PERFORMANCE
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(There are 3 tiers. Once I buy or sell to fit within a tier, I let the position float for a while. The general goal is to have 9 positions total. Sometimes that's 3 in each as 3-3-3, but can be any iteration.)
Tier 1 - 43%
(Allocation sizes: 15-25%)
25% - Datadog (DDOG)
18% - Monday.com (MNDY)
(Allocation sizes: 15-25%)
25% - Datadog (DDOG)
18% - Monday.com (MNDY)
Tier 2 - 48.5%
(Allocation sizes: 7 - 12%)
12% - Bill.com (BILL)
11% - Zscaler (ZS)
9% - SentinelOne (S)
8% - ZoomInfo (ZI)
7.5% - Upstart (UPST)
Tier 3 - 8.5%
(Allocation sizes: 2 - 4%)
5.5% - MongoDB (MDB)
3% - Snowflake (SNOW)
0% - Cash
9 positions, plus cash (8 last month)
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ACTIONS FROM THIS PAST MONTH
Bought:
Made Snowflake (SNOW) a Tier 3 holding
Added:
N/A
Trimmed:
N/A
Sold:
N/A
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GENERAL THOUGHTS
I've recently been thinking about the Four Stages of Competence. This image from Wikipedia sums it up.
By TyIzaeL - This file was derived from: Competence Hierarchy adapted from Noel Burch by Igor Kokcharov.jpg by Kokcharov, CC BY-SA 4.0, https://commons.wikimedia.org/w/index.php?curid=60343464
What I like about the pyramid is the intuition / analysis labeling on the right. When a person first starts out doing anything they will have no intuition. But as they gain experience and skill, they move toward making accurate decisions quickly.
If we use this pyramid to say playing basketball, we can equate the bottom "Unconscious Incompetence" to picking up the ball for the first time. A person would look at it through the eyes of a child. They may make a basket and think it's all fun and easy.
But as they continue to play, they'll start to realize that it's more difficult than originally thought, that there's lots to learn in regards to technique and strategy. They'll move up toward "Conscious Incompetence" because they'll start to see the limits of their abilities.
If they power through and practice for many months or years they'll enter the third rung of "Conscious Competence" where they must try really hard to be successful. They'll still see their limits but their limits will have expanded. They'll gain techniques and strategy but it comes with struggle and practice.
After many years, the person may enter "Unconscious Competence" at the top of the pyramid, the very peak of performance, where the skills and techniques are buried deep into their mind and body. They won't have to think too hard about pulling off difficult shots in the waning minutes. They simply intuit the game.
Investing is not like a physical sport. Professional or even amateur athletes have a finite number of years they can compete at a high level. For a professional athlete lucky enough to have a full career, that ranges from about the ages of 18 to 35 give or take. Investing has a much longer timeline because it's a mental game (as opposed to physical). An investor can learn to intuit markets, and develop temperament over decades.
That's why I think it's important to pick a strategy and stick with it. Iterate, but stick with it. You learn to recognize patterns and develop a temperament that suits you.
These past six months have been difficult. It's been shock and awe. But given a certain timeline, I can look past it and simply stick with my strategy. It's easy to look at the past six months and give up. But if I look back even two years I can see that my portfolio has roughly tripled.
The portfolio is retesting the lows of March 14th. It's down 42% YTD. And down about 54% from ATH in November. Am I rationalizing this loss? Am I trying to convince myself that's it's logical? I don't think so. I think I just look forward two years and know that this will pass.
I do know the selloff has been based on macro. The market is separating the companies that only grew during the pandemic from the ones that are still growing today. It's taking a few quarters to sort out.
One of the primary themes of my investing is the "transition to the cloud". And the hyper-scalers Microsoft, Google and Amazon all just reported strong growth in their cloud businesses. My companies will report in April and May. So we'll see how the market reacts to what I'm sure will be robust growth.
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I use a "3 Tier System". Tier 3 should really only be one or two companies. And Tier 1, the same.
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.
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I track the monthly market caps and TTM revenue numbers because I like how it's a snapshot. The trailing P/Sales is far from 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.
In general, for me, lower valuation is a "nice-to-have" but not a "need-to-have".
Current P/Sales Overview:
DDOG - 41
MNDY - 19
BILL - 43
ZS - 35
S - 43
ZI - 26
UPST - 8.5
MDB - 28
SNOW - 51
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)28 Feb 2022: 161.11 (Market Cap: ~ $56b, TTM Revenue: ~ $1b, P/S 55)
31 Mar 2022: 151.47 (Market Cap: ~ $53b, TTM Revenue: ~ $1b, P/S 53)
29 Apr 2022: 120.78 (Market Cap: ~ $42b, TTM Revenue: ~ $1b, P/S 41)
Last quarter was another set of jaw-dropping numbers. I'd like to bring Datadog down to about a 20% allocation but I haven't felt the need to. I will need to think about bringing it down in the back half of the year. They'll show accelerating YoY revenue growth until they report Q3 2023. Even if the company grows at 10% QoQ the next two quarters, which would be a big slowdown, they will show accelerating YoY growth until they report then.
The stock took a hit after Snowflake reported because of the belief that their consumption model will show a slowdown in Q1. But I don't think the market has that one correct. Datadog's consumption is almost all automated. So while people may take time off in January, Datadog will chug along.
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)
28 Feb 2022: $158.87 (Market cap: ~ $7.1b, TTM revenue: $308m, P/S 23)
31 Mar 2022: $158.07 (Market cap: ~ $7.1b, TTM revenue: $308m, P/S 23)
29 Apr 2022: $129.40 (Market cap: ~ $5.7b, TTM revenue: $308m, P/S 19)
Monday.com has a make or break earnings release on 16 May. I guess all reports are make or break but this will be the first look into whether or not their guidance was indeed extreme sandbagging or if they do have revenue durability.
A few months ago I wrote that Monday.com had the potential to become my best idea of 2022. At the moment it's been my worst idea.
A couple of take-away lessons from Monday thus far are:
First off, it's still a recent IPO. It surely was when I bought it. If I had waited 6 months I would have had less pain.
Second, it's not an American company. I'm looking at their SEC filings for the first time and I can see there is just far less info from them. I can't find RPO balance because they don't have to file it because they don't have to file a 10Q. The SEC says that they can raise money on the American markets and it's buyer beware. This company is not supplying all the info that American companies must provide.
These 2 things combined I think create less visibility into the company and therefore more uncertainty and therefore are less likely to have a higher valuation.
I need to heed these things with SentinelOne too.
Maybe most importantly in conjunction with these 2 things above is position sizing. Had I not taken this so aggressively to 25% it would be far less of an issue. So, for instance, with SentinelOne I need to keep it at Tier 2 at the highest. And let it prove it deserves a shot at Tier 1.
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)
28 Feb 2022: $237.88 (MC ~ $24.6b, TTM Rev $411m, P/S 60)
31 Mar 2022: $226.79 (MC ~ $23.4b, TTM Rev $411m, P/S 57)
29 Apr 2022: $170.71 (MC ~ $17.6b, TTM Rev $411m, P/S 43)
Bill.com had the most surprising ER of all my companies. Huge beat on revenue and the margins all improved from the acquisitions. That's exactly what we wanted to see. Datadog probably had the strongest in terms of execution at scale, but Bill.com blew everyone away and the stock was up about 30% the next day.
Initially, after the ER I thought that this could become a Tier 1 Company, but after thinking it through, I think this has to remain Tier 2 because the transaction-based revenue means it has less consistency. Only 31% of revenue is subscription based. It means there's relatively higher probability the company could miss. It also means there's a higher probability they could over-deliver. But either way there's a chance for inconsistency. Also the acquisitions make it a bit harder to figure out overall. This could remain a very strong Tier 2 company though.
One thing to watch:
- Revenue guidance appeared weak because of seasonality. The CFO answered this in the call:
"Looking ahead, in the fiscal third quarter, we typically experience some seasonality with TPV slightly down compared to Q2 because many SMBs pull spend into the December quarter from January for year-end tax planning purposes."
Zscaler (ZS)
31 Dec 2021: $321.32 (MC ~ $48b, TTM Rev $761m, P/S 63)
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)
28 Feb 2022: $239.15 (MC ~ $35.8b, TTM Rev $860m, P/S 42)
31 Mar 2022: $241.28 (MC ~ $36b, TTM Rev $860m, P/S 42)
29 Apr 2022: $202.74 (MC ~ $30b, TTM Rev $860m, P/S 35)
Zscaler casually knocked the cover off the ball two quarters ago, which was Q1 22. The topline growth was 17% QoQ, which was their biggest sequential gain in 11 quarters.
So perhaps the market was expecting a similar QoQ growth for Q2 because the stock sold off about 16% the next day, which seemed really stupid to me because the ER was incredible. That's when I went in and bought it after having not owned it for two years.
Perhaps with the "weak" billings of Q2 means that Q1 was a bit of a pull forward in this environment. However, they explained on the call that govt spending was unexpectedly in the "low single digits because of budget constraints." Given the current state of the world I think it makes sense to hold ZScaler and even add.
One thing about ZS that gives me confidence (especially after Monday.com and Amplitude fiascos) is that they are mission critical.
I could take this up to about 10% but wouldn't want to go much beyond that unless they show continued acceleration.
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)
28 Feb 2022: $41.50 (MC ~ $10.9b, TTM Rev $169m, P/S 65)
31 Mar 2022: $28.74 (MC ~ $7.5b, TTM Rev $204m, P/S 37)
29 Apr 2022: $33.27 (MC ~ $8.8b, TTM Rev $204m, P/S 43)
From their last two reports we can see they have operating margin. I think it will be all about revenue growth going forward. Can they sell their product while they're ostensibly in a tornado of demand? We'll see.
S is not the gorilla. Crowdstrike is (or maybe Palo Alto). So maybe I should heed that. There's been a lot of comparisons the past few months. But I can't be dogmatic or ideological in investing. Have to keep an open mind and try to put capital in the best place. The first rule of growth investing is revenue growth, and S1 is growing at a much faster rate than CrowdStrike.
For now I'm leaving it at Tier 2 to give it another quarter to prove they can improve the operating margin while also keeping growth high. I don't have to stay dogmatic about Gorillas. I can invest in the chimp here. But need to make sure the chimp can continue to grow very quickly while also showing leverage.
Keep an eye on the FCF margin next quarter. It grew the most meaningfully YoY. It might be lumpy, so keep an eye.
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)
28 Feb 2022: $54.69 (Market cap: ~ $22b, TTM revenue: $747m, P/S 30)
31 Mar 2022: $59.74 (Market cap: ~ $24b, TTM revenue: $747m, P/S 32)
29 Apr 2022: $47.40 (Market cap: ~ $19b, TTM revenue: $747m, P/S 26)
From the last report, the only real black mark was the weak forward guidance. That said, they didn't have a jaw-dropping report. The revenue didn't accelerate further as I had thought it would. And simply the revenue growth isn't high enough be a Tier 1 holding. I sold half my shares and dropped it to it to Tier 2.
Will reassess after the next report.
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)
28 Feb 2022: $157.99 (MC ~ $15b, TTM Rev $848m, P/S 18)
31 Mar 2022: $109.09 (MC ~ $10.4b, TTM Rev $848m, P/S 12)
29 Apr 2022: $75.02 (MC ~ $7b, TTM Rev $848m, P/S 8.5)
Upstart is comically volatile. It was a lot more fun when the stock price was going up up up. If you simply looked at the earnings numbers you'd see a business that is crushing it. But looking at the stock price it looks like it's turned into a total failure. I think the market just has no idea what to expect from Upstart. I read last week that the company had 26% of its shares sold short.
They are extraordinarily profitable given their growth rate. But the growth is lumpy Q to Q, so I have to be able to stomach the wild swings, and going forward, it will be difficult to update in real time. Big opportunity ahead for the company but wild swings in business momentum = wild swings in stock price.
I may grow tired of holding this bucking bronco. Either way, I can leave at Tier 2 for now and probably trim if it runs up.
Avg loan size is decreasing slightly but number of loans is growing. Auto will be a big market, and who knows, maybe mortgages in the future. Unlikely that I'll be able to gauge correctly where the business is going quarter to quarter. So like I said I may just get tired of it.
MongoDB (MDB)
28 Feb 2022: $$381.99 (MC ~ $25.4b, TTM Rev $778m, P/S 33)
31 Mar 2022: $443.59 (MC ~ $30b, TTM Rev $873m, P/S 34)
29 Apr 2022: $354.93 (MC ~ $24b, TTM Rev $873m, P/S 28)
MongoDB was a new position in Mar. I've loosely followed the company for 2-3 years and had owned it previously. I sold because they struggled with profitability and the growth really slowed during the pandemic. However, it's all about Atlas now going forward. We've known for some time that Atlas would really drive revenue and I think we've reached a tipping point.
After the last report I wrote that while it was a good report, it wasn't a complete crush, and that it warranted being a Tier 3 holding. Altogether I see high revenue growth, I also see relatively anemic customer growth. I see improvements in operating margin but it's not like amazing improvement. It's very slowly improving. And then combining that with weak FY guidance, I don't yet want to make it larger than Tier 3.
They're likely to continue showing YoY acceleration for the next 2 quarters. They will have to grow faster than they did in the same quarters last year though to do it. But with Atlas growing to a bigger % of revenue it seems likely that it's possible.
Snowflake (SNOW)
29 Apr 2022: $171.44 (MC ~ $62b, TTM Rev $1.2b, P/S 51)
Snowflake has about the strongest business momentum of any public company out there right now. They are putting up the highest growth numbers. However, in the last report they showed their first tiny blip by "only" growing revenue 15% QoQ. Their growth will be slightly lumpy because of the consumption-based model. Previously, I couldn't justify owning a 100 or even 80 billion dollar company. But at 62 billion, while still quite large, it seems like a better bet.
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MACRO THOUGHTS
There really isn't anything positive at the macro level at the moment. It's all doom and gloom. It seems everyone is accumulating onto one side of the ship.
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NEW LINEUP GOING FORWARD
The same.
Watchlist:
Braze (BRZE)
Samsara (IOT)
CrowdStrike (CRWD)
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ACTIONS FOR NEXT MONTH
- Trim Datadog if it goes above 25%
