Ben’s Portfolio update end of February 2023

Ben’s Portfolio update end of February 2023


Portfolio Notes
2020 63.6% Since May 12, 2020, when I started this portfolio with over 40 companies, mostly holding large cap tech & FAANG, but also some high-growth SaaS which I kept until now.
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 YTD Month
Jan 8.3% 8.3%
Feb 16.3% 7.3%

These are my current positions:

Feb 2023 Jan 2023 First buy*
Snowflake 18.9% 20.6% 2/8/2021
Datadog 15.6% 16.3% 5/13/2020
Cloudflare 15.4% 14.6% 11/2/2020
Zscaler 11.7% 11.9% 3/4/2021
Crowdstrike 10.9% 10.3% 5/13/2020
Nvidia 8.8% 8.0% 5/13/2020
SentinelOne 7.9% 8.0% 12/10/2021
Monday 6.5% 5.9% 9/13/2021
Enphase 2.3% 2.6% 5/15/2020
TradeDesk 2.0% 2.0% 5/13/2020

*held through today

Company comments:

Enphase Energy:

Enphase reported Q4 revenue of $725M (14% QoQ, 76% YoY), readily above my expectation of $718M (13% QoQ, 74% YoY). Interestingly international revenue, which had increased as a percentage of total revenue in the previous three quarters (16% → 20% → 29%) stayed flat at 29% in Q4. My guess is that Enphase’s seasonally weaker quarters (especially Q1 but also somewhat Q4) are more pronounced in Europe than in the US: The main reason international revenue grew so strongly in Q2 and Q3 was a literal growth explosion in Europe where the company grew revenue 69% sequentially in Q2 and 70% sequentially in Q3. And so, as the hours of daily sunshine came down for the European winter so apparently did the appetite for solar, as the Q4 sequential growth rate dropped down to “only” 21% QoQ, which is still an amazing sequential growth rate. On the other hand, revenue growth in the US re-accelerated to 15% QoQ in Q4, up from 7% QoQ growth in Q3.

We also got great margins this quarter: (Non-GAAP) gross margin improved from 42.9% in Q3 by almost 1% to 43.8% in Q4 and up from 40.2% in Q4 last year. Operating income and net margins also improved by about a percentage point sequentially to 31.7% and 29.3%, up from 23.7% and 24.9% in Q4 last year. “We exited the fourth quarter at 44% gross margin, 12% operating expenses, and 32% operating income, all as a percentage of revenue on a non-GAAP basis.” I was also happy to see an amazing $237M in free cash flow this quarter (leading to a total of $700M for the FY), which is 32.7% of their revenue (30% for the FY), up from 28.2% last Q and 20.4% in the quarter a year ago (and up from 22.8% from FY21).

Their revenue guidance for Q1 is a -1% QoQ decline at the midpoint. But again, keep in mind that Q1 is their seasonally slowest quarter by far. So if they can actually grow around 3-4% QoQ in Q1 it will be a significant seasonal slowdown but not too far from the 7% QoQ they delivered in 1Q21. Still, I wouldn’t be surprised if part of this slow down is due to the current macro economy: “We expect our Q1 revenue for the company to be within the range of $700 million to $740 million. We are fully booked for Q1 right now. (…)We expect our U.S. business to be slightly down in Q1 compared to Q4, primarily driven by seasonality and the macroeconomic environment.

Additional points:

*Our Q4 Net Promoter Score worldwide was 71%, compared to 70% in Q3. That’s a very high number!

*Approximately 55% of our Q4 microinverter shipments were IQ8

On increasing capacity:

*shipped approximately 4.9 million microinverters (…) Our quarterly capacity was 5 million microinverters exiting Q4. We are on track to begin manufacturing at Flex Romania starting this quarter, enabling us to service Europe better. [We will] open six manufacturing lines by the end of this year adding a quarterly capacity of 4.5 million microinverters, bringing our total quarterly capacity to more than 10 million microinverters as we exit 2023.

*Our average call wait time was quite down to 1.6 minutes compared to 4.8 minutes in Q3. That is a nice to see development. Why should I care about call wait times and system installation times in general, you might ask? Well, for example for batteries, the key is that “any [battery installation] inefficiency in the installation process impacts [the installer’s] profitability.” And increased installer profitability means that “storage deployment will accelerate”. That is why Enphase puts such a huge focus on this!

*In Australia, the solar market continued to recover in Q4 after a weak first half of the year. (Seems to be anti-seasonal due to summer vs. winter)

***Interesting regarding raising interest rates: We’ve also seen some analyst reports about a possible shift from loans to PPA due to the high-prevailing interest rates.


My summary of Cloudflare’s Q4 numbers: Growth - mehh, profitability - yeah, baby!

I had my revenue expectation penciled down at $277M (9% QoQ, 43% YoY), assuming a 1% beat as absolute bottom expectation. Well, they delivered $275M (8.2% QoQ, 41.9% YoY). Since the difference to my bottom-expectation was the equivalent of a partial day during the quarter, I’ll call the difference noise. Still, yes, that means they were at the bottom of my expectation there and with that, I really wanted to see continued improvements on the profitability front. And boy, they delivered: their operating income grew to $16.8M, up from $14.8M last Q and up from $2.3M in Q4 of last year. That resulted in a margin of 6.1% of revenue, up from 5.8% last Q and up from 1.2% last year. Net income shows a similar picture as it went to $21.6M, up from $19.1M sequentially and $0.1M versus 4Q21, resulting in a margin of 7.9%, up from 7.5% last Q and 0.1% in 4Q21. But the real highlight was their free cash flow of $34M, up from -$4.6M last Q and $8.6M in 4Q21. That is a record margin of 12% and delivering on their promise to be FCF positive in 2H22. And here comes the kicker: while we know that our companies can “simply” flip a switch and become profitable by reducing their spending in S&M and R&D, this is not what Cloudflare did this quarter - they added $10M to their S&M expenses and $3M to their R&D expenses while keeping their Capex roughly unchanged from last Q (slightly down to $40.1M, from 41.9M). So I am really happy about these developments which demonstrate Cloudflare’s ability to generate cash. I think in a way it also answers the big question I had in my last Q’s earnings recap about Cloudflare: Their “purchase of property and equipment has significantly increased over time. Again, is that a problem and will this keep them form ever becoming FCF positive?” And while their ratio of raw sequential revenue add to purchase of property and equipment stayed flat at approximately 2x as last Q (meaning they spent 2 dollars in Capex this Q for each dollar they added to revenue over last Q’s revenue), they clearly managed to generate a significant portion of free cash flow. In fact, “While there will be some variability in our free cash flow quarterly, we expect to be free cash flow positive in 2023 and the years after that.” So for me that looks like a big change in their narrative from we don’t want to be profitable to we have started generating positive FCF and plan to continue to do so.

In accordance with their mehh revenue growth was another slow down in their DBNRR from 124% to 122% and large customer growth which dropped to 7% QoQ, down from 9.1% QoQ in Q3. Note that “We still see a clear path to a dollar-based net retention over 130% as we ramp seat-based products like Zero Trust and storage-based products like R2, and we won’t be satisfied until we get there”. At least total customer growth re-accelerated slightly from 2.8% last Q to 3.9% this Q. Although I believe the large customer growth will be more telling about future revenue growth as it makes up the majority of their revenue. The silver lining is that YoY, large customer numbers grew still more than revenue (44.2% vs. 41.9%) which makes me hopeful that we will see a revenue re-acceleration. And while their Q1 guide suggests further revenue deceleration at a guided 5.8% QoQ (37% YoY), the full year guide of 37% growth hints at a bottom there for the deceleration. Especially since they re-iterated their $5B annualized revenue in 5 years target, which implies a 38% CAGR of revenue. So I guess it’ll be uphill from there? At least if I share their optimism, which I do for now, as they haven’t given me yet any reason not to…

I also really liked a quote that Saul emphasized: “Marc Boroditsky joined us last quarter to lead our sales organization. Last week, he briefed us on his first 100 days. My initial reaction, if I’m honest, was embarrassment over some of the basic things we should have been doing better. But my second reaction was excitement, as there are so many opportunities for us to improve. (…) I’m aware that these efforts can take time. That’s why we’re not relying on any improvement in S&M efficiency, or any rebound in the economy, as we formulate our guidance.


It is nice to finally see some companies exceeding my revenue expectations again! Monday did so by reporting $150M (9.5% QoQ, 57% YoY) vs. my expected $148M (8% QoQ, 54% YoY), so this was a big relief! Next quarter guide was $155M or 3.4% QoQ which is a little bit lower than I had hoped for (I was hoping more like 5%QoQ), but it is hard to gauge what they will be able to manage since the short beat history we have is pretty choppy. On a first glance, full-year guide also seemed a little bit on the low side at 33.5% at the midpoint. But if they will be able to beat this guide by 9% as they did beat their full-fiscal 22 guide in 4Q21 they would end up just shy of 45% YoY revenue growth. Yes, that is a significant deceleration from the 68.4% YoY growth they managed this FY. BUT, they also blew my expectations off the roof with their continued march towards profitability - that is - they made a big jump there. So before laying out the profitability numbers I think we as investors always have to balance growth with profitability trends. I think IF Monday manages close to 45% YoY growth in FY23 while becoming a cash generating machine, I would be very happy with that. But maybe 45% YoY growth is a stretch? Especially given current macro? And their continued large customer deceleration to 11% QoQ, down from 14% QoQ in the quarter before and 21% QoQ in the Q before that, as well as their dropping NRR numbers in all cohorts makes me really worry (all customer NRR stayed down at +120%, from +125% half a year ago, +10 customers NRR dropped to +130%, down from +135% last Q and large customer NRR dropped quite a bit to +135%, down from +145% last Q). So both their land and expand seem to suffer at the moment. Understandably, because of current macro? Or because of an underlying business weakness? I guess it depends on how soon macro will improve… And their profitability might again take a step back in the first half of FY23 as Monday typically increases their expenses in the first half of the FY. Non-GAAP operating income guidance seems at least optimistic there, with a guided loss of $19 to $17M. This is a $3M improvement over their 4Q22 guide which they issued in Q3. So there is at least a chance that operating income margin will stay at +10% in Q1. I would love to hear other’s opinions there …

Ok, so now onto profitability: As I just hinted at, operating income margin made a big jump to +10%, up from -2% last Q and up from -10% 4Q21. So did their net margin which reached a record +15%, up from +2% last Q and -12% in 4Q21. And best of all they managed to double their free cash flow from last quarter and triple it from 4Q21 to $30M, a 20% margin - quite amazing, despite some moderation in spending in R&D and S&M. Of course, having a 90% (non-GAAP) gross margin can only help here.


Yes, yes, yes, Q1 and FY23 guidance is horrible. Let’s forget this for a moment and let’s have a look how the business performed in Q4 (past tense!). We can then circle back and try to make some sense of this very low guide. But for now, let’s try to NOT get biased by it.

Datadog reported revenue of $469M (7.5% QoQ, 44% YoY) versus my expectation of $474M (8.5% QoQ, 45% YoY). So that was clearly a notch lower than I had expected and resulted in their lowest beat since COVID (5%). Note that after the low COVID quarter, the average beat has been 8.4% since 3Q20 and excluding this Q. Interestingly the quarterly revenue growth stayed stable at 7.5%, same as in Q3. Normally, I would be happy about this in the current environment and considering that DDOG’s revenue is purely consumption driven. On the other hand though, Q4 growth has historically been stronger than Q3 growth in all years since 2017 - on average by 5%. So in relative terms it was yet another slow down. One thing that confuses me a bit is that Datadog’s management always calls out the lower consumption in Q4 because of the holidays, yet, it has almost always been their strongest quarter in terms of QoQ revenue growth. So not sure what to make of it. Ideas? Anyways, we can also look at raw sequential revenue add to substantiate the relative deceleration in comparison to past Q4s: from 2017 to 2021 Q4 sequential adds were never below 40% (57% on average). This Q4 this metric dropped to 8.1% (but still positive!).

But what about the demand side? RPO growth accelerated again, fro 2.7% in Q2 to 6.8% in Q3 to now 12.6% in Q4. And billings grew a solid 14.8% QoQ. Next, QoQ customer growth stayed relatively stable at 4.5% for all customers (down from 4.7% in Q3) and more importantly, large customer ($100k+ ARR, 85% of total ARR) QoQ growth stayed also relatively flat at 6.9% (down from 7.4% in Q2). So RPO, billings and customer growth numbers tells me that the demand is certainly not falling off a cliff. Instead it keeps growing quite robustly, even accelerating partially.

Furthermore, DDOG now has 317 customers spending more than %1M ARR, up from 216, so a solid extra 100 customers. Overall, customers keep expanding with 2+ products fraction increasing from 80% to 81%, 4+ products fraction increasing from 40% to 42% and 6+ products fraction increasing from 16% to 18%. And NRR was still above 130% (makes me wonder how large it must have been at some point, given how it dropped for many other companies).

Coming to profitability, I wanted to see 20ish% FCF margin and they managed 21% so well done there. I also wanted to see operating income and net margins around 20%. They came in a tad lower at 18% and 19%, respectively, so I’ll give them a pass there. Again it is worth examining how they got there: Both R&D and S&M spend increased dollar-wise which is good and R&D spend as percentage of revenue stayed in-line with their historical 30%. S&M spend as a percentage of revenue even went up to almost 27%, the highest fraction in 7 quarters. With that I am really happy about their profitability margins.

So, where are we with that? The company’s revenue growth held up well this quarter and land and expand still seem to work well, pointing to future re-acceleration. Profitability is a charm. Given the current macro and DDOG’s consumption based model I don’t see much to dislike.

Now, let’s have a look at guidance and see how it could play out: Q1 guide is flat, meaning no revenue growth and FY23 guide is only 24% YoY. That sounds horrible, coming from 63% YoY growth in FY22. But let’s keep in mind that their FY guide, given in Q4, has always been ultra conservative. I haven’t listened to the call yet, but wouldn’t be surprised if it was even more conservative this time. But let’s assume they can beat their FY guide by the same 10% they beat their FY22 guide issued in 4Q21. That means they would manage 36.6% growth in FY23 against pretty tough comps. What would a reasonable scenario look like that would bring them to 36.6% growth in the FY?

For example:

Q1: a low, 5% guidance beat → 5% QoQ growth.

Q2: 8% QoQ growth

Q3: 11% QoQ growth

Q4: 15% QoQ growth

Believe it or not, that scenario would bring them to 36.6% YoY growth; not bad or? Especially as it would set them up for much higher growth in FY24 (yes due to easy comps, but still …). Anyways, you can play different scenarios to get to 36.6% YoY growth and I can’t find a bad one. Of course they might not beat their FY guide by 10% as last year. Macro might continue to be a headwind or even worsen. But it might also get better in which case the above example might be conservative.

One additional thought that @mooo brought up, which I found quite insightful is that their NRR is still above 130%. So even if they don’t manage to get a single new customer their revenue growth from NRR alone would be 30%+ (corresponding to 6.8%+ QoQ) if they can keep the 130%+ NRR. I realize that they made a comment in the Q/A that it might drop below 130%, but they might have only said that to stay consistent with their 24% YoY guide. And of course they will in all likelihood continue to grow their customer count. At least there hasn’t been any deceleration in the last three quarters, despite all the macro. So given their current NRR and continued customer growth I believe a 10% beat of their FY guide isn’t too optimistic at all.

Overall, I think it was a good report besides the guidance. DDOG is currently my second largest position at 16% after SNOW and tied with NET. I’ll likely keep it that way, at least until our other companies reported at which point I can re-evaluate the relative strength of DDOG compared to the others.

Wrapping it up

Overall, I thought the results so far are quite good. I haven’t made any allocation / conviction changes yet, but that might change once our other companies have reported. I think it is important to then go back and review all results in relation to each other and see where companies showed relative strengths or relative weaknesses.

Thanks for reading and I wish everyone an awesome March!

Past recaps

July 2022: Ben’s Portfolio end of July 2022 - Saul’s Investing Discussions - Motley Fool Community
August 2022: Ben’s Portfolio end of August 2022 - Saul’s Investing Discussions - Motley Fool Community
September 2022: Ben’s Portfolio update end of September 2022
October 2022: Ben’s Portfolio update end of October 2022
November 2022: Ben’s Portfolio update end of November 2022
December 2022: Ben’s Portfolio update end of December 2022
January 2023: Ben’s Portfolio update end of January 2023