CompoundingCed's Jan 2023 Review

With our companies now starting to report Q4 results, all eyes will be on how they guide for 2023. I feel there’s a need to reset revenue growth expectations. The hypergrowth levels we’ve grown so used to in the past 4 years will likely moderate, some by a large degree.

Most companies will probably guide conservatively. I’d be happy to accept mid-30% growth (CRWD, NET, etc.), while anything exceeding mid-40% will be fantastic. Of course, there are other factors to consider such as profitability and how the business will stand in the face of (potential) recession.

Given my willingness to consider 30% growth, the pool of companies widens. I’ll be looking to analyse some of the more steady 30% growers and hope to share them if they pass muster.

Follow me @CompoundingCed in Twitter for more sharing.

YTD Returns

Jan 2022   8.8%

Monthly Activity: It was a quiet January. There was no activity for the portfolio.
*At the beginning of Feb, I sold my small BILL position.

Write-ups: For this month, there are new write-ups for Tesla, NET, and Bill.

Holdings: These are my 8 holdings at the end of the month. At the time of writing, my stronger positions are TSLA, GTLB and GLBE. Weaker ones are S and CRWD.

Company      Dec 2022 Jan 2023

Tesla**       9.2%     11.9%

Gitlab       10.5%     10.8%

SentinelOne   8.2%      7.8%

GLBE          5.0%      6.7%

ZScaler       5.6%      5.7%

Cloudflare    3.9%      4.2%

BILL***       2.7%      2.6%

CRWD          2.2%      2.0%

Cash         52.6%     48.5%

**Discussion of this company is OT for the board. I am including it for completeness. Please contact me off board if you wish to discuss this company.

*** I exited BILL in early Feb

High Allocation Companies (>10%)


**Discussion of this company is OT for the board. I am including this for completeness. Contact me off board if you wish to discuss.

It’s been a roller coaster ride for TSLA shareholders in the past 2 months. The stock halved in December over fears of price cuts and dwindling demand, and then doubled in January, leaving us at pretty much the same point at the end of it.

Q4 numbers were not pretty.

  • Revenue grew 37% YoY to $24.3b

  • Non-GAAP operating profit was flat at 17.8% (vs. 17.9% in the same period a year back)

  • FCF margin declined to 5.8% (from 15.7% in the same period a year back)

  • Model S/X deliveries up 46% YoY

  • Model 3/Y deliveries up 31% YoY

  • Global vehicle inventory: 13 days

Investors were probably more concerned over 2023 guidance than with Q4 numbers.

Over fears of declining prices: “Our ASPs have generally been on a downward trajectory for many years. Improving affordability is necessary to become a muti-million vehicle producer. While ASPs halved between 2017 and 2022, our operating margin consistently improved from approximately negative 14% to positive 17% in the same period.

To be fair, the narrative with Tesla has been consistent. In his vision for a sustainable future, Musk’s aim has always been to lower the cost of Tesla cars. Declining sticker prices are a non-issue for me as long as costs of production continue declining as well.

There were a few points mentioned that would lead to reduced costs and/or increased margin:

First, spreading out deliveries in the quarter: “In Q2 2022, the 3rd month of the quarter accounted for 74% of vehicle deliveries. That number fell to 64% in Q3 and to 51% in Q4. We are working to reduce the percentage of vehicles delivered in the 3rd month and smooth deliveries throughout the quarter, which will help reduce cost per vehicle.

Second, FSD: “There’s millions of cars where full self-driving can be sold at essentially 100% gross margin.

Musk then addressed sales volume and demand for 2023.

Volume: “We are planning to grow production as quickly as possible in alignment with the 50% CAGR target we began guiding to in early 2021. For 2023, we expect to remain ahead of the long-term 50% CAGR with around 1.8m cars for the year.

OK. I mean, our internal production potential is actually closer to 2 million vehicles, but we were saying 1.8 million because there just always seems to be some freaking force majeure thing that happens somewhere on earth.”

Demand: “Thus far in January, we’ve seen the strongest orders year-to-date than ever in our history. We currently are seeing orders at almost twice the rate of production. So it’s hard to say whether that will continue twice the rate of production, but the orders are high.”

The company reminded everyone that “the Tesla team achieved these records while – despite the fact that 2022 was an incredibly challenging year due to forced shutdowns, very high interest rates and many delivery challenges. So it’s worth noting that all these records were in the face of massive difficulties.”

I said last month that “I’d be happy to add if the market continues to throw up silly prices.” Well, silly prices happened, but the rapid halving of the stock price shook my conviction. News of falling demand and slashing of sticker prices made the situation seem dire. I didn’t add to my equity position (but I did add some long option positions at $125).

Following the Q4 call, Tesla remains a high conviction company.

My thoughts on Musk are here:

My write-up for the company is here Tesla Inc | An Investment Pilgrim's Journal

**Discussion of this company is OT for the board. I am including this for completeness. Contact me off board if you wish to discuss.


Gitlab had another great quarter. In Q3, Gitlab achieved

  • 69% revenue growth YoY

  • 89% gross profit margin and improving non-GAAP operating profit margin of -19% (vs -36% in the same period a year ago)

  • FCF margin improved to -3% (from -15% in the same period a year ago)

  • Customer (>$5k ARR) growth was 59% YoY and Customer (>$100k ARR) growth was 49% YoY.

Growth is slowing, but not at a worrying pace. Q4 revenue growth should come in at close to 60%. While it is still early days for CY 2023 guidance, the company said it was “comfortable with the Street estimates, which have us growing revenue over 40%.”. I take this to mean it can hit 50% growth next FY. Margins are improving at a good clip while the company expects to be FCF breakeven by CY 2024.

Call notes:

”We’ve had great gross retention. It’s been about the same for the last 4 quarters. So no major uptick there. And then also, we aren’t seeing the sales cycle elongate that actually shrank again this quarter, but we are seeing more scrutiny on deals.”

On why the company can expand when headcounts are being reduced:

“It’s a bottoms-up land when we land a new customer, it’s typically 50 to 100 licenses. In some cases, they have thousands and thousands of engineers and expand over time. And that’s why the cohorts are still expanding.”

“On net dollar retention rate, the #1 reason why they’re expanding is seat expansion. The second is for tier upgrade to Ultimate. And then the third is increased yield from the customer.

When you have a mission-critical platform and everybody needs to basically drive quicker time to value, you’re seeing a move to a platform, and those returns are paying off for those companies.

Under a different market sentiment, I have no doubt this stock will be flying. For the past few earnings, the stock has popped ~20% post earnings release (only to be beaten down by sentiment in the weeks that follow). I’ll be happy with a 10-12.5% stake in this company.

Medium Allocation Companies (5-10%)


Q3 results were decent but not great.

  • Revenue grew 106% YoY but only 13% QoQ.

  • Gross Margin improved to 71.5% (from 66.8% in the same period a year ago)

  • Operating margin improved to -43.0% (from -69.1% in the same period a year ago)

  • FCF Margin worsened to –56.2% (from -37.8% in the same period a year ago)

  • Customer growth also strong: large customers (>$100k ARR) growing 117% YoY and 28% QoQ.

This was its weakest QoQ growth since publicly publishing results. The company is guiding for 8% QoQ growth in Q4 and expects Q3 weakness to persist. Continued QoQ growth in the low teens will see YoY growth come down rapidly from its current triple-digit growth rates.

Given where the other companies are, I can accept a 50-70% growth for next FY, but my (unsubstantiated) sense is it will be punished for such a guide come Q4.

Call notes:

We’re seeing higher cost consciousness and prudence around IT budgets. Enterprises are striving to enhance their security posture while also preserving cash. As a result, we are experiencing longer sales cycles and purchase delays, particularly among larger deals.

“In light of persistent macroeconomic uncertainty, we’re sharpening our focus on cost management and are calibrating our investments with the pace of growth.

We expect the macro conditions impacting growth in the third quarter to persist in Q4.

There was good information on MSFT Defender as a competitor, their strength in Singularity Cloud vs endpoint competitors and data offerings in XDR projects. For brevity, I shall not post them here on my portfolio review; I encourage you to read the call transcript for more information on these.

This company is a good reminder of how quickly things can change with our high-growth companies (or with any company). Just a quarter back, I said that this was a high conviction company after its monster Q2 and sustained high growth rates.

I added 2% to my position a few weeks before the call. I won’t be adding to the company and will monitor to see how the macro situation develops in relation to my cybersecurity companies.


All things considered, I thought ZS posted a decent-to-good quarter but the market liked it less than I did.

  • Revenue grew 54% YoY and 12% QoQ.

  • Operating margin improved to 11.8% (from 10.4% in the same period a year ago)

  • Customer growth was weak: both customers (>$100k ARR) and (>$1m ARR) grew 6% QoQ.

Call notes:

“Our business value message is resonating in this challenging macro environment and more customers are willing to adopt our broader platform to consolidate multiple point products, increasing our average deal size. As a result, we are actively working on more large, multiyear, multi-pillar opportunities than ever before, to align to the increasing deal sizes in each of our geo theaters.

Our Q1 results exceeded our guidance on growth and profitability even as we manage through additional deal scrutiny and longer reviews.

In our opportunity pipeline, we’re actively working on more multiyear and multi-pillar opportunities than we historically have. While good for our business, larger deals take longer to close as customers introduce more checks and reviews.

I didn’t like that customer growth was so much weaker compared to previous quarters. However, given the macro situation, I can accept a likely high 40% growth for ZS in its FY.

I’m happy with my medium allocation for now. I’m unlikely to do much with this.

Global-e Online

GLBE facilitates cross-border e-commerce.

It aims to make international transactions as seamless as domestic ones.

Services include

  • interaction with shoppers in their native languages

  • market-adjusted pricing

  • localized payment options

  • compliance with local consumer regulations and requirements such as customs duties and taxes

  • shipping services

  • after-sales support

  • returns management

The company solves a pain point for merchants as huge upfront costs and efforts are needed to offer cross-border sales.

According to Forrester, brands typically see around 30% of e-commerce traffic being international but in terms of actual sales figures, no more than 5-10% come from international shoppers.

Q3 results were very good IMO but share price suffered following the release due to lowered guidance (from 74% YoY growth for the year to 67%)

  • 79% YoY revenue growth

  • Gross margin improved to 41.5% (from 38.6% in the same period a year ago)

  • Operating margin was flattish at 11.5% (compared to 11.5% in the same period a year ago)

The lowered guidance in and of itself doesn’t worry me. Q4 is still expected to come in at over 70% YoY growth. However, there are headwinds to take note of, as one would expect for a company reliant on e-commerce. More in the notes below.

Call notes:

“In order to err on the side of caution, we have decided to slightly lower our GMV and revenue forecast for 2022 by 2.5% and 2% at the midpoint of the range, respectively, in order to take into account 2 extraordinary factors which we anticipate will have an unusually large adverse effect on our Q4 results. First is the effect of the unusually large foreign exchange swings, which worsened through the third quarter and into November, especially those of the U.S. dollar vis-à-vis other major currencies. The other factor is the go-live of a very large merchant, which was originally planned for Q4, but at the last minute was postponed to Q1 of 2023.

While the overall e-commerce market growth has slowed down in 2022, our cross-border opportunity remains massive as merchants are continuing to put direct-to-consumer in the front-end center of their strategy which results in cross-border direct-to-consumer continuously gaining share over other channels and growing.

“However, in Q3, what we started to see, especially in the second part of Q3, is also some slowness in APAC region, mainly Australia and New Zealand that we’ve seen a decrease in consumer spending, while U.S. is still holding relatively strong. So still, we see growth. When we look at our existing merchants, we do see growth, but it is a softer growth than what we’ve seen in previous quarter, but this was basically already built in and this trend is starting even prior to reporting our Q2 results.

“As we said, although there are obviously some headwinds and a lot of volatility, the segment that we focus on, which is cross-border and even more important, the direct-to-consumer is still growing very, very fast. We expect to continue the fast growth into next year. And we think that taking into account the fact that the market is huge, and we are just starting to tap into it, we will be able to grow fast for the next few years. And then this is our target.

The company also gave an update on its Shopify partnership: “We do believe that on the growth rate, the main effect would come on in 2024 onwards as the bulk of of merchants, I would say, launch some time and start along sometime within late Q3 – late 2023 and affect our 2024 growth rate.”

Given the more volatile nature of e-commerce revenues compared to SaaS companies, I’m happy to maintain a low-ish allocation.

Low Allocation Companies (0.1-5%)


Cloudflare started to show weakness in Q3 but I somehow didn’t feel that disappointed after reading the call notes. Q4 numbers confirmed the slowdown in the business.

Q4 Results:

  • Revenue growth was 42% YoY to $275m

  • Non-GAAP operating profit margin improved to 6.1% (from 1.2% in the same period a year back)

  • FCF margin improved to 12.3% (from 4.5% a year ago)

  • Paying customer growth was 16% YoY.

  • $NRR was 122%

The company guided for 37% growth in Q1 2023 and 38% for the full year. They made certain assumptions in their guide:

In our guidance, we have not factored in any improvement in the macroeconomic environment or from our go-to-market initiatives. Specifically, despite a notable improvement in our pipeline exiting 2022 as compared to with the first half of the year, we have assumed the increase in sales cycle, which we observed in the second half of last year continues in 2023 and have, therefore, incorporated close rates below recent historical lows.

We are confident in the ramp of implementing these models and tactics which we expect will ultimately improve revenue growth and productivity. However, we have not incorporated any improvement in sales productivity in our guidance for 2023, embedding, in fact, productivity levels below our recent historical lows.

There was a surprising commentary on ZScaler: “And the other important bit is that unlike some of the competitors that are out there, whether those are our competitors in the application services space that have grown through a series of M&A acquisitions or even in the Zero Trust space, someone like Zscaler actually run multiple independent networks to provide their various services.

And that means that give customers that are using those different services, not only is it more inefficient for them to service those customers, but those customers experience very performance setbacks when they’re delivering their services. And that’s something that a lot of the customers that are switching from Zscaler to us not time and time again.

What’s different about us is we have relentlessly said that we run 1 single network. And every single server across our entire network is capable of running and performing any of the functions that we may need it for. And so that means that as we grow our services, it allows us to deliver them incredibly quickly, incredibly efficiently and anywhere in the world, and that is paying off today by allowing us to continue to scale as efficiently as possible.

I think NET will do about 40% growth this year, with potential upside from their conservatism. That’s more than satisfactory to me given the macro environment.


I re-initiated a position in CRWD a few weeks before earnings. I exited my CRWD position in 2021 over concerns of slowing growth. Seeing its performance in 2022 and how other companies have performed, I then accepted that slowing growth for its size was inevitable and it was doing as well as any of my other portfolio companies. Then came the weak guide during Q3 results announcement…

In Q3,

  • Revenue growth was 53% YoY and 8.5% QoQ

  • Non-GAAP operating profit margin improved to 15.4% (from 13.3% in the same period a year back)

  • FCF margin was rather flat at 30.0% (compared to 32.3% in the same period a year ago)

  • Customer growth was 44% YoY

  • ARR grew 55% YoY.

This was a great set of results. What was disappointing was the forward guide for next FY. The company guided for low-to-mid 30% growth, which would be a larger than expected deceleration from this year’s mid-50% growth. Given all the talk about the strong demand for cybersecurity products leading up to Q3 results, this was shocking. In reality, the company is probably being conservative and will achieve high 30% to low 40% growth, but the guide rattled investors.

My plan was always to initiate a position at 2.5% and then evaluate as Q3 and Q4 results reveal more about the next FY. I’m glad I didn’t rush into a 5% position (the reminder at the top of the review helped!). As things stand, it is unlikely I will add more and even more unlikely I will make this larger than a 5% position. I will also consider the sum of my S+ZS+CRWD position and I don’t wish to make it larger than a 20% position (currently at 16.4%).

Exited Positions


Q2 (Oct-Dec 2022) Results:

  • Revenue growth was 66% YoY

  • Non-GAAP operating profit margin improved to 3.2% (from -11.9% in the same period a year back)

  • FCF margin improved to 18.3% (from -10.3% in the same period a year ago)

  • Customer growth was 35% YoY (not including Divvy and Invoice2go).

  • Gross take rate increased to 0.25% (from 0.18% in the same period a year ago)

Bill was never a high conviction position for me as I thought the growth in the past 2 years was too dependent on transaction volume (rather than user growth) and hence less enduring. Transaction volume is great on the way up but can hurt bad on the way down.

With the company guiding for weaker near term volume growth and negative QoQ revenue growth, I decided to exit the position.

Previous Updates

Dec 22: CompoundingCed's Dec 2022 Review