DiscoGator's August Update

August 2020 Portfolio Update and News

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 some 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.

George Jenkins (the founder of Publix) had many different sayings that I learned over my years with the company. My all-time favorite has always been, “Begin, the rest is easy.” I’ve used this in all parts of my life for the past 20 years or so. It could be something simple, like finding the motivation to go outside and do some gardening, or something more complex such as packing up the contents in your current residence to move to a new one. In both cases, the hardest part is just getting started. Once you’re outside gardening, it is a lot easier to move from one bed to the next as you’re working. Likewise, once you start packing the first box in a room, the rest come a lot easier. The hardest part is beginning. You may be asking yourself, that’s great and all, but what does it have to do with investing? It is the exact same concept. Every month I hear about more and more people coming on board with investing. Most feel or felt like this was over their head, or two complex. Once they get in, they realize that they don’t have to be a rocket scientist to take control of their future. That said, they will need to be able to stomach the swings.

Although it may not be rocket science, it is not always as easy for people as pushing buttons and making money. I’m fortunate to be in a chat with a good group of thinkers. We bounce ideas off of each other throughout the day, and there’s always someone bringing a new company to look at. I wish I was able to convince them sooner to come on board with managing their own portfolio, but now that they’re in, I can’t imagine them ever giving it up.

As I reminder, I post results the last weekend of the month. Although Monday is officially the last day of August, I am giving results through the close of market on Friday, August 28. 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. The previous months that listed YTD were always PTD. There are some people that have started following this after the first month, so they may not be aware of the time frame. 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**
8/07/2020       -10.69%        +2.45%        +3.80%       +2.47%        +5.99%          72
8/14/2020        -1.89%        +0.64%        +1.18%       +0.08%        +0.55%          72
8/21/2020        +8.20%        +0.72%        -0.00%       +2.65%        -1.61%          69
8/28/2020        +2.57%        +3.26%        +2.59%       +3.39%        +1.67%          76
 August          -2.75%        +7.24%        +8.42%       +8.84%        +6.61%                       
  PTD          +126.51%       +29.40%       +23.05%      +48.52%       +30.44%  

This month started out very poorly and it looked like it could turn into one of the big drops I elude to each month. Luckily we fought back over the past two weeks. We finished the month down, but are still in great shape PTD. As you can see, we are also still outperforming the broader market. The Fear and Greed Index continues to creep up and has now crossed over into Extreme Greed, closing this period at 76. This is certainly the time to be a little more cautious. Don’t get me wrong, I’m not going into cash or anything. I just get a little more fearful when the market gets greedy.

At the end of last month, I felt very comfortable and confident about my portfolio. At the time, I could have seen myself staying in those companies for months or even longer. As you are likely aware, things are constantly evolving and changing, and it forces us to take a closer look at what we are doing. I didn’t like some things that were happening with a couple of my companies, so I needed to make adjustments.

I got out of Livongo after its merger with Teladoc. Although the merger could workout well for both companies, I just struggled with getting my head around the deal. I preferred to have Livongo as their own entity, however, I will keep my eye on Teladoc in case it is something I want to take a position in in the future. I also exited my position in Alteryx. They announced earnings and showed extreme deceleration with revenue. Although I love the business, it is facing far too many headwinds in the current environment and I feel I am better off invested elsewhere. I will keep this on my watchlist and possibly enter again if they start to turn things around.

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       August % Change     PTD % Change**
Zoom (ZM)                16.86%              +17.86%            +165.12%
Crowdstrike (CRWD)       16.71%               +4.81%            +210.09%
Datadog (DDOG)           14.70%              -11.59%            +148.74%
Fastly (FSLY)            12.57%               -1.89%            +162.24%
Cloudflare (NET)          9.73%               -4.73%             +62.83%
Okta (OKTA)               6.70%               -5.88%             +96.99%
Twilio (TWLO)             6.39%               +5.79%              +5.79%
MongoDB (MDB)             6.37%               -1.38%             +96.15%
Etsy (ETSY)               5.78%              -13.75%             -13.75%
Shopify (SHOP)            4.19%               -1.51%              -1.51%

On the chart above, you get a clear picture of how things are currently allocated. Zoom had a great month, most likely in anticipation of them announcing earnings on Monday. They pretty much carried my portfolio in August. Things would have looked a lot worse without them.
During the the transition to my new portfolio, I added some to CrowdStrike, Datadog and Cloudflare, while trimming a little from Fastly. I have also added new positions in Twilio, Etsy and Shopify, and will discuss them in much greater detail below. As great as Zoom was in August, Etsy was nearly as bad. I really like Etsy and explain why below as I discuss them and the other stocks in the portfolio:

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. Last month we talked about Zoom phone. This month, Zoom announced the expansion of this service to an additional 25 countries. This brings the total availability to over 40 countries world wide. This expanded cloud phone offering should help boost revenues even more.

Zoom for home is expanding its service to smart displays, including Amazon Echo Show, Portal from Facebook, and Google Nest Hub Max. The first to go online will be Zoom on Portal which will roll out next month. The other two will be out by the end of the year. According to a recent Gartner survey of company leaders, nearly half (47%) said they intend to also employees to work remotely full time going forward. I expect Zoom for home to be big part of this.

During Q2 of this year, Zoom completely shattered the previous Apple App Store record for downloads, previously set by Tik Tok. While Tik Tok set a then record of 67 million US downloads in Q1, Zoom hit almost 94 million US downloads in Q2! World Wide Q2 downloads for Zoom were over 300 million!! All of these users just speak to the dominance Zoom has in this space. Zoom will release their much anticipated Q2 results on Monday, August 31.

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. August has been a very quiet month on the news front for CrowdStrike. This will change next week when they announce earnings on September 2nd. CrowdStrike has delivered exceptionally strong financial performance of late, measured by revenue growth, cashflow margin, and deferred revenue. I also feel that the stock has not seen the growth that many of the other cloud cohorts have seen. I’m hoping this changes next week.

Datadog (DDOG) - Datadog operates a fast-growing platform that monitors customers’ cloud activity and mines it for business insights. Announced earnings on August 6th and posted very positive results. Revenue came in at $140 million, an increase of 68% Y/Y and above the high end of guidance. Customers with Annual Recurring Revenue (ARR) of $100,000 or more increased by 71% to 1,015. These customers generate about 75% of their total ARR.

They have approximately 12,100 customers, which represents growth of 37% Y/Y. As they onboard customers, their customers begin to use more of their products over time. As of the end of Q2, 68% of customers use two or more products, with 15% using four or more. Last year, none of their customers were using four or more of their products. For the 12th consecutive quarter, Dollar Based Net Expansion Rate (DBNER) was over 130% as customers increased their usage and adopted their new products. However, this was a decline from Q1. Gross profit margin was 80% which is an improvement over the 75% they had last year. This was mainly driven by efficient use in their cloud hosting.

Overall the results were excellent, yet they are guiding for 50% revenue increase next quarter. That seems like a significant drop, and the stock dropped accordingly. I am not concerned and expect them to easily surpass this number. One thing that I find very encouraging is that only 24% of their revenue comes from international businesses. This gives them a large market to expand into.

At Datadog’s Dash event, they announced a slate of new products. The new products include, Error Tracker, Continuous Profiler (low-overhead app code profiling), an application marketplace, compliance monitoring, and Incident Management products. This shows their rapid pace of product innovation. The innovation alone may drive its already strong cross-sell motion and high growth rates over a multi-year horizon.

Fastly (FSLY) - Fastly is a global content delivery network (CDN) that makes apps and the internet itself faster, more reliable, and more secure. Announced earning on August 5th. Revenue was up 62% Y/Y to $75 million. Dollar-Based Net Expansion Rate (DBNER) was 137% up from 133% in Q1. Net Retention Rate is 138%, up from 130% in Q1. Total customer count increased to 1,951 which is up more than 6% from last quarter sequentially, and the largest quarterly growth since the IPO. Non-GAAP gross margin was 62% up from 56% Y/Y. This represents a significant increase. Margin is one of the points that had been lagging, but was expected to improve and it did. We will look for continued progress in this area. Enterprise customers continue to drive the bulk of the business and now represent 88% of revenues.

One red flag from this update was Fastly’s exposure to Tik Tok. Through the first 6 months of this fiscal year, Fastly stated that Tik Tok represented 12% of their total revenue, with 50% of that coming from the United States. Given that the U.S. government is considering an outright ban of TikTok in the U.S. after September 15, this revenue may be at risk.

On August 27, Fastly announced an agreement to acquire Signal Sciences. Signal Sciences’ strong, developer-first web application and API protection solutions will bolster Fastly’s existing security offerings to bring customers a unified edge security solution. Signal Sciences’ technology combined with Fastly’s current solutions will form Fastly’s upcoming new security offering, Secure@Edge. Secure@Edge will be a modern, unified web application and API protection solution that will power and protect companies looking to further or begin their digital transformation. The acquisition supports Fastly’s mission to provide simplified, secure, and frictionless solutions at scale, and to transform the security landscape by offering an alternative to the existing array of opaque, fragmented and inflexible solutions needed to protect web applications and APIs.

Signal Sciences currently has more than 60 enterprise customers, of which at least 40 will be new customers to Fastly. They have $28 million ARR with Gross Margin greater than 85%. This seems to be an excellent match for Fastly which has tended to very slowly add enterprise customers and have a lower gross margin than many of their competitors.

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. Announced earnings on August 6th and they came in very strong. Revenue increased 48% Y/Y. Total Paying Customers grew 24%, while Large Customers (>$100,000 Annualized Revenue) increased 65%! They added 250 Large Customers Y/Y which is a substantial gain. They still have approximately 3 million free customers that are using their network. (Cloudflare gave small businesses 6 months of free service of Cloudflare for Teams at the beginning of the pandemic. If not extended, this is set to expire September.) With the growth they are having adding large customers, I can’t help but think this should really help them down the road. Non-GAAP Gross Margins remained strong at 77% as Operating Margins continued to improve, coming in at -10%.

One point I found very interesting is that Cyber Threats blocked per day increased to 72+ billion! This is up from 45.1 billion threats last quarter. To be clear, that’s three months ago, not y/y.

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. Announced earnings on August 27th. Q2 Total Revenue grew 43%, while subscription revenue grew 44%. Total Remaining Performance Obligations (RPO) grew 56%. Platform usage during the pandemic have grown more than ever. During the quarter there was a one day record of 145 million logins, and unique app logins increased almost 70%. The focus on gaining large enterprise customers continues to yield results with the addition of 105 customers with an annual contract of $100,000 or more, added in Q2. This total number of large customers ($100,000+) is nearing 1,700, while they also have over 100 customers with an annual contract value of $1,000,000. Dollar based net retention rate was 121%. This improved from 118% Y/Y. Gross Margin was 78.9%, improving 160 bps, and marking their highest total achieved. Non-GAAP EPS came in at $0.07 was a large beat from the consensus of -$0.02.

“The three mega-trends that have been driving our business for the past several years – the adoption of cloud and hybrid IT, digital transformation, and zero trust security – are all being accelerated globally by the current environment,” commented Todd McKinnon, CEO of Okta.
He continued: “Organizations are re-evaluating their roadmap to modernize their identity systems and Okta’s platform is the linchpin of the new cloud technology stack.”
As a result, Okta raised its FY21 revenue guidance to $800-$803M from the prior guide of $770-780M on the solid Q2 beat.

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. Announced earnings on August 4th. Q2 Revenue was $400.8 million, up 46% Y/Y. (The consensus estimate was only 34%) Revenue dollar-based expansion was 132%. They guided for Q3 at a 36% to 38% increase in revenue. Non-GAAP EPS was $0.09% vs ($0.08%) expected, representing a substantial beat. Non-GAAP Gross Margin was 56%, down slightly from 59% in Q1. WhatsApp continues to be their largest customer making up 7% of revenue. Following Twilio’s Q2 results, 10 analysts provided updated coverage ratings. All 10 raised their price targets.

Overall, Twilio’s revenue performance was really strong. Q2 was the first quarter with purely organic growth since the SendGrid acquisition, and their numbers still looked good. They also have a large part of their business (travel, ride-sharing, hospitality) which are still below pre-covid numbers

MongoDB (MDB) - MongoDB engages in the development and provision of a general purpose database platform. Their open-source database captures data not easily squished into columns and rows, disrupting traditional database vendors. MongoDB made two announcements this month where they added new executives. Rishi Dave has been added as the new Chief Marketing Officer. He has spent his career in the technology industry, working with Dell, Rivio, Trilogy Software and, most recently, Bain & Company. The other announcement was for Harsha Jalihal, who will be the new Chief People Officer. Jalihal will oversee the company’s human resources operations. She brings more than two decades of people and culture experience to the role including being author of the World Economic Forum’s HR 4.0 framework. They will announce earnings on September 2nd.

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. Etsy is a company that I had heard numerous recommendations for on Motley Fool podcasts, but never had any real interest. After their recent earnings announcement, I spent a number of hours researching and reading up on this company and decided to pull the trigger and add it to my portfolio. Prior to this earnings release, revenue was hovering in the mid 30% increase range. This report totally blew those numbers away. Revenue was up 137% Y/Y at $429 million. Active buyers increased 41% Y/Y, while active sellers increased 35% Y/Y. Gross Margin increased from 68% to 74% Y/Y.

Due to Covid, mask sales were a large part of the revenue increase, with over 112k sellers sold at least one mask. I believe this was the #1 red flag for people waiting to invest here and one of the reasons why this stock hasn’t taken off yet. Digging further, you see that non-mask sales for Etsy were still up 93% Y/Y. That’s a huge increase over where they were trending and it has accelerated during the quarter. (non-mask sales were up 79% in April). In fact, only approximately 7% of buyers on the platform bought a mask and nothing else. Many may repeat purchases of other items. I also believe that most people think that their recent surge in revenue is temporary. They guided for the next quarter a 115% increase, which I expect them to beat.

Etsy sales were previously focused on their six core categories. As they continue to grow, sales are expanding across different categories where 25% of their sales now come from. Some of these are becoming very large categories themselves such as toys, games and pet supplies.

I believe that covid-19 will end up being a catalyst for growth with Etsy that will be sustained over a number of years. I’m not saying they will continue to have triple digit growth that long, but the landscape of the market place has likely changed forever. Online shopping is at an all-time high. People have become more comfortable searching for things and making those decisions online.

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. New position this month. Announced earnings on July 29th. Revenue increased 97% to $714.3M. This was a huge acceleration from the 47% in Q1. Shopify recorded their highest growth rate since their IPO on the back of a significant boost in merchant count over the last few months. The COVID-19 pandemic hurt retail businesses and forced them to go online for survival, and it looks like this transition played directly into the hands of Shopify. Certainly I expect growth to temper in the following quarter or two, but we could expect to see some longer term stickiness here. My favorite part of their Investors Deck was where they described their Total Addressable Market: “Anyone who wants to make more money from their site than they pay for it”. Pretty clever.

Shopify Payments is a service that is offered to merchants to help make it easier to collect money for sales. Shopify takes a small cut from every transaction. Q2 resulted in the highest penetration of payments usage, coming in at 45%, which was an increase of 132% Y/Y. This demonstrates that vendors are becoming more imbedded in the platform.

CFO Amy Shapero joined a chorus of others when she stated, “we believe the COVID pandemic has permanently accelerated the growth of online commerce, changing he retail landscape forever.” She expects to see Shopify’s strong growth continue. I tend to agree with her.

At this time last month, I was probably feeling the highest level of confidence and conviction in my portfolio. With the merger of Livongo blindsiding me, and Alteryx tanking, it sent me to my watchlist. Thankfully I feel like I’ve added three great companies and I look forward to continuing to learn more about them in the coming months.

Now for the gut check portion of the monthly update. I was feeling sky high with the progress I made last month. I started doing some yoga again recently to help with my back and with core strength. Sadly, progress wasn’t as good and I only dropped 0.9 pounds, bringing me to a total of 17.5 pounds lost.

This reminds me of a story I was told many years ago. One afternoon, a man hears a knock on his door so he goes and answers it. After opening the door, he sees his neighbor standing there. They greet each other before the neighbor asks if he can borrow the man’s lawnmower. Without hesitation, the man says, “no I’m sorry, you cannot borrow it. I’m making soup.” The neighbor looking confused, says to man, “I don’t understand what you making soup has to do with me borrowing your lawnmower”. The man looks at him and says, “one excuse is as good as the other”

I must do better this month.