Disco Gator's July 2021 Update

July 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…

In July, the roller coaster year continued. We ended the month down at -3.54%, alternating between positive and negative returns each of the last six months. The main reason we were down this month is because I was buying up as much Digital Turbine and Pinterest as I could, expecting big things from them moving forward. I got a good portion of the funds to do this from Crowdstrike and DocuSign, trimming them after they had run up a bit in mid July.

We now know that although Pinterest turned in amazing financial numbers, the decrease in users punished their stock. Digital Turbine’s fate remains to be seen but I am a big fan of this company and feel the stock is undervalued. At one point the two of these made up close to 35% of my portfolio. Unfortunately, they were both down around 20% each in July. (APPS -19%, PINS -23%) It’s hard to have a good month while taking that deep of a hit.

After Pinterest’s results, I can see how I was blind to the concerns about Monthly Active Users last quarter. I overlooked something that was obviously a lot more important to most investors than I had valued. I was focused more on Revenue and profits, expecting them to easily beat the consensus. After reading the conference call notes, I plan to continue to hold on to Pinterest for now. I will continue to do so until I feel I have a better opportunity elsewhere.

As a reminder, I post results the last weekend of the month. This made July a five week period. Our high point this period occurred on July 6th when we closed the day at +29.75%. Our low for the month occurred on July 16th when we closed at +19.30%.

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
   YTD           +21.37%      +17.02%      +14.14%      +13.85%      +12.73%        24 

July was going relatively well until this past week when things fell apart, led by Pinterest’s poor showing. The Fear and Greed index hit a YTD low of 17 on July 19th and a high of 45 on July 2nd. The index stayed in the fear range for a good part of the month before ending in extreme fear at 24.

After a quiet June where I didn’t make any changes, July was quite the opposite. On July 9, I decided to exit my position in Zoom (ZM) at $383.58. Although our ratings system still loves Zoom, I see Zoom’s Q3 results being very challenging and I don’t want to stick around that long to see how it plays out. I wouldn’t exit a position without a plan to invest in something else, so I started a position in Upstart Holdings (UPST), averaging in at $115.45.

I also utilized this change opportunity to reset allocation in my portfolio. As I mentioned last month, my conviction in Digital Turbine has been growing quite a bit, so I decided to make it my largest holding. I feel as they have plugged in their acquisitions, that the company value hasn’t increased proportionately. Their organic growth was strong prior to these acquisition and now they could be turning in +200% growth the next few quarters. I also increased my position in Pinterest (ouch!) And Fulgent Genetics.

More about Pinterest below as I assess where I want to be with this moving forward.

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
Digital Turbine (APPS)     18%         02/02/21          $60.76        -18.77%          +3.60%
CrowdStrike (CRWD)         16%         01/01/21         $211.82         +0.15%         +19.73%
DocuSign (DOCU)            13%         01/01/21         $222.30         +6.75%         +34.07%
Pinterest (PINS)           13%         03/08/21          $67.38        -23.35%         -12.59%
Roku (ROKU)                11%         05/07/21         $327.00         +3.07%         +30.98%
Square(SQ)                 11%         01/04/21         $219.15         +3.05%         +12.83%
Upstart (UPST)             11%         07/09/21         $115.45         +4.60%          +4.60%
Fulgent Genetics (FLGT)     7%         03/12/21          $93.86        +12.31%          -1.72% 

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. Looking at how much Digital Turbine and Pinterest were punished, it is easy to see why I had a down month. I certainly hope Digital Turbine can get it done this month.

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. Although they tailed a bit this past week, They were going strong mid month. They are still projected to have a big quarter and now seem to be the one company I’m invested in that is closest to being a sure thing. I trimmed here a bit in July as their valuation continues to soar. They almost have to have a great quarter, with a beat to justify this frothy price. After the Pinterest debacle, I could really use them holding strong when they announce.

They end July as a high 3??

Digital Turbine (APPS) - Digital Turbine simplifies content discovery and delivers it directly to the device. Its on-device media platform powers frictionless app and content discovery, user acquisition and engagement, operational efficiency and monetization opportunities. After digging deeper into Digital Turbine’s business, I decided to increase my position. They seem well setup for some really great quarters moving forward and I believe that they are grossly underpriced and misunderstood. One of the biggest fears investors have is with Apple’s recent privacy changes with IDFA, but leadership has already come out and said they haven’t experienced any negative effects from this.

The acquisitions seem to be great compliments to their business and I look forward to seeing how this plays out in earnings. We will have to wait a bit as this isn’t expected for another month or so. Digital Turbine ends July ranked as a 5?? and our #1 stock overall.

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 continued the scorching pace that they experienced in June, but tapered off a bit the last week. As I was writing my updates this month, it suddenly dawned on me that about half the companies I invest in are somewhat of household names. Prior to selling out of Zoom this past month, 5 of the 8 were known by most Americans.

What does this mean from an investing standpoint? That’s a good question, but I imagine novice investors would feel a lot more comfortable investing in a company that they have heard of, and know something about, than they would a company that they may not know anything about.

DocuSign is one of those companies and one that I can see having a long growth runway ahead of them. They have really simplified so many processes for people that it would be silly for this not to continue. They end July ranked as 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. As fears of a Covid resurgence run rampant, Fulgent Genetics stock price appreciated accordingly. I’ve been noticing a lot more mask wearing when I’m out and about, and I live in a state that isn’t known for being big on masks. Don’t get me wrong, still not to the level that you see elsewhere, but noticeably more.

They will announce earnings on August 9, and I fully expect them to blow analysts projections out of the water. I think they easily come in at more than $200M in revenue, and wouldn’t be surprised if they approached numbers closer to $220M. As mentioned previously, I added to my position twice in July. Fulgent finishes July ranked as a high 3?? in our system.

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. Oh Pinterest, why must you be so ugly. Pinterest announced earnings on July 29 and completely crushed their financial metrics. Analysts were expecting $562M in Revenue (+106% Y/Y), but they turned in an astounding $613M (+125% Y/Y) which was a $51M beat!

Now the ugly part. Monthly Active User (MAU) growth was terrible. The expectation was that MAU would grow to 484M, but they ended up with just 454M (+9$ Y/Y). US numbers were actually down 5% while international users were up less than expected. To make matters worse, during their announcement they mentioned that so far in July, numbers are trending even worse at -7% for the US.

Not all MAU are created equally. On the conference call, Ben Silbermann – President and Chief Executive Officer, stated that the majority of the miss from this metric was due to web users being down versus those using the mobile app. Web users tend to be less engaging and generate less revenue than the people that come directly to Pinterest through the app. In addition to this, Silbermann stated that MAU on mobile apps actually grew in the US Y/Y and internationally by more than 20%. So they are gaining more profitable users while losing the less profitable ones. This makes sense considering the revenue beat that just occurred. Keep in mind, there is still some unwinding occurring where their traffic is down due to covid restrictions being lifted in various areas.

The main reason I have been increasing my position in Pinterest is because I fully expected the monetization of users would greatly improve, which it most certainly did. Average Revenue per User (ARPU) was $1.32 (+89% Y/Y) overall, and pretty much why I was still in Pinterest in the first place. Although still only $0.36 per user, International ARPU was up 163% Y/Y, and up 38% Q/Q. International Users makeup 80% of all MAU, so with this portion growing so quickly, the numbers should add up over time.

During the conference call, the CFO guided to the low 40s% for Q3, stating that they had quite an impressive comp from the previous year. Even without strong growth in MAU numbers, I can still see Pinterest having significant growth as a business. The big question is, will the stock follow suit or lag behind?
Pinterest ends July still ranked as a 5?? in our system.

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 has been on a tear ever since they announced earnings three months ago. Now we find ourselves a few days away from their next earnings announcement, very excited to see how the past quarter has gone.

Mid month, Roku stated that first-time advertisers continue to flock to their platform and made up 42% of upfront spending commitments this year. I truly believe that this is just getting started and can easily see Roku’s revenue come in at mid to upper 70% range this coming quarter. They remain ranked as a 4?? in our system.

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. As expected, Square launched Square Banking to support small business cash flows. This allows small businesses to sync payments, business banking accounts and cash flow seamlessly together. From their website, “When you take payments and bank through Square, everything is connected. Watch your sales flow directly into Square Banking, so accessing and moving your money is fast, easy—and can even be automated.” This opens up FDIC insured core products to their growing list of sellers. Another module if you will, and a way for Square to make things more convenient for their customers.

With everything connected, a business can make sale through a terminal and immediately have that money available in their checking account, which can then be spent instantly using the Square Debit Card.

I really look forward to Square announcing earnings on August 5th so I can dive into the conference call notes to see what information is available about Square Bank, and my beloved Cash App. Square is ranked a 4?? in our ratings 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. I have been following Upstart for a few months now and finally made the decision to buy in. Their technology has provided a win/win/win opportunity for borrowers, financial institutions, and the institutions that end up buying the underwritten loans. The company’s mission statement is, “You are more than your credit score”. By utilizing AI, Upstart is increasing approval rates while decreasing interest rates at the same time.

One of the biggest reasons I got in now was due to their recent expansion into auto loans. I suspect it’s only a matter of time until this widens even more to include student loans and even mortgages.

Although I have had a lot success by utilizing the recommendation of our ratings systems to help choose my new investments, this time our ratings have Upstart as a mid to low 3??. This is near the floor of were I would consider starting a new position. I was starting out a bit cautious with this one making it my second smallest position. (Barely)

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.

Close to half of the 100 companies that we track in our ratings system will announce earnings over the next week, and quite a few more over the course of August. This should make for a very interesting month, and quite a few decisions to be made.
?I certainly hope we have significantly more good news than bad. We shall see.


Thank You DiscoGator for such a rich write up!

Actually, I was looking out for one of the board regulars to post about their take on the recent Pinterest earnings results, so that I could validate my take from the earnings call with someone else’s; and this was perfect :slight_smile:

While I believe that slowing user growth, which is mostly attributed to web users, might continue to be seen until Q4, revenues might still continue to grow upwards of 60% for many quarters to come given the room in ARPU expansion and new products/features driving more engagement.

As with Facebook, having conquered the world (2.9B MAU), user growth rates are very low(2-3%) but revenues grow steadily(astonishing 55% in Q2’21).

With Pinterest at 478M active users, it still has a fair bit of runaway ahead of it before users really saturate and accelerating revenue will help the stock climb higher as well.