This is my first monthly update on the board. I welcome all constructive comments, positive or negative.
After reviewing my 2021 portfolio return and decisions, I realized that while my holdings were largely hyper growth companies, the area where I failed miserably was in portfolio allocation. My mistakes in 2021 were:
- Allocating too little capital to fundamentally stronger companies. (For e.g. I only had 2.4% in DDOG at one point)
- Adding to fundamentally weaker companies that had grown more attractive because their prices fell. (For e.g. I added to FUBO a few times as price fell)
- Initiating try-out positions with too high allocation. (I would typically start with 5% allocation, which on hindsight seems too high.)
I hope to use the monthly updates to be more accountable in my portfolio decisions.
Monthly activity: In the month, I added small increments to my positions in DDOG, MNDY, and TASK. I more than doubled my allocation in SentinelOne. I reduced my stake in Kaspi. I initiated new positions in ROKU, ZS, NET and MDB.
Jan 2022 -21.4%
These are my current holdings, grouped into high allocation (10-15%), medium allocation (5-10%) and low allocation (0.1-5%).
DDOG 16.4% Monday 11.8% Sea Limited 11.6% Tesla 10.7% SentinelOne 8.3% ZScaler 5.2% Nextdoor 4.8% Kaspi 4.6% MongoDB 4.0% Upstart 3.9% Affirm 3.3% TaskUs 2.9% Cloudflare 3.0% Fubo 2.7% MELI 2.8% ROKU 2.4% Cash 1.7%
I work on the basis of 10 to 20 stocks. While I see others on the board have a concentrated portfolio to great effect, I’m not comfortable with allocating too much capital to a handful of companies. @GauchoRico shared a truism that concentration in a portfolio is a function of one’s stock picking skills. I don’t think I’m there yet.
In reviewing the allocation above, it seems there is too much allocation to the 0-5% band of companies. I need to think through if this is appropriate; any comments/suggestions on this are welcome.
I made many changes in January. As I am writing this, I don’t think I’m totally happy with my allocations to ZS, MDB, NET, MELI and ROKU. I hope to address them before I report again next month.
High Allocation Companies (10-15%)
Growth seems to be accelerating and margins have been improving. Total customer growth has been steady at 30+% while customer (>$100k ARR) growth has been accelerating since Q4 2020. Customers that are using >2 products and >4 products are also increasing. In short, they are executing brilliantly.
As the work-from-home trend seems here to stay, Monday.com will be a beneficiary. During the Q2 2021 quarter, the CEO said, “we are going to continue to invest aggressively in the second half of the year in order to generate additional hyper-growth at scale.”
Other than posting 90% YoY growth, margins are improving rapidly. It seems likely that they will turn profitable and FCF positive in 2022. Enterprise customers growing at >200% YoY seems rather insane.
This is a high conviction position because of the performance it’s posting. However, I’m not willing to allocate as much capital as say DDOG because the space seems to be quite competitive with players like Asana, Smartsheet, Atlassian, etc. Having said that, it is worth noting that according to the company, their largest competitor is still “email, and spreadsheet, and PowerPoint.” and “On 70% of the deals we see literally no competition.”.
Sea was the first company I brought to the board. https://discussion.fool.com/a-look-at-sea-limited-se-34520074.as…
It’s a gaming and e-commerce giant based in Singapore. It has a brilliant business model where the cash-generating gaming business (Garena) provides the cashflow to build the initially capital intensive e-commerce business (Shopee). In any new market it enters, it leads with gaming, followed by e-commerce 18-24 months later.
In the past 12 months, it has brought the fight to MercadoLibre in Latin America, and entered India, France, Spain and Poland.
It has grown at triple-digit YoY growth rates for the past 13 quarters and margins have been improving.
From the Q3 2021 report, there were concerns over slowing growth in the gaming business, particularly in quarterly average users and quarterly paying users. On hindsight, I perhaps should have trimmed to a medium conviction position after the Q3 report. But after a 63% tumble in share price, the company seems stupid cheap now. It’s still performing at hyper growth and posting improving margins. E-commerce in South-East Asia is still at a nascent stage and e-commerce players in other regions (MELI, Amazon, Shopify, BABA, JD.com) have shown that the runway for tremendous growth is long.
This was one of my best performers for 2020 and 2021, and I need to remind myself not to be anchored to that. If gaming continues to be weak in Q4, I will need to review my allocation to the company.
When I first joined the board, I remember coming across a post that said any discussion of Tesla was OT. I can’t seem to find it now. I’m including a discussion of the company for completeness but I’ll remove it from future posts if it becomes an issue.
Capital intensive. Highly competitive. Eccentric founder-CEO. There are many reasons to justify why an investment in Tesla would be silly. Yet, the company’s stock was up over 300 times at the end 2021 from its IPO price. It must be doing something right.
The company grew at hyper growth rates in 2021 and is guiding for 50% CAGR over the next few years. Even with the current shortage in chip supply, the company expects 2022 growth to be in excess of 50%.
Currently, the company is supply constrained with only 4 days’ worth of inventory at the end of Q4 2021. There are signs that the EV industry is at the beginning of technology S-curve adoption where growth can accelerate exponentially. Over the next few years, Gigafactories in Shanghai, Berlin and Texas are expected to come online and meet the demand.
Tesla’s products enjoy a fanatical cult-like following, similar to Apple’s iPhones (another company in a capital intensive, highly competitive industry, and with an eccentric founder). Growth optionalities include subscription from Full Self Driving and its future autonomous ride-hailing network.
My initial allocation was about 5% and it grew organically to a >10% allocation. As long as the company continues executing as it has, I’m happy to keep a reasonably high-conviction allocation. There are a couple of reasons why I find it hard to make TSLA an outsized high-conviction position. First, selling a physical product at scale means more complications than selling software. Second, at $1T market cap, it could be harder for the company to double or triple compared to other SaaS companies (but I don’t rule it out).
My write-up for the company is here https://investmentpilgrim.wordpress.com/2021/12/05/tesla-inc…
Medium Allocation Companies (5-10%)
SentinelOne’s AI-powered Singularity platform seems sufficiently differentiated and superior (as per Gartner Peer Insights and MITRE ATT&CK assessments) compared with other cybersecurity offerings. Like many others here, I’ve monitored the company since IPO but never pulled the trigger because of its ridiculously high negative margins.
In Q3 2021, it finally showed vastly improved margins. At triple-digit revenue and customer (>$100k ARR) growth rates, it was tempting to build it up to a medium conviction position after Q3 results. I want to see indications of improved margins for at least another quarter before building this to a high conviction position.
This is a recent addition. ZS’s growth has reaccelerated for a number of quarters now but I had always been hesitant because it had been investing heavily and sacrificing operating profit margins to achieve that growth.
Revenue growth started accelerating in Q3 2020 (ZS has a 31 Jul year-end)
Year Q1 Q2 Q3 Q4 FY 2020 48% 36% 40% 46% 42% 2021 52% 55% 60% 57% 56% 2022 62%
In that time frame, operating margin (non-GAAP) did not show a consistent improvement.
Year Q1 Q2 Q3 Q4 FY 2019 1.9% 13.4% 7.7% 9.2% 8.3% 2020 4.0% 12.2% 7.5% 6.2% 7.5% 2021 13.8% 9.4% 13.0% 10.5% 11.6% 2022 10.4%
In my mind, there was little difference between CRWD, whose growth was slowing but was showing decent margin improvement, and ZS, whose growth was accelerating because it was investing heavily in OpEx. In the words of management, “…we’re going to prioritize growth over operating profitability.” (Q1 2022)
In December, I reviewed the company again and realized that over the past three years, their guidance for Operating Profit Margin had increased gradually and that they were likely planning for some (minimal) margin improvement. During the Q4 2021 call, management said, “If we continue to have high growth and strong unit economics, we’ll prioritize investing in the business, which would lead to lower than 300 basis points of margin expansion per year. To that point, our fiscal 2022 guidance of 40% to 41% revenue growth and 9% to 9.5% operating margins reflects approximately 150 to 200 basis points of margin expansion after adjusting for the increased T&E and M&A expenses.”
I decided that accelerating growth with slight margin improvement (ZS) was preferred over slowing growth and decent margin improvement (CRWD). Judging from price action following results in the past year, the market seems to prefer the former too. I’m comfortable with ZS being a medium conviction position.
Low Allocation Companies (0.1-5%)
Nextdoor offers a very different kind of social network platform: the hyper local network. Users are real people with real addresses. It aims to be a social network based on trust (no avatars, bots and multiple accounts allowed) and kindness (local moderation and toxic content censorship).
Businesses and brands like to advertise on Nextdoor because it offers them a reach that other social networks cannot. As an example, if a baker were on another platform, say Instagram, she would have to build followership. She might build it up to 5-20 people, but she’d have to be a good marketer to make it really happen. In Nextdoor’s case, when a bakery posts to a neighbourhood, and to nearby neighbourhoods, it is getting to tens of thousands of people, all of whom live locally and could actually come into the store.
Nextdoor is a relatively new company on the public markets so it will have to prove itself. Revenue growth has been consistently above 40% YoY in the last 5 quarters and was 66% YoY each in the last 2 quarters. Gross Margin is over 80% and Operating Profit Margins have been improving consistently.
Growth potential is great because while it is in 11 countries (US, UK, Canada, Australia, Netherlands, France, Italy, Spain, Germany, Sweden and Denmark at the time of the IPO), it is only monetizing the US and the UK. The company is targeting 40% YoY growth over the “next several years”.
Other immediate levers of growth include increasing penetration in neighbourhoods (it is currently in 45m households with potential for about 160 households) and increasing Average Revenue Per User (about $1.80 in the US vs. $8.20 for SNAP and $5.10 for Pinterest).
This is not the most important detail, but the board has an impressive board, comprising Mary Meeker, David Sze from Greylock Partners and Bill Gurley from Benchmark Capital.
This will remain as a low conviction allocation till it proves itself over a few more quarters.
This is perhaps the most contentious company I own. Kaspi is the largest Payments, E-commerce marketplace and Fintech company in Kazakhstan. That’s right, homeland of Borat. Kazakhstan had enjoyed almost 30 years of peace and prosperity after declaring independence from the Soviet Union.
Little did I expect that peace to be so fragile. In early January 2022, after the government declared an end to fuel subsidies, protests and riots broke out in the capital Almaty. The incumbent President called in Russian troops to help quell the protests, in what was seen as a political power play. The situation seems to have stabilized since.
In any case, here’s the thesis for Kaspi: (I can’t blame you if you skip this altogether.)
It is the Super App for the people of Kazakhstan, much like WeChat in China or Grab in Southeast Asia. In Payments, its TPV corresponded to a market share of 65% in 2019. It owns its own proprietary closed loop payments network. This has the benefit of lower costs because it eliminates the need for 3rd party processors and payment networks such as Visa/Mastercard.
In E-commerce, it is the largest online retailer in Kazakhstan, with its GMV corresponding to a 46% market share (and 5.5% of total retail trade).
In Fintech, it offers consumer finance, deposits, buy-now-pay-later services, merchant financing, auto finance, SME products, etc.
In terms of growth, it has plans to offer other services like Travel, Delivery, Super App for merchants etc. It also intends to expand into other countries like Azerbaijan (population 10.1m), Uzbekistan (32m) and Ukraine (32m; unlikely now given the situation there).
Growth accelerated to over 50% in the last 3 quarters and net profit margins are over 40%. At $24b market cap (before the riots), the company was not expensive (TTM rev $828m, TTM Net Profit $402m).
The situation in Kazakhstan seems to have stabilized. I trimmed the position in the past week. I’ll probably wait for the next earnings call to decide what to do with the rest. Hindsight tells me I should have kept the position small given the risks and never allocated near 7% capital to it. I hope to do better with my portfolio allocation skills in future.
Another recent addition. This is a SaaS company that has been listed for a while and used to be a board mainstay IIRC. MongoDB’s NoSQL database architecture puts it in a strong leadership position with little real competition from legacy relational databases.
Growth started declining in Q2 2020 and that’s probably when investors here lost interest. However, growth was given a shot in the arm when Atlas, its cloud-based database-as-a-service offering started reaccelerating revenue growth in Q1 2022 (i.e. in Year 2021). Atlas revenues are now large enough to meaningfully move the needle for the company. Total revenue growth has accelerated in the past 3 quarters and the company should do well as long as Atlas growth holds up.
Looking at margin improvement trends, it is likely that the company will turn profitable and FCF positive in FY 2022.
It’s declining Enterprise business will be a drag on overall revenue growth and is keeping me from allocating too much. I am comfortable with a solid 4-6% allocation to the company at this point.
Like many here, I was caught swimming naked with a large position when Q3 earnings came out.
As a layman, I have two concerns. With AI models, there’s really no way to truly tell if their models are superior to existing credit evaluation methods until we get some sort of macro-economic pressure. Second, I can’t say for sure having years of head start in data collection will definitely result in a better AI model over the competition. In my mind, it is possible that someone with better algorithms can eventually build a better mousetrap.
I’m keeping a small position because it seems that Q4 results will be an improvement on Q3 results, the company looks like it can sustain hyper growth, and the runway seems long. Perhaps because of what happened, it’s hard for me to see this becoming a high conviction holding again.
When I first analysed the company in September last year, I had concerns that revenue growth was not evident in their core consumer-facing business (i.e. Network Revenue) and was instead coming from the “finance” part of the business (Interest Income and Loan Sale). I shared it here: https://discussion.fool.com/affirm-weakness-in-core-revenue-3493…
When I reviewed the company again in December, I decided that strong performance in the finance part of the business was perhaps good enough to justify a small stake in the company. After all, who am I to determine which revenue is core and non-core for this Fintech company?
In December, BNPL firms like Affirm, PayPal, AfterPay, and Klarna were scrutinized by US regulators over their policies. This seems similar to reviews conducted by Australian regulators on AfterPay in 2020. I am less concerned about this as I believe the BNPL industry is here to stay.
The company is still in hyper growth mode and seems to be on the verge of profitability. I will want to see the contribution from the Shopify and Amazon partnerships showing up in Network Revenue before getting more confident about this position.
This was a MF pick at the end of 2021. TaskUs is a Business Process Outsourcing company focused on serving high growth tech companies. Services offered include Digital Customer Experience (largely non-voice channels), Content Security (content monitoring and moderation) and AI operations (data labelling and annotation for purpose of training AI algorithms).
Its cloud-based technology allows clients to set up operations quickly and allows clients to outsource their customer experience processes at earlier stages of their company lifecycle. I believe it offers a strong value for young tech companies where customer experience is crucial but perhaps not a core capability to develop internally yet.
It should be noted that there’s some degree of customer concentration, but this reliance on top customers is decreasing. FB represented 32% of 2020 revenue and 27% of Q2 2021 revenue. Doordash represented 12% of Q2 2021 revenue. Other clients include Zoom, Netflix, Coinbase and Oscar.
It was hit by a short seller report in January (same guys that issued a short report on Lightspeed). The report focused mainly on the Facebook business, the highly competitive nature of the industry, historical discrepancies prior to listing and how overvalued the company was. There were no claims of outright fraud. IMO, the concerns raised by the short seller were not issues of grave concern and my thesis for the company is still intact. However, the spectre of a short report can have short term pressures on the stock price. I’ll wait till the next quarterly earnings before deciding what to do.
Growth accelerated from 30% in 2020 to 50-60% YoY in 2021. Margins are improving. It will remain a small allocation for now.
I owned and sold this company in 2021. Then I recently bought it again this January when prices cratered. Cloudflare’s consistent/pedestrian 50% performance and relatively high valuation made me look for shinier stocks in 2021. I couldn’t quite understand the run-up in 2H 2021.
Customer growth accelerated in 2021, giving me confidence that revenue growth can at least stay consistent, if not accelerate. It’s still not as cheap as the other SaaS companies. I’d be happy to add more to this position if the market gives me an opportunity to do so. With its relatively lower growth rates, this will be a medium allocation at best.
I’ve owned Fubo for over a year and have suffered in that period. Fubo has been offering live sports streaming since 2015. The investment thesis banked on the company launching its sports betting services in Q4 2021, which it did.
In 2021, revenues grew at triple digit rates while gross margins and operating profit margins improved rapidly. Subscribers grew at triple-digit rates and ARPU increased consistently. But the market was not impressed.
I added to the company several times in 2021 as the stock price fell but I’m done adding. I’ll wait for Q4 2021 earnings and may exit if it continues to gain little love from the market.
Roku was a recent addition in January because there were a couple of weeks where I didn’t know what to buy. I felt Roku shares were better than cash after the huge drop from its ATH.
I believe the company has a long runway for growth in the US and globally. It faced near-term weakness as the US emerged from Covid in 2021 and supply chain issues meant players could not get sold as fast as they liked. It’s unlikely I will hold this stake for long as other hyper growth companies become more attractive price-wise.
MELI was a recent addition in December because I felt MELI shares were better than cash after the huge drop from its ATH. I believe the company has a long runway for growth in Latin America. It’s unlikely I will hold this stake for long as other hyper growth companies become more attractive price-wise.