to prove that we're delivering something right now worth a million bucks. There were ways that you could word the contract to make that more obvious, and if you didn't word it that way, then the accountants just assumed – and I myself was an accountant. I'm talking about the SEC filing regulation – it would assume that that entire contract was tied up for 12 months in the way that you just talked about.
So yeah, for the accountants out there, if you pay – call it 120 bucks, just to make it easy – 120 bucks, only $10 of that is revenue upfront, and $110, the 11 months we haven't delivered yet is deferred revenue, which is hung up as a liability. So for a while, Wall Street was scared of thinking about things that way. Then they got enamored with thinking about things that way. It's been interesting to watch.
Dan Ferris: Right. So let's talk about why they got enamored. You said you don't have that event – you know, if it's a five-year contract, you don't have to go through this whole sales cycle again in five years. In fact, if someone has subscribed to your thing for five years, that's really good.
Bryan Beach: Very sticky. We call that stickiness. In a good software company, and this is very easy to measure, we'll renew 98% of your customers every year. It's the same thing. You do this. I do this. Every time I walk in my house, I walk by the ADT security code, you know, the little punch button by my garage door. I'm like, "Am I still paying $24 a month for that?" There's just something about subscriptions.
So when you talk about software, we'll talk about Salesforce just because we've already brought it up, we use Salesforce at Stansberry. You trained everyone up on it. The whole sales team knows how to use it. It's got all of your customers' data in it. It's sticky. Why would we think about not renewing? It's a very powerful business model.
So Wall Street, I think they're right. A dollar of SaaS revenue really is worth more than a dollar of selling widgets revenue or selling No. 2 pencil revenue, because it's going to come back every year, without trying, 95% to 98% of the time. It's a great business model. It's a better way to do it for sure.
Dan Ferris: It's funny. You just said a dollar of SaaS revenue is better than a dollar of widget revenue or No. 2 pencil revenue. The first thing that came to my mind was: what about iPhone revenue?
Bryan Beach: Yeah.
Dan Ferris: Of course that's a device that has all this other stuff attached to it, that has software attached to it.
Bryan Beach: Yeah, that's software too. I've not delved into their financials in years. Probably I did many years ago. But yeah, that's something the accountants have to figure out, how much of this revenue relates to the software and how much of this revenue relates to the hardware, and that's the reason. It's a revenue-timing decision.
Dan, a really cool case study for this is Adobe. I believe it was 2014. They went out and they made the transition from the perpetual model to the SaaS model. Of course PDF is the big product, also Photoshop, which photographers use. They have all this different software, and they're like, "If you want our products, you're going to have to go subscription."
The CEO had to kind of train the analysts how to think about this. He'd say, "Look, it's going to look like revenue is not growing, but it's fine. It isn't growing, but it's because we're selling – on purpose, we're selling on a subscription basis right now."
That was I think 2014, so it's been about 10 years. Look at what's happened to the cash flows of that company. It just builds up and up and up because, as you said, the expense base doesn't grow. It's just the number of subscribers has grown. It's a great model once it's mature, for sure.
Dan Ferris: Yeah. It kind of shows you though, too, as an analyst you really have to be forward-looking with this. You can't just look at the trailing financials and extrapolate into the near-term future and say, "Well, that's it. It's worth 12 times earnings," or something. You'll get it wrong. It really is a long-term proposition, isn't it, a SaaS company?
Bryan Beach: That's right.
Dan Ferris: It's almost like an insurance company or something.
Bryan Beach: It doesn't look like a good business model for the first seven years. It really doesn't. Benioff started this in 2014 – I'm sorry, 2004 or something like that. But it didn't get hot, it didn't become hot until like 2014, like 10 years later, and that's why. It took 10 years for the market to be like, "Oh, I get it. Oh, OK."
Dan Ferris: And by then billionaires were made from the thing.
Bryan Beach: Yeah. Now it's been another 10 years and it's gone full cycle since then. I think value guys like you and me, it's fun to roll up your sleeves, call some customers. How sticky is this really? You can pretend to be a competitor, fun stuff like that.
I know a lot of software sales guys still, so I can ask around. They're willing to share war stories. You can get a real sense of how sticky is it really, and it gets even better than stickiness if you can constantly sell your existing customers new products.
So you could have renewal rates technically over 100%. If your customers from last year bought a million dollars, and that same customer list bought $1.1 million this year, sure, some of them probably dropped off, but the ones who remain buy more software to offset that.
So I'm really starting to roll my sleeves back up in this corner of the market. Any listeners who are into value, you're going to not like that we're using price-to-sales or price-based multiple, but try and look past that. Dan is going to make fun of us for using that method, because that's what he likes to do, but look past that and look at some software stuff.
Dan Ferris: Hopefully I'm only making fun when it's 20 or 25 times. That's when I really start making fun.
Bryan Beach: I read your stuff. You always bring up the Internet boom. When price-to-sales comes up, you bring up the – and I'm like, "Oh, that's not the only time that multiple is used, that metric is used." It's kind of a –
Dan Ferris: My point is generally – I'm usually talking about big overall trends. I'm not talking about analysis of individual companies. I usually am looking at companies that aren't profitable, that I think are garbage anyway. So if I scoop SaaS companies in with that, maybe you can forgive me or something, but I'm unaware of having written specifically targeting SaaS companies. To me, that's too narrow.
Bryan Beach: It stuck in my craw, so you must have it somewhere. I don't know where. I can't cite it.
Dan Ferris: My big targets have been the components of the ARK Innovation Fund, and all the bubbles that were insane in early 2021, SPACs, clean energy, cannabis, all the stuff that even if it was a great business, there was no way that that was the right number.
Bryan Beach: Yeah. And SaaS did get lumped in with those businesses, and to some extent deservedly so, but unlike say the Internet boom or clean energy, which may or may not work out – I'm not here to dog these clean energy companies as businesses – but there is an established path to huge cash flows for the SaaS model. You can't say that about mining for battery material on the ocean floor.
We've already got a model. We know that the SaaS model can lead to cash flows already. So to some extent it was fair to scoop those altogether, but I always kind of was like, "Eh."
On the other hand, as a value guy, fine, dog the model, and that will leave more opportunities for those of us who understand more of the nuances. But you haven't made fun of SaaS in general. That metric comes under your attack every once in a while.
Dan Ferris: Yeah, it does. To me, it gets obvious – I like to think the way I'm doing it, it's kind of obvious why, but maybe I'll be more careful about scooping the SaaS –
Bryan Beach: Be careful man. That's all I'm asking.
Dan Ferris: Yeah, that's right. Now I'm like, well let's see... I need to pay more attention to these companies.
It's funny, Bryan. I was at a meeting of investors and the topic of subscription-based businesses came up. At the time, things were very expensive. So everybody was like, "Eh." But it's become more interesting and SaaS has become a really interesting topic among these folks in the past year or so. It's a group of value people that I meet with once a year.
They started asking me about our business. I was like, "Well, not a software company." My point is that software is a big part of the equation. You can't do this with donuts or something. You know what I'm saying. Maybe you could have a subscription donut business, but a subscription software business is like – I mean the product is so deeply embedded in your life at this point that it's like begging to be a subscription, a sticky subscription, isn't it? That's a big part of this.
Bryan Beach: It is. Let me give you a single number that just sums up what you said. It's renewal rate. That's what you're talking about. A donut business, a subscription of donuts or a subscription of jellies or whatever is not going to have a 98% renewal rate.
Frankly, I don't know if I can say this, but neither are newsletters. I mean it's not a 98% renewal kind of business. It comes down to mathematics. Mike DiBiase and I have figured this out, mostly Mike.
I'm throwing this out there. I say if this leasing software subscription said leasing software is more profitable, a better business than selling software, right, but there's a point where that's not true. If your renewal rates dip below say 90%, the math doesn't work that way. You might be better off ...
In your donut example, you're better off just selling donuts by the dozen to people who are hungry right now, than to try to get them on the hook at a discounted rate. I don't know how to make this a perfect analogy, but the renewal rate has got to be high for this to work, even with software companies. If it's not sticky, it's not going to work.
That's a pretty easy calculation to get. The software companies have to disclose it or they usually disclose it. So that is one number that kind of sums up everything you just said about the types of businesses this would work with.
Dan Ferris: Yeah. The original subscription business of course is like periodicals. It's better than that because you can get tired of Time magazine, or you can get sort of bored with whatever, plug in the name of any periodical. You can get bored with it.
In the days of newspapers, and now newspapers are still that way but it's an online model and it has sort of grown up with the times, but my point was that – I mean software, it's almost like diabetes medicine or something. You just can't function without it, especially businesses.
That fascinates me. It fascinates me that there are some products – the matching of a product with a business model is quite a beautiful thing actually.
Bryan Beach: You brought up newspapers, and we've been kind of mentioning Warren Buffett in passing. I heard about a software value guy named Savneet Singh. This was on a podcast years ago. He was being interviewed.
He's an interesting guy. I could talk more about him, but he had a really cool quote and it sounds like you would agree with him. If Warren Buffett were 24 years old today, he would be all about software. Right?
Dan Ferris: Yes.
Bryan Beach: The same stuff that got 24-year-old Warren Buffett excited about newspapers back when he was starting the Buffett Partnership back in the '50s, and just started buying up every newspaper he could, because of what you're talking about. People renew their Buffalo News subscription. That's one of the first papers he bought. Of course he ended up buying the Washington Post at some point.
All those things that he loved about newspapers are true for a sticky software company. So really, it should be an area where value guys are interested.
Dan Ferris: Absolutely. If you're that guy that sort of, you know, the Buffett thing, like wide moat, addicted to the product. He used to talk about other consumer products that way, too, like Wrigley's chewing gum or Coca-Cola or whatever it was. It's the same thing.
I guess what I'm trying – I'm really not being very articulate, but I'm trying to say that these things are embedded even more deeply than your consistent sort of consumer delights.
Bryan Beach: Yeah. Hey, do you want a stock pick?
Dan Ferris: Sure, man. We love stock picks.
Bryan Beach: This just came to mind. Actually, it's kind of – well, Savneet Singh, I just brought him up. He is a guy who focused – I think he and some buddies, they had all made a ton of money in stuff. His backstory is kind of fun.
A young guy, I think he probably just turned 40. They started a fund, a value-based software fund. He is well-known in software circles now, but back in 2019 he took the reins of a company that was transitioning to software called PAR Technology. He's the CEO now. He was an investor and then became a CEO.
So an interesting thing. This is a company dating back to the late '60s. They sold some kind of technology to the Army that could detect vibrations in the ground or something, to detect tanks in Vietnam, and they've still got this top-secret Army component today. They've still got this kind of Defense Department contract. So that's a big part of the business, oddly.
But way back in the '70s, they started selling this technology. They started selling hardware into fast food joints. I think all of the cash registers at McDonald's were sold by this company.
Then really they started when Savneet kind of took over. They were about 10 years into starting to sell software into all of their fast food joints, stuff to automate inventory levels, schedule employees, kitchen times, process the payment, all of this stuff. So he's cobbling together a little software empire related to restaurants.
This company just keeps growing. I recommended it in May 2020 – no, May 2019, four years ago, at probably $26 or $27. It's probably at $40 today. So it's up 40% over four years.
That's nothing to brag about at a cocktail party, but what's interesting about this company, Dan, is that it is a perfect exemplar of the valuation stuff we've been talking about. I recommended it at 25. It went down to 10 during the pandemic, up to 90 in 2021. From $10 to $90 in 2021, and now it's back down at around $40.
So technically I think my buy up to price is $38, so I'll probably get in trouble for telling your listeners something different than what my official subscribers are getting in terms of guidance, but keep an eye on it. It's 40 bucks today. It might be 38 tomorrow. But what a perfect one-stop example of what I'm talking about.
Now because there's this non-software component to this company, the valuations don't look like what we're talking about, but I think at its peak it was like at 10 times revenues. Again, a lot of those revenues are not software related, so they shouldn't have a software multiple. Now it's probably at less than four times revenues.
Over this time, when the stock went from $25 to $10 to $90 to $40, the revenue just kept growing. It went from $200 million to $400 million, more or less steadily. What is the market doing, going from $10 to $90 to $40, when it's just steadily growing? So take a look at this. It's run by a software guy.
You'll love this. What do you think Savneet Singh did when the stock hit 90 bucks or 80 bucks or something? What do you think he did, as a value guy? What would a value guy running a public company do at that point?
Dan Ferris: Issue a bunch of shares.
Bryan Beach: He did. He sold a bunch of shares to the market to fund some acquisitions, to cobble together this conglomerate. They're still not making money because he's buying companies and innovating new products, a very long-term view. So I don't know how long it's going to take, but I did not sell this thing when it went from $25 to $10. Obviously, I should have clipped some gains when it went from $10 to $90.
I like this company. I may raise the buy up to price and I haven't yet. But what a perfect example of what we're talking about. You'll love the guy running it, Dan. He's cut from your cloth, but he's a tech guy.
Dan Ferris: OK. I'm going to have to look at this. It calls to mind Constellation Software in Canada, which is a fantastic example of if you were Warren Buffett a little bit later, what would you do? Well, you'd roll up a million software companies under one roof.
Bryan Beach: Yeah. PAR is focused right now on restaurants. It was doing fast food joints mainly, and it's branching into now table serve. So they're focused on one area. I think Constellation was just looking for "mom and pop" software companies. It was less industry specific.
Dan Ferris: That's right.
Bryan Beach: But it's very smart, what Singh is doing, because I can just cross-sell you this stuff. Hey, you're using my payment processing stuff. Why don't you use my kitchen scheduling software, or whatever? Hey, you've been using our hardware since 1972. These sales guys have a million people to call, because they've already got the hardware in these restaurants.
So I can't wait to see what he does. He's already shown that he's got a value investor's mind, selling at 90 whatever it was, 80, 75. They should flip to breakeven this year. I think that's going to be a catalyst for the market. That's going to be a big catalyst for the market. It'll be like, "OK, this is a real business finally."
I think he's finally on these calls, these earnings calls, and started talking like someone who is investing in growth and someone who is ready to kind of cash in on some of these investments. So keep an eye on that one this year and heading into the next couple years.
Dan Ferris: All right. PAR, P-A-R is the ticker symbol. Thanks for that and thanks for being here. I think it's time for my final question, which is the same for every guest. I hope you don't remember it because it works better that way.
The final question is simply this. If you could leave our listeners with a single thought today, what would it be? And if you've already said it, just repeat it. That's fine.
Bryan Beach: Well, I assume you're talking about the markets. A lot of my time and energy has been thinking about what's going on in Europe and the folks over there. Our friend, Bill McGilton, is still misplaced from Kyiv.
It sometimes seems gauche to talk about the markets and think about the markets all day, but what's happening over there is going to have big ripples for, unfortunately, I think decades. I've rambled on about software a lot, but I've got my eye on energy and commodities. I think that's going to be an area to watch. You don't need to hear my final thoughts to know that. Everyone knows that.
I guess my final thought is to not forget about the people like Bill. It's a tough time to be alive for a lot of people. I'd catch myself thinking about oil prices this weekend. I was looking at some oil companies, and just thinking about the impact of what's happening in Ukraine and in Russia on grain exports and oil.
I've got this mathematical mind and I'm just like, gosh, Bill's kids have not been at their apartment since April of 2022. I try to make myself think about the real life stuff behind some of these market topics we talk about.
I don't know. That's probably not what you were looking, but you don't have to hear it from me. Energy is going to be really interesting to watch over the next couple years. Obviously, I'm looking at software right now, but let's not forget the people in Ukraine and Russia too. Thoughts and prayers go out to some kind of resolution to that. I'm numb to it now, like everyone. It's been a long year and a half, but keep praying for something better over there.
Dan Ferris: All right. Actually, that's fine. You said just now that that wasn't what I was looking for. That's exactly what I'm looking for. It doesn't have to be a stock pick or a Warren Buffett nugget of wisdom. It has to be something exactly what you did. It's an authentic thing that you wanted to tell the listeners before we signed off, and that's perfect, absolutely perfect. So thank you for that.
Bryan Beach: Thank you, Dan.
Dan Ferris: Thanks for being here.
Bryan Beach: I'll see you in October, right?
Dan Ferris: Yeah, absolutely. I'll see you in October in Las Vegas at the Stansberry conference. We'll both be on stage at least once or twice I guess.
Bryan Beach: Yeah. I'm looking forward to it. Thanks again.
Dan Ferris: All right, thank you.
Dan Ferris: Many mainstream analysts are predicting that stocks will recover soon, but I say we'll instead witness a cash frenzy unlike we've experienced in 21 years before stocks recover. I'm urging Americans not to buy a single stock until they see it. I predicted the Lehman Brothers crash in 2008 and I called the top of the Nasdaq in 2021. But this, this is the No. 1 most important thing to pay attention to for 2023.
I'm not talking about another market crash or politics or inflation or any of these other things. As all this unfolds, the financial consequences of what I'm talking about could last for several decades if you don't understand what's happening. There will be winners and losers, and now is the time to decide which one you'll be.
This is why I strongly encourage you to read about my warning, totally free today. It's all spelled out in a free report we put together. Get the facts yourself. Go to www.StockDeadzone.com to get your free copy of this report. You can learn how to get my four steps to prepare for what's coming. Again, that's www.StockDeadZone.com for a free copy of this new report.
Dan Ferris: I always enjoy talking with my friend, Bryan Beach, and I hope you can see why. He's a font of knowledge. It's fun sometimes of course to talk about all of the macro stuff that we talk about, that Corey and I talk about it, etc. But when you find somebody who really knows an industry and a particular company – he mentioned some particular companies here and there – really well, let's face it, as investors that's what we've got to do.
You have to know your industries. You have to know your companies. You have to know what things are worth. You have to know when they're exorbitantly expensive at 27 times sales and when they're dirt cheap at six times sales, like Bryan talked about with the SaaS companies.
I also found the comment where he said that if Warren Buffett were 24 years old, he would be into software instead of newspapers. When he was 24 years old, he was buying newspaper stock. But if Warren Buffet were 24 years old today, he'd be as excited about software companies as he was about newspapers.
So I think that was very insightful and I think it's spot on, absolutely spot on. If you're that kind of investor, you're looking for those companies that are, as we talked about during the interview, deeply embedded in our lives that produce reliable cash flows over the long term, because financials might not be so sexy right now, as we talked about also. If you didn't already know it and you aren't already there, software is the place to go. It was a really fun conversation, as usual, with my friend, Bryan Beach.
All right. Well, that's another interview and that's another episode of Stansberry Investor Hour. I hope you enjoyed it as much as we did. We provide a transcript for every episode. Just go to InvestorHour.com. Click on the episode you want. Scroll all the way down, click on the word "transcript," and enjoy.
If you liked this episode and know anybody else who might like it, tell them to check it out on their podcast app or at InvestorHour.com.
Do me a favor, too... Subscribe to the show in iTunes, Google Play, or wherever you listen to podcasts. And while you're there, help us grow with a rate and a review. Follow us on Facebook and Instagram – our handle is @investorhour. On Twitter, our handle is @investor_hour.
If you have a guest you want us to interview, drop us a note at [email protected] or call our listener feedback line at 800-381-2357. Tell us what's on your mind and hear your voice on the show.
Announcer: Thank you for listening to this episode of the Stansberry Investor Hour. To access today's notes and receive notice of upcoming episodes, go to InvestorHour.com and enter your e-mail. Have a question for Dan? Send him an e-mail at [email protected].
This broadcast is for entertainment purposes only and should not be considered personalized investment advice. Trading stocks and all other financial instruments involves risk. You should not make any investment decision based solely on what you hear. Stansberry Investor Hour is produced by Stansberry Research and is copyrighted by the Stansberry Radio Network.
Opinions expressed on this program are solely those of the contributor and do not necessarily reflect the opinions of Stansberry Research, its parent company, or affiliates. You should not treat any opinion expressed on this program as a specific inducement to make a particular investment or follow a particular strategy but only as an expression of opinion. Neither Stansberry Research nor its parent company or affiliates warrant the completeness or accuracy of the information expressed on this program and it should not be relied upon as such. Stansberry Research, its affiliates, and subsidiaries are not under any obligation to update or correct any information provided on the program. The statements and opinions expressed on this program are subject to change without notice. No part of the contributor's compensation from Stansberry Research is related to the specific opinions they express.
Past performance is not indicative of future results. Stansberry Research does not guarantee any specific outcome or profit. You should be aware of the real risk of loss in following any strategy or investment discussed on this program. Strategies or investments discussed may fluctuate in price or value. Investors may get back less than invested. Investments or strategies mentioned on this program may not be suitable for you. This material does not take into account your particular investment objectives, financial situation, or needs, and is not intended as a recommendation that is appropriate for you. You must make an independent decision regarding investments or strategies mentioned on this program. Before acting on information on the program, you should consider whether it is suitable for your particular circumstances and strongly consider seeking advice from your own financial or investment adviser.