In this episode of Industry Focus: Financials, host Jason Moser and contributor Matt Frankel, CFP, take a deep dive into banking SaaS company nCino (NASDAQ:NCNO). Then, Frankel discusses why tech companies like Oracle (NYSE:ORCL) and Hewlett Packard (NYSE:HPE) are leaving Silicon Valley and how investors can play it. Finally, Frankel discusses why leading self-storage operator Public Storage (NYSE:PSA) is on his radar this week, while Moser has his eye on Korn Ferry (NYSE:KFY).

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This video was recorded on December 14, 2020.

Jason Moser: Today is December 14th, just making sure. Let's light this candle. [laughs] Three, two, one. It's Monday, December 14th, I'm your host Jason Moser, and on this week's Financials Show, we're digging a little deeper into a banking services company called nCino. We'll also talk about the growing exodus from Silicon Valley companies and employees moving elsewhere. We'll kick around some of the real estate stocks poised to benefit from that movement. Of course, we'll wrap up the show with one to watch, as we like to do every week. Joining me this week, he's back in the saddle as Certified Financial Planner, is Mr. Matt Frankel. Matt, how is everything going?

Matthew Frankel: Pretty good, I missed you guys last week, so it's good to be back on the show.

Moser: Well, it's nice to have you back. For the record, last week, for those of you who are listening, we did have a very fun interview with CEO and founder of LivePerson, Mr. Rob LoCascio. I really enjoyed that conversation. I hope the folks who were able to catch that interview enjoyed it. Rob talked about a new banking concept in Bella bank. It's really cool from a number of different angles. There was this one part to the service, to what they're offering called Karma. Essentially, it's just this opportunity to help shell out a few bucks to people that you know or don't know, here and there, just out of that karmic nature. It was just a really neat, sort of different take on banking. Compassionate banking is what he referred to, as I always enjoyed catching up with Rob. If you missed last week's show, go back and listen to it. Rob is just a passionate guy. LivePerson is doing a lot of cool stuff. The stock has done tremendously over the past several years. Just a really nice guy to talk to, just listening to his entrepreneurial journey and seeing all the success that they're having with LivePerson.

But this week, Matt, we're going to jump into a specific company, as I mentioned in the read in there, nCino. For those of you who aren't familiar, this is a new IPO, just came out from July of this year, 2020. Still just really getting its feet underneath it. It's only reported two quarters worth of results. Very fascinating business and I think we'll probably get everyone's attention, Matt, when I say the term SaaS. Why don't you go ahead and tell our listeners, what is nCino, and what does nCino do?

Frankel: Yeah, so they are a SaaS company. How many times do I get to say that on the show? Their goal is to essentially bring banks into the 21st century.

Moser: Yeah.

Frankel: They offer what they call their bank operating system that uses some artificial intelligence technology, which is right up Jason's alley, in order to improve the efficiency and effectiveness of banking operations. It's designed to be a seamless platform that is accessible from anywhere there is an Internet connection, that really just improves banking. Just to run down a couple of quick statistics: it's used by 1,100 banks so far. Even though it's a recent IPO, it's not a tiny company by any means.

Some of its clients are Bank of America, TD Bank, Regions Bank. It's used by a lot of the big players in the industry for their technical needs. The statistics are pretty impressive. Just running through a few of the numbers; banks who use this saw loan closing times improve by 40%. That's pretty impressive. Overall, banking efficiency improved by 2%. In terms of growth, they saw account application completion rates, meaning that customers who start an application and finish it, improved by 127%, all while reducing service costs dramatically. It's designed to not only improve the banking experience, but to make it more cost effective as well, which a lot of these brick-and-mortar banks desperately need to compete with the new wave of disruptors coming into the market.

Moser: Yeah, it feels like the old guard, in regard to banks, the stereotype that we're so familiar with it, it's changing in a lot of ways. In the financial industry, you're seeing a lot of companies now in these fintech firms that are building themselves, not as banks, but really as a service company that partners up with banks to then be able to provide financial services and what not. I mean, with nCino, again, this isn't a bank. This is essentially the technology, it's the operating system that it offers, everything from customer relationship management to account openings, loan originations, deposit accounts, credit analysis. I mean, the list goes on, and it's really impressive to see. I'm impressed to see that Bank of America is a customer as well. In regard to how they make their money, and again, it's a young company, they're just getting things going here. But I mean, is this primarily just a subscription business? Is there a transactional component to it?

Frankel: A little bit. They are primarily a subscription business. That's what they're focused on, growing. Just when you look at the recent numbers, total revenue grew by 43% in the last quarter. Subscription revenue is up by 56%, that's an ongoing trend that we're seeing.

Moser: Right.

Frankel: The subscription part of their business is what's really being built out the most, and it's what you want to see as an investor too, because that's what's long tail and predictable revenue, that you're going to get quarter after quarter after quarter. It's also worth noting that this platform is based on Salesforce's architecture.

Moser: Yeah.

Frankel: They use Salesforce's CRM technology. Salesforce is a big shareholder of nCino.

Moser: That's what I saw.

Frankel: They own about 12% of the company.

Moser: Yeah, I saw that and thought, of course the first thing that comes to mind is Salesforce ultimately just taking this thing over, with close to 12% of the shares. Listen, when I saw the description of the business, what they do, its operating system offers customer relationship management. For folks out there who wonder what that is, that's CRM. That's specifically what Salesforce does. I mean, shoot! Man, that's Salesforce's ticker.

Frankel: Right. Salesforce is all in on nCino. They've been very helpful building out the platform and helping them build out the architecture. nCino is not the only company that does what it does. This partnership with Salesforce is a big differentiating factor, which is why I want to emphasize it so much. They are the most seamless integration into the banking process. On Bank of America, we've talked about it many times, how Bank of America is by far the most tech inclined of the big four banks. It's not a coincidence that they are the first of the big four to really adapt nCino's bank operating system, and why their efficiency has improved so much. We've talked about how their growth has been more impressive than other banks in recent quarters, because more people are opening accounts. They're not getting frustrated with the process. It's an impressive company, and I think that the Salesforce partnership, if you will, is a big differentiator going forward.

Moser: Yeah, I guess that was going to be the next question I ask. When you talk about this space, there is competition, this isn't just nCino's market. Would you consider their only real advantage that Salesforce relationship, or is it the fact that Salesforce has really helped build this company up from that architecture, so to speak, that gives it a more holistic service, a more holistic offering? What ultimately is nCino's advantage beyond the Salesforce angle, or is there one?

Frankel: I would say that there is a big first-mover advantage going on there.

Moser: Okay.

Frankel: I mentioned they have about 1,100 customers right now. To put that in perspective, there are a little over 5,000 banks in the U.S. That's a pretty big market penetration so far, especially some of those big names I mentioned.

Moser: Not bad.

Frankel: I mentioned the statistics on how much they're saving their customers, how much more efficient they're making the loan process, for example. As more and more banks join the platform, as those statistics really get out there, you get this network effect, where other banks are seeing the value in the platform. At some point, JPMorgan Chase, Citigroup, and Wells Fargo are going to see how much more efficient Bank of America is getting [laughs] because of this, and might take a closer look at the platform. Regions' direct competitors are going to see how much it's helping Regions, and say, we need that. It's definitely a network effect. If their software is really as good as it seems to be, then having 1,100 customers already using it is the best growth advantage you could have.

Moser: Yeah, well, I mean, anytime you can have that grassroots movement, so to speak, or just the customers that are using your service or just praising it, then you're seeing the results from your competitors and they are bringing those results down at the bottom line. Banks, especially these days, are trying to figure out in which way they can relate to get as much profitability in this low interest rate environment. I certainly can see the longer-term road there, the longer-term opportunity there for nCino. Let's talk a little bit about management, because I was interested to see with nCino. There are a few co-founders of the business. If I'm correct here, the CEO of the business today. What do you know about management?

Frankel: I know they're doing a pretty good job. [laughs] That came out wrong. [laughs]

Moser: No, it came out right. I like what you said. Let's just dig into that a little deeper.

Frankel: I'm sorry to keep looking away, but I have all my stats right here. Every time that I do a premium write-up on a company or do really research into a company, I checkout what the employees have to say. That's how you can learn a lot about the management team and the culture they're forming. 99% of the employees approve of the CEO's job performance. That's a pretty impressive statistic. It's really rare that you see that. If you don't believe me, go to and type the next 10 companies that come to mind. I bet you, you won't see any 99's on there.

Moser: Hey, I believe you. I'm not bringing you on the show to grow -- I believe you, you've got some credibility with me.

Frankel: Well, he's a visionary CEO. This is not his first venture. He was at S1 Corporation, I don't know if you've heard of them, he was one of their key players. He's proven his ability to lead in fintech, which is really tough to do. We talk about -- great CEOs, great founders, have poor leadership skills all the time. We've seen founders come and go over the years and he is a proven founder, I guess you would call it.

Moser: I think that's a good way to put it. You see a lot of businesses out there where the founder hits a level, they hit a ceiling.

Frankel: Right. We saw that in Green Dot. Green Dot's one that we cover that we just saw that. I'm not calling Steven Streit who was the founder of Green Dot a poor leader by any means, but he hit a ceiling, as you said, and ended up having to move on and they brought in some new blood. That's not happening here. We've gotten to 1,100 institutions and are still growing rapidly. We mentioned subscriber growth growing at more than a 50% annual as base and that's during the COVID pandemic.

Banking was one of the most affected sectors. When a lot of banks were pumping the brakes on spending, they're still growing at over a 50% rate. Banks are being cautious, they're lowering dividends in some cases, they're not buying back stock, they're being very cautious on spending, and they're still seeing enough value in this platform to be spending more money on it than they were a year ago.

Moser: Yeah, I would say we could talk a little bit about the risks with a business like this. It's interesting to me, we see with the, I think three different co-founders involved with the business still at least in some ownership capacity, it's something like 4.5% of the company that those co-founders still own. Question one is, does a bank see this? Does a bank see nCino as an essential service? Even if times get tough, it almost feels like this isn't the service they can really cut back on. Perhaps they could put the brakes on expanding the relationship, but it doesn't seem like something they could just, well, let's go ahead and cut that subscription, we don't really need it right now. Especially for banks that have used it even longer. There is an absolute switching cost that comes with using a business like this and if it's taking away from what you are able to offer to your customers in the first place. You cut services like that, you risk that customer defection and they typically aren't going to come back.

Frankel: Right. This is a great model for customer retention, especially with those figures I've mentioned earlier. The big one, improving the overall efficiency of the business by 22%. If you're worried about your profits over the next year or so, as most banks are in the COVID pandemic, you don't want your efficiency to be reduced by 22% because you canceled this product.

Moser: Yeah.

Frankel: Generally, it doesn't necessarily sell itself. I'm sure nCino's customer acquisition cost is not cheap.

Moser: No.

Frankel: I don't have the figure right in front of me for that. Lending a client like Bank of America especially, I'm sure it's not easy. Once they have subscribers, assuming those numbers are true that they were putting out, this is a product that the retention should be there. They should have a near 100% retention rate, if that's true.

Moser: Yeah, I would think so.

Frankel: If account openings are growing by 127% on banks that are using this platform like they're claiming, or if loan servicing costs are reduced by 90%, which is what they're claiming, if those are true, then I could think of no good reason a bank would want to cancel this, unless nCino's platform is too expensive, which doesn't seem to be the case.

Moser: Yeah. I'd imagine that's the case. If you look at just the general investor sentiment, so to speak. There's some numbers you can look at, at least to get an idea about how investors are viewing this company. The shares outstanding are around $92.3 million, and only about 48% of those shares float. Only about 48% of that $92.3 million actually trades out on the open market, which means there's about 44 million shares of trade. Of those 44 million shares that trade, you've only got about 3 million of those shares sold short. For a business that still hasn't hit that profitability number yet, for a business that is trading at these kinds of multiples, when say these kinds of multiples, you're talking about 40X sales, you're talking about 73X gross profit but to see that low of a short interest, that tells the tale. That tells you something at least. The investor sentiment probably sees a bright future for a company like this and aren't willing to bet against it, at least not now.

Frankel: For sure. It is important to double down on what you just said that this is not a cheap stock by any means. Like you said, over 40X sales. There is a lot of growth already priced into this company. The market assumes that it's going to keep that 50% growth rate going for some time. Investors seem to have a lot of faith. Like you said, this is not a major short target or anything like that, but it is not a cheap stock. That's something that I always try to let people know that, if growth were to unexpectedly slow, that's when you see a stock like this come under pressure.

It's a fast-growing stock, it's priced for it, I think the valuation is more than justified to be perfectly clear, and it's not profitable even on an adjusted basis which a lot of these growing companies are. It has a clear path to profitability if it keeps going. This is a pretty high-margin business. Right now it's pretty much investing anything it can in growth. It's got over almost $400 million in cash on its balance sheet right now. It can afford to lose money. It's losing a few million a quarter, it's got almost $400 million on its balance sheet, so we can afford it. There's no financial worries to be clear. It's got a path to profitability, but it's not there yet, so keep that in mind too.

Moser: Yeah. I'd say the one of the businesses that this reminded me of, just to a certain degree, is Ellie Mae, the mortgage software provider that we talked so much about before they were acquired. It just seems like they offer a pretty compelling value proposition for some really important customers. As time goes on, you'll see switching costs, you'll see network effects. At some point or another, maybe they can exercise a little pricing power. I'm with you, the valuation to me is one where I'd be a little bit curious as to how much of that growth is priced in today. First glance, I tell you, this is a very interesting business, I'm very ready to dig in and learn a little bit more. I think I'd have this one on the top of my radar for sure.

Frankel: Yeah, it's been on my watch list since I first heard about it. Like I said, I tend to be more of a value investor than most people here. You know that.

Moser: Sure. Yeah.

Frankel: I have to really be sold to pull the trigger on a growth stock. [laughs]

Moser: That's understandable for sure.

Frankel: We mentioned a few, Lemonade really sold me. That's one that we've talked about recently. But I really have to be sold to pull the trigger on a growth stock and this one is toward the top of my list.

 I want to see how their customer account's growing, how their revenue retention, which we don't have too much great data on just yet, because they're recently public. I want to see that their existing customers are spending more over time, which will indicate that they're seeing value in the platform. I'd like to see stuff like that, but it's definitely one that's on the top of my watch-list.

Moser: Well, Matt, we're seeing signs that companies and leaders are starting to grow a little weary with California. Elon Musk recently moved to Texas. Now, Oracle has announced its moving its headquarters to Texas. Matt, I understand the sentiment. There's some concerns with regard to regulatory issues, taxes, yada, yada, yada. I'll read a quick quote here from Elon Musk where he said, "If a team has been winning for too long, they do tend to get a little complacent, a little entitled, and then they don't win the championship anymore." California has been winning for too long and I think they're taking them for granted a little bit." Them being the business people and the innovators. Matt, we're seeing businesses and companies continuing to look at leaving California for one reason or another as remote work becomes more consideration, more an opportunity. It feels like to me that's something we may see some more of here in the coming year. We were talking over the weekend about this. It seems like it's going to be a catalyst for a handful of real estate oriented stocks out there, right?

Frankel: It's good for some and bad for others. [laughs] Just to add to that list, Hewlett-Packard's another one that's leaving California. First of all, why are companies leaving California? High taxes, extremely high cost of living in Silicon Valley, which also translates to high cost of employment. I don't remember the exact data, but I remember the average salary of Facebook's something like $300,000 a year.

The reason is not because Facebook pays its employees exorbitant amounts of money, it's because it costs that much to live in Silicon Valley. It's not just a remote work thing, it's a cost-saving thing. Question No. 2 is why Texas? I like Texas, I've been to Texas. No state income taxes, real estate is relatively cheap. If a company wants to get a couple of dozen acres of land and build new headquarters, it's a lot cheaper to do in Texas than in Silicon Valley.

No state income taxes. Miami is another popular destination for that reason. I can't remember which companies that they were moving to Miami. Goldman Sachs said they're bringing a lot of their operations down to Miami, so that's another. Florida has no state income tax, which is another big motivator and the weather's nice. It's kind of like Silicon Valley on the East Coast weather-wise, I guess you'd call it.

Moser: Maybe a little rainy. Well, I don't know.

Frankel: Little rainier, but warm. Tech guys don't like it cold for whatever reason. [laughs] One question, before I get into some real estate things, do other cities have to worry about the same thing? Which, if it's a remote work thing they do. If the thesis is people are going to be able to work remotely, they're not going to want to do it where it's expensive. They're going to leave. Then other cities have to worry. But I don't think cities like New York have quite as much to worry about.

Moser: Maybe not.

Frankel: New York doesn't have nearly as many company headquarters, especially in the tech industry, as Silicon Valley does. What companies are headquartered in New York? Mostly financial service companies.

Moser: Financial capital.

Frankel: Because they need a good proximity to Wall Street. Wall Street's not moving. I don't think Wall Street itself is going to relocate to Texas.

Moser: Very doubtful. That would be pretty cool, I'm not going to lie [laughs]. Now, if you had plenty of barbecue catering lunches, afternoon siesta, just a little bit more of a laid back workday, that'd be pretty sweet actually. [laughs]

Frankel: You can make a case for it, but that doesn't mean it's going to happen. [laughs] But point being, I think this is a disproportionately California issue.

Moser: Yeah, I think you're right --

Frankel: -- more than other cities. So having said that, when it comes to real estate, if you look at just office real estate, I would avoid any companies that have outside exposure to California, Boston Properties is one despite its name, it has a lot of San Francisco properties. Ticker symbol BXT, that's actually the biggest office reap in the market. But I would look at some of the more localized ones. I know I talk about Empire State Realty more than anyone wants to hear me talk about it. [laughs] Ticker symbol on that one is ESRT. They are localized to New York. So, if you think that people are still going to want to live and work in New York City, that's one to look at, a big hold in your mind. I'll give you two more interesting places that I really like on this exodus from California. One is Howard Hughes Corporation.

Moser: Yeah, absolutely.

Frankel: They are a master plan community developer with a particular concentration in Texas. Their flagship master plan community is the Woodlands in the Houston area. They have a couple more in the Houston area. They were very beaten down during the COVID pandemic. They also have a big presence in Las Vegas, which is a terrible place to be right now in terms of owning property. But they're also very leveraged to the oil industry because of their location in Texas. One of their biggest office tenants is Occidental Petroleum, for example. The oil fears have really beat down property values there. But if now that's going to become a tech capital, there's a whole new opportunity to build out their Texas business. A lot of their Texas communities are nowhere near being fully built out yet. So, that could be a major catalyst for Howard Hughes going forward if Texas in particular stays a popular destination.

The other one, from a residential point-of-view, talking about the work from home trend, Mid-America Apartments. Ticker symbol on that one is MAA, I think their official name is now MAA, not a Mid-America Apartment anymore, but whatever. They specialize in sun belt apartment communities. These are cheaper areas, low cost of living for people, if they can work from home and can work somewhere cheaper, usually like markets like Charlotte, Atlanta. They're cities that people who want city life, but want to lower the cost of living can go. Mid-America apartments is a really interesting name in that space. So, I think, just to reiterate, a very California specific problem. I don't think if you're invested in saving the New York City area or the Boston area or the DC area that you're going to see these. The Motley Fool based in the DC area. I don't think they have any plans to go to Texas. [laughs]

Moser: Not specifically, we're not picking up the headquarters and moving into Texas.

Frankel: Right. The tech industry in California is the problem, is the point. So, the remote work trend is real. There are going to be a lot of people who work remotely after the pandemic, who didn't work remotely before, which is why I think it can be a real catalyst to apartment communities based in those lower-cost cities. Howard Hughes, big Texas developer, really the only publicly traded company of its kind in terms of being a master plan community builder. Think of them as a real life version of the video game SimCity. They sell some residential land to developers. Those developers put houses there. That adds demand for commercial assets like office buildings, which they build and collect rent on. Those commercial assets make the land around it more valuable, which they'll sell to builders at higher costs. It's like a cycle that repeats. It's a really interesting business model. I highly encourage you to check out the company if you've never heard of them. Those are my ways to play the California exodus. I don't think we've seen the last of these big companies leaving Silicon Valley.

Moser: I tend to agree. I think those wheels are in motion for a lot of folks, and I don't know that there's any really turning back the clock down, but I guess we shall see. Matt, let's wrap this up with one to watch. We'd like to give our listeners a couple of stocks to keep on their radar for the coming week. What is your one to watch this coming week?

Frankel: I'm watching another real estate company called Public Storage. Pretty much everyone is familiar with Public Storage, these big orange storage buildings that are all over the country. I'm sure there's one within a mile or two where Jason is sitting right now.

Moser: Most likely. [laughs]

Frankel: They're everywhere. I would think over 3,000 of them in the country, they're a real estate investment trust. They recently had a big activist come in and nominate some directors for the board. This is a company that's been very complacent for a while, in my opinion. I'm a shareholder myself. For example, if you go to Public Storage's Investor Relations web page, they don't do things like making investor presentations, they don't do an Investor Day each year. They're really not an investor-focused company at the moment. The fact that an activist is really coming into play doesn't really surprise me, and it's a welcomed change. I've said that their investor relations department needs an overhaul for some time. Not necessarily the growth strategy. They are by far the dominant self-storage player in the country, I think they're bigger than their next three rivals combined. But I do think there are some opportunities to unlock shareholder value that I would like to see them explore. I'm a big fan of the Public Storage business, and even more so now. That's what I'm watching right now.

Moser: What's the ticker again for Public Storage?

Frankel: PSA.

Moser: I am going to be digging a little bit deeper into a company called Korn Ferry and this is one I don't think we've really ever talked about on this show and it's one I dug into for a recent episode of Market Foolery with Chris Hill a couple of weeks back. Korn Ferry, and I'm sure a lot of folks out there actually recognize the name as the developmental golf tour, the step below the PGA Tour. It's actually a consultor, it's in consulting, and it's just a little $2 billion company but consulting is a really great gig, and you can build a heck of a business around it over time if you have a good network.

Like I said, this is a small company but it's one that's growing slowly but surely. The interesting thing about their consulting business is that about 20% of their business is devoted toward the financial services industry. We figured out all those consulting companies do have a fair amount of exposure to financial services and Korn Ferry is no exception there. A strong collection of offerings and consulting and digital, they have executive search in RPO or Recruitment Process Outsourcing and professional search. The interesting thing I found about the business though was that approximately 71% of their revenue comes from clients that utilize multiple lines of the business. So, it seems like they're doing something that people like and the people are coming back for more of, and given its size, it strikes me as a business that could potentially have some more opportunity on the horizon. I'm going to continue to dig in there and see what that opportunity may be.

Well, Matt, I think that's going to do it for us this week. It was great seeing you again, thanks for taking the time to be with us, looking forward to next week as well.

Frankel: I am too. I wish we could say more but you'll just have to tune in to see who it is.

Moser: You will have to tune in.

As always, people on the program may have interest in the stocks they talk about and the Motley Fool may have formal recommendations for or against, so don't buy yourself stocks based solely on what you hear. Thanks as always to Tim Sparks for putting the show together for us. For Matt Frankel, I'm Jason Moser, thanks for listening and we'll see you next week.