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%)
27% - Datadog (DDOG)
(Allocation sizes: 15-25%)
27% - Datadog (DDOG)
Tier 2 - 48.5%
(Allocation sizes: 7 - 12%)
13% - Zscaler (ZS)
13% - Crowdstrike (CRWD)
12% - Bill.com (BILL)
10% - SentinelOne (S)
7% - Snowflake (SNOW)
Tier 3 - 8.5%
(Allocation sizes: 2 - 4%)
5% - MongoDB (MDB)
4.5% - ZoomInfo (ZI)
3.6% - Cloudflare (NET)
5% - Cash
9 positions, plus cash (8 last month)
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ACTIONS FROM THIS PAST MONTH
Bought:
- Made Crowdstrike (CRWD) a Tier 2 holding
Added:
- A little bit to Zscaler (ZS)
- Made Cloudflare (NET) a Tier 3 holding
Trimmed:
- Added to Snowflake (SNOW) and made a Tier 2 holding then sold the shares back after earnings
- Sold half my shares in ZoomInfo (ZI) after earnings
Sold:
- Monday.com (MNDY) after earnings
- Upstart (UPST) after earnings
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GENERAL THOUGHTS
It's reached a point where if I were a hedge fund I would have blown up. Investors would have pulled their money and I would be getting margin calls. And for good reason. If I had my money with an investor and saw they were down 56% in five months and ~ 70% from ATH, I would probably pull my money too.
But if I zoom out a little bit and go back to January 1 2020 the portfolio is up ~ 80%. That's an incredible return over 2.5 years. And if I look out 2.5 years from here I'm guessing that I'll be up from where we are today, probably substantially, but who knows.
Hindsight is 20/20. It's easy to look at where I was six months ago in November 2021 and say that I should have sold because valuations were beyond stretched and the Fed was going to pull liquidity. But if I take that same hindsight I can say that it was obvious to buy Zoom in January 2020 and sell it eight to ten months later.
The thing is is that updating in real time and navigating a ship through the ocean is hard. Everything is obvious is hindsight. Dealing with what's happening today is not. It's important to learn from the past, but the key is to iterate on a strategy. If a strategy has worked in the past over a long period of time then it's likely to work in the future. It will require tweaks here and there. But what I shouldn't do at this point is abandon the strategy of high growth investing altogether.
I think going forward if there's another scenario where I've had a big run up and then inflation makes its way into headlines and the Fed announces QT I might go to cash or buy other assets. Or I can find a way to hedge. But those are pretty rare things to happen simultaneously. The truth is that the market gives and it takes away. Over time (2, 3, 4, 5+ years) this strategy has worked.
I will definitely be more cognizant of inflation and the Fed's response via interest rates. I'll likely put more credence into the "Quads" of GDP Inflation and Growth rates. It's tough because "long duration" assets are super sensitive to changes in those things. They front run interest rate rises – in this current environment by six months or more.
The key might be to be comfortable raising cash when we're destined for a Quad 4 regime on the horizon. Furthermore, if the Fed is "tightening into a downturn" I'll be more aware of the consequences. "Liquidity drives markets, don't fight the Fed" is another way to put it.
I guess we'll also see how my "long duration" assets play out from here as we are currently smack dab in the middle of a Quad 4 environment.
Who knows where we go from here. "Inflation" "Recession" "Quantitative Tightening" "Rising Interest Rates" "War" "Bear Market Rally". These things dominate headlines. There's no good news. There's no light at the end of the tunnel. And yet it could get much worse.
It's important not to get into situations where I've got money in the market that I cannot afford to lose in the next two or three years. It's also important not to use leverage (or only use a tiny amount). That's where the losses become too painful or people blow up. That's when people sell out at the bottom.
I have seen dings in my companies. Snowflake's revenue, which is consumption-based, has taken hits the past two quarters. Upstart got annihilated. Monday.com showed a lack of durability. What I have to do is try to find companies that are still growing, or even accelerating, and improving profitability. I think at the moment that's going to come from cyber-security. But we'll see.
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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.
At the moment I don't like having Datadog at 27%. I'll likely trim. And after Crowdstike and SentinelOne report today and tomorrow we'll see how it shakes out.
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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 - 28
ZS - 23
CRWD - 24
BILL - 24
S - 31
SNOW - 32
MDB - 18
ZI - 20
NET - 26
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)
31 May 2022: $95.39 (Market Cap: ~ $33b, TTM Revenue: ~ $1.2b, P/S 28)
It all seems like business as usual, another crush of a quarter.
Revenue likely will start decelerating from here.
Also we know they were affected during Covid. So we know they are affected by economic slowdowns and technically there's a good chance of an economic slowdown at the macro level in Q2. So I need to heed that.
But Datadog is in its own class at the moment with revenue growth in the 80's and strong operating and free cash flow margins.
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)
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)
31 May 2022: $153.09 (MC ~ $23b, TTM Rev $969m, P/S 23)
The strong secular tail winds combined with strong demand in the current environment are pushing and pulling with the current macro maybe-recession, slowdown. Their product is needed more than ever yet companies are having to cut costs. That combined with ZS's long sales cycle makes for a bit of a guessing game.
But I thought their report was strong, certainly relative to other companies (like Monday.com). Billings and operating margin were a bit disappointing but FCF was strong, and revenue continued along.
I think staying in cybersecurity is the place to be for the next three months at least.
Zscaler is one of those companies described as "mission critical", which is a tricky term.
One way to think of it is like this. "Nice to have" vs "need to have".
Monday.com and Bill.com might be "mission critical" to a business once embedded. But it's not quite "mission critical" enough that a company has to install it today or risk existence. It would be nice to have an application software that improves communication and efficiency. But I need endpoint security and observability more today.
For a software to truly be "mission critical" it has to be something a company absolutely needs whether they like it or not. Their survival depends on it. That can be old boring reliable technology.
And "mission critical" things can be temporary or transitory too. During the pandemic Slack was not mission critical. Zoom was. But that was a transitory thing.
Crowdstrike (CRWD)
31 May 2022: $159.99 (MC ~ $38b, TTM Rev $1.6b, P/S 24)
31 May 2022: $159.99 (MC ~ $38b, TTM Rev $1.6b, P/S 24)
Crowdstrike is predictable at the moment but also showing durability. I'm sort of at a loss to find new companies. And I think Crowd at this moment in time is better than holding cash. The stock price might go lower in the near term. But looking a year out, I think the growth and profitability combined with the current need for endpoint security in general make this a good holding.
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)
31 May 2022: $118.24 (MC ~ $12.2b, TTM Rev $518m, P/S 24)
Bill "only" beat its guidance by 6% rather than 19% last quarter. And it's ostensibly more sensitive to the macro environment since its customer base is rooted in SMB. "Consumption-based" cuts both ways. Bill might see its revenue drop because of recessionary headwinds. But those headwinds will turn to tailwinds on the other side.
The consumption based model is less predictable. Transaction revenue is 68%, 31% subscription and 1% float.
The good is that there was an improvement in cash flow. The bad is that the operating and net margins didn't improve year over year. Also they're adding customers but because they're getting a lot of new customers from BOA. But they said a couple of times on the call that it takes 6-9 months before those customers start adding anything significant.
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)
31 May 2022: $23.79 (MC ~ $6.3b, TTM Rev $204m, P/S 31)
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.
Snowflake (SNOW)
29 Apr 2022: $171.44 (MC ~ $62b, TTM Rev $1.2b, P/S 51)
31 May 2022: $127.65 (MC ~ $46b, TTM Rev $1.4b, P/S 32)
Reiterating what I said above, "consumption-based" cuts both ways.
Snowflake had a disappointing (to me) earnings report. Right from the top at 10% QoQ revenue growth. The first rule of growth investing is revenue growth and Snowflake has now shown it is not infallible.
I cut my allocation from 12% to 7% after the ER.
We can see that cash flow was good but we know it's seasonally strong. Revenue growth was not good and they aren't improving profitability at a really fast clip. And they aren't growing customers fast enough.
From a high level, it seems pretty straightforward. Companies need to cut costs in the macro environment. And so they can manage how much Snowflake they use. So snowflake is seeing a very direct impact to the macro environment.
So as I said before. It might be "mission critical" once it's embedded. But Snowflake absolutely has to continue to add new customers and revenue to GROW. And they are seeing a hit to that GROWTH.
I guess it comes down to me guessing if the economy has "bottomed" and retailers will start to expand again and take Snowflake with it. Or if it's going to get worse. So in a sense I'm trying to make a macro call. It's really hard. And I don't know the answer.
A few thoughts:
#1 It does seem like the "optimization" they did to their internals will take a few months to play out. In other words, it benefits their customers right away so that means slower revenue growth. The onboarding of more workloads will take a few quarters before it starts to contribute to revenue.
#2. They managed Wall Street expectations very well by saying twice that they "aren't a growth at any cost company"
#3 It does seem like they were back up and running in May. I'm still iffy on this b/c I don't know why April in particular would have been such a slow month from a macro level. So I'm still guessing as to whether it was the bottom in macro.
Lastly, this might have marked THE bottom for now. Because Snowflake basically didn't sell off at all after their report. If they had delivered this report three months prior the stock would have been absolutely hammered. We can also see this with ZScaler who reported the day after Snow too: the company basically came out with an identical report to the one three months prior and the stock was up 12% instead of being down 18%.
So all that said, perhaps valuations are in line now and we will get basically no more multiple compression. But that's a big "perhaps".
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)
31 May 2022: $237.15 (MC ~ $19b, TTM Rev $873m, P/S 18)
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.
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)
31 May 2022: $40.39 (Market cap: ~ $16b, TTM revenue: $836m, P/S 20)
After their report in May I again sold half my shares and too it to Tier 3.
My initial thoughts were that it was a good report but not an absolute blow out.
I should heed the fact that this company is becoming complicated to follow given all the acquisitions. I don't want to really have to keep track of those. Organic revenue was 49%. So need to consider that as the baseline. cCan they continue to juice the revenue growth with acquisitions? Is that becoming too complicated of a story? Maybe.
Also keep in mind that revenue is not accelerating. And seems very unlikely that it will. That was one of the investment theses behind this last year. And it didn't pan out starting from Q4 (last quarter). So that thesis is broken
One other thing to consider ... since this company is clearly an M&A story ... software businesses are beaten down at the moment. so ZI could potentially buy more at good prices to juice growth. This was actually brought up on the call. That is tenuous I think though. It can't really be an investment thesis.
Do they have revenue durability? The market is sort of guessing they don't ... given their slightly less high valuation.
But of course the exorbitantly high operating and FCF margins give this company legs to stand on. And that's why I'm still in it, albeit as a Tier 3 holding.
Cloudflare (NET)
31 May 2022: $56 (Market cap: ~ 19b, TTM revenue: $730m, P/S 26)
I bought back into Cloudflare for the first time in over a year. Honestly, I am struggling for new ideas and I don't fully understand Cloudflare's business. It's capital intensive compared to other SAAS companies. But the valuation has fallen back to earth a bit. And it fits into my "cybersecurity" bucket somewhat with a competing technology to ZScaler.
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)
I sold out of Monday.com after earnings.
The numbers in isolation might be ok. But the slowdown is really bad. Slowing revenue and NOT rapidly improving metrics of profitability. I wrote last year that Monday.com had the opportunity to be my best idea of 2022 and it turned out to be my worst.
The growth did show a slowdown and they did guide really low.
I think the lesson that is coming out of Monday I already recognized last quarter. recent IPO and not US domiciled so less visibility.
And now the third lesson is that it's not "mission critical". It's nice to have but not need to have today.
I'm a bit of a bagholder on this one. I have to admit to myself. Monday.com surged and IPO'ed at exactly the right time. And they handed the bag to me while the numbers still looked good. But now the numbers are showing a huge slowdown.
It's painful to admit but I was wrong with this company. I was wrong. You cannot only "follow the numbers". You have to do more.
It's bad all the way down the financial statements: slowing revenue growth, margins not improving as meaningfully, and NOT cash flow positive after being positive last quarter. As I said, the numbers in isolation might be ok. But the slowdown is really bad.
They might show some slight QoQ re-acceleration next quarter. But perhaps Q2 is seasonally their strongest.
This might be an ok LTBH holding as a 2% allocation in a portfolio of 30+ holdings, but it's not something that is going to fit into a concentrated portfolio.
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)
I sold out of Upstart after earnings.
Everyday is a new day in investing. It’s only about what’s ahead. What’s in the past are learning experiences. As painful as it may be, I have to reflect on pain and learn from it.
I held Upstart’s stock for over a year (April 2021 to 9 May 2022) and net made money on it, but it was a big run up, trimming, and then a big draw down. The drawdown was painful.
Upstart might be a successful business (and stock) in the future, but it no longer fits into my concentrated portfolio of growth stocks because the first rule of growth investing is revenue growth, and the company just guided for no QoQ growth for the next three quarters.
LESSONS LEARNED
#1. Don’t average down on your cost basis. Sometimes the market is prescient and sells something that deserves to be sold. If you really think the market is wrong, you can try. But realize you may be wrong. By not averaging down, as it falls, it becomes less significant in the portfolio (as opposed to shorting where the position becomes larger as it goes against you).
Sure, other stocks were also in free-fall at the same time as Upstart, but Upstart was falling significantly more.
#2. You can “follow the numbers” but realize those numbers can change very quickly quarter to quarter, and there are folks out there who will predict the change because they have real domain experience in the field or sector. Therefore, you have to update in real time between quarters.
I knew Upstart was sensitive to the macro because it had just suffered revenue loss during Covid. But there were folks out there who knew a lot more about interest rates and capital markets and predicted correctly that Upstart’s growth would slow or reverse.
#3. You want predictability. Look at the QoQ growth.
Q1 Q2 Q3 Q4
2019 ? 66 52 26
2020 2 (73) 277 33
2021 40 60 18 33
2022 2 (2) 0 0
2019 ? 66 52 26
2020 2 (73) 277 33
2021 40 60 18 33
2022 2 (2) 0 0
* 2022 Q2-Q4 is approx guidance
It’s comically unpredictable. There’s no evidence of seasonality. The quarters with tremendous growth created “let-downs” in the following quarters. Sure, covid complicated the overall picture, and maybe after a few years the company will develop a pattern, but that’s in the future. We want to see a pattern of predictability.
Therefore, as a rule, a business with unpredictable growth should never be more than a Tier 2 holding (for me that’s 7-14%) no matter how tremendous the growth is. I can’t have a Tier 1 holding falling 20%+ (or 50%+) on a disappointing earnings report. I just can’t. And to be honest, maybe the rule should be to hold no companies with unpredictable growth no matter how tremendous it is.
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MACRO THOUGHTS
Inflation is something I've truly never had to deal with before. Not a meaningful amount of inflation anyway. It's turning everyone into a macro investor whether they like it or not. I need to stay focused and continued to look for companies that are growing and improving profitability in a durable way.
High growth companies, which are "long duration assets", have a history of bottoming before indices and will take off before the indices on the other side. So timing is hard.
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NEW LINEUP GOING FORWARD
Watchlist:
None.
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ACTIONS FOR NEXT MONTH
I'll reassess in the first week of June after all companies have reported.
