October 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. I assure you that when that update comes out, it will not be a rosy picture. Now on to this month’s update…
What a month! As we started the third week of the month, I was riding an all time high. Things seemed like they could not be going any better. As you are likely aware, things made a sudden and drastic turn in the opposite direction, culminating with a portfolio drop of 4.88% on October 30th to end the month. We took such a beating the past couple weeks that it felt like October must have been devastating. After entering numbers into my spreadsheet, I found I was only down 2.83% for the month. It certainly felt much worse. This shows the benefit of tracking this information when you can see that the month wasn’t nearly as bad as it felt. Sure momentum appears to be headed in the wrong direction, but I expect this to change after the election on Tuesday. The market does not like uncertainty, and it should gain some this coming week.
I know there are people that have come into investing at various points since the pandemic started, and the recent volatility is a lot to stomach. This is something that happens even when a pandemic is not going on. The stocks of the companies we invest in are very volatile and can have large swings. Some times this occurs after big news, and some times it happens for seemingly no reason. I do not worry when I see all of my stocks going down at once. My conviction hasn’t changed, and I know they will bounce back. This month, both Etsy and Shopify posted amazing quarterly results, but the stock still dropped. It’s good to remember that there’s a difference between a company’s performance and their stock’s performance.
As I reminder, I post results the last weekend of the month. This worked out well for October since the last day fell on a weekend. There has been some talk about how sharing some of these portfolio results could be a bit indecent, based on the current climate. For me, they are absolutely critical in helping to understand how managing a condensed portfolio can benefit you. Following Saul’s board and reading other poster’s results is what got me committed to this change a few years back.
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. For some reason, the Fear and Greed index hasn’t been displaying on the page for the past couple weeks. Thankfully, one of the people in our group chat taught me how to utilize the developer menu and use “Command+option+i” to inspect and find the information that I look for.
Please note, I changed my YTD designation to Portfolio to Date (PTD). This portfolio was started on March 13, 2020 when all of my assets were rolled over into this one Retirement Account. New people start following each month. I just want to be clear so I’m not misleading anyone.
W/E Date Portfolio S&P 500 % DJIA % Nasdaq % Russ 2000 Fear and % change change change change % change Greed Index ------------------------------------------------------------------------------------------- 10/02/2020 +4.92% +1.52% +1.87% +1.48% +4.37% 40 10/09/2020 +9.07% +3.84% +3.27% +4.56% +6.38% 54 10/16/2020 +0.95% +0.19% +0.07% +0.79% -0.23% 62 10/23/2020 -7.30% -0.53% -0.95% -1.06% +0.41% 66 10/31/2020 -9.26% -5.64% -6.47% -5.51% -6.22% 30 ------------------------------------------------------------------------------------------- October -2.83% -0.86% -2.47% -0.02% +4.31% 30 PTD +152.15% +20.62% +13.81% +38.56% +27.15% 30
This month was close to the opposite of last month, we started out on fire, then we crashed and burned. We briefly made it up to the +200% mark, but it quickly fell apart. This was only our second down month since we started this portfolio, and it ended up being our worst, barely beating out August at -2.75% The Fear and Greed Index rose during the month, before plummeting the final week of the month. The last time the index finished a week lower than 30 was on April 3rd when it was 21.
On October 15th, Fastly pre-announced earnings and indicated that revenue would fall a bit short of their guidance. We had discussions in our group chat over the prior two earnings periods over the lack of enterprise customer growth, specifically compared to Cloudflare. Enterprise customers were supposed to be Fastly’s main focus and Cloudflare was known to focus on small to medium sized businesses. In spite of this, Cloudflare was adding multiples of new enterprise customers, significantly faster than Fastly. This is an area that I personally need to do better at. I felt all along, and stated so more than once, that I felt that Cloudflare was a better company to invest in. I followed the hype and stayed in Fastly. I’m happy I did. I sold at $84.70 with a 136.20% return.
I used 60% of the proceeds from the Fastly sale to start a new position in DocuSign at $235.09. I put the other 40% into CrowdStrike at $145.26. I’ve been following DocuSign for quite a while. You can read more about it below. CrowdStrike is my second highest conviction company, but Datadog had passed it up. I wanted to get it back up to where my level of conviction was.
On October 26th, Twilio announced earnings and did even better than I expected. Revenue accelerated again (+52% Y/Y) for the second straight quarter and their DBNER was 137%. These metrics alone make this sound like a great quarter. (which it was) Once again, they put out a low ball guidance for Q4 with a revenue target of 38%. Although I feel like Twilio is a safe play, I don’t see them as being one of my highest conviction companies. As things continue to be a bit chaotic, I am looking to keep my portfolio pretty tight with fewer positions. Because of this, I exited Twilio at $296.36. The vast majority of the funds from this sale was split between CrowdStrike again ($134.35) and Cloudflare ($56.42), with a small amount added to Etsy ($142.60)
On to the individual results for each company that I invest in. If a company announced earnings during the period update, I will usually lead off with that then backtrack to the other news in chronological order. They are listed by allocation from highest to lowest
Company Allocation October % Change PTD % Change --------------------------------------------------------------------------- Zoom (ZM) 23.33% -7.17% +308.32% CrowdStrike (CRWD) 22.39% -9.20% +223.68% Datadog (DDOG) 16.08% +0.11% +172.03% Cloudflare (NET) 14.28% +29.80% +113.43% Etsy (ETSY) 6.96% +2.80% -12.35% DocuSign (DOCU) 6.22% -13.97% -13.97% Okta (OKTA) 6.07% -2.95% +98.74% Shopify (SHOP) 4.68% -3.69% -12.53%
On the chart above, you get a clear picture of how things are currently allocated. We have reduced the portfolio to 8 positions. Cloudflare (+29.80%) was the overwhelming bright spot, but Etsy showed a gain as well. I still feel that Etsy is the most undervalued and most misunderstood company in the portfolio. Looking at the breakdown, the two companies I haven’t he highest conviction in are sitting comfortably in the lead.
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. On October 14th, they held an event they called Zoomtopia. During this, they made numerous announcements of upcoming enhancements, features and developments. Among these are: OnZoom, a way for small businesses and Zoom content partners to host free, paid, and fundraising events, which launches today in beta with WW (Weight Watchers) an initial partner; Social distancing-related features Zoom Rooms Kiosk Mode, which allows a business to display a receptionist on a screen at the building’s entry point, and Scheduling Display People Counting, which provides a capacity count for in-person meetings; By year’s end, Zoom for Home will be supported on Amazon’s Echo Show, Google’s Nest Hub Max, and HP’s Collaboration G6 24/27 All-in-One. Next year, Home will launch in the Lenovo ThinkSmart View, Portal TV from Facebook, and Neat’s Farme and Bar One devices. There were many more announcements, but I found these the most interesting.
Q3 earnings should be out in another month or so. We will get another look at how this company continues to execute.
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. They finalized their acquisition of Preempt Security bringing some zero trust credentials into the fold. Preempt had previously stated that 80% of breaches involve credentials, so this is something that customers were looking for. They did state that financial outlook for the third quarter and fiscal year 2021 as guided on September 2, 2020, is unchanged as a result of this transaction. Pretty quiet month overall but as I previously stated, at added to my position at $145.26 and later at $134.35. These were pretty significant adds, as it increased my position by 43%
Datadog (DDOG) - Datadog operates a fast-growing platform that monitors customers’ cloud activity and mines it for business insights. On September 30th, announced a new strategic partnership with Microsoft Azure. As part of this launch, Datadog will now be available in the Azure console as a first class service. This means that Azure customers will be able to implement Datadog as a monitoring solution for their cloud workloads through new streamlined workflows that cover everything from procurement to configuration. The improved onboarding experience makes Datadog setup automatic, so new users can start monitoring the health and performance of their applications with Datadog quickly, whether they are based entirely in Azure or spread across hybrid or multi-cloud environments.
In addition to the integration enhancements, the new channel through the Azure Marketplace allows customers to draw down on their committed Azure spend to purchase Datadog. This makes it significantly easier for customers to find budget, and also aligns incentives for Azure and Datadog sales teams for better collaboration and engagement in co-sell motions with enterprise clients. This is a big win for Datadog. The announcement resulted in heavy trading and a 10% gain that day.
On October 16, Datadog announced that the Gartner Peer Insights ‘Voice of the Customer’: Application Performance Monitoring report named Datadog an October 2020 Customers’ Choice. As part of the Gartner Peer Insights reviews, customers are able to share their willingness to recommend a product. Datadog received a recommendation rating of 91% percent based on 132 responses.
On October 20, Datadog announced that it will report its third quarter fiscal year 2020 financial results after the U.S. financial markets close on Tuesday, November 10, 2020. I’m looking forward to this.
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. On October 12, they released Cloudflare One, a comprehensive, cloud-based network-as-a-service solution for your workforce. As more businesses rely on the Internet to operate, Cloudflare One protects and accelerates the performance of devices, applications, and entire networks to keep workforces secure. Now businesses can protect their workforce in a flexible and scalable way, without compromising security as distributed teams work from multiple devices and personal networks. As we continue to see, so many of the companies that we invest in intermingle, partner, and even compete with each other. This launch now steps into Okta’s realm of Single Sign On. This new platform was received extremely well by the market as Cloudflare stock increased 23% on the first day. There were numerous other enhancements and announcements during Cloudflare’s Zero Trust Week, but Cloudflare One was the most impactful.
This was quite the month for Cloudflare with a significant amount of announcements and launches. This coincides with their 10th Anniversary and they really did it big. I’m even more excited about them than I was before.
Cloudflare announced that they would release their Q3 earnings on November 5th. I have been patiently waiting for this for the past six months. This is the quarter where their six months of free Teams will lapse. Of course, this should have happened near the end of the quarter, but I am expecting a bit of a tailwind moving forward. After exiting Twilio, I increased my position in Cloudflare by approximately 25%, adding at $56.42
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. Announced earnings on October 28 and posted another quarter of stellar results, demonstrating their ability to sustain momentum. Revenue came in $39 million over guidance, at $451M which was +128% Y/Y. Added 15M new and reactivated buyers, which was an increase of 112% Y/Y. This brings their total active buyers to 69M. Since mask sales is a big question for many people, they broke out a lot of data around this. Mask sales for July ($123M), August ($85M) and September ($56M) dropped each month but overall GMS remained strong. In Q2, masks were 14% of GMS, this dropped to 11% of GMS in Q3. Sequential deceleration in GMS growth is primarily driven by a steady decrease in mask sales, and the deceleration of new buyer growth. Overall growth remains strong.
Guidance for Q4 was revenue of $459M-$513M, which is an increase of 70%- 90%. I wholeheartedly believe that this is way under what they will return. Their continued advertising with bring in many new customers to do their holiday shopping. I think we will see a continued growth of online shopping with offline continuing their decline.
With the results they’ve posted the past two quarters, and their guidance for Q4, I have a hard time understanding why they are not getting a better price multiple than they are.
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. New position this month. I have been following DocuSign for quite a while, due to our group chat. Our very own DocuHype man has been trying to get me on board for the past 5 months or so. After digging deeper into their numbers, I feel like now is a great time to get in. Most notably, their revenue has started to accelerate, going from 37.63%, 38.82%, to 45.24%, and I expect this to continue at a minimum through the next quarter.
The market is massive for their core business. Management estimates that its current customer base is less than 2% of what it could be in its target markets globally. DocuSign supports integrations with more than 350 software tools that allow e-signatures to be easily embedded into existing enterprise business processes. They continue to work to tailor its offerings to ensure they can meet the standards in different industries. As they continue to do this, they will be able to get an even larger part of their addressable market. I look forward to seeing how they do, and started a position at $235.09
Okta (OKTA) - Okta uses cloud-based software to manage companies’ digital access rights, making work simpler for employees and helping employers keep track of who’s who on their networks. This also allows them to securely integrate internal and third-party cloud applications. Think, single sign on. On October 7th, Okta announced a host of updates at their Showcase virtual conference including: A new partnership with Salesforce Work.com, the launch of their Customer Identity Workflows product that makes user identity extensible across the entire software stack with low-code options for developers through Okta Hooks or using drag and drop tooling for non-technical business units, and updates to the Okta Devices SDK that allows developers to enable passwordless authentication through branded push notifications with biometric capabilities. I am definitely selling all of their announcements short, but they are more technology driven improvements and enhancements.
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. Announced earnings on October 29. Revenue came in at $767.4M (+96.55 Y/Y), beats by $114.8M. Non-GAAP EPS was $1.13 beating by $0.63. Subscription revenue grew 48% Y/Y and was $245.3M. GMV increased 109% and was a record $30.9B. This crushed the consensus expectation of $27.5B. Q3 saw a record number of merchants become paid subscribers following a 90-day extended free trial. Overall it was another great quarter and strong beat.
On October 27, Shopify announced a first-of-its-kind commerce partnership with TikTok that brings the world’s leading destination for short form video to Shopify’s more than one million merchants. With the TikTok channel for Shopify, merchants can take advantage of TikTok’s global scale to reach new and highly engaged audiences. TikTok is one of the world’s fastest growing entertainment platforms with over 100 million highly engaged users in the US alone. My two youngest children are on this app all the time. This seems like a pretty solid partnership for Shopify. I’m looking forward to see how it plays out.
I plan to do some additional research this coming week and possibly make some changes to the portfolio. I did this a few months back and it really helped me with my confidence level in deciding which positions I wanted, and what size I wanted them to be. I may end up not making any changes at all, but I definitely want to look into things more.
Now for the gut check portion of the monthly update. I did a better job of staying active this month and was able to lose another 2.5 pounds. My wife and I took a trip down to Key West at the beginning of the month, so I’m happy to make this progress while having a vacation. This brings my total weight loss to 21.8 pounds. I’m very happy with the steady progress I have made and expect it to continue.
I hope you all had a good month and find some value in this update. Please feel free to reach out to me if you have any questions.