Ben’s Portfolio update end of December 2023

SlowAndFast · December 29, 2023, 9:05pm

Ben’s Portfolio update end of December 2023

Returns and portfolio holdings:

	Portfolio	Notes
2020	63.6%	Since May 12, 2020, where I started this portfolio with over 40 companies, mostly holding large cap tech & FAANG, but also some high-growth SaaS.
2021	13.1%	Discovered Saul’s board in February 2021 and started concentrating to 16 companies through December 2021.
2022	-60.7%	Concentrated a bit more through July 2022 from which point I started posting my monthly updates on Saul’s board, holding about 12 or fewer positions.
2023	77.8%

2023	YTD	Month
Jan	8.3%	8.3%
Feb	16.3%	7.3%
Mar	17.9%	1.4%
Apr	5.2%	-10.8%
May	40.5%	33.5%
Jun	38.6%	-1.3%
Jul	50.7%	8.7%
Aug	41.2%	-6.3%
Sep	35.3%	-4.2%
Oct	27.5%	-5.8%
Nov	66.0%	30.3%
Dec	77.8%	7.1%

These are my current positions:

	Dec 2023	Nov 2023	Dec 2022	First buy*
Datadog	17.1%	17.5%	17.4%	5/13/2020
Snowflake	16.8%	17.0%	20.5%	2/8/2021
Crowdstrike	16.3%	16.2%	11.1%	5/13/2020
Cloudflare	14.9%	14.8%	13.5%	11/2/2020
Zscaler	14.0%	13.4%	11.6%	3/4/2021
Nvidia	12.3%	12.5%	6.5%	5/13/2020

Monday	5.9%	6.1%	6.0%	9/13/2021

TradeDesk	1.7%	1.8%	1.9%	5/13/2020
Enphase	0.9%	0.8%	3.3%	5/15/2020

*held through today

Company comments:

Crowdstrike:

Crowdstrike reported fiscal Q3 2024 on 11/28/23. Revenue was $786M (7.4% QoQ, 35% YoY) just a notch below my expected $790M (8% QoQ, 36% YoY). It is good to see this QoQ re-acceleration from their seasonally slower Q2 where they grew just 5.6% QoQ. Also, their new Q4 revenue guide points to further QoQ acceleration: They guided for $838M at the midpoint, up from actual revenue of $786M in Q3, while I had expected a guide of $837M (from a slightly higher assumed Q3 base of $790M), meaning my outlook for Q4 QoQ acceleration continued to improve - Good! Applying my most conservative beat of 1.2% at the midpoint (or 1% beat from the top of their guide), I arrive at $848M for Q4, which would mean a 7.9% QoQ growth. So anything above 8% would be great.

Zooming in a bit deeper, net new revenue grew 39% QoQ, clearly demonstrating that they are overcoming the revenue growth softness of the last 1+ year. For comparison, net new revenue in 3Q23 was negative 3.4% while being positive 22% in 3Q22. In fact, this was the first quarter this FY where this negative trend reversed; net new revenue in Q1 was negative 2.3%, while being positive 11.5% the year before and net new revenue in Q2 was negative 29.3%, while being negative 16.7% the year before. So again: this Q3 was the first quarter this FY where net new revenue QoQ growth accelerated in comparison to the prior year’s quarter.

ARR and net new ARR tell a similar story. Maybe more importantly, they logged a new record for net new ARR of $223M and with their Q4 revenue guide I expect them to (for the first time) break out of what looks like a ceiling of around $220M, which they kept hitting since the end of FY22. Here I have penciled in a net new ARR exceeding $250M for Q4, which would be an exciting new peak and significantly above their just mentioned, previous $220M ceiling.

Both backlog and deferred revenue displayed lower growth than typical for Q3. This resulted in overall lower RPO growth of only approx. 4.1%, down from approx. 7.2% in Q2 and 11.6% in 3Q23. This was somewhat addressed in the call when an analyst asked about some weakness in deferred revenues. The reply, along the lines of “billings [which is related to deferred revenue; (deferred revenue is the money already billed, but not yet recognized)] obviously is going to be impacted by duration. And there are many things that go into that” hinted at timing to be the reason for this softness. The way I see it, is that Q2 RPO growth was much stronger than in Q1, so the softer Q3 growth is balancing the strong Q2 growth. Of course this is a bit fuzzy and Crowdstrike stopped (as far as I can tell) giving us an accurate RPO number which makes things even more fuzzy. So while I, just as the analyst, was initially concerned about this Q3 softness, I now think all is good if they can grow RPO to above $4b in Q4. Let’s wait and see…

While customers with more than 5 products stayed constant at 63%, multi-product adoption in the 6+ cohort improved to 42%, from 41% in Q2 and jumped to 26%, from 24% for the 7+ cohort - Great!

Profitability continued to trend in the right direction with operating margin expanding to 22% (from 15% a year ago), net margin expanding to 25% (from 17% a year ago) and FCF came in strong with a 30% margin and record amount of $240M - solid numbers.

Zscaler:

Zscaler reported fiscal Q1 2024 on 11/27/23. They delivered revenue of $497M (9.2% QoQ, 40% YoY), versus my expected $501M (10% QoQ, 41% YoY). Close enough and another QoQ growth acceleration, from 8.1% in Q3 to 8.6% in Q4 to 9.2% in Q1. For Q2 I expect a seasonal drop of this metric though. They guided for $506M, significantly below my expected $526M. Here I had assumed stronger Q1 billings, which didn’t happen, but more on that later.

On the other hand, they increased their FY guide by a solid 1.8%. In my last recap, I had called out the FY guide they gave with the Q4 report as a lowball and inconsistent with their billings guide. This increase makes the revenue guide again more consistent with their billings guide, which they didn’t increase, but just reiterated. It is still a little bit low though to be consistent with their billings guide and I estimate it should be closer to $2.19b, instead of their updated $2.1b FY revenue guide. So without getting too much into the weeds here I think this just shows that I expect further FY revenue guide increases to come, even if they keep their billings guide exactly where it is now. One last mention on revenue is that they achieved a new record in net new revenue in Q1, of $41.7M, significantly above the previous record of $37.5M. It is always good to see net new revenue go up!

Ok, now to billings. Billings was a bit softer than I had hoped for this quarter. I really wanted to see a number north of $470M, but we only got $457M, a 36.5% sequential decline in billings. For reference, this was a bigger decline than we saw in Q1 last year, which was -34.6% and the two years before that it was around -25.5% for Q1. I have two thoughts about this. First, Zscaler had a very strong billings quarter in Q4. So now I am thinking that it is possible that some deals which would have otherwise closed in Q1 got pulled forward into Q4. So let’s have a look if we can find anything in the transcript about this… Indeed: “On a sequential basis, total billings declined 37% quarter over quarter with a difficult comparison to Q4, which had a $20 million upfront billing on a multiyear deal.” If I account for that, (i.e. move $20m from Q4 to Q1) the sequential drop was only 32%, which is an improvement in comparison to Q1 a year ago. My second thought here is that, with the upfront billing on this $20m deal, I over-estimated the FY24 revenue impact of the super strong Q4 billings. And with that I have adjusted my outlook for FY24, where I now project that YoY revenue growth will continue to drop slowly and end up in the low thirties by Q4. That is, unless they manage to significantly exceed their FY billings guide. So while I was considering bumping my allocation in Zscaler after the Q4 numbers, I now am just happy where Zscaler is in my portfolio (in 5th place).

It is the same story with RPO, which again pulled back a bit, after a very strong Q4 number - makes sense. Customer growth QoQ numbers also pulled back a bit from very strong Q4 values and tend to be a bit weaker in Q1 in general, so I am not too concerned there yet. Operating income margin and net margin stayed approximately constant from last Q and FCF margin jumped to 45%, also positively affected by the $20m billings deal in Q4. Note, that Q1 has always been a strong FCF margin quarter for Zscaler, so while seasonality has helped here, I expect FCF to show continued relative strength going forward.

Finally, it is again worth emphasizing that while revenue growth rates have come down from their peak around 60% YoY in FY22, net and operating income margins have essentially doubled since then, after having been pretty much stuck in the prior years since 2019. So as the law of large numbers started to work on their revenue growth rates they managed to become highly profitable, printing cash like never before and all that, while still maintaining very strong YoY revenue growth, north of 30% - what a great model example of a company to invest in!

Snowflake:

Snowflake reported Fiscal Q3 2024 on 11/29/23. Product revenue was $698.5M (9.1% QoQ, 33.6% YoY), versus my expected $692M (8.2% QoQ, 32% YoY). It is very good to see the QoQ trend continue with revenue growth acceleration, after having bottomed out in Q4 at 6.2%, then 6.3% in Q1, followed by a strong 8.5% in Q2 and now topped off with 9.1% in Q3.

When I came up with my original expectation for the Q4 guide ($727M, 5% QoQ, 31% YoY) I hadn’t properly accounted for the seasonally slower Q4 (as discussed here: Snowflake reported Q3 FY2024 earnings). Instead, Snowflake guided for $718.5M (2.9% QoQ, 29.4% YoY) at the midpoint. Again, 2.9% QoQ growth guide might seem low, but we have to consider two things: first, they were able to beat their last two guides by 3.9% and 4.0%, so a similar beat would bring their actual QoQ growth to around 7%. Second, we can compare that to the drop in QoQ growth rate in the last two years, going from Q3 to Q4; Here, QoQ growth percentage dropped by 34% in FY22 and by 49% in FY23. A drop from 9.1% to 7.0% would only be a 23% drop in the QoQ growth percentage, so relatively stronger than in the last two years. Or in simpler words: the negative Q4 seasonality impact on product revenue growth was much stronger in FY22 and FY23 than I now expect it to be in FY24, which would show that the trend of re-acceleration continues when accounting for seasonality. Looking at the new FY guide leads me to the same conclusion: They increased their FY guide by a very strong 1.9%, showing their expectation of improved business momentum to carry forward into Q4.

This improved business momentum is also reflected in their RPO growth (which is one of SNOW’s core metrics and of forward looking nature). RPO grew to $3.699b, or 4.5% QoQ, up from 3.8% in Q2 and negative 6.9% in Q1. Looking towards a seasonally stronger Q4, I expect Snowflake to close FY24 with about $2.3b in current RPO (RPO which will make to revenue within the next 12 months) - a strong baseline for FY25. Doing a little bit of conservative napkin math, I would expect the $2.3b of “safe” revenue to grow by about 20% due to customer growth between 2Q24 through 1Q25 (assuming a 9 month lag to ramp consumption for new customers) and the total to grow by another 30% due to overall net revenue retention in FY25. That would result in $2.3b x 1.2 x 1.3 = $3.6b for FY25, or approximately 35% more than in FY24. This is of course super rough and I wouldn’t quote myself on this, but it just goes to show how durable Snowflake’s growth could be in the next 12 months, if they just continue to execute the way they are executing right now. In any case, I’d like to hear from others how this napkin math is wrong or could go differently and why. (For example, am I double counting some of the growth as I have included the revenue from new customers separately (~20%) even though it’ll surely also add to NRR (~30%)? And are there other ways to project FY25 growth aside from the upcoming guide, of course?).

I believe improved business momentum is also reflected in customer growth numbers. Q3 total customer growth has a seasonal headwind, where QoQ growth dropped in every year from Q2 to Q3 in the previous four years. That’s why I would have been happy with just 4% growth in Q3, even though they managed 4.9% growth in Q2. So while QoQ growth percentage dropped by 15% and 26% going from Q2 to Q3 of FY22 and FY23, it only dropped by 9% in FY23 resulting in a QoQ growth of all customers by 4.4%. The more important cohort of $1M+ customers even accelerated in growth, to 8.7% QoQ, up from 7.5% QoQ (more important because it correlates closer to future revenue growth than the other cohorts). Lastly, Global 2000 customers, which are important to fuel SNOW’s flywheel, almost didn’t grow this Q, but growth was relatively strong in Q2 and we have to keep in mind that those are small numbers which can behave very lumpy. Nevertheless, this metric also shows some weakness when looking at TTM. On the other hand, this metric will also have to start showing first signs of slowing down at some point (and probably already is) as there are only 2000 companies and they already have 647 of them. So less worrisome, but something to continue to watch. Does anyone have an idea what their G2000 impact on future revenue could be? While in principle every company in the world deals with data one could say their G2000 TAM is 2000 out of 2000, but I wonder which percentage of their G2000 customers will drive further adoption of Snowflake, that is, smaller companies adopting Snowflake just because they are working with a G2000 company that is on Snowflake. Any thoughts on this?

NRR, a lagging, backward looking metric for revenue growth, continued to drop as expected to 135%. Snowflake’s management sees it “stabilizing. It could dip a little more.” Given the fact that it pretty much dropped linearly for the last 6 quarters, a continuation of the linear trend would bring them to 128% in Q4. So any number larger than that would be an improvement from the current trend. We’ll see, but I’d probably like to see it close to 130%, maybe 131% in Q4.

Things look pretty good on the data sharing side: Marketplace listings grew 8.5%, adding a total of 183 new listings. While this percentage is down from last Q’s 13.5% we again have to remind ourselves that we are dealing with small lumpy numbers here. Indeed, Q2 raw adds of 255 new listings were 5 times higher than in Q1, so it is only natural that the trend regressed a little bit back towards the mean. That said, the ratio of marketplace listings to total customers grew to 26.2%, up from 25.2% in Q2 and 23.3% in Q1 - that’s great to see as it shows continuous improved engagement. Customers who have at least one stable edge (= continuous data-sharing connection between Snowflake accounts) grew a very strong 12.5%, up from 8.6% last Q, again a regression towards the mean, but this time from a lower number in Q2. And again, we can look at the ratio of stable edges to total customers and find that this number grew to 28%, up from 26% in Q2, 25% in Q1 and 23% last Q4 - very good as this is indicative of Snowflake’s flywheel gaining more and more momentum.

Last but not least, Snowflake continued to make good progress on profitability. Operating income margin grew to 10%, up from 8% in Q3 and 8% a year ago. Net income margin jumped to 12% from 7% a year ago and 12% in Q2 and FCF margin grew to 15%, up from 13% in Q2 and 12% a year ago - looking good!

Overall, I would say very well done, especially the product revenue growth of 9.1% QoQ this quarter was a highlight. Combine that with strong large customer growth numbers and a nice RPO increase, I am very optimistic about the future of Snowflake.

Wrapping it up

We have reached the end of another year - and what a year it was! A year in which we witnessed how my companies responded to an economic downturn that began more than two years ago, and I must say they all performed admirably. And as we enter 2024, I anticipate that they will keep up their excellent execution - these companies have proven their ability to adapt and thrive in challenging times, and, even though they may not be the fastest growing companies in the market at any given moment, they have shown durable revenue growth of around or above 30% YoY while making significant progress in increasing their profitability. And that, I believe, could persist for years to come…

Thanks for reading and I wish you all a happy, healthy and successful 2024!

Ben

Past recaps