Disco Gator's August 2021 Update

August 2021 Portfolio Update

Monthly Disclaimer: I put together these updates as a sort of record keeping for myself. It helps me to think things through with my investments, and documents the reasoning for most of the moves I make. I do not want to come across as a know-it-all or a braggart just because things are going well. I have always kept records of my investing because I want to see how each of the decisions I make compares with the overall market. Having these records reminds me that it is an absolute certainty that things can and will go south at some point. This is now the fourth year that I have kept detailed information on a monthly basis. Every year, there have been periods of time where my portfolio has dropped from 15-30% and it will happen again. It happened twice in 2020, and it has already happened twice this year, with the most recent being in May. Now on to this month’s update…

The roller coaster continued in August with us finishing the month +6.16% after being down in July. This marks the seventh consecutive month where we have alternated between positive and negative months. I am really hoping to break this streak in September, however August could easily have been a negative month, if not for Upstart. They announced earnings this month and I am pretty sure it was received well. Ok, that was a play on the Tracy Morgan, Rocket Mortgage commercials. If you haven’t seen them, a potential home buyer says they are pretty sure about getting a mortgage, and Morgan freaks out, showing him some funny “pretty sure” examples. Upstart put up some astounding numbers which vaulted them near the top of my portfolio. In fact, I plan to increase my position even more in September. You can read more about their quarter below.

Upstart wasn’t my only position that announced earnings in August. Four other companies announced earnings as well, with two of them taking a beating afterwards. Roku and Digital Turbine both finished the month down in the mid 16% range, severely hampering the potential I had this month. Digital Turbine seemingly had a great quarter with a very promising future. Pro forma growth was great, but it seems the gross margin is holding them back. Roku’s results were pretty similar to Pinterest’s as their financial information looked great, but their account growth didn’t see the numbers investors were looking for. Fulgent Genetics had the biggest miss any of my companies have ever had, but they still finished the month up slightly. Go figure.

As a reminder, I post results the last weekend of the month. This made August a four week period. Our high point this period occurred on the very last day of the period as we closed out the month. Our low for the month occurred on August 19th when we closed at +17.81%.

Here is a snapshot of how my portfolio has performed over the past month, compared to the broader indexes. As usual, I’ll include the CNN Fear and Greed Index.

W/E Date        Portfolio     S&P 500 %     DJIA %      Nasdaq %    Russ 2000    Fear and
                % change       change       change       change     % change    Greed Index
 January         +12.72%       -1.11%       -2.04%       +1.42%       +5.35%        35
 February         +5.50%       +2.61%       +3.17%       +0.93%       +5.80%        48 
  March          -12.01%       +4.29%       +6.92%       -0.41%       +0.93%        52
  April           +5.63%       +5.20%       +2.42%       +6.27%       +2.02%        56    
   May            -4.88%       +0.55%       +1.93%       -1.53%       +0.11%        39
  June           +19.68%       +1.82%       -0.28%       +4.45%       +2.88%        44
  July            -3.54%       +2.68%       +1.46%       +2.17%       -4.63%        24
 August           +6.16%       +2.60%       +1.49%       +3.11%       +2.33%        50
   YTD           +28.85%      +20.06%      +15.84%      +17.39%      +15.35%        50 

Overall, August was a great month. I’ll take a 6% increase any chance I can get. We are still outperforming the indexes and actually widened the gap a little this month. The Fear and Greed index stayed in Fear or Extreme Fear nearly the entire month. There were only two days that it finished neutral, with one of them being the final day of the month, where it now sits at 50.

After a lot of moving and shaking in July, I only made a couple small changes in August. When I saw Crowdstrike drop down under $230, I couldn’t resist adding to it, so I increased my position by 12% at $229.87. To do this, I trimmed some shares from Pinterest (sold 6% of my position at $55.87) and Digital Turbine (sold 8% of position at $51.96) This quickly paid off as Crowdstrike quickly took off, moving up to new All-Time Highs.

Although I only made a couple small changes, the allocations moved around a lot. Digital Turbine was my #1 position, but dropped down to third. As I just mentioned, I trimmed this a little, but it did the rest on its own by dropping in value by more than 16%. With the two small additions, Crowdstrike moves back to #1. I plan to grow my top two even more this month as they’re the ones I have the most confidence in right now.

On to the individual results for each company that I invest in. They are listed by allocation from highest to lowest.

Company                Allocation       Initial         Purchase         June         % Change
                                       Purchase          Price         % Change      since Pur
Crowdstrike (CRWD)    	  19% 	        1/1/21	        $211.82	        +11.32%       +33.28%
Upstart Holdings (UPST)	  17%	        7/9/21	        $115.45	        +84.81%	      +93.31%
Digital Turbine (APPS)    13%	        2/2/21	         $60.76    	-16.44%	      -13.43%
DocuSign (DOCU)	          13%	        1/1/21	        $222.30          +0.91%	      +35.29%
Pinterest (PINS)	  11%	        3/8/21	         $67.38	         -2.85%	      -15.08%
Square (SQ)	          11%	        1/4/21	        $219.15	         +8.39%	      +22.30%
Roku (ROKU)	           9%	        5/7/21	        $327.00	        -16.64%	       +9.18%
Fulgent Genetics (FLGT)	   7%	       3/12/21	         $93.86	         +0.88%	       -0.85%

On the chart above, you get a clear picture of how things are currently allocated. For the “Initial Purchase” column I default to the stock price when the year started for stocks I have owned prior to this year, instead of when I purchased it. I want to see how things go from this point forward. Thank goodness for Upstart!

Now on to the discussion of the individual holdings in my portfolio, listed in alphabetical order.

CrowdStrike (CRWD) - CrowdStrike Holdings offers cybersecurity services through its Falcon platform, which monitors client operations at their endpoint connections to the internet and works to identify and stop threats. The platform learns from attacks made on it and then warns the entire CrowdStrike cybersecurity network about likely avenues for future security issues. Not much on the news front for Crowdstrike in August. The only real news was their inclusion in three different Nasdaq 100 indexes. Although this doesn’t mean anything for the company itself, it did effect their stock as they saw a quick run after the announcement.

After trimming my position in July, I couldn’t help but to add back after the stock dipped below $230 in August. This has always been one of my highest conviction stocks and it currently sits Top 2 with Upstart. Crowdstrike announces earnings this coming week, and they end August ranked a 4??

Digital Turbine (APPS) - Digital Turbine is the leading independent mobile growth platform and levels up the landscape for advertisers, publishers, carriers and OEMS. By integrating a full ad stack with proprietary technology built into devices by wireless operators and OEMs, Digital Turbine supercharges advertising and monetization. Digital Turbine announced earnings in August and overall they were some fantastic results. Total revenue was $213M (+260% Y/Y), a beat of $21M, which was a pretty sizable beat. This includes partial revenue from the acquisitions of Fiber and AdColony. Had they been owned for the full quarter, revenue would have been $292M, +104% Y/Y vs comparable pro forma figures. They also increased guidance for next quarter, with a range of $300M - $306M. On Device Media Revenue grew 93%, while In-App Media Revenue grew 117%. SingleTap revenue increased nearly 600% Y/Y and is expected to continue rapid growth due to the announcement that Samsung will begin launching SingleTap across their entire global footprint. This is happening due to positive results in Latin America, so Samsung wants to expand this rollout. The conference call was extremely positive with revenue acceleration in multiple parts of their business. In fact, Digital Turbine now has their software installed on more than 700 million devices, with an increasing number of those 5G capable which makes them more lucrative due to ad format availability.

Gross Margin was 34%, down from the low 40% range where they had been. This is expected to be further impacted next quarter as the acquired business will be included for the entire period. They noted that key rationale for the acquisitions was to drive new revenue growth and platform capabilities and it wasn’t a cost reduction play. Of course, they do expect to realize favorable expense synergies as the companies continue to mesh together.

Non-GAAP net income was $33.4M compared to $12.5M last year. This indicates that although their margin is suffering, the bottom line is prospering. They also highlighted that each of the new business are high revenue growth companies, each of which was profitable on its own before being acquired.

Although I am still a very big fan of Digital Turbine, I have to think that their gross margin is holding them back quite a bit. We will have to see how things evolve over the next couple quarters. They end August ranked a 5??

DocuSign (DOCU) - DocuSign is the market leader in providing electronic signature technology and automation of the agreement process through its cloud platform. DocuSign’s solution addresses the core of every business transaction - the agreement - and makes the process much more efficient, resulting in lower processing cost and time. DocuSign has widely been considered solely a WFH company, but the guidance for the quarter about to report, begs to differ. They will be up agains some very tough comps from last year, yet they’re still expected to show revenue increases greater than 40%. I expect to see further expansion of their net dollar retention rates as well as great top line growth. I would not be surprised if they hit $500M this quarter. I guess we will see on September 2. Until then they remain a 3?? in our system.

Fulgent Genetics (FLGT) - Fulgent Genetics is a technology company that provides comprehensive diagnostic genetic testing using its proprietary platform, which integrates data comparison and suppression algorithms, adaptive learning software, advanced genetic diagnostics tools, and integrated laboratory processes. Fulgent Genetics announced earnings on August 9, missing revenue estimates by 22% ($44M), but still showing an increase of 790% Y/Y. This was the biggest news story of the day for them, but there was plenty of other newsworthy information. They announced the acquisition of CSI Labs, as well as acquiring controlling ownership of their Chinese Joint Venture.

The primary reason for the revenue miss was the unexpected drop-off of billable tests from Q1 to Q2. Covid revenue was down 63% Q/Q, while they were only expecting a decrease in the low/mid 50% range. Core Revenue (NGS) grew 296% Y/Y to $26M and was much better than expected. Because of the momentum in their NGS testing, they were able to keep their Q3 guidance intact, but lowered their guidance for the year by $30M due to the miss.

By acquiring CSI Laboratories, they are adding the leading cancer testing and diagnostics laboratory. This is a profitable company with ~$35 million in annual revenue. The new addition will expand Fulgent’s presence in somatic molecular diagnostics as well as cancer testing.

Finally, they announced a partnership with Helio Health, an emerging liquid biopsy company for early detection of cancer. This was a $20M equity investment for Fulgent and enters them into the early detection liquid biopsy space and will help to commercialize Helio Health’s products.

Overall, I am happy with the direction this company is heading. They end August ranked a 2?? in our system, so I will keep a close eye on it.

Pinterest (PINS) - Pinterest is an image-sharing social media site that allows users to collect links and create virtual pin boards for personal photos, ideas, decorations, places to visit, recipes and other items. Advertisers use Promoted Pins to reach users across the full purchasing funnel. Overall, August was a quiet month on the news front for Pinterest. I trimmed some from my position this month to add to Crowdstrike when it dropped under $230. I expect that I may find myself trimming more in September to put the funds into companies that I have a higher conviction in. I still believe Pinterest will continue their growth and profit trajectory. What I believe and what will actually happen could vey well be two different things. Management cautioned that there could be some bumps this next quarter. I need to decide if I’m willing to find out. This month they dropped to a 4?? in our rankings

Roku (ROKU) - Roku is a key player in the growing over-the-top (OTT), or video streaming services market. Through the sale of streaming players and offering the Roku TV operating system on select smart TVs, Roku offers users a way to access various applications, primarily streaming services including Netflix, Hulu, and Amazon Prime Video, among others. Roku’s strategy focuses on acquiring active accounts and then monetizing them primarily through advertising revenues. Roku announced earnings on August 4 and it immediately seemed like deja vu from Pinterest in July. Total Revenue was $645M (+81% Y/Y) which beat estimates by $27M. ARPU was $36.46 vs an estimate of $34.51. Overall Gross margin rose to 52%. Now for the bad part. Active accounts grew just 28% to 55.1M with an expectation of 55.8M, while streaming hours were 17.4B vs a 19.2B estimate.

Although Roku’s metrics outperformed the overall TV industry, they still weren’t up to expectations. I do believe that linear TV ad spend will continue the shift to connected TV, allowing Roku to further increase their ARPU. They will have tough comps to overcome in Q3 and have guided for $680M (+51% Y/Y)

Like my position in Pinterest, I plan to continue to evaluate my position here. They moved up to a 5?? in our system to end August.

Square (SQ) - Square is a commerce enablement platform focused on providing card acceptance, business analytics, and other ancillary products to help small merchants grow their businesses, as well as well as utilizing the Cash App ecosystem to broaden their reach to people that are under banked, and wanting to trade including crypto currencies etc. On August 1st, Square announced that they were buying Afterpay for $29B in stock. Square plans to integrate Afterpay into their existing CashApp and Seller business units. I think $29B is a huge price tag and I sure hope it pays off. Afterpay’s growth rate is actually higher than Square’s so it should be able to contribute to continued growth. Due to this announcement, Square released their earnings a few days earlier than expected.

Revenue for Q2 totaled $4.68B against consensus estimates of $5.05B. This is down Q/Q but still up 143% Y/Y. The shortfall was due to Bitcoin transaction revenue. Square records selling Bitcoin to a customer through their platform as revenue, where their Bitcoin costs are the total amount of bitcoin that they purchase. They purchase the Bitcoin to facilitate customer’s access to Bitcoin, and charge a small fee for this. This is the main reason why their revenue numbers look so high.

Excluding Bitcoin, revenue was $1.96B, +26% Q/Q and +87% Y/Y. In Q1, Cash App contributed more to Top Line Revenue, but in Q2 it shifted back to the seller ecosystem. Gross profit was $1.14B (+91% y/y) with it pretty closely split between Cash App and the Seller Ecosystem.

I was very happy with my Square position prior to the Afterpay purchase and would have been fine without it. We won’t see the completion of this purchase for nearly a year, so until then I will enjoy the ride. They maintain their 4?? ranking in our system.

Upstart Holdings (UPST) - Upstart provides a lending platform that uses a unique proprietary model driven by artificial intelligence to determine a borrower’s creditworthiness. Upstart’s AI models uses more than 1,600 non-traditional variables to assess true default risk in loan originations. The company operates a platform that aggregates consumers and refers them to banks using their AI technology. This worked out well. Upstart announced earnings on August 10th and shocked most analysts and investors. Revenue was $194M for the quarter, up an astounding 1,018% Y/Y and 60% Q/Q. Analysts were expecting $36M less than this, so it was a very substantial beat. Once again, 71% of loans were fully automated and instantly approved. They ended the quarter with 25 banks in the fold, up from 10 when they went public in December. This is a really small number so you can easily see how much growth potential they have in front of them. Of course, this small number does present risks, as their revenue is concentrated into such a small amount of customers. Once again, they have aggressively increased guidance for next quarter, but I doubt it will be enough. I fully expect another large beat.

Currently, their revenue comes almost exclusively from the personal loan market. As they continue expansion into auto loans, revenue should increase even more. It seems so often that when people see a company’s stock price move up multiples in a short amount of time, they fear it is at the top so they start jumping out. I plan to be there to catch their shares along the way. I fully intend on increasing my position here, possibly making it my largest holding. They end August ranked a 4?? in our system.

Throughout this writeup, I mention ratings for the various companies I am invested in. More information about this can be found on Twitter @PBMMInvestments. Please feel free to reach out to me there with any questions, or via email if you prefer.

August was a very busy month with most of the companies we track announcing earnings. We still have some heavy hitters coming up that I most certainly are looking forward to.