Ben’s Portfolio update end of February 2024

SlowAndFast · March 1, 2024, 1:32am

Ben’s Portfolio update end of February 2024

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%

2024	YTD	Month
Jan	5.9%	5.9%
Feb	17.5%	10.9%

These are my current positions:

	Feb 2024	Jan 2024	First buy*
Crowdstrike	17.4%	17.4%	5/13/2020
Nvidia	16.5%	14.2%	5/13/2020
Datadog	15.5%	16.3%	5/13/2020
Cloudflare	14.8%	13.1%	11/2/2020
Snowflake	13.3%	15.3%	2/8/2021
Zscaler	12.8%	13.9%	3/4/2021

Monday	5.9%	6.2%	9/13/2021

TradeDesk	1.7%	1.5%	5/13/2020
Samsara	1.4%	1.4%	1/8/2024
Enphase	0.8%	0.7%	5/15/2020

*held through today

Company comments:

Cloudflare:

Cloudflare reported Fiscal Q4 2023 on 02/08/24. Revenue was $362.5M (8.0% QoQ, 32.0% YoY) versus my expected $360M (7.2% QoQ, 31.1% YoY). Great start! With that, Cloudflare closed the fiscal year with 33% YoY revenue growth, adding a record $88M net new revenue in 2023. The new Q1 revenue guide was $373M (2.9% QoQ, 28.5% YoY) versus my expected $378M. Note, Q1 has been seasonally slower the last two years, where QoQ net new revenue dropped from Q4 to Q1, followed by an increase in Q2. Following this trend I now have a conservative expectation that they will add $20M in net new revenue in Q1 (26% less than they added in Q4), or total revenue of $382M (5.5% QoQ, 31.8% YoY). With that they would beat their revenue guide by 2.5%, which is slightly below the Q4 beat of 2.8%, but significantly above the 1.5% or lower beats in the previous 5 quarters.

I’d interpret revenue below $382M in Q1 as a yellow flag, given the improved outlook for Cloudflare from a narrative point-of-view where

They successfully fixed their GTM issues with further improvements expected with new President of Revenue.
Macro has improved (and hopefully will continue to do so).
New AI tailwinds are not yet materially contributing to revenue growth, but I believe this is just a question of time and might start sooner than later:

These days, earnings conferences would not be complete without an update on AI. As of the end of 2023, we deployed GPUs in 120 cities globally, meaningfully ahead of our target of 100 cities. By the end of 2024, we plan to have inference-tuned GPUs deployed in nearly every city that makes up Cloudflare’s global network and within milliseconds of nearly every device connected to the internet worldwide . The breadth and potential impact of the use cases we are seeing with Workers AI are extraordinary, and we’re super excited about the opportunity to establish Workers AI’s serverless model built on Cloudflare’s trusted global network as the best infrastructure for running AI inference tasks. From our launch in September to the month of December, the average number of daily Workers AI requests increased 9x . Furthermore, one-third of the thousands of Workers AI accounts are new to the Workers platform, suggesting that Workers AI is not just significant opportunity in and of itself, but also a potential accelerant to adoption of the Workers overall platform. Inference, however, is only part of the AI equation. We are also extremely encouraged by interest in Vectorize, our vector database, which makes it easy, fast, and affordable to index and store vectors to support use cases that require access, not just to running models, but customized data too, as well as AI gateway, which gives organizations the tools to cache, rate limit, and observe their AI deployments regardless of where they’re running .

So AI applications is a significant improvement in the narrative for Cloudflare that obviously goes beyond Q1 and probably beyond the just started FY24, with the potential to become a new, dominant revenue driver for Cloudflare in the years to come.

Moving on to NRR: From my Q3 recap: “the just mentioned NRR rebound to 116%, up by one percent, indicates that this metric might have bottomed, which would be great. But since there is a possibility that it just went from 115.49% last Q to 115.51% this quarter due to noise, I am going to wait another quarter before calling the NRR bottom.” Given that NRR was again 115% in Q4 I am glad I didn’t call the bottom yet. That said, it really seems to have stabilized now with being around 115%-116% the last three quarters.

Customer growth was very healthy in Q4: QoQ growth was 4.3%, similar to 4.5% in Q3 for all customers and significantly up from the previous 5 quarters where QoQ growth ranged from 2.4% to 3.9%. Large customer growth was also strong, growing 7.7%. Despite being down slightly from Q3’s 8.8%, I call it even very strong because of the apparent seasonality in Q4, where the QoQ growth percentage dropped by around 20% from Q3 to Q4 in 2020, 2021 and 2022, while it now only dropped 12% in 2023, showing relative strength. Q4 also marks the third quarter where large customer raw adds where around 200, up from 114 in Q1 and 134 last Q4. So well done here. One last comment regarding overall customer growth and NRR impact on revenue growth: Customer numbers grew 17% YoY in 2023 and NRR is currently at 115%. If those numbers stay that way, that would compound to 34.5% YoY revenue growth going forward, which is close to, and even slightly above their FY23 revenue growth of 33%. So if not slight re-acceleration, I think we can expect at least growth durability in the near term. Needless to say that growth durability is something we should highly value with this investing style. And any of the previously mentioned new AI tailwinds should come on top of this, giving additional upside.

Another highlight and, just like customer growth, also a forward looking metric, were remaining performance obligations (RPO) which grew 14.9% QoQ, up from 4.6% in Q3 and 9.1% a year ago. Nice!

Finally, profitability continued to be great in Q4: Cloudflare really has come a long way from the times some were criticizing them for “just wanting to make the internet better and never wanting to make a profit”. They started to break even in 2021, achieved an operating income of $36M in 2022 and increased that by 3.4x to $122M in 2023 (and they almost quadrupled net income from $44M in 2022 to $170M in 2023). 2023 was also the first year they were free-cash-flow positive, achieving $119M, up from losing $40M in 2022.

In my book, the narrative improvements, coupled with huge profitability improvements and revenue growth durability in the 30’s (down from the 50’s when they were not yet profitable), is a really great case-study for the type of company I want to be invested in.

Monday:

Monday reported Fiscal Q4 2023 on 02/12/24 before the market open and this was not a good quarter in my mind:

Revenue was $202.6M (7.1% QoQ, 35.1% YoY) versus my expected $205M (8.3% QoQ, 36.8% YoY). The reason I was disappointed about this print is because it put Monday right back into their $13M sequential net new revenue range they somehow cannot break out of. Here are the last 10 quarters: $12.4M, $12.5M, $13.0M, $15.2M, $13.2M, $13.0M, $12.3M, $13.4M, $13.5M, $13.4M. So besides the one outlier at $15M they have really been stuck at generating $13M sequential net new revenue. And if they beat their Q1 guide by 3% (they beat the last guide by 2.8%) they’ll generate $12.7M net new revenue in Q1. As a result of that, QoQ revenue growth rates have come down from around 17% 10 quarters ago to probably below 7% in Q1.

We also got an update on the exact NRR numbers for the various cohorts, which show a continuing, dropping trend, although they seem to stabilize slowly at around 115% for 10+ customers, >$50k customers and >$100k customers. I think 115% is still good/acceptable, especially when combined with strong customer growth rates, but I don’t want to see it drop significantly lower from here and better yet start climbing again soon since that would indicate that their new products are upselling well and/or they are expanding seats within their customer base.

Speaking about customer growth, the large customer growth was a positive highlight of the report. >50k customers grew 10.5% QoQ and up from 9.8% last Q, adding a record 218 new customers to this cohort. Unfortunately, customer growth of the 10+ users cohort continued to drop. In the last four quarters, we saw QoQ growth going from 6.3% to 5.7%, to 4.2%, to 3.2%. I don’t have the QoQ numbers for all customers, but I expect that they are very similar to the 10+ cohort, since both grew 21% YoY (20.9% versus 21.1% for all customers, to be exact). As a side note: can management please stop putting these silly up-curved arrows on top of the bar charts in their presentations? Especially if growth is actually decelerating? I know it is nitpicking, but makes me wonder if their PR/IR team either doesn’t know math or tries to visually manipulate investors - example:

Ok, after this short rant, back to the numbers: So, if we assume that the QoQ customer growth number doesn’t continue to drop further going forward (big question mark), and that their NRR stays around 110% (all customers) to 115% (10+ customers), I estimate their revenue growth will continue to slow down to 25% to 30% YoY, from currently 35% YoY (1.032^4 * 1.10 or 1.032^4 * 1.15, taking the Q4 customer growth rate of 3.2% as a baseline). If they can do better than that, for example because their new products like CRM (grew 21% QoQ!) and DEV (grew 39% QoQ!) continue to get good traction, we should see NRR and customer growth start re-accelerating again. If not, we’ll probably see revenue growth continue to drop towards 25-30% YoY. In general, that in itself wouldn’t necessarily be a thesis breaker for me, but only if combined with large improvements in profitability - more on that below.

Profitability margins were also disappointing this quarter. Operating, net and FCF margins were 10%, 17% and 27% respectively, versus my expected 15%, 20% and 35%. Now don’t get me wrong, those margins aren’t bad at all, but Q4 has historically been a strong quarter for profitability margins as Monday typically has higher expenses in H1 due to hiring, etc. Also Q4 has historically been much stronger than Q3 with margin expansions of 10% or more in 2022, going from Q3 to Q4. But what we got now was a drop in operating margin from 13% to 10%, a drop in FCF margin from 34% to 27% and a constant net margin at 17%. This margin contraction was a result of the slower revenue growth combined with increased operating expenses. From their Investor Day and the earnings call it became clear that Monday is trying to accelerate revenue growth going forward by increasing investments in R&D and S&M and they plan to do so through 2024. “So when we did the Investor Day, we said that our #1 focus for 2024 is going to be increasing top line throughout investment. There is some seasonality, obviously, because Q1, you always put more on the performance marketing because this impacts the entire year. But we said that the focus is going to be on top line, and we are not going to improve our operating margin in the way we did in the past.” So the big question is: If they won’t continue to expand profitability margins in 2024, will they be able to re-accelerate revenue growth? The answer to this question might be a thesis maker or breaker.

Now look: yes, judging just by the numbers this was not a good quarter (with exception of large customer growth and CRM & DEV product adoption numbers). But if I had sold out of a company every time there was a not so good quarter, I wouldn’t have owned any of my holdings for as long as I did. I still think Monday has big potential, but I want to see them pick up the pace again in the next 2-3 quarters and see their plan to re-accelerate top-line growth materialize. If they can manage that, I am sure they’ll get a lot of praise for their foresight and understanding of their business by having made the deliberate decision to boost R&D and S&M expenses now and see the fruits later. The other thing that’ll be interesting to watch is how their price increase will turn out. They expect a $15M-$20M contribution to revenue in FY24 due to that, which I estimate to give them a one-time boost in QoQ revenue growth in Q2 of around 2% in comparison to Q1. So we’ll have to be careful not to attribute a Q2 QoQ revenue growth acceleration to a return of the R&D and S&M investments alone; instead I think the Q3 and Q4 QoQ growth rates will be more telling here. It’ll be also interesting to see if there is any new weakness in customer growth rates as a result of the pricing increases which will give us a hint whether this was a good move or not. Bottom-line: I believe investors will need a little bit of patience the next couple of quarters…

Datadog:

Datadog reported Fiscal Q4 2023 on 02/13/24 before the market opened. Revenue was $590M (7.7% QoQ, 25.6% YoY) versus my expected $592M (8.2% QoQ, 26.1% YoY), resulting in a healthy $42M net new revenue. That is a really nice recovery from $12M in Q1, and improving to $28M in Q2 and $38M in Q3. For the upcoming Q1 I had expected a revenue guide of $604M (2% QoQ, 25% YoY) and we got $589M (0% QoQ, 22% YoY). Assuming a beat close to 4% YoY revenue growth will accelerate significantly to over 27%, up from ~25.5% in the previous three quarters. And that even though Q1 is always a seasonally slow quarter for revenue growth, where net new sequential revenue dropped from Q4 in every single Q1 since 2018. Going forward I expect Datadog to reaccelerate revenue growth closer towards 30% YoY by the end of FY24, which would be great.

Total and $100k+ customer growth was disappointing, growing only 1.9% sequentially in both cohorts. I really hope this metric will pick up again in Q1. One thing that makes me feel a bit better about this is that Datadog seems to be focussing on expanding with their larger customers as a lot of the talk in the call was on highlighting the expansion opportunity in-front of them. Combining this with abating usage optimizations this narrative is confirmed with their stellar growth acceleration of RPO and billings as well as their continued success in multi-product adoption: Customers using 2+ products grew to 83%, up from 82%, customers using 4+ products grew to 47%, up from 46% and customers using 6+ products grew to 22%, up from 21%. 9% of all customers now use eight or more products, which is up from about 5% a year ago. So the number of customers using 8+ products more than doubled in a year and grew to almost 2500.

While NRR continued to drop to mid-110% Datadog sees it stabilizing as in Q4 TTM ARR added started to grow again for the first time since 2Q22.

When I first saw the new customer growth and NRR numbers, I was initially thinking about trimming my Datadog position, but I ended up deciding against that for two reasons: first, their focus on expanding with larger customers is something we have discussed already since a few quarters and second, what made me eventually reconsider is their absolutely stellar growth in billings and RPO. The latter grew an amazing 73% YoY and billings grew 35% YoY. And while RPO and billings durations increased YoY (which is not a bad thing), I cannot see them NOT reaccelerate YoY revenue growth rates from here. Just look at this:

Billings QoQ growth: Q1: -4.7% → Q2: 1.8% → Q3: 16.7% → Q4: 19.1%

RPO QoQ growth: Q1: 7.5% → Q2: 9.6% → Q3: 16% → Q4: 27%

What a recovery in these forward-looking metrics!

Finally, Datadog achieved amazing profitability metrics, where operating income margin grew to a record 28%, up from 24% last Q and 18% a year ago. (Note, regarding net income, don’t be surprised if you see an apparent margin drop as Datadog established a 21% non-GAAP tax rate in FY24 and going forward and recasted their FY22 and FY23 non-GAAP net income numbers to reflect this. I don’t think this changes much as I believe it is more important to follow the trends here, which haven’t changed.) Free cash flow margin jumped to 34%, up from 25% last Q and 21% a year ago. Really amazing progress here that led them to update their long-term operating margin goal to 25%+, from 20-25% at IPO.

Additionally during their Investor Day 2024 (https://investors.datadoghq.com/static-files/b2f47d9f-b07d-44aa-bd72-67520dcc88dd), Datadog highlighted how they started out in observability, then expanded into cloud security, software delivery, understanding and support of users and now combined all of that into a platform for cloud service management. They also highlighted an example of a 7-year customer of Datadog which had its hours (cost) to resolve major incidents reduce by 82% after becoming a Datadog customer, providing a clear ROI - just the type of ROI I like to see as investor. They also started their new “Bits AI” which is Datadog’s new AI copilot that answers questions expansively, helps to understand incidents faster and helps to take action. According to Gartner, the total addressable cloud market will be growing 20% CAGR through 2027 and the total addressable observability market will be growing 11% CAGR through 2027. Datadog estimates that the total addressable cloud security market will be growing 16% CAGR through 2027. Among others, these were all nice-to-see highlights and developments showing that Datadog is staying on top of their game with lots of new opportunities for 2024 and the following years to come.

Snowflake:

I haven’t had a chance to dive deeper into the numbers yet, but my quick take on Snowflake’s report is that this seems to be more of a buying opportunity than not. What worries me a bit is data sharing growth metrics, but that, including some other metrics which seemed a bit on the soft side could be affected by seasonality with the holiday-heavy quarter. RPO was amazing, showing me that Snowflake gets a lot of traction with their customers and the divergence of RPO and cRPO growth tells me that those customers are willing to take on longer, multi-year contracts, which is great. Profitability metrics were very good. The new CEO seems solid and it feels like a good thing to have an AI leader take Snowflake through the next phase of its development. Low guidance feels like a huge sandbag to set up the new CEO for success and I could certainly see a strategy here along the lines of “when we announce that Frank is stepping back as CEO, the stock might be punished just because of that and the resulting new uncertainty, so might as well guide low and then have some easy beats for the next couple of quarters and a good setup for the new CEO …”.

Wrapping it up

I still have to dive a bit deeper into the Snowflake report and didn’t get a chance to look at Zscaler’s numbers yet, but I’ll cover those together with Crowdstrike and Samsara in my next update.

Thanks for reading and I wish you all a great March!

Ben

Past recaps