This software leader has the "FORCE" with it. Here's why…

Wednesday: The Independent Investor FROM THE DESK OF MILES EVERSON: Happy mid-week! We’re excited to talk about our topic for today’s “The Independent Investor” article. Every Wednesday, we discuss various basic investing tips. Our goal is to help you implement the right investing strategies and disciplines so you can grow your investment portfolio and achieve financial freedom in the long run. Today, we’ll feature a business case study in the context of investing. Read on to know why this software leader keeps impressing the market. CEO, MBO Partners Chairman of the Advisory Board, The I Institute

This software leader has the "FORCE" with it. Here's why… In a past “The Independent Investor” article, we talked about why the best investors are great listeners. Listening enables them to pick up on hidden cues that can only be discovered by paying attention to a management team’s earnings call, not by simply reading from a transcript or any other investing-related materials. We also highlighted one of the tools Professor Joel Litman and his team at Altimetry Financial Research use to analyze companies or stocks: The Earnings Call Forensics (ECF) tool. This helps them measure a management team’s inflections in speed of speech, tone, hesitation levels, and changes in “breathiness.” Afterwards, they compare such data against spoken words and numbers. Today, we’ll be applying this concept in this business case study. Salesforce is a cloud-based software company headquartered in San Francisco, California. It provides customer relationship management software and apps focused on sales, customer service, marketing automation, analytics, and app development. In November 2022, Professor Litman discussed how the rough environment for tech stocks has hurt Salesforce. As a result, the company announced a round of layoffs and a hiring freeze. What’s worse? The company’s stock has fallen over 30% in 2022. Given such a scenario, one could expect some investors would easily panic and sell their Salesforce stock/s… but in this case, the market’s response was the opposite. Instead of worrying that their investment portfolios would get hurt because Salesforce’s shares went down, they still expected a lot from the company! Huh? How was that possible? Professor Litman explained what investors saw in Salesforce, and why the company might do even BETTER than what others thought… The “Magic Quadrant” Analysis Every year, research and consulting company Gartner releases rankings for the “Magic Quadrant” analysis, which scores tech companies on 2 scales: Completeness of vision and ability to execute. The report puts tech companies into one of 4 quadrants. They’re either a leader (high vision and execution), visionary (high vision and low execution), challenger (low vision and high execution), or niche player (low vision and low execution). This analysis is a BIG deal in the industry. Being ranked as a leader is a prized rating for many tech companies! Early in 2022, Gartner ranked Salesforce as a leader in the multichannel marketing hub sector… again. In fact, the company has been a leader in that category for 5 years straight. This ranking placed emphasis on Salesforce’s strength. That’s why even in the midst of recent struggles, the market remains confident in Salesforce. Besides, it’s known for having some of the top products in the industry. Here’s the thing: Having and making great products is only half the battle for Salesforce. The other half is actually selling those products. To achieve that, the company’s management team has to make right and smart choices for the business. During Salesforce’s Q2 2022 earnings call, the management team expressed it will continue to deliver strong results and highlighted the ability to drive multi-cloud adoption. This meant customers could use cloud storage from multiple vendors, and that would then lead to better performance, reduced costs, and higher revenue per customer. What else? The management team was confident in messaging app Slack, which Salesforce bought in July 2021. In fact, the company is using the app as a gateway to bigger software contracts. By listening to this earnings call, many investors noticed Salesforce’s management team’s enthusiasm. While its stock went down in 2022, management’s expectations for the company implied they haven’t given up yet. Because of that, investors understood this confidence and made them ready to buy in. What can you learn from this case study? Gauging a management team’s confidence is critical to making investment decisions. Many CEOs often talk about a good game. However, to know what’s truly going on at a company, you have to read between the lines. You can see this strategy in action in Professor Litman and his team at Altimetry whenever they use the ECF. By comparing a management team’s spoken words against written numbers, they are able to rate those statements as either “questionable” or “confident.” Remember: Learn to LISTEN as an investor. You’ll know so much from also hearing how people say things, not just what they say. Besides, by paying attention to a management team’s statements during an earnings call, you’ll know whether or not a company is worth putting your money into. Hope you’ve found this week’s insights interesting and helpful. Follow us on LinkedIn.     Stay tuned for next Wednesday’s The Independent Investor! Clinical psychologist Shefali Tsabary once said: “There is no universal template that can be applied to everybody. So everyone kind of enters the process in their own way, on their own time.” Learn more about the importance of using the RIGHT tool for the RIGHT job in next week’s article!