This is a lot more in depth than my typical review, and I’ve been working on it all month. Let me know if it is helpful, too long, or whatever.
Previous Month Summaries
Dec 2016 (contains links to all 2016 monthly posts): http://discussion.fool.com/bear39s-portfolio-at-the-end-of-2016-…
Jan 2017: http://discussion.fool.com/bear39s-portfolio-at-the-end-of-janua…
Feb 2017: http://discussion.fool.com/bear39s-portfolio-at-the-end-of-febru…
Mar 2017: http://discussion.fool.com/april-fools-suckers-here39s-the-real-…
Apr 2017: http://discussion.fool.com/bear39s-portfolio-at-the-end-of-april…
note that I use tickers .INX, .IXIC, and IWM to benchmark. These do not include dividends, I don’t think. If anyone can suggest tickers that do, I will switch over.
This Month My Portfolio 4.91% S&P 1.16% Nasdaq 2.50% Russell 2000 -1.97% YTD My Portfolio 31.10% S&P 7.73% (8.67% including dividends, via [https://ycharts.com/indices/%5ESPXTR/ytd_return](https://ycharts.com/indices/%5ESPXTR/ytd_return)) Nasdaq 15.15% Russell 2000 1.09%
My Current Allocations
Ticker Curr% Buy/S Mo Ch YTD Ch TLND 10.5% + 9.7% 47.6% TWLO 10.0% + -26.4% -15.7% SHOP 9.6% + 20.9% 114.3% HDP 9.3% 18.7% 48.7% SQ 9.2% + 26.0% 68.7% SPLK 9.2% + -4.8% 19.7% WIX 6.8% + -10.6% 64.0% TTD 6.6% - 47.3% 98.8% YELP 6.2% -21.2% -26.8% HUBS 5.8% 7.5% 53.4% CYBR 3.7% NEW -7.4% 7.7% MELI 3.3% NEW 17.0% 76.2% PSTG 2.6% + 22.0% 14.8% MULE 2.1% NEW 12.9% 11.2% NEWR 1.8% NEW 7.9% 54.6% cash 3.2%
A note on a theme
I just continue to be amazed at the power of recurring revenue. Especially when leveraged with increasing prices, a great dollar based net expansion rate (that is, more sales to existing customers), and new products and offerings.
Many companies handily break this out, and you can see two revenue lines on their Income Statement. Typically, one moves sporadically or cyclically, as sales are wont to do. The other, the recurring revenue line, typically goes up each quarter sequentially. This steady increase buoys overall increase with interesting effects. See more about this under my new position in CYBR.
Stocks I sold
PAYCOM and FACEBOOK - One of the first things I did in May was sell these two positions, after earnings. Unlike my other sales, these had less to do with the companies themselves, and more to do with opportunity cost. These are successful companies and fairly stable stocks, but I just don’t see as much potential with them as elsewhere. The two are very different, but with both I am questioning how many levers they have left to pull. Maybe I’m wrong and they’ll have a great run, but I see these as slower movers, and stocks I’ve held onto as potential rocketships. I admit this is somewhat like timing, but all I can do is go where my conviction is highest.
XPO LOGISTICS - XPO Logistics is a company I’ve held a long time. I bought originally in 2015 (too early), when they were somewhat optimistically priced for growth (stock was around $50). Then it crashed to under $20, and they were very pessimistically priced. My thesis is that this was largely because of margins, or lack thereof: the market questioned their ability to ever take any of their revenues to the bottom line. After a year, they have proved the market wrong, and have started to turn a very slight, ~1% profit. The stock has turned around and is over $50 again, but the company’s growth has almost stopped. I would say it is now fairly priced. PE is actually under 40, and they probably still have some room left to improve margins. However, that’s all they seem to have. It’s gone as planned so far, and I’m happy with the results, but at this point it would be speculation for me to presume to know how much more they can squeeze out. Sure, they may still have levers to pull that I just can’t see, but I see lower hanging fruit elsewhere.
STAMPS DOT COM - They reported M17 earnings on 5/3 after the market closed. Fantastic quarter – ARPU was up 17% and Revenue was up 28%. Read more here: http://discussion.fool.com/stmp-does-it-again-32698779.aspx
Then disaster struck. Pitney Bowes announced a very scarily similar offering (they would say a BETTER offering) at less than 1/3 the subscription price. Ouch. I sold out that day, and wrote about it on the board here: http://discussion.fool.com/well-today-was-a-bad-day-for-stmp-sha…
So of course STMP is up something like 30% in the weeks since then…whatever, I haven’t looked back. After the run up, I’d be even more scared if I owned the stock now! I believe the competition could change everything for Stamps, which has enjoyed very fat margins since they haven’t had much in the way of competitors before now.
AXON ENTERPRISE - Axon makes tasers and body cameras, mainly for police departments, and has a SaaS business storing the body camera footage called Evidence.com. In April they changed the company name from Taser to Axon and offered free body cameras and a free year of Evidence.com to any police department that wants it. The later development is very innovative and intriguing, and will probably work out really well for them. I guess the reason I sold is simply a gut feeling. I can’t really defend it and might be complete paranoia, but for whatever reason it just turns me off from this company. The main thought behind my gut reaction is that the intertwined interests of a private company and a public service could be problematic. A post on the RB board mentioned struggles with PDs being able to edit Evidence.com footage, and that was all the confirmation I needed that my fears weren’t completely unfounded. They may do really well, and I truly hope body camera footage improves law enforcement, but I’m happier watching than investing. Call me a skeptic.
PACIRA PHARMACEUTICALS - I never got interested enough in this so I’m out. I’ll stick with things that captivate me.
Stocks I own
TALEND (10.5%) - This company has carved out a niche within big data integrations by specializing in Hadoop, an expertise that will not be easily disrupted. Saul has called them a “category crusher,” a leader with no viable competition in its niche. I tend to agree, though others will not ignore this space forever. Hopefully Talend will continue to build up years of subscription revenues while they occupy the catbird seat.
I first invested in Talend in February. I added in March, in April, and again in early May, confident that they would have a great quarter. They reported on May 11, and they absolutely killed it. Cloud and big data solutions grew 100%. Subscription revenue overall grew 47%. Customers that spent over $100k in the quarter grew from 162 to 260. Dollar based net expansion rate hung tight at 125%. It was phenomenal.
Sure they spent a lot, too, but that’s all part of a very deliberate land and expand plan. You’ll find that this is a common thread in the companies I own. Amazon may be blamed for this…but then, it’s working for them. Some investors find the spending levels egregious. Maybe it’s not for everyone. Personally, I think if you apply the spending over the period of time where the revenue they win will actually be recognized, you get a very attractive picture.
Anyway, the market yawned. Which means there is still some great value here, as it hangs around a PS of ~8, yet grows revenue at 40%+ (emphasis on the plus). I’m happy with it being my largest position.
TWILIO (10.0%) - Twilio makes web service APIs for phone calls and texting. Software developers who subscribe to Twilio’s platform can use these services in their products, this works out great on both sides: from customers’ perspective they only have to pay when these services get used, and from Twilio’s perspective, the more the services get used, the more Twilio gets paid.
Earnings were great, but they made the disappointing announcement that Uber, their biggest customer, was cutting back their spend. Uber is going to do a few things in-house, and also use other vendors. This makes a lot of sense to me. It’s such an integral part of Uber’s business, they don’t really need to be so dependent on any one company. We had a lot of discussion on the board about the Uber situation. I still feel this way, basically: http://discussion.fool.com/matt-if-uber-can-do-it-this-quarter-w…
I bought a good bit on the ~30% drop, adding as recently as yesterday. Even though the share price is much lower, Twilio is now a much larger position for me than it was at the end of April. With a PS around 7, this seems like incredible value for a company growing as fast as Twilio. I think the risks are way overblown, and they will prove it when they report the June quarter.
SHOPIFY (9.6%) - We probably all know Shopify by now. To slightly modify what they say about themselves, Shopify is “the only platform you need to build your [small or medium sized business] empire [online].” They help you set up your site, take payments, do SEO optimization, etc, etc, etc. They’re innovating and growing…and boy are they growing. They make money when businesses sign up with them, and then they make more when those business grow and sell more stuff.
I first bought SHOP in June of 2016. In Q4 2016, I accumulated until it became a 25% position for me. When it started to spike in 2017, I took profits quickly. It’s hard to blame myself – it was up 50% in a month’s time. But then it went up 50% again. I could have gotten in on more of that if I’d acted a little slower. Not trying to be a Monday morning QB, but just something to remember/consider.
This month, I’ve slowly started to add back to my Shopify position. A couple dips gave me opportunities to buy in the low 80’s, which was nice. But mainly, I’m starting to see that though it looks expensive (PS is near 19!), this stock may actually still have incredible potential remaining. When I think about how big this business could be, an $8B valuation doesn’t seem steep at all.
HORTONWORKS (9.3%) - Like TLND, they specialize in Hadoop, but where TLND does integrations, Hortonworks takes it from there and does everything else. Customers subscribe to the HDP software platform, and with Hadoop Hortonworks stores, processes, and analyzes their data.
Like Talend, they reported a fantastic quarter. Some of my favorite parts?
Support Subscription Revenue Increased 52 Percent Year Over Year to $42.1 Million
Non-GAAP gross margin was 71 percent for the first quarter of 2017, compared to 64 percent for the same period last year.
12 $1M+ projects (almost twice as many as last year)
The average dollar-based net expansion rate was 123% over the trailing four-quarter period.
Like with Talend, the market initially yawned, but then Hortonworks took off, although they’ve given back quite a bit since then. At a PS of ~4, there’s a ton of value here. The only reason I haven’t added is because it’s already a top position.
SPLUNK (9.2%) - We’ve all heard a lot about big data. Heck, with TLND and HDP, I’ve said a lot in this post already. Talend integrates your systems, Hortonworks helps you store, process, and analyze data in Hadoop databases. Splunk is a little broader than these. It captures and organizes data in real time, then identifies patterns. There are a lot of use cases: application management, analytics, and even security. From my admittedly limited vantage point, it sure seems Splunk is really becoming a very big fish in the big data pond. (data lake? har har)
As I said here (http://discussion.fool.com/sjo-thanks-for-pointing-out-the-splun…), I increased my Splunk position mightily in May in anticipation of a great beat and raise earnings report. Well, I also increased it after earnings. http://discussion.fool.com/first-quarter-sales-rose-30-versus-th… That was basically my reaction. I was very pleased that recurring revenue increased 48% YoY – that’s a fantastic pace and it’s not slowing down. I was also very happy to add more shares even cheaper (at a PS around 8.5). This is a rare discount in an expensive market.
SQUARE (9.2%) - Square is a company that makes those little attachments that you put on your iPhone to accept payments (I think they might have been the first to do so). They also have registers for small businesses to do the same. In addition to taking payments, they provide analytics for business owners, offer overnight loans, and a whole lot more.
Square turned in a great quarter on Wed 5/3. Beats on top and bottom lines, raised guidance. But what looks most interesting is that the money is starting to drop to the bottom line. With just increased payment volume, and continued expense discipline, it seems inevitable they’ll soon fly into increased profitability, and I’ll even go out on a limb and say potentially even GAAP profitability in the near future. The speed with which they’ve gone from barely even showing any gross profit to now almost showing net profit is amazing. Jettisoning the Starbucks deal a while back made a big difference, but now SQ is really hitting on all cylinders.
If they hit their 535M guidance for total revenue in Q2, I’d expect gross profit to be over 200M…up from 173M sequentially! Pretty incredible. Then it’s just about keeping their operating expenses in check: they were 188M this quarter, so at 200M they would have been profitable!
After earnings, I increased my SQ position back to where it was a couple months ago before I trimmed it. I wish I’d bought even more, because the shares really took off and were up 26% in May.
WIX (6.8%) - Wix is a company that helps users create websites, and then hosts them. It makes money by selling ads that are displayed on its free sites, and by charging subscription fees from its paying users.
On May 10, Wix reported an incredible quarter, with revenue increasing even faster than expected: 50%! They didn’t hit the EPS the market wanted, but the revenue is increasing at a pace where they’re probably willing to focus on that exclusively.
Again, no big reaction to great earnings. Wix was down from April highs before earnings were released, and it remains down around the same levels. Since Wix is up almost 4 fold in just a year or so, it’s understandable for the market to take a breather every now and then, despite the results they keep pumping out. But I took advantage of the breather to increase my position by 70% in May.
THE TRADE DESK (6.6%) - This company plays in the somewhat crowded world of advertising, but it seems the way they’ve positioned themselves to work with ad agencies (instead of companies placing ads) has really made them a preferred source. They also don’t buy inventory but just facilitate, so that streamlines their process and enables them to serve their customers without conflict. Their growth is phenomenal: revenue grew by 78% for the year in 2016. And they’re profitable with a PE around 50, which given their growth, seems insanely low.
The Trade Desk was a new position for me in February. In March the stock flew up and then back down, and I added a ton on the way down. It got to be my second biggest position, so in April I just held. In May, I trimmed a little before and a little more after earnings. The report was fantastic (some called it “perfect”) and they grew revenue at a staggering pace once again: 76%. Though everything seems to be going great, I just don’t understand the industry too well, or why TTD is growing so much faster than competitors, so I’m more comfortable with it being a medium-large, but not a top position.
YELP (6.2%) - As most of us know, Yelp is a website and app for crowd-sourced reviews of local businesses. They primarily make money selling ads, but have developed other revenue streams booking reservations, running a food delivery service, etc. I have owned Yelp since July 2016.
Yelp reported their March quarter on May 9th. Revenue growth was a disappointing 24%, but worse, they cited retention problems and lowered guidance. It was a bad quarter. I made the point here (http://discussion.fool.com/i-almost-joined-you-in-yelp-recently-…) that Yelp doesn’t need to grow at 30 or 40%…they’re bargain priced, so even 20-25% growth should be plenty to send shares back in the right direction, eventually. Their PE right now is under 35 and their PS ratio is around 3. They also have nearly half a billion in cash. These numbers compare favorably to many companies like Twitter that are growing much slower than Yelp. Basically, Yelp has finally grown into its valuation.
But Facebook and Google dominate everything, and Yelp trades on the fear that these will drive it right out of business. I believe that instead, there’s a lot of margin of safety here. I really don’t see Yelp getting much cheaper than this…after the quarterly report Yelp shares dropped to $24 or something and were back up to $28 or so the next morning. It just seems to me like a price in that low was unsustainable.
I think a fair question to ask is, why own this one at all? Maybe it doesn’t have much downside, but is there much upside? And more importantly, how do you know? Should it fall into the “too difficult” column? In my opinion, no. The business is growing steadily, though increasingly slowly. But nothing about the competitive landscape has appreciably changed. Google and Facebook have been looming all along, and they still are. Yet Yelp’s community has been growing, and it still is. They still spend an awful lot of money striving to speed up growth again. If they succeed, shares could appreciate quickly. Surprise, the market wants to see growth.
I haven’t sold any, but I’m not adding either. After dropping, Yelp is only a 6.3% position for me, which is fine. I don’t have the level of conviction with Yelp that I do with my top positions, but I am convinced there is substantially more upside than downside with Yelp.
HUBS (5.8%) - Hubspot helps companies manage their brand online. This is much more than just buying ads. This is SEO, website, blog, social media, etc, etc. Hubspot is such a powerful and value-adding tool for marketing departments (a CMO’s dream) that I can’t see why any company of a certain size wouldn’t want to use it, and use it increasingly. Of course with a product that’s this much of a value add, there are certainly competitors. It sure seems to me like Hubspot is becoming a leader, if not THE leader, in the space, and the results it continues to acheive seem to confirm this.
They grew revenue 40% this quarter (and most of it is recurring), raised guidance mightily, and announced some other great trends. My favorites were that total customer count increased by 40% to 31,262 and that marketing customer count increased 28% to 24,775. I haven’t added yet, but am definitely looking at Hubspot with an increasing excitement.
CYBERARK SOFTWARE (3.7 %) - Cyberark does security, but has a nuanced take on it: they make Privileged Account Management (PAM) products which are able to detect internal security breaches and then quarantine the offending computer before damage can be done.
Shares have hovered in the mid 50’s for the last year or so, but were down as low as ~$46 in May. Saul and I both had small positions last year, but both exited, I think for the same reason: growth expectations seemed pretty lackluster.
They had another quarter that on its face seemed more of the same. Revenue grew only 26%, and guidance for next quarter wasn’t any better. There was a post-earnings drop, and PS got down below 7.5, which might not sound incredibly cheap given that revenue growth rate, but let’s dig a little deeper.
CYBR’s “Licence” revenue growth has really slumped, down from mid 30’s last year to less than 20% in March. However, “Maintenance and Professional Services” (read: recurring) revenue has slowed less. If you look YoY, it has slowed as well – it was in the mid 40’s last year, and it came down to 28% in the Dec quarter, though it ticked back up to 34.5% in the March quarter. More importantly, though, it has been up sequentially every quarter. In fact, it has sped up sequentially:
That’s a good trend. Recurring Revenue was 44% of total revenue in the March quarter, but as that increases, overall revenue growth should speed up.
Even if it’s not utter sandbagging on the guidance, I see the near-term as a minor slump while they integrate Conjur (which they just bought for 42M they could easily afford…they had almost 300M in cash and they’re profitable!) and spend on innovation and to gain market share.
Bottom line: The current valuation seems very attractive. I’ve gotten accustomed to just looking at PS and growth, so I have to keep reminding myself they’re actually profitable, and PE is ~37. I took the ~20% drop as an opportunity, and started a position at around $47.
MERCADO LIBRE (3.3%) - Most Fools have heard of Mercado. It’s been called the South American Ebay/Amazon. They have been growing like a weed, expanding offerings, taking payments, etc, etc. Mad growth. Revenue growth accelerated to 74% (constant currency…79% locally) in the March quarter! I took a tiny position, and added to it on a couple dips during the month. Still learning about this company and the risks that go with it, but the growth is phenomenal.
PURE STORAGE (2.6%) - Pure Storage sells flash memory products and software. Like a lot of companies I own, part of their revenue is from subscriptions, and so it is recurring. I like this model of course. But with PSTG, subscription revenue is a small part of total revenue. Most is based on product sales. Even though Pure’s market position seems excellent and dominant and everything you’d want, I can’t help but be a little turned off by the fact that they, like any company that sells a product, are subject to the whims of buyers. If their customers pump the brakes on spending, they could get hurt.
That said, although revenue growth has slowed from triple digits a couple years ago, to nearly 100% the first half of last year, to around 50% the second half of last year, to 30% in Q1, it’s supposed to tick up again and be around 36% for 2017 overall. That ain’t bad.
I had added quite a bit (more than doubled my share count from last month) in anticipation of an easy beat, and although they did beat, it was not what I hoped, especially on the recurring side. The beats for the rest of the year don’t seem as easy, and although I trust that they know what they’re seeing, I must assume that they’re mostly going to be driven by product sales (which as I said above are naturally more precarious). I sold half my position after earnings. Think I may just hold onto my small remaining position.
MULESOFT (2.1%) - MuleSoft integrates applications. Wikipedia actually calls their directory of API’s a “social network for developers.” When Saul originally described MuleSoft, some thought it sounded a lot like Talend. It actually does a type of integration so different from what Talend is doing, that I think it has more in common with Twilio. It facilitates communications – not between apps and their user’s phones (like Twilio does), but rather between apps and other apps.
Saul has described this company as an unrecognized category leader, and they are certainly growing like one. Though revenue increased a fantastic 56% in the March quarter, subscription revenue actually grew much faster. Saul pointed out in his introduction to the company that they’re not only growing by winning tons of contracts, but also by a drastically increased contract value. More people using them more…a great Shopify-like trend.
But they ain’t cheap. Even after a big drop yesterday and another today, PS is still ~14.3. I took a tiny position a few days ago and added yesterday.
NEW RELIC (1.8%) - New Relic is a company that monitors web and mobile applications in real time, detecting issues before they become problems, and helping companies figure out where the pain points may be before it costs them sales, or even customers. They process more than 30 billion data points per second.
Sales have been quite good:
Year Mar Jun Sep Dec 2015 33 38 43 48 2016 52 59 63 68 2017 73
So that’s a 40% revenue increase last quarter, 50% last year. Other March quarter highlights:
Dollar-Based Net Expansion Rate of 133%
15,216 Paid Business Accounts (in more than 100 countries)
Cash, cash equivalents and short-term investments were $206.4 million
Along with CSCO’s recent acquisition, AppDynamics, and a private company called Dynatrace, New Relic is one of the main leaders in the APM space. They partnered with Splunk this quarter, which I think solidifies their position even more. I bought some shares this month and may look to add.
Random Thoughts and Conclusions
Well, with MELI and CYBR I finally bought a couple things from my watchlist. With MULE and NEWR that’s 4 new positions, and I sold 6, so I’m down from 17 to 15 total positions.
I’m still not “putting out the bucket” on any one stock, although I’m not exactly “putting out the thimble” on any of my top 10 positions. The smallest, HUBS, is at about 6%. The largest is just over 10%. That’s a lot of confidence (83% of my portfolio) in those 10 stocks.
It’s been a good year so far, for Saul, for me, and I’m sure for many of you as well. A lot of us invest primarily in innovative software companies, and tech has done well. The Nasdaq is up 15%, and FDN even more, while the S&P is up 8% or so, and the Russell is barely up 1%. I don’t think that necessarily means tech is overvalued. First of all, tech stocks lagged in the initial bump the market got last year, so it’s natural that they would catch up a bit this year. Also, innovation is happening and value is being created. These companies are difficult to value but it’s easy to see that they are in fact valuable. The valuations may not be based on traditional metrics, but neither are they based on nothing at all. A lot of growth is happening, and it’s expected to continue. To me, the times are as exciting as the results.
All this to say, I still see the stocks I own as bargains, even though some have appreciated quite a bit. They are growing revenue at incredible rates, and since many were/are coming off valuations that I believe were quite compressed, I still see plenty of room to run.
My best to all,