Ben’s Portfolio update end of July 2023

SlowAndFast · July 31, 2023, 8:04pm

Ben’s Portfolio update end of July 2023

Part 1: Returns and portfolio holdings

Part 2: Earnings expectations for companies that are still due to report

Part 3: Company comments regarding recent earnings

Part 1: 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	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%

These are my current positions:

	Jul 2023	Jun 2023	First buy*
Datadog	19.4%	17.7%	5/13/2020
Snowflake	17.7%	19.1%	2/8/2021
Cloudflare	14.5%	15.0%	11/2/2020
Nvidia	13.7%	13.5%	5/13/2020
Crowdstrike	12.2%	12.1%	5/13/2020
Zscaler	12.0%	11.9%	3/4/2021

Monday	6.7%	6.9%	9/13/2021

TradeDesk	2.5%	2.3%	5/13/2020
Enphase	1.3%	1.5%	5/15/2020

*held through today

Part 2: Expectations for upcoming earnings

In the following I summarize my expectations for the companies that are still due to report this earnings season. The goal of this exercise is to come up with reasonable earnings expectations. The goal here is not to be absolutely accurate, but to be able to identify when a company surprises in either a good or a bad way. That way it will be easier for me to identify if a change in conviction level is warranted. Also, just because a company exceeds or performs below my expectation with a single metric, that doesn’t necessarily mean my conviction has to change. Really, what this exercise does is it helps me to think about my companies holistically. Therefore, I think it is valuable to come up with these expectations before they report as it will help me to keep the companies (and myself) accountable and minimize any cognitive bias once the results are out.

Snowflake:

Reporting Fiscal Q2 2024 on 8/23/23.
Product revenue expectation: $634M (7.4% QoQ, 36% YoY), assuming a 3.5% beat.
Q3 new product revenue guide: $666M (5% QoQ, 27% YoY) which I would interpret as $688M (8.5% QoQ, 32% YoY) and hoping for modest QoQ re-acceleration.
I would like to get an update on future revenue visibility (which was non-existent last ER).
I would like to see positive Operating Income margin and positive Net Income margin.
Around 15% FCF margin.
I would like to see >1M customer QoQ growth in the mid-teens.
NRR not below 143%.
RPO increase.
I would like to see continued strength in stable edges and powered by registrants.
Detailed thoughts: Ben’s Portfolio update end of May 2023

Datadog:

Reporting Fiscal Q2 2023 on 8/8/23 before the market opens.
Revenue expectation: $516M (7% QoQ, 27% YoY), assuming similar beat as last Q’s 2.9% beat.
Q3 new revenue guide: $547M (6% QoQ, 25% YoY) which I would interpret as $562M (9% QoQ, 29% YoY) assuming a QoQ re-acceleration to beat FY guide by ~5%.
My Q2 revenue expectation implies $33.7M raw sequential revenue increase, but I would like to see at least $30M.
I would like to see similar profitability margins as last Q.
I would like to see large customer QoQ re-acceleration.
I would like to see NRR stay above 130%.
I would like to see RPO QoQ growth greater or equal to 7.5%.
Detailed thoughts: Ben’s Portfolio update end of May 2023

Cloudflare:

Reporting Fiscal Q2 2023 on 8/3/23.
Revenue expectation: $307M (6% QoQ, 31% YoY), hoping that the beat will improve from 0% last Q to 0.7% this Q.
Q3 new revenue guide: $325M (6% QoQ, 28% YoY) which I would interpret as $328M (7% QoQ, 29% YoY) expecting 1% more QoQ growth as previous Q.
I would like to get an update on three topics: a) Sales/GTM issues b) their “$5B in 5 years” goal c) their AI angle.
I would like to see clear signs that revenue growth will start re-accelerating again in 2H.
I would like to see large customer QoQ re-acceleration.
I would like to see continued, good profitability margin progress.
I would like to see RPO QoQ growth re-accelerate.
Detailed thoughts: Ben’s Portfolio update end of April 2023 And here: Ben’s Portfolio update end of May 2023

Zscaler:

Reporting Fiscal Q4 2023 around 9/7/23.
Revenue expectation: $454M (8.3% QoQ, 43% YoY), expectation from billings model and 5.5% beat.
Q1 new revenue guide: $477M (5% QoQ, 34% YoY) which I would interpret as $501M (10.3% QoQ, 41% YoY) as my expectation from billings model.
I would like to see ~$711M in billings.
I would like to see >=6% large customer growth.
I would like to see ~20% FCF margin.
I would like to see 17-18% Operating income margin (~$79M), confirming new profitability trend hypothesis.
I would like to see a strong first FY24 guide.
Detailed thoughts: Ben’s Portfolio update end of June 2023

Crowdstrike:

Reporting Fiscal Q2 2024 around 8/31/23.
Revenue expectation: $741M (7% QoQ, 39% YoY), assuming a 2.6% beat this Q.
Q3 new revenue guide: $778M (5% QoQ, 34% YoY) which I would interpret as $800M (8% QoQ, 38% YoY), hoping for a modest QoQ re-acceleration.
I would like to see >=26% FCF margin, ~17% operating income margin and ~20% net margin.
I would like to see ARR growth re-accelerating QoQ.
I would like to see deferred revenue QoQ re-acceleration (while backlog and thus RPO might still be reduced).
I would like to see continued multi-product adoption success.
Detailed thoughts: Ben’s Portfolio update end of June 2023

Monday:

Reporting Fiscal Q2 2023 on 8/14/23 before the market open.
Revenue expectation: $177M (9.1% QoQ, 43% YoY), assuming same 4.7% beat as last Q.
Q3 new revenue guide: $186M (5% QoQ, 36% YoY) which I would interpret as $195M (10% QoQ, 42% YoY), hoping for a modest QoQ re-acceleration.
Operating income and net margin around 10% would be great.
I would like to see FCF margin greater or equal to 20%.
I would like to see large customer growth re-accelerate QoQ.
I would like to see NRR stabilizing or improving.
Detailed thoughts: Ben’s Portfolio update end of May 2023

Part 3: Company comments:

Enphase Energy:

Enphase reported Q2 FY23 earnings on July 27. Revenue came in at $711M (-2.1% QoQ, 34% YoY) and quite a bit below my expected $733M (1% QoQ, 38% YoY). US revenue decreased 12% sequentially and was down again in comparison to a 9% QoQ decline last Q. In California, positive impacts from the NEM 2.0 rush are expected to continue through Q3 and maybe even through November, according to some installers. With that, international revenue is quickly approaching the same level as US revenue, with a current mix of 41% international to 59% US. That means that while revenue in US declined about 12% QoQ, it increased about 15% internationally, and 25% in Europe. So while international revenue still does very well, the big negative this quarter, in addition to two consecutive revenue declines in the US, was the Q3 guide, which implies an overall sequential revenue decline of a whopping 19%. Their guide and commentary implies that Europe will see its first sequential decline in 6 quarters (about -7% QoQ) and US revenue would drop about 28% sequentially. I have guesstimated these numbers by assuming International = Europe and using the following commentary (Q: “But the walk of guidance, you’re down about $135 million sequentially at the midpoint. Is it safe to say that sort of two-thirds of that might be from the U.S., just due to the channel inventory and the third seasonality in Europe?” A: “I would say more like 85 and 15.”) The revenue decline in the US is mostly blamed on the currently high interest rates, which keeps home-owners from buying solar (via financing). “The overall U.S. market is experiencing a broad-based slowdown due to high interest rates.” I think though that home-owners are just postponing the switch to solar and given the current picture that the Fed is pretty much done raising and might start cutting again in 2024, the pent-up demand could quickly turn into revenue tailwinds in the US. Those tailwinds could last a long time if the FED takes its time to reduce interest rates, or it could be over quickly if the FED drops interest rates quickly. Either way, patience (and opportunity cost for those invested) might be required for those tailwinds to materialize. “And in Q3, we expect Europe to be slightly down compared to Q2 due to typical summer seasonality.” I guess I’ll just have to take Badri’s word here since I don’t have much data to support this statement. The only Q3 number I have for Europe is from 2022 where revenue was up an incredible 70% sequentially (doesn’t sound anything like weak to me!). But yeah, I guess some people went on vacation in the summer months instead of buying solar.

So, what to do with all of that? On one hand, these revenue declines really suck. On the other hand, it’s all about the future and reasons for the decline; what will happen after Q3? Will demand pick up again? I think the key here is the reasons for the decline: While Europe in Q3 will just be noise due to seasonality, the reason for US revenue decline are just interest rates and home owners abilities to finance solar. I believe these are temporary and nothing fundamentally wrong with the business of Enphase. After all, a 5-7 year ROI for switching to solar sounds very attractive for home owners. So I think I’ll wait for now, but carefully evaluate the Q4 outlook for Europe. I’ll also look for future correlation of interest rates and US revenue. If there will be further softness in Europe or US revenue doesn’t turn if interest rates go down, that would be a very red flag pointing to business reasons for demand to wane. One other thing to keep in mind is that Enphase is very different from our SaaS-type businesses (for various reasons, which I won’t get into here) and has experienced similar declines in it’s recent history. That is just to say that I would evaluate such revenue declines very differently if they would happen to one of our SaaS-type companies (where even in the current economy we are just experiencing slower growth instead of revenue declines).

The rest of the numbers can be summarized quickly, NPS was still outstanding at 74%, down from 75% last Q. Operating income margin increased from 29% last Q2 to 32%, Net income margin increased from 28% last Q2 to 29% this Q and FCF margin dropped from 36% last Q2 to 32%. These are all very good numbers. Gross margin continued to rise to 46.2%, up from 45.7% last Q and is expected to continue to grow slowly going forward. So that tells me that Enphase probably doesn’t face new pricing pressure, while they continue to optimize their products - Good.