PERFORMANCE
MTD
Me: (7.02%)
S&P 500: 5.61%
12.63 points worse
YTD
Me: 32.73%
S&P 500: 28.79%
3.94 points better
Me: (7.02%)
S&P 500: 5.61%
12.63 points worse
YTD
Me: 32.73%
S&P 500: 28.79%
3.94 points better
So the final 2021 YTD return was 32.73%. And the 2 year return from 1 Jan 2020 was 261.08%. It looks inflated because 2020 was a ridiculous year unlike any I'll probably ever have. That is just over a 3.5x return in 24 months.
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(The tiers are separated by percentage levels within the portfolio. The percentages are buy levels. In other words, I buy or sell somewhere within the percentages, then let the positions float from there. The goal is to have 3 companies in each level, or 9 total.)
Tier 1 (14-25%)
24% - Datadog (DDOG)
23% - Monday.com (MNDY)
15% - ZoomInfo (ZI)
Tier 2 (7 - 10%)
10% - Bill.com (BILL)
9% - Upstart (UPST)
8% - Zscaler (ZS)
6% - Amplitude (AMPL)
Tier 3 (2 - 4%)
4% - SentinelOne (S)
1.6% - FuboTV (FUBO)
0% - Cash
9 positions, plus cash (8 last month)
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ACTIONS FROM THIS PAST MONTH
Bought:
- SentinelOne (S). Made it a Tier 3 position. I sold CrowdStrike (CRWD) and replaced it with SentinelOne.
- Zscaler (ZS). Took it straight to a Tier 2 position.
Added:
- Bill.com (BILL). I took it from Tier 3 to Tier 2. I could see making this one a Tier 1 too. Will wait for next ER.
Trimmed:
- I did NOT trim Upstart (UPST), but it fell from close to a Tier 1 position to a Tier 2. I didn't buy more, I just let it fall and become less relevant.
- I did NOT trim Upstart (UPST), but it fell from close to a Tier 1 position to a Tier 2. I didn't buy more, I just let it fall and become less relevant.
Sold:
- Global-e (GLBE). I sold out of GLBE. It was a Tier 2 position.
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GENERAL THOUGHTS
To be honest I should be thrilled with a 32% return for the year, and will be if I have that kind of CAGR over the next twenty or thirty years.
I didn't do too much philosophizing or have many reflections in December. I mostly just frantically watched my portfolio fall. At one point, I was down about 25% from ATH. It seems like it should have been a lot worse because high growth stocks were falling off a cliff in November and December. To finish November down 10% and December down only 7% is surprising. It felt a lot worse with the volatility. And there were a couple of days in November when I was fully invested where my entire portfolio fell by 9 or 10% in one day, my stocks were getting eviscerated. Some days I winced and looked through one eye as I opened the browser.
But after selling positions, at one point, I had a large cash position of 30%+ at one point. So I bought as the stock prices fell. I didn't come close to timing it perfectly or even well, but it did help reduce the drawdown relative to if I had been fully invested. It was luck more than anything. I had just sold out of positions like Global-E, Upstart (50% of the shares), Doximity, FuboTV (80% of the shares) and Twilio, and had yet to redistribute the capital.
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At the moment I'm putting a lot of the weight into Datadog and Monday.com. I have A LOT of conviction in them as they make up almost half my portfolio. Add ZoomInfo to those two and Tier 1 in total is 62%, and if we throw in Bill.com, four companies make up 72%.
Currently have four Tier 2 positions and only two in Tier 3. I aim to have three in each. In retrospect, I probably should have kept Amplitude in Tier 3 until their next ER.
When I think about the tiers, the idea is that Tier 1 should really be driving the results. There should be one or two that really drive it home. And you only need one or two really good ideas in a year.
Tier 3 are companies either about to fall out, or are new positions.
Tier 2, is the in-between, ideas on the back-burner ready to either step up to Tier 1 or step down to Tier 3. They aren't large enough to make an impact but are significant enough to make me pay close attention.
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COMPANY THOUGHTS
Datadog (DDOG)
31 Dec 2021: $178.11 (Market Cap: ~ $62b, TTM Revenue: $880m, P/S 70)
I've held Datadog now for just over two years. I started to buy shares at $32 and have increased and trimmed along the way. It has really paid off to follow the company.
They are firing on all cylinders and Q4 has historically been their strongest quarter so it's likely we continue to see the outperformance continue.
Datadog was my best idea of 2021. I actually made more $$ in Upstart because I trimmed it quite a bit before their Q3 ER. But Datadog has the potential to continue to be my best idea as we enter 2022 (unlike Upstart). I leaned in hard on it and it paid off, proving once again to me that it only takes one or two really good ideas per year.
From a high level I knew they were going to start to show accelerating YoY growth once they lapped the Q2 covid quarter. That played out and the company should continue to show accelerating growth or at least close to steady YoY growth until they lap the Q2 quarter again.
The company has high revenue growth, high gross margins, mostly recurring revenue, rapidly improving operating and FCF margins, land and expand, attracting lots of customers, and is developing lots of new products. It's got everything.
From the last ER:
- 75% YoY revenue growth, 16% QoQ, to ~ $270 million
- 78% gross margin
- 16% operating margin vs 7% last year
- A 21% FCF margin
- ~ $1.5 billion in cash on the balance sheet
- A DBNER of 130%+
- 66% YoY growth of enterprise customers
Monday.com (MNDY)
31 Dec 2021: 308.72 (Market cap: ~ 13.6b, TTM revenue: $262m, P/S 52)
I bought Monday.com in October. After their last report I immediately said "this is exactly what I want: high revenue growth and rapidly improving margins."
My reaction was to take it from about a 6% position to 14%. Then as the stock continued to fall with the market overall, I eventually got aggressive and took it to 20%+, which is where it is today.
It's got many of the same attributes as Datadog (verbatim): high revenue growth, high gross margins, mostly recurring revenue, rapidly improving operating and FCF margins, land and expand, attracting lots of customers.
Perhaps it isn't as necessary of a product as Datadog because it's more a nice to have than a need to have. But given it's a much smaller company and slightly less "overvalued", it has potential to become my best idea of 2022.
From the last ER:
- Revenue grew 95% YoY and 18% QoQ to ~ $83 million. (Asana only grew revenue 12% QoQ)
- 90% Gross margin. What?! Incredible.
- Operating margin improved YoY from minus 72% to minus 11%. That is an incredible improvement and shows operating leverage at scale.
- ~ $876 million in cash on the balance sheet and no debt!
- A 5% cash from operations margin and 0% FCF margin. Need to improve this!
- Enterprise customers increased 231% YoY and 30% QoQ
- DBNER of 130%+ for customers with more than 10 users
ZoomInfo (ZI)
31 Dec 2021: $64.20 (Market cap: ~ 26b, TTM revenue: $653m, P/S 40)
ZoomInfo doesn't get a whole lotta love compared to other SAAS companies but it's revenue growth, operating and free cash flow margins are so bizarrely good I almost want to hold the stock as an experiment to see if the market goes berserk for it at some point.
It seems they have a couple of VC firms with large stakes who are trying to liquidate, which floods the market with supply. But the results from earning releases in the past year have really surprised me. I want to own companies that are really knocking it out of the park and ZoomInfo is doing that.
From the last ER:
- Revenue increased 60% YoY and 14% QoQ to ~ $197 million.
- The company has long-term debt of ~ $1.3 billion
But:
- A cash from operations margin of 24% and
- An unlevered FCF margin of 37%! and
- Gross margin of 88%
- Operating margin of 40% What!?
Bill.com (BILL)
31 Dec 2021: $249.15 (MC ~ $25b, TTM Rev $308m, P/S 83)
I've been ignoring Bill.com for two years now. I looked at the company two years ago, and have kept a tenuous eye on their reports since, but have never dug in. The company's growth really slowed during Covid but now they have the same thing going on as Datadog and Asana: accelerating YoY revenue growth because of the easy Covid comp.
They also just made a couple of acquisitions that appear to have actually improved their margins, which is rare. So we have core revenue accelerating YoY and acquisitions that push their growth into overdrive. this one has potential to become a Tier 1 holding.
From the last ER:
- Organic core revenue increased 78% YoY and 16% QoQ to ~ $78 million. This is actually the reason to own the stock. This is organic growth.
- Overall core revenue increased 164% YoY. This is the growth from acquisition in addition to organic.
I see debt on the balance sheet of ~ $1.1 billion which is due to the acquisition. That's not great relative to the quarterly revenue of only $116 million. But it appears as though it was a great purchase because I also see:
- $2.8 billion of cash
- A gross margin of 83% vs 76% last year. Big improvement for a gross margin.
- An operating margin of minus 10% vs minus 5% last year.
- The one real blemish is a minus 22% FCF margin.
Those last 2 metrics leave something to be desired but given the improvement in gross margin it seems as though the acquisition has potential to really drive results. We'll wait for the next ER. We want to see continued high revenue growth but improvements in operating and cash flow.
Zscaler (ZS)
31 Dec 2021: $321.32 (MC ~ $48b, TTM Rev $761m, P/S 63)
They grew revenue at 62% YoY and 17% QoQ to ~ $230 million. And it just gets better as you make your way down the financial statements
- 81% gross margin vs 81% last year
10% operating margin vs 14% last year. (Here with this metric we can do a quick comparison to Monday.com and see that Monday's P/S is well below ZS despite growing at a much higher rate. The market has yet to discount Monday's operating margin. Perhaps some are waiting to see if it turns positive. It seems highly likely at the rate the company is growing. There are other factors to consider when talking about valuation but this a snapshot.)
And perhaps the metric that most supports their valuation is:
UPSTART (UPST)
31 Dec 2021: $151.30 (MC ~ $14.6b, TTM Rev $630m, P/S 23)
Notice how much lower the P/S is for Upstart vs SaaS companies. Does this make it "cheaper"? The market knows that their growth has far less visibility.
The stock of the year was Upstart, no doubt. I made more absolute realized gains off Upstart than any other stock. In fact, I made more off Upstart than any stock I've ever owned and did it in fewer than 3 months. That said, I'm also now sitting on a sizable unrealized loss because the stock has fallen so much since the last ER. But even if I sold out today it would be a huge realized winner for me.
I had Upstart at about 18% going into the last earnings. It had grown to as high as 26% but I trimmed several times. The day after earnings the stock fell 20%, and has trended down since then.
After I looked at the numbers, I sold 2/3 of my shares then bought back.
What can I say? The numbers they reported were stellar. But everyone, myself included, was expecting (hoping for?) something truly out of this world. After the company reported 60% QoQ growth in Q2 it got everyone thinking they could continue on an asymptotic trajectory. In retrospect it wasn't tenable. I'm just glad I had trimmed it some.
I still have high hopes for the company but it's a reminder of what it's like to invest in non-SAAS companies. The growth is lumpy, and therefore warrants a lower allocation within the portfolio. I can't have a Tier 1 position fall 20% in a day. I just can't.
These were my stream of conscious initial thoughts:
I'm going to have to come to terms with the fact that the numbers took a huge hit QoQ, and how does that compare to Zoom?
Q2 was an extreme outlier but it looks like they are still planning to grow in the 15 to 16% QoQ which is 75% to 80% YoY
After I thought about it, I don't think that the falloff in revenue is similar to Zoom simply because they have guided much stronger than Zoom did in 2020.
But I also don't think that it makes sense to annualize Upstart's revenue in any quarter. So it comes back to what I said before, which is that this is not a SAAS company and guessing where the growth is going to go is going to be quite difficult. Therefore I can follow the numbers and go along for the ride while it lasts but keep it lower Tier.
Zscaler (ZS)
31 Dec 2021: $321.32 (MC ~ $48b, TTM Rev $761m, P/S 63)
Zscaler casually knocked the cover off the ball with their last ER. The topline growth was 17% QoQ, which was their biggest sequential gain as a public company. Will the revenue continue to accelerate? To do that they would have to grow 11%, 13% and 13% for the next 3 quarters. All those rates are 1% above what they grew in the comparable quarter last year.
It's unknown if the 17% was a sign of things to come or a one-off / pull forward.
They grew revenue at 62% YoY and 17% QoQ to ~ $230 million. And it just gets better as you make your way down the financial statements
- 81% gross margin vs 81% last year
10% operating margin vs 14% last year. (Here with this metric we can do a quick comparison to Monday.com and see that Monday's P/S is well below ZS despite growing at a much higher rate. The market has yet to discount Monday's operating margin. Perhaps some are waiting to see if it turns positive. It seems highly likely at the rate the company is growing. There are other factors to consider when talking about valuation but this a snapshot.)
- 40% operating cash flow margin
- 36% FCF margin
- Calculated billings up 71% YoY. This portends well for the future.
- Enterprise customers up 87% YoY
- Customers with $100k+ ARR up 53% YoY
- DBNR of 125%+
- 36% FCF margin
- Calculated billings up 71% YoY. This portends well for the future.
- Enterprise customers up 87% YoY
- Customers with $100k+ ARR up 53% YoY
- DBNR of 125%+
And perhaps the metric that most supports their valuation is:
- RPO up 97% YoY to ~ $1.7 billion. That is 7.4x their quarterly revenue. That means they have 7.4 quarters (almost 2 full years) of ostensibly guaranteed revenue. This is the highest RPO balance in relation to quarterly revenue I've seen from any company including Snowflake and Okta.
Amplitude (AMPL)
31 Dec 2021: $52.94 (MC ~ $5.7b, TTM Rev $148m, P/S 39)
The market cap might be larger. I used 108 million diluted shares which is what the company gives for weighted avg shares outstanding for Q4 guidance. But since it's a recent IPO that number is surely higher.
When I first bought shares in Amplitude in November one of the sticking points was that it was a smaller company of only $9 billion. Since then it's fallen about 25% and is now a $7 billion company. So I like it more now than I did then.
After their first report as a public company I wrote:
Everything looks pretty standard SAAS. Except the guidance for next quarter is only 3%. that's really terrible
But since then, I've digested it more, and in the earnings call, the CEO addressed the guidance directly and it seems he's simply being very prudent since it's their first full quarter as a public company. We'll find out!
"Pretty standard SAAS" is maybe a loaded term but what I mean is that it's got all the metrics I'm looking for. Similar to Monday.com, it's got high revenue growth with rapidly improving margins. It's got land-and-expand along with some big customers. I'd say the potential for this company to continue to grow rapidly is quite good.
SentinelOne (S)
31 Dec 2021: $50.49 (MC ~ $13b, TTM Rev $169m, P/S 79)
I can't pretend to understand any technical advantage SentinelOne might have in cyber security. But I can look at the numbers from their ER. From a high level, the YoY improvement in operating margin was the crux of it for me. Previously they had high revenue growth. But the most recent ER showed that same high revenue growth with a meaningful improvement in operating margin. It's still very negative, along with the FCF margin. But if the company can continue to improve meaningfully while maintaining 100%+ top line growth, the stock could really move, and this $12 billion company with a P/sales of 75 could stay "expensive" as it grows into a $24 billion or even $48 billion company (like Crowdstrike).
All that said, I'll be watching it closely, and if the operating margin goes the other way or if the growth slows down noticeably, I'll quickly sell it and move on.
This is a perfect Tier 3 holding I think. It has potential to move up quickly, but if it disappoints, it won't hurt at all.
Fubo TV (FUBO)
31 Dec 2021: $15.52 (MC ~ $2.2b, TTM Rev $512m, P/S 4.4)
Look at that P/sales! It shows that despite high revenue growth (100%+ organic), the market really pays attention to margins. Fubo has really terrible margins. The stock is down 45% YTD.
FuboTV is now a stock I've held for close to a year albeit at a ~ 2% allocation. It's a stock the market loved at first and has since completely hated. Prior to earnings, it had trended down and I took it up to an 8% allocation thinking it would pop on earnings. It then rose going into earnings and subsequently sold off hard after they reported. I've now taken it back down to a less than 2% allocation with nothing lost except opportunity cost (which of course can be significant, but again not really at a 2% allocation).
After their report I wrote:
High revenue growth but still no operational leverage. In fact the margins deteriorated slightly.
That basically sums it up from a high level for me.
I might give FUBO another quarter. I do think it could really go on a run if they could improve their margins. It's almost comical to me the way the market has despondently sold Fubo TV. Either way, it has stiff competition for a spot in my portfolio from Braze and Samsara which are now on my watchlist.
Fubo TV is the only other non-SaaS company I own other than Upstart, and I should give that fact more credence because non-SaaS has a tendency to disappoint.
Global-E (GLBE)
When push came to shove and all high-growth stocks were falling, I was confronted with my conviction of each company. From a high level, I saw in Global-e high revenue growth, but a low gross margin and lumpy seasonal growth. I sold so I could distribute into higher conviction holdings. Perhaps it's too simple to sell because of that, but that really is the crux of it. I'm sure this could be a great stock but probably not in my portfolio.
Crowdstrike (CRWD)
I had held Crowdstrike since November of 2019, about 2 years, and it was a 20+% holding as recently as a few months ago. But I think the market has managed to wrap its head around its growth. What I mean by that is, it seems as though Crowdstrike's growth is going to slowly taper off from here. They have ridiculous operating and FCF margins, but the growth is somewhat predictable from here, and it's decelerating.
A year ago the market still hadn't figured out where the growth was going, but I think we can see it now. It's not going to reaccelerate, and CRWD is a $50 billion company.
I simply A-B'ed it with SentinelOne and asked myself: is Crowdstrike likely to double or triple in the next 18 months? I thought no, it won't become a $100 or $150 billion company in that timeframe. Is SentinelOne? I thought more likely.
I had already moved Crowdstrike to a Tier 3 position. So I just went ahead and swapped it for SentinelOne.
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MACRO THOUGHTS
At the moment it seems the stock market in general is being held up by a few very large tech companies: Apple, Microsoft, Amazon, the usual players.
At the moment it seems the stock market in general is being held up by a few very large tech companies: Apple, Microsoft, Amazon, the usual players.
QE is ending and in the past that has resulted in about a 20% decline in the S&P 500. Yet the S&P 500 continues to trade at near ATH's (b/c of big tech).
Maybe it'll sell off in H1 2022? Seems logical. Yet many high growth stocks have been hit so hard already (20-60% from ATHs) that maybe they've already price it in.
This macro doesn't really affect my investing because I'm doing it with a 30 year timeline.
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NEW LINEUP GOING FORWARD
The same lineup.
Watchlist:
Braze (BRZE)
Samsara (IOT)
Both of these are perfect watchlist candidates I think. Both are new IPO's that have come out in a big rotation out of growth and have promising metrics. I'll want to see how the next ER is and they guide.
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ACTIONS FOR NEXT MONTH
Won't need to do anything until next round of ER's which will come in February.
