Early Year End

Investing is complicated and everyone seems to want to reduce the complexity down to a formula. I’m no different. But should I be? After my most recent exercise in trying to distill my relative confidence levels for my investing portfolio to be as simple as possible I realized that I really just enjoy the process of hearing all y’all relating to each other in a way that helps each of us achieve, mostly.

The following is what appears to give me more or less confidence in my current investments. But, I’m going to sort of start with: Thanks. And I hope you’ll see this post as full of warm wishes to you for the Holidays.

I buy SaaS companies, that are growing revenue at rates I couldn’t have imagined a few years ago, and it’s why I don’t worry about them not making a profit now. My other criteria are still there: rapid revenue growth, recurring revenue, lack of debt, insider ownership, a moat, not capital intensive, not hardware, doing something really special, etc, etc, but I’m taking advantage of this new world, Saul.

(Your recent post about us not being crazy really fleshed it all out crystal clear)

Me: I’m not going to pass up this ‘new world’ either. Heart felt thanks for working so hard at getting this to sink into my head, Saul.

Simplifying maybe too much, what gives me the relative confidence levels for each of my company’s is:

#1 -AYX 22% -confidence due to Oomph (growth rate X margins) + predictability (having owned it for two years).
#2 -ESTC 12%, TTD 12% -‘confidence due to CAP + TAM + leadership (personal comfort level gained from conference calls
#3 - ZM 10.5%CRWD 10.5%DDOG 10.5% -confidence due to Oomph + business execution efficiencies/early profitability
#4 -OKTA 9.5, Zs 7.5%, MDB 5.5% -confidence due to Moat/Stickiness/CAP + inevitability/longevity

Having written the above I feel really good about why I own as much as I do relative to each other and I find that more difficult than understanding that these are all really really great companies. In understanding how lucky I am to be fully invested in these companies. Thanks again to those who contribute to this board. Thank you for all your generous sharing.

The following is some ramblings showing a little of how I arrived at the above- if your interested further.

Given: with revenue growth rates between 50%and 90% and gross margins between 70% and 90% and Net Revenue Retention Rates of 125%. With average of 70% rev growth and 82% margins, the companies I’m investing in will grow profits to 8X more than a great but ‘old world’ company in three years. So, looking at PS, I’m not able to ignore it if it’s P/S is more than 18 say with out asking myself some hard questions (see Saul’s quote above for some of what I should ask.

But specific to the portfolio I have shown above, nearing the end of this year now. What I’m asking is:
Questions like Why Is OKTA’s Moat more important than MDB (with numbers deteriorating very similarly, ergo Duma’s post)
Asking myself this question led me to selling much of both early last week, using the money to buy Zm, DDOG, and CRWD bring them up to equal weight.

And, why do I have a higher allocation of ESTC and TTD than I do Zm, CRWD, and DDOG? Why not have uncertainty about TTD (advert sales being unpredictable/ and not as necessary as the above companies) and why don’t I worry about ESTC’s open source model?
I believe with the huge number of use cases offered by ESTC (albeit unrealized potential at this point) lending to multiple hyper-growth opportunities, that ESTC has optionality that is off the charts. I believe they are executing well and that the s-Curve that I’m using to map their growth is overall as a company just in an earlier phase of their Adoption. And So I bought my 3/3rd this month taking my allocation up to just above equal weight.
And I think I’m putting the seemingly insurmountable ability of TTD to ride the massive wave that is digital programming at a higher certainty than my confidence levels in Those I’m holding with lower % of port.

Zs, OKTA or MDB are riding their own waves in their industries. There’s a lot to like about Zs, OKTA and MDB. I just have to apply my subjective confidence by way of % in my portfolio being what it is and describe it by simply saying that as much as I see these companies as inevitable leaders I am not as confident in their leaderships ability to execute relative to those at higher allocations, in the next three to five years.
That may be, similar in my thinking about ESTC and their adoption curve - I’m ‘feeling’ that ESTC is perhaps just a bit closer to accomplishing acceleration toward their eventual dominance (I see it in their Elastic Cloud offering, albeit only 20% of their business, growing at an increasing y/y : Compard to MDB Atlas being 40% of their business decelerating their growth rate with end of m-labs customer acquisition cycle- good but not as good. I suppose I have more confidence in accelerating growth (ESTCs portion of higher margin cloud offering) than in deceleration of the high margin growth (MDB’s Atlas Post M-Labs, Zs’s unpredictable Sales motion, OKTA’s - ok it was good but I sold 20% of my OKTA at $121 to by Zm at $64 and CRWD at $35 just out of respect for their execution efficiencies.

And then, Why do I have AYX at near double the allocation of #2 (ESTC)?
The answers to this seemed easy in comparison to the other two- because mostly AYX margins and growth rate are higher (Oomph) and growth rate actually accelerated this quarter.

Stuff like that and reading as much and as often as I can - listing the posts is more than I’m up for right now. Just Know that my whole family know the names: Saul, Darth, Bear, Captainics, 12x and Tinker.

We send our Love to you all at Saul’s Investing Discussions,