Editors’ note: This is a transcript version of the episode of Alpha Trader that we published earlier this week. We hope you enjoy.
Aaron Task: Welcome to Alpha Trader. We are two weeks away from the election and in the thick of earnings season and maybe there’s going to be a fiscal stimulus package and maybe not. In the meantime, we are joined today by a very special guest. Jon Markman is President and Founder of Markman Capital Insight, which is an independent investment research publisher. He’s the publisher and author of the Strategic Advantage newsletter and which is featured on Forbes under the name Fast Forward Investing, which is also the name of one of his several books on investing. Jon, welcome to Alpha Trader.
Jon Markman: Hey, it’s great to be here. Thanks for inviting me.
AT: It is great to have you here. As we really get into the thick of earnings season this week, because you are a stock picker, I want to talk about individual stocks with you, but want to get your big picture. As I mentioned, there’s so many macro things that the market seems to be hanging on right now; the election, obviously, COVID and the case numbers creeping up, the fiscal stimulus talk, it seems like on a given day that’s what’s moving the market. What do you think about from a big picture perspective about the market right here?
JM: Sure. Well, in terms of the big picture, what we have to remember is that earlier this year, the COVID crisis thrust the market into a bear market for a short period of time and into a recession. And the bear market ended essentially at March 23 when the Federal Reserve announced that it [would backstop] the bond market and basically, reduced interest rates to zero for an extended period of time. The market turned around there, and a new bull market started, and a new economic cycle started. Generally speaking, for the last, you know, 80 years, when the Fed has intervened to stop a bear market, the market has proceeded to go up by five times in the next 10 years.
Stephen Alpher: Okay.
JM: 5x. So that happened in 2009, and it happened in the 1982. It’s a very common occurrence. So, I think the big picture is that no matter what happens in the days and weeks ahead, I think we can be have some measure of certainty that the Dow will be up 5x over the next five years. So, talking like 91,000 in 2025.
AT: Right, so it’s going to be – so you are talking about Dow 90,000 plus. That’s an extremely bullish…
SA: Yeah, I have to write that down. Hold on.
JM: And, you know, for the NASDAQ, for those of you who follow NASDAQ, NASDAQ was [6,771], I think at the low. So, we’re looking at NASDAQ 33,855. Now, this sounds kind of extreme, but I did this exact thing after the 2009 debacle. And I announced a target for the [S&P 500 or 3,330]. And you know, we got there late last year.
AT: Right. So that was 5x from the low of 666.
JM: Right. And the – in the he Dow – and then NASDAQ was up a multiple of that. I think it was about 7x instead of 5x.
AT: Right. So that’s very interesting for a lot of reasons. Because, you know, Stephen and I have – one of the themes of this podcast has been, you know, there has been a lot of analogies or comparisons to the late 1990s. So, it sounds like, you know, if that analogy is holding, then we’re in like, 1995 or 1996. Like, we haven’t really gotten started yet.
JM: I would say more like 2009, like late 2009.
JM: Following the financial – great financial crisis, because I was in a crisis in which the Fed intervene to the extent that – and to an extent, similar to what it did this time, although this time was even more so. I mean, the Feds never committed to the interest rate at a basically zero bound for the next two years ever, in its history never has done it. And so when you combine that with the fiscal stimulus we already had, plus this fiscal stimulus is coming, and I think that investors should stop worrying about the small picture and just – the big picture, and just focus on the individual stocks in sectors that they want to be involved in as this bull market rolls on.
AT: So, we will get to those and I just want to be clear, and we try to be apolitical on the show, but it sounds like you’re saying it doesn’t matter the outcome of the election at this point.
JM: I would say it doesn’t matter from an investor’s perspective. I mean, the market is obviously all in on a Biden victory, and the democrats flipping the senate. Markets been very low – has had a very low volatility, where the VIX is really subdued, there’s no expectation of a gigantic calamity happening, you know, in November. So, I think people need to put their fears away and just get on with the work of identifying good companies run by good managers and good niches.
SA: And just to clarify, while you’re saying that the Dow, the NASDAQ, the S&P are going to be several multiples higher several years from now, it doesn’t mean we can’t get some pretty sizable or brutal kind of bear moves in between.
JM: Yeah, I mean, even in a bull market, you’re going to have, we have 15% to 19% declines from, you know, from time-to-time, over some crisis that we’re not even aware of, you know, when you look back, and you look at the things, the ways that the market got sidelined, between 2009 and today, you can’t even remember the details of most of them, but they seem so important at the time. You know, like, you know, the European financial crisis.
AT: Exactly. That’s the first thing that came to mind for me, like it was such a big deal, at least, you know, in the financial news, but for the markets, you know, pretty much on the screen.
JM: Remember the Greek debt crisis?
JM: I mean, every single day on our screens, we were talking about the Greek debt crisis, and suddenly it just went away, as the President says, like, things go away.
AT: The pigs, I mean, it was all about the pigs. Right?
SA: Right. Sure.
JM: Yeah. And, you know, from time-to-time there’s going to be these missteps with the market, but generally speaking, when the Fed has flooded the zone with as much money as it has, it has to go somewhere. And generally, it goes into the most speculative areas first, before it seeps down into industry. And when I say the most, you know, Walter Wriston, the former head of CEO Citibank said, money goes where it is most wanted and stays where it is best treated. And as generally the stock market at the beginning of these upturns.
SA: I know a lot of the stocks you’re picking are about technological disruption and such, but given kind of the flood of money out there, do you have any interest in kind of what have previously been underperforming sectors, like energy, financials?
JM: I’m kind of interested in the energy sector. The energy is down 50% since from last year, which is unbelievable, in a lot of ways. And I’m interested in the industrials and the, sorry the financials. But they’ve been afforded at every turn, every time we think that the value stocks and energy and banking are going to turn around and start to move higher they get slammed by the sellers. So, I would say less interested in energy and banking until I can pull out of their bear market – their sideways move and be much more interested in technology.
You know, I think that people, a lot of investors are – they’re worried about valuations, they’re worried about the election, but they’re missing the bigger picture. The digital transformation that I’ve been talking about in my letters, in my columns, is the biggest most investable trend in our generation. Digital transformation is just getting started. It’s going to happen, regardless of valuations, it’s going to happen regardless of elections. And any market weakness that you see is an opportunity to buy these companies that you know, lower prices, because they’re not going to stay lower for long.
AT: So, let’s talk a bit more about that digital transformation. And it’s, you know, in Fast Forward Investing, your most recent book, I know that was the theme of the book, but what’s different or new about it today than back in, again the late 1990s, when we were talking about how the internet was going to change everything, you know, is this – is it the same thing all the Fast Forward 20 years or is it something different from that?
JM: No, it is very much the same thing. Digital transformation is the use of data and software to build new business models. That’s all it is. The use of data and software to build new business models, and it’s possible because cloud computing made data processing relatively portable and inexpensive. And it also made large scale permanent data storage viable. So, here’s a great example. Look at the evolution of Netflix. It used to be a mail order DVD business, you know, you just filled out a form, mailed it to Netflix, and they send a physical DVD to you by mail. Remember those?
AT: I do.
JM: But the digital transformation turned the DVDs into an icon on your Smartphone, and now it’s just a – instead of a hard disk, it’s just bits of data stored away in the cloud. You tap the image on your phone and magically a movie emerges. There’s no DVD, there’s no player, there’s no paper forms to fill out and mail away. Every step of the process has been transformed by a digital alternative. And that’s really – just have to start with Netflix. Netflix is real businesses using predictive analytics to determine you know, produce and digitally to deliver content to you that’s based on your interaction with its software.
So, think about this, Netflix now has 192 million paying monthly customers. They’ve created a business worth $234 billion out of thin air, and that thin arrow was actually – that’s kind of a cliché, but what’s really happened is that they’ve harnessed the digital revolution to create a business is $234 billion. And the – or in the market its shares are up like 15,000% since they shifted online.
AT: They should have been rewarded. And I will note Netflix, you know, one of the highlights of this week’s earnings, you do have a position in Netflix on your Markman buy list. So, I’m curious if you have any specific thoughts about the earnings report and maybe more importantly, like, how do you approach earnings as a trader, especially in the name like Netflix, where you know, we’re on, you’ve got some big paper games right now?
JM: Yeah, I mean, I think this is a 10 years to 20 years theme, and I think that over the next 10 years, Amazon, for instance, will go from being a trillion dollar company to a $10 trillion company. So kind of like where you end up, where you end up buying a stock like that is kind of immaterial vis-à-vis just going ahead and understanding that this trend is happening and taking advantage of it. You have to realize that there are a lot of more – a lot more companies on this [Chucks] in Netflix there. You’ve got Peloton Interactive, reimagining the gym, and delivering and you’ve got companies like Schrodinger is delivering health care using digital tools. You know, I think that getting involved in these companies is more important than figuring out exactly what’s the price is, what the right price is.
AT: Just from like a portfolio management perspective, and I know you trade options as well, do you buy puts out of the money just in case something bad happens on earnings call? Are you just like these are core holdings and you’re not going to play around with them?
JM: My attitude is that these are core holdings, and I’m not going to play around with them. So, I do publish options, tune options, newsletters, and also features. So, I’m very attuned to the short-term picture. But in terms of this larger theme that we’re talking about digital transformation, this is going to be going on for 20 years. You know, it’s sort of like, Aaron, you know, when you and I used to working back in the late 1990s and early 2000s, and we said, there’s going to be a mobile computing revolution, right? Remember that?
JM: This was before YouTube was really popular and before, you know, you’re prepared to get everything that you needed online. And how long has it taken for that vision to be fulfilled? It’s been about 20 years. So, you know the companies that were the [hot] at the beginning of the digital content revolution are still hot today. And if you can’t decide on which one to buy, I think, generally speaking, Visa and MasterCard are the way to go, because they’re leveraged to both – to the economy, as well as to the digital revolution.
AT: Wait, so why not PayPal, as opposed to use your MasterCard?
SA: Or Square?
JM: Yeah, I mean, Square and PayPal are both great companies and we have on them in the past, but in terms of like, if you just have to have one name that covers E-tail and the transformation of hard money into credit into software. And the two companies at the forefront of that revolution are MasterCard and Visa. MasterCard and Visa are a duopoly. Basically, there are no other companies that provide ATM and credit card transaction data to the scale that they do. So, those are two companies that are like just because I’m sure they’re going to be around in 20 years.
AT: A quick follow up there, Jon. What about Bitcoin? You know, do you have a thought on cryptocurrency more broadly, as [kind of] threat to the Visa’s and MasterCard’s of the world?
JM: I try to get involved with cryptocurrency at the very beginning and I just couldn’t get my head around it. And I still don’t completely understand why it’s valuable. So, I’ll leave that to other people. You know, you can’t be an expert in everything Aaron.
SA: We try.
AT: We try.
JM: I’m much more interested in, you know, Peloton Interactive. I think they’re a fascinating company. Peloton is known for its best-in-class stationary bikes and treadmills, but the company is really disrupting the physical gym experience with interactive virtual exercise instruction. And, you know, the public has really taken to – you have Peloton sales are up 99 – sales were up 99% in fiscal 2022 to almost $2 billion. And the shares are up about 360% since the beginning of the year. And that’s a really interesting company as taking advantage of this sort of virtualization of our experiences.
AT: Alright. We’re going to come back and talk more about Peloton with Jon Markman. You’re listening to Alpha Trader, we’ll be right back.
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We’re back with Jon Markman, author of the Strategic Advantage newsletter among many others. You can find it on Forbes and Fast Forward Investing. He also has Markman’s Strategic Options and Power Elite equity research services at Weiss. So Jon, just before the break, you mentioned Peloton and one of your recent commentary pieces you wrote some of our favorite names like Peloton are extremely overbought and likely to stall and as you just alluded to, it’s had a phenomenal six plus months here certainly since the lows in March. So, what kind of stall or what are your concerns short-term about Peloton? Is it just a valuation call?
JM: It’s more of an overbought call. I’m not worried about the valuations, the valuations will take care of themselves. You know, with inflation low in a piece can be pretty high, and so I think that I’m not that worried about valuation per se in a high growth company like Peloton. I’m more worried about you know, some competitors coming in like Nordic Track and others, but Peloton has really built up, it’s more than just a bike. Have you ever tried it Aaron, ever tried the vehicle?
AT: I have not. I have not had the pleasure yet.
JM: It’s really quite remarkable. I got one a year ago and the bike itself is exceptional, very high quality, but what’s really cool is the video, the he spin instructors are fantastic, very motivational, and they really keep you wanting to come back and do your work on the machine. You can get a you can get a – but I want to think of as – like an hour’s gym workout in about half an hour on this bike. And the instructions are very motivational. I think they’ve just done a fantastic job of creating sort of, for one of a better word, the Netflix of gyms where it’s a company that’s completely dependent, and built on the digital experience, and disrupts the gym as an experience. But there’s other companies I think that are less obvious.
You ever checked out the company called The Trade Desk, TTD. It’s a platform for real time buying and selling of digital Ad, Ad inventory. So, big clients bid for digital ads across connected TV platforms like Amazon Prime and most websites that are not owned by Facebook and Alphabet. What I mean by that is that most ads on the internet are served by Facebook and Alphabet, but all the ones that aren’t those two are served through The Trade Desk. Sales were up 38% last year to [616 million]. And they’re pulling back now, but they’re still up 130% for the year.
AT: Right. And I’m looking at the, your Markman Buy List and Trade Desk, you got into it in late April at around $225. You know, most recently it’s trading over 600, Europe 170% on that name. But if you want to go back to Peloton for the same reason, because you’re on paper, at least you know your gains here are well over 500%. So, you know, again, are you doing anything to protect or lock in those gains given you just said, you think it’s overbought on a short-term basis?
JM: You know, I do think it’s overbought. So, I think that people who were in it from the beginning from the IPO, etcetera can pair back their holdings, but I’m not really – I’m not – that’s like my thing. I don’t really get into people sculpting their portfolios. I just want to help them understand what the best companies are to invest in to take advantage of these themes. Does that makes sense? I’m not their financial manager or consultant. I just want to bring ideas to them that they may not have been aware of. Another company that I like a lot in the space, ServiceNow, symbol NOW. It operates in enterprise workflow platform, have you ever heard it?
JM: They allow companies to easily monitor different parts of their business in real time and it also permits the integration with a lot of other software that – and legacy software that companies have. It’s actually become the operating system in many large companies and some companies – those clients are so enamored with what they’re doing, their subscription revenues, renewals average 97%. So, ServiceNow has done a tremendous job of digitizing the work desk in large companies, and I think it’s a company that people ought to really be involved with.
AT: Because, you know, you’ve got so many different potential ways people can find your stuff like for someone who’s you know, just getting familiar with Jon Markman like what’s the best way for them to find your work and follow some of these picks that you’re talking about?
JM: Sure. People can go visit my website markmancapital.net and sign up for a free two week trial of my Strategic Advantage newsletter, which comes out daily. People can also check out my column at TheStreet called, Markman On Tech.
SA: I wanted to talk about another stock you wrote recently about one you own when there’s been a multi-bagger for you, that we’ve all heard of which is Zoom video, your most recent column say that that’s looking a little overbought, they might face some challenges, you remain quite bullish on the name in the future. I’m kind of – I’m struck by the speed at which things move now. We were talking about Netflix earlier, and kind of how that’s become a dominant name, you know across the globe really. 20 years as a public company up whatever, 13,000% or 15,000%. It’s still just a $250 billion company. It has been a Public Company for a little while. It’s already $170 billion company. Is the market so much bigger for Zoom than Netflix that we shouldn’t be really paying attention to market caps?
JM: Well, I think the Netflix piece of the story that I find fascinating is that every step along the way people would say, Disney is going to crush them.
SA: That’s right. Yeah.
JM: Comcast is going to crush them.
SA: Apple is going to crush them.
JM: Apple is going to crush them. But you know, when you’ve got a really good idea, and you’re able to prosecute that idea with a lot of focus, like the people at Netflix did, you can be successful. A little bit earlier in the year or last year, I was a little bit skeptical of Zoom, because, you know, there’s a lot of competing products out there. Cisco has a great product. Microsoft has a great product called Skype.
SA: Google has Google themes.
JM: Google has Google Meet. And I’m like, you know, you got all these big sharks out there in the water, how is the Zoom Communications going to survive? But it turns out that they created and they operate this simplest video conferencing business in the enterprise world. You know, it’s got a web interface that can have anybody zooming in seconds, including grandma, grandpa, and the kids. And you know, it’s become an essential tool in the post-COVID world. It’s partly because they were in the right place at the right time, it’s probably because of luck. But they’ve done a great job of capitalizing on their luck. I’m just a little bit worried about Zoom going forward because they’re moving into an area as they get bigger, where they’re going to be competing with the Cisco’s and Microsoft’s of the world more directly, and I think that could slow and distract them. But for now, I’m a big Zoom fan.
SA: And do you look at management’s, obviously Zoom’s in the right place at the right time, right now, Peloton is in the right place at the right time right now. You know, how do we know that they’ve got, you know, they are [Reed Hastings] that’s going to, you know, survive 20 years of challenges?
JM: I mean, you don’t know right? So, because we don’t know, it’s risky. And but risk is how you make money. If things were, we were certain about things, there would be no money to be made? Because everyone would have the same opinion, but…
AT: Yes. And I remember when people were calling for Reed Hastings head when he did the Qwikster move. I guess that was about 15 years ago, maybe and Netflix was looking dead at that point. It looked like self inflicted wounds at that point. So that’s a great point. We don’t know which of these, you know, newer younger manager or management teams are going to turn out to be the next Steve Jobs, Tim Cook at all.
JM: Right. You have to keep in mind there has to be risk involved, otherwise it wouldn’t pay.
JM: You know, another company I think is really interesting in this space is Teladoc Health, you remember them. TDOC?
JM: This is an idea which was always on the calm, right. Everyone was thinking, telephone-based medicine that’s the future people. People have been saying that since like the 1990s, the early 2000s, late 2000s. You know, it’s like it was just never quite happened and it suddenly boomed. However this crisis in Teladoc Health becomes the largest telehealth platform in the United States. They operated video platform that connects healthcare professionals and doctors, psychologists, etcetera to their patients. And in my opinion, the strength of the Teladoc program is its contractual relationship with health insurers in large companies. Sales were up 32% to 535 million last year, or earlier this year and stocks are up 164% in 2020, but I think this is another one that you can buy on pullbacks, it doesn’t really have a natural competitor.
AT: Right. So yeah, so it sounds like – a lot of these things, Teladoc Health, Peloton, Zoom certainly you know, have benefited from the COVID panic or pandemic excuse me and panic. Is it your view though that if, you know if tomorrow they announced the vaccine, and we can all get back to “normal life”, how disruptive or not will that be to these companies?
JM: Well, there’s actually three things happening and talking about vaccines. I call them the – this is a terrible acronym, because I can’t do any better than this Aaron. It is FVS. It will be better if I had a vowel, you know, yeah, I need a vowel. But anyway, let’s just say FVS. The S is the said. So, I’m talking about support for the market. The Federal Reserve decision to basically say that they’re going to keep a zero interest rate policy for the – through 2023 is a huge boost for the market. Number two, V. The V is vaccines. You know, obviously, the market thinks that there will be a vaccine in the next year. I don’t think it’s going to happen in the next three months. But you could certainly have a vaccine for the most severely impacted people by the middle of next year. And that’s a rate of hope that that investors are leaning on. And the S is stimulus.
Stimulus, if it were to happen, if they were to pass a stimulus bill now, it might only be $500 billion, because that’s the amount that the Senate wants to pass. Speaker Pelosi and Treasury Secretary Mnuchin have proposed a $1.8 trillion program, but you know, if the stimulus program does not occur in the next – if they don’t make a deal in the next two days, it’s going to go to after the election. And I think the investors out to hope that it happens after the election because if the Biden camp – if the democrats win, you’re probably looking at stimulus of more like $3.2 trillion. And that’s like double what they could get right now.
AT: That’s real money. That’s real money.
JM: That’s real money. A trillion here, a trillion there, pretty soon.
AT: Pretty soon. Pretty soon it’s real money. Yeah, yeah. No, it’s incredible like how we all become so numb to these big numbers. But yeah, I mean…
JM: A $3 trillion infusion – $3 trillion infusion into the economy would just supercharge this. It would turbo-charge the economy and also the stock market, because excess money always goes to speculative uses. So, I think what the market right now is doing is it believes that these three horsemen, the Fed, Vaccine, and Stimulus are going to support investors, at least the next year or two.
SA: And a vaccine doesn’t change your bullish view on names like Zoom video?
JM: No, I mean, I’m not an expert by any means on medicine, but from what I’ve read, it seems like the rollout of the vaccines will be very slow.
AT: Yes, that is true. So – and you reference this with Teladoc, specifically. So, you know, maybe you’d look to buying a pullback. So, what is your advice for people and there’s a lot of them, and you know, myself included, you know, who’ve been sitting on cash or too much cash relative to where they “should be” based on their age and risk profile, you know, waiting, you know, because they think something bad is going to happen and the market is going to, you know, fall back here, like, what would you recommend someone do with cash at this point?
JM: Again, I’m not a financial advisor; I just kind of try to find stocks that I think will help people – will benefit people if the thing that I’m talking about will come true, but I think that, you know, this is not a good time, this is probably not a good time for cash. The Fed is telling us that, you know, by forcing interest rates down to near zero, it’s creating the view as the correct view that it’s called TINA, you know, you’re familiar with TINA, right?
AT: Yes. There is no alternative. Yes.
JM: There is no alternative. So, I read a long time ago, an interview with Warren Buffett where he said, and it really stuck with me. He says that, ‘stocks and bonds are always in competition with each other’. If you can get a 6% return from a bond, why bother with stocks? But you know, you can’t get 6% anymore, right? It’s hard for [indiscernible] to get 1% over passbook savings account. So, cash is trash. Yeah, I’m not just saying that because it’s [indiscernible]. I’m saying it’s because the Fed is telling us that they want – they’re forcing people into stocks. And the Fed’s the most powerful engine of growth in the world that has been, you know, for the last hundred years. People always want to think that the Fed’s not all powerful, but it really is.
AT: Yeah, don’t fight the Fed is the oldest, you know saying on Wall Street. Well, not the
JM: The oldest saying on Wall Street is don’t fight the Fed. And my addendum to that is the Fed is undefeated.
AT: Can’t be the oldest because the Fed’s only been around for 100 plus years, but sorry, that’s splitting hairs. That’s [indiscernible].
JM: The oldest piece of advice of that nature is there’s nothing new under the sun that comes directly from – it comes from the Bible, but it comes to us via reminiscences of a stock operator. It’s on the first page.
AT: That’s right.
JM: There’s nothing new under the sun because everything that we talk about is as much about human emotion as it is about dollars and cents. In my view, PE is an opinion, PE is – [high PE] is to tell you that investors have a high level of confidence in the company, the [low PE] says people have low level of confidence. So, I would – I think right now, people have relatively low level of confidence in the market overall. It should be more exposed.
SA: Are there any stocks that you’re a fan of that have, to your [chagrin], kind of disappointed you, yet you still remain a fan?
JM: Well, actually, let me talk about one just – just for Aaron, because he’s kind of worried. He’s he says people have cash and are looking to raise the plat. And, you know, for those people who are a little bit on the fence, I would say stick with some of the best run companies that have been through so many cycles and come out on the other side. One of the companies I really like a lot on that regard is Danaher, DHR, are you familiar with them? They’re a conglomerate that operates in professional services like diagnostics, environmental, and Applied Sciences, and they’ve got [30 different] businesses under their banner, but that all share a cohesive management structure and a digital infrastructure. And this provides, you know, economies of scale, and the Danaher business has grown year-after-year, after year-after-year and, you know, 2020 has been especially lucrative, but this is a really well managed company. You know, Aaron, you’re a baseball fan, you know how people say sometimes, he’s a professional hitter. You know that phrase?
AT: Yes, yes.
JM: And it sounds like ridiculous. Like, of course, they’re all professional hitters, but no, there are some hitters that are just – they just seem to be able to hit the ball when it’s necessary, hit the, you know, hit a home run when required.
AT: Like go the opposite way when they need to, just to move a [indiscernible] yeah.
JM: Advance the runners, etcetera, etcetera. Well, Danaher is that kind of company, to me. It’s extremely well managed, and one of the stocks, I have the easiest time recommending to people.
AT: Essentially, it sounds like Danaher a number of years ago people would talk about and they are sort of like, you know a smaller GE when that was a complement.
JM: Good point.
AT: But it sounds like, you know, you’re talking about Danaher the way people used to talk about GE.
JM: That’s correct.
AT: You know, steady, well run business, well managed, you know, diversified and they know what they’re doing.
JM: Exactly. And so that’s not really a tech company, per se, but I included in my list because it does, it has taken, they’ve done a tremendous job of taking advantage of the digital revolution. Another stock I like a lot that people doesn’t get enough credit is Cadence Design, you ever heard of them, CDNS. They make – it’s a company that makes systems that companies use to design semiconductors. And you know, chips are the center of the digital revolution, because they’re finding their way into ever smaller, lower powered devices.
So, we’re making lots more semiconductors than we used to. And Cadence is in the business of making that process more efficient and cheaper for the manufacturers like Nvidia, etcetera. And you know, it’s not the fastest growing business in the world, I think it’s growing at a highest single digit growth – it has high single digit growth last year and this year, but it’s a company that’s really not that well understood and not that – not overpriced, and I think people ought to take a look at it, Cadence Design, CDNS. And then one more company I’d like to call the people’s attention that may not – people may not be aware of is MongoDB.
AT: That one I’m not familiar with, what does MongoDB do?
JM: It has – symbol is MDB. It makes a scalable cloud-based database program that competes directly with Oracle. So, Oracle is kind of messed up, has been for years, because it’s got this tremendous terrible legacy business, it is trying to grow out of MongoDB, and it’s being assaulted by these smaller cloud-based database platforms like MongoDB. So, MongoDB revenues shot up to 420 million in fiscal 2020. Just repeated design wins and new business from companies like Adobe and Google. So, in terms of, you know, the best online or cloud-based database program, company, I think MongoDB is the one MDB.
AT: You know, I do want to ask you about a couple other [demes] and obviously, you know, it sounds like we could talk about – you could talk about interval stocks for a long time here. When you were talking before about Peloton it struck me though the way you describe them is the way a lot of people talk about Tesla, which is the other, you know, headline earnings report this week, and I’ll put air quotes on earnings because who knows if it’s going to be positive or not? Do you have a position in Tesla or a view on that particular stock?
JM: I’m a big fan of Tesla. I’ve never – I haven’t owned it for a while because it got just – the price got, in my opinion got [outrageous] and I’ve always been worried about Tesla because they’ve had a series of Financial – Chief Financial Officers leave the company which is sort of a bad sign.
JM: So, Tesla has exceeded my expectations. I’m not an expert in Tesla, but I do respect what they’ve done.
AT: Fair enough. Okay. And then the other name I wanted to ask you about is one that I would think most of our listeners are familiar with, which is Microsoft, give an interesting perspective on Microsoft, which is that, you know, people are under estimating the importance of office in a work from home world, can you explain that thesis?
JM: Yeah, I mean, Microsoft is one of the few – is the only company of its generation, they managed to survive. You know, Cisco has not really survived, Oracle has not really survived. And a lot of its competitors have gone away, but Microsoft has just been blessed with great management after Steve Ballmer left. And they made a really important shift to the cloud. They stopped worrying about whether they were going to sell Windows devices, they started to sell – they want to sell more into the digital space. And it’s, you know, management has done a great job year-after-year of directing them into the high margin areas of this industry, and I think the world of Microsoft – I think that it can be up, you know, 5x by the beginning of the next decade.
SA: And a name that I haven’t seen you talk about in at least any your recent writings, which I’ve just read is Apple, obviously an important name to a lot of people.
JM: Yeah, Apple is a name that I have a lot of problems with. The market hasn’t had as much problems as I have. But to me, it’s, you know, iPhone is no secret, iPhone sales peaked about three years ago, and have not gone back up. And making a big business out of like, Apple Watch, and the iPad services just seems to me like it’s a difficult proposition. And I really, you know, you look at Amazon, what they really have is either a five SQ company, can you imagine another, could there be any other [trillion dollar] company that basically has five things to sell.
They can sell, you know, what I mean? And if one of those products, you know, becomes in effective [indiscernible] it’s not a good seller, the whole company can be brought down, and I’m just a little worried about them, Apple. I mean, they haven’t really improved the – I mean, it’s the – they’re trying to make, keep the impression that a smartphone has to be expensive. And then a lot of other vendors who showed us that you can make a device, it’s like 99% as good as an Apple and sell it for about 60% loss.
AT: Yeah, it’s interesting that when the 5g phones came out last week, you wrote, you know, the phones are finally here, but investors should skip Apple and focus on Skyworks Solutions and Qorvo, the component supplier that make the new devices speedier, and to me that, you know, you obviously, you’re not shy about investing in mega cap stocks, but it’s – to me that sort of seemed like the classic Jon Markman. Like, I’m going to look for the first derivative type of play. What, you know, do you have positions in Skyworks and is a Qorvo symbol, QRVO?
JM: Yeah, I don’t have one at the time, but I’m waiting for them to pull back, give me an opportunity to buy them. But I do think that, you know, these are the sensors, these are the, to make the internet of things work. And we need low cost sensors and we need ways to access them. And that’s what these two companies helped Apple devices do. So, you know, I don’t think it’s really that necessary to do first derivative stocks, but you can go directly to the source.
So, if you really want to take advantage of this industry, you can buy the stocks and I recon I did. But if you want to go to first or second derivative, then yeah, buy the chipmakers and make this possible. And Qorvo, Cadence is my number one pick in chip design. I think Nvidia is my number one pick in the development of new businesses for chips. And if I had to pick one, I think I’d wait to buy Nvidia on the next pullback.
AT: All right, well, if you’re right, we may not get any pullbacks for the next decade, but we really appreciate all your time here today. Our guest has been Jon Markman. You can find his research and more at markmancapital.net. Jon, thanks very much for being with us today.
JM: Aaron, thanks for having me.
SA: Thank you, Jon.