PERFORMANCE
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Tier 1 (Allocation sizes: 15%-25%)
None
None
Tier 2 (Allocation sizes: 7%-12%)
14% - Datadog (DDOG)
14% - Bill.com (BILL)
13% - Crowdstrike (CRWD)
10% - Zscaler (ZS)
8% - Snowflake (SNOW)
7% - MongoDB (MDB)
6% - Cloudflare (NET)
Tier 3 (Allocation sizes: 2%-4%)
2% - ZoomInfo (ZI)
2% - SentinelOne (S)
24% - Cash
9 positions, plus cash (9 last month)
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ACTIONS FROM THIS PAST MONTH
Bought:
- None
Added:
- To Cloudflare (NET) after their report, and took it from a Tier 3 to Tier 2 holding.
- To Snowflake (SNOW) after their report
Trimmed:
- ZoomInfo (ZI)
Sold:
- None
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GENERAL THOUGHTS
This month my portfolio was up about 8% while the S&P 500 was down about 4%. That was a similar dynamic to June, but it's small consolation compared to being down 48% YTD. But it's a consolation nonetheless. The June to August period was one of euphoria and "maybe the bear market is over". But by the time August ended that has again turned to doom and gloom.
Investing through bear markets is difficult because the macro weighs on company results. The strategy is continue to find the companies that are growing even through the headwinds. That might entail more trading than usual, but it's a necessary part of the process.
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. At the moment the trend has turned back down.
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On another note, my son will be born in a couple weeks. I'd like to start a fund for him and see how it CAGR's over many years. Starting early, even with a small amount, is the key to exponential growth.
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I use a "3 Tier System". 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 should really only be one or two high-confidence companies. The idea is that Tier 1 should drive the results.
And Tier 3 is similar in that it should also be one or two companies that are either new starter positions or companies about to fall out.
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 have no Tier 1 positions (after I trimmed Datadog this month), and seven Tier 2. I also have a 24% cash position. That's telling me I don't have a lot of confidence in anything.
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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 - 27
CRWD - 24
ZS - 24
Bill - 27
SNOW - 40
MDB - 21
NET - 26
ZI - 20
S - 25
GTLB - 27
Last month P/Sales:
DDOG - 30
CRWD - 27
ZS - 24
BILL - 27
MDB - 22
SNOW - 38
NET - 24
ZI - 19
S - 28
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)
31 Aug 2022: $104.95 (Market Cap: ~ $36b, TTM Revenue: ~ $1.3b, P/S 27)
Datadog reported this month and from a high level we can see revenue growth slowed but not as bad as Covid. Customers slowed similar to how they did in Covid, not good at all. Slight margin pressure but it's an efficient business. The question is how much more will it slow in this macro situation?
Consumption-based cuts both ways. So if the macro is affecting them. The business should accelerate coming out on the other side. The problem is we don't know when that will be. And we don't know if they'll be able to achieve hyper growth now at a much larger run rate than two years ago coming out of covid.
I think the uncertainty of the guide is what caused the sell off after the report. And it's a legitimate reaction I think.
Frankly, it wasn't a great report. There's uncertainty in the guidance. That's it.
After going through the call it seemed like the business had already reaccelerated again in August. But they don't actually know. So there is some uncertainty.
Datadog is in limbo in my portfolio. Initially I decided to bring it down to a lower Tier 1 position at 15%. It's floated down a touch to 14%. But I'm now also considering it a Tier 2 holding. In fact I may cut it back to 12%.
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)
31 Aug 2022: $182.61 (MC ~ $44b, TTM Rev $1.8b, P/S 24)
Crowdstrike also reported in August, and from a high level we can say it was routine outperformance. They have incredible opex and cash flow margins, as well as a positive adj net margin and eps. They have lots of tailwinds, etc. They beat consensus and raised guidance. All great things.
But the growth is slowing down very, very steadily. And it doesn't seem there's any chance it's going to reaccelerate. I've known that now for almost a year. The stock in 2022 has been buffeted because it had stalled relative to others in 2021.
At the moment it's a solid Tier 2 holding. I'll give it another quarter then reevaluate.
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)
31 Aug 2022: $159.24 (MC ~ $23b, TTM Rev $969m, P/S 24)
Zscaler reports Sept 8th and will be the last of my companies to report.
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)
31 Aug 2022: $161.88 (MC ~ $16b, TTM Rev $640m, P/S 27)
Bill.com reported August 18th and of all my companies, they had the strongest report. They crushed it actually. We have high revenue growth and improving margins but not drastically improving. So for that reason I can't take it up to Tier 1. But this was a strong report and the guidance was strong enough as well that it exceeded Wall Street expectations.
Bill.com is also a bit of a complicated story with the acquisitions so I don't want to make it Tier 1 for that reason.
And further, remember it's consumption based so it cuts both ways. One thing we've seen in the reports is that companies with consumption-based revenue have had mixed results. What I mean by that is that some companies like Datadog and, in particular, MongoDB had very apparent macro headwinds. Snowflake didn't show a ding (but they did report a pull-forward in revenue from a large customer).
Bill.com showed very little to no slowdown. However, the employment rate has stayed historically low, which means lots of people are getting hired and getting paid. And that's how Bill.com makes money. If the unemployment rate starts to rise it could mean that Bill.com will be affected. And in fact, the rate did tick up in August, and with the Fed continuing to raise rates, it's likely to continue. That's another reason I'm cautious about Bill.com
On the call they did say they were seeing a sign of macro headwinds: "TPV growth rates moderate and this trend continued into July and early August"
On the call they did say they were seeing a sign of macro headwinds: "TPV growth rates moderate and this trend continued into July and early August"
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)
31 Aug 2022: $180.95 (MC ~ $65b, TTM Rev $1.6b, P/S 40)Snowflake reported August 24th and it was a great report. From a high level it was high revenue growth combined with meaningful margin improvements. The stock was up 15%+ the next day.
Last quarter I said:
It seems like they were back up and running in May. I'm iffy on this because 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.
But it seems from the results of Q2, that April was perhaps the low for them in terms of macro headwinds. And that they will continue to execute now going forward. There were still some macro headwinds, but those only caused them to reiterate guidance whereas other companies, like Salesforce, lowered guidance. So perhaps Wall Street was expecting them to lower. Reiterating is the same as a beat in this environment.
However, two things stood out from the report:
#1 They had a pull forward in revenue. The CFO said in his opening remarks:
"We collected a $33 million invoice in Q2 from a customer who had paid its invoices in Q3 in prior years."
This is important because that represented 6.6% of the revenue in the quarter. If we pull that number out, QoQ revenue growth would have been 10% instead of 17.7%.
#2. Guidance was relatively weak. They guided for $505 million in product revenue for Q3, which would represent 8% QoQ growth. They had guided for 12% QoQ growth coming into this quarter. So that's a slowdown in my mind and what I would call relatively weak guidance (8% vs 12% last Q).
These two things are tied together obviously. The pull forward caused the weak guidance. And that's important because last year their Q3 was very strong at 23% QoQ growth. The CFO reminded everyone of this in his opening remarks:
"I would like to remind everyone that in Q3 last year, we saw unusual seasonality due to reaccelerated product revenue growth."
The Q3 pull forward set up Q4 to be a disappointment when they "only" reported 15%. And then Q1 was a further disappointment at 10%. So we can see it's lumpy. Look at the numbers:
23 15 10 18
So we just have to be careful and not get too excited.
23 15 10 18
So we just have to be careful and not get too excited.
All that said, it seems Snowflake is still a best of breed tech company growing fast and improving margins. And it seems they can grow for a very long time.
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)
31 Aug 2022: $322.86 (MC ~ $22b, TTM Rev $1.1b, P/S 21)
Mongo DB reported on 31 August and all the air came out of the tires of this one. Of my companies, this is the weakest report so far.
The macro is hurting them. If consumption takes a hit then revenue takes a hit. And then everything else below the revenue will also look worse. IE margin pressure. It's pretty simple.
Consumption cuts both ways. Coming out of whatever this macro slowdown is might be a boon for them and revenue will reaccelerate. But when will that be? It's tough to know.
If you have a time horizon of a year or more, probably the company is going to regain business momentum and then stock momentum. It's just a question of if you want to wait that long.
They are guiding for 0% QoQ growth for the next 2 quarters. That's really bad. And the tough YoY comps will make it look even worse.
But I can't have this be a large part of the portfolio. It has to come down to Tier 3. Down to a level where it can't hurt me.
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)
31 Aug 2022: $62.57 (Market cap: ~21b, TTM revenue: $812m, P/S 26)
Cloudflare had a good report this month. They reported the same day as Datadog and their report was better. Their numbers aren't as good but they are more consistent quarter after quarter.
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)
31 Aug 2022: $45.42 (Market cap: ~ $18.7b, TTM revenue: $928m, P/S 20)
After their report in May I again sold half my shares and took it to Tier 3.
And after their report this month I trimmed a little more. The revenue has been surprisingly durable but organic revenue of only 42% isn't really exciting. That said, their margins are incredible.
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)
31 Aug 2022: $27.31 (MC ~ $7.6b, TTM Rev $302m, P/S 25)
Sentinel One also reported on 31 August and I thought it was incredibly strong. Maybe the strongest report of all my companies.
They said in the call a couple of times that the beat on revenue came from the organic business. And they also said they had their "largest ever customer win". They showed a meaningful improvement in operating margin which is what I was looking for.
So it was an incredibly strong quarter, but the guidance leaves me scratching my head. Unless they are just being uber conservative. It seems like way too much conservatism. It leaves a question in my mind.
The market sold it down 7% on the day they reported which was really surprising to me. Everything in my portfolio was down that day yes. But still. I think the market is sleeping on SentinelOne a bit, and will eventually wake up.
I can take this to a 10% position, but don't want to let it get much bigger than that because of the uncertainty around the guide.
Gitlab (GTLB)
31 Aug 2022: $59.87 (MC ~ $8.8b, TTM Rev $333m, P/S 27)
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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.
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Watchlist:
Gitlab GTLB
