• Matt Wolodarsky

Battle of the Digital Transformation Supply Chain Stocks

Updated: Nov 5

Part 6 of 6 part series


Part 1: Cloud Platform Provider Stock Analysis Series

Part 2: Why Fastly Could Be a Multi Bagger Over the Next Few Years

Part 4: Can PagerDuty cross the chasm from niche to mainstream for outsized investor returns

Part 5: Stock Idea: ServiceNow is growing into credible PaaS provider under Wall Street's nose

In this six part series I provide an overview of my favorite investing theme currently - the cloud platform providers powering digital transformation and analyze what I think are four really good cloud platform stocks in this area. In this final post I do a side by side comparison and select the best of the bunch.

One of the technology trends that I believe offers significant upside potential for investors

are the category of cloud providers helping companies, governments, and education institutions undergo digital transformation.


Just like Ford doesn't build all of the components that go into their cars, developers don't need to build all of the infrastructure that goes into their apps. Platform providers like Twilio for communications, or Microsoft Azure and Amazon Web Services (AWS) for compute, storage and artificial intelligence (AI), have become the supply chain for developers building apps.


This trend of cloud companies decomposing the software stack into a set of APIs (Application Programming Interface) and selling them as a service so developers can focus on what customers really want is creating a lot of investor opportunity. Worldwide spending on the technologies enabling digital transformation is forecasted to reach $2.3 trillion in 2023, according to the International Data Corporation (IDC)Worldwide Semiannual Digital Transformation Spending Guide. Digital transformation spending is expected to steadily expand throughout the 2019-2023 forecast period, achieving a five-year compound annual growth rate of 17.1%.


Who are the cloud companies that offer the best potential investor gains over the next five to ten years? Over the last couple of months I've been analyzing four of the most interesting digital transformation supply chain stocks as part of a six part blog series. Now I'm ready to recommend, of these four stocks, which are deserving of an investment. First a brief overview of each stock.


Fastly (NYSE: FSLY) - Why Fastly Could Be a Multi Bagger Over the Next Few Years


Today, many leading companies whose digital businesses depend on meeting their customers expectations of speed and an amazing experience use Fastly. Shopify, Spotify, Yelp, Pinterest, Slack, Twitter, and more are all building on Fastly to deliver user experiences that are driving their growth. Fastly provides developers with a secure and programmable edge cloud platform.


Alteryx (NYSE:AYX) - Alteryx is leading the data driven digital transformation revolution

Alteryx provides customers an Analytic Process automation (APA) Platform for anyone in an organization with curiosity to build analytic models that help them make better decisions. Alteryx is unique in that they provide an all-in-one analytics solution that covers the range of analytical needs, from simple cataloging and preparation, to descriptive, predictive and prescriptive analytics. Alteryx is expanding the pool of data scientists in an organization by making data science easier.


PagerDuty (NYSE: PD) - Can PagerDuty cross the chasm from niche to mainstream for outsized investor returns

PagerDuty offers customers a digital operations platform to reduce downtime and outages, leading to more revenue and more productive teams. The PagerDuty story is one of accelerating digital transformation that offers big potential investor gains if the company can cross the chasm from its current niche market into a more mainstream digital operations market.


ServiceNow (NYSE: NOW) - ServiceNow is growing into credible PaaS provider under Wall Street's nose


ServiceNow is helping organizations apply digital transformation to themselves with their workflow platform, streamlining previously manual and inefficient processes. Where I see some potential upside is their transformation from a Software-as-a-Service (SaaS) business into the powerful combination of SaaS plus Platform-as-a-Service (PaaS). While they are large cap company, so a bit of an odd duck amongst this group, the emerging PaaS business offers some intriguing upside for investors.


Now that we've introduced the contenders let's analyze them side by side to crown the champion. We do this using the Wealthy Owl Characteristics of High Growth Potential Cloud Platform Service Stocks.



Platform

The clear winner in terms of platform capability is Fastly. The biggest digital brands are using Fastly to power their businesses. The potential for greater stickiness and use case expansion is immense with the launch of their Compute@Edge platform. Both Alteryx and PagerDuty fall short of true platform status. While there is room to improve, ServiceNow has recently achieved platform status, which customers are relying on to build amazing employee experiences.


Market Opportunity



Alteryx likely has the greatest market opportunity upside with only ~1% capture of their estimated $75B total addressable market (TAM). What makes their market upside potential particularly interesting is their strategy to get data scientist, analyst and knowledge workers onto the same platform so they can collaborate on strategic analytic use cases. This has the potential to transform how organizations do data science in the same way that spreadsheets transformed how organizations worked on manual ledgers decades ago. I believe they need to revisit their pricing model to realize this vision of bringing knowledge workers on to the platform.


The greatest green space for Fastly, and competitors, is in the nascent edge computing market. Developers are migrating quickly and en masse to developing on the edge because of its performance, security and scalability superiority. Fastly is well positioned because companies want to use multiple central clouds to build negotiating power when dealing with the cloud titans (e.g., Amazon Web Service, Azure, Google Cloud, etc.), and to load balance. Fastly is viewed as an honest broker.


The biggest question mark for PagerDuty is whether their is a more mainstream market for them to grow beyond their current DevOps niche. ServiceNow competes in several mature markets and therefore has less greenfield ahead of it as compared to the other companies. I do believe Platform-as-a-Service (PaaS) has more upside for ServiceNow than they are likely getting credit for today.


Better Mouse Trap

While all four companies are product leaders in their respective markets, Fastly has a slight lead as result of its pioneering efforts to offer edge programmability and superior performance. There are several platform companies that build their SaaS and PaaS services on Fastly, including Mux, Pantheon and GitHub. Usage of Fastly by these platforms is significant, as these companies are among the most technically demanding in the world. Their lead is about to make a step change forward with the general availability of their Compute@Edge platform which will add support for more programming languages.


Both Alteryx and PagerDuty are product leaders in their respective core markets as rated by third party analysts such as Gartner. This analyst recognition is backed up by the demonstrable enthusiasm their end users have for their respective products. While ServiceNow is a product leader in their core market of IT Service Management, they have product gaps in their emerging market of Platform-as-a-Service. The good news is they are aware and innovative quickly to close the gaps.


Developer Love

Fastly and PagerDuty are both special companies in the sense they are rooted in the developer mindset - both companies were founded by developers. Given the influence developers are now given in the technology purchase decision-making process by midmarket and enterprise sized organizations, the esteem developers have for these companies is extremely important. Fastly is expanding the developer languages it supports with its edge@compute platform, addressing its main achilles heal with the developer audience.


ServiceNow has product gaps to address in order to improve its standing with developers, as well as making it easier for developers to transact with them. Alteryx has not prioritized the developer audience at this stage and it shows with the limited support it offers them.


Optionality

With official production use of their compute@edge platform underway, a number of new use cases open up for Fastly, including personalization, IoT, and machine learning inference. They are also moving aggressively into security, as evidenced by their recent acquisition of Signal Sciences.


Platform-as-a-Service (PaaS) is the next big growth driver for ServiceNow and I like the position they are in today so that they can capture more share.


While I see some optionality potential for Alteryx, management has not been that forthright with details of what they are pursuing. In contrast, PagerDuty has been very clear about their plans to expand into departments outside of IT with their digital operations management approach. I'm not seeing sufficient evidence yet that they are crossing the chasm into mainstream enterprise yet.


Strong and Visionary Leadership

PagerDuty CEO Jennifer Tejada leadership received the greatest validation with a perfect employee approval score of 100% from Glassdoor. Tejada has been an excellent CEO for PagerDuty. The only knock is her lack of a technical background. Tejada spent the majority of her career as a marketing executive at Proctor & Gamble. I believe this is addressed with the very technical founder and former CEO staying on in an active leadership role in the company.


Much like PagerDuty, Fastly is also led by a non-technical CEO (and non-founder). Joshua Bixby has only been CEO for less than a year and already he has proven himself to be an excellent leader. Fastly continues to benefit from the amazing technical leadership of its founder Artur Bergman who recently stepped down as CEO of the company to become the company's chief architect and executive chairperson.


Veteran and proven tech executive Bill McDermott (former SAP CEO) recently stepped in as ServiceNow CEO. I have high confidence in his ability to take ServiceNow through the next phase of its growth.


There has recently been CEO turnover at Alteryx with long-time CEO/founder Dean Stoecker stepping down. New CEO Mark Anderson brings a strong sales background from Palo Alto Network to the role. It was an abrupt change and there are still open questions about the current state of leadership.


The Numbers

While difficult to rank the four companies based on the above metrics, I do give a slight edge to Fastly in favor of their high revenue growth rate and strong dollar based net expansion rate (DBNER). The recent share price decline puts them in a more (relative to two weeks ago) reasonable (though still high) valuation.


Despite their large cap status, ServiceNow has compelling numbers in terms of growth, margins and DBNER. Are their best growth days behind them? Yes. However, due to the potential of their PaaS offering and other growth areas I do believe ServiceNow will steadily outperform their sector over the next five to ten years.


Both Alteryx and PagerDuty trail because of their relatively low growth numbers. At their respective stages in their development I want to see higher growth rates.


My Bottom Line

While it's probably anti-climatic at this stage, I believe Fastly is the best digital transformation supply chain stock and therefore I recommend initiating a position. This is a re-recommendation of Fastly. I first recommended the stock in this July 6th post. It was a good purchase then at $83.05 and even better now at the October 29th price of $68.60.

My recommendation on the other three stocks:

  • ServiceNow: Worth starting a small position in the stock if you are bullish on their PaaS offering. I do not recommend a full position at this stage. The price is quite high.

  • PagerDuty: Stay on the sidelines. Wait to see more significant evidence that they will be able to cross the chasm into a mainstream market

  • Alteryx: Stay on the sidelines. Wait to see if they can re-accelerate their growth in the coming quarters and how the new CEO performs.

-------------------------------------------------------------------------------------------------------------------------- These stock idea falls into the category of "taking intelligent risk". Before making investment decisions please do your own research and/or seek the advice of a professional adviser.

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