Well, well what do you know, after all the negative news about the economy and “famous” investors talking about doom and gloom in the past couple months, the market never revisited its lows and is now meaningfully off those lows. I have to admit reading all that news and commentary did mess with my mind. I exited companies because of deterioration in their fundamentals, but I held back from allocating the cash meaningfully because I was worried about lower lows.
I am now in 22% cash. At this stage, it feels like the market is finally responding positively to good earnings (MELI, NET, TSLA etc.) and prices are holding (for now). It doesn’t feel good entering after a meaningful rebound but I’ll probably start buying slowly and see where this leads to in the next couple of months.
Areas of Improvement for 2022
I keep this section to serve as a reminder to myself. After reviewing my 2021 portfolio return and decisions, the area where I didn’t do well was in portfolio allocation. My mistakes in 2021 were:
• Allocating too little capital to fundamentally stronger companies. (For e.g. I only had 2.4% in DDOG at one point)
• Adding to fundamentally weaker companies that had grown more attractive because their prices fell. (For e.g. I added to FUBO a few times as prices fell)
• Initiating try-out positions with too high allocation. (I would typically start with 5% allocation, which on hindsight seems too high.)
YTD Returns
Jan 2022 -21.4%
Feb 2022 -24.6%
Mar 2022 -22.8%
Apr 2022 -37.9%
May 2022 -51.5%
Jun 2022 -51.2%
Jul 2022 -46.7%
Monthly Activity: It was a pretty quiet month for the portfolio. I sold off my remaining position in SNOW. More thoughts on this in the individual stock discussion.
These are my current holdings at the end of the month. I have 9 holdings in total. They are grouped into high allocation (>10%), medium allocation (5-10%) and low allocation (0.1-5%), broadly reflecting my conviction levels.
Company Jun 2022 Jul 2022
DDOG 17.3% 16.9%
Tesla** 12.2% 14.8%
SentinelOne 9.4% 9.1%
Gitlab 9.1% 9.0%
MongoDB 7.1% 7.8%
Monday 8.0% 7.3%
ZScaler 6.3% 6.0%
GLBE 4.2% 4.3%
Cloudflare 2.2% 2.3%
SNOW 2.1% 0%
Cash 22.1% 22.4%
__**Discussion of this company is OT for the board. I am including it for completeness. Please contact me off board if you wish to discuss this company.__
Portfolio Commentary
I work on the basis of 10-20 stocks. While I see others on the board have a concentrated portfolio to great effect, I’m not comfortable with allocating too much capital to a handful of companies. Chris shared a truism with me that concentration in a portfolio is a function of one’s stock picking skills. I don’t think I’m there yet, hence a greater diversification is prudent. Moreover, I currently don’t have a handful of companies that are executing so perfectly that I feel comfortable allocating >15% to each (I wish I do, though), hence I will have to spread my allocation out.
Having said that, I’m currently down to 9 positions and a high cash position, which is a rare situation I find myself in. It’s been a few months since I’ve found new companies to invest in. There are a couple of previously-owned companies that I may initiate positions in (MELI and CRWD).
High Allocation Companies (10-15%)
Datadog
DDOG continued to perform in Q2. Revenue growth was 74% YoY and non-GAAP operating margin improved from 13.2% in the same period a year ago to 20.8%. FCF margin declined from 18% in the same period a year ago to 15%. Total customer growth was steady at 29% while customer (>$100k ARR) growth was stronger at 50%. Customers that are using >4 products and >6 products accelerated again. Customers using >2 products declined from 81% the previous quarter to 79% in Q2. The company said this was due to more customers landing with multiple products from the get go, so I’m not too bothered with that metric.
The company did warn that “our larger spending customers continue to grow but at a rate that was lower than historical levels.” and “This effect was more pronounced in certain industries, particularly in consumer discretionary, which includes e-commerce and food and delivery customers and affected more specifically our products with a strong volume-based component such as log management and APM suite.”
With that in mind, guidance for Q3 was lowered, at 53% YoY growth. The company also guided for margins to be impacted 100bps in Q3 due to increased spending and 400bps in Q4 due to the Dash user conference.
I may trim the position slightly but this continues to be a high conviction holding.
Tesla
**Discussion of this company is OT for the board. I am including the write-up for completeness. Please contact me off board if you wish to discuss this company.
Capital intensive. Highly competitive. Eccentric founder-CEO. There are many reasons to justify why an investment in Tesla would be silly. Yet, the company’s stock was up over 300 times at the end 2021 from its IPO price. It must be doing something right.
There are signs that the EV industry is at the beginning of technology S-curve adoption where growth can accelerate exponentially. Over the next few years, Gigafactories in Shanghai (Q1 2022: it has applied for at least a doubling of already-built capacity), Berlin and Texas are expected to come online and meet the demand.
Tesla’s products enjoy a fanatical cult-like following, similar to Apple’s iPhones (another company in a capital intensive, highly competitive industry, and with an eccentric founder). Growth optionalities include subscription from Full Self Driving and its future autonomous ride-hailing network.
The company grew at hyper growth rates in 2021 and is guiding for 50% CAGR over the next few years. Q2 results were weaker than expected due to shut downs in Shanghai. Revenue grew 42% YoY and -10% QoQ, non-GAAP operating profit improved to 16.7% (from 14.9% in Q1 2021) and FCF margin declined to 3.7% (from 5.1% in Q1 2021).
In spite of the weaker Q2, the company painted a strong picture for 2H. “We are positioned for a record-breaking second half of the year. We’re quite excited about this.” Shanghai is back to full production and Tesla recently completed an upgrade in production capacity in the factory. Texas and Berlin continue to ramp up nicely.
There was also a good example of how great companies can emerge stronger from crises in innovative ways. “And so one of the ways that we’ve been able to address supply chain issues on the chip front is by rewriting of software to be able to use different chips or, in some cases, achieve dual use of a single chip, which is even better. And actually, quite frankly, the chip shortage has served as a forcing function for us to reduce the number of chips in the car. Yes, it turns out we had more chips than we needed.”
As long as the company continues executing as it has, I’m happy to keep a reasonably high-conviction allocation. There are a couple of reasons why I find it hard to make TSLA an outsized position. First, selling a physical product at scale means more complications than selling software. (Yet, successfully doing so means higher barriers to entry for the competition.) Second, at $1T market cap, it could be harder for the company to double or triple compared to other SaaS companies (but I don’t rule it out).
My write-up for the company is here https://investmentpilgrim.wordpress.com/2021/12/05/tesla-inc…
Medium Allocation Companies (5-10%)
SentinelOne
SentinelOne’s AI-powered Singularity platform seems sufficiently differentiated and superior (as per Gartner Peer Insights and MITRE ATT&CK assessments) compared with other cybersecurity offerings. In the latest MITRE evaluation, S1 outperformed the competition again. Out of the 30 vendors evaluated, S1 achieved 100% prevention, 100% detection, the highest analytic coverage (108/109) with zero detection delays, demonstrating the platform’s ability to autonomously combat the most sophisticated threat actors.
Q1 results were more-of-the-same (read: very good). Revenue grew 109% YoY and 19% QoQ, while operating margin improved from -127% a year ago to -73%. Including contribution from Attivo (a recent acquisition), revenue growth for 2022 is expected to be in the triple digits and improvement in operating margins is expected. Customer growth is also strong, with large customers (>$100k ARR) growing 113% YoY and 14% QoQ.
This is a high conviction company. This is a company where I’d be happy to increase my allocation.
Gitlab
This is the latest addition to the portfolio. Gitlab’s platform is built on Git, an open-source VCS (Version Control System) application. A VCS is a collaborative tool that records the changes made to source codes over time and stores the information in a repository. This allows team members to see who has made what changes, when. If something goes wrong, they can easily revert the project back to an earlier state.
Git is critical for teams because without it, teams have to store different versions of the source code in different folders. This is a huge problem, especially if different people have to work on the same project. They would have to send different versions around via email and then manually merge the projects. Git reduces costs by enhancing productivity, consolidating different tools and eliminating integrations. It also enhances operational efficiency through reducing security and compliance risk.
Gitlab (and Github – owned by MSFT) provides Git services such as command-line interfaces (CLI) for advanced developers, web-based interface for new programmers, web-based repositories, wiki support, bug tracking, feature requests and task management. Revenues are subscription based, on annual or multi-year contracts.
While Github has a larger marketshare than Gitlab, their largest competitor is DIY DevOps, which are in-house point solutions developed by individual companies for their own internal use. Gitlab estimates that itself and its largest competitors still have less than 5% of the market overall.
Gitlab achieved 75% revenue growth YoY in Q1, with 90% gross profit margin and improving non-GAAP operating profit margin or -28% (vs -45% in the same period a year ago). Customer (>$5k ARR) growth was 64% YoY and Customer (>$100k ARR) growth was 68% YoY.
I am looking to increase my allocation to the company.
MongoDB
MongoDB’s NoSQL database architecture puts it in a strong leadership position with little real competition from legacy relational databases. Growth was given a shot in the arm when Atlas, its cloud-based database-as-a-service offering started reaccelerating revenue growth in Q1 2022 (i.e. in Year 2021). Atlas revenues are now large enough to meaningfully move the needle for the company. Total revenue growth has accelerated in the past 5 quarters and the company should do well as long as Atlas growth holds up.
The company posted a great set of results but warned of macro headwinds (more on that later). Revenue growth came in at 57% YoY and the company turned operating profit profitable, with OPM improving from -4.6% a year ago to 6.1%. Customer growth continued to be strong at 31% YoY. Atlas revenue came in at 82% YoY growth and is now 60% of total revenue.
The company shared that it was experiencing slower growth in the self-serve and mid-market channels in Europe and in May, started to see the same trend in North America. The root cause was slower growth in usage of its underlying applications. It expects a negative $4 million to $5 million impact to Q2 revenue and a negative $30 million to $35 million impact to fiscal '23 revenue guide. In spite of the headwinds, the company still raised its fiscal ’23 guide by $11m.
I am happy to keep this a mid-size position.
Monday
As the work-from-home trend seems here to stay, Monday.com will be a beneficiary. The space seems to be quite competitive with players like Asana, Smartsheet, Atlassian, etc. Having said that, it is worth noting that, according to the company, their largest competitor is still “email, and spreadsheet, and PowerPoint.” and “On 70% of the deals we see literally no competition.”.
In May, the company launched Work OS with 4 new products: Monday projects, Monday dev, Monday marketer and Monday sales CRM. This will see it further differentiate itself with other work software companies.
Prior to Q4 earnings, I thought it was likely they would turn Non-GAAP Operating Margin profitable in 2022. I’ve since had to reset those expectations based on the company’s 2022 guide. The company expects to be investing more heavily in 2022 to keep up hyper growth. With the resumption of conferences, travel and accelerated hiring, operating margin is expected to worsen.
I don’t know if I’m overthinking this, the more I think about them spending $8m on the Superbowl ad, the more uncomfortable I get. “Brand awareness” advertising like billboards, TV commercials and print ads provide companies very little information about how well the advertising does because companies cannot measure how their audience respond to the advertisements, and hence cannot measure their ROI. For a company like Monday, with a relatively small Sales & Marketing budget ($57m in 2020 and $77m in 2021), to spend that much on an ad campaign with no measureable results, just seems like a poor capital allocation decision to me.
Monday was a high conviction position prior to Q4 earnings but I don’t think I can say the same now. Q1 results were good, with revenue growth at 84% YoY and operating margin flattish at -40.4% (compared to -39.5% a year back). Enterprise customers (>$50k ARR) grew 187% YoY and 21% QoQ.
It fell to a medium allocation in my portfolio after some trimming in April and by virtue of price decline. I’m happy to leave it as it is for now or trim a little if I need to raise capital for other positions.
ZScaler
Compared to CRWD, ZS seems to have prioritised revenue growth over operating margin in the past few years. In their Q1 2022 earnings call, they said, “we’re going to prioritize growth over operating profitability.” This probably makes sense since they are already non-GAAP and FCF profitable.
In the latest quarter, ZS posted good-but-not-great revenue numbers (63% YoY and only 12% QoQ) and declining operating margins (9.5% vs. 13.0% a year ago). I see a parallel with MNDY where conferences, travel and increased hiring will provide pressure on operating margins for the rest of the year. For this reason, I find it hard to increase this to a high allocation. I’m happy with my medium allocation for now.
Low Allocation Companies (0.1-5%)
Global-e Online
GLBE facilitates cross-border e-commerce. It aims to make international transactions as seamless as domestic ones. Services include interaction with shoppers in their native languages, market-adjusted pricing, localized payment options, compliance with local consumer regulations and requirements such as customs duties and taxes, shipping services, after-sales support and returns management.
The company solves a pain point for merchants as huge upfront costs and efforts are needed to offer cross-border sales. According to Forrester, brands typically see around 30% of e-commerce traffic being international but in terms of actual sales figures, no more than 5-10% come from international shoppers.
In April 2021, the company announced a partnership with Shopify where GLBE would be the exclusive 3rd-party provider of cross-border services integrated into Shopify’s checkout. I’m unsure if this will be a needle-mover as Shopify has its own native white-label cross border service (Shopify Markets).
Q1 results were decent (65% YoY revenue growth, operating margin improved from 10.1% in the same period a year ago to 13.5%, Net Dollar Retention Rate >130%). It lowered revenue guide for the full year from 72% to 64%, which is still very strong. The uncertainty, with fears of a macro slowdown, is that revenue for the year will get revised lower.
The reason for the downward revision is the company saw significant reduction in sales in several Central and Eastern European markets. The company expects sales in that region to remain weak but for the other geographical markets to maintain their strength.
Given the more volatile nature of e-commerce revenues compared to SaaS companies, I’m happy to maintain a low allocation and possibly trim it if capital requirements arise.
Cloudflare
Cloudflare continues to confound me. It posted another consistent set of results in Q2. Consistent, but not spectacular. Yet the share price jumped about 20% after-hours. I’m not complaining, but I don’t understand it.
Revenue growth was 54% YoY and non-GAAP operating profit margin improved from -2.6% in the same period a year back to -0.4%. Paying customer growth was 20% YoY. The company shared that is was aiming to increase their $NRR to above 130% and it planned to do so by bundling products together.
The company revealed that in Q1, their pipeline generation slowed, sales cycle extended and customers took longer to pay their bills. In Q2, those metrics stabilized but “they’re not where we throw up hooray yet.” The CEO cautioned that “while our business remains strong, I believe this is a time for prudence and caution.”
The CEO then shared about their strength in Zero Trust services. “Because in a lot of cases, the kind of previous Zero Trust solution either suffered from a lack of ability to scale, real performance bottlenecks, not having the total global coverage that global companies need, and Cloudflare addresses all of those things extremely well. So I think that, that’s an opportunity for us.”
It was also insightful to hear how he could use high gross margins to help their customers with pricing during tougher periods. “We try to be strategic and accommodating where we think it makes sense to build business relationship and business. But we’re using our margin to accommodate for that without any doubt.”
It has gotten more expensive after the pop, I’m happy to keep my position, but I think other companies will probably give me better value at their prices. Then again, this company’s price moves continues to confound me…
Exited
Snowflake
I don’t think it was a great set of Q1 results from SNOW. While YoY revenue growth looks pretty good at 85%, the drop from triple digit growth rates just a quarter back is too large for my liking. The sequential QoQ numbers show more alarming information. In Q4, QoQ growth declined to 15% (or 75% annualized) while Q1 QoQ growth declined to 10% (or 46% annualized). For context, in the 12 quarters prior to Q4, QoQ growth had largely been above 20% (or 107% annualized). Customer growth has also declined precipitously to 39% YoY from 67% YoY a year ago. Remaining Performance Obligation declined sequentially in Q1, which is the first time it has happened since publicly publishing results.
Looking forward in the year, the company expects consumption to decrease, especially from consumer-facing cloud companies. It also announced cloud deployment improvements that are expected to have ~$97m revenue headwind for full year revenues. In short, I think the revenue decline going forward will be drastic.
I had already significantly reduced my position in June. I decided to exit the entire position in July.
Previous Updates
Jan 22: https://discussion.fool.com/compoundingced39s-jan-2022-review-35…
Feb 22: https://discussion.fool.com/compoundingced39s-feb-2022-review-35…
Mar 22: https://discussion.fool.com/compoundingced39s-mar-2022-review-35…
Apr 22: https://discussion.fool.com/compoundingced39s-apr-2022-review-35…
May 22: https://discussion.fool.com/compoundingced39s-may-2022-review-35…
Jun 22: https://discussion.fool.com/compoundingced39s-jun-2022-review-35…