PERFORMANCE
MTD
Me: 4.09%
S&P 500: 5.20%
1.11 points worse
YTD
Me: (2.26%)
S&P 500: 11.28%
13.54 points worse
Me: 4.09%
S&P 500: 5.20%
1.11 points worse
YTD
Me: (2.26%)
S&P 500: 11.28%
13.54 points worse
*****
Tier 1 (10-25%):
Crowdstrike (CRWD) - 21%
Crowdstrike (CRWD) - 21%
Datadog (DDOG) - 18%
Roku (ROKU) - 11%
Tier 2 (5-9%):
Twilio (TWLO) - 10%
Zoom (ZM) - 7%
Pinterest (PINS) - 7%
Asana (ASAN) - 7%
Upstart (UPST) - 6%
Tier 3 (2-5%):
Digital Turbine (APPS) - 4%
Celsius Holdings (CELH) - 4%
FuboTV (FUBO) - 3%
Snowflake (SNOW) - 2%
Cash - 0%
Cash - 0%
12 positions, including cash (12 last month)
*****
ACTIONS FROM THIS PAST MONTH
Bought:
Initiated a starter position in Snowflake (SNOW)
Added:
Added to Upstart (UPST)
*****
GENERAL THOUGHTS
I don't have much to add this month.
One quote that caught my attention this month was:
I’m not expecting it. I’m observing it.
- George SorosOne advantage of investing in public over private markets is that companies report progress quarterly. I don't have to get too caught up in trying to guess what a company will do far into the future. I don't have to "expect" something to turn out a certain way. Instead, I can observe what has happened at a quarterly clip.
An example would be Magnite, which I sold out of a couple of months ago because the story of the company is great, but the results haven't really been something to write home about. FuboTV is another. It's not that Magnite or FuboTV aren't good companies, and it doesn't mean they don't have the potential to be great companies. They do. But they haven't really demonstrated it yet so there is an element of hoping and wishing there.
So it might just be better to follow the results rather than to "expect" results in the future.
***
On another note, I'd be remiss to not reflect on my initiation of Upstart (UPST). I really went in and bought aggressively. The stock price has been all over the place. So scaling into a good cost basis has been tricky. I'm down about 15%. That won't matter if the stock goes on to double or triple, but if I had exercised better patience I would have gotten a better price. So my reflection is that I need to be thoughtful about scaling into positions. It's good to at least be aware that entry points matter. Sometimes it's better to go all in. But other times it's better to start a stock at Tier 3 and let it grow slowly, release an earnings report or two. It has to do with conviction. If I have conviction because I have previous history with the company, or because I trust someone else's expertise or have some sort of expertise myself, then it makes sense. But I shouldn't go in aggressively based on a hope that the company is about to do really well, or a dream that Wall Street is about to recognize what it's been missing.
*****
Would like to get it to under 10 positions. I can reason better around the positions when I have fewer.
*****
COMPANY OVERVIEWS
The only thing of significance was Pinterest's Q1 earnings.
Pinterest (PINS)
Market cap: $42 billion
MTD performance: (10%)
YTD performance: 1%
T6M performance: 13%
T12M performance: 221%
Pinterest reported earnings a couple days before month-end and the stock sold off about 15%. From a high level, the report was exceptional except for the forward guidance of flat YOY growth for for Monthly Active Users (MAU's). That was the story in the headlines about why the stock sold off.
There's a tendency to dismiss the market as being stupid or short-sighted, and to go in and buy the dip. But I think I need to take a minute and reflect on the dip instead. I need to try and stay perceptive to the real world and respect the market.
Am I missing something obvious? Or choosing not to see something that is obvious to others?
The economy is opening back up and therefore people will spend less time on social media. They will go outside. Therefore, engagement on Pinterest will fall off to some degree. I can accept that as a reasonable line of thinking.
I can also accept the line of thinking that says ad budgets will continue to come back strong and Pinterest should benefit.
So the high-level thinking goes like this ... despite losing some engagement, can Pinterest monetize the users who stay on the platform enough to make up for the loss of the ones who leave? It's really quite a complex question. And I think management genuinely don't know the answer so they guided low.
If I zoom out and look at Pinterest over a two to five year time horizon, I think it will succeed. But frankly, I don't only invest with a medium to long-term time horizon in mind. I also want companies to succeed in the near-term. I want them to be crushing it today and have medium and long-term tailwinds. If I had a more diversified portfolio of say 20 - 30 companies with position sizes ranging from 1% to 5%, it would be ok to let the story play out. But my portfolio is more concentrated so I need to stay vigilant.
I can't get too bogged down in stories like "well the company is doing great except for that one metric that Wall Street didn't like". I fell into that with Slack last year and their lackluster Billings growth. Eventually, I sold but I held onto the stock for about six months too long. I do think Slack will be a successful company, I just don't think it's going to grow fast enough in the near-term for me (now they are merging with SalesForce anyway). So that said, I do think Pinterest will be a successful company, I'm just not sure it's going to succeed in the near-term at a rate that is fast enough for my liking.
Essentially, will the investments they are making to become more efficient at monetizing users make up for decelerating user engagement in the near-term? Do I give them another quarter to see how it plays out? There's a bit of hoping and wishing there. As I said, I do think it'll play out over the long-term, but I'm more aggressive than that.
The decision I came to (for now at least) is that I will NOT buy the dip, or add to the position. I may even decide to trim it back to a Tier 3. I would like to give the company another quarter. But I need to be aware that this could be a mistake. The company may come out next quarter with great results except the uncertainty will continue as they begin to lap tough comps. I will try NOT to become attached to the stock or the company, and instead try to see what is actually happening in the world. There are other companies out there that are absolutely killing it right now, and that don't have stories about how they are doing great except for that one metric. It may be better to allocate capital to them instead.
What about Pinterest's earnings? It was phenomenal except for that one metric in guidance.
The decision I came to (for now at least) is that I will NOT buy the dip, or add to the position. I may even decide to trim it back to a Tier 3. I would like to give the company another quarter. But I need to be aware that this could be a mistake. The company may come out next quarter with great results except the uncertainty will continue as they begin to lap tough comps. I will try NOT to become attached to the stock or the company, and instead try to see what is actually happening in the world. There are other companies out there that are absolutely killing it right now, and that don't have stories about how they are doing great except for that one metric. It may be better to allocate capital to them instead.
What about Pinterest's earnings? It was phenomenal except for that one metric in guidance.
All of this stuff below is really great:
- Revenue grew 78% YOY to ~ $485 million. (It's worth noting that it was down 45% sequentially as the business is cyclical and Q4 is by far their strongest quarter)
- Approx $2 billion in cash with no debt. That's up 16% YOY
- Cash from operations was ~ $270 million compared to ~ $57 million last year. That's a Operating cash flow margin of 56% compared to 21%. That is exceptionally high.
- FCF was ~ $269 million compared to ~ $50 million last year. That's a FCF margin of 55% compared to 18%. Their Capex was $1.2 million to generate $269 million in FCF. That seems almost comical and not a believable number, and perhaps it will be lumpy in future quarters.
- Adj EBITDA was ~ $84 million compared to ~ MINUS $53 million last year.
- Adj Gross Margin improved yoy from 64% to 73%. Phenomenal
- Adj Operating Margin improved YOY from minus 24% to positive 16%. That's huge!
- Adj Net Margin improved YOY from minus 22% to positive 16%. That's huge!
- Adj EPS improved YOY from minus 10 cents to positive 11 cents. Huge!
KPI'S:
- Global MAU's improved 30% yoy from 367 million to 478 million
- US MAU's improved 9% yoy from 90 million to 98 million. THIS IS THE NUMBER TO WATCH GOING FORWARD
- Intl MAU's improved 37% yoy from 277 million to 380 million
- Global ARPU was up 35% YOY from 77 cents to 1.04
- US ARPU was up 50% YOY from 2.66 to 3.99
- Intl ARPU was up 100% YOY from 0.13 to 0.26. This still needs to grow more to move the overall needle but that's great growth!
For all the talk of slowing MAU's, they have rapidly improving margins and seem to be an exceptionally capital-efficient business.
For all the talk of slowing MAU's, they have rapidly improving margins and seem to be an exceptionally capital-efficient business.
As for the MAU's, in the forward guidance they said:
In Q2, we expect global MAUs to grow in the mid-teens and US MAUs to be around flat on a year-over-year percentage basis.
In Q2, we expect global MAUs to grow in the mid-teens and US MAUs to be around flat on a year-over-year percentage basis.
Flat MAU growth means that their recent top-line growth and margin expansion could be transient. It is important. MAU's is a leading indicator and does offer some predicting abilities.
Going back in quarters, starting with this most recent report, US MAU's have grown YOY by 9%, 11%, 13%, 13%, & 6%. So, flat YOY growth would be a letdown.
Despite most of their MAU's being International, 380 million out of 478 million total, most of the revenue is US-based, $390 million out of $485. So International users are going to have a hard time moving the needle.
They also guided for 105% growth in revenue for Q2, which is a huge sequential acceleration, but it's because they have an easy comparison to Q2 2020 (the Covid quarter). In other words, they are still growing revenue, but Q2 is an easy comp. So the market is already looking past it.
Therefore, the primary near-term headwind I see is that user engagement is dropping off.
The primary near-term tailwind for the company is that ad budgets will continue to come back strong as the economy continues to open. It's also worth considering that the reopening of the economy could benefit engagement in some ways around travel, weddings, & party planning.
The primary near-term tailwind for the company is that ad budgets will continue to come back strong as the economy continues to open. It's also worth considering that the reopening of the economy could benefit engagement in some ways around travel, weddings, & party planning.
You can see how all this becomes a complex story.
Medium-to-long-term tailwinds for the company include International growth and expansion in ARPU. International is growing rapidly and looks to continue, and those users are becoming better monetized.
Another medium-to-long-term tailwind is Shopping. Pinterest is partnering with Shopify and rolling out features that allow users to shop right on Pinterest's platform.
So coming full-circle, from a high level, essentially, will the improvements in monetization make up for decelerating user engagement? It's a tough question to answer, and that's why I decided not to add to the position, and may decide to trim.
As an aside, one thing with Pinterest I have either failed to realize, or forgotten about is that there isn't as much visibility into the future as to what their revenue will look like, relative to SAAS companies. They don’t have annual recurring revenue (ARR), net retention rates (NRR) or deferred revenue sitting on the balance sheet (RPO). Therefore the stock is not afforded as high of a valuation. Quite the opposite, it is relatively "undervalued" for its growth rate compared to SAAS companies. Therefore, the idea that it is mispriced or has room for multiple expansion, could be a flaw. It is relatively "undervalued" compared to SAAS companies for a reason and will likely stay that way.
Medium-to-long-term tailwinds for the company include International growth and expansion in ARPU. International is growing rapidly and looks to continue, and those users are becoming better monetized.
Another medium-to-long-term tailwind is Shopping. Pinterest is partnering with Shopify and rolling out features that allow users to shop right on Pinterest's platform.
So coming full-circle, from a high level, essentially, will the improvements in monetization make up for decelerating user engagement? It's a tough question to answer, and that's why I decided not to add to the position, and may decide to trim.
As an aside, one thing with Pinterest I have either failed to realize, or forgotten about is that there isn't as much visibility into the future as to what their revenue will look like, relative to SAAS companies. They don’t have annual recurring revenue (ARR), net retention rates (NRR) or deferred revenue sitting on the balance sheet (RPO). Therefore the stock is not afforded as high of a valuation. Quite the opposite, it is relatively "undervalued" for its growth rate compared to SAAS companies. Therefore, the idea that it is mispriced or has room for multiple expansion, could be a flaw. It is relatively "undervalued" compared to SAAS companies for a reason and will likely stay that way.
*****
MACRO THOUGHTS
None.
None.
*****
NEW LINEUP GOING FORWARD
Same lineup.
BUT I'm thinking of moving Snowflake (SNOW) up to a 9-10% allocation and dropping all the smaller conviction plays. I could drop them to 1% or from the portfolio altogether. Snowflake is valued extremely high, but the business is so performant that it's almost a foregone conclusion that it will grow into it's market cap.
Watchlist:
ZoomInfo (ZI)
*****
Watchlist:
ZoomInfo (ZI)
*****
ACTIONS FOR NEXT MONTH
None.
None.
