Ben’s Portfolio update end of October 2022

Ben’s Portfolio update end of October 2022

Returns:

Portfolio
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% -2.9%

These are my current positions:

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

Portfolio changes:

This month I finally decided to sell my position in Hubspot which I held since June 2020 (Hubspot will report Q3 results on Nov. 2). They might do well long term, but I just felt my money is better invested in my higher conviction companies - mainly because Hubspot returned to their pre-covid growth of low-30% YoY and it looks to me that now they are simply a 30ish percent grower and not a 40 or 50 percent grower, and profitability margins also deteriorated somewhat in the past quarter. Again, they will probably do well if they can keep the 30% YoY growth long term while continuing to produce cash, but going forward, I see more potential in my other companies.

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.


Company comments:


Enphase Energy:

Enphase reported Q3 2022 numbers on October 25th. Total revenue was $635M and grew 20% QoQ, 81% YoY - what an amazing feat! I had expected $641M so this is a pass for me. Here international (non-US) revenue is becoming more and more relevant: The international revenue mix grew in the last 3 quarters from 16% → 20% → 29%. Revenue in Europe literally exploded sequentially - again(!) from -6% → 69%70% (136% YoY). This is just mind blowing! Just imagine that revenue almost tripled here in just 6 months (1.69*1.70=2.87). And although currently most of the international revenue comes from Europe, “In Latin America, revenue increased 100% sequentially” - wow.

I also expected margins to approximately hold steady. Gross margin improved another 0.7% to now 42.9%. This is now an almost 3% margin expansion in the last 3 quarters, so also well done here: “The increase was driven by a favorable IQ8 mix partially offset by the further strengthening of the U.S. Dollar against the Euro”. Operating income margin improved to 31%, up from 29% last Q and 24% a year ago and net margin held steady at 28% from last Q, but up from 24% a year ago. Finally, FCF margin stayed high at 28%, where last Q was a bit of an outlier at 36% and last year was 29%. This all looks very good and is exactly what I wanted to see. One would think that a company like Enphase is quite capital intensive. But given $188M in cash flow from operations and $179.1M in free cash flow this quarter their total Capex was only $8.9 million for Q3, compared to 8.7M for Q2. Am I missing something here? - some companies spend this amount of money just for one single advertisement (you know whom I am talking about ;)).

Badri’s script had quite some focus on improving installation efficiency and customer experience, like call wait times (4.8 minutes, which is related to rapid business growth, wants to be less than a minute) and improving system installation times. The general focus on customer experience improvement goals made me first think “is it so bad???” But no, as evidenced by their Net Promoter Score (NPS) worldwide, which was 70% (compared to 68% in Q2) that is unlikely to be the reason. In fact, 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!

Currently, “Microinverter supply continues to be tight and channel inventory continues to be below normal”. While Enphase currently has a 5M micro inverter capacity per Q, this number will go up, starting 1Q23, towards 6M with their new manufacturing plant in Romania, although it will take one to two quarters to ramp up to peak capacity. And with regard to their new vertical of EV chargers, they are still shipping less than 10k units per quarter, so still quite a small number, but “we are on track to manufacture Enphase branded EV chargers at our contract manufacturing facility in Mexico by the end of this year, helping us to increase capacity and cut down cost. As for new products, we expect to introduce smart EV chargers [in 1H23]”. Regarding the longer term battery outlook, “we’re already working on our fourth-generation IQ battery to be introduced in 2024, which will result in a substantial energy density improvement compared to the third generation.” So quite something to look forward to with regard to their new verticals. Note they introduced batteries in 3Q20, so just two years ago.

Speaking about looking forward, revenue guidance for next Q is 10% QoQ, down from the previous quarter’s guidance by 5%, so would expect around 15% QoQ revenue growth next quarter from guidance alone. Here, “We assume a conservative euro FX rate in our Q4 guidance and we don’t expect significant impact to our financials from the USD strengthening, given most of our revenue is denominated in US dollars.

Overall, I think Enphase still has a bright future both in the US and internationally. In the US, the US Inflation Reduction Act extended the 30% residential solar tax credit by another 10 years and introduced stand-alone storage and energy production tax credits, and “If IRA is implemented with favorable terms to us for domestic manufacturing, our tax rate may be reduced from 22%”. Not only as a result of all of this, Enphase plans to open 4-6 manufacturing lines in the US (each with approx. 0.75M quarterly capacity) by 2H23 which will also benefit from IRA. Internationally, aside from the continuing demand of customers in countries where Enphase already sells products, there are still lots of new countries to expand into, for example: “we expect to begin shipments of IQ8 microinverters into the Netherlands and France in the fourth quarter and rest of Europe in the first half of 2023.” And “IQ batteries into Austria in the fourth quarter (…) and in the first half of 2023 in Australia.” As for the demand and supply, "demand for Q4 is quite robust and easily exceeds the higher end of our guidance range. As for Q1[2023], it’s a little bit early to comment, but we see that the bookings are quite healthy right now” and “On supply, the component availability is getting better.” So Enphase’s revenue growth still seems to be limited by supply chains. Considering that this is slowly getting better, and the fact that they have tailwinds in the US due to IRA and tailwinds in Europe due to the energy crisis and climbing utility rates in general, we might see continued strong revenue growth for the foreseeable future.

  • Revenue mix: US: 84% → 80% → 71%, international: 16% → 20% → 29%
  • US revenue growth QoQ: 9% → 15% → 7%, international QoQ: -6% → 69%70% (136% YoY)

Expectations for upcoming earnings

In the following I summarize my expectations for the companies that are 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:

Snowflake will report Q3 results around Dec. 1st. While “in Q3 last year we saw unusual seasonality due to reaccelerated product revenue growth”, which led to 23% QoQ growth, I am expecting product revenue around $536M this Q3. This would equate to 15% QoQ and 72% YoY growth. To keep their revenue trend going forward, I also would like to see a new guide for the next Q on the order of $595M or 11% QoQ, 65% YoY growth, which I would interpret as $632M or 18% QoQ, 76% YoY. Considering that Snowflake is a consumption based company it will be interesting to see whether they can continue to thrive in this economy (which they clearly did last Q). While RPO QoQ growth did plateau in the last two quarters (0% in Q1 and 3.8% in Q2), “we expect we’ll have a big increase in RPO”, so it would be nice to see this already happening in Q3. On the margin front I would especially like to see continued operating income margin improvement, which would tell me that they are continuing their march towards profitability. This is also likely to happen because “the first half of the year is always the biggest hiring”, so that should help profitability margins in Q3 and Q4. And since “it’s about a six-month period to ramp” we should expect those new-hires to start contributing to revenue growth in Q4 and after.


Datadog:

Datadog will report Q3 results on Nov. 3, before the markets open. For Datadog I expect revenue around $443M, which would equate to 9% QoQ and 64% YoY growth. Keep in mind though that Q3 has been seasonally slower than Q2 (besides the COVID hit in 2Q20). And assuming they will start bouncing similar to their trend after COVID, I am expecting a new guide of around $461M (4% QoQ, 41% YoY), which I would interpret as $496M or 12% QoQ and 52% YoY. When that happens, I can already hear people screaming “OMG Datadog is falling off a cliff, from 83% YoY growth in Q1 to 52% in Q4 - they must be doomed!!!” But keep in mind that this is exactly what they went through after COVID: from 87% in 1Q20 to 56% in 4Q20. So the more important question is if and how fast Datadog will bounce after that. Note that part of the reason they managed 83% YoY growth in Q1 was because of the easy comps set up after the COVID hit. So the last 3-4 quarters were easy comps, which now turn into increasingly tough comps. That’s why I will focus more on the QoQ numbers in the coming quarters. I would also like to see around 20% FCF margin and no large customer QoQ growth deceleration in the coming report.


Crowdstrike:

Crowdstrike will report Q3 results around Dec. 1st. For Crowdstrike I expect roughly $594M in revenue or 11% QoQ, 56% YoY growth and a new guide of $642M (8% QoQ, 48% YoY) which I would interpret as $665M or 12% QoQ, 54% YoY revenue growth. This is considering that “we suggest that investors adjust their seasonality expectations to exclude the impact of significant large deals such as the two approximately 8-figure accounts we discussed in Q4 of last year”. I would also be happy about a couple percent QoQ increase in FCF, operating income and net margins, just because Q3 has always been stronger there than Q2. I would like to see customer growth on the order of 10% QoQ, just to see that their customer growth really stopped decelerating.


Zscaler:

Zscaler will report Q1 results around Nov. 30th. I expect revenue of at least $356M (12% QoQ, 54% YoY growth). This is a lower bound based on their guidance. Their last four Q’s billings points closer to $363M or 14% QoQ revenue growth, which would be excellent. Regarding the YoY number, keep in mind that they are still having tough comps where 1Q22 saw 17% QoQ growth - a clear outlier. So I think annualized sequential growth will be more telling. I would interpret a new guide of $377M (6% QoQ, 47% YoY) as $395M (11% QoQ, 54% YoY), mainly because the next Q is typically a little slower than the current one. If Zscaler’s billings seasonality pattern of the last 3 years repeats in FY23, I expect about $380M in billings. I also would like to see around 9% QoQ large customer growth, and a tick up in FCF margin to around 30%, up from 24% as their Q1 has seasonally been significantly stronger in FCF margin than their Q4. Finally, I would like to see roughly unchanged operating income and net margins - a small step up from the previous quarter would be nice though. Coming to softer metrics, I would like to see continued progress in emerging products, which will hopefully contribute more than 14% to their new business in Q1. They have also been talking about a more than 6x upsell opportunity with existing customers on ZIA and ZPA. So seeing that this starts to happen would be great.


Cloudflare:

Cloudflare will report Q3 results on Nov. 3rd. I have penciled in $261M in revenue, which corresponds to growth of 11% QoQ and 52% YoY. A new guide of $282M (8% QoQ, 45% YoY) would be consistent with their historical trends and may yield in around $292M revenue, or 12% QoQ, which would put them just in the 50% YoY range. I would like them to follow through on their promise to deliver FCF positive in the second half of the FY. Profitability margins should stay around breakeven and I’d like to see large customer QoQ growth of about 15% or more.


SentinelOne:

SentinelOne will report Q3 results around Dec. 7. For Sentinel I expect revenue of $121M (17% QoQ, 116% YoY) and a new guide of $131M which I would interpret as $142M to keep their quarterly growth rate at 17% (115% YoY). While I want Sentinel to continue their march towards profitability, I understand that this Q is unlikely to see a similar step forward as we saw last Q. That is because “there is some shift between Q2, Q3 expenses or expenses from Q2 into the second half as we felt a bit better about the market conditions.” So Q2 leverage improved more because they shifted some expenses to Q3 and this is why I don’t expect to see a sequential improvement in Q3. But it hopefully won’t get worse sequentially either. They might not give any details about organic growth, but I expect organic net new ARR to plateau next quarter, when it goes from about $65M in the last Q (without the 35M from Attivo), to a “high $50 million range” and again incorporating “the macro factors I just mentioned, which we believe is prudent in this environment”.


Monday:

Monday will report Q3 results on Nov. 14 before the markets open. I expect in-between 11% and 14% QoQ revenue growth for Monday. The low range would equate in $138M revenue or 66% YoY growth. Yes, Monday is clearly coming down from the >90% YoY growth numbers we saw just a year ago. The million dollar question is if and where they will stabilize. So their new guide might be insightful and tell us if Monday is more a 14% QoQ grower or a 11% grower. Anything less would be concerning as the former annualizes to 69% YoY, the latter to 52% YoY - both good growth rates if combined with strongly improving profitability margins - which are currently still negative double digit percent. For this coming report, I would be willing to trade my high-end revenue growth expectation (14% QoQ) with the low end (11% QoQ), if we see a big improvement in operational leverage. Operating margin guidance for this Q is -19%, which is 10% better than last Q’s guidance, so we should expect their significant improvement of leverage to continue this quarter as “we expect margins in H2 to improve” and “free cash flow (…) is going to be low double digits (…) as a percentage of revenue by the end of the year. And I would assume that somewhere next year in H2, we’re going to see a shift toward breakeven or some free cash flow positive.” Finally, another quarter of 20% or more QoQ growth in large customers would be very good.


Wrapping it up

The next weeks and months will be again action packed with a new round of earnings releases. Let’s hope our companies will do well.

Thanks for reading and I wish everyone an awesome November!


Past recaps

July 2022

August 2022

September 2022

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