Logos LP Eyes New Trends in Software

10/31/2019 5:00 am EST


Matthew Castel

Head of Strategy, Logos LP

We are currently in the middle of deflationary period for many once popular software stocks which began in late July and early August and certain names have dropped anywhere from 40-60% in a matter of months, notes Matthew Castel, money manager and editor of Logos LP Blog.

What can be made of this selloff? We are now evaluating this group as a safe and potentially profitable chance to buy something no one likes.

There are likely a variety of reasons for this repricing tied to the overall pessimistic “macro” narrative that continues to dominate “popular” discourse — yet a more simple explanation is that their valuations have gotten ahead of themselves in a market that is maturing. 

We are beginning to get excited about opportunities in the space and have begun considering increasing our portfolio weighting in software and technology related services.

Many software names continue to generate impressive amounts of recurring revenue, maintaining breathtaking rates of growth while solving real problems for customers. 

Our focus has been on companies in the sector in the small to mid-cap arena with strong secular growth stories with real free cash flow. As such, we have started to initiate positions in companies like the following:

1. New Relic (NEWR)

Company provides analytic and data monitoring software for DevOps teams. Company is trading a little over 6x sales with ~80% gross margin. Stock is down 47% from 2018 and free cash flow (FCF) has nearly quintupled since then. New Relic has more FCF than companies like Zscaler (ZS) with a similar growth profile is trading at nearly half the market cap.

2. Zuora (ZUO)

Company provides software to utilities, industrials and other technology firms that are developing subscription services. Trading under 5.99x sales with growth in enterprise accounts over 100k at 20% and overall growth at over 40% since 2018, the company blew past quarterly earnings and raised guidance last quarter. Stock is down 61% since 2018.

3. Upland Software (UPLD)

Marked as the U.S. version of Constellation Software (Toronto: CSU) the company trades at 14x next year’s earnings, a little over 4x sales with FCF quadrupling since 2016. The company has been on an acquisition spree and has raised full year guidance. This is a name that may become a core.

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