Disco Gator mid-month update

I made a couple small changes and one large change since my last update, so I will lay it all out here.

On 11/2, I trimmed my Datadog (DDOG) position by 11% at $89.57 and added that to my position in Etsy at $127.34. I feel that Etsy is just so undervalued right now, and I expected Datadog to drop once they reported earnings. (They did, but have since mostly recovered) I would really love to hear more bear arguments about Etsy. They could very easily report their third consecutive +100% growth quarter and it doesn’t seem to be priced into their stock.

I’m still a big fan of Datadog and expect them to ramp back up over the next few quarters. This has been discussed quite a bit here lately, so I’ll let you read more about it in the various other threads.

On 11/12, I trimmed my Cloudflare (NET) position by 15% at $63.65 and added that to my position in Zoom (ZM) at $425.88. This decision was more me trying to get more into Zoom while others were selling off. Obviously, it’s sold off more since then, but I expect big things at the end of the month.

Now for the main reason I am posting. Today I exited my position in Okta (OKTA) and started a new position in Teledoc (TDOC). I still feel Okta is a great company with a bright future, but it is growing much slower than my other holdings. I mentioned at my end of month update that I was planning on erasing my portfolio, and this is the only major change I expect to make at this time.

Teledoc’s share price today is the same as it was seven month ago in April. All they have done since then is greatly accelerate their growth and acquired Livongo which was a darling of this board and a large holding of mine. Their price multiples seem very low compared to how the company is performing.

My current allocation is as such:


Company                 Allocation    
----------------------------------           
CrowdStrike (CRWD)         23.40% 
Zoom (ZM)                  22.16%            
Datadog (DDOG)             14.95%           
Cloudflare (NET)           13.43%           
Etsy (ETSY)                 8.77% 
Teledoc (TDOC)              6.40%          
DocuSign (DOCU)             6.33%           
Shopify (SHOP)              4.57%     

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Disco Gator, really appreciate your update and thank you for sharing.

The one concern I have with a company like Etsy, and Fiverr as well, is that most people purchase one-off as opposed to subscription payment.

Of course, some people will purchase multiple times and over many years - but they don’t have the predictability or consistency of say Shopify, Zoom, and the other companies that are discussed here most often.

Is that not a concern for you? Interested to know how you view that?

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Although the stock price of TDOC is the same as in April, the market cap is quite different. In April was around 15B, now it’s 25.6B.

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The one concern I have with a company like Etsy, and Fiverr as well, is that most people purchase one-off as opposed to subscription payment."

Despite Etsy’s YTD price appreciation of 184%, I am still surprised that its market cap is ~$16B; especially given its given its 73% gross margins, and the likelihood of its third consecutive 100%+ YoY growth. Customer repeatability might indeed be one of the biggest reasons why, and it’ worth noting that management shed some light on the last earnings call:

So the other metrics, I would point out would be some of the metrics that talk about frequency specifically. So our fastest-growing and most valuable cohort are what we call our habitual buyers. Those are buyers that come to us six or more times in a year or spend more than $200. And they – that cohort grew 100% in the third quarter. I think last quarter we said, I think, grew 64%. And prior to that, that cohort has been growing in the low-20% range. So we really had a nice spike in the people that are coming the most frequently to us.

The next category down is, what we call, repeat buyers, which are people that come two or more times a year and that grew 70%. So we’ve got a nice uptick in the frequency. And then, the last metric that helps to sort of triangulate the frequency picture is that for our new and reactivated buyers so that was 15 million buyers in the quarter.

12% of them came four or more times across two or more categories. And so, they are coming more frequently and they’re coming across multiple categories, not just a single category. And so those – I think a lot of the marketing and product initiatives that we’ve put – we’ve laid down since the beginning of the year are really helping to encourage repeat frequency.

The purchase of masks provided Etsy a generational customer acquisition opportunity - and time will tell whether they can sustain and increase repeat purchases. For what it’s worth, it seems that everyone I know is looking for birthday/holiday gifts on Etsy.

It will be interesting to see how management decides to drive this - birthday/holiday gifts might drive a decent short-term uptick, but it won’t take the business to the next level. I would expect Pinterest traffic, live shopping, and merchant services to support its transformation to become more recurring.

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My family personally used Etsy several times so far during the pandemic. It is very unique store, I do get frequent emails from them on many offers. I am not sure how goo their tech is in general, and their mobile app. Also, please keep in mind that not all of the items listed on Etsy are unique/boutique made, I saw couple of items (wall picture collage) that was also available on Amazon for 30% cheaper - exact same product with exact same product photos. That to me was a major red flag, since 30% difference in price for a generally available product its a big deal and can impact their long term potential to capture repeat business. I do find Wayfair as a good alternative to Etsy for some items as well.

I have a small position in Etsy since last year which has generated good returns thus far, but I am hesitant to add due to the reasons outlined above. I do add occasionally to my SHOP position which I believe as an ecommerce platform has more long term potential.

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Of course, some people will purchase multiple times and over many years - but they don’t have the predictability or consistency of say Shopify, Zoom, and the other companies that are discussed here most often.

Is that not a concern for you? Interested to know how you view that?

It is somewhat of a concern, but it is a different business than what we normally invest in. I am more banking on the people who have discovered Etsy during this pandemic and are finding many more opportunities to buy something from them. I expect the fourth quarter to again exceed expectations. Historically, Q4 is by far their busiest quarter, so it will be interesting to see how they perform.

I guess my bigger concern is what will happen once they lap Q2 from this year. What will Q2 of next year look like? Will this current growth even continue into Q1? I’m counting on it.

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Although the stock price of TDOC is the same as in April, the market cap is quite different. In April was around 15B, now it’s 25.6B.

Quite an oversight on my part. I do have the correct EV in my spreadsheet, but didn’t take into consideration the shares they have added to the market.

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“Quite an oversight on my part. I do have the correct EV in my spreadsheet, but didn’t take into consideration the shares they have added to the market.”

That is true, but they have Livongo’s revenue in addition now.

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