PERFORMANCE
*****
(There are 3 tiers. The tiers are "buy" levels where positions are initially bought or sold. Then allowed to float. The goal is to have 3 in each, or 9 total.)
Tier 1 (14-25%)
23% - Datadog (DDOG)
23% - Monday.com (MNDY)
16% - ZoomInfo (ZI)
Tier 2 (7 - 10%)
10% - Bill.com (BILL)
8% - Upstart (UPST)
8% - Zscaler (ZS)
6% - Amplitude (AMPL)
Tier 3 (2 - 4%)
5.5% - SentinelOne (S)
1.4% - FuboTV (FUBO)
0% - Cash
9 positions, plus cash ( last month)
*****
ACTIONS FROM THIS PAST MONTH
Bought:
N/A
Added:
Added to MNDY.com about mid-month
Trimmed:
Trimmed from DDOG to add to MNDY
Sold:
N/A
*****
GENERAL THOUGHTS
December was bad, January was worse. That was aggressive selling by the market. So I was down 23% in one month, and that was after my portfolio rallied hard the final two trading days ... it was up about 5% and then 10% on those days.
Otherwise it mostly just fell. There were a couple days where I was stunned. From an ATH on 9 November to a recent low on 27 January, my portfolio was down 49%.
But volatility is the price of admission in hyper-growth companies. And this isn't the worst sell-off the market has ever seen.
I countered the aggressive selling with aggressive positioning. I took Monday.com to 24% at one point, which is the high end of my range. I have a lot riding on Monday.com, Datadog and ZoomInfo.
Last month I said:
I didn't do too much philosophizing or have many reflections. 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.
That's funny now in retrospect as January only got worst.
The selling has been indiscriminate. Everything "high growth" has been labeled a "covid stock". But February will bring earnings and the wheat that continues to grow today will get separated from the chaff that only grew during the pandemic. The goal is to only own companies that are killing it today, and have prospects as far as the eye can see.
*****
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 per 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.
*****
I started copying Bear's tracking of the monthly Market caps and TTM revenue numbers because I like how it's a quick snapshot. Tracking the trailing P/Sales isn't perfect but it gives a quick and dirty comparison. Since most of my portfolio is SAAS, which has steady revenue, I don't feel the need to use a forward estimate. For me, lower valuation is a "nice-to-have" but not a "need-to-have".
COMPANY THOUGHTS
Datadog (DDOG)
31 Dec 2021: $178.11 (Market Cap: ~ $62b, TTM Revenue: $880m, P/S 70)
31 Jan 2022: $146.11 (Market Cap: ~ $50.7b, TTM Revenue: $880m, P/S 57)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)
31 Jan 2022: $209.32 (Market cap: ~ 9.2b, TTM revenue: $262m, P/S 35)
I bought Monday.com in October. After their last report I immediately said "from a high level, 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)
31 Jan 2022: $52.86 (Market cap: ~ 21.5b, TTM revenue: $653m, P/S 33)
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 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)
31 Jan 2022: $188.21 (MC ~ $19b, TTM Rev $308m, P/S 62)
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 acquisitions 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 and will 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 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.
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)
31 Jan 2022: $109.01 (MC ~ $10.5b, TTM Rev $630m, P/S 17)
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 2021 was Upstart, no doubt. I made more absolute realized gains off Upstart than any stock I've ever owned and did it in fewer than 3 months. That said, even after I sold half my position I'm also now sitting on a sizable unrealized loss because the stock has fallen so much since the last ER.
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 (to say the least).
After I looked at the numbers, I sold 2/3 of my shares then bought some 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 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.
Zscaler (ZS)
31 Dec 2021: $321.32 (MC ~ $48b, TTM Rev $761m, P/S 63)
31 Jan 2022: $257.11 (MC ~ $38.5b, TTM Rev $761m, P/S 51)
Zscaler casually knocked the cover off the ball with their last ER. The topline growth was 17% QoQ, which was their biggest sequential gain in 11 quarters, since Q2 2019. 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 comparable quarters 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 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.
- 40% operating cash flow margin
- 36% FCF margin
- Calculated billings up 71% YoY. This foreshadows 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 foreshadows 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.
I wrote about RPO / Quarterly revenue here:
https://boards.fool.com/rpo-in-relation-to-quarterly-revenue-34791384.aspx?sort=whole#34791384
Amplitude (AMPL)
31 Dec 2021: $52.94 (MC ~ $5.7b, TTM Rev $148m, P/S 39)
31 Jan 2022: $39.31 (MC ~ $4.2b, TTM Rev $148m, P/S 29)
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 to a $4.2 billion company. So I like it more now than I did then.
After their first report as a public company I wrote:
From a high level, everything looks pretty standard SAAS. Except the guidance for next quarter is only 3% QoQ.
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.
I currently have four Tier 2 companies, and the goal is to have 3. In retrospect, I probably should have kept Amplitude Tier 3 until their next ER because they are a recent IPO without a track record (only one ER) as a public company.
SentinelOne (S)
31 Dec 2021: $50.49 (MC ~ $13b, TTM Rev $169m, P/S 79)
31 Jan 2022: $44.75 (MC ~ $11.7b, TTM Rev $169m, P/S 70)
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 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)
31 Jan 2022: $10.74 (MC ~ $1.5b, TTM Rev $512m, P/S 3.0)
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.
FuboTV is now a stock I've held for over a year albeit at a ~ 2% allocation. It's a stock the market loved at first and has since completely hated.
Prior to the last ER, I took it up to an 8% allocation thinking it would pop. It then rose going into earnings and subsequently sold off hard after they reported. I quickly sold 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.
Crowdstrike (CRWD)
I sold Crowdstrike in December. I had held it since November of 2019, about 2 years, and it was a 20+% holding as recently as a few months before. 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, 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.
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.
*****
MACRO THOUGHTS
QE is ending and in the past that has resulted in 20% declines in the S&P 500.
In Q1 we'll get slight decelerations in growth and inflation. Q2 will bring a big deceleration in both. That's does not portend well for the stock market in general but the macro doesn't really affect my positioning because the money I have in the my portfolio I don't plan to need for at least 20+ years.
*****
NEW LINEUP GOING FORWARD
The same lineup.
Watchlist:
Braze (BRZE)
Samsara (IOT)
Both of these are perfect watchlist candidates I think. They are recent IPO's that debuted during a big rotation out of growth. And both have promising metrics. I'll want to see how their next ER's look and how they guide.
*****
ACTIONS FOR NEXT MONTH
Won't need to do anything until next round of ER's.
