Disco Gator's September Update

September 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…

Our group chat had a good discussion this month on some old Warren Buffett YouTube videos that were shared on this board. In one of the videos, Buffett states that, “diversification, as a practice generally, makes very little sense for anyone that knows what they’re doing”. I mentioned Buffett’s thoughts on this in the June update. He goes on to say that, “there is less risk in owning three easy to identify, wonderful businesses, than there is in owning 50 well known, big businesses.” In various videos, he says his personal portfolio would have between 3-6 companies in it! I’m not quite to that level yet.

I really believe that a condensed portfolio is the #1 factor to our success. I remember when I had 49 companies in my portfolio. There just aren’t that many amazing companies. Heck, I could not even have named them all without looking at a list, so how amazing could they have really been? My biggest hangup was with the fear of missing out (FOMO). I was afraid I would sell one of the 49 and it would then explode. In the grand scheme of things, even if it did explode, how much impact would it have on my portfolio if it was one of 49? This month is a perfect example of what happens when you have a condensed portfolio and one of your companies crushes earnings, but we’ll talk about that later.

As I reminder, I post results the last weekend of the month. Although there are still a few more days in September, I am giving results through the close of market on Friday, September 25. This was a four week period.

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. 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
09/04/20          -0.25%       -2.31%       -1.82%       -3.27%       -2.73%           59
09/11/20          -0.79%       -2.51%       -1.66%       -4.06%       -2.48%           59
09/18/20          +7.03%       -0.64%       -0.03%       -0.56%       +2.64%           52
09/25/20          +8.16%       -0.64%       -1.75%       +1.11%       -4.03%           48
September        +14.56%       -5.97%       -5.16%       -6.69%       -6.55%           48
  PTD           +159.49%      +21.67%      +16.70%      +38.58%      +21.89%           48

Although the month started out slow, halfway through the month things really started accelerating. After being down 2.75% last month, we erased all of that and finished this month up 14.56%, with our PTD number coming in at +159.49%! The overall market did not fair nearly as well, with the indexes averaging -6.09% in September. The Fear and Greed Index plummeted over the past four weeks, going from 76 at the end of last month to finishing this month at 48 and a neutral rating.

On September 2nd, MongoDB announced their Q2 earnings. After reviewing the report, I was not happy with their direction. I had expected to see Atlas continue its rapid growth and help keep the top line revenues going strong. This did not happen. Revenue showed significant deceleration dropping from +46% in Q1 to +39% in Q2. They also guided another large drop for Q3. Although COVID has accelerated the world’s digitalization, it doesn’t seem to have benefitted MongoDB. Due to the deceleration and the apparent COVID headwinds, I got out.

I used the funds from the MongoDB sale to add to four positions: Datadog at $82.90, Fastly at $88.42, Etsy at $121.23 and Shopify at $1,049.00. After these early month trades, things settled down and I started feeling very comfortable again with my portfolio and how it was allocated. Of course, all of this could change, when my companies start announcing earnings at the end of October.

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        Sept % Change       PTD % Change
Zoom (ZM)                  24.42%             +65.90%            +339.85%
Crowdstrike (CRWD)         16.77%             +14.96%            +256.48%
Datadog (DDOG)             15.61%              +9.24%            +171.73%
Fastly (FSLY)              12.21%              -3.39%            +153.35%
Cloudflare (NET)            8.58%              +0.98%             +64.44%
Etsy (ETSY)                 6.44%              -1.15%             -14.74%
Okta (OKTA)                 6.08%              +3.95%            +104.77%
Twilio (TWLO)               5.16%              -7.35%              -1.98%
Shopify (SHOP)              4.73%              -7.79%              -9.17%

On the chart above, you get a clear picture of how things are currently allocated. We have reduced our positions back down to 9 and feel comfortable where we stand. Zoom had an earnings for the ages and carried my portfolio for the second straight month. Crowdstrike continues to be in Zoom’s shadow even though they had a great earnings report as well. You can also see that the three newest companies (ETSY, TWLO, SHOP) continue to languish a little, but I feel they will be fine in the long run.

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. Yeah, so back in June announced earnings and shocked the market with their results. This sent analysts scrambling for new price targets and trying to decide what the future would hold. Over the past three months, nearly every article you would read about Zoom would tell you that it was way overpriced and destined to drop. Fast forward to August 31st and their Q2 earnings.

Revenue soared 355% year over year to $663.5 million. Growth in Customers with >10 employees was 458%. Growth in Enterprise Customers was 112%. Adjusted income from operations jumped more than 13 times over the same period. Free cash flow zoomed more than 21 times to $373.4 million. Other KPI include, 71% Gross Margins, 42% Non-GAAP Operating Margin, 56% FCF Margin, Guided $690M at the high end of Q3, good for 314% growth YoY, Increased FY revenue forecast to $2.38B, good for 282% growth YoY. In fact, they had more revenue in Q2 than they did in all of their previous fiscal year! People often talk about “Home Run”, or even “Grand Slam” results. Like Tim Beyers said, this was the equivalent of a baseball Perfect Game. Totally unbelievable. With these results and guidance for continued success, the stock has soared to amazing heights. In our group chat we were discussing whether or not Zoom would be able to hold pricing of $300 per share. They close this period at nearly $500!

I think it is indisputable that COVID-19 tailwinds amplify Zoom’s results. I also believe we are witnessing a permanent shift in spending that would support continued high growth. Zoom is shaping up as a fixture for a vast number of businesses around the globe

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. Announced earnings on September 2nd and had another great quarter. Total revenue was $199.0 million, an 84% increase, while subscription revenue was $184.3 million, an 89% increase. Subscription revenue is 93% of their total revenue and Annual Recurring Revenue (ARR) was up 87%, with a Dollar-Based Retention Rate of 124%. With such high ARR, Crowdstrike should have less chance of a negative surprise from quarter to quarter. An added benefit of this subscription service is their fixed costs. This allows them to easily improve profitability, with gross margins this quarter at 75% compared to 73% last year. In fact, Crowdstrike is already guiding to profitability in Q4. This should really help them moving forward. In line with their substantial beat this quarter, they significantly raised guidance for Q4. At this point I feel that they are a bit undervalued and I’m happy to have them as my second largest position.

On September 15, Crowdstrike announced their Falcon Overwatch 2020 Mid Year report. In this report, they indicated that hands on keyboard attacks for the first half of 2020 have already surpassed all of those in the entirety of 2019. OverWatch observed six different China-based actors, whose motivations are likely associated with espionage and data theft objectives, conducting campaigns against telecommunications companies in the first half of the year. This increased activity indicates the importance of companies like Crowdstrike and shows they have an ever increasing TAM.

On September 23, CrowdStrike acquired identity security company Preempt Security for $96M. With the acquisition, the company plans to add Preempt’s zero trust security and conditional access technology to the CrowdStrike Falcon platform. “Hybrid work environments will become the norm for many organizations which means that Zero Trust security with an identity-centric approach and detecting threats in real-time are critical for business continuity. With the addition of Preempt Security’s capabilities, the CrowdStrike Falcon platform will provide enhanced protection against identity-based attacks and insider threats,” says CrowdStrike CEO George Kurtz. This seems like a good fit for them.

Datadog (DDOG) - Datadog operates a fast-growing platform that monitors customers’ cloud activity and mines it for business insights. Even though they have bounced back a bit this month, Datadog has been down since announcing earnings at the beginning of August. One of the reasons they have been down so much has been their guidance for the current quarter. They’ve guided for a 50% increase, which is substantially less than they were trending two quarters ago, and a sequential drop from the 68% of this past quarter. There was some discussion on the boards about some comments that were made in the last earnings report. It seems like opinions are evenly split with half the people expect a quarter with +50% revenue returns and the other half feeling they will easily beat this. I tend to be more optimistic when I read things so I’m on the side where they will have a significant beat. We won’t really know until the beginning of November.

Fastly (FSLY) - Fastly is a global content delivery network (CDN) that makes apps and the internet itself faster, more reliable, and more secure. Fastly’s stock was punished for most of the month due to the uncertainty surrounding its biggest customer, Tik Tok. With the pending ban in the US Market, the stock took a big hit. As the month progressed, Oracle confirmed that it had struck a deal with ByteDance to become a trusted technology partner for the company. The deal is expected to involve TikTok becoming a U.S.-based company for which Oracle would serve as both a technology partner and a minority shareholder. This helped the stock recover a bit later in the month.

On September 10th, Fastly announced its availability as a private listing on Google Cloud Marketplace. Under a single billing arrangement and using Google Cloud committed spend, Google Cloud customers can now purchase Fastly – the first partner edge cloud-based content delivery solution to be offered within the Google Cloud Marketplace – as a part of their modern tech stack. The addition of Fastly to the Google Cloud Marketplace gives developers a modern, flexible platform on which to build fast, innovative, secure and highly personalized digital experiences.

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 September 15, Cloudflare announced that it has partnered with the Internet Archive, a nonprofit digital library that runs a digital archive of the World Wide Web called the Wayback Machine. By partnering with the Internet Archive, Cloudflare is strengthening its Always Online solution that makes sites available when their origin servers are down and keeps the Internet functioning for users globally. Launched in 2010, Always Online is like insurance for websites. It caches a static version of websites, so, if for any reason, your web host or service provider goes down, it will kick in to keep your site online. Without it, a website risks reputation damage, a decreased user experience and even a drop in search ranking if the website’s origin goes offline, experiences a timeout, or otherwise breaks. Now, Cloudflare’s Always Online service will fetch the most recently archived version of a site from the Internet Archive, an additional safeguard, if one cannot be found in the local cache. This is a big feather in Cloudflare’s cap.

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. I feel like I’m finding myself to be the Etsy hype man amongst my group of friends where we discuss such things. September seemed like a month full of good news for Etsy the company and bad news for Etsy the stock. Always remember that they are not one and the same.

Early in September, Etsy was moved from the S&P Midcap 400 to the S&P 500. These moves are usually good news for companies as funds that mirror these indexes will now have to include Etsy. To me this is another sign that this is about much more than the pandemic, and Etsy is moving much more quickly into a massive, largely untapped opportunity.

As of the middle of July, Etsy ranked No. 4 in the top 10 American e-commerce platforms, based on monthly traffic. Etsy Chief Financial Officer Rachel Glaser painted a picture of continued growth in the months ahead. In the Q2 earnings call, she estimated GMS for Q3 to be between $2.2 billion and $2.5 billion – up 80% to 110% compared to Q3 of last year. I just don’t see how the stock is priced for this. I’m expecting another knockout quarter when they announce at the end of October, and for the stock to follow suit.

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. Okta announced it plans to let most of its employees work remotely on a permanent basis, becoming the latest Silicon Valley company to adopt sweeping office policy changes amid the pandemic. Numerous other companies have announced similar accommodations for their workforce. Of course, this benefits many of the companies that have been work from home plays, with Okta being one of them.

On September 1st they announced their continued global expansion with the launch of a new office in Japan and the hiring of its first Japan Country Manager, Takashi Watanabe. With a base of customers and a growing local team, Okta is making a long term, strategic investment in the dynamic Japanese enterprise technology market.

“Okta’s vision is to enable any organization to use any technology, and that global challenge is more important than ever in today’s remote work-dominant landscape,” said Todd McKinnon, Chief Executive Officer and co-founder, Okta. “Japan is an incredible match for Okta. As a thriving, technology-savvy market, Japanese businesses are adopting tools across the full technology spectrum–from cloud to on-premises–and Okta is the only identity provider that can truly help simplify and secure adoption across all technologies. We’re thrilled to bring aboard industry veteran, Takashi Watanabe, to take on this opportunity, and look forward to continuing to serve the Japanese market as a trusted partner.” Okta sees the Asia Pacific Region as a large growth opportunity and this sets them up for continued expansion.

Twilio (TWLO) - Twilio allows developers to incorporate communication capabilities, including voice, messaging, video, and authentication, into software applications, via Application Programming Interfaces (APIs). Twilio sells its products primarily by focusing on and servicing software developers. Microsoft (MSFT) recently announced the availability of Azure Communications Services. The new product is a library of APIs (an API is an application programming interface, a pre-defined operation that can be inserted into and executed by an app) for developers to embed communications capabilities into an organizations’ operations or web and mobile apps – everything from video to chat to traditional phone calls. This is in direct competition and pretty much exactly what Twilio does. For now, Twilio remains the established leader, but this is certainly something that could eat into their market share.

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. This month, Shopify announced, and later closed, an offering of Class A subordinate voting shares. During this offering, they raised over $1.1 Billion which will be used to strengthen their balance sheet and provide flexibility to fund its growth strategies. Makes me wonder if they have some sort of acquisition in mind.

On September 22nd, Shopify revealed on an online discussion forum that customer data was exposed when two rogue members of the company’s support team were engaged in a scheme to obtain customer transactional records of certain merchants. The individuals accessed the records of fewer than 200 merchants before the incident was exposed. When the breach was discovered, the offending employees were immediately locked out of Shopify’s network and the information was turned over to the Federal Bureau of Investigation (FBI) and the Royal Canadian Mounted Police.

The data exposed included basic contact information, including email, customer names, addresses, and the products purchased. On a positive note, however, Shopify said the individuals were not able to gain access to complete credit card numbers or “other sensitive personal or financial information.” At this point, there’s no indication that the customer information was being used, but Shopify said that they were still in the early stages of the investigation. Although this incident was not the result of a technical vulnerability in their platform, it was still a little unsettling. They were quick to point out that the vast majority of their more than 1 million merchants, were unaffected.

After mostly settling in for the past two months, I am back to feeling very confident about where we are. I have extreme confidence in my Top 4, with Cloudflare and Etsy being next tier, closing with Okta, Twilio and Shopify with a lower level of confidence. I do not foresee myself making any changes until the next wave of earnings reports which should start at the end of October. If they report as I expect, this will only help to solidify my confidence in them.

Now for the gut check portion of the monthly update. I made better progress this month, dropping 1.8 pounds. This is pretty impressive since my mom came to visit and we enjoyed quite a few margaritas during the time she was here. This brings my total weight loss to 19.3 pounds. Kids will be going back to in person school in October, so that should free up some time for me to relax and exercise.

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.