Bear's Portfolio through 04/2023

Investment Analysis Clubs Saul’s Investing Discussions
1

Important context for my portfolio reviews: I run a concentrated portfolio and WARNING the swings can be huge. From the 2021 high to the 2022 low, my portfolio fell more than 60%. For every $100 I had at the top I had just $40 left! Staggering. So, before trying this style, even with a small portion of your total net worth, please understand the downside – it’s much steeper than if you own an index, or a bunch of megacaps. Also, don’t follow or copy me, Saul, or anyone. We may sell a position or buy a new one at any time, so it’s impossible to follow anyway. Also, to succeed with a concentrated portfolio, you must rely on your own decisions.

image

image

April was a miserable month to be an investor. I mitigated some damage trimming and adding opportunistically, but in the end every company I own was down, and so was my portfolio. The big earnings reports for companies we follow were ENPH and NET this week. Both were poorly received by the market. I’m thankful to still be up 5% or so, somehow, in 2023. I’m hoping that will continue, but with DDOG and BILL earnings coming next week, I’m not feeling awesome.

I actually didn’t sell out of anything (though I cut SNOW and NET a ton) this month. I did however add a tiny position in Confluent, and a very large position in Crowdstrike (yep, I’m back so soon). More on CRWD below.

MY COMPANIES

BILL - Well, with earnings next week, part of me thinks if I don’t cut this down a bit, I will get what I deserve if the quarter stinks. But so far I can’t bring myself to do it. I just don’t think the company is this bad! I think it’s been beaten down too far, and it’s not like I have anywhere else I want to put cash.

Zscaler - So, I guess I am the curse. I got into Zscaler again in March, and in April it had its worst month in a while! But I’m bewildered…what could be the catalyst? Oh well, I guess I’ll find out. Seems like a bargain to me, but I’m sure I’m missing something.

Crowdstrike - Feels like I just sold this one a couple months ago…because I did. But then they reported Q4 earnings and guided for the full year, and it was way better than I expected (much like Zscaler). So I’m back until proven wrong again. Seems safer than most (famous last words), and I can’t find anything else to load up on, so I made it a large position.

Datadog - I had Datadog up around 15% like Zscaler, but after AWS reported a flat sequential quarter yesterday, I cut it back quite a bit. I’m concerned the quarter will drive it even lower. If so, who knows, I might be adding. Just depends on the report.

Samsara - I trimmed Samsara a lot this month as I thought it had run a little too far. As it has fallen this week, I’ve added my shares again.

Global-e - After I slashed this position last month, I considered building it back up, but I can’t get super comfortable with it. They’re a little outside my wheelhouse, and they have a few unknown unknowns I suspect, dealing with big fashion brands and international issues etc. And remember, it has affected their execution, and we’ve seen them miss and/or reduce guidance at times. Still…I’m considering adding a tick at these levels.

Enphase - Another one with unknown unknowns. I took gains when it was up, but I’ve added back a small position after they fell so much on earnings. I still don’t think it’s “cheap,” but it is a good company. I’ll probably keep this one tiny, and take gains if I get the chance.

Cloudflare - Cloudflare lost its premium because they failed to guide properly and had to cut it. I’m concerned they might have to cut it even more next quarter. I’ll be out soon. Just have a few shares left because they’re in a taxable account.

Snowflake - Just like Cloudflare lost its premium when they had to reduce their guide, I’m extremely concerned the same could happen to Snowflake. Also, I think it is overvalued. Also I don’t see much upside. Full disclosure, I have bought speculative puts on this one.

It’s a tough time to make money in the stock market. My eyes are always peeled for new companies, but I don’t want to force it with inferior businesses. Because as always, the goal remains the same: pick the best companies. (Trim them, of course, if they get drastically too expensive.) And know that sometimes even the best companies will see their stocks go down because of the environment…but don’t get dragged away by pretender companies. Those waters contain true danger.

Bear

“Compound interest is the eighth wonder of the world. He who understands it, earns it … he who doesn’t … pays it.” - Attributed to Albert Einstein

Previous Month Summaries
Dec 2016 (contains links to all 2016 monthly posts): Bear's Portfolio at the end of 2016 - Saul’s Investing Discussions - Motley Fool Community
Dec 2017 (contains links to all 2017 monthly posts): Bear's Portfolio through Dec 2017 - Saul’s Investing Discussions - Motley Fool Community
Dec 2018 (contains links to all 2018 monthly posts): Bear's Portfolio through Dec 2018 - Saul’s Investing Discussions - Motley Fool Community
Dec 2019 (contains links to all 2019 monthly posts): Bear's Portfolio through Dec 2019 - Saul’s Investing Discussions - Motley Fool Community
Dec 2020 (contains links to all 2020 monthly posts): Bear's Portfolio through Dec 2020 - Saul’s Investing Discussions - Motley Fool Community
Dec 2021 (contains links to all 2021 monthly posts): Bear's Portfolio through 12/2021 - Saul’s Investing Discussions - Motley Fool Community
Dec 2022 (contains links to all 2022 monthly posts): Bear's Portfolio through 12/2022
Jan 2023: Bear's Portfolio through 01/2023
Feb 2023: Bear's Portfolio through 02/2023
mid-March 2023: Bear's Mid-March Update
March 2023: Bear's Portfolio through 03/2023

74 Likes
2

I believe I can pinpoint two recent catalysts. Tenable (TENB) reported earnings 4/24 AMC and took companies like ZS, NET, FTNT, PANW, CRWD, and S down with it. Probably DDOG and others as well. Then on 4/27 Cloudflare came along.

What happened is that TENB cut their FY year guidance. Two short snippets from the call:

The last two weeks of March exacerbated these conditions as the banking crisis came to light. Specifically, we saw longer lead times in purchasing and approval phases of our sales cycle in the first quarter versus what we had typically experienced …

First, our annual CCB guide reflects a continuation of the selling environment that we experienced at the end of March. While in April, we closed a number of the deals that pushed out of Q1 and demand generation was strong in the quarter, our guidance assumes that new business will take longer to close over the remainder of the year in light of the macro.

Sounds familiar? Before turning to Cloudflare, here are two snippets from Alteryx’s earnings call:

When we guided on our last call, we had factored in some macroeconomic headwinds but we did not anticipate the financial system events that occurred in the final weeks of the quarter, which did affect our customer behavior.

While we have no material direct exposure to the impacted banks to-date in terms of cash balances and no material vertical market concentration, we did see elevated deal scrutiny, longer sales cycles, and shorter contract duration.

We did see sales cycles elongate towards the end of the quarter. And really when the regional banking crisis hit, a few weeks before the end of the quarter, we really saw customers sit on their hands in shock about, how this was going to play out. So that did impact our linearity in Q1.

And then we have Cloudflare putting the horror movie on full display:

Matthew Prince
… the quarter saw new challenges, macroeconomic uncertainty, which intensified over the course of Q1 with every failing bank, resulted in a material lengthening of sales cycles, a significant decline in close rates, even as win rates held strong and an extreme back-end weighting to the quarter. To give you some sense, almost half of the new business closed in the last two weeks of the quarter, which is very non-linear for us. … The quarter most reminded me of Q1 of 2020 when businesses were paralyzingly nervous about the impact of COVID-19 …

Thomas Seifert
Last quarter, we highlighted our expectation for sales cycles to continue to lengthen for both the first quarter and full year 2023. However, the level of elongation experienced in the first quarter was unprecedented and far surpassed our forecast entering the year,
[…]
Also, we believe that currently depressed close rates and elongated sale cycles are temporary in nature. We cannot predict when the increasing caution is exhibited by the customers during the first quarter will recover. As such, we have assumed these headwinds, which intensified in the month of March will persist through the end of the fiscal year.

[…]

We looked at close rates and assumed that what we have seen in the third and fourth quarter of last year of elongation would continue. But the deteriorating environment surprised us. We saw sales cycles really elongate far beyond our forecast up to 27% on average and then the expansion, as I said before, close to 50%.

So, we have three companies sharing a similar story that points to a rapid deterioration, and I believe that’s the overarching thing. The “a little dense here” question during the Cloudflare Q&A and subsequent answer and elaboration told me that staying invested in the sector might be a rough ride.

As for ZScaler, they already have quite long sales cycles, and from my reading of their call there seemed to be a focus on upsell, which might be a difficult proposition in an environment where companies are cautious and looking at cutting costs. It looks like they’re also facing increased competition from Palo Alto Networks, and to some extent Cloudflare. Although this is just how I see it.

Anyway, seems like part of the recent drops aren’t directly about ZScaler. However, I believe it’s good to take what can be gleaned from recent earnings calls as backdrop regarding whether “missing something” or not.

Hope that’s helpful.

38 Likes
3

Hi @Bear and thanks as always for your take. I posted my report for the first time and I do welcome any and all criticism to it.

I have one question for you. It seemed to me in January that B2B is struggling far more than B2C defining as B2C anything where the consumer is directly impacted (i.e. TTD is included or payment processors but not security, analytics, etc). AYX told us that SVB served as an excuse for companies to further curtail B2B spend AND make exorbitant pricing demands. AWS’s April spooked people and algorithms.

We shall see from SHOP, TTD, SQ, FOUR, RDFN, and others coming up what the status of the consumer really is.

So my question is what makes you optimistic that B2B can fare well over the next 1-2 quarters. Or are you looking ahead past that?

The common theme I see is that “everybody” wants the best of “you name it” tech. But that “nobody” wants to pay for it “right now.”

Thanks!

18 Likes
4

I guess everything is on the table for me, including debt instruments paying 5% or so, but I hesitate to look for “oil” opportunities, or “tech” opportunities, or “banking” opportunities" or “consumer” opportunities or B2C companies. I don’t look for anything specifically. I just look for the best companies. I’ve been very hesitant to get away from subscription models, as there is some safety there. If you compare our overvalued tech to other overvalued (non-subscription) tech from a couple years ago, the “safety” is our companies have dropped 60-70% instead of 90%. Yeah, small consolation, but it’s pretty life a changing difference.

Global-e isn’t directly B2C, but its customers are (so, that is similar to TTD I guess). So I guess GLBE is my foray into B2C and I see it similar to Shopify but growing much faster. Why I’m keeping it so small is, I haven’t had as much success with companies not based in the US, and in general I’m used to B2B companies having more growth durability, though that hasn’t necessarily been the case lately.

Boy that rings true these days!

Thanks for the question above. I’ll ponder it more. And I’ll read your portfolio review to learn about the B2C companies you mentioned.

Bear

Bear

16 Likes
5

I agree with everything you wrote, @Raylight, and I would characterize most of this as “narrative” problem…though obviously a longer sales cycle could lead to weaker numbers, so it’s not “narrative” only.

But I feel like we need to sort companies that will be more and less impacted by this “optimization” that customers are doing – in other words, which of our companies can be “optimized” the most? Snowflake and Datadog jump out quickly – even more so than Cloudflare, so, yikes. But can you really optimize what you spend with Crowdstrike? You can choose not to add new modules I guess. But I don’t think you would cut whole modules – you added them, I would think, because you need them! And you can’t secure fewer endpoints, except inasmuch as you have fewer endpoints (e.g. you can remove them for employees you fire or lay off). So it’s not impossible for some optimizing to be done there, or at the very least a slowing of NRR, but IMO it’s nothing compared to what SNOW or DDOG or the hypserscalers are experiencing.

I see Zscaler somewhat similarly to Crowdstrike. With BILL, as always, it’s a little more complicated. But BILL and Zscaler are so beaten down already, I have to imagine expectations are incredibly low. We’ll see.

Bear

20 Likes
6

what bothers me for ZS is that they highlighted their FedRAMp status and big deal for quite some time now (for 3 or 4 quarters)… however, other vendors (not just security) including PANW has reported growing revenue with government and yet ZS has consistently not communicated clearly that their lead is converting into revenue…

14 Likes