PERFORMANCE
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(There are 3 tiers. Once a position is set, it's allowed to float, with rebalances about monthly. The general goal is to have 9 positions total.)
Tier 1
(Allocation sizes: 15-25%)
22% - Datadog (DDOG)
(Allocation sizes: 15-25%)
22% - Datadog (DDOG)
Tier 2
(Allocation sizes: 7 - 12%)
13% - Crowdstrike (CRWD)
11% - Zscaler (ZS)
11% - Bill.com (BILL)
8% - Snowflake (SNOW)
7% - MongoDB (MDB)
Tier 3
(Allocation sizes: 2 - 4%)
4% - Cloudflare (NET)
4% - ZoomInfo (ZI)
2% - SentinelOne (S)
16% - Cash
9 positions, plus cash (9 last month)
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ACTIONS FROM THIS PAST MONTH
Bought:
- None
Added:
- None
Trimmed:
- None
Sold:
- None
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GENERAL THOUGHTS
Well my portfolio was "only" down 52% YTD at the end of July. Perhaps the bottom is behind us. Perhaps it's not. Who knows. Investing surely is more fun when stocks go up. But volatility is the price of admission in growth investing. And the macro environment is all doom and gloom right now. The stock market discounts the future. When all the bad news has been discounted that's when the bottom hits. If more * new * bad news comes out in the coming months then it could get worse. Investing through the full business cycle is what it's all about. I'm getting to experience historic volatility.
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I use a "3 Tier System". 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 1 should really only be one or two companies. And Tier 3, the same.
Tier 3 are companies either about to fall out, or are starter 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 month P/Sales:
DDOG - 30
CRWD - 27
ZS - 24
BILL - 27
MDB - 22
SNOW - 38
NET - 24
ZI - 19
S - 28
Last month P/Sales:
DDOG - 28
ZS - 23
CRWD - 25
BILL - 22
SNOW - 36
MDB - 18
NET - 21
ZI - 16
S - 27
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)
30 June 2022: $95.24 (Market Cap: ~ $33b, TTM Revenue: ~ $1.2b, P/S 28)
29 July 2022: $102.06 (Market Cap: ~ $35b, TTM Revenue: ~ $1.2b, P/S 30)
In the next earnings, we'll see how "mission critical" their products and services are during an economic slowdown. The consumption-based model cuts both ways.
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.
Crowdstrike (CRWD)
31 May 2022: $159.99 (MC ~ $38b, TTM Rev $1.6b, P/S 24)
30 June 2022: $168.52 (MC ~ $40b, TTM Rev $1.6b, P/S 25)
29 July 2022: $183.62 (MC ~ $44b, TTM Rev $1.6b, P/S 27)
Crowdstrike is predictable at the moment and 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.
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)
30 June 2022: $149.15 (MC ~ $22b, TTM Rev $969m, P/S 23)
29 July 2022: $155.06 (MC ~ $23b, TTM Rev $969m, P/S 24)
The strong secular tail winds combined with strong demand in the current environment are pushing and pulling with the current macro 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.
Others have sold out of ZS due to the billings so I have to watch that in the next quarter or two. Am I missing something that is obvious to others? We'll see and learn.
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)
30 June 2022: $109.86 (MC ~ $11.4b, TTM Rev $518m, P/S 22)
29 July 2022: $135.07 (MC ~ $14b, TTM Rev $518m, P/S 27)
Bill "only" beat guidance by 6% rather than 19% the previous 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 same thing for Snowflake and Datadog.
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.
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)
30 June 2022: $140.28 (MC ~ $50b, TTM Rev $1.4b, P/S 36)
29 July 2022: $149.87 (MC ~ $54b, TTM Rev $1.4b, P/S 38)
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 at a really high clip.
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)
30 June 2022: $259.50 (MC ~ $17.6b, TTM Rev $978m, P/S 18)
29 July 2022: $312.45 (MC ~ $21.2b, TTM Rev $978m, P/S 22)
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.
MDB reported on 1 June, and from a high level I thought it was a strong quarter of growth. Revenue accelerated further. Atlas remained strong. At the same time they improved profitability and cash flow.
The guidance was disappointing but the market must have been anticipating something much worse because the stock was up afterhours. The company didn't lower guidance but only raised it slightly. Management seemed credible on the call. The call was very well executed. Management talked a lot about the macro environment and how they see it playing out. It wasn't upbeat exactly but they addressed the problems they are seeing.
I felt comfortable taking the position to lower Tier 2 – 7-8% – but not above that.
They're likely to continue showing YoY acceleration for the next quarter. They will have to grow faster than they did in the same quarter last year. But with Atlas growing to a bigger % of revenue it seems likely that it's possible.
Cloudflare (NET)
31 May 2022: $56 (Market cap: ~ 19b, TTM revenue: $730m, P/S 26)
30 June 2022: $44.28 (Market cap: ~ 15.2b, TTM revenue: $730m, P/S 21)
29 July 2022: $50.32 (Market cap: ~ 17.3, TTM revenue: $730m, P/S 24)
I bought back into Cloudflare for the first time in over a year. Honestly, I am struggling for new ideas and I don't really like Cloudflare's core CDN business. It's capital intensive and a commoditized service relative to other SAAS companies.
But their revenue durability has been unprecedented relative to other SAAS companies and it seems like it has endurance. The valuation has fallen back to earth a bit. It also fits into my "cybersecurity" bucket with a competing technology to ZScaler.
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)
30 June 2022: $33.24 (Market cap: ~ $13.6b, TTM revenue: $836m, P/S 16)
29 July 2022: $37.89 (Market cap: ~ $15.5b, TTM revenue: $836m, P/S 19)
After their report in May I again sold half my shares and took it to Tier 3.
My initial thoughts were that it was a good report but not a 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. Can 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 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.
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.
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)
30 June 2022: $23.33 (MC ~ $6.5b, TTM Rev $245m, P/S 27)
29 July 2022: $24.84 (MC ~ $7b, TTM Rev $245m, P/S 28)
Sentinel One reported Q1 in the first week of June and I sold most of my position down to a 2% allocation. From a high level we have high growth but the operating and FCF margins went the wrong way QoQ. After more thinking I've realized they did the same thing in the year ago quarter. So maybe margins will improve going forward. Perhaps I'm wrong in selling it off, but we'll see. If they show signs of improvement in the next quarter I can add back to the position. I basically want proof that they can improve throughout the year.
They have high growth but the margins are just really negative – Minus 73% adj op margin. Minus 70% FCF margin – much more so than any of my other companies.
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MACRO THOUGHTS
It seems inflation is sort of discounted by the market in general at the moment. Unless we get another shock to the system.
Now we have to look toward a recession. Will companies start to lower guidance? Will earnings get revised down?
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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Watchlist:
Gitlab GTLB
Elastic ESTC
Palo Alto Networks PANW
