Disclosure: This is the first time I am writing a monthly update as a field report so to speak. I did not include all the details that repeat in Quarterly Earnings or what you
find in other posts, for the sake of brevity.
I’ve found writing this update quite useful. For example, I think I will need to increase my Sentinel One position. I will be happy to refine this long form and post next month to see how that goes. Thank you. I hope it’s not too long.
Baconski Family Portfolio monthly field report March 31st, 2022.
At the end of March we are invested in the following 8 businesses, about 90% of our portfolio value. The rest is a bit of cash and some minor starter positions I am watching.
Business % of port
DataDog 19%
Monday 16%
Cloudflare 15%
ZScaler 10%
CrowdStrike 8%
Snowflake 6%
Upstart 5%
SentinelOne 4%
ZoomInfo 4%
Our portfolio lost -4.8% in value this month.
Year to date (YTD) a loss of -24.4% in value.
Month YTD
January -22.1%
February -20.6%
March -24.4%
We continue to be in the longest DIP we’ve had in the last few years. Our last PEAK was on November 9th, 2021. Our portfolio reached a new bottom this month on March 14th, 2022, We are now -44% below last PEAK, 142 days ago.
It would take our portfolio to grow 79% to reach back to the previous PEAK. This is not our first DIP but by far the largest in the last 5 years.
CHANGES THIS MONTH
We trimmed some positions for tax-loss harvesting.
We hold the same businesses as last month
The following businesses issued Quarterly Earnings this past month:
Snowflake on March 2nd.
CrowdStrike on March 9th.
SentinelOne on March 15th.
Let me update you on each business we own.
DataDog
We first purchased DataDog in February 2020, and have been adding more shares since. We now have 19% of our money allocated in this business.
Last Earnings Date was on Feb 10th, 41 days after Q4 2021 ended. They gave us an outlook for Q1, ending today to grow revenue at 4% QoQ on a high end, expecting 71% YoY growth. We expect to see Q1 Earnings in the first week of May.
On March 8th CEO Olivier Pomel, and CFO David Obstler, participated in a 30 min conference call with Morgan Stanley analysts. I listened to this audio call
https://morganstanley.webcasts.com/viewer/event.jsp?ei=15313…
Few points from that interview that have helped me retain high conviction in DataDog’s products, execution, and years of growth ahead:
- The mission is to break down silos in organizations. DataDog’s products connect all stakeholders in an organization.
- They make products that implement the principles of DevOps and DevSecOps.
- There is a shortage of engineering and security talent. Companies need best of breed tools, and they will buy DataDog products because the costs of building something in-house is prohibitive due to rising labor costs.
- They are expanding to Security space. They already monitor, observe the entire software systems operations, adding security on top of it seems efficient and cheaper for existing customers
Monday
We first purchased Monday in September 2021, and have been adding more shares since. We now have 16% of our money allocated to this business.
Last Q4 Earnings date was February 23rd, 54 days after Q4 ended. They gave us an outlook for Q1, ending today, to grow revenue at almost 7% on high end, expecting 73% YoY growth. We expect earnings in the first two weeks of May.
They have been growing earnings over 90% in the last 3 quarters and I expect them to earn in the 80% range over the next few Quarters with a Gross Margin up to 90%.
In the Q4 Earnings Call they told us that they are “frontloading expenses in Q1 to drive the growth”.
On March 2nd, they announced a partnership with KPMG to “accelerate transformation and innovation process to be more efficient”
There was no other news in March for Monday, I assume they are busy building and selling the software.
I see this business as a leader in a low-no-code people collaboration software for any business in the world, in any language, where people need to make work visible and actionable.
Cloudflare
We first purchased Cloudflare in May 2020, and have been adding more shares since. We now have 15% of our money allocated to this business.
Last Q4 Earnings date was on Feb 10th, 41 days after Q4 ended. They gave us an outlook for Q1, ending today, to grow revenue at 6% QoQ on a high end, expecting 49% YoY growth. We expect earnings in the first week of May.
They have been growing earnings above 50% over the last 6 quarters and I expect them to maintain over 50% YoY growth for the following Q with an average Gross Margin of 78%
On March 7th in a joint effort with Ping Identity and Crowdstrike (which we also own), all 3 companies announced a Critical Infrastructure Defense Project (https://criticalinfrastructuredefense.org/) which provides FREE Cybersecurity services and support to US Critical Infrastructure sectors (Hospitals, Energy and Water utilities ), to defend themselves from cyber attacks. This action is a response to the Russian invasion of Ukraine, and all vulnerable businesses should be prepared for more frequent, and sophisticated cyber attacks.
On March 9th CFO Thomas Seifert participated in a conference call with Morgan Stanley analysts. I listened to this 30 minute inverview.
https://morganstanley.webcasts.com/viewer/event.jsp?ei=15318…
Few points from the interview that helps me retain high conviction in Cloudflare
- They are dematerializing network infrastructure, replacing on-premises products with services down to level 3.
- Constant Innovation engine
- Zero Trust infrastructure just getting started.
- Edge computing platform is just getting started. Most Cloudflare products are now built on top of Workers
- Always looking for the most disruptive moves to gain competitive advantage.
- The bigger the network the faster the flywheel.
On March 13th they kicked off Security Week announcements.
https://www.cloudflare.com/security-week/
On March 14th, they announced the plans to make EMAIL SECURITY tools available, once the acquisition of Area 1 Security closes (expected in early Q2). Email will be routed to Cloudflare and inspected before delivery to protect you from phishing and malware attacks. (https://www.area1security.com/overview/ ). It will be a one-click deployment. Area 1 acquisition was announced on February 23rd. (https://blog.cloudflare.com/why-we-are-acquiring-area-1/ ). I believe this product was built on First Principle thinking, “A Clean Internet Begins with a Clean Inbox”. A worthy acquisition.
On March 15th, Cloudflare was positioned in the LEADER category for CDN 2022 Vendor Assessment by IDC MarketScape. Out of top 10 CDN vendors evaluated the immediate competitors are: Akamai, Amazon and Fastly. I am confident Cloudflare will continue to take business away from those competitors. I consider CDN as Act One for Cloudflare. They are now building and selling Act Two and Act Three products.
On March 16th they announced the API GATEWAY product, which manages traffic between businesses’ API driven applications and their Internet customers. Now any business can replace their existing and costly gateways at a fraction of a cost. The Gateway manages API authentication, validates incoming requests, monitors usage, detects abuse and more. (https://blog.cloudflare.com/api-gateway/).
On March 17th they announced an expanded partnership with CrowdStrike. Cloudflare ZTNA and SWG are now integrated with Falcon ZTA for joint customers. I see this as a great partnership since we own both businesses.
(https://blog.cloudflare.com/cloudflare-crowdstrike-partnersh…)
ZScaler
We first purchased ZScaler in April 2021, and have been adding more shares since. We now have 10% of our money allocated to this business.
Last Earnings date was on Feb 24th, 24 days after Q2 ended On Jan 31st. They gave us an outlook for Q3, ending April 30th, to grow revenue over 6% QoQ on a high end, expecting 54% YoY growth. We expect earnings in the first week of May. Similar outlook they presented in Q1, yet they delivered 63% YoY growth in Q2. I see their revenues re-accelerating thanks to more businesses implementing Zero Trust Architecture.
On March 2nd, CFO Remo Canessa and CEO Jay Chaudhry gave a zoom presentation at the Berenberg Thematic Software Conference. Jay presented several slides and explained how ZScaler provides businesses the needed Network Transformation from Castle-and-Moat to Zero Trust Exchange. Network Architecture needs to change and Security is leading this change.
The slides were used form March investor presentation available here:
https://ir.zscaler.com/static-files/38a3cc14-35c2-4a48-8538-…
Key points of ZScaler strategy:
- Don’t connect users to the network, instead connect users to applications, use the network as a transport only.
- Become Zero Trust Exchange layer in ZTNA. ZScaler is like a Network Switchboard, who talks to whom.
- We work with all partners; Identity and Endpoint protection providers for Zero Trust ecosystem. - - Close partnership with CrowdStrike
- Gartner leader in SSE (Security Service Edge)
- Very early adoption. Big opportunity
- Over $1 B in ARR. They can increase ARR 6X just with existing customers upselling ZIA and ZPA products.
Federal opportunity: White House strategy memo from January 26th, the Federal Government needs to move the U.S. Government toward a “zero trust” approach to cybersecurity.
https://www.whitehouse.gov/omb/briefing-room/2022/01/26/offi…
CrowdStrike
We first purchased CrowdStrike in September 2019. We have been rewarded greatly by holding this business over the years. We now have 8% of our money allocated to CrowdStrike.
On March 9th they announced Q4 earnings, 37 days after Q4 ended on January 31st. They told us they will make up to $465.4 million in Q1, expecting to grow 8% QoQ and 54% YoY. The growth is definitely slowing over the last 3 quarters.
I trimmed CrowdStrike in December, and I am holding 8% even though the growth is slowing, because I see Crowdstrike as a vital partner in Zero Trust for Endpoint protection for ZScaler and Cloudflare. I’ll re-examine if I need to trim or sell at the next Quarterly Earnings if revenue growth dives below 60%. So far, steady grower. Watch for competition from Sentinel One, which we also own.
On March 31st they announced results from MITRE ATT&CK evaluations, they achieved 100% prevention. Congrats. Notice Sentinel One also took part in this evaluation, in the group of 30 vendors, both did great.
For geeking out on details see https://attackevals.mitre-engenuity.org/enterprise/participa…
There was no other significant news apart from previous companies notes above where I highlighted CrowdStrike partnerships.
Snowflake
We first purchased Snowflake in November 2020 as a starter position, it’s now 6% of our portfolio.
On March 2nd they announced Q4 earnings, 30 days after Q4 ended on January 31st. They told us they will make up to $388 million in Q1, expecting to grow 8% QoQ and 81% YoY. I am pleased with the Q4 earnings.
On March 7th they CFO Mike Scarpelli participated in a conference call with JMP analysts. I highlighted few things here
https://discussion.fool.com/thanks-jonwayne-for-the-notes-i-just…
On March 17th they announced HealthCare Data Cloud
https://www.snowflake.com/news/snowflake-launches-healthcare…
On March 23rd they announced integration of Tecton Feature Store that I highlighted here https://discussion.fool.com/what-is-feature-store-and-how-it-can…
Upstart
We first purchased Upstart in May 2021. It’s now 5% of our portfolio.
I paid no attention to Upstart this March. My thesis on this business is not broken. Earnings will be lumpy, less predictable than SaaS business.
For Q4 they guided to 16% QoQ growth, they delivered 33% growth, beating by 15%. Then in Q4 they guided Q1 to grow 0%, indeed they may grow 0% QoQ, or beat by 20%? We don’t know. There is no need to speculate. To me this is a revolutionary business and very lumpy hypergrowth. I’ll re-examine next Quarterly Earnings.
Sentinel One
We first purchased Sentinel One in January 2022, just 2 months ago. It’s now 4% of our portfolio.
On March 15th they released Q4 earnings. They delivered 120% YoY revenue growth, increased ARR by 23%, now at $292.3 million. They also guided for 14.3% QoQ growth up to $75 million which would make it 103% YoY growth.
As I am writing this I realize I need to increase my position.
ZoomInfo
We first purchased ZoomInfo in April 2021, it’s now 4% of our portfolio.
I have not paid any attention to ZoomInfo this month. I will revisit next Q.