Disco Gator's February 2022 Update

February 2022 Portfolio Update

In February it looked like things were turning the corner until Russia invaded Ukraine and the tanking returned. Thankfully we rebounded a bit after that to salvage the month, but we were moving along swimmingly prior to that. We hit a month high on February 16 where we were +15.57% for the month and our YTD had improved to -9.22%. Our low point of the month occurred on February 23 when we were -28.66%.

One of the main reasons things started turning around for us was that it was finally time for our companies to start announcing earnings. During the month, five of the companies I held announced their Quarterly Results. Four of the five had amazing results, and one of them (DigitalOcean) was strong in some areas, but not in the one that was most important to me which is revenue growth. In response, the stock price of four of the five shot up quite a bit. The sole abstention was monday.com which took a dive in spite of their strong results. Even though I was not happy with DigitalOcean, the market was and the stock price went on quite a run.

Without a doubt, the three month stretch that ended with January was the worst in my investing career. I first started investing after the stock market crashed in 2008, and experienced the crash when Covid hit in 2020, but this one was much more prolonged than any I experience before. In spite of this, I never wavered nor did I consider exiting the market at any time.

First of all, when would I have exited? I wouldn’t have exited after one bad month. This is something we encounter 2-3 times a year, so I would have at least waited another month. You can’t predict in advance when things will drop, nor can you predict for how long they will do so. If I exited after a terrible November/December, when would I have gotten back in? The point is, we just don’t know when things will start going down and when they will turn back up. If I sold after dropping 9.42% the day before Russia attacked, I would have missed out on the +9.92% the very next day. As the saying goes, “Scared money don’t make money.”

Lets go ahead and get into some numbers so we can see where I stand two months in. 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         YTD %        Monthly        DJIA%      Nasdaq %     S&P 500%    Fear and
                change       % change       change       change       change    Greed Index
 January        -21.46%       -21.46%       -3.64%       -9.30%       -5.55%        38
February        -17.30%        +5.29%       -3.53%       -3.43%       -3.14%        24
   YTD                 -17.30%.             -7.04%      -12.41%       -8.51%        24

After an abysmal January, we started fighting back throughout the month of February, ending the month up 5.29%. All of the indexes were negative in February, so this gave us the opportunity to close the gap towards them a bit. The Fear and Greed Index sat in Fear almost the entire month, with two of the last three days of the month being Extreme Fear. The average for the month was 34 (Fear), hitting a high of 41 on February 16 and a low of 24 on February 28.

After going two months without changing any of my positions, I made one change in February and rebalanced my portfolio. I sold out of DigitalOcean (DOCN) and started a new position in Cloudflare (NET). I didn’t want Cloudflare to be my smallest position, so this resulted in my tweaking a few other things to build my position up a bit.

Although the market was very happy with DigitalOcean’s earnings results, I was less thrilled. Their last three quarters they averaged a revenue beat of $3.8M each, with the smallest beat being $2.6M. I was looking for a $2M beat this quarter and they ended up with +$641k, which was significantly less. This “beat” ended their string of quarterly acceleration. Their DBNRR also stagnated at 116%. These metrics were already the lowest of any company that I invest in, hence it being my smallest position. Due to the lack of acceleration, I sold my position.

With three companies announcing in March, there is a chance that I will be making another move during that time frame. As of now, Zscaler is at the top of my watchlist, and I’m looking for a way to get them on board. There is a possibility that I exit my Upstart position as I am still not all that comfortable with them. I guess we will see how it plays out.

The following chart shows the breakdown of my current positions as well as their individual performance. They are listed by allocation from highest to lowest. I am going to start tracking my cash percentage here as well. Although I almost never have a significant amount of cash on hand, I will need to accumulate some over the next month to pay taxes.

Company                Allocation       Initial        Purchase       February      % Change
                                       Purchase         Price         % Change     since Pur
Datadog (DDOG)            21.25%        1/1/22         $178.11        +10.27%        -9.54%
Crowdstrike (CRWD)    	  15.78%        1/1/22	       $204.75         +8.07%        -4.66%
Cloudflare (NET)          13.37%       2/24/22          $95.75        +21.59%       +21.59%
Upstart Holdings (UPST)	  12.10%        1/1/22	       $151.30	      +44.93%        +4.42%
[monday.com](http://monday.com) (MNDY)         10.14%        1/1/22         $308.72        -24.10%       -48.54% 
[bill.com](http://bill.com) (BILL)            9.11%        1/1/22         $249.15        +26.39%        -4.52%
Snowflake (SMOW)           9.04%        1/1/22         $338.75         -3.71%       -21.58%
UiPath (PATH)              7.97%        1/1/22          $43.13         -4.98%       -19.52%
Cash                       1.29%

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.

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

bill.com (BILL) - bill.com is a cloud software provider of accounts payable, accounts receivable software integrated with payments processing service (ACH, check writing, cross border payments and virtual credit cards) to small and medium sized businesses. Bill.com software automates the payables cycle from purchase order to payment, as well as the accounts receivable process from shipping to payment. Bill.com was the first of my companies to announce earnings and they did not disappoint. Last month I mentioned that I was expecting revenue to be in the area of $140M. They totally blew this number away, coming in at $156M!! This represented an increase of 190% Y/Y, +35% Q/Q, and sent the stock soaring.

Organic revenue continued its acceleration for the fifth consecutive quarter, coming in at +82% Y/Y, with the subscription revenue accelerating as well. As expected, the transaction revenue continues its rapid growth at 121% Y/Y and +30% Q/Q. Gross margins continue to improve and are now up to 85%.

Overall great numbers across the board, exceeding what I expected and even hoped for. The integration of the Divvy and Invoice2go acquisitions already appear to paying great dividends. The stock responded quite favorably as it was my second biggest gainer in February. I look forward to continuing to follow their growth.

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. Once again I am back into Cloudflare. I first initiated a position in March of 2020, selling out early in 2021. The reason for me exiting my position was I felt the stock price had run up too much and it was becoming more of a story stock than a company based on fundamentals. After following them for the past year I see that the story is slowly coming around and the stock is in good shape to grow from here.

They announced earnings on February 10. Revenue was $194M (+54% Y/Y) which is an acceleration from Q3. They continue to add large customers (>$100,000 annualized revenue) with 156 new customers this quarter. That brings the total number of large customers to 1,416, up 71%. This is an acceleration from the past few years. Cloudflare’s focus continues to shift to larger customers as they now makeup more than 50% of the total revenue. Their Net Retention Rate improved to 125% and has steadily increased from 119% Q4’20.

The main reason I established this position is because I expect further acceleration of revenue. I think it is very realistic that they will be +57% in Q1 and possibly +59% in Q2. Cloudflare has been extremely consistent with their growth over the past five years and it is only getting stronger. I made this a decent sized position right from the beginning, not expecting it to gain more than 21% in less than a week. It is now my third largest position.

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. Crowdstrike will announce earnings on March 9. There has been a lot of discussion on the revenue’s rapid deceleration and the fact that this is a business that will no longer be a hyper growth company. As I mentioned last month, I do not believe this to be true. For sure they have come down from their +86% of Q320, but their Q420 was only +74%. I know what you’re thinking, that’s a big drop and you are correct, but that was last year. Why didn’t people sell out then? Q321 was +63% and I expect Q421 to come in somewhat close to that.

I think revenue in the area of $425M would be right around my expectation and would indicate that the bleeding off has stopped. As far as valuation goes, this is pretty much the cheapest Crowdstrike has ever been. The stock had an excellent month on no news. I added a little to my position this month and look forward to March 9.

Datadog (DDOG) - Datadog, Inc. engages in the development of monitoring and analytics platform for developers, information technology operations teams and business users. Its platform integrates and automates infrastructure monitoring, application performance monitoring and log management to provide real-time observability of its customers’ entire technology stack. Datadog announced earnings on February 10. They were the second company of mine to announce earnings this quarter, and the second one to blow away expectations! I was looking for revenue around $311M which would have been +75% Y/Y and they turned in a whopping $326M, +84% Y/Y! This was a big beat and it didn’t stop there. EPS was $0.20 against an expectation of $0.11. Free Cash Flow was $107M, which is a margin of 33%.

They now have 216 customers with more than $1M ARR, +114% Y/Y, and 2010 customers with more than $100k ARR, +63% Y/Y. They then guided Q1 for more than 70% Y/Y and FY 2022 revenues at +50% Y/Y. Overall I couldn’t have hoped for anything better. The stock responded favorably, moving us close to the break even point for 2022. This remains my #1 holding.

monday.com (MNDY) - monday.com Ltd. engages in the provision of enterprise social communication tools. It offers a platform that connects people and provides internal transparency and collaboration in an organization. Monday announced earnings before the market opened on February 23. Revenue was $96M (+91% Y/Y) and right in line with what I expecting. This is their third consecutive beat around $8M and may be something to watch moving forward. Net dollar retention rate of customers with 10+ users was 135%, up from 130% in Q3. Customers with greater than $50k ARR grew 200% Y/Y to 793, up from 264 in 20Q4. This was also up 29% Q/Q and is showing a very strong trend. Gross margins are still at 90% and the highest of any of my companies.

For Q1, monday.com currently expects $101M (+71% Y/Y) at the midpoint but I think we can count on it being around $109M (+85% Y/Y). The stock was punished after earnings even though I feel like they had really strong results. In fact, this past Thursday, I received an alert that they had hit an all-time low. That’s just crazy to me. Although one of my better performing companies, they are by far my worst performing stocks. I feel good about my position here and like how the data is trending.

Snowflake (SNOW) - Snowflake, Inc. provides cloud data warehousing software. It provides SQL data warehouse, zero management, and broad ecosystem products. It offers data warehouse modernization, accelerating analytics, enabling developers and monitoring and security analysis solutions to a various range of industries. Snowflake will announce earnings on March 2. They have forecasted a high end of $350M, but I think we can easily expect about $15-$20M more than that which will be a range of $365M to $370M, again putting them over +100% growth Y/Y. Customer growth has been really strong the past couple quarters and I look for that to continue in their Q4 results.

The stock is still a little pricey, and I trimmed it a slight bit this month because of that. There have been quite a few other companies with good earnings results and the stock was immediately punished. I wanted to minimize my risk here a little to better coincide with my conviction.

UiPath (PATH) - UiPath is a robotic process automation (RPA) vendor providing an end to end set of automation capabilities. The platform uses a patented computer vision technology and AI/ML capabilities to enable robots to emulate processes such as extracting information from documents, filling forms, and updating databases. With the exit of DigitalOcean, UiPath is now my smallest position. As I continue to learn more about this company, I find it surprising that they haven’t gained more traction. The land and expand capabilities are evident with their 144% DBNRR. As their customers begin using their product, they continue to find more ways that it cannot help them and usage increases throughout the organization.

Uipath will announce earnings on March 30, so we have nearly an entire month to go until we see how they did. A few things I would like to see are ARR in the $917M - $922M range, 650 Total new Customers putting them around 10,280, with the addition of 20 or so large customers with >$1M ARR, which would put them at 155. Anything noticeably short of this would cause concern and make me lean towards selling. Although I wouldn’t call the stock cheap, it did hit an all-time low this past Thursday. I am really looking forward to seeing what they say at the end of the month.

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. Upstart announced earnings on February 15 and appear to be back in beast mode. Revenue was $305M, +252% Y/Y, +33% Q/Q. Contribution Profit was $149M, +261% Y/Y, +56% Q/Q, and put them back on a much better path after the dip in Q3. Net Income was $59M, up from $1M LY and +102% Q/Q! Pretty much every financial metric they shared far exceeded any estimates or expectations. They guided for $300M at the midpoint for Q1 and $1.4B for FY22! The fiscal year guide was a big boost as we know they will come well over that.

Overall, it was hard to find anything to be unhappy with the company’s results and the stock movement reflected that. The part that I have a hard time with is the fact that I really didn’t know what to expect, nor how to even come up with a fair guesstimate. I mentioned last month that that alone should be a big red flag and reason enough for abandoning my position. I think it is inevitable at this point that I do, but I will likely let it play out a little longer.

When January closed, I was up 14% on the last two trading days to help prevent my worst month ever. At least it was nice ending the month on a high note. February closed in similar fashion, with three positive days at the end, resulting in +16% over that period. Maybe March can help us take the next step and really put together a great month.

As I end this update, I want to say that I am really looking forward to Crowdstrike and UiPath releasing their quarterly reports in March. I think that Crowdstrike has been unfairly punished and criticized, while UiPath is under appreciated. We will find out shortly if my thinking is correct.