A few thoughts on the last weeks

Here we are, crippled and battered. A lot has happened in the last two weeks and I thought a little overview would be helpful. Let’s start with a quote:

“Bear markets make you feel dumber than you are in the same way that bull markets make you feel smarter than you are”.

I definitely don’t feel like a genius right now, I’ve made some mistakes and lost money. But I’m still swimming and breathing, so it could be worse.

In general, the earnings season was better than many expected. Banks and especially energy companies reported very good figures. Consumer spending also held up better than feared. The reporting season in our universe started with the Hyperscalers and ServiceNow. So far so good. When ZoomInfo presented the results, it quickly became clear what to expect. The narrative of the recession-proof SaaS business cracked a bit. But let’s take a closer look at the individual companies, I won’t juggle a lot with numbers but will give my general assessment.

A mixed quarter. While it´s very positive that NRR >130% and new customer adds (≈1000) are healthy, it is clear that customers are trying to optimize their spend and make shorter commitments. Margins were good, with operating margin (17%) and fcf (15%). The outlook shows the disadvantages of a consumption-based model, I expect a little less than 45% yoy in Q4.

→ The results were a bit below my hopes. I have therefore reduced my position by about 35%. Despite this, DDOG remains a great company with great management, many new products introduced at DASH and constant innovation. A clear leader with little competition. The near future will be difficult, but the thesis remains intact for me.

A disappointing quarter for me. NET reported 47% yoy growth and Fcf was negative at -2%. NRR ticked down from 126% last quarter to 124%. The operating profit of around 15M was positive. Next quarter growth should be around 45% yoy.

→ Here’s the thing about Cloudflare - they are an innovation machine, have a charismatic CEO and are in an interesting position because of their unique network. But it has always been the case that numbers and narrative/valuation have been far apart (not so much after the selloff). So far, their unique feature has been extreme consistency, which has not been the case this quarter. Because they have never shown the desire to be profitable, there is no foundation to help investors confidence with a “miss” at the top line. What I want to see is positive cash flow in Q4 as announced at the beginning of the year. My expectations were high as Matthew Prince sounded very upbeat during the last few months. I just expected better results, I have to say. It’s also that I’m having trouble understanding exactly where it’s going - first R2 was the next big thing, now the focus has been heavily on zero trust. I’m just not so sure anymore, and therefore I halved my position in the first few minutes after earnings were released - it was my largest before, together with SNOW. I want to see the many products and opportunities bear fruit before increasing my allocation again. As others have already noticed, I also lacked information about FedRAMP, unfortunately there was nothing new to report.

I still like the huge addressable market ahead of Cloudflare, the vision of the team and their creativity - however personally I would like to have a little more focus on sharpening their profile and executing on existing products now. There could be a big chance now that the hyperscalers are slowing down a bit at the moment and are proving to be quite expensive.

I think this was a good quarter - market disagrees, it seems. Core revenue growth came in 83% yoy and total revenue increased 94% yoy. Record in new customers, record gross margin (≈86%), net income of 16.9M and free cash flow positive. Float revenue is a nice feature of the business that could offset some softness in transaction revenue as long as interest rates stay high.

→ Already had a big position but added a bit into the weakness the last days.

To conclude: for me it looks like everything is getting sold in the last days, regardless of good or bad earnings. The early weakness we are seeing in Software, while some consumer facing companies still see no impact, seems to have changed the narrative to the other extreme. I think the reason for this is, that most SaaS companies are dealing with huge enterprises which anticipate a downturn much earlier then most other market participants. Therefore the cost cutting and optimizing starts long before a real recession begins. And of course, our SaaS companies are still far too expensive, they are shouting! But are they really?

Unfortunately, there is no key metric that can give absolute truth about this. But with EV/GP/Fwd Growth I think we’re getting as close as we can. This means enterprise value/gross profit/estimated next FY growth. This is what it looks like after todays close:

Snowflake           20.7 
Crowdstrike         13.1
Cloudflare          12.7  
Zscaler             12.6
Datadog             12.1
ServiceNow          10.7
Bill                 9.9
Palo Alto            9.8        
GitLab               9.0
Sentinel             8.1
Monday               4.7

Nvidia              22.8
Tesla               18.4
Apple               12.1
Microsoft           11.5
Costco               7.4
Alphabet             6.8

For me that doesn´t look expensive at all! Apple and Microsoft are estimated to grow <5% next year and since these are very mature businesses it´s unlikely they will reaccelerate meaningfully. That means if I you calculate with two years into the future, a probably still rapidly growing SaaS company like CRWD or DDOG is much cheaper than a mature slow growing business like MSFT.

This is how my portfolio looks right now:

Snowflake           12.3%

Bill                11.5%

Crowdstrike         11.0%

Datadog             7.7%

Cloudflare          6.7%

Zscaler             6.7%

BTC                 3.0%

ETH                 1.5%

Cash                 40%

As of today after the close:
2022down 45,8 % year-to-date (max. drawdown from peak Nov 16th 2021: 54,3%)

Now you could ask why do I have such a large cash position when the companies are that cheap. This part of my portfolio is a tradable position - I will jump in and out of a specific QQQ ETF with this part. So I’m fully allocated in single companies right now. Since this is off topic for this board, I will not go further into detail.

How will it go from here? I have no idea. IF this cycle follows historic patterns, it is very likely that our companies bottom a long time before the indexes do. Long yields will fall and provide us with a floor. This could be tomorrow or in several month - or maybe Im completely wrong. What I know is, these companies have strong balance sheets, many of them generate positive cash-flow and appear to be valued extremely reasonable. We will ride it out until better days come.

All the best, Hannes



I think you have a misunderstanding of what is driving Cloudflare’s current growth and what is not yet contributing much to growth. Matthew Prince has been pretty clear that Cloudflare is currently in their 2nd of 4 “Acts” of growth. They have always stated that CloudflareOne (Zero Trust,SSE, Network Servies, etc.) are the current growth drivers. These are Act2 products.

From the start they have said Act3 products related to data storage & serverless development platform (R2,D1,pub/sub,etc.) was many years out ~2025 from contributing significantly to growth. They have been pretty clear & consistent that the TAM for the Act3 products are significantly larger than the previous Acts, but it is going to take awhile before they are ready. Building a development platform and products like this is very complex. And it will take time getting developers on the platform. A lot of these Act3 products are still in beta. They have a plan for the 4th Act as well (Localized network connectivity in Cloudflare for Offices), but that is even farther out.

There is a reason the focus is on Zero Trust in investor calls. It’s not because they are trying to divert attention from Act3 products that aren’t ready yet.



Hi bnh, thanks for your reply. Yes, the strategy is laid out - that’s why I still have my position and said I like their big vision.

It’s just that I feel my other companies have a much sharper profile and are easier for me to get a grip on - I can only assume that it’s the same for some potential customers. Cloudflare’s product portfolio is so broad and they are throwing out new products with such an immense pace that they don’t fit in a clear category.

But I like when I have a sharp picture of where my company will be in 5 years. NET plays on many fields and this makes me nervous. The lack of real progress to be profitable contributes to that.

Regarding my comment about R2 - not to long ago and this was one of the main drivers behind the NET narrative and the huge increase in share price. On the call Matthew Prince said this:

”And I think that Zero Trust is very much going to be the story of the next few years to come.”

If zero trust is the main revenue contributor in the next few years, then it’s even more important to talk about FedRAMP and raise awareness about their offering. And he said:

“But when a customer is considering going on their Zero Trust journey, if we’re in that consideration, we love our win rates in that.”

The main players are still Palo Alto and Zscaler - that’s what he said here. If NET’s product is much better - as they say whenever possible - why is that? So when the main story in the next years is security, there are competitors like ZS with a clear and sharp profile, proven product, profitable, highest FedRAMP… not as innovative and maybe not as durable. That’s why I hold both. I will let them fight it out in my portfolio :wink:.



Yes, I agree with most of what you are saying. Part of Cloudflare’s premium before this past ER was due to products that haven’t started showing up in revenue yet. After the ER that premium vanished. The stock is probably the most sensitive of the group followed here to moves in interest rates. The other part was due to stability. I still think NET’s business is fairly stable compared to most in this sector. (See DDOG’s & others deceleration). NET guided for a 38% 5yr revenue CAGR when most companies are pulling long term guidance.

The market’s reaction to the R2 announcement (before it was even in beta) was crazy, as we can now see. Sending NET’s EV over $70bil last fall. Mostly caused by the 0% rate and QE environment. But NET management has been consistent in saying it’s going to take awhile before that stuff starts having an impact.




Can you please double check your EV/GP/Fwd growth valuations?

I too use this as a valuation metric and my numbers look a bit different. For example…based on today’s prices
CRWD is 36
DDOG is 38
NET is 39

GP = forward twelve months revs * most recent gross margin
And I use the next quarter’s expected growth rate in the final denominator.
I prefer to see this valuation metric below 40 to consider it to be attractively valued.

I could be mucking up the calculations myself too. Let me know what you see.


Hi Beach,

i don‘t want to turn this into a chat conversation, so we should better move to substack/twitter for further discussing this in detail.

But a short example with NET:

EV: ≈15.5B
GP: ≈750M
EV/GP = 20.6

Now taking ≈ 41% fwd growth into account we should be at around 14.5 after yesterdays big bounce. How can you land at a higher number then the current EV/GP when taking next year growth into account?

The GP numbers are out of my head, I’m on the road and don’t have my notes with me. Could be a little more or less - but that doesn‘t change much.

Edit: Raylight my request to talk privately related to the discussion about evaluation methods and not to other views on the companies. I was just reading your nice text and I would be happy if you would make it available again.


I see! Thanks! I enjoyed reading your topic and began writing a reply yesterday and it kinda just kept growing, so I figured it would be better to put my wall of text in a separate thread: