Bear's Mid-August Portfolio Update

Investment Analysis Clubs Saul’s Investing Discussions
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I don’t usually say much about my portfolio mid-month, but I’ve been making a lot of changes. After traveling a lot in July, I’m scrutinizing things a lot more, and with some quarterly results already coming in, and others soon to come, I’ve been re-sizing a lot of positions. Here are my thoughts for those interested.

MDB, ESTC, and AYX are now my largest positions at around 11% or 12% each. These companies seem to have so much runway to grow revenue at a hyper-fast pace, and with market caps under 10 billion their valuations also have room to grow. AYX just turned in monster growth – accelerating even. I think all three of these will grow faster (organically) than almost anything else (…except maybe CRWD and ZM, and with those two it’s hard to imagine they’ll continue to grow at 100% for more than a year or so.)

SMAR is right behind them at 10%. This is only a $5 billion market cap, so I’m really looking for it to out-pace a lot of our others. I think it will grow like the three above for a while, and my confidence is only slightly lower in SMAR…and I’m really not sure why…perhaps I’m influenced by Saul’s smaller position there.

TWLO is still an 8% position. I haven’t touched it, but I’d be more likely to trim than add. I just don’t see how they’re going to grow as fast as these others. I’m not impressed with the Sendgrid progress, although I admit it’s too early to ding them much for that, and I could be proven wrong…eventually. I don’t care much about the Flex conversation…it’s more about SendGrid for me. It was a very large acquisition and growing slowly compared to “legacy” Twilio products.

I cut 1/3 of my TTD position after the earnings call. It’s about 6% now. They seem like a fine, steady grower, akin to SQ, which I’ve added to and is now a 5% position. I think these will continue to grow at ~40% and do just fine, but they’re not in the same league as MDB, ESTC, AYX, or SMAR.

All my other positions are 4% or less, and the only one that’s changed is CRWD. I cut it in half when everything else was down but it wasn’t. I just don’t see it going up too much from here, because it’s already a $20 billion company!

Market Cap

You’ll notice I keep mentioning market cap. I think it’s worth considering. It’s no crystal ball, of course. Crossing the $10 billion or even $20 billion mark didn’t slow down SHOP or SQ (although since crossing the $30 billion level, SQ has been up and down for over a year now). But a lot of hyper-growth SaaS companies have grown significantly slower after reaching a certain size. I think this would be worth studying…but for now I’m just using it as a sort of rough rule of thumb.

And those are my thoughts as we approach mid-month.

Bear

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But a lot of hyper-growth SaaS companies have grown significantly slower after reaching a certain size. I think this would be worth studying…but for now I’m just using it as a sort of rough rule of thumb.

I focus on mkt cap a lot too and for me it has to do with acquisition floors or how much i think a company would get bought for to provide a floor for their stock price.

This is why i dont like ZM…who would pay a premium to acquire them at these levels?

We saw Tableau get acquired…helps support the floor for AYX, imo.

On side note, i think there is a good chance TTD growth will reaccelerate at CTV matures and Amazon and Disney÷ and ATT/HBO, CBS/Viacom, Comcast/NBC and others all enter streaming market in a meaningful way.

Amazon partnership should boost q3 and definitely q4.

Disney+ starts Nov and will influence part of q4.

CTV should be a boon for 2020 and beyond. Then you have possible China boost to overlay on top of that.

We will see.

Dreamer

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Bear, only a few weeks ago you mentioned this…”I also think TTD may have a loooooong runway ahead because the market it’s after is so huge. So despite their being a bit larger than these others, they’re a top position for me too.

So the earnings call must have spooked you out? Still have FSLY?

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TWLO is still an 8% position. I haven’t touched it, but I’d be more likely to trim than add. I just don’t see how they’re going to grow as fast as these others. I’m not impressed with the Sendgrid progress, although I admit it’s too early to ding them much for that, and I could be proven wrong…eventually. I don’t care much about the Flex conversation…it’s more about SendGrid for me. It was a very large acquisition and growing slowly compared to “legacy” Twilio products.

I share your sentiments on TWLO–buying SEND has just never sat right. If you’re a company with a huge runway ahead of you and lots of growth avenues to take advantage of, why would you make a big acquisition of a slower-growing company in a different product category? At best, it is a distraction for management. At worst, it was an attempt by TWLO to buy revenues or perhaps they were concerned about competitive dynamics and felt they needed to become more “full-service” to differentiate themselves. It may work out in the end and we see some cross-selling, but generally, companies in the midst of their S-curve growth don’t make big acquisitions like TWLO did with SEND. Some sort of sales partnership would have been just as good.

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On side note, i think there is a good chance TTD growth will reaccelerate at CTV matures and Amazon and Disney÷ and ATT/HBO, CBS/Viacom, Comcast/NBC and others all enter streaming market in a meaningful way.

I was thinking the exact same thing about Roku since Roku takes a cut of streaming subscriptions.

-AJ

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Bear, only a few weeks ago you mentioned this…”I also think TTD may have a loooooong runway ahead because the market it’s after is so huge. So despite their being a bit larger than these others, they’re a top position for me too.

So the earnings call must have spooked you out? Still have FSLY?

Yeah, I guess I should have explained what I didn’t like about TTD. Basically, I see some disconnect between the dominant position they have in their field and the 42% revenue growth this quarter. It’s great, and it’s up from 41% in the March Q, but it’s just not hyper-growth. CTV is what, maybe 15% of their total revenue? It would have to keep growing at triple digits for another year or two to really bump their overall growth up to 50%+ again.

So basically, I like TTD, I own them and will continue to, and I think they will do well, but I don’t think they have the potential of my other top positions, so I lowered them and raised others.

I still have FSLY (and even TWOU) but they’re negligible in size (less than 1% each). I did sell EVBG as I mentioned here: https://discussion.fool.com/evbg-june-2019-quarter-34266841.aspx…

Other than that, I still have TDOC, DOCU, PLAN, and ZS, and I haven’t touched them in August.

Bear

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But a lot of hyper-growth SaaS companies have grown significantly slower after reaching a certain size. I think this would be worth studying

I agree, did some research this evening, and wanted to share my findings. I’ll admit this is highly subjective and a small sample size indeed, but the results do confirm your comment italicized above. Before getting into the results, I’d like to explain my process:

  1. I used macrotrends.com to find the market cap history dating back to each company’s IPO. https://www.macrotrends.net/stocks/charts/TTD/trade-desk/mar…

  2. Noted the date ranges, or, because the chart is weekly, at least within a few days of when the company fell into the following ranges:

a. <$1B to $5B
b. $5B to $10B
c. $10B to $20B
d. $20B to $40B

  1. Went to Yahoo! Finance (I know, I know) and viewed the performance chart for the date ranges of each market cap category listed above. For example…https://tinyurl.com/y4f9s2vx

  2. Noted the percentage return during those market cap category date ranges.

  3. Noted the number of days the company stayed in that market cap.

I’ll use TTD as an example for how my data looked once collected:

<$1B to $5B - 9/16/2016 to 8/6/2018, total of 685 days, returned 214%
$5B to $10B - 8/7/2018 to 4/23/19, total of 990 days, returned 136%
$10B to $20B - 4/24/2019 to TODAY, total of 110 days, returned 21% thus far

I did this for most of the commonly discussed companies here. These are as follows: AYX, TTD, OKTA, ZS, SQ, MDB, SMAR, TWLO, ESTC, ZM, DOCU and SHOP. Admittedly, some of these companies have had IPOs within the past six months, and the results are probably a bit skewed, but I’ve included them nonetheless. That would be the “highly subjective” part referenced at the beginning of this post.

All that said, here are the results, expressed as averages for all companies mentioned:

Market Cap between $<1B and $5B = 370 days within this range, 127% return
Market Cap between $5B and $10B = 524 days within this range, 70% return
Market Cap between $10B and $20B = 213 days within this range, 52% return

Please note that the $10B to $20B market cap range has a few companies that only recently entered (ZS, SMAR, ZM) so those results are skewed beyond what I would like to believe is accurate. As time advances I’d imagine the number of days within this particular category would increase above the current average.

Only SHOP and SQ were above $20B, and I’ve excluded that data for now due to extreme small sample size.

As Bear and many others have noted, this research shows that larger companies have harder times growing, both in terms of sheer size and also stock performance return.

I’ll keep updating this every few months and see if the trends continue as our companies continue to grow, and as we continue to find new investment opportunities.

Brandon

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Brandon - that’s really cool thanks for doing that. It would be interesting to know the revenue growth rate averages for the 3 baskets too. Look forward to this as a dedicated thread.
A

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Hi Brandon,

TTD’s duration as a $5B to $10B market cap was 260 days. Not 990. Just a typo, but significant if determining the annualized rate of growth.

Best
Craig

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Nice analysis Brandon. I am wondering if there is a way to include the size of the company in relation to its addressable market in this analysis. Probably difficult to estimate, but some of the companies discussed here have an addressable market that seems to be extremely large and growing–and therefore likely to affect potential future returns…

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TTD’s duration as a $5B to $10B market cap was 260 days. Not 990.

Yes, you are absolutely correct. I mis-entered the date, and have corrected in my grid. Also went back and checked the dates on other entries to make sure no more typos existed.

Updated results as follows:

Market Cap between $<1B and $5B = 370 days within this range, 127% return
Market Cap between $5B and $10B = 402 days within this range, 70% return
Market Cap between $10B and $20B = 213 days within this range, 52% return

Brandon

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Brandon,

Thanks for the time and effort dedicated to present the data.

Based on the sample size (i.e. 12 companies); I would be interested to learn if any contributing members to this board would have an educated opinion on how statically significant the data could be based on the limited sample size.

With the understanding that you properly presented the data with a hedge or disclaimer, I’m just curious if any contributing member to this board has a mathematical/statistical background and can provide a qualified opinion.

Thanks,

Harley

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Hi Brandon

I am new to this discussion board … I found your analysis provide the ‘facts’ supporting the
commonly held belief that larger companies growth is lower than smaller companies.

Thanks

Rakesh

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Interesting that the 10B+ market cap performs better than the $5B - $10B cohort.

52% over 213 days > 70% over 402 days

I know it is a small sample size.

Might have a lot to do with timing. The 213 days would be skewed to more recent with the market doing exception this year.

Jim

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Unfortunately, because there are many companies that have recently graduated to this range, the 213 days isn’t an apples to apples comparison. The paint hasn’t dried if you will. I made sure to note that in my original post. I’ll be checking back in a few months where I would expect the number of days to be higher, and eventually more than the $5b to $10b range.

Brandon

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Brandon, I think for the numbers to make sense you should only include companies in each range that have graduated the range. Unfortunately, there probably aren’t enough companies to be statistically significant. I also think you need to take revenue growth into account somehow.

I suggest we stop discussing this unless someone wants to do a little more work on a model.

Bear

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Brandon, I think for the numbers to make sense you should only include companies in each range that have graduated the range. Unfortunately, there probably aren’t enough companies to be statistically significant. I also think you need to take revenue growth into account somehow.

Yes, the sample size is small.

Also, when a company makes an acquisition, does a secondary equity offering, or issues convertible debt then the market map instantly jumps without the stock price jumping. Such events will affect the outcome of the analysis.

Chris

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