ExponentialDave's May 2022 Portfolio Review

For better formatting (plus some graphs I couldn’t add here), please check out the post on my blog: https://exponentialdave.substack.com/p/may-2022-portfolio-re…

My portfolio is up 74% as of writing on 5/22/2022 from when I started tracking my results in January of 2020. This means that, $100 invested in the ExponentialDave portfolio on January 1, 2020 would now be worth $174. Meanwhile my benchmark, WCLD, is up 14% since January of 2020, and the S&P 500 is up 21% since January 2020. For the period from January 1st, 2022 through 5/22/2022, my portfolio is down 59%, meanwhile WCLD is down 43%, and the S&P 500 is down 19%.

I want to call attention to WCLD and the S&P 500 results. First of all, over the past two years, WCLD (an ETF of cloud stocks) is ONLY up 14%. Based on everything we know about the past two years, “digital transformation”, the move to the cloud, all the gains the underlying SaaS BUSINESSES (not talking about the stocks) have made over the past two years, does it make sense to you that cloud stocks would only be worth 14% more than they were worth at the start of 2020?

Furthermore, notice that the S&P 500 is actually up MORE than WCLD over the past 2.5 years. The S&P 500 includes so many dead weight stocks! American Airlines, American Water Works, Ameriprise Financial, Autozone, and so many other lackluster companies. Not to be a growth stock snob (let’s be honest though I definitely am), but how could the S&P 500 possibly outperform an index of cloud stocks? Yes, I know the S&P 500 is weighted by market cap and it is powered by FAAAM stocks (formerly FAANG), Tesla, and some SaaS stocks of its own, but still. It is silly to think that the S&P should be beating an index of cloud stocks.

Monthly YTD performance at the end of each month
Jan 2022: -24%
Feb 2022: -28%
Mar 2022: -30%
Apr 2022: -46%
May 2022: -59% (as of 5/22/2022)

2020 Performance: 225%
2021 Performance: 30%
Cumulative Performance 1/1/2020 - 5/22/2022: 74%

Note, I do not expect to ever make 225% again, and my goal is 20%-30% annually. Of course, no promises that I will get 20%-30% every year.

Current Allocation vs Allocation as of Last Portfolio Update on 4/30/2022:
Ticker Current Last Month
DDOG 25% 25%
CASH 17% 0%
S 11% 12%
BILL 10% 11%
NET 9% 10%
SNOW 9% 8%
ZS 8% 9%
MDB 6% 7%
ZI 5% 6%
MNDY 0% 11%

Conviction Levels:
First Tier: DDOG
Second Tier: NET, ZS, SNOW, S, MDB
Third Tier: ZI, BILL

Risk/Reward Categorization
Higher Reward, Higher Risk: SNOW, S, BILL
Higher Reward, Lower Risk: DDOG
Lower Reward/Lower Risk: ZS, ZI, NET, MDB

On the market right now
It seems sort of pointless to be posting about the results of individual companies right now, because at the moment the market does not care at all about company specific metrics.

Bert Hochfeld, who does a great job over on Ticker Target, keeps track of the correlation between growth and valuation for a large basket of growth stocks. This correlation has reached new all time lows in May of 2022. They are usually about 50%-60% correlated, but now they are hovering around 25% correlated. This really speaks to how little the market cares about actual business fundamentals right now.

I suspect we won’t see a healthy, normal market that cares about individual company performance until inflation is under control, whenever that will be. Each month we get various KPI’s about inflation and jobs, and until we see some consistency there I wouldn’t be surprised if we are in for more pain before this gets better.

A big part of this is that Wall Street has fallen out of favor with growth stocks. In fact, not only is Wall Street not buying growth, it’s actively shorting it at rates we haven’t seen since 2006: <graph_of_shorting>

And last month I posted P/S multiples, which is not something I often do. But even from last month, there has been considerably more multiple compression. Look at this:

(first number is peak 2021 p/s ratio, second number is the p/s ratio from my last portfolio update in April, and the last number is the p/s ratio as of 5/22/2022)
DDOG 68 36 25
S 101 35 26
BILL 102 41 22
NET 113 41 24
SNOW 115 42 34
ZS 65 33 22
MDB 47 26 18
ZI 28 17 15

COMPANY SPECIFIC OVERVIEW

MONDAY.COM

I had sold Monday ahead of earnings because I realized this is not the kind of market you want to hold lower conviction positions in, period. This applies especially when there is an earnings call coming up. And everyone is so convinced we are in a recession right now. Perhaps we are. With that in mind, I think my other companies are better poised to weather a recession, simply because their products strike me as more mission critical.

Anyhow, let’s talk about their most recent earnings report. QoQ revenue growth showed its 3rd straight quarter of deceleration, from 19.7% → 17.6% → 15.1% → 13.6%. 13.6% growth is strong, but the pattern of deceleration is concerning. However, guidance was stronger than usual for the upcoming quarter, coming in at 9.7%. Previously, for upcoming quarters they had only guided as high as 7%. This company is probably too new to say “with a typical beat” (they’ve only given us guidance 3 times in the past), but the lowest revenue beat we’ve seen from Monday was 7%. So with a 7% beat, we could certainly be looking at a QoQ reacceleration to 17%. But I don’t feel comfortable giving Monday the benefit of the doubt here because they are still young as a public company.

Other key points:
–Enterprise customer growth of >$50k was strong at 21% QoQ. However this is weaker than usual, and their worst performance going as far back as Q2 2019.
–Path to profitability metrics look bad for this quarter across the board
–NG Op margin jumped to -40%, which was averaging about -12% over the prior 3 quarters. This -40% is the SAME that it was in the comparable quarter last year. But before this quarter, it looked obvious they would do much better than -40%.
–NG net loss was much higher than last years, coming in at $-43.2m vs -$24.4m last year.
–Net dollar retention rate for cust > 10 users was > 135%

It was said by some that management explained away the bad profitability metrics in the call. The problem is, they were previously averaging around a -12% operating margin. It would have been challenging, but from -12%, you could reasonably suspect they might have become profitable this year. However, they came in at -40%. With that bad of a number, no amount of explanation in a conference call could make me think they are close to profitability.

Also, it’s worth highlighting again that they are experiencing revenue deceleration. But to be clear, I could probably live with their level of revenue deceleration, especially because it looks likely that they reaccelerate from here. But they took a huge step back on the path to profitability (is there even a path?) And, the macro environment is incredibly different from when I first bought Monday.com in Q3 of 2021. Now, I am especially interested in NOT owning anything that is lower tier conviction. Monday.com has been tier 3 for at least the past 3 monthly updates.

BILL.COM
Bill.com had the least straight forward quarter of any company I follow. On the one hand, guidance for next quarter (fiscal Q4) is strong, coming in at 10% QoQ. Unless there is some sort of acquisition in the works, 10% guidance from Bill.com is exceptionally high. Without acquisitions, typical guidance they give is for a smaller than 4% QoQ bump( and then they usually trounce the guide). Additionally, YoY growth will be buoyed by the fact that Divvy will now be considered organic revenue.

On the other hand, although guidance for next q was strong, actual QoQ growth for the just completed fiscal Q3 was underwhelming, clocking in at 7%. The reason why 7% is kind of bad is because of how hot they had been. Starting with the March 2021 quarter going all the way to the current March 2022 quarter, they experienced QoQ growth of 11%, 30%, 49%, 34%, 7%. You have to account for the timing of acquisitions though for fair comparisons. Additionally, fiscal q3 is typically one of their weakest quarters from a seasonal perspective if you look back to their last normal year, 2019 (2021 was not normal due to covid and acquisitions, 2020 was not normal because of covid, etc).

On the strengths side of the equation, Bill.com showed customer growth of 8% QoQ, which is a couple notches higher than the usual 4%-5% QoQ growth we usually see. Quick reminder that Bill.com customers take a number of months to ramp up their usage of Bill.com before they start adding meaningful revenue to Bill.com. Additionally, TPV is not down QoQ nearly as much as it was in the comparable quarter last year.

One minor bad thing that happened is that the former CEO of invoice2go, who Bill.com appointed to be Bill.com’s COO, is now stepping down from Bill.com. I don’t think this is tragic (a lot of CEO’s do this after their company gets acquired), although I do hope they keep the Divvy CEO for longer.

And one more thing to add to the weaknesses column was transactions fee growth. Note, calculating some Bill.com transaction fee growth numbers involves some minor assumptions, so some numbers you arrive at may be slightly different than mine here. I arrived at 4% QoQ organic transactions growth compared to the usual 20%-35% QoQ organic transactions growth. Before people make any rash conclusions, recall that Bill.com has digested a couple of acquisitions (notably Divvy) and that there is unknown seasonality we could be dealing with. But the last time Bill.com had transactions growth that low was in Bill.com’s fiscal Q1 of 2020 (which for Bill is the September quarter). That said, this may be indication that we’re in a recession already, and BILL is feeling it.

The lack of being able to get a good idea of what’s normal vs what’s not normal makes bill.com a tougher case to crack than companies that weren’t as acquisitive.

It has a non-SaaS component which would be a drag in a recession. You would think that bill.com, being a fairly mission critical SaaS company, would be pretty recession proof. But you can see that covid-19 depressed their 2020 numbers, when quarterly growth would get as low as 5% and 2% in the March and June quarters of 2020.

Although I mentioned numbers which indicate that Bill.com would struggle in a recession, the CEO doesn’t see it that way. There was one long quote worth calling out from the latest conference call where Bill.com management addresses the current macro environment and its impacts on Bill.com’s business. The quote in its entirety is here:
"I’d like to comment on two top-of-mind macro factors and how they impact our business: inflation and interest rates. Regarding inflation, we have heard from customers that price increases for goods, services and employee salaries are collectively creating pressure in their businesses.

The magnitude of the impact obviously varies by company. Because Bill.com provides visibility into spend and cash flow, our platform gives businesses looking for cost efficiencies, the tools to redirect resources where they are needed most in the current environment.

It is likely that inflation to date has had a positive impact on our total payment volume growth, but we believe the impact is immaterial overall. And like most businesses Bill.com is also experiencing cost increases and we’re diligently managing this trend.

On the topic of interest rates, we generate float revenue from interest earned on funds held for customers. Assuming recent FBO balances of $3 billion to $3.5 billion, every 100 basis points increase in the Fed funds rate would result in approximately $30 million to $35 million in incremental annual float revenue, though there will be a lag effect until current FBO investments mature and are reinvested in higher-yielding securities.

We also earn interest income on our corporate cash balances. While rising interest rates result in increased interest expense related to funding a portion of Divvy’s card program, we expect this additional expense to be more than offset by increasing interest income. The net of these moving parts is that, rising interest rates is a significant tailwind for Bill.com."

All in all, I think this was a mixed quarter. In a normal environment, I probably wouldn’t consider selling any of it, but I think I view BILL as being more prone to weakness due to a recession. For that reason, I may be interested in owning less of it going forward, but I haven’t decided yet for the time being.

DATADOG

Datadog’s quarter strikes me as one of the easier ones to analyze. This was a business as usual quarter from my top conviction stock. Revenue grew 11% QoQ, which is exactly what happened in the comparable quarter last year. And last year, Q1 was comparably weaker than the preceding Q4 (like this year). Q2 of 2021 ended up being a strong quarter with 18% QoQ growth. I don’t expect 18% QoQ growth this year, but I wouldn’t be surprised for a QoQ acceleration from here to 12-13%.

Guidance was on the lower side of normal at 5% QoQ growth for the upcoming Q2. This is a smidge better than the 4% they guided Q1 2022 to be, and it is noticably worse than the comparable guide they gave us for Q2 last year (8%). The weaker guide compared to last year could be due to the large numbers (worst case scenario), or it could just be conservatism due to the current macro environment. Recall, Datadog experienced some revenue growth slippage when covid first hit, and scared Datadog customers lowered their DDOG usage.

Other metrics I will call out, non-GAAP net income came in at $83m. And GAAP net income came in at $10m. Datadog continues to see a healthy amount of customers using 2 or more, 4 or more, and 6 or more modules. Customers with 6 or more modules jumped to 10%, up from 3% last year. Additionally, DDOG had free cash flow of $130m and a FCF margin of 36%. This is fantastic for a company of DDOG’s size and growth rate.

Datadog’s balance sheet is strong, with $271m of cash, $1.4b of marketable securities, and $2b total current assets. Current liabilities total $1.4b.

CLOUDFLARE
Cloudflare, like Datadog, experienced a very business as usual quarter. The market may have been a little spooked by weak free cash flows, but management addressed this on the conference call that FCF will return to being positive in the second half of 2022.

Revenue growth was boring good, same as usual per Cloudflare. Specifically it was 10% sequentially and 54% YoY. Guidance for next quarter was 7%, which is on the stronger side of average.

Million dollar customer growth was 72% YoY, meanwhile enterprise customers spending > $100k grew 9% QoQ and 63% YoY. 9% QoQ is actually a few points lower than usual for Cloudflare. This was probably the lone weakness I saw in Clouflare’s report. In the greater context of the strength and consistency of Cloudflare’s business, this small deceleration is not very meaningful on its own. Large customers continue to expand their proportion of Cloudflare’s revenues. 58% of all Cloudflare revenues come from enterprise customers.

DBNER was higher than ever, coming in at 127%. Non-GAAP net income was $3.5m, which is the second time that this has happened in Cloudflare’s history.

Clouflare has $1.9b in current assets, and $276m in current liabilities.

ZOOMINFO
In ZI’s most recent quarter, we saw below average QoQ revenue growth of 8% which was in line with seasonality we saw in 2021. The guide we have for next quarter is pretty normal for ZoomInfo at 5.5% sequential growth.

A big part of why I have held ZoomInfo for so long (instead of something with faster revenue growth) is because I see it as a way to diversify my holdings into something that offers pretty good growth and superb free cash flows. This most recent quarter generated $125m unlevered free cash flow, which converts to an unlevered free cash flow margin of 52%.

Enterprise customer growth (those spending >$100k) grew 12% QoQ or 71% YoY. 12% QoQ growth is a bit lower than the 16% and 14% we had seen in recent quarters but still is overall a pretty good amount of enterprise customer growth.

ZoomInfo has $617m of current assets and $515m of current liabilities. Peering further down the balance sheet, we see that total assets number $6.9b versus total liabilities of $4.8b.

Overall, I don’t see this quarter as super concerning. That said, I do view ZoomInfo as a lower conviction investment for me because of its slower growth rate and seat based revenue model. I might be inclined to convert my ZoomInfo to cash or into another position.

Wrapping Up
Thanks for reading! Drop a comment if you have any questions.

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Dave,
Thanks for posting as always. Love to get your thoughts.

This has been a humbling experience. I’ve been investing since 1992 and this by far, for me anyway, has been the most challenging I’ve ever experienced. Maybe it’s just because my portfolio is so much bigger then is was in 2000, or 2008. So I’m now one of the older generations in regards to time in the markets.

What worried me last year, frankly for the last few years, was the newer thinking that was in a sense born out of the successes of this bull run that we witnessed, especially since 2018. There seems to be, or maybe now seems to have been, a generation, a new way of thinking that it was their right to do 100% a year. That a 25% one year return would be viewed as a failure. That 25% can be done in a month. Why would anyone be happy with a 20 or 25% return in 12 months. That really worried me and I really felt a lesson was coming. So much talk, the consensus was a year end rally was inevitable in 2021, that of course the same snap back super rallies was just the way the market now worked. On some sort of predictive auto pilot. Wash, rinse, repeat.

So for the first time you sound a bit worn out, a bit tired of what’s gone on. Very understandable, I think we all have to be. If someone as upbeat as you sounds that way, then the mood out there amongst hyper growth tech investors has to be at an all time low. I’m hoping this new way of thinking, that it’s easy to make money in the market, that 100% gains are a piece of cake, that it is our right as investors to just crush the indexes, I’m hoping that’s gone now. I doubt it is, but I hope it is. It’s better for the market when people are more humble. Maybe this needs to go on for a few more months to make sure. A snap back rally back in March to new highs wouldn’t have done it. I think it would have been really bad for the market longer term. My view is that we needed this.

It’s a humbling experience for certain. I’ve been humbled many times by the market. I was waiting for signs of a bottom. People throwing in the towel, raising cash, changing their tone and expectations. I’m starting to see that now, even on this board. When people just can’t take it any longer. That’s when we are most likely close to a bottom.

So my only question Dave is about your cash. I know you sold MNDY, but was that where all the cash came from? Did you trim anything else?

Do you have a plan for that 17% cash position? Are you now in wait mode to put it to work? That seems to be a big change for you to have that much cash. I’ve been heavy cash, but been adding along the way here, which hasn’t quite worked out, but I’m a dollar cost average guy, that attempts to take the emotion out of investing.

Thanks again for your update. Hey, this tech selling has to end at some point.

TMB

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There seems to be, or maybe now seems to have been, a generation, a new way of thinking that it was their right to do 100% a year. That a 25% one year return would be viewed as a failure. That 25% can be done in a month…

So my only question Dave is about your cash. I know you sold MNDY, but was that where all the cash came from? Did you trim anything else?

Do you have a plan for that 17% cash position? Are you now in wait mode to put it to work? That seems to be a big change for you to have that much cash.

Hey TMB, good questions about the cash. Before I answer though, I do genuinely think it would be crazy to have another performance like I and many others here had in 2020. And I think probably everyone understands that, but just in case someone really doesn’t know any better, I mention in every report that I don’t think I’m gonna make 225% in a year ever again.

Most of the cash came from selling MNDY, but I also took small amounts out of ZoomInfo and Datadog earlier in May. And then all my equity positions contracted by a lot this month, meanwhile my cash position stayed the same. So on a relative basis, my cash position “gained” on my stock positions.

I haven’t finalized a plan for the cash yet, but I am leaning towards dollar cost averaging it into my existing positions. I would consider an accelerated schedule if earnings continue to be solid and/or the macro situation starts to improve.

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