Disco Gator's December Update

December 2020 Portfolio Update and News

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 the third year that I have kept detailed information on a monthly basis. In all three years, there have been periods of time where my portfolio has dropped from 20-40% and it will happen again. In fact, it happened twice in 2020. Now on to this month’s update…

Happy New Year! 2020 was a tough one for all of us. When I retired in January, I had no idea what to expect for my first year of living off my investments. I am generally a very happy and positive thinking person, so I tend to make the best of any situation. I really believe that having a positive attitude is a choice. If there are two ways to take something, I always choose the best way possible. Why would I want to live any other way? Although this year provided new challenges, I firmly believe that the way I react and interpret different situations helps to keep me calm and ease my mind. It certainly makes things a lot easier to do this when you are able to triple your portfolio in one year.

It’s crazy how many people continue to harp on how overvalued the companies we invest in are. They constantly try to use out dated valuation metrics to compare to SaaS and cloud computing companies. I’m not sure how long it will take them to understand, but this time it really is different. So many of our companies are the leaders in their field, and many of these fields hardly existed 20 years ago. So many of these companies continue to evolve and add new components to their offerings. This increases their stickiness and makes the cost of switching higher and higher. When you see what companies like Crowdstrike and Cloudflare are doing, how do you put a price target on that? Amazon stock was punished for years because they were not making money. That was a choice as Bezos was constantly reinvesting every nickel Amazon made. Most of our companies are focusing on growth instead of profit.

As a reminder, I post results the last weekend of the month. This worked out well for the end of month and year since the last trading day fell on a Thursday with a three day weekend following. This portfolio was started on March 13, 2020 when all of my assets were rolled over into this one Retirement Account. Therefore, instead of using a more traditional Year to Date (YTD) column, I am utilizing a Portfolio to Date (PTD) designation. 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
12/04/2020        +1.17%       +1.67%       +1.03%       +2.12%       +2.00%        88 
12/11/2020        +1.68%       -0.96%       -0.57%       -0.69%       +1.02%        76
12/18/2020        +7.51%       +1.25%       +0.44%       +3.05%       +3.05%        63
12/25/2020        +2.07%       -0.17%       +0.07%       +0.38%       +1.72%        54
12/31/2020        -6.87%       +1.43%       +1.35%.      +0.65%       -1.23%        51
 December         +5.14%       +3.24%       +2.33%       +5.59%       +6.45%        51
   PTD          +211.60%      +38.55%      +31.44%      +63.66%      +63.21%        51

We end December in the green in spite of a really poor showing the last week of the year. In fact, prior to this last week, we had 6 consecutive weeks of positive results. This was the only time in 2020 we were able to accomplish this. We had previously had 5 consecutive weeks on two other occasions. This was pointed out to me by a member of our investment group chat, so we were expecting the negative week heading into Christmas. The week that follows a long string of positive weeks has been pretty bad. This time it was -6.87%, with the previous two being -9.07% and -7.30% respectively. You can see as the weeks were closing out the year, the Fear and Greed index was rapidly dropping. It ends the year almost right in the middle at 51.

Now lets take a look at how we performed over the course of the year:

W/E Date        Portfolio     S&P 500 %     DJIA %      Nasdaq %    Russ 2000    Fear and
                % change       change       change       change     % change    Greed Index
March            +11.02%       -6.27%       -7.08%       -4.74%       -6.45%        23 
April            +19.45%      +11.64%       +9.88%      +15.10%       +8.93%        39
May              +28.54%       +7.32%       +6.76%       +9.91%      +11.65%        52
June             +18.82%       -1.16%       -1.45%       +2.82%       +0.15%        45 
July             +15.00%       +8.71%       +5.65%      +10.13%       +7.37%        65 
August            -2.75%       +7.24%       +8.42%       +8.84%       +6.61%        76
September        +14.56%       -5.97%       -5.16%       -6.69%       -6.55%        48
October           -2.83%       -0.86%       -2.47%       -0.02%       +4.31%        30
November         +17.53%      +11.27%      +12.86%      +11.86%      +20.59%        92
December          +5.14%       +1.43%       +1.35%       +0.65%       -1.23%        51
   PTD          +211.60%      +38.55%      +28.45%      +54.99%      +53.33%        51

As you can see, 8 of the 10 months that the portfolio has been in existence, we have been positive, with 7 of the 8 positive months being by double digits! We end the year up 211.60%, while we would have been happy with 21.16% in most years. The average return of the indexes that we track was 49.21% over the same period, so we were more than 4 times better than that.

We end December with the same 8 companies that we started with, but I once again tweaked my allocations. I felt like I was getting a little more top heavy than I wanted, with all but Zoom of my highest allocated holdings running up quite a bit over the past two months. At the end of November, my top four holding were about 74% of my portfolio, while now they are 67%. All of this was done mid-month on December 14. Since then, Crowdstrike continued to run up and it is now near 30% of my portfolio. I will likely trim this back down to 25% at the start of next week and sprinkle it into a couple of my other companies.

On to the individual results for each company that I invest in. They are listed by allocation from highest to lowest. Crowdstrike, Zoom and DocuSign all announced earnings this month. You can see the difference on how each was received on the chart below. Next month we won’t have any earnings to report.

Company                Allocation       Initial         Purchase       December       % Change
                                       Purchase          Price         % Change      since Pur
CrowdStrike (CRWD)       29.64%        03/13/20          $39.55        +40.44%        +435.58%
Cloudflare (NET)         13.45%        04/01/20          $24.35         +1.65%        +212.07%
Zoom (ZM)                12.74%        03/13/20         $107.40        -39.81%        +213.87%
Datadog (DDOG).          11.23%        03/13/20          $35.26         +2.10%        +179.18%
Teladoc (TDOC)            9.36%        11/16/20         $176.12         +1.79%         +13.54%
DocuSign (DOCU)           9.19%        10/16/20         $235.09         -2.01%          -5.44%
Etsy (ETSY)               9.16%        08/10/20         $138.73        +10.81%         +28.24%
Shopify (SHOP)            5.22%        08/10/20        $1005.56         +9.43%         +12.57%

On the chart above, you get a clear picture of how things are currently allocated. I’ve tweaked this chart a bit due to some feedback I received where the results for some of the companies may have been confusing. Below we will get into news and updates for the eight companies in our portfolio.

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. Announced earnings on December 2 and had another blowout quarter. Revenue was up 86% Y/Y for $232 million. This beat analysts estimates by 8%. Annual Recurring Revenue improved 81% to $907 million, Customer Count grew 85% to 8,416. This was the most profitable quarter they have had as their EPS increased to $0.08, making it their third consecutive quarter of positive EPS.

When Crowdstrike went public, they offered 10 different modules for customers to choose from. Now with further innovation, couple with acquisitions, they are up to 17. Currently, 44% of customers use 5 or more modules, which is up from 39% last quarter. 22% of customers are currently using 6 modules. These numbers are quite impressive as they continue to get existing customers to increase usage of their modules. Considering how fast they are adding new customers as well, it is no surprise that they increased revenue guidance by additional 7% for next quarter.

On December 8, Crowdstrike released their annual CrowdStrike Services Cyber Front Lines Report, which brings together the insights and observations of CrowdStrike’s global incident response (IR) and proactive services teams in 2020. One of the biggest findings of this report was that 68% of organizations that fell victim to an intrusion experienced an additional intrusion attempt, and traditional antivirus solutions failed in 40% of observed incidents. These were organizations that experienced intrusions before bringing Crowdstrike on board. Crowdstrike was able to stop further intrusions after being implemented.

I’m sure most people have heard of the massive malware hack that was perpetrated on Solar Winds. This attack was used to steal information from numerous Government agencies. One US official stated that this looks like the worst hacking case in US History. After this was discovered, SolarWinds rolled out CrowdStrike’s Falcon Endpoint Protection across the endpoints on its systems to ensure that its internal systems are secure. If Crowdstrike’s quarterly results weren’t enough to drive the stock price higher, this took them to the next level. By the end of the month, Crowdstrike stock was up more than 40%.

Cloudflare (NET) - Cloudflare is on a mission to help build a better Internet. They have built a global cloud platform that delivers a broad range of network services to businesses of all sizes around the world—making them more secure, enhancing the performance of their business-critical applications, and eliminating the cost and complexity of managing and integrating individual network hardware. This month Cloudflare had three more announcements. It seems like every month they are expanding their offerings and/or constantly improving. Between the three of these, there should be something beneficial for everyone. I was already very happy with this company after seeing their 75% conversion rate from free to paying customers. This is the gift that keeps giving.

On December 7, Cloudflare released the Data Localization Suite to give businesses across the globe tools to address their data locality, privacy, and compliance needs. With Data Localization Suite, businesses can use Cloudflare’s global cloud network to control where their data goes and who has access to it––no matter what countries they operate in, their industry, or their specific data protection obligations.

Many countries across the globe are introducing new standards and regulations to address data access, protection, and privacy. As a result, businesses now need to evaluate and set data controls at the regional level. Until now, businesses who wanted to localize their data often had to choose to restrict their application to one data center or one cloud provider’s region—sacrificing performance or security as a result. The Data Localization Suite helps businesses get the performance and security benefits of Cloudflare’s global network, while making it easy to set rules and controls at the edge about where their data is stored and protected.

On December 17, Cloudflare announced the release of Cloudflare Pages, the next-generation website development platform with exceptional performance, security, scalability, and pricing. Cloudflare Pages is JAMstack-compatible and offers exceptional security, scalability, pricing, and performance—up to twice as fast as other platforms. Cloudflare Pages provides developers a simpler, faster, and more collaborative way to build websites for free.

On December 22, Cloudflare announced the acquisition of Linc, an automation platform to help front-end developers collaborate and build powerful applications. Linc has done amazing work with Frontend Application Bundles (FABs), making dynamic backends more accessible to frontend developers. Their approach offers a straightforward path to building end-to-end applications on Pages, with both frontend logic and powerful backend logic in one bundle. With the addition of Linc, Cloudflare will accelerate Pages to enable richer and more powerful full-stack applications.

On December 23, they announced that you can now set up your Access policies to require that all user traffic to your application is filtered by Cloudflare Gateway. This ensures that all of the traffic to your self-hosted and SaaS applications is secured and centrally logged. You can also use this integration to build rules that determine which users can connect to certain parts of your SaaS applications, even if the application does not support those rules on its own.

It seems like Cloudflare always has something going on lately.

Zoom (ZM) - Zoom Video Communications provides telecommunications services that allow people to connect via video, voice, and chat as well as sharing content. The dedicated cloud-based platform aims to offer a superior user experience compared to traditional teleconferencing options, and its device-agnostic features offer high-quality communications regardless of how users connect to the platform. Announced earnings on November 30th and the stock has been in a downward spiral ever since. Although many people seem to be dumping it every day, I still believe that they have a lot to offer. Revenue Growth was 367% Y/Y, with 485% Y/Y growth in Customers with more than 10 employees. Enterprise traction continues to be strong with 136% Y/Y in count. International customers make up approximately 31% of the business, and they have added new international customers at a rate of 629% Y/Y.

Gross margins were a weakness in the report at 68.2% compared to 82.9% last year and 72.3% last quarter. The company is providing the service for free to many users including K-12 schools during the pandemic. This is a situation where Schools using Zoom less, would actually help make Zoom more profit.

Next quarter guidance ranged from $806 million to $811 million and was one of the biggest reasons for the sell off. Although on the surface those numbers look amazing Y/Y, it is the sequential numbers that have investors upset. I guess they were expecting a much, much bigger beat and increase.

One of the highlights of Zoom’s earnings report was that they are the Recognized Market Leader in Gartner’s Magic Quadrants for Meeting Solutions and UCaaS. In this report, Gartner forecasts only 25% of enterprise meetings will take place in person, compared to 60% today. The analyst firm also predicts that 74% of companies plan to shift to even more remote work.

The fear of a lot of investors with Zoom is its growth prospects after the pandemic. They are already working to expand their offerings. Another note to point out is that they were happy with the low churn they have had. With the stock price punished as far as it is now, I fully expect it to perform well in 2021.

Datadog (DDOG) - Datadog operates a fast-growing platform that monitors customers’ cloud activity and mines it for business insights. Although I have trimmed this position a little this month, I still have a very high conviction in it. Dollar-based revenue retention has been over 130% for 13 consecutive quarters, showing how much value customers continue to expand their usage across the platform and how much Datadog has to offer in new products and services. (It revealed eight new products and features over the summer at Dash, its annual user conference, and has since announced several more.) It’s possible this stock goes sideways for the next quarter or so before busting out again sometime next year.

Teladoc (TDOC) - Teladoc provides virtual access to healthcare providers with a portfolio of services covering 450 medical subspecialties from non-urgent, episodic needs like flu and upper respiratory infections, to chronic, complicated medical conditions like cancer and congestive heart failure. On December 16, Amazon announced that they are building a Telehealth services business that could compete against Teladoc, driving shares of Teladoc down after this announcement. Amazon started a Telehealth service called Amazon Care in 2019 for its Seattle-based employees. The company hinted that it could expand Amazon Care to more employees in the future and now it seems like it will be happening. Amazon tends to jump in to a lot of different businesses, and many do not become very successful. I’m not really worried at this point, but it is something to keep an eye on.

On December 22, World Telehealth Initiative (WTI), a leading nonprofit organization working to advance sustainable access to healthcare in under-resourced communities around the world, announced an investment from Intel Corporation. The investment will be used to support WTI’s global scale, especially amid the COVID-19 pandemic, and further leverage Teladoc Health’s virtual care enablement platform to expand access to care worldwide. WTI enables access to care in more than 15 developing communities worldwide and plans to expand to 40 communities within the next two years. WTI will use Intel’s investment to partner with more community clinics in developing countries.

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. Announced earnings on December 3rd. Revenue of $382.92M (+53.5% Y/Y) beats by $21.59M. Subscription revenue was up 54% to $366.6M. Professional services sales increased 43% to $16.3M. Billings were up 63% to $440.4M vs. the $379.6M consensus. Non-GAAP gross margin was flat on the year at 79%. For Q4, DocuSign guides revenue of $404-408M (consensus: $387.4M) with subscription revenue of $384-388M. DOCU expects billings of $512-522M and non-GAAP gross margin of 78-80%. Overall this was an excellent beat and raise, with sequential acceleration from the previous quarter. With a small beat during this current quarter, they will once again be above 50% increase.

Total customers grew by 260k (46% Y/Y), while enterprise & commercial customers grew by 44k which was a 64% Y/Y increase. International growth was up 77% and is now contributing 20% of total revenue. “As companies accelerate the digital transformation of their business and agreement processes, DocuSign’s role as an essential cloud platform continues to grow,” said Dan Springer, DocuSign CEO. "Our Q3 results reflect that tailwind, as well as the immediate and long-term value that customers see from eSignature and our broader Agreement Cloud.”

Etsy (ETSY) - Etsy operates a global marketplace where people can make, sell, and buy unique goods online. The company also offers various services to support its sellers. On Monday, November 30, CEO Josh Silverman stated “The most-searched term on e-commerce site Etsy this year is “personalized gifts, It is even more popular than queries for masks, a category that was virtually nonexistent on Etsy this year before the coronavirus pandemic caused a boom in sales” What a great way to start off the Holiday Shopping season! I’ve seen numerous commercials on television and hope this results in another blowout quarter when they next report. They’re already guiding for their best quarter ever, and I fully expect them to beat it. I’m a big believer that 2020 will be the breakout year for Etsy and they will see this carryover moving forward.

Shopify (SHOP) - Shopify’s e-commerce platform allows merchants of all sizes to build an online presence, including storefronts and fulfillment, payment, and shipping services. Shopify announced Black Friday-Cyber Monday total sales were up by more than 76% to top $5.1B. The company notes that in addition to the record-setting weekend, it saw holiday shopping start earlier than ever before, with daily total sales increasing 19 days before Cyber Monday (almost two weeks earlier than previous years). In the week leading up to Cyber Monday, sales increased by 84% Y/Y. Shopify’s top-selling countries were the U.S., U.K., and Canada, while four markets – Japan, Italy, Germany, and the U.K. – generated triple-digit sales growth. Just over two-thirds of those orders were placed on mobile devices, which remains nearly unchanged from the previous year. Shopify President Harley Finkelstein noted that with the “center of gravity in commerce shifting from in-store to online, the pandemic has accelerated a change we have long anticipated.” I don’t see things ever shifting completely back.

I learned a lot more about investing over the course of the year. Having more time to research really allowed me to dig into the companies I was interested in. If you’ve been following along in my journey, you have also noticed how my reporting has changed throughout the year. I’ve tried to keep things as simple and clear as possible, while also explaining why I was making the decision that I was. I hope that you have found some of this information useful. I look forward to continuing this in 2021.

This will be the last time I bore you with an update about my personal health. When I retired, I set a goal to exercise more frequently and to lose 25 pounds in 2020. As of today, I have lost 22.2 pounds, so I fell short of my goal. I underestimated how hard it would be to manage my eating habits during the holidays, because I wanted to be able to really enjoy the entire holiday season for the first time in my adult life. In prior years, I regularly worked 60 or more hours per week and often missed out on some things. I plan to continue my journey in health and wellness in 2021, but will not be reporting about it here each month.

Goodbye 2020, on to 2021…