Disruption Stories: The 2 Stocks Our Analysts Think Could Be Most At Risk

0:05Asit Sharma:Is your SaaS portfolio being disrupted? We're going to talk through the signs and you're going to want to pay attention. You're listening to Bobby Full Money.

0:20Asit Sharma:Welcome, Fools. I'm your host, Tim Beyers. With me are longtime Fools Asit Sharma and David Meier. Thanks for being here, fools.

0:27Tim Beyers:Thanks for having us, Tim. Thanks for having me.

0:30Asit Sharma:So last week was a pretty turbulent one. Both the S &P 500 and the tech-heavy Nasdaq ended the week up a bit. So there's 1.12 % for the S &P and 1.28 % for the Nasdaq. But there were some sharp sell-offs in the software as a service sector and fears of disruption are ripe. So what does it look like when disruption happens? We're going to look back to look forwards here and talk about some disruption stories. And I'm going to tell you two guys that I think are instructive. These are from the past, but I think they're instructive about what's going on now. And I want to talk about Siebel Systems and Apple.

1:11Asit Sharma:So, you know, audio show of hands here, Dave Asit, do you guys remember Siebel Systems? Tom Siebel.

1:22Tim Beyers:Vaguely. I do, though. Vaguely, okay. All right. Maybe there's a reason why it's so far displaced from my memory. This must have been a big disruption.

1:29Asit Sharma:Yes. So, between 2003 and 2005, it was becoming increasingly apparent that the incumbent supplier of customer relationship management software, which was Siebel Systems, was being disrupted by Salesforce. And so, if you don't remember, Siebel had a CRM package that you installed. You managed yourself. You would have to upgrade it yourself. And it was a big pain in the butt. And Salesforce had come out. And I remember this campaign at the time because I was still working in marketing and PR. But Salesforce, as part of their bid to disrupt this sector, they came out with a slogan. And it was literally a button.

2:11Asit Sharma:It was almost like a campaign button where they had software written on the campaign button and a slash through it. And the whole idea was no software. You don't need software anymore. You can do everything online. And what was happening, gross margin had started heading south. Net margin has also started heading south. But most damning of all was growth just went negative in four out of its last eight quarters as a public company. It just disintegrated. Now, Apple had a similar story, a little bit different. This too, Apple was showing margin deterioration sometime before the disruption to its business.

2:49Asit Sharma:And now we're going back to like 1993, 94, 95 years of bad business model choices. And I remember this because I had a client on the PR side who was a Mac cloner. Remember those? Apple had Mac cloners. I had a client, a Mac cloner called Umax Computer. And margins just got obliterated by this. And it made the company look and feel too much like any other PC maker. And so, we saw some really, really big declines in margins until ultimately, net margin went negative. The company started losing money and actually started bleeding money up until Steve Jobs came back in 1997. So some things from this, some lessons I think we can learn from this.

3:38Asit Sharma:Disruption isn't linear. It doesn't follow the same pattern in every case, but there are some signs. And so persistently lower gross margin is one I think we've seen many times. Another is increasing costs to acquire new revenue. In other words, the disruptor comes in and makes you spend more to keep your customers around. The other is reduced stickiness. The large customers tend to go away. I think that was more true for Siebel than it was for Apple. Here's the buildup and the payoff here, guys. Given what we saw last week, there were a lot of companies that the market seems to believe are just heading for a Siebel or Apple style of disruption.

4:24Asit Sharma:So I want to give you a few companies and you tell me which are most at risk. These are companies that have paid a little bit of a price recently. Monday.com, Figma, HubSpot, Salesforce, or the Trade Desk. So the tickers there, fools, are MNDY, Monday. Figma is FIG. HubSpot is H-U-B-S. Salesforce is CRM. And the Trade Desk is TTD. So are any of those showing you are a particularly concerning sign of disruption? And if you want to defend any of them, I would say go for it. And Asit, I'm going to start with you.

5:10Tim Beyers:Tim, I am going to go with Salesforce.com as a company that is looking seemingly vulnerable to disruption. Now, this is a business that is trying to stay very much ahead of the curve. This is a business which is very forward-looking, very innovative. A couple of years ago, they decided to go all in on AI agents, I think because they understood the risk to their business as a provider of legacy CRM software and annualized recurring revenue. The run rate for their agent business is through the roof for its small base. So$1.4 billion annually. The issue with this is that Salesforce.com, of course, is a pretty large company now.

5:58Tim Beyers:They're estimated to do about$41 billion in revenue this year, Tim. So I'm not sure that this new revenue can catch up. The problem that Salesforce faces is that it has a commoditized business at this point in time. It's fairly easy for businesses with good engineering teams to do part of what their platform offers. So that is really fine-tuned marketing in-house and lead generation following up on that. That part isn't difficult. Where they're a little bit mode-y is that the burden of maintaining such a system in-house, I think, is sort of high. What we're faced with, though, is a company that, let's face it, grew up acquiring other businesses as a now legacy business.

6:47Tim Beyers:It's projected to only grow at somewhere between 8 % and 10%. That's not enough to protect it from disruption. It needs another several percentage points to get that distance between its revenue and its cost to preserve those margins. I think those margins are going to be under attack.

7:05Asit Sharma:I like that you called it Modi. You know, it's a Modi business, but maybe not as Modi. So Dave Asit is arguing here that Salesforce needs to reignite growth if it wants to avoid disruption. Who are you picking out out of this list? So I just want to say this is a fabulously timely question, given that everything that is going on, I see the world a little differently.

7:36David Meier:Okay, do it. When I look at the level of enterprise, the enterprise level of the software that these many of these companies develop, there may be disruption into the future. but who on the enterprise side is really going to rip out a system that's working very well for them that they've been willing to pay for for so long in order to create maintain and then debug innovate they're just going to get all this for a fraction of the cost that they're paying today for somebody to do it for them. I think that a lot of this is overblown in the very short term. Okay. Disruption is happening. Don't get me wrong.

8:28David Meier:Yep. So where I would look is probably more on the trade desk. Okay. And the reason I would look there is for me, the trade desk is a marketplace that sort of has a SaaS model, a subscription model on top of it. So if you were an enterprising entrepreneur and you had a technology that could bring that marketplace together maybe a little more efficiently, you could sort of fly under the radar for a little bit because Trade Desk is by far a huge player in this space of bringing technology to bring ad buyers and ad sellers together. Maybe from a disruption standpoint, you could disrupt without being noticed.

9:24David Meier:Then the next thing you know, you have a better mousetrap and you're really pulling customers away from the current leader. But Trade Desk is not resting on its laurels. Let's put it that way. They're doing a lot to try to fend this off. But that's where I would see someone who was using technology to bring those people together into a marketplace, bring those buyers and sellers into a marketplace. You could sort of fly under the radar. I don't see anybody necessarily flying under the radar on the enterprise software side. Okay. Let's put it this way. They have monday.com who recently reported earnings.

10:05David Meier:The fastest growing segment of their business were the biggest customers that they were going after. These were the customers that were buying more after they had already come into the company. They had the highest dollar-based net retention levels. And they have decided that their workflow management software is something that provides value to the business that they are responsible for running. So there was a reporter who came out and said, Hey, I've just vibe coded a Monday.com replacement. It manages my schedule. Okay, great. That's not the only thing that Monday.com's software does. And Oh, by the way, I really don't know what's behind the software that you vibe coded.

10:53David Meier:So So is it portable? Can it handle hundreds of thousands of calls? You know, lots of people using it all at once. We don't know these things, okay? It's very clear that if you are able to think about something, it's easier to get it. You don't have to necessarily know all the intricacies of coding to get a model out there, to get a prototype of something out there. But production-based software is very different than a prototype.

11:29Asit Sharma:Yeah, I think that's very clear. We're going to move on to the second segment here. But before we do, listeners may be interested to know that I asked our robot overlords, who may be party to the disruptions we're talking about, what they think is the company. Who do they think are the most disruptible? And the answers were the Trade Desk and Salesforce.com. I don't know what that says, but I think it's interesting. All right, up next, we're going to talk some mindset. What does it mean to be brave in fearful times? We're going to talk about it. You're listening to Motley Fool Money.

12:13Tim Beyers:But what I wanted to tell you is that my daughter is a very good study. Semesterbeitrag, laptop, books, software, internet. So a master is really cheap.

12:20Asit Sharma:Oh, tell her, she can get it back.

12:23Tim Beyers:You mean from the tax? But she doesn't pay.

12:26Asit Sharma:No, it's a loss-to-release contract.

12:29Tim Beyers:She does it very simple with Visa Steuer. And if she works, it's kaching. That's it? Safe. Visa Steuer. Get back your money. Now, try it out.

12:39Asit Sharma:Alright, fools, we're back. It is a weary, weary time to be an investor, as we just talked about. So, we want to talk about bravery here. And Asad, I'm going to start with you here, because we used to do the Mindset Show. The reason I bring this up is because I think we've got some investors who may be listening to this show who feel like, you know what? This SaaS sell off has got me afraid. It's got me annoyed. Maybe it's got me angry. It's screwing up with my retirement plans. All very real feelings. This is a thing that every investor deals with. So I want to talk about bravery. I'm going to tee you up with this.

13:19Asit Sharma:I think there are three elements of bravery that are required for investors in individual stocks. Here's number one, willingness to go against consensus, because outperformance is never the byproduct of agreement. Number two, willingness to be told you're wrong by market action. So the SaaS sell-off, for example, this past week for an extended period of time. And then number three, willingness to not act when others are and to act when others aren't. So what do you make of those and what would you either add or replace on that list?

13:55Tim Beyers:Well, Tim, I think the first point I would make about this is the willingness to go against consensus is something that can really serve an investor. You just have to have your own opinion about a company or a thesis or a market. To arrive at that opinion, you need to do a little bit of homework and research and you need to think some about it in a quiet corner. Just put some thought to it. We tend to get caught up in our fear emotions during times like this. And it is difficult not to make that visceral knee-jerk reaction. You and I have talked about this so many times. So being able to sit down as Dave just did, walk through the thesis on the trade desk, or as I did with the Salesforce, and decide for yourself what your perspective is.

14:41Tim Beyers:That is key. Once you do that, then it's just a little bit of turning up the bravery to go ahead and take the step. Now, willingness to be told that you're wrong by market action for an extended period of time, that's harder for me. And I'll tell you why. Markets are pretty wise on the whole. Look back at the winners over time. They build consensus because they build results year after year after year. So there's only a certain amount of time you can really cling to a wrong decision. But for sure, in the short term, often that's where the greatest returns lie. People are selling out of fear. So many SaaS companies last week spilling into Monday, as I looked at my screen this morning, some of those are going to be mistakes.

15:26Tim Beyers:I happen to think, for example, the trade desk has a little bit of insulation. Not to rehash those arguments from a few minutes ago, but if you've got that contrary opinion, it's okay to be wrong or have the market tell you you're wrong, just be sure of why you purchased that in the first place. The extended period of time, Tim, again, here's where we dial up the bravery. So let's go from the short term, a few weeks to let's say a couple of quarters, right? It's been six months, nine months, five quarters. That's more than a year of time. And your thesis isn't being proven out by the market, but lo and behold, if you're correct, things do come around.

16:10Tim Beyers:And this is why patience really helps the investor these longer term holding periods versus just getting in and out of positions. And then three, okay, willingness to not act when others are and to act when others aren't. Well, this is part of the contrarians playbook. We're not always contrarians, or I should say, we don't stay contrarians forever on a certain position or purchase or thesis. We stay contrarians for the amount of time it takes the market to come around to our view, then we're in the consensus again. So that willingness to hold back when others are selling or to take the position when all the pundits are saying that's the wrong move and to be able to wait and then just let everyone come around.

16:58Tim Beyers:That again, takes bravery. So in all of these cases you've laid out, there's both an element of purposeful action and research and conviction and the other side of it, which is, you know, being a little courageous, getting that muscle up and holding fast to your beliefs.

17:16Asit Sharma:Yeah, it's not so easy. So the way I've been talking about this, Dave, is when you think about how you can get yourself to act against trends in the market. And this is something that if you are going to be a long-term investor, you are probably going to make several bets that are against the trends in the market. And you know what? Our brains deal with this sort of nonsense when everything looks against you. The brain does want to comply. Say like, okay, you win. Don't hurt me anymore. So compliance is a common approach to dealing with the fear of the unknown. But courage and bravery is the other.

18:02Asit Sharma:So talk to me a little bit about what you do to gain courage. Like you need it. But how do you think of speaking to an investor that really does struggle with this? What can you tell them about little things you could do to gain some courage?

18:19David Meier:First of all, we all struggle with this.

18:21Asit Sharma:Yeah.

18:21David Meier:This is inherent in the way our brains work and the way our emotions work. Okay. So you're not alone. The second thing is to remember, and I'm pretty sure this is a Buffett quote. You are not right or wrong because the market agrees with you. You are right or wrong because your data analysis and logic are sound. Okay. Those two things are very different. And I'm going to tell a very quick story to illustrate, hopefully, to folks out there about bravery. And this is my own experience with a company called AES. The ticker symbol is AES. This is an independent power producer. Before 2000, there was a bubble in energy.

19:04David Meier:Everyone was on the energy bandwagon. If you look at the energy stocks during that time period, independent energy producers like AES, their stocks were flying high. The bubble burst and they were out of consensus. Their stocks crashed. So being in the energy business at that time, I took a look and I'm like, hey, AES, whose stock went from, I want to say it was like a peak of 90 at the time to about$4 when I started looking at it. And the consensus was this business has a whole lot of debt and they are going to they're going bankrupt. Well, one of the things that the debt was, one of the characteristics of that debt was it was called non-recourse debt.

19:52And what that meant was the debt, the parent company