PERFORMANCE
MTD
My portfolio: 1.5%
S&P 500: 2.61%
1.11 points worse
YTD
My portfolio: 8.49%
S&P 500: 1.47%
7.02 points better
*****
CURRENT PORTFOLIO
My portfolio: 1.5%
S&P 500: 2.61%
1.11 points worse
YTD
My portfolio: 8.49%
S&P 500: 1.47%
7.02 points better
*****
CURRENT PORTFOLIO
Tier 1 (10-25%):
17% - CrowdStrike (CRWD)
13% - DataDog (DDOG)
10% - Roku (ROKU)
Tier 2 (5-9%):
9% - Twilio (TWLO)
8% - Cloudflare (NET)
7% - Pinterest (PINS)
7% - DocuSign (DOCU)
7% - Zoom (ZM)
6% - Magnite (MGNI)
5% - Asana (ASAN)
4% - FuboTV (FUBO)
Tier 3 (2-5%):
3% - Digital Turbine (APPS)
2% - Red Violet (RDVT)
1% - Cash
14 positions, including cash (14 last month)
*****
GENERAL THOUGHTS
I underperformed the S&P 500 – first time that has happened since last March when the whole world was coming to an end. The following four months after that, my performance vs the index was:
April 22% vs 12%
May 35% vs 4.5%
June 23% vs 1.8%
July 15% vs 5%.
But that was the past
At one point this month I was up 25% YTD. Then the market turned sour. There was a big sell-off in high-tech and fast-growing companies. I was reminded of what it feels like to see free-fall. Like last March, indiscriminate selling by machines. 5-10% in a day. Just all red.
I can usually laugh it off. When it stops being funny or when I start to lose sleep, is when I know I've reached my threshold for pain. I didn't hit it this month, but I did just start to lose my sense of humor this past Thursday when the market became really manic.
I'd say there is a non-trivial chance the selling could continue into March. It could even get really ugly. But it won't last forever. I'm buying the stocks of fast-growing, capital-efficient businesses with rapidly improving operating and cash flow margins that sell essential products (software) which scales basically to infinity. So even if the market in general goes into free-fall there is some solace in knowing I own some of the best companies.
*****
ACTIONS IN THE PAST MONTH
Added:
Pinterest (PINS)
Built:
Digital Turbine (APPS)
Trimmed:
Cloudflare (NET), Twilio (TWLO)
Cloudflare (NET), Twilio (TWLO)
Sold:
Okta (OKTA)
*****
PORTFOLIO THOUGHTS
I said last month that it was too many companies, and this month I did nothing about it.
I sold Okta to buy Pinterest.
I think I'll be able to narrow in March. The remaining half will report and I'll be forced to make decisions.
Overall the portfolio has divided in two. On one hand I have companies that benefited from the pandemic. That includes Zoom, DocuSign, Cloudflare, Okta, Twilio and Roku.
I sold Okta to buy Pinterest.
I think I'll be able to narrow in March. The remaining half will report and I'll be forced to make decisions.
Overall the portfolio has divided in two. On one hand I have companies that benefited from the pandemic. That includes Zoom, DocuSign, Cloudflare, Okta, Twilio and Roku.
Roku's benefits didn't show until Q3 because in Q2 they were gaining customers, but due to ad dollars evaporating, not monetizing them until Q3 when ad dollars returned. Roku will have a 1-quarter lag before tougher comps (ie. in Q3 2021)
On the other half are companies that should benefit from the reopening of the full economy – in particular, those that make money from ads. They have easy comparable upcoming quarters. Pinterest, Magnite, Fubo, Asana (not in ads) and Roku (only until Q2).
I haven't designed the portfolio this way, it's just sort of happened.
*****
COMPANY SPECIFICS
CrowdStrike (CRWD)
Market cap: $47.7 billion
MTD performance: 0.09%
YTD performance: 1.97%
CrowdStrike is a cloud-native security platform. Covid was great for their business because all of a sudden you had all these people around the world who needed to work from home. They needed laptops and phones protected and that's exactly what CrowdStrike does.
On top of that, in December, SolarWinds, a leading competitor in the security space, suffered a massive data breach by Russian hackers of government data. CrowdStrike was brought in to fix the problem.
Given the continued work-from-anywhere trends and heightened security environment combined with the best tech and world-class management, I'd say they are in a good place.
They've grown sales in the 80%+ range, and improved operating margins for the past four quarters.
After being up 38% in December and 300%+ in 2020, CRWD has "taken a breather" the past two months.
After being up 38% in December and 300%+ in 2020, CRWD has "taken a breather" the past two months.
DataDog (DDOG)
Market Cap: $29 billion
MTD performance: MINUS 7%
YTD performance: MINUS 3%
DataDog is a software monitoring platform. Like CrowdStrike it is cloud-native and operates on a Software-as-a-service (SAAS) business model. The company sells software that allows other companies to monitor their own. If problems arise, DataDog is on top of it.
The company wasn't immune to the pandemic. They had one bad quarter of decelerating revenue (80%+ to 60%+ in Q2 2020). Now they're working off a lower baseline until we lap that quarter in 2021.
They reported great results this month. We were looking for QOQ growth of ~15% and that's what we got. 56% YOY growth. In Q2 2021 we will see an acceleration of YOY revenue so long as they continue to hit ~ 15% sequentially.
130% DBNER
RPO (revenue backlog) of $434 million, a 78% YOY increase.
Yes please
Plus a whole lot more.
I plan to keep DataDog where it is
Roku (ROKU)
Market cap: $50 billion
MTD performance: 1.6%
YTD performance: 19%
Roku makes little boxes that sit next to your tv and connect it to the internet. They also license that software so manufacturers can install it live natively into "smart tvs".
Their strategy is to: #1 grow accounts, #2 increase engagement, and #3 monetize those users. They monetize by also owning an ad business.
In their own words they "pioneered streaming to the TV. We connect users to the streaming content they love, enable content publishers to build and monetize large audiences, and provide advertisers with unique capabilities to engage consumers."
They are an "over-the-top" (OTT) "connected tv" (CTV) service.
I see Roku as the operating system of TVs similar to how Microsoft and Apple are the operating systems of computers.
The company has one long-term tailwind: "cutting the cord". Because customers are leaving "linear TV" (traditional cable) for "connected TV" (CTV), it means advertising dollars are moving too. This is the investment thesis – the shifting of ad dollars. And because TV over the internet is more personal, it allows advertisers to reach specific audiences.
This tailwind was disrupted by the pandemic when ad dollars dried up. But they kept adding customers, so that once ad dollars came back on, the leverage showed. They "monetized" them. We're still in the middle of that accelerated leverage I think and it gives the company strong footing for the (near) future.
Roku announced earnings in February and it was the best report I've seen (I've only seen 6 probably). They put up the strongest numbers I've seen, and gave strong guidance for the next quarter.
The headline numbers were:
The headline numbers were:
- Revenue increased 58% YOY to ~ $650 million in the quarter.
- Platform revenue (their high-margin revenue) increased 81% YOY
- Platform revenue as a percentage of total increased to 73% from 63% YOY
- Cash flow from operations for the entire fiscal year 2020 improved from $13.7 million to $148 million this year. Amazing. From 3% to 23% of revenue.
- Free cash flow for the year, was ~ $65 million from negative $63 million last year. FCF margin of 10% vs minus 15%.
- ADJ EBITDA increased 650% YOY to $113 million, and increased from 4% to 17% of revenue. Really great.
The company doesn't give Adj numbers but I backed out SBC to get
- Adj operating margin increased YOY from 2% to 16%.
- Adj net margin increased YOY from 3% to 32%. Amazing!
active accounts up 39% YOY
active accounts up 39% YOY
streaming hours up 56%
ARPU (annual revenue per user) up 24%
More customers, using the product more, and spending more money. And NONE of them are going back to linear TV. They are ALL staying on.
Most revenue comes from the US, but they are (slowly) expanding into Canada, Brazil and the UK.
Most revenue comes from the US, but they are (slowly) expanding into Canada, Brazil and the UK.
Last month I debated Tier 1 vs Tier 2. I can definitively put them into the Tier 1 bucket with CrowdStrike and DataDog.
The stock has been my best performer the last six months. After their earnings report mid-Feb it's return for the previous six months was 213%. Compared to:
CRWD - 126%
DDOG - 23%
NET - 111%
Cloudflare (NET)
Market cap: $22 billion
MTD performance: minus 3.51%
YTD performance: minus 2.66%
What the company does:
Cloudflare is a web infrastructure and security company. It provides content delivery network (CDN) and other services that sit between a website's visitor and the websites they are visiting. The company's motto is "build a better internet".
Recent company performance:
The pandemic was great for them because all of a sudden you had all these people in lock-down around the world working from home needing the internet.
They've been innovating and releasing products like crazy.
They released earnings this past month and I thought it was good but not excellent. From a high-level, my take on Cloudflare is that it is essentially a souped-up CDN, which is just not a great business. It's ultimately capital intensive relative to other SAAS companies. I could be wrong on that (and very likely am), but that's how I see it. Cloudflare is a better bet than Fastly, but I don't want to put too much money on either horse.
- Revenue, both in the quarter, and for the fiscal year, grew 50% YOY.
- Gross margin was 78%.
- Adj OM in the quarter improved YOY from minus 22% to minus 4%. Big improvement!
- Adj NM in the quarter improved YOY from minus 20% to minus 6%. Big improvement!
- Gross margin was 78%.
- Adj OM in the quarter improved YOY from minus 22% to minus 4%. Big improvement!
- Adj NM in the quarter improved YOY from minus 20% to minus 6%. Big improvement!
Perhaps the brightest spot is the continued addition of customers:
- Paying customers grew 32% YOY and
-Paying customers with Annualized revenue of $100K+ grew 57% YOY
- Paying customers grew 32% YOY and
-Paying customers with Annualized revenue of $100K+ grew 57% YOY
- RPO remained strong in Q4, coming in at $384 million, representing an increase of 12% sequentially and 75% year-over-year.
- DBNR 119% (not a great number)
What to look for in the future:
They will have tough comparable quarters starting in Q1 2021 as we start to lap the Covid quarters.
We want to see them continue to add customers with revenue 45%+. They guided for 44% in Q1 and 38% for FY 2021.
Stock performance:
Last month I wrote that I wasn't sure whether I wanted to let Cloudflare, along with Roku, become a Tier 1 company, or keep it at Tier 2. After their very respectable, yet not blow-out earnings report, I put them in the Tier 2 bucket (and Roku in Tier 1).
Twilio (TWLO)
Market cap: $64 billion
MTD performance: 9%
YTD performance: 16%
What the company does:
Twilio is a communications company. They create products that allow developers to communicate through phone calls and messages.
An example of what they do is, when you call a driver through the Uber app, and it connects you without showing personal phone numbers. Or when you use Instacart and chat with the person who is shopping.
Recent company performance:
Twilio reported earnings in February and capped off a phenomenal year with a phenomenal report.
The scale is impressive. $2 billion in revenue annually and growing at 50%+.
Two great numbers:
- Active customers up 23% YOY. About on par with the previous 4 quarters
- DBNER of 139%. Amazing number at scale. An acceleration from previous quarters
What to look for in the future:
- DBNER of 139%. Amazing number at scale. An acceleration from previous quarters
What to look for in the future:
The company guided for 47% revenue growth at the high end for next quarter, which means we should see something like 53%.
They will have tougher comps starting in Q1 and Q2.
I think Twilio could be a $500 billion company one day, maybe ten years from now. Unlikely that I'll still own the stock, but it seems to have that sort of pedigree.
Stock performance:
The stock is up 280% (3.8x) since the beginning of 2020.
Pinterest (PINS)
Market cap: $50 billion
MTD performance: 17%
YTD performance: 22%
What the company does:
Pinterest is a social media platform that allows users to share and discover ideas using images and videos on "pinboards".
Recent company performance:
I had looked at Pinterest in August, and passed on it. What a mistake! I didn't pay attention until this quarter. It was spectacular. Good enough that I decided to sell Okta to buy it.
From a high-level here is the near-term investment thesis: 76% revenue growth, guided for 70%+ next Q, AND will have an easy comparable quarter in Q2 (2019 Q2 revenue growth was only 4% b/c ad dollars evaporated).
CFFO in the quarter improved yoy from ~ 9 million to 100 million. Went from 2% of revenue to 14%!!
FCF improved from minus 3.7 million to positive 97 million. Went from minus 1% of revenue to 14%!!
CFFO in the quarter improved yoy from ~ 9 million to 100 million. Went from 2% of revenue to 14%!!
FCF improved from minus 3.7 million to positive 97 million. Went from minus 1% of revenue to 14%!!
What to look for in the future:
Revenue growth in the 70's for at least two quarters. They will have tougher comparable quarters in the second half of the year.
Stock performance:
Up 128% (2.28x) since I passed on it 6 months ago. Doh!
DocuSign (DOCU)
Market cap: $43 billion
MTD performance: minus 2.6%
YTD performance: 2%
What the company does:
DocuSign does eSignatures – it allows organizations to manage electronic agreements.
And they are the biggest and best at it.
Recent company performance:
The company, like so many others, benefitted from the pandemic because you had all these people around the world working from anywhere but still needing to sign contracts.
Will it continue or have they already conquered the world? We'll find out partially when they report in March
What to look for in the future:
Simply put, can they move the needle with new products?
Stock performance:
It's up 160% in the last year, but only 6% in the last 6 months. Everyone has the same question: will revenue continue to grow in the 50%+ range as we start to lap the covid quarters?
Zoom (ZM)
Market cap: $ 109 billion
MTD performance: FLAT
YTD performance: 10%
What the company does:
Zoom is ... everyone knows what Zoom is.
Pretty simple, they do video. Sounds easy, but if it were so easy Zoom wouldn't have been known as the the service that "just works".
Recent company performance:
Hall-of-Fame calendar year 2020.
But that's all in the past now, and what can the company do in the future now that they've conquered the world?
What to look for in the future:
Sequential growth + continued customer acquisition
What to look for in the future:
Sequential growth + continued customer acquisition
Can Zoom Phone move the needle? Can the company maintain anything like its pre-covid growth? We'll be looking for something like 15-20% sequential growth.
Stock performance:
Stock performance:
The stock is up 255% in the last year, but only 25% in the last six months. It's all about the future.
Magnite (MGNI)
Market cap: $ 5.6 billion
What to look for in the future:
CTV revenue continuing to become a larger percentage of the overall. It should happen at a torrential pace.
What we need to see is organic revenue growth.
Stock performance:
I bought a small 2% speculative position in December and it's about a 3-bagger since. I'll likely trim it
MTD performance: 41%
YTD performance: 59%
What the company does:
Magnite is an advertising company. They are a "sell-side platform" (SSP). They connect publishers to brands. An example is that they connect Hulu with brands that want to advertise on Hulu.
Recent company performance:
Ads drying up in 2020 killed their revenue, but that has completely reversed course because ad dollars are back.
YTD performance: 59%
What the company does:
Magnite is an advertising company. They are a "sell-side platform" (SSP). They connect publishers to brands. An example is that they connect Hulu with brands that want to advertise on Hulu.
Recent company performance:
Ads drying up in 2020 killed their revenue, but that has completely reversed course because ad dollars are back.
All that said, it's a complicated story because they've growth through acquisitions. Organic revenue growth in Q4 2020 was only 20%.
But the future is in "connected TV". CTV revenue was only 19% of total but should go to 66% by Q3 2021 (again through acquisition).
CTV is the story. It's all about CTV, CTV, CTV. That's fine just show me some organic hyper-growth.
The story is similar to Roku's in that Magnite is in a unique position to ride the wave of advertising dollars shifting from linear TV to connected TV. It's a "story" because we haven't seen real organic growth yet.
What to look for in the future:
CTV revenue continuing to become a larger percentage of the overall. It should happen at a torrential pace.
What we need to see is organic revenue growth.
Stock performance:
I bought a small 2% speculative position in December and it's about a 3-bagger since. I'll likely trim it
Asana (ASAN)
Market cap: $5.5 billion
MTD performance: minus 2%
YTD performance: 17%
What the company does:
Asana is a "work-place management" application. You can think of it as similar to Slack – or something like email 2.0. It helps teams organize, track, and manage work.The company was founded by a guy from Facebook and a guy from Google.
Recent company performance:
Revenue growth suffered through the pandemic similar to Slack. As companies tried to cope with cost-cutting, they prioritized teleconferencing (Zoom) over work-place management software like Slack and Asana.
Q3 2020 results showed promise and a turn-around. Revenue growth of 55% and DBNER of 140% for their largest customers.
What to look for in the future:
They report in March
I feel like this one has the most upside potential given that it's a smaller company with less float, has easy upcoming comps, and is relatively under-valued. But that's just a feeling and it could be wrong
The one thing they haven't demonstrated is operational leverage. We want to see that
Stock performance:
Asana IPO'ed in late September and is up about 20% from that day.
FuboTV (FUBO)
Market cap: $3.8 billion
MTD performance: minus 16%
YTD performance: 26%
What the company does:
FuboTV is a streaming TV service that focuses on sports, including all the major leagues (NFL, MLB, NBA, NHL, MLS and the major football leagues in Europe).
Recent company performance:
Similar to Magnite, the story is complicated because of acquisitions and mergers. It's also a "story" because while the company has lots of potential for the future, it has yet to report strong results (IPO'ed in October).
What to look for in the future:
A big part of the "story" is sports betting, which they plan to monetize
We should expect to see strong revenue growth and strong guidance as the company should have easy comparable quarters upcoming. Sporting in general shut down early in the pandemic, which is obviously bad for a streaming service focused on sports.
Stock performance:
The stock got caught up in a frenzy in December. There was a lot of speculative trading. And when that is combined with a low float and small market cap it causes the stock price to go bananas. At one point it went from $28 to $64 back to $28 in a couple of weeks.
Digital Turbine (APPS)
Market cap: $7.3 billion
MTD performance: 44%
YTD performance: 46%
What the company does:
Digital Turbine makes software that sits on Android devices, and helps monetize users
Recent company performance:
The company has grown at a torrid pace through acquisition. From the earnings report in February:
- Revenue grew 146% yoy
- GAAP op margin improved from 11% to 23% yoy
- GAAP net margin improved from 9% to 16% yoy
- Revenue grew 146% yoy
- GAAP op margin improved from 11% to 23% yoy
- GAAP net margin improved from 9% to 16% yoy
(I used their GAAP numbers there to show they are indeed GAAP profitable)
The company just announced another acquisition on 26 February.
The company just announced another acquisition on 26 February.
What to look for in the future:
I suppose we should expect to see more acquisitions since that seems to be their strategy. Some organic growth would be nice.
They will have very tough comps starting in FY Q2 as it laps their acquisition of Mobile Posse
Stock performance:
Up 245% in the past 6 months and 1200% in the past year
RedViolet (RDVT)
Market cap: $281 million
MTD performance: 3%
YTD performance: minus 11%
What the company does:
RedViolet sells data privacy software. They offer data and analytics of people, to other people and businesses. Sounds sketchy.
The company's flagship product is "FOREWARN". It allows realtors to verify the identity of clients before meeting with them at real estate locations. It's tailored to the real estate industry.
Recent company performance:
Its revenue actually fell into negative territory in Q2, but the CEO was so positive on the call, that the stock didn't move much at all. In that Q2 call, he said that initially in March, April and May, Covid hit their business hard. But that business quickly bounced back in May and really started to accelerate in June.
In Q3, revenue grew 12% yoy, but sequentially 31%!!! Like DDOG, they were operating off a lower baseline because of Q2.
What to look for in the future:
RDVT will report earnings in a few weeks and again, like DDOG, the first thing I'll be looking for is sequential revenue growth.
Stock performance:
Flat
Okta (OKTA)
I sold out of Okta to buy Pinterest. It's a tough decision but at the end of the day these are liquid investments and I could get back in tomorrow if I wanted.
OKTA is an incredibly strong company that completely dominates its space. They have tons of guaranteed revenue in RPO going forward relative to their quarterly revenue, and lots of cash on the balance sheet with zero debt.
But the reality is that their revenue growth has slowed into the 40%-range and they are at the extreme end of valuation. They also face tougher comps in the upcoming quarters.
As a direct relation, Pinterest is growing almost twice as fast on the top line, has more room to progress to the extreme, and has easy upcoming comps.
*****
MACRO THOUGHTS
The current narrative for why the market, in general, and high-growth, in particular, are selling off is because the yield on the 10-year is backing up. It's at 1.6% and has gone up something like 61% this year. I can't pay attention to stuff like that. Things will happen in the macro environment. Interest rates will rise and fall, wars and revolutions will take place, tariff policies will become more or less aggressive, many things will happen. Unless we get into some Mad Max kind of scenario where I need guns, bullets, gold coins, and seeds to survive, I'll stick with my strategy.
The current narrative for why the market, in general, and high-growth, in particular, are selling off is because the yield on the 10-year is backing up. It's at 1.6% and has gone up something like 61% this year. I can't pay attention to stuff like that. Things will happen in the macro environment. Interest rates will rise and fall, wars and revolutions will take place, tariff policies will become more or less aggressive, many things will happen. Unless we get into some Mad Max kind of scenario where I need guns, bullets, gold coins, and seeds to survive, I'll stick with my strategy.
From a very high 50,000-foot view, we are in a "reflationary" environment, one in which GDP and inflation growth rates are accelerating. That sort of environment is historically good for fast-growing and "high-beta" stocks – the kind of which I own. And that environment will continue through at least Q2 as we lap the Covid quarters. Because the overall economy had such a terrible Q2 last year, it makes for easy comparisons this year. Starting in Q3 and into Q4, it will be a different story. The takeaway for me, for now, is that we are in a macro environment that is frankly good for the kind of stocks I own. I don't pay a lot of attention, but it's nice to know where we are.
*****
NEW LINEUP GOING FORWARD
About half of my companies will report in the next month. In one bucket I have those that benefited from the pandemic. Will that growth continue?
In that bucket is: CrowdStrike, DocuSign, and Zoom
And in the other is companies that suffered through the shut down. Can they now accelerate?
That bucket is: Asana, FuboTV and RedViolet
Tier 1 (10-25%):
CrowdStrike (CRWD) WILL THE LEADERSHIP CONTINUE??
DataDog (DDOG)
Roku (ROKU)
Twilio (TWLO)
Cloudflare (NET)
Pinterest (PINS)
DocuSign (DOCU) WILL IT GET CUT??
Zoom (ZM) WILL IT GET CUT??
Magnite (MGNI)
Asana (ASAN) WILL IT GET CUT OR ADDED TO??
FuboTV (FUBO) WILL IT GET CUT OR ADDED TO??
Digital Turbine (APPS)
Red Violet (RDVT) WILL IT GET CUT??
Snowflake (SNOW)
Okta (OKTA)
Roblox IPO 10 March?
*****
*****
ACTIONS FOR NEXT MONTH
- After earnings, decide what to do with:
- After earnings, decide what to do with:
(Bucket 1)
CrowdStrike
DocuSign
Zoom
(Bucket 2)
Asana
FuboTV
RedViolet
- Trim MGNI back to 4-5%
