Ben’s Portfolio update end of March 2024
Part 1: Returns and portfolio holdings
Part 2: Snowflake, Samsara, Zscaler and Crowdstrike earnings
Part 3: Wrap up of earnings season and a look back
Part 1: Returns and portfolio holdings:
Time stamp: March 30, 2024
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% Mar 13.6% -3.3%
These are my current positions:
Time stamp: March 30, 2024
Mar 2024 Feb 2024 First buy* Nvidia 18.8% 16.5% 5/13/2020 Crowdstrike 18.1% 17.4% 5/13/2020 Cloudflare 15.5% 14.8% 11/2/2020 Datadog 14.5% 15.5% 5/13/2020 Snowflake 12.0% 13.3% 2/8/2021 Zscaler 10.5% 12.8% 3/4/2021 Monday 6.0% 5.9% 9/13/2021 Samsara 2.2% 1.4% 1/8/2024 TradeDesk 1.7% 1.7% 5/13/2020 Enphase 0.7% 0.8% 5/15/2020
*held through today
Part 2: Company comments:
My earnings recaps of Cloudflare, Datadog and Monday are here: Ben’s Portfolio update end of February 2024
Snowflake:
Snowflake reported fiscal Q4 2024 on 2/28/24. Product revenue was $738M (5.7% QoQ, 32.9% YoY) versus my expected $747M (7.0% QoQ, 34.5% YoY). QoQ growth was down from 9.1% in Q3, which was expected due to seasonality of Q4. (For example Q4 QoQ growth dropped to 6.2% in FY23, down from 12.1% in 3Q23 and Q4 QoQ growth dropped to 15.1% in FY22, down from 22.7% in 3Q22). Their new FY25 guide of 22% YoY growth does not factor in consumption trends to improve in comparison to FY24 and is probably set low to make it easier for their new CEO to play the beat and raise game. With that I am not too concerned that revenue growth will continue to rapidly slow. Instead, I’d like to see Snowflake approach close to 30% YoY revenue growth in FY25 - without any AI narrative tailwinds. It’ll be interesting to see if and by how much they raise their guide when they report Q1.
The highlight of the report was RPO, which I wanted to see greater or equal to $4.1b. Well, it came in at a staggering $5.175b, growing 41.4% YoY and 40% QoQ - wow! So let’s unpack this: Does this mean revenue growth has to accelerate? No, not really. I think what this tells us is that Snowflake customers are committing for much longer terms than they used to. You can see this by looking at the divergence of RPO and current RPO. Current RPO grew only 22.7% QoQ, so they added three times as much RPO than cRPO in Q4. In other words, while cRPO was 57% of RPO in Q1 through Q3, it dropped to 50% of RPO in Q4 because customers committed more spend over a longer period than a year. In any case, this shows the strength of Snowflake’s customer commitments.
A few years ago I tried to come up with a way to correlate Snowflake’s RPO with future revenue growth (similar to how Zscaler’s next Q’s revenue is predicted by a 4Q billings average), but I abandoned this idea pretty quickly after realizing that consumption trends can simply change too quickly to get a useful scaling. I saw some people on X (twitter) implying 40% YoY growth rates for Q1 and FY25 based on RPO trends (@FinallyFoolin referred to this here: Snowflake 2024 Q4 Results & Price Reaction - #5 by FinallyFoolin), but I don’t think this is valid. If one would do such a thing, one should really use cRPO to do this and while there is a correlation, it has large residuals (the fit would suggest that this Q’s cRPO YoY growth of 28.5% will result in 31.2% YoY revenue growth in Q1, but the +/- 1 standard deviation confidence bounds are at 23.6% at the low end and 38.8% at the high end. So all this correlation can tell us is that there is an 68% probability that Q1 revenue growth will be in-between 24% and 39% - not particularly useful …).
NRR, which I wanted to see around 130%, came in at 131%. This suggests that NRR is starting to stabilize, when following the trend from the last couple quarters. While the original linear trend had suggested NRR for Q1 will come in at 124%, the new trend suggests it might be closer to 129% in the coming Q1 which would be quite an improvement from the previous trend.
Initially I thought customer growth was a mixed bag. Total customer growth rate kept accelerating from 4.6% QoQ in Q1 to 4.9% in Q2 to 4.7% in Q3 and reached 6.1% in Q4, so that’s great. It was also great to see G2000 growth pick up again after being essentially flat last Q. Here they added 14 new customers, up from only 2 in Q3, resulting in 2.1% QoQ growth. What I initially thought as a bit disappointing was large customer growth which slowed down to 5.7% QoQ and 39% YoY. Here they added 25 new large customers, down from 35 last Q and 44 in the same quarter a year ago. But then @WSM007 reminded me that this specific cohort really is a backward looking metric by definition (Stocknovice's March 2024 Portfolio Review - #2 by wsm007). Indeed the count today is “the number of customers under capacity arrangements that contributed more than $1 million in product revenue in the trailing 12 months”, so it is really no surprise to still see some weakness here given the consumption headwinds Snowflake faced in the last 12+ months. Thanks for this reminder, WSM!
Data sharing growth took a breather this Q, which might have easily been due to seasonality of the holiday heavy quarter, but I am not sure about that. Data Marketplace listings grew only 3.6% QoQ and more than one stable edge customers grew only 2.4% QoQ. I am also not sure how important those metrics will be going forward, especially with the rapid shifts towards AI applications, so if anyone has thoughts here, please share!
Profitability margins were great and beat my expectations throughout: Operating income margin was 9% (while I had expected 8%), net margin was 16% (while I had expected 11%) and free cash flow margin was 42% (while I had expected 30%).
Overall, I thought this was an OK, not great quarter, mainly because revenue growth was a little bit slower than I had hoped for. While I think the CEO change brings additional uncertainty, we’ll get more clarity especially regarding their FY outlook with their next quarterly report.
Samsara:
Even though I did look into Samsara when they IPO’d at the end of 2021, I am still actively learning the ins and outs of this company. So I am especially thankful for all the great board contributions on this company!
Samsara reported fiscal Q4 2024 on 3/7/24. Revenue was $276M (16.3% QoQ, 48.1% YoY) versus my expected $273M (15% QoQ, 46.3% YoY) and $256.5M (8.0% QoQ, 37.5% YoY) adjusting for 7.7% longer quarter (every sixth fiscal year is one week longer for Samsara, yeah … I know …). Compared to 8.3% QoQ growth in Q3, this was a very strong showing, especially considering that Q4 QoQ growth always has been a tad slower than Q3 in the past. So not only did they exceed my revenue expectation, but also showed relative strength in QoQ growth.
I also thought the new FY guide was very strong. While 27.6% guided YoY growth seems like a significant slow-down from their just achieved 43.7% YoY growth we have to consider two things here: First, looking at adjusted numbers (accounting for the longer Q4), projected FY25 YoY growth is 30.3% versus adjusted actual 40.6% growth in FY24. Second, in FY23 and FY24, Samsara beat their initial FY guides by 12.9% and 10.5%, respectively. So assuming they can beat their FY25 guide by 8%, which I believe is a conservative assumption, they would manage YoY growth of 37.8%, or 40.8% adjusted. That compares favorably to their adjusted FY24 growth of 40.6%. So I think we can at least expect growth durability at or slightly above 40% YoY growth for the next four quarters.
Also, don’t be spooked by their Q1 revenue guide of $272M, which is $4.3M less than they got in Q4. Again, taking the adjusted Q4 revenue of $256.5M, they guided to actually add $15.5M in Q1 in comparison to the adjusted Q4, a 6% QoQ growth. And looking at their historical beats, they’ll surely beat that. So on a YoY basis, I actually expect them to reaccelerate revenue growth in Q1, when compared to their adjusted Q4 YoY revenue growth of 37.5%.
ARR QoQ growth accelerated from 7.8% in Q3 to 9.9% in Q4, and compared to 9.9% in Q4 of last year. They added a record $99M in net new ARR, which is significantly above the $60M to $74M range they were able to add in each of the last five quarters. Given seasonality, I expect net new ARR to drop again below $90M in Q1.
Net retention was acceptable at 115% for their core customers and good at 120% for their large customers. Those rates were both at Samsara’s target rates.
Large customer growth was very strong. $100k+ customers, making up 52% of ARR grew 11.1% QoQ and 49% YoY, adding a record 185 new customers to this cohort, well above the previous record add of last quarter’s 148. $1M+ customers grew 15.5% QoQ and 61% YoY to 82, from a small base of 71 last Q and 51 a year ago. And core customers contributing more than $10k to ARR per year, making up 91% of ARR, grew 32% YoY compared to 40% in 4Q23. Net new ACV from non-transportation customers stayed at 87%, same as in Q3, but up from 81% a year ago. As far as I can tell they also for the first time broke out their net new ACV contribution from construction customers, being 20%. It is great to see Samsara’s end market diversification improve.
RPO grew strong, to $2001M, up 37.9% YoY and 13.4% QoQ. Current RPO grew to $948M, up 36.5% YoY and 12% QoQ. That cRPO dollar amount is slightly more than Samsara made in revenue in FY24. So they can achieve the above mentioned (adjusted) 40% YoY revenue growth in FY25 if they keep their core customer target NRR of 115% and grow core customers by only 19% YoY, slowing down from 32% YoY in 4Q24 and 40% YoY in 4Q23. So cRPO * 1.15 * 1.19 = $1.3b in FY25 revenue, up 38% YoY or 41% adjusted. One caveat here is that part of the current RPO probably already contains some expanded revenue from existing customers, so the NRR for cRPO might be lower than 115%. On the other hand, every new cRPO number we’ll get in the next four quarters will be increased by new upsell contracts, so I’ll have to give it more thought on how the math works out on this. Thoughts?
In any case, I think core NRR and core customer growth numbers support my narrative for future revenue growth durability at or above 40% YoY if they can keep those numbers at or above 115% and 22% YoY, respectively (1.15*1.22=1.40).
Finally, a word on profitability: Not only are they just starting to break even in non-GAAP profitability margins, which is great, but their adjusted (SBC-subtracted and accounting for the 1 extra week in the quarter) operating expenses for S&M, R&D and G&A grew 20% YoY in 4Q24, (down from 37% YoY in 4Q23). This is significant because their (adjusted) revenue was growing significantly quicker, namely 37.5% YoY in 4Q24 (and 48.4% in 4Q23). So not only is their operating expense growth decelerating, it is also growing significantly slower than revenue does. So I expect this operational leverage and margin expansion to continue if they can grow revenues at or above 40% YoY in FY25 while keeping adjusted operating expense growth significantly below that.
Zscaler:
Zscaler reported fiscal Q2 2024 on 2/29/24. Revenue was a bit light at $525M (5.7% QoQ, 34.5% YoY) versus my expected $531M (6.9% QoQ, 37% YoY). Note that Q2 has been seasonally slower than Q1, so a drop from 9.2% QoQ growth in Q1 was expected and I expect it to accelerate again in Q3 to about 6.6% growth, given their reported Q1 billings. They also increased their FY revenue guide by 1%, while essentially keeping their billings guide constant. Given that Q2 billings growth was slower than in Q2 last year (37.5% QoQ versus 45.2% QoQ), I expect YoY revenue growth rates will continue to drop from 35.4% in Q2 to around 33.6% in Q3 and 29.8% in Q4. Yes, revenue growth has come down also for Zscaler, just like our other companies reporting multi-billion dollar annual revenues. While that is natural for a company at that scale, the question is always how fast can it drop and how quickly in turn should profitability improve, to be a good investment going forward? So while revenue growth rates have come down to 35% YoY in 2Q24, from 63% in 2Q22, growth of operating expenses has come down to 22% YoY in 2Q24, from also 63% in 2Q22, showing nice operational leverage (revenue now grows much faster than operating expenses, which was not the case two years ago). So I am content with Zscaler’s slowdown in revenue growth as long as they can maintain this leverage and of course, it would be good to see them settle revenue growth rates at some point (Crowdstrike seems to manage just that - see below).
RPO and NRR were OK, the former growing 3.5% QoQ and the latter being at 117%, down from 120% last Q. Management pointed out that they expect NRR to move around quarter to quarter.
I was happy to see large customer growth re-accelerate QoQ in both large customer cohorts, with $100k+ customers growing 4.1%, up from 3.8% in Q1 and $1M+ customers growing 6.2%, up from 4.2% in Q1.
Finally, their above mentioned operational leverage resulted in excellent profitability margins, where they achieved a record operating margin of 19.6%, up from 12.6% a year ago and a record net margin of 23.1%, up from 14.9% a year ago. FCF margin was also strong at 19.2%, up from 16.2% a year ago.
Crowdstrike:
Crowdstrike reported fiscal Q4 2024 on 3/5/24 and achieved quarterly revenue of $845M (7.5% QoQ, 32.6% YoY) a tad less then my expected $848M (7.9% QoQ, 33% YoY). They have nicely reaccelerated revenue growth from their bottom Q2 where they grew only 5.6% QoQ, to 7.4% in Q3 and now 7.5% in Q4. Given their strong Q1 guide of $904M (versus my expected $899M), I expect this revenue growth acceleration to continue into Q1 where I am now hoping for 8% QoQ growth. For the rest of the FY I expect them to settle somewhere around 32% YoY growth, assuming that they’ll beat their current FY guide by 1.1%. Note, they beat their initial FY24 guide which they gave in Q4 of FY23 by 1.4%. So while YoY revenue growth has slowed pretty much linearly in the last five years I expect it to settle in FY25, which would be a strong improvement of the growth trend.
A highlight of this quarter’s print was net new ARR. After their Q3 report I had pointed out that they had been hitting a net new ARR ceiling close to $220M which they kept hitting and couldn’t break out since the end of FY22. And with their strong Q4 guide they gave in Q3 I had expected them to achieve this breakout for the first time, hoping for net new ARR exceeding $250M. Well, they managed to achieve $282M. Net new ARR growth has always been strongest in Q4, but with this number they are back to their historic QoQ growth numbers, growing net new ARR by 26.4% QoQ, up from only 11.9% last year (FY18 to FY22 was always in-between 22.1 and 27.6%). Given the strong re-acceleration and seasonality, I have penciled in $195M in net new ARR for the upcoming Q1 report.
Another highlight was RPO, which grew 24% sequentially to $4.6b (versus my expectation of $4.0b). This was a result of strong growth in both deferred revenue (grew 20% QoQ) and backlog (grew 34% QoQ), which came after a somewhat softer Q3 RPO growth. So this confirmed the argument they gave in the Q3 earnings call that the Q3 deferred revenue softness was more a result of timing and billings duration than an actual slowdown.
We also got an update of their NRR numbers for FY24, which have stabilized at 119% for the last three quarters. Customer’s multi-product adoption kept improving by one percentage point in each of the three cohorts of 5+, 6+ and 7+ customers, which is great.
Finally, they are on track towards their updated margin goals and delivered an operating income margin of 25.2%, which is up from 22.3% in Q3 and up from 15% a year ago (operating income was $213M, 12% higher than my expected $190M). Similarly, net margin improved to 27.9%, up from 25.3% last Q and 17.5% a year ago (net income was $236M, 18% higher than my expected $200M). They also managed a record free cash flow of $283M, which is 33.5% of revenue. Those are all very strong numbers, so well done!
Part 3: Wrap up of earnings season and a look back
And that’s it for another earnings season! The majority of our companies reported Q4 earnings and with that new FY outlook numbers. Naturally this is always a time where uncertainty is at its peak for the year, so a focus on a company’s actual numbers and trends (instead of guidance, which always tends to be on the weaker side in every Q4) is even more important than in other quarters. One theme I see, reflecting back on this earnings season, is that our companies’ customers substantially increased their future commitments and duration of such (RPO and billings increases). Below is a table comparing revenue growth rates with RPO, customer growth rates, NRR and profitability metrics for our main holdings, based on their last reported quarter and their corresponding quarter a year ago in brackets (fiscal Q4 for most of them). Keep in mind that this is, for the most part, a look into the past and also just two snapshots in time. Aside from customer growth and RPO numbers, the table won’t tell us much about the future. And when projecting into the future, any numbers and trends always have to be taken together with a narrative for those numbers. What these tabulated numbers can do however, is teach us something about a company’s past performance. So let’s have a look:
Selected KPIs for our companies based on their last reported quarter and their corresponding quarter a year ago in brackets.
Before we start, let’s step back a bit and briefly relate those metrics to each other:
Ultimately, for an investor to be able to expect a return on their investment, the goal of a company should be to maximize profits. Dot. That’s it. Of course, making the world a better place, in one form or another is also important, maybe even necessary, but not sufficient to give you a significant return on your investment. One could also think that the company that, from the time of investment, can grow its profits the most, should in principle be the best investment. There is one catch though with this idea, and that is that investors look into the future when making decisions about allocating their capital. So my best understanding of what we “growth investors” are trying to do, is to identify these future cash cows as early as possible and invest in them before they are making the largest profits they will eventually make. Specifically, we want to identify and invest in them early enough so that we can have some confidence that they will turn into those future cash cows. So, how are we going to achieve that, you might ask? Well, read Saul’s knowledge base (and then read it again), but here is my 10000 feet view on this question:
We want a company with large, durable or accelerating revenue growth, so that incoming cash grows exponentially and as fast as possible. We want a company with a high gross margin, so that only a small part of that revenue gets used to make the goods sold. And eventually, not necessarily now, but at some point in the future, we want a company with high operating-, net- and fcf- margins, so that most of the revenue that doesn’t get used to make the goods sold, ends up staying in the bank account (or is available to be re-invested back into the company. Note, like Saul, I look at non-GAAP numbers as the difference to GAAP is mostly due to SBC which I look at separately via dilution). Because of this “natural” evolution from growing revenues to growing profits, looking at trends is so important. Ideally, we want revenue growth to accelerate or be constant (these YoY percentage numbers should get bigger or at least not smaller, so that revenue continues to grow exponentially). And ideally, we want to see those margins expand. That is, we want the company’s expenses grow slower than it grows its revenue.
All of this is an incredibly difficult task for any company and there are circumstances when I accept deviations from this evolution, adjusting for other factors that play a role (some examples below).
Initially, when the company is small(ish), we should mostly care about quickly growing revenue combined with high gross margins. To be able to do this, the company should most likely have some sort of recurring revenue, where a dollar spent this year in sales & marketing or in research & development will not only result in a return in the next year, but the year after, and the year after, and so on, potentially in perpetuity. That’s why at this stage it is OK to have a loss at the bottom-line (or negative profitability margins). At this stage, we want our company to re-invest every dollar they get back into the business because this is how we maximize the future revenues and thus the future profits. It might even be OK to not trend towards profitability early on, but there better be a good narrative for that trend to set in later, like for example a huge opportunity to accelerate revenue growth now and temporarily paying for it with temporarily increased S&M. But even then I want to see this revenue growth acceleration actually happen while the narrative is telling me that revenue will keep growing without having to continue to grow S&M at the same rate.
And pretty soon, we want those profitability margins to get better, move towards profitability, so that we can see the company is not only growing at all cost, but has “operational leverage”.
Next, revenue growth will start slowing (law of large numbers). At this point, our company better be already almost profitable or already profitable, while continuing to quickly expand those profitability margins.
And finally, revenue growth will ideally settle or stop slowing quickly, while profitability margins continue to improve, but at a slower rate. I think this should be the last stage to invest into a company since at this point our original thesis for the company has mostly played out.
As mentioned earlier, all of this thinking should be accompanied with a strong narrative that keeps evolving as the company grows. For example: At the earlier stages, is the company just growing at all cost, or is there a narrative that those investments into growth will eventually pay off? How can the company increase their gross margin? Or, will revenue keep growing well? What helps with the last question are “secondary metrics” like remaining performance obligations (RPO) or billings, customer growth rates, product adoption rates and the company’s net retention rate (NRR). The companies that are most likely to succeed on this path are those with a strong leadership team, founder-led, low debt with high cash balance and a great product, or multiple great (future) products and a large and growing total addressable market (TAM, which admittedly might be hard to nail, even for the company’s own management) with lots of greenfield. I call this evolution from high revenue growth to high profit growth and eventually high profits with slower growth a company’s “S-curve”. A company can go through multiple such cycles, or “S-curves” for each new product, so it is not always straight forward to tell at which point on the S-curve a company is. Also, new catalysts, like the advent of AI can lead to re-accelerating revenue growth. And macro-economic cycles can temporarily reduce growth rates with regard to how they would be if there was no macro-economic downturn (or upturn). Finally, there is also always some amount of luck involved. As @stocknovice likes to say, we are trying to stack 70-30 bets in our favor with each investment.
So, successful stock picking investing can be difficult, but if we take the time to study a company and if we have the luxury of crowd sourcing by being part of a group of investors that have the same basic understanding of the above, then, I believe we can build the necessary conviction to successfully invest into an individual company.
So … after this short (and not exhaustive) excursion into what I am looking for in a company to invest in, and how those tabulated metrics relate to each other, what can we learn from our companies that just reported?
(Table posted again to save me the scrolling.) Selected KPIs for our companies based on their last reported quarter and their corresponding quarter a year ago in brackets.
The first observation is that, in comparison to a year ago, revenue growth has slowed throughout the pack. Does that mean our companies are at the end of their S-curves? Not necessarily. I think we got a lot of pull forward after COVID which boosted revenue growth rates. How would revenue growth rates have developed without COVID? I don’t think there is a way of knowing, but I can imagine that it would have been more flat or durable. If that’s the case the ~30% YoY growth rates we see now are probably more normal and where I would expect them for an exponentially growing company that still has a lot to gain in terms of TAM/greenfield, which I believe fits the bill for the entire list.
The second observation is that gross margins have improved pretty much throughout and are at very high levels (~80%), which is great.
The third observation is that while revenue growth rates have come down (from what I think were artificially inflated levels, to now still exceptionally great levels), profitability margins have greatly improved. It is also great to see that while revenue growth has slowed from the 50s to the 30s, operating expense growth has slowed significantly more for every company besides Monday and Snowflake (they did improve for Monday as well, when looking at FY numbers instead of Q4 numbers; and even for SNOW, profitability margins have greatly improved over the years). This quicker slowing of expense growth than revenue growth is a great display of operational leverage which asserts our thesis about becoming future cash cows.
The fourth observation, and coming to secondary metrics is that customer growth rates and NRRs have also significantly slowed, but from what I believe were stellar numbers to very good numbers. I think the reason for this could have to do more with the pull-forward we saw after COVID and now we are regressing to the mean.
The fifth observation is that while revenue growth rates have slowed, RPO growth rates have accelerated in some cases (DDOG on a YoY basis and DDOG, SNOW, NET and CRWD on a QoQ bases, in comparison to last year’s Q4). Again this shows that customers are committing to more spend upfront, which is a great sign for future revenue growth.
Ok that’s it for now. You can probably make more observations and this exercise could be expanded with other board favorites, so I hope it encourages us to continue to explore, analyze and evaluate together and I’d love to hear other findings/insights!
Thanks for reading and I wish you all a great rest of April!
Ben
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
February 2023: Ben’s Portfolio update end of February 2023
March 2023: Ben’s Portfolio update end of March 2023
April 2023: Ben’s Portfolio update end of April 2023
May 2023: Ben’s Portfolio update end of May 2023
June 2023: Ben’s Portfolio update end of June 2023
July 2023: Ben’s Portfolio update end of July 2023
August 2023: Ben’s Portfolio update end of August 2023
September 2023: Ben’s Portfolio update end of September 2023
October 2023: Ben’s Portfolio update end of October 2023
November 2023: Ben’s Portfolio update end of November 2023
December 2023: Ben’s Portfolio update end of December 2023
January 2024: Ben’s Portfolio update end of January 2024
February 2024: Ben’s Portfolio update end of February 2024