Bear's Portfolio through 12/2022

Investment Analysis Clubs Saul’s Investing Discussions
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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 (2022 is a good reminder). Also, don’t follow or copy me, Saul, or anyone. To succeed with a concentrated portfolio, you must rely in your own decisions.

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Well, with the Nasdaq down about 9% in December, I feel like my companies held up well.

I added to Datadog and BILL in December. Neither is perfect, but to me they stand out from the pack. I added to Cloudflare as well. I’ve got these about as big as I would ever want them, especially Datadog and BILL.

I trimmed Snowflake even more this month. As I said last month, it just hasn’t been beaten down as much as others, and I don’t believe it will grow much faster or produce much more FCF, etc. (I actually had sold almost all of it when it shot to $160+, but added some back when it was in the $130’s.)

I didn’t add much to The Trade Desk because I still don’t feel quite as sure about it as the ones I’ve held longer. But I may regret that.

That’s about it for real positions, and I don’t even feel great about all of those. It’s just a weird time in the market right now. But I’m confident that eventually Datadog and BILL will (again) be much larger companies. And I think the others will too.

I closed Peloton and opened a tryout position in Axon. Not much to say about either, as anything under 2% is really just an idea.

I wrote about SentinelOne a lot this month, and why I’m concerned about it, and endpoint in general. Same goes for Crowdstrike. I reduced both to tiny positions. Most of the proceeds are still in cash, as I don’t have anything to add to yet.

Not much else to say. That’s a wrap on 2022. As always, the goal remains the same: pick the best companies. Eventually the multiples will bottom and maybe even expand again. Then, company revenue and profits (rather than falling multiples) will drive share prices. Until then, we wait. Good riddance, 2022! Here’s hoping for better things from 2023!

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 2020 monthly posts): Bear's Portfolio through 12/2021 - Saul’s Investing Discussions - Motley Fool Community

Jan 2022: Bear's Portfolio through 01/2022 - Saul’s Investing Discussions - Motley Fool Community

Feb 2022: Bear's Portfolio through 02/2022 - Saul’s Investing Discussions - Motley Fool Community

Mar 2022: Bear's Portfolio through 03/2022 - Saul’s Investing Discussions - Motley Fool Community

Apr 2022: Bear's Portfolio through 04/2022 - Saul’s Investing Discussions - Motley Fool Community

May 2022: Bear's Portfolio through 05/2022 - Saul’s Investing Discussions - Motley Fool Community

Mid-June 2022: Bear's Mid-Month Review - Saul’s Investing Discussions - Motley Fool Community

Jun 2022: Bear's Portfolio through 06/2022 - Saul’s Investing Discussions - Motley Fool Community

Jul 2022: Bear's Portfolio through 07/2022 - Saul’s Investing Discussions - Motley Fool Community

Aug 2022: Bear's Portfolio through 08/2022 - Saul’s Investing Discussions - Motley Fool Community

Sep 2022: Bear's Portfolio through 09/2022

Oct 2022: Bear's Portfolio through 10/2022

Nov 2022: Bear's Portfolio through 11/2022

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Hey Bear, thanks for the monthly post and transparency as always. I am interested in your comment above regarding Datadog. I personally thought their recent performance was poor and have trimmed it slightly as a result. Below is what I wrote a couple weeks back in my quarterly earnings post.

Datadog: Well, after walking away disappointed with their results last quarter, Datadog did little to make me feel any better this go round. In fact, I would say this is the worst performance I have seen from Datadog aside from Q2 2020 when covid struck.

What I liked:

  • Adjusted operating margin and FCF remained strong
  • NER remained above the 130% threshold
  • Customers continue to expand the use of their platform, as the percentage of customers using 2+, 4+ and 6+ pillars all showed solid upticks

What I disliked:

  • The smallest beat since the covid quarter led to the slowest QoQ growth since the covid quarter. This is the first time **QoQ growth was below 10%**apart from that quarter
  • The guidance indicates Q4 is also going to be challenging and likely below 10% growth QoQ, despite Q4 generally being their strongest
  • OpEx grew 65% YoY, outpacing revenue growth at 61%. This is the first time this has happened in several years
  • Stock based compensation continues to balloon and hit a record at 23.2% of revenues. Datadog SBC was 15.7% of revenues last year on average so they are clearly having to shell out more stock as compensation to make up for the depressed share price
  • They added only 1,000 customers, which is less than 1,100 from a year ago
  • They added only 180 customers with ARR > $100K, which is less than 230 from a year ago

Obviously, there is a lot more I disliked than I liked, but that is par for the course this quarter. Consequentially, I have trimmed about 10% of my DDOG position. I don’t plan on trimming anymore because I do believe these are temporary headwinds they are facing. Given the fact they are consumption based, it is not too surprising to see this kind of deceleration. In my opinion, they offer a best of breed solution and are well position to see growth rates pick up once things improve with the economy.

Would you be willing to expand on what you are seeing in Datadog that makes you want to add to your position? Is it more so based on the low valuation versus the recent performance or did you see something you liked that I overlooked?

Datadog remains over a 15% position for me so I understand the bullishness, however, I expect the next couple quarters to be challenging at a minimum. I expect a much stronger second half of the year for Datadog once the comps are a bit easier and hopefully the macro will have improved a bit by then but I do see the business as a bit riskier / more volatile due to the consumption based aspect.

Ultimately, Datadog is a very strong business that will likely come out of the other side stronger but I think there is a good chance the stock trades sideways for a while until they can post some stronger numbers. Curious to get your thoughts.

Rex

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Would you be willing to expand on what you are seeing in Datadog that makes you want to add to your position? Is it more so based on the low valuation versus the recent performance or did you see something you liked that I overlooked?
…
Ultimately, Datadog is a very strong business that will likely come out of the other side stronger but I think there is a good chance the stock trades sideways for a while until they can post some stronger numbers.

I think we’re in lock step – both on the long term, and the idea that DDOG could trade sideways for a while. Personally, sideways doesn’t sound too terrible right now. And I agree with your take on Q3 and would add that I wasn’t a fan of Q2 either: DDOG Q2 2022 - #13 by PaulWBryant I don’t expect Q4 to be great, and maybe not the next couple either, but I do think most of the pain has already been dished out to the share price. If not, I’m willing to hold through more pain, or even add. That’s the kind of company I want to concentrate into right now.

So of course, I’d certainly lighten the position if the shares rise before earnings. But I guess since I’m concerned about the short term for every company, I’m more comfortable with a couple giant positions in the companies I feel the best about long term. I certainly don’t want to make the same mistake I made with Crowdstrike, thinking it a “safe” and profitable 40%+ grower for the near term, even though I questioned the growth drivers long term.

Please let me know what you think, and thanks for the discourse.

Bear

PS Datadog (DDOG) Q3 2022 Earnings Review - Software Stack Investing This great review from Peter gives a sober analysis of the quarter, yet he doesn’t seem to foresee many long term worries, and I find it hard to disagree. If anyone feels differently, I’d be interested to know why.

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This makes a lot of sense to me and I think it hits the nail on the head. In the period ahead with lots of uncertainty, it makes the most sense to consolidate into the businesses you feel best about long term. Or put another way, stick with the businesses you believe will have the most durable growth long term. This is a good rule of thumb in any environment but especially the one we find ourselves in today.

I agree that Datadog fits this bill. For me, I would put Snowflake and The Trade Desk in this category as well which is why those three names make up my largest holdings. Personally, these are the businesses I have the most confidence in today to still be growing at a solid rate in the years to come while producing significant amounts of FCF.

Thanks for the discussion and best of luck in 2023, Bear.

Rex

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