August Portfolio Roundup

PERFORMANCE

MTD
Me: 22.01%
S&P 500: 2.92%

19.09 points better

YTD
Me: 44.19%
S&P 500: 20.44%

23.75 points better

*****

CURRENT PORTFOLIO

Tier 1 (10-25%):
Upstart - 20%
Datadog - 19%
CrowdStrike - 14%

Tier 2 (5-9%):
ZoomInfo - 9%
Twilio - 6%
Roku - 5%

Tier 3 (2-5%):
DocuSign - 4%
Doximity - 4%
Asana - 4%
FuboTV - 3%

11 positions, including cash (11 last month)

*****

ACTIONS FROM THIS PAST MONTH
Bought:
- ZoomInfo

Trimmed:
- Upstart when it reached 26% of my portfolio
- Datadog when it reached 22%
- Roku after what I thought was a disappointing earnings report
- Crowdstrike
- Asana

Sold:

- Snowflake
- Latch
- Digital Turbine

*****

GENERAL THOUGHTS

I had a couple of realizations this month on portfolio construction. They might seem obvious, but it's good to write them down to cauterize them in my mind.

#1.
I prefer about 9 positions. 10 maybe. 11 is definitely too many.

That doesn't include cash. So with cash, it would be 9 + 1, 10 +1, etc.


#2
I want to own companies that are crushing it both long-term and short-term. That might sound silly but it's important for a concentrated portfolio. Compare the earnings releases this month of Upstart, Datadog and ZoomInfo, which you would be hard-pressed to find any sore spot in, to Roku or Pinterest, which both had disappointing customer growth metrics. Rather than ignore those metrics as "not that important" or "the market doesn't understand the company", it's better to put money into companies that are crushing it today, and have long-term tailwinds.

"Long-term" and "short-term" are relative and subjective, so it's important to define them for my purposes.

The short-term is 3 months. Until the next earnings report. Do I think the stock is going to go up in the next three months based on the numbers that were just reported?

And if the stock is not going to go up in the next 3 months, then lose it. If it's not going to go up meaningfully after the earnings report, if there is nothing meaningful about the report that is going to cause it to go up, then lose it.

Keep in mind this is not trying to guess which way the market, in general, is going to move. That's impossible. I'm not making a bet as to which way the market is going to move, but the individual stock within the market.

And then combine that with the long-term, which is basically just over the horizon as far as you can see. Is there no end in sight? That is what I could call a long-term secular tail-wind.

The short-term is 3 months (until the next ER) and the longterm is there is basically no end in sight. 5 to 10 years. The TAM will expand, and they will become the gorilla within that TAM.

The kinds of companies that just released a killer earnings report and have growth as far as you can see are the kind of companies I want to own.

*****

UPST
I would fail to come up with an adequate superlative to describe Upstart's Q2 2021 earnings report if I tried.

My plan coming into August was to lean heavily into Upstart and Datadog and that worked out quite well. So much so that I now wish I had leaned in more. But that's of course a fool's errand. Anytime I make a good call on a position I'll always wish I had loaded up even more.

I trimmed a few times when it hit about 26% of my portfolio. I plan to add back more if it falls.


DATADOG
See above. It wasn't on the level as Upstart's, but I've been waiting about 9 months for this earnings report with the idea that YoY revenue would accelerate as they lapped their Covid comp, and that played out.

Datadog will now likely show accelerating YoY revenue for the next 2 quarters at least, if not 3. The company is firing on all cylinders, and I plan to keep it as a top Tier 1 holding.


CROWDSTRIKE
I trimmed Crowdstrike from about 19% to 14% simply because I think they've hit peak optimism in the market. Meaning that everyone knows it's a great idea and I don't think their stock will double over the next 12 months. That could turn out to be dumb, and I haven't seen any evidence of it yet. But their market cap is around $57 billion! I don't really see it becoming a $120 billion company in the next 12 months.


ZOOMINFO
I've been following ZoomInfo since their IPO last year, and even held a small position toward the end of 2020. But I sold it because their organic revenue growth was only around 40%. My thoughts were that eventually as they lapped their acquisitions, the growth would fall off. But instead it showed an acceleration when they reported this month. So I immediately thought "this is exactly the kind of company I want to own". There were no sore spots in the report.


ROKU
I sold about half my shares in Roku after what I thought was a disappointing earnings report. Then because of Upstart's and Datadog's moves, Roku fell relative to the rest of the portfolio and is now about 4%.

I think it's an incredible company with many long-term secular tailwinds. And I think an investor will do fine by holding the stock for 3, 5, or 10 years. But, with a concentrated portfolio, I'm looking for companies that are crushing it on all metrics both in the near-term (quarterly) and long-term (secular trends). Compare Roku's report to ZoomInfo's. What part of ZoomInfo's earnings report makes you go "oh well those two metrics over there were bad, but the rest were all good." There was nothing like that. It was more like "wow they really crushed it on all fronts." Same thing with Crowdstrike the past several reports. 

Roku on the other hand had disappointing user growth metrics. It's easy to ignore those or write them off as not important. But Roku's basic business model is: acquire users, increase engagement with those users, monetize users. Last year in Q2, their Covid quarter, we saw increased user acquisition, but a fall off in revenue (b/c ad dollars left the AVOD system). But revenue poured in in Q3 and Q4 as they then engaged with and monetized those users. In other words, revenue growth lagged user growth. 

Q2 of this year, the most recent quarter they reported, we saw the exact opposite. Revenue looked great but user growth was disappointing. I think it's only a matter of one or two quarters before the revenue growth will show a deceleration. Again, because revenue growth lags user growth. There are reasons to believe that revenue won't decelerate. Perhaps Roku will maintain revenue growth near 70% or 80% simply because they are better at monetizing the users they have (increased ARPU). But to keep it simple, from a high level, I'm going to make a bet that revenue continues to trail users.

DOCUSIGN
I bought back into DocuSign toward the end of the month because I wanted to own it going into earnings. I've done a really terrible job of owning DocuSign. I never owned it during it's Covid run-up. Then I bought it last year at its ATH. Then sold it prior to Q1's report, and subsequent big run up in stock price. Now I'm buying back in just before an earnings report. I've really screwed that up! But the growth has continued and it's profitable and free cash flow positive, so we'll see what this report brings.


DOXIMITY (DOCS)
Just looking at the numbers, this is exactly the kind of company I want to own: high revenue growth and rapidly improving metrics of profitability.

Revenue increased 100% YOY to ~ $73 million

~ $726 million in cash

$0 Debt

Cash from operations of ~ $33 million. That's a margin of 46% vs 24% last year. WOW!

FCF margin of 45% vs 21% last year

Adj EBITDA of ~ $ 31 milllion. 43% margin vs 11% margin last year. Wow!

89% Adj gross margin vs 79% last year. Wow!

Adj op margin of 42% vs 9% last year. Wow!

Adj Net margin of 42% vs 7% last year. Wow!



ASANA
I sold about half my shares of Asana after the stock nearly doubled in a month or so. At the beginning of this year I said:

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.

And then they demonstrated some operational leverage and the stock quickly doubled. But they still have a long way to go, and one report doesn't make the company a success.


FUBOTV
Fubo is showing good traction but is still what I would call extremely unprofitable. And it may be for a while. I'm going to hold this one and follow the numbers. If the company turns a corner on profitability I think the stock could easily 3 or 4x due to institutional ownership.



SNOWFLAKE
I sold out of Snowflake after their earnings report this week. Simply put, what could Snowflake possibly report that would meaningfully move its stock price? I viewed it as a conservative investment because their reports were just ho-hum another incredible quarter of jaw-dropping numbers. But the problem is that there isn't any upside surprise the market isn't expecting. It's just routine outperformance. Everyone knows that it's an incredible company that is poised to be a big time winner. There isn't any room for meaningful upside. I do think it'll continue to grow at a faster rate for longer than the market is predicting. But it could take easily another year for that to kick in and move the stock price meaningfully. The stock is about flat from where it IPO'ed 1 year ago. It's an $80 billion company at a $1 billion run-rate. Valuation doesn't have to be some precise calculation. When Berkshire Hathaway and other "value" investors own a growth company, it tells you something about the assurance that the market at large has about its future success. Everyone knows that everyone knows, etc.



LATCH.COM
I sold out of my trivial 0.5% Latch position after their report this month. I do think this one has a very long runway as it is a small company, but the macro housing market is hurting their business currently. I'll continue to follow them.


DIGITAL TURBINE
Simply put, it's too complicated due to the acquisitions. Why mess around? The revenue growth is high. But the margins are falling and it looks like they'll have to do a capital raise.

When in doubt, get out!

MONDAY.COM
I took a look at Monday.com on the last day of the month and I have to say that it's enticing.

As I said above about Doximity, just looking at the numbers, this is exactly the kind of company I want to own: high revenue growth and rapidly improving metrics of profitability.

Revenue increased 95% YoY and 20% QoQ to ~ $71 million. Fantastic.

Adj gross margin of 90% vs 88% last year. Amazing

Adj op margin of minus 14% vs minus 41% last year. Amazing improvement

Adj net margin of minus 16% vs minus 41% last year. Amazing improvement

Adj eps of minus 26 cents vs minus 39 cents last year. Amazing improvement

Cash is at ~ $ 875 million

$0 Debt

Current deferred revenue increased 44% YoY to ~ $101 million. That's pretty good

Cash from operations was minus 1% of revenue vs minus 38% last year. That's great

FCF margin of minus 2% vs minus 41% last year. Great improvement.

*****

NEW LINEUP GOING FORWARD

I'm considering losing Roku and Twilio, and perhaps DocuSign and replacing them with Monday.com and higher allocations to Asana and Doximity.

Watchlist:
Monday.com