Disco Gator's November 2021 Portfolio Update

November 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 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 now happened three times this year. Now on to this month’s update…

What a month! Easily my worst month since retiring and making the switch to living off my portfolio. Don’t get me wrong, I’ve endured other drops and there will be more in the future, but this all happened in one calendar month, which makes things appear worse. Now that I got that out of the way, lets talk about what I did in November while my portfolio dipped more than 30% from November 2 through November 23.

Being a retail investor with a condensed portfolio can be a very humble experience. Although I spend quite a few hours reading and researching, things don’t always end up like you hope and expect. Two months ago, I revamped my portfolio to higher growth stocks, a few of which plummeted, weighing down my returns.

I was reading some lengthy discussions on Saul’s board in regards to Upstart’s earnings and guidance moving forward. Initially I was surprised to see so many people selling out of the company when they have guided to another great quarter coming up. During this discussion, the biggest hangup seemed to be how Upstart didn’t have recurring revenue like SaaS companies do, therefore they would always have “lumpy” quarters. One of the more prominent members of the board ended up selling out completely due to them not having recurring revenue. Another of the more prominent members replied, “…are you just going to stick with SaaS for all eternity?” The first person’s repose, “I can try”

Initially I laughed, but it really made me think. As you may know, I maintain a spreadsheet where I track pertinent KPI for 100 companies. I decided to make a new column to designate whether the company was SaaS or not. After finishing this, I found that 49 companies were SaaS and 51 were not. After sorting the spreadsheet by future growth, I separated it into SaaS and non-SaaS. The results were very eye opening for me.

Although the non-SaaS companies are growing twice as fast as the SaaS, the SaaS companies stock was performing twice as good! We also track a form of valuation for the stocks and the SaaS were significantly more expensive.

I did not need any more information to convince me that I need to make a change. There is enough data at this point to realize investors are more hyped and willing to spend more money on companies with recurring revenue.

Once again, I evaluated my portfolio and decided to exit all but one of my non-SaaS companies. Gone were Lightspeed (LSPD), Affirm (AFRM), Digital Turbine (APPS) and fuboTV (FUBO). Sadly, I sold out of the four after each of them already endured significant drops. I don’t mind selling stocks for a loss as I don’t even consider any sort of price anchoring. The reason I mention this is because I bought into the SaaS stocks right before all of the SaaS stocks plummeted. Being on the wrong side of both sell-offs is how my portfolio dropped so much in one month

Now let’s get into some numbers so we can get a visualization of how things are going. 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     S&P 500 %     DJIA %      Nasdaq %    Fear and
                change      % change       change       change       change    Greed Index
 January        +12.72%       +12.72%       -1.11%       -2.04%       +1.42%        35
 February       +18.92%        +5.50%       +2.61%       +3.17%       +0.93%        48 
  March          +7.35%        -9.74%       +4.24%       +6.62%       +0.41%        51
  April         +10.51%        +2.95%       +5.24%       +2.71%       +5.40%        56    
   May           +5.10%        -4.89%       +0.55%       +1.93%       -1.53%        39
  June          +28.64%       +22.40%       +2.22%       -0.08%       +5.49%        41
  July          +21.29%        -5.72%       +2.27%       +1.25%       +1.16%        24
 August         +29.82%        +7.04%       +2.90%       +1.22%       +4.00%        53
September       +29.71%        -0.09%       -4.75%       -4.29%       -5.31%        25    
 October        +41.15%        +8.82%       +6.91%       +5.84%       +7.27%        72
November         +2.85%       -27.13%       -0.83%       -3.73%       +0.25%        27
   YTD           +2.85%        +2.85%      +21.59%      +12.67%      +20.56%        27

What a difference one month makes. In just 30 days, I went from crushing all of the indexes to them crushing me. Looking at the Fear and Greed index as it closes the month at 27 (Fear) is a bit misleading. In fact, from November 1-17 the index was in the Extreme Greed range with a high of 86. It tapered off in Greed through November 24 before dropping into the Fear range on November 26. As Warren Buffett famously said, “be fearful when others are greedy, and greedy when others are fearful.” We discussed this in our group chat the first time the market closed in Extreme Greed on November 1. Although I believe in staying fully invested at all times, it makes you wonder how different things could have been if I sold a portion of my portfolio into cash until we got out of Extreme Greed. Definitely something to think about next time it happens.

This is the second time in two months that I completely rebalanced my portfolio. It is something I am not very fond of and I surely hope things start turning around from here. I have three companies that will be announcing earnings at the beginning of December. If they all go well I shouldn’t be changing any positions next month. I expect Crowdstrike and Asana to be relatively fine, with UiPath more of a wild card.

The following chart shows the breakdown of my current positions as well as their individual performance. As part of the changes in my reporting, all of these numbers are for the entire month of October and not listed as any week ending reporting numbers. They are listed by allocation from highest to lowest.

Company                Allocation       Initial        Purchase       November      % Change
                                       Purchase         Price         % Change     since Pur
[monday.com](http://monday.com) (MNDY)         20.72%      11/11/21         $369.41         -2.60%        -2.60% 
Crowdstrike (CRWD)    	  15.32%        1/1/21	       $211.82        -22.95%        +2.51%
Datadog (DDOG)            14.54%       9/17/21         $143.93         +6.73%       +23.87%
Asana (ASAN)              14.38%       9/17/21         $114.07        -23.42%        -8.84%
Upstart Holdings (UPST)	  10.27%        7/9/21	       $115.45	      -36.38%       +77.47%
[bill.com](http://bill.com) (BILL)            9.66%      11/19/21         $328.00        -14.20%       -14.20%
Digital Ocean (DOCN)       7.32%      11/19/21         $131.77        -23.56%       -23.56%
UiPath (PATH)              7.03%      11/19/21          $54.42        -11.26%       -11.26% 

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.

Asana (ASAN) - Asana is a leading work management platform that helps teams orchestrate their work, from daily tasks to strategic initiatives. Asana adds structure to unstructured work, creating clarity, transparency and accountability to everyone within an organization—individuals, team leads and executives—so they understand exactly who is doing what, by when. No direct news of any significance came out for Asana in November. One of their largest competitors, Monday.com, announced earnings this month though and turned in stellar results. This should bode well for Asana as both companies have been running pretty similarly the last few quarters. We will find out for sure on December 2 when they announce earnings.

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 initiated a position in bill.com after exiting most of my non-SaaS holdings. When I revamped my portfolio in September, monday.com and bill.com were the two companies that just missed the cut.

bill.com announced earnings on November 4. Total Revenue was $116M, +152% Y/Y. All but $800k of the revenue is what they consider Core Revenue which represents subscription and transaction fees. This amount was up 164% Y/Y, while organic core revenue was up 78% Y/Y

bill.com generates their revenue through two primary sources. The first is subscription revenue, and this makes up 30% of their total Revenue. The second is through transaction revenue. bill.com receives a fee every time they receive or a send a payment. This makes up 69% of their total revenue. They now have more than 126k customers and 3.2M network members. The network members are those that the bill.com sends a payment to or receives a payment from. DBNRR is currently at 124% which I found to be surprisingly strong.

Non-GAAP Gross Margin was up to 83% from 76% for the same period last year. Gross profit was $97M, +176% Y/Y. Net loss was $14.1M while it was only $1.4M for the same period year prior. M&A is the main reason for this as they added Divvy and Invoice2go through this route.

As of now, my biggest concern is the fact they are cash flow negative and seem to be having a hard time turning this around. I’m currently sitting at close to a 10% position with this and will continue to read all I can about this company to get a better grasp of things.

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. On November 1, Crowdstrike moved to acquire SecureCircle, a SaaS-based cybersecurity service that extends Zero Trust security to data on the endpoint. With this acquisition, CrowdStrike will extend its industry leading Zero Trust endpoint security device and identity capabilities to include data. The all cash transaction is expected to close during CrowdStrike’s fiscal fourth quarter, subject to customary closing conditions.

They will announce earnings on December 1.

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 November 4. Revenue was $270M for the quarter representing a +75% Y/Y increase and 16% Q/Q, with a beat of $23M. This was an exceptional beat and shows revenue has accelerated from the previous quarter as well. EPS was also exceptional at $0.13 more than double the expected $0.06. Revenue guidance for Q4 was also raised to $291M where $264M was expected.

Customers with ARR of $100k or more increased 66% Y/Y as they continue to build on this. These customers represent 80% of their ARR. They now have more than $1 Billion in ARR. DBNRR remained over 130% for the 17th straight quarter.

Gross Margin was 78% for the quarter, up from 76% last quarter, but down from 79% Y/Y. They did mention that they expect further margin improvement in Q4 as well. They currently have a very strong cash position at nearly $1.5 Billion. 77% of their customers use two or more products, while 31% use four or more. Last year only 20% were using four or more products.
They mentioned a few times in their conference call about how cloud migration is ramping back up to the levels it was pre pandemic. This is the biggest factor of their acceleration and they expect to see this continue. Secondarily the adoption of new products is continuing to help their top line growth. For existing customers, about 2/3 of their growth is from expansion of current products while 1/3 is from the adoption of additional products.

Overall this was a great quarter and I added to my position a little.

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. I opened a position in Digital Ocean on November 19 after converting my portfolio to being more SaaS based.

They announced earnings on November 4. Revenue came in at $111M (+37% Y/Y) and was a slight beat from analysts consensus. Although 37% growth is lower than I typically like to follow, this has been accelerating for four straight quarters and I expect it to further accelerate in the coming quarter. DBNRR has been accelerating for six straight quarters and is now at 116% for the quarter that just ended. ARR remained consistent at +36% Y/Y.

The thing I like most right now is that they are already free cash flow positive, and management shows a big emphasis on profitable growth. Although still very early in their growth curve, they are well on their way to profitability.

I look forward to seeing how they progress over the coming quarters.

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. I initiated a position in monday.com after exiting my position in Lightspeed. When I revamped my portfolio in September, monday.com and bill.com were the two companies that just missed the cut. Although more profitable than Asana, this is a foreign company which I usually try to stay away from, hence why I went with Asana first.

Monday announced earnings on November 10. Q3 Revenue was $83M which is +95% Y/Y and 17% Q/Q. Customers with $50k or more in ARR was +231% Y/Y and 30% Q/Q. Gross margins are 90% and are among the highest of any of the companies I invest in.

For Q4 they guided for $88M which represents a +75% growth Y/Y. We will certainly expect a sizable beat here as that is what they have done so far in their brief history of being public.

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. As part of my November portfolio revamp, I started a position in UiPath on November 19. As of now it is my smallest position, mostly due to the growth rate being at the lower end of what I’m looking for.

What is Robotic Process Automation (RPA)? Simply put, it is automation software to end repetitive tasks and make digital transformation a reality. Ultimately, it makes it easy to build, deploy, manage software robots that emulate humans actions interacting with digital systems and software. Just like people, software robots can do things like understand what’s on a screen, complete the right keystrokes, navigate systems, identify and extract data, and perform a wide range of defined actions. Software robots can do this faster and more consistently than a human can, freeing up employees from these tedious tasks and allowing them to accomplish more pertinent work.

UiPath is consistently gaining new customers as they get strong reviews from their current customers as well as recognition from Gartner and Forrester as the leader in the space. As they gain new customers, they continuously get more and more out of them as evidenced by their 144% DBNRR. In fact, they currently have 118 customers with more than $1M ARR which was up 13.5% Q/Q.

They IPO’d earlier this year and the stock price is currently down. They will announce earnings on December 8 giving us a better look at how things are progressing.

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 November 9. Q3 Revenue was $228M, up 250% Y/Y, and 18% Q/Q. The Q/Q was a major fault to many investors and the selloff began. Number of loans hit 363k for the quarter which was +348% Y/Y and +26% Q/Q. The percentage of fully automated loans dipped to a low of 67% this quarter, from 71% last quarter and 69% last year. The conversion rate remained strong at 23%. Net income for the quarter came in at $29M as this company remains a strong money maker.

After one of their bank partners had decided to eliminate any and all FICO requirements for their borrowers last quarter, four additional banks dropped the requirement this quarter. This improves the overall accessibility of loans to all demographics.

With their expansion in auto lending, they are rapidly adding new dealerships to their fold, adding an average of more than one rooftop per day throughout Q3. Although this isn’t contributing much to their top line results as of now, it is expected to greatly improve them over the coming quarters.

Upstart is the only remaining non-SaaS company that I invest in. I will keep a close eye on this over this next quarter to see which direction it goes. I’m a bit apprehensive about this as my other non-SaaS companies had turned in great results but the stock price did not reflect it. We shall see.

I am happy to see November in the rearview window and look forward to seeing what December has in store for us. Can’t wait!