Disco Gator's January 2022 Update

January 2022 Portfolio Update

I usually start off my monthly update with a disclaimer stating how things can turn south at any given time, and how our portfolio can drop 30% two or three times a year. If you’re reading this, you already know this to be true. In fact, my current drop from November 1, 2021 to January 27,2022 is now sitting at -56%. What this means is my portfolio value today is less than half of what it was just three months ago. I am very thankful that I had built up a nice buffer prior to that, so I haven’t gotten to the point of panic.

People may wonder why I’m not more panicked. Many have said since I started this journey that I was crazy and would end up broke. A closer look at the companies I invest in tells a different story. What exactly has changed with the companies I invest in? Have they reported catastrophic losses that resulted in the stock plummeting? Are they going out of business? Are they no longer growing? The answer to these last three questions is the same for each of them. A simple “no”. In fact, I believe and certainly hope that the bottom is near. Once these companies start announcing earnings, I can’t imagine them not rebounding at least a little bit. Many of the price multiples have dropped to levels that we haven’t seen in more than a year, some even longer than that.

When I was depositing money into my brokerage on a weekly basis, I used to not mind periods like this. It gave me the opportunity to get better entry points on some positions and always seemed to pay off in the long run. If I was still working, I would have been buying as much as I could over the past three months as it would have helped my overall cost basis.

We close January with our third double digit decrease in a row, with the last two trading days keeping us from our worst month ever. I haven’t made any changes to the portfolio for nearly two months now. The last change was selling Asana and buying Snowflake the first week of December. I did add a little to Datadog, DigitalOcean, UiPath and Upstart, with the cash I made from selling calls and puts. I will be ecstatic if I make it through February without any changes. Most of my companies will announce earnings in February and if I don’t make any changes, that means that they all met my expectations. I’ll share some of my expectations for each of my companies below.

Lets go ahead and get into some numbers so we can see how 2022 has started off. 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 %      Portfolio       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
   YTD          -21.46%       -21.46%       -3.64%       -9.30%       -5.55%        38

Not the start we were hoping for after getting clobbered in November and December. Although we had a terrible January, none of the indexes started off well either. The Fear and Greed Index had 7 days each in Greed, Neutral and Fear, with a monthly average of 50. My portfolio hit a low of -31.16% on January 27. I would be quite pleased if it never drops below that in 2022, but I am afraid that is wishful thinking.

As I previously mentioned, I pretty much went through January unchanged. I spent a lot of time in January researching some of the companies on my watchlist. I want to be ready to move if one of my companies doesn’t meet expectations with earnings and I have some good candidates.

I went back to look at 2021 because I felt like I made a lot of trades. In the grand scheme of things, it really wasn’t that bad. In total, I owned stock in 20 different companies in 2021. Keep in mind I started and ended with 8, only keeping 1 (Crowdstrike) for the entire year. I added and sold stock in 12 different companies, adding and selling Fulgent Genetics (FLGT) twice.

Although I can’t guarantee it, I plan to make fewer moves in 2022. I really feel like I have a better grasp of what I am looking for in a company and have really narrowed my focus. I look forward to revisiting this come the end of December to see how it played 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.

Company                Allocation       Initial        Purchase       November      % Change
                                       Purchase         Price         % Change     since Pur
Datadog (DDOG)            21.02%        1/1/22         $178.11        -17.97%       -17.97%
[monday.com](http://monday.com) (MNDY)         18.82%        1/1/22         $308.72        -32.20%       -32.20% 
Crowdstrike (CRWD)    	  14.62%        1/1/22	       $204.75        -11.78%       -11.78%
Snowflake (SMOW)          11.16%        1/1/22         $338.75        -18.55%       -18.55%
Upstart Holdings (UPST)	   9.80%        1/1/22	       $151.30	      -27.95%       -27.95%
[bill.com](http://bill.com) (BILL)            9.31%        1/1/22         $249.15        -24.46%       -24.46%
UiPath (PATH)              8.87%        1/1/22          $43.13        -15.30%       -15.30%
Digital Ocean (DOCN)       5.93%        1/1/22          $53.90        -28.62%       -28.62% 

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. You can see how the pain was distributed across all of my holdings. When all of my holdings are down, I know that it isn’t due to performance related issues. Of course, that doesn’t help ease the pain, it just lets me know that changes are not necessary at this point.

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. I mentioned this in November, but it stands to be mentioned again considering the turmoil with our stocks that we’ve encountered since then. Bill.com gets the bulk of its revenue from its variable revenue stream, which is primarily transaction revenue. While this revenue has been increasing at a rapid rate, it is far less consistent than subscription revenue. This could mean that we could have quarters with big beats if transactions are high, but also some misses if transaction volume falls short. Don’t get me wrong, I actually expect the gap between variable and fixed revenue to widen even more as the volume of payments continues to increase with their customers. Just something to keep in mind.

Bill.com announces earnings on Thursday. I estimate that their revenue will come in around $140M which would be +159% Y/Y. Anything significantly short of this would be a red flag and a reason I may sell. They should remain in triple digits for the two quarters after that as well. We will find out more on February 3.

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. I’ve seen a lot of discussion where people are starting to bail on Crowdstrike. Yes, their Y/Y comps have been decelerating rapidly, however, their Q/Q comparisons are still looking pretty intact. Q3 was +12.6% Q/Q where the previous quarter was +11.5%. I know that is just one quarter and I’m not claiming any sort of future acceleration, but I do think their Q4 results will come in at around a +12% Q/Q result. Their current estimate is for $411.42M and if they come in $14M higher than that they will be right around the 12%. As a matter of perspective, they beat Q3’s number by $16M, and their average beat has been over $12M for the last eight quarters. This seems somewhat reasonable to me.

Ultimately, I think their 2020 revenues were greatly accelerated due to the onset of the pandemic and they were up against some big numbers with the unexpected jump. To me they’re still growing strong off a much bigger base number than the competition. I’ll continue to hold to see how things play out.

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 is currently my largest holding at more than 20% of my portfolio. Early in January they announced a new partnership with AWS. Just this past week, they announced that they received FedRAMP Agency Authorization at the moderate impact level through sponsorship from the Department of Veterans Affairs.

FedRAMP is a United States federal government program that provides a standardized approach to security and risk assessment of cloud services and technologies. FedRAMP enables the federal government to accelerate the adoption of cloud computing by creating transparent standards and processes for security authorizations. Agencies can then leverage these authorizations on a government-wide scale. At present, the FedRAMP marketplace lists 40 federal agencies that have granted Datadog an Authority to Operate (ATO).

As federal agencies migrate to the cloud, monitoring and observability become very critical. This authorization gives the public sector the ability to utilize Datadog’s products.

Datadog will announce earnings on February 10. Although analysts expect revenue increases in the mid 60% range, It is very realistic that they will report revenue increases in the mid 70% range again, with the possibility of a slight acceleration. They have beat revenue by at least $20M the last two quarters and a similar beat will put them right in line with this. A beat of $10M will put them over 70% Y/Y and is right around the minimum I will look for.

Digital Ocean (DOCN) - DigitalOcean helps developers, startups and small and medium-sized businesses (SMBs) rapidly build, deploy and scale applications. This is done on a simple platform, with predictable pricing and award winning customer service. Digital Ocean has accelerated revenue over the past four quarters and I expect them to do so again this coming quarter. The last four have looked like this: Q320 +24%, Q420 +26%, Q121 +29%, Q221 +35%, Q321 +37%. They guided for +36% in the current quarter, so it will only take a small beat for them to continue this trend. That’s the good news. The bad news is that their beats are usually slim, beating by only $2.59M in the latest quarter. A similar beat for this quarter will put them at +39%, keeping our acceleration intact. The Net Retention Rate is on the lower end of companies that I invest in, but it too has been accelerating every quarter for the last 7 at least. It currently stands at 116%.

Digital Ocean announces earnings on February 24. As I just mentioned, a beat as small as $2M will continue the acceleration trend. This is my smallest position due to lower growth rate, but I will continue to keep a close eye on it if acceleration continues.

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. No news about Monday came out in January, so I will talk about some of things that I really like about them. Although I try to stay away from foreign companies, there are sometimes benefits to finding good ones. For companies based in the United States, one of the things that we look towards is their global expansion and how much of their business currently comes from abroad. This can give us insight towards what their future expansion can look like. Monday.com is based in Israel and already has a big head start on that. Currently, 52% of their revenue comes from outside the US. They have been focusing on gaining large customers, with customers with $50k or more in ARR was +231% Y/Y and 30% Q/Q during their most recent results. They are strictly a subscription service. People pay them for their software without and revenue coming from services that tend to be lower margin. Of course, one of the biggest bear arguments is that S&M is more than their gross profit

Although I expect they will announce earnings sometime in February, I can’t really say when. They’re a newer public company so this will be the first time they report their Q4 and end of year results. They did give three weeks notice for the last two earnings dates and haven’t announced a date for Q4 yet. I think it is a safe guess that we are at least three weeks out.

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 continues to grow customer count at a rapid rate, while their current customers continue to increase consumption. Their largest customers, which spend greater than $1 million per year was up 128% Y/Y last quarter and now number 148. This accounts for 53% of their total revenue, up from 46% a quarter ago. This is just exceptional growth so I’m less nervous about how expensive this company is.

I say expensive, but the stock price has plummeted alone with the rest of my portfolio. In January, Snowflake stock dropped to the cheapest it has ever been based on our valuation metric as well as in P/S ratio. I’m happy I initiated my position last month and can see myself adding to it in the future. They’ll announce earnings on March 2.

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. On January 19, UiPath released a survey about the current labor shortage. In this survey they found that 62% of US companies are currently struggling with the labor shortage. As a result of this, 78% of them are likely to invest or increase their investment in automation to manage through the impact of higher-than-normal turnover rates.

Of course, I am always skeptical of any report commissioned by a company that I invest in, but a lot of this seems like common sense. This does not mean that these companies looking to increase their current levels of automation will look towards UiPath as part of their solution, but it is definitely something that I’m interested in keeping tabs on with my investment here.

The main KPI I track with UiPath is ARR. They have been beating their mid-point guidance by a little more than $20M the past two quarters. If this holds true in Q4, they will end up with a +59% Y/Y return, and a slight acceleration from last quarter which was +58%. To be clear, I won’t be disappointed with less than a $20M beat. A small beat will keep them on a good pace. As of today, they have not announced a date for their Q4 results. They usually give a four week notice so we may be looking at early March for this.

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 is by far the most punished stock that I own. Although people site that the stock prices is up exponentially since their IPO, they have also tripled the amount of banks and credit unions that they partner with, announcing some of them since they last reported. As previously mentioned, the CEO believes they will have partnerships in the hundreds, so we still have a long way to go. The company is actually very profitable with $237M in FCF which is a margin of 38%. With them currently holding only 1.1% of their TAM, there is plenty of room to grow. I’ve gone back and forth on whether I wanted to exit my position here or not. I have finally decided that I would wait until they release their next earnings report which will come out on February 15. One of the things that bothers me about Upstart is that I really don’t know what to expect from them when they do announce. This should be a bigger red flag for me and may be one of the reasons I end up exiting my position here.

Now that we close January with two great days, helpfully we can start working our way back to break even on the year and get us headed in the right direction. I really think our companies announcing earnings will help send us in the right direction. I look forward to digging in to all of my earnings reports as well as those of many other companies. Hopefully February brings much more positive results.