Ben’s Portfolio update end of November 2022

Ben’s Portfolio update end of November 2022


2020 63.6% (Since May 12, 2020)
2021 13.1%
2022 YTD Month
Jan -19.9% -19.9%
Feb -18.7% 1.4%
Mar -21.3% -3.2%
Apr -37.8% -21.0%
May -50.5% -20.4%
Jun -53.5% -6.0%
Jul -49.6% 8.3%
Aug -46.0% 7.3%
Sep -50.7% -8.8%
Oct -52.1% -3.0%
Nov -58.3% -12.8%

These are my current positions:

Nov Oct Sep Aug Jul
Snowflake 18.7% 18.2% 17.1% 16.6% 13.4%
Datadog 16.3% 14.8% 15.4% 17.6% 20.6%
Zscaler 13.5% 13.1% 12.0% 10.6% 11.1%
Cloudflare 13.0% 12.4% 10.1% 10.4% 6.7%
Crowdstrike 12.0% 14.0% 12.3% 12.5% 13.4%
SentinelOne 8.0% 10.0% 9.1% 7.8% 7.7%
Nvidia 7.3% 5.5% 5.0% 5.7% 7.3%
Monday 5.1% 4.8% 5.2% 4.7% 4.6%
Enphase 3.9% 3.5% 3.3% 3.1% 3.3%
TradeDesk 2.1% 2.0% 2.3% 2.2% 1.7%
ZoomInfo 0.0% 1.8% 4.6% 4.6% 4.1%
Hubspot 0.0% 0.0% 3.7% 4.2% 6.1%

Portfolio changes:

Last month I wrote:

I also trimmed ZoomInfo (to report Q3 results on Nov 1st.) because I am concerned about their revenue growth trend. Looking back the last two quarters ZI grew 8.7% sequentially, then 10.5% now. While this is a QoQ acceleration, it is significantly lower than the 12.5 to 13.6% they grew sequentially in Q2, Q3 and Q4 of 2021. Their guidance for next quarter, which I now interpret to be around 10% QoQ is again similar to the last 2 quarters indicating that ZI is currently more a 10% grower, rather than a 13-14% grower. Note here that 10% quarterly growth compounds to 46% YoY, while 13% quarterly growth compounds to 63% YoY - quite a different picture! Also, their large customer growth dropped to 9% QoQ from a 12 to 16% QoQ range in the previous 5 quarters - certainly doesn’t bode well for future revenue growth.

My concerns with ZoomInfo became a reality when they reported Q3 results on Nov. 1st. Luckily I had already sold the majority of my shares in the weeks before they reported. Now I sold the rest this month. Poor QoQ revenue growth (7.7%), paired with a weak guide, a decline in RPO and weak large costumer growth (4.8%) put this company into the sell category for me - at least for now.

Company comments:


Total revenue was $437M and grew 7.5% sequentially and 61% YoY. I had expected $443M (9% QoQ, 64% YoY), so they delivered revenue below my expectations. I think this sentence from the transcript sums up the quarter quite well: “Q3 was overall very similar to Q2, with strong performance in new logos and new [product-attached] activities, tempered by growth of users from existing customers, although healthy, was below our long-term historical averages.” I also had expected an FCF margin around 20%, which came in at 15%. Operating income and net margins dropped sequentially from 21% to 17% and from 21% to 19%, respectively. But both margins were up from 16% a year ago.

Now look: Because DDOG is a consumption based business and we have seen a similar drop in fundamentals after COVID, we knew already that their business will be impacted by current macro. The only real question was and still is by how much and for how long as “the macroeconomic environment is likely to remain a headwind in the near term”. So while these newest numbers suggest a slower recovery than after COVID, there were also good signs in their just reported fundamentals. For example, large customer growth (which I didn’t want to see decelerating QoQ) stayed indeed flat from 7.6% last Q to 7.4% this quarter. Note that those customers contribute 85% to ARR, so clearly the most important cohort. Also, percentage of customers using 2+, 4+ and 6+ products continued to increase sequentially from 79 to 80%, from 37 to 40% and from 14 to 16% in this quarter. Further, the number of customers using 2+, 4+ and 6+ products grew sequentially 6% (up from 4.4% last Q), 13.2% (same as last Q) and 19.7% (down from 24.9% last Q) and “We continue to be pleased with this continued adoption of multiple products in our platform, which indicates the additional value we are bringing to our customers.” So customer growth is there, it is just that customers grow consumption less than they used to at the moment.

But even there is a light at the end of the tunnel: RPO grew 6.8% QoQ, up from only 2.7% last Q and while it grew still way slower than it used to in past years, there is an acceleration from last quarter and not a further deceleration, which is a positive trend. In conjunction with RPO, Billings (which is very seasonal) grew 17.6% QoQ, the highest sequential billings growth they had in Q3 since 2019 (up from 13.5%, -2.6%, 14.4% in 3Q19, 20 and 21). And net retention rate stayed above 130% as well, with “churn remain[ing] low and hasn’t changed, with gross revenue retention steady in the mid- to high 90s”, highlighting the “the business criticality of Datadog”. All these three points, RPO, billings and NRR point towards future revenue re-acceleration, also supported by a strong sales pipeline “heading into Q4 for both new logos and new products” and two 7-figure lands, a 7-figure upsell and an 8-figure multi-year upsell.

And as we heard from their Dash conference, Datadog keeps innovating and releasing new products in observability (data stream monitoring and cloud cost management), security (Cloud Security Management), developer end-to-end testing (e.g. Intelligent Test Runner) and a series of new products “that take our platform from observing to allowing our users to take action and respond all within Datadog”. Also, “we acquired Cloudcraft, a planning and design tool used by tens of thousands of cloud architects to create live diagrams of their infrastructures, including real-time health, configuration and cost data”. Note that to start, Cloudcraft brings “immaterial amount of revenues relative to our total”. For more details on the newly announced products you should definitely read this awesome writeup by @LisaOnCloud9, here: DDOG announces Q3 Results - #10 by LisaOnCloud9.

So with all of that it feels like DDOG is slowly starting to recover already. And while a Q4 sequential revenue growth acceleration as implied by the new guide is expected due to seasonality (Q4 has typically been stronger than Q3), a healthy full year guidance raise by 2% at the midpoint also points to a generally re-accelerating business. On the other hand though, it appears to me they are trying to tamper expectations a bit with their statement that “December tends to be a little bit weaker as a lot of our customers take time off and shut down their development environment and things like that”.

*related to the office space discussion around Monday: I find it interesting and noteworthy that Datadog is “adding more office space around the world as we continue to return to office”.


Cloudflare reported revenue of $254M, a 8.2% sequential increase and 47% YoY. This was quite a bit below my expectation of $261M (11% QoQ, 52% YoY). Worse, their large customer growth dropped back to only 9.1%, down from 13.8% last Q and 15.8% last year. On the bright side, they made a surprisingly (at least to me) large step towards profitability, increasing their operating income margin to +6%, up from 0% last Q and 1% a year ago. Similarly, their net margin grew to +8%, up from 0% last Q and +1% last year. It is noteworthy though that this profitability improvement was mainly a result of Cloudflare not increasing their expenses for S&M, R&D and G&M this quarter.

Matthew reiterated that they do not plan to become highly profitable anytime soon. In the context of growing to $5billion in 5 years, he stated that “we know that we have the levers to when it’s the right time for us to be a business that delivers very significant operating profits. But while we see a total addressable market ahead of us that we only have less than 1% penetration on, we think that it makes sense to continue to invest in that market and continue to drive growth going forward. And today, we’re still living above the Rule of 50”.

NRR was 124%, slightly down from 126% last Q and “while there is some noise in that number based on when contracts renew, we will continue to be dissatisfied until it’s over 130%, and we believe that it’s still very achievable as we add seats and storage-based products like Zero Trust and R2.” And “the decline was primarily driven by less net expansion, we have not seen elevated churn”.

They also reached a $1billion in annualized revenue milestone and state that they are on a “path to organically achieve $5 billion in annualized revenue over the next five years.” Note that would require 38% YoY organic revenue growth for the next 5 years. At the moment though, when it comes to customers buying Cloudflare products, they still see “everyone right now is measuring twice to cut once”. On the other hand what “is continuing to hold up extremely well right now, and in fact, in some cases, we’re seeing acceleration, is in the security portion of our business”.

Regarding their next quarter guide I had hoped for 8% QoQ guided growth and they indeed did guide for 8% QoQ growth. The only question now is how to interpret this new guide since this Q had the smallest beat in their history by far: Only 1.1% vs. 3% to 5% in the previous 6 quarters. So, if they will beat again around 4%, that would be good, but if it’ll be again only around 1% that would be bad. The full year guidance increase could also have been larger and was only 0.46% at the midpoint.

Finally, I want to see them turning to FCF positive in the second half of the year. They didn’t manage to do so this Q at -2% FCF margin, so they really have to deliver positive FCF next Q. In any case, digging a bit deeper I wondered why they weren’t free cash flow positive despite their +8% net margin this Q. Looking at their release I figure the reason was their “Purchase of property and equipment” of $41.896M:

I asked myself: Is that a problem? How did this look like in the past?

Well, here is the answer:

So 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? To get a better look at that, and looking back even further in time, I plotted the raw sequential revenue add vs. the cost of purchases of property and equipment; in million dollar and quarterly and the result was somewhat surprising to me:

if you look at the trend, they are spending 1.6 dollars for property and equipment for every dollar they add to revenue in that same quarter (last Q was even closer to 2 dollars). Please keep in mind that this correlation doesn’t necessarily imply a causation - but I would be interested to find out to which extend their revenue is driven by purchases of property and equipment. In any case, if that trend stays like this and other expenses stay on their trends, it means they are growing revenue in a way that is not and will not produce significant positive free cash flow. But I guess ultimately the hope is that all these infrastructure investments will eventually create a big lever to produce huge profits in the future. Peter Offringa laid this out nicely, in his NET Q3 summary post at software stack investing: Cloudflare (NET) Q3 2022 Earnings Review - Software Stack Investing

You should definitely read the entire article (and subscribe!), but in a nutshell, he writes that (and I am paraphrasing) “It is this investment in building their own network that has capped Cloudflare’s FCF growth in the past”. And while NET’s FCF looks inefficient compared to other software infrastructure companies like DDOG, SNOW, CRWD and even ZS, those run on top of the hyperscalers, which will ultimately limit future FCF margin leverage, “as they continue to grow, so too will the cost paid to the hyperscalers in a roughly linear fashion”. On the other hand, Cloudflare “can shift new incremental investment to adding capacity” allowing them to potentially become more efficient, while being “able to pack many more monetized services onto their [own!] infrastructure” which “could result in a much higher FCF margin over time”.


Revenue came in at $137M revenue, resulting in 10.6% QoQ and 65% YoY growth. I had a range for my revenue expectation with the lower end at $138M, which they basically reached. I said, I would be only happy with this lower end if they strongly improved operational leverage. Well, they did: operating income margin was a record -2%, up from -12% last Q and up from -11% last year. Similarly, net margin improved to +2% from -12% last Q and -14% a year ago. FCF margin improved to +10%, up from -16% last Q and +3% last year. A great step in the right direction towards profitability with all these margins! Looking under the hood, spending for G&A and R&D went up slightly and spending for S&M went down slightly in comparison to last Q, resulting in roughly the same total dollar amount spent for these three buckets as last Q ($139M for operating expenses and cost of revenue in this Q as well as in the last Q). While some might be worried that their reduced spending for S&M might hurt future revenue growth, especially because it was increasing significantly in previous quarters, I am giving Monday’s leadership the benefit of the doubt: They should be the best to judge when and when not to invest more in S&M, as “We were operating in accordance with our playbook” and “our performance marketing and marketing spend overall is lower than anticipated because the cost per sign-up went down. Therefore, we benefit from this efficiency”. But maybe there are differing opinions? In any case, improving their operating income margin by 10% QoQ without spending 10% less(!) brought them significantly over the break-even line for operating expenses for the first time in their history:

Now the question is: will they be able to keep it up? Up to now, I would say everything trends in the right direction:

And “the way we manage the business from an efficiency perspective and the playbook that we apply drove the great margins that we saw in this quarter” also suggests that they have very good control over both revenue growth and profitability margins.

And speaking of giving Monday’s leadership the benefit of the doubt: I hear a lot of criticism from fellow investors about Monday’s spending for office spaces (and ads, like the Super Bowl ad or planting a bunch of trees). Now aren’t growing their headcount and investing in future headcount growth, (and building brand awareness and growing a healthy company culture where employees enjoy working) all good things? Also eventually good things for growing revenue further out? And isn’t it great that Monday can actually afford to do this? Especially in the current economy? “While others are pulling back, we continue to see opportunities and invest for growth and gain market share”. I understand that there are various opinions out there about the value of office vs. home-office. And, by the way, working with others in the office shouldn’t preclude use of software that makes collaboration easier, like the type Monday sells for example! - The bottom line here is: who am I to judge from the comfort of my sofa what will be better for Monday’s growth and future as a company?? As long as their numbers move in the right direction I trust the leadership that they are doing the right thing. And their recent investments in ads and office spaces apparently didn’t hurt their bottom line (see above discussion and plots of their progress towards profitability). And if anything, these investments will certainly not hurt future revenue growth; instead they should help it. Ok, I’ll leave it there and would love to hear other thoughts (because what do I know??) … Regarding Monday’s advertisement spend and marketing strategy I highly recommend the recent post by @mooo, here: reports earnings - #17 by mooo

Moving on, not so good was their large customer growth: They only grew 14% sequentially - by far the slowest sequential number they ever had (last two Qs was 21% and last FY was in-between 27% and 40%). This really worries me, especially if I combine it with their new revenue guide for Q4, which I interpret as 8% sequential growth. So sequential raw revenue add right now is not only plateauing around $13M, but will likely fall to only $11M in Q4. A little bit of blame goes to the US dollar, which created a headwind for them as 30% of their ARR is non-US currency based.

At least net retention rate of 10+ customers, representing 76% of ARR (up from 70% a year ago), held steady above 135%, which means they are still nicely expanding within their current customer base (I think the other NRR cohorts are currently less meaningful). Also, their Monday work OS products really seem to take off: last Q they surpassed 1000 paying customers in two months, this Q the number went up to over 3000, so awesome sequential growth here although from a small base. What’s even more interesting is that “these new Work OS products have only been made available to new customers, and we are excited to [get] all the products out to our existing customer base in the near future”. So their potentially biggest future growth driver isn’t even available yet for their existing customers. While I don’t understand the logic / strategy / reason for this, it nevertheless means there is still tons of future expansion possible with existing customers. And with regard to competition I find it quite remarkable that they only see competition on 30% of their deals. And on those 30% “we see less competitors, and also some of the competitors who were very aggressive in terms of discounts, become less aggressive”.

So overall the numbers paint a mixed picture, which gets mostly tainted by their short-term revenue outlook.

Wrapping it up

Overall, what we have seen up to now during this earnings season is more of the same I would say: Our companies continue to deal with a difficult macro environment, while generally holding up quite well so far. I’ll talk about Crowdstrike in my next update and Snowflake, Zscaler and Sentinel are also still due to report in December, so still a lot to look forward to next month in terms of company results.

Thanks for reading and I wish everyone a great last month of 2022!

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