Bear's Earnings Season Wrap Up

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Splunk reported today, so that wraps up earnings season for companies I own. I would put Splunk’s report in the “solid” group. Nothing bad, but nothing that really blew me away. Growth ticked up from 30% to 32%, so that’s nice.

I also added Alarm.com since my last update, so I will rank it as well. I think it gets a perfect score, because not only did they deliver solid results all around, but revenue ticked up from 26% to 33%, and SaaS revenue ticked up to 40%. This may be due to an acquisition, but if so it appears to be going spectacularly, because EPS was also up big as their operating income more than doubled YoY, even on a GAAP basis.

Let me recap and share some thoughts on how earnings went overall.

PERFECT SCORES

-Shopify (SHOP)
-Arista (ANET)
-Twilio (TWLO)
-The Trade Desk (TTD)
-Alarm.com (ALRM)

I opened a small position in Arista.

SOLID RESULTS

-Square (SQ)
-Hubspot (HUBS)
-Wix (WIX)
-Talend (TLND)
-Hortonworks (HDP)
-Blackline (BL)
-Teladoc (TDOC)
-LGI Homes (LGIH)
-Splunk (SPLK)

DISAPPOINTED

-New Relic (NEWR)
-Mercadolibre (MELI)
-Mulesoft (MULE)

THOUGHTS AND CONCLUSIONS

Every company on this list had a decent report, regardless of how some were interpreted. Even the ones I was disappointed with were not “bottom-fell-out, abandon ship” types of reports. Just things to watch, mostly. I even added to one of them (MELI), because it was down so much. Likewise, I didn’t universally add to the ones that killed it. I increased SHOP quite a bit, but I actually sold a little TWLO when it was up around $33. I bumped TTD ever so slightly, but it’s still just a 4% position based on conviction – I refuse to let myself get carried away with an Adtech company. And ANET and ALRM are new positions, so they’re still under 4%.

This month I have greatly reduced or eliminated several positions (NEWR, BL, HDP, TLND, MULE, LGIH) to more accurately match my level of conviction. It’s not that I feel any of these companies are going to fail…it’s simply that I’m less certain about the demand for their products, and their valuations, than I am of other companies with similar growth rates. Some of them, including HDP, TLND and LGIH, were top positions for me. That just didn’t seem right based on my conviction toward them (short and long term) vs something like Shopify or Hubspot. For them, the demand is clear and the price is inexpensive if your term is long enough. For NEWR or MULE (for example), it’s very difficult for me to feel like I know anything about what the demand will be.

I also feel like some opportunities have come up where I see bargains on things that are more traditionally valued. ALRM and ANET are actually profitable, but the premiums they sell at are nothing compared to the rates at which they are growing revenue and EPS. But mostly I’m still investing in the fastest growing companies I can find, and valuing them primarily by their PS ratios. I’m just trying to take a hard look at what my actual conviction is, and attempting to better size my positions.

For the most part (Wix and a few others notwithstanding), I feel like the market has adjusted fairly well to earnings season. In other words, fewer things look overvalued. A more positive spin would be that there are more bargains now than there were before.

It’s always fun to try to assimilate all the new information into my analysis, and see what the market is offering. If anyone has any thoughts/feedback to offer, I’m all ears.

Bear

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This month I have greatly reduced or eliminated several positions (NEWR, BL, HDP, TLND, MULE, LGIH) to more accurately match my level of conviction. It’s not that I feel any of these companies are going to fail…it’s simply that I’m less certain about the demand for their products, and their valuations, than I am of other companies with similar growth rates.

Bear,

The one decision that stands out to me is TLND. I did the opposite by adding a bit on August 1st. It’s currently a 9.1% position. I like the growth opportunity ahead. I like the valuation. I really like the revenue growth and the customer count growth. The dollar-based net expansion has been high and stable. The SBC is lower than the peers that I reviewed (although I think it will increase due to the relocation to Silicon Valley). I also like the CEO’s approach to rapidly grow revenue WHILE increasing CFFO and earnings.

I also completely exited MULE, NEWR, and HDP. I never owned BL.

I reduced LGIH today from 9% to 7.1% (sold above $45/share to buy more NVDA and SHOP), but this may be temporary bet.

I like WIX’s growth and I like their consistent release of new features and formation of new partnerships. I don’t like their high SBC so I have reduced WIX to a 2% position. WIX is probably the first company that I would sell…solely due to the SBC. Not sure. I’m thinking I might give them a pass until their next earnings report but I’m doubtful that they change their ways on SBC…it feels like management is raping shareholders there.

The other company that I added to recently is KITE. I exited completely from CELG and holding that one for several years. It’s not that I think that CELG will not continue to do well but more that I don’t see CELG growing fast. I’m betting that KITE will get approval in the US and Europe soon and that the stock will rise more then. I also like that they’ve made progress on treating a variety solid tumors. Since I made that move, CELG has been flat while KITE has increased 17%; I like to see that!

With the above changes, I now have only 11 stocks and if I were to cut WIX I’d be down to only 10. When I started following this board in early 2014, I had more than 50 position and I never dreamed that I’d be comfortable owning only 10 stocks.

Chris

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Chris and Bear,
Thanks to your friendly nudge, I sold out of four stocks that I maintained small positions.

OTEX Open Text
CELG Celgene
ELLI Ellie Mae
BOFI Bank of the Internet

~TracyK

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Chris and Bear,
Thanks to your friendly nudge, I sold out of four stocks that I maintained small positions.

I don’t know much about those particular 4, but concentrating your funds into the companies you follow closest and like most is a good thing! Way yo go, Tracy.

Bear

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Nice work, Bear!

Can’t say I disagree with anything you’ve brought up, and I admit a few of your holdings I know next to nothing about, except for what you’ve posted here. (ALRM, NEWR, TDOC, SPLK)

My questions are mostly about MELI. The price is not following my expectations or interpretations of their progress at all, and I’m not sure why. Do you think the Venezuelan political/economic situation has much bearing on the stock price? Other than being in South America, what do you think is holding the price down so much lower than (what I think, at least) it deserves? Lastly, was your disappointment in MELI due more to aspect(s) of the earnings report or just the stock price? I need to go through the transcript closer again, but didn’t see anything too drastic or disappointing the first time around and that makes me wonder what I missed.

When I get more time available, it’s time for me to rebalance with major changes. I reload exactly the way you did–by conviction. (Man, that should scare you!) Thanks for considering my questions.

Dan

long MELI @ 4%

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Hi Dan.

My questions are mostly about MELI. The price is not following my expectations or interpretations of their progress at all, and I’m not sure why. Do you think the Venezuelan political/economic situation has much bearing on the stock price?

It’s possible, but I think it’s more company specific. I’ll say more below.

Other than being in South America, what do you think is holding the price down so much lower than (what I think, at least) it deserves? Lastly, was your disappointment in MELI due more to aspect(s) of the earnings report or just the stock price?

My disappointment was due to the report. 1) Growth didn’t match the torrid pace they had achieved in the March quarter. I certainly wasn’t upset about 59% growth, so maybe “disappointing” is a little strong, but the ramp up to 74% in March had my hopes high. 2) Sales and marketing spending was up fairly drastically. I haven’t looked too closely, but I assume this has to do with their free delivery initiative. I have a buddy who lived in Peru for years and he described to me how hard it is to get mail at all in certain places in South America. So I’m a little skeptical about it being a huge success. Still, MELI will be fine overall, and keep growing.

I think the stock had simply gotten a little ahead of itself. But maybe the drop was an overreaction.

Just my opinions.

Bear

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http://discussion.fool.com/1069/meli-the-chart-8-14-17-edition-3…

The above link is from a poster on the RuleBreakers board who has followed MELI for years. He has some great insights and may have the answers to your questions about MELI.

Personally, I know that since MELI collects in S American currencies and reports in US Dollars, so when the S Amer currencies are weak or the Dollar is strong MELI doesn’t fare as well during the quarterly reports. The opposite is true as well and causes big spikes in share price when MELI beats expectations.

A couple other points about MELI is (1) their expenses have increased as they have begun to offer free shipping. This will be a short-term drag on earnings but in the long term will greatly benefit them. (2) Overall internet penetration in South America is still well behind and therefore more growth is inevitable as the ability to get online increases. (3) Since internet penetration is smaller, of course, online shopping is smaller…this will only continue to grow. (4) MELI, like EBAY before them has their own payment network and creates additional revenue on every purchase that uses their payment network. In South America, the use of credit cards is very low and cash is king, but converting these customers to “Mercados Envios” (the payment network) will easily translate into more revenue.

JK

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