CloudL December 31, 2021 Portfolio update

It’s exciting to write an update when the portfolio is up 30% in 1 month. it’s hard to write an update when it’s down 30% in 1 month.

I want to review the year 2021 and what I did. 2021 was a year of distractions personally for investing. I dabbled in MEME stocks. I allocated up to 5% to 10% to WSB stocks early 2021! Luckily I made a tiny profit and got out in a few days. It was crazy and it was a distraction. It makes the heart beat pumping when we see the stocks go up 50% or 100% in a day and it’s easy to be tempted to take action. In retrospect, it’s like gambling. One person told me that imagine what I can accomplish if I stay focused given what I know about investing since 2006? (2006 to 2019: dividend, Since 2020: concentrated hyper growth). After almost 2 years, I think I can avoid being distracted again
I also had other low conviction stocks in the pursuit of maximizing the return.(e.g. EXPI, ATER, LMND). Having a market beating return as a goal is fine. Having a maximizing return as a goal is very dangerous. At the time, I had the mentality of competing for the highest ROI. I’ts too easy to pick the wrong companies. That’s not the way to invest! We should invest for a realistic and sustainable return with a low expectation.

Then, I was getting grumpy about growth stocks selloff early 2021 and lost confidence in hyper growth stocks. And I sold out most growth stocks between March And august. There are two problems selling out: 1. It interrupts the compound interest. 2. Market timing is tough and most people end up selling low and buying high. That’s what happened to me. I bought back many stocks at a much higher price than if I stayed invested during the March to May selloff. Now, I can check the stock prices and just smile when they drop 5% to 10% in a day. I did the DD. I know the companies are doing fine. Note that personally, I am very good at selling out companies. I sold out ZM, PTON, LSPD near the top. So for me to stay invested when the SaaS selloff 30% to 40% in a correction says a lot about my confidence in those companies.

What did I do with the cash from March to August? I sold cash secured puts on random stocks. The problem that tends to happen is we focus on the premium ROI instead of studying the company. The option premium gives a false sense of security. But if the stock price crashes, the option premium becomes almost non-existent. (e.g. 1 to 5% per year) while hoping the stock price rebounds. I sold puts on many stocks that went nowhere. (BIGC, PATH, AI, etc) if I didn’t change course in August and came back to quality hyper growth companies, my network would suffer a drastic decrease in 2021.

By getting distracted and selling out growth stocks in early 2021, I missed around 30% return in 2021! That’s a huge price to pay but it was a good lesson. I think my results should be good and more consistent from now on. I am getting more serious and focused and stop playing around.

Despite all the above missteps I took, as of Dec 31, 2021, my net worth is up 40% since Dec 31, 2019 without other sources of income: no job income(quitted job in november, 2019) or social benefits income or dividend income. That’s an 18.3% per year CAGR increase of net worth over 2 years. That’s not bad! And it’s down just 7.6% in 2021. Note that our net worth increase will always be lower than the stocks increase because our net worth includes other low return/zero return assets: house, cash, and expenses such as living expenses and taxes. So my total portfolio return in 2021 should be slightly positive. I didn’t track results from March to August.

I want to mention again with higher expected return, it comes with higher volatility. Hyper growth stocks can drop 10% in a day and will always have corrections of around 30% multiple times a year. We have to live with that fact and not sell in panic. If we miss the rebound, we’ll miss 30% to 50% gain like I did. Most people don’t like volatility. That’s why most people can’t outperform the market. But let’s face it, stable assets like cash are guaranteed to lose value at least 3% a year! Cash is like the LEAPS call option with no expiration date and no fixed strike prices. What are we going to buy at what price? While we wait, it depreciates. And for bonds, it can barely keep up with inflation.Stable stocks will generate lower annual return. E.g. BRK-B 5 year CAGR is just 12.5% per year! It’s lower than SP500 of 15% per year.

December,2021 monthly result:
Portfolio: -14.2%
SP500: 4.26%
WCLD: -7.87%

**2021 YTD result:**

 **Date	       Portfolio  SP500   WCLD**
8/31/2021	19.99%    1.03%     6.60% 
9/30/2021	14.91% 	  -3.76%    -0.76%
10/29/2021	22.95% 	  2.99%     7.82%
11/30/2021      12.18%    2.16%     -3.05%
12/31/2021      -3.75%     6.51%   -10.68%

(Note: 2021 YTD numbers are from Aug 13,2021 because I was out of growth stocks between March and August. Next year 2022, I’ll have a true YTD result. It’s important to keep invested and avoid selling out the market completely for the reasons of compound interest and continuous performance history)

Portfolio is down 3.75% since Aug 13, 2021. It’s still better than WCLD -10.68% but lagging SP500 +6.5%. The all time high was on 9/17/2021 when it’s up 32% since aug 13. So it’s down 27% from ATH.

I am glad 2021 is over and I will have a real YTD in 2022! It’s better to have a continoues performance record so we know how we do over time. Stay invested!

**Allocations as of December 31, 2021:**

**Ticker	Allocation	December price change**
MNDY	19.42%	         -14.20%
BILL	17.41%	         -11.29%
NET	11.69%	         -30.14%
SPT	11.48%	         -18.79%
MDB	10.46%	         6.27% 
DDOG	9.25%	         -0.10%
DOCN	8.90%	         -20.32%
CFLT	8.48%	         -2.28%
SNOW	2.85%	         -0.41%

My conviction level:
I have two conviction levels: high or medium. I don’t have low conviction companies. If it’s low conviction, I don’t include it in my portfolio. I am wrong sometimes. That’s when I think a low conviction company is a medium/high conviction. I get out when I realize I made a mistake. Both high/medium convictions are high quality businesses. The difference is that a high conviction company offers potentially a higher return than a medium conviction company. As I mentioned, I allow companies with different growth rates in my portfolio ranging 40% to 100% growers or slow growers accelerating.

I tend to allocate more funds to high conviction companies but sometimes I allocate small percentages to high conviction companies due to many factors: 1. Out of cash and I don’t want to sell others. 2. High valuation. 3. Starter position

High conviction: MNDY, BILL,SNOW
Medium conviction: NET, SPT, DOCN, MDB, DDOG, CFLT

December transactions:

Bought a 3% position in Snowflake.

Note that between earnings, there’s really not much going on with companies so below will be mostly the same as November update.

Monday (MNDY):
Recent Financials:
-Gross margin increased to 87.7% from 84.6% Dec 30, 2019.
-DBNR (10+ users) increased to 130% from the most recent three quarters of 125%, 121%, 119% respectively and from 116% on Dec 30, 2019.
-Revenue grew 17.5% QoQ. It’s within the historical average growth rate of 15% to 24%.
-Customers with 50k+ ARR increased 30.4% to 613. It’s maintaining the momentum from the past 2 years.
-For full year revenue, Monday raised the guidance to a range of $300 million to $301 million from total revenue of $280 million to $282 million of last quarter.

The earning report was excellent. There’s no reason for the stock to trade below a level in September, 2021 other than the combination of a self fulfilling prophecy of lockup expiration and the actual selling itself. Giving the increasing average daily trading volume, I expect the effect of lockup expiration should disappear in 1 to 2 months. Note MNDY stock is currently severely undervalued.

They are focused on growing the enterprise customer and expanding the existing customer base without neglecting small customers.

Roy said they have big plans next year to challenge the revenue growth. I am excited to see what they will do with the already fast growing revenue and enterprise customer count.


Recent Financials:
? Q1 Core Revenue Increased 164% Year-Over-Year
? Q1 Organic Core Revenue Increased 78% Year-Over-Year
? Q1 Transaction Fees Increased 319% Year-Over-Year
? Q1 Organic Transaction Fees Increased 127% Year-Over-Year

Organic core revenue growth of 78% YoY is still impressive. Transaction fees continue to make up more of total revenue because it’s growing faster than SaaS revenue. Organic transaction fee has been growing at around 20% consistently QoQ before COVID and after COVID. It scales as customers scale. BILL doesn’t depend too much on customer number additions. The leverage comes from growth of its customer’s business.

The reason BILL acquired Divvy and Invoice2Go is it plans to become an all-in-one financial operations platform for SMBs. Those two acquisitions provide cross selling opportunities and increase the stickiness of the platform. Divvy stands out with stand-alone revenue growth of 187% YoY! Divvy Card spends increased 160% YoY! Note Divvy is free to use but it makes money from credit card transactions. It gets a cut from the merchant fee from banks and VISA.

Notable earning notes:
-We have developed a simplified version of our white label platform, which will be the default payment and invoicing solution for SMB customers of the top three U.S. banks.
-we are making great progress on building the all-in-one financial operations platform for SMBs of all sizes.
-The Invoice2go acquisition closed on September 1, and therefore, our reported fiscal first quarter results include one month of Invoice2go.
-Our strategy to enable Divvy to maintain their strong momentum in the near term, while at the same time, investing in product integration and cross-selling, is paying off as reflected by Divvy’s Q1 stand-alone revenue growth of 187% year-over-year.
-We continue to believe we are in the early innings of a global digital transformation that is disrupting the legacy methods of managing the financial back-office. These trends show no signs of slowing as small businesses are increasingly embracing the need to evolve from analog, paper-based processes to digital solutions that simplify and automate their operations.
-During the quarter, we also processed $1.5 billion in card spend from Divvy’s spending businesses, which is an increase of 160% from last year
-In addition, we experienced very strong card revenue growth from Divvy of 187% versus last year.
-Note that the majority of Invoice2go revenue is from subscription fees on a per month per user basis with minimal transaction fee revenue.
-The majority of revenue from our Divvy solution is transaction-based, with minimal subscription fee revenue.

Cloudflare (NET):
I knew it was richly valued at $215 but I didn’t sell out. It’s tempting to sell out at what seems like an all time peak. Let’s say one sells at the peak perfectly and the stock declined 30%… If one sells out 15% position, it makes 4.5% difference to the whole portfolio.(30%X15%) If one sells half of the 15% position which is 7.5%, it makes a 2.25% difference to the whole portfolio.(30% x 7.5%). To make a difference, one has to sell a big portion of a position and time it perfectly. What if after selling, the stock doesn’t drop or even go up? One will miss the boat of a high quality business! I am okay with NET generating 50% per year return with likelihood of acceleration here and there. NET keeps expanding its TAM and its the ability to generate long term growth is attractive.

Sprout Social (SPT)
It’s growing at a steady 40% to 50%. Social media management is a boring but stable business. It piggybacks on the successes of social media such as Facebook, twitter and many others. Social media is a new norm and here’s to stay for a long time.
Sprout Social is quickly approaching profitability. It’s operating cash flow became less negative and went positive 2 quarters ago. I expect it to reach positive EPS in 1 to 2 years.

It keeps the steady ~10% QoQ growth rate. That’s 45% to 50% per year growth.
Customers> $10k ARR is growing consistently at around 12% QoQ or 60% per year. Customers>$50k ARR is at 478 which is up 98% from last year. So there’s potential for revenue acceleration from large customers. I am fine to have some stable 50% growers in the portfolio.

Digital Ocean (DOCN):
I did a writeup on why I bought it:…

Total customer base has a high churn rate so it doesn’t show the whole whole picture. The real growth comes from the small customers that grow bigger.

MongoDB (MDB)
MongoDB is a general purpose enterprise grade database.
Its main revenue growth driver is: Atlas cloud
Data will keep growing so I think MongoDB can grow at high speed for a long time.

In December, MDB MongoDB released earnings.
Total revenue: up 14.2% QoQ sequentially.
Revenue excluding Atlas cloud: up 9% QoQ sequentially.
Atlas cloud revenue: up 18.3% QoQ sequentially. It continues to constitute a higher percentage of total revenue. Now it sits at 58% of total revenue. It should climb to 80% in a year.

-QoQ: 14.2% is the fastest since early 2019. Clear re-acceleration
Medium term expectation:
-20% per year growth in non-cloud revenue
-80% per year growth in Atlas cloud revenue
Overall revenue growth: 60% per year, slowly accelerates to 70% per year.
-Atlas revenue is currently 58% of total revenue. It was just 22% 3 years ago. Because Atlas Cloud revenue is growing faster than non-cloud, Atlas revenue will make up around 70% in 1 year, 75% in 2 year and 80% in 2 year. It’s unlikely to reach 100%.

Note: MongoDB has big seasonality in quarterly revenue but its long term growth trend is intact.

Datadog (DDOG)
Datadog is a well known name on the board. No need for me to explain what it does.
After selling other positions, I need somewhere to park the cash and Datadog is a good choice.

Confluent (CFLT)

Confluent vs MongoDB similarity

First of all, their products are different: MongoDB is a database where you store the data at rest. Confluent is a data stream where data is processed dynamically in real time. It’s Data In Motion.

The similarity lies in they are both based on an open source project. Both have naitive cloud hosting services based on the public cloud provider: AWS, Azure, Google cloud. And in each case, cloud revenue is the main revenue growth driver because cloud revenue is growing much faster than others.

As of last quarter: MongoDB Atlas revenue was 56% of total revenue.
As of last quarter: Confluent cloud revenue was at 26% of total revenue.
It seems to me Confluent is in an early stage of growth vs MongoDB (a few years) and can have years of growth ahead of it. If MongoDB stock did well, so will Confluent stock! It helps to compare similar business models of different companies.

Some will ask what about competitors for Confluent ? Well, there are many databases available. MongoDB is just one of them. MongoDB did well. Likewise, Confluent is one of the data stream products. I think the market is big enough for many players. I also read many times that Confluent(kafka) is one of the leaders in the data stream. Kafka is one of the top open source projects and Confluent employees are major contributors to the open source project.

Snowflake (SNOW):
New position in December.

I was in and out of snowflakes multiple times between 2020 and 2021. I finally decided to take a long position. It has no sign of slowing down suggesting the TAM is massive.
I think data warehouses are a sticky business model. As the data grows, there will be more and more old data. To do data analysis, they need to look at all historical data. There was some concern about RPO deceleration from the past 3 quarters. The 18% QoQ increase in RPO shows it’s not permanent deceleration. I think what happens is that customers do a bulk purchase once a year or so. As they use up the credit, they make new purchases again.

Disclaimer: This portfolio update is not investment advice and you should do your own research.

My thoughts on hyper growth investing: