ExponentialDave's Sep 2022 Portfolio Update

My portfolio is up 85% as of writing on 9/18/2022 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 $185. Meanwhile my benchmark, WCLD, is up 1% since January of 2020, and the S&P 500 is up 20% since January 2020. For the period from January 1st, 2022 through 9/18/2022, my portfolio is down 57%, meanwhile WCLD is down 45%, and the S&P 500 is down 19%.

2020 Performance: 225%
2021 Performance: 30%
2022 Performance: -57%
Cumulative Performance 1/1/2020 - 9/18/2022: 85%

Monthly YTD performance at the end of each month
Jan 2022: -24%
Feb 2022: -28%
Mar 2022: -30%
Apr 2022: -46%
May 2022: -59%
Jun 2022: -61%
Jul 2022: -57%
Aug 2022: -54%
Sep 2022: -57% as of writing on 9/18/2022

Current Positions vs Previous Positions as of Last Update

Ticker Current Last Month
DDOG 17%, 24%
S 14%, 10%
BILL 13%, 13%
ZS 13%, 9%
NET 12%, 10%
SNOW 12%, 6%
CASH 11%, 13%
CRWD 8%, 7%
MDB 0%, 6%

You will notice my positions are much more evenly weighted than usual. This is because at this time, I don’t think any of them are much better than any of the others. In my opinion, Datadog faltered somewhat, and with that we don’t have one stock to rule them all anymore.

Previous Monthly Updates

My old portfolio updates are here (click into 2020 and 2021 links to see more per year):
2020: https://discussion.fool.com/vinegar10139s-2020-year-end-portfoli…
2021: https://discussion.fool.com/exponentialdave39s-dec-2021-portfoli…
Jan: https://discussion.fool.com/exponentialdave39s-mid-jan-portfolio…
Feb: https://discussion.fool.com/exponentialdave39s-feb-2022-portfoli…
Mar: https://discussion.fool.com/exponentialdave39s-mar-2022-portfoli…
Apr: https://exponentialdave.substack.com/p/april-2022-portfolio-…
May: https://discussion.fool.com/exponentialdave39s-may-2022-portfoli…
Aug: https://discussion.fool.com/exponentialdave39s-aug-2022-portfoli…

Overall Commentary
Earnings season is over, so how do I feel about my stocks now that the dust has settled?

On the whole, this was a solid earnings season for cream of the crop SaaS and SaaS-adjacent companies. Only Datadog and MongoDB had less than business as usual earnings reports.

We have officially been in a recession for a while, as defined by two quarters of negative GDP growth. And yet, most of our companies are hardly performing any worse. Revenues are not stagnating or declining but rather, they are growing with leaps and bounds.

These aren’t just fanciful qualitative things I’m saying, you can see the revenue growth more clearly here:
Ticker QoQ Growth YoY Growth
DDOG 12%, 74%
S 19%, 102%
BILL 13% ,71%
ZS 11% ,61%
NET 11% ,54%
SNOW 18% ,83%
MDB 6% ,52%
CRWD 10% ,58%

Markets are cyclical, and eventually there will come a time when risk appetites return and investors will clamor to pay premium prices for high quality businesses. Until then, expect P/S multiples to stay more or less where they are or possibly fall further. But don’t forget, we don’t actually need multiples to rise to make a lot of money. We just need them not to fall! A company growing its revenues 40% per year with a constant P/S ratio will rise 40% in a year! That’s not too shabby.

A question I get somewhat frequently is “When are our stocks going to hit all time highs again?” The best most honest answer is, nobody knows, and anyone who tries to tell you exactly when is either ignorant or lying.

But even further in the spirit of honesty and transparency, let’s not kid ourselves. It’s fun to make ball park guesses! So I made a twitter poll asking people when growth stocks will revisit all time highs. The results came out like this:

2023: 21%
2024: 34%
2025-2026: 26%

= 2027: 19%

To add a little math here, my own growth stock portfolio is down roughly 69% from my all time high which I hit about a year ago in 2021. In other words, if I started with $100 on that day, I would now only have $31. To get back to $100, I would need to just slightly more than triple my money from here.

To be fair, the poll wasn’t asking “When Exponential Dave will hit all time highs again” - it was asking about growth stocks.

Anyway, my own “conservative” guess here is that we’ll be back to all time highs by 2027. Worth reiterating, I don’t know, and neither does anyone else.

That might sound crappy to have to wait five years to get back to where we were just a year ago. But keep in mind the S&P 500 on average doubles every 7 years, so if we triple in five years, I think that would be fantastic.

MongoDB, see details in MongoDB section.

Earnings Analysis

Another solid quarter in the books for Zscaler. Revenues grew 11% QoQ and 61% YoY, beating guidance by 4%. Although this revenue beat is the lowest it’s been in a couple years. On the other hand, revenue guidance for next quarter is 7%, the highest it’s been in a few quarters.

Profitability metrics for Zscaler looked good as well. Non-GAAP net income grew to $36m, up from $20m last year. Free cash flows grew substantially, increasing to $103m from $44.7m last year.

Million dollar customer growth was somewhat weaker than usual at 11% QoQ and 58% YoY. Although million dollar customer growth is important, I think it’s critical not to place too much weight on quarter to quarter fluctuations so long as other metrics are strong, which they are. Enterprise customer spending > $100k grew 41% YoY, which is pretty normal for ZS.

Somewhat frequently people will point out that billings have been weaker lately. Well, they just grew 50% QoQ. That’s not a typo. This is within the range of seasonally normal for Zscaler in their fiscal Q4, and I think this puts any fears about billings to rest.

Other weaknesses people like to point out include the longer sales cycles and allegedly slower pace of innovation. But I think the continued strong financials, especially revenue growth, really speaks for itself. You don’t need to be the fastest salesman or the most frequent innovator to sustain hyper growth for years.

Organic revenues grew 19% QoQ and 102% YoY. This is right on par with their typical revenue growth. This implies a guidance beat of 8% on a non-organic basis (they did not provide an organic guide).

The guide for Q3 is for 8% revenue growth QoQ, which is arguably about normal for them.

Non-GAAP gross margins surged 4% higher than their previous all time high to 72%. Someone could probably gripe about how it’s technically not a fair comparison since it includes non-organic revenues, but the implication is that the acquired business Attivo is higher margin than SentinelOne. This is a very good thing!

Non-GAAP operating expenses as a % of revenue is still insanely high, but it is moving in the right direction. In the comparable q last year, it was 161% of revenue, and now it is 129% of revenue.

Non-GAAP net loss grew 22% YoY to -$56m. With SentinelOne’s continued break neck pace of revenue growth, this sort of net loss is acceptable to me.

There was not a breakout of enterprise organic customer growth that I could find, but on an inorganic basis the numbers look pretty solid. $100k customer growth was 28% QoQ. Worth noting, enterprise customer growth was much weaker than usual in Q1, and now they had an acquisition that helps pad the number which they did not break out organically. Of course I don’t like that style of reporting, but with everything else looking good and transparent, I think I let this one slide.

DBNER was an outstanding 137%, crushing their previous record DBNER of 131%.

I had a lot of thoughts about this report in both directions. It wasn’t terrible, but it certainly wasn’t good. At a high level, I will keep this as simple as possible before diving into some details. My best guess is that next quarter their revenues will slow to 7% growth QoQ and 43% growth YoY. That would be lower than everything else I own, but overall probably acceptable to me. But then the following quarter (Q4), I am guessing that even if revenues accelerate (as they tend to in Q4), I think their revenue growth lands right around 13% QoQ growth or 38.5% YoY. And that is with a generous 13% QoQ trajectory! And 13% is possibly too generous here, so if QoQ growth in Q4 is more like 7% again, we are looking at 30% growth YoY, which is way lower than anything else I own.

If Mongo had ever demonstrated better operating leverage and progress to profitability, I think I could live with the lower revenue growth. It looked like they were trending towards profitability and increasingly positive free cash flows until this quarter, when free cash flows evaporated from $8.4m last quarter to $-48.6m this quarter. But it’s not realy fair to compare Q2 against Q1, so if we look at Q2 last year, free cash flows were $-22.7m. Clearly Q2 is seasonally weak for FCF’s, but even still it’s more than twice as bad this year than last year.

So we have decreasing revenue growth and a not so great path to profitability. This is really enough for me to say that I have better places for my money than MongoDB.

A big part of why I invested in MongoDB is the perception that it would be more mission critical than other stocks. If times get tough you can’t just throw away your database, right? Yes, true but if you are an ecommerce store customer of MongoDB, when a recession hits you will probably have fewer customers using your web site. Fewer calls to the database are getting made, and remember that Atlas charges based on usage. So MongoDB gets potentially much less revenue in this situation.

What is somewhat confusing is that we saw MongoDB revenues decelerate, yet Snowflake (who is also a usage based database provider) reported a quarter that was as strong as ever. Most likely Snowflake had fewer customers in impacted verticals, like ecommerce, cryptocurrencies, advertising, etc.

Below are more details about their quarter.

–Revenue growth was 6.4% QoQ and 53% YoY. 6.4% is weak for Mongo in a Q2 - it’s right about what we saw during Q2 of 2020. Perhaps most telling is that MongoDB has always had a better Q2 than Q1 on a QoQ basis, and this year broke that trend.
–Similarly, with Atlas revenues, we usually see a big uptick from Q1 to Q2 and we didn’t see that this year. Atlas revenues grew 13.5% QoQ, which by itself is not all that bad. The problem is that in the comparable quarter last year, we saw atlas grow by 20%.
And last quarter’s Atlas growth was a bit meager as well, coming in at 11%. This 11 % gain in Q1 by itself is not bad, especially considering that in 2021 Atlas grew by a similar amount in the comparable quarter.

–Atlas became 64% of revenues, up from 60% just one quarter ago. This is a big jump for one quarter. It is surprising that Atlas revenues would jump so much as a percentage of all revenues, AND simultaneously we get a weak quarter. The oppposite effect was supposed to happen! An increasing share of atlas revenues was supposed to lead to revenue acceleration (or at least sustained revenue growth, not deceleration). The implication, I think, is that although Atlas had a weak quarter, the rest of the business had an even worse quarter.
–Guidance beat was about 8%, which is normal for Mongo.
–Guided for no revenue growth for Q3, which is actually a pretty normal guide for them.
–Raised full year guide to 38% from 36%. This is less of a jump than we saw last year from Q1 to Q2.

–Enterprise customer growth was about normal, growing 6% QoQ and 30% YoY.
–Atlas customer growth was the weakest it’s been ever on a QoQ basis
–Direct sales customer growth was 12.5% QoQ, much better than in the same quarter last year.

–On profitability metrics, they did ok on non-GAAP net loss and quite poorly on free cash flows. They lost $16m on non GAAP net income, and they lost -$48m in FCF. The -$48m loss is substantially more than last year’s $-22.7m loss.

We’ve seen this before - the long term future of the company is certainly very bright. But the company doesn’t have as clear a path to profitability as I would like, and I predict that revenue growth is going to dip into the 30’s by Q4 of this year. We won’t know until March most likely, and I don’t want to wait around for that long to find out.


My initial thoughts here are that this was a lackluster quarter relative to how CRWD typically performs. They are victims of their own success.

Revenue growth QoQ came in at 10%, which is the lowest it’s ever been. Keep in mind that objectively 10% revenue growth QoQ is still quite good! Although their revenue beats keep getting smaller - this quarter it was 3.8%, the smallest it’s ever been. I see this as a natural progression of the law of large numbers. Nothing overly concerning.

I’ve noticed and written before about how Crowdstrike has the most linear revenue deceleration I’ve ever seen. You can see that avg QoQ growth was 17% in 2019, 15% in 2020, 13% in 2021, and now it’s at 11% in 2022.

The guide for next quarter was pretty average, coming in at 7.6%, and they bumped their full year guide to 54% annual growth, up from 52% last quarter.

Secondary metrics were mixed - free cash flows didn’t fall as much as they did last year from Q1 to Q2 on a QoQ basis, and RPO growth was weak.

Customer growth was 10% QoQ - this is tied for the worst they’ve done on that metric. Similar to revenue growth, customer growth has veryyyy linearly decelerated over the years. Crowdstrike, in their conference calls, has at times mentioned they are moving down market (as in they started with the big fish and aim for progressively smaller customers). In contrast, SentinelOne has talked about how they started with smaller customers and are moving up market to bigger customers.

On the whole, I think their performance was acceptable but not up to their usual standards.

After an unusually dull Q1, we got a terrific Q2 from Snowflake. Product revenue grew 18% QoQ and 83% YoY. This was a 7% beat over guidance, pretty much hailing a return to the sort of stellar performance we saw a lot of in 2020 and 2021.

Guidance for the next quarter came in at 8%, which is on the low side for Snowflake. It could indicate a weaker Q3, or it could just be cautious guidance through the recession. Further hinting at a weak Q3, the full year guide was barely raised, from 67% to 68%. I think the guidance here points towards actual growth of 10% QoQ for Q3 - this translates to 64% YoY product revenue growth. Note this a big step down from the 83% product revenue growth we got this quarter. In my opinion, the writing is on the wall that revenue growth will slow down under 70% YoY next quarter, probably into the mid sixties. But surely some people don’t see it that way, and some of those people will sell when the numbers are officially released, leading to more downward pressure on Snowflake’s stock price.

Million dollar customer growth was oustanding, growing 19% QoQ and 112% YoY.

Overall customer growth has continued its steady slide downward. My stance on this is that it’s ok so long as other metrics (revenue growth, million dollar customer growth, etc) remain strong. The company has reiterated many times that its focus is on the small number of exceptionally large customers and not on large numbers of small customers.

There was also this note in the conference call regarding stable edge growth:
In Q2, the number of Snowflake data sharing relationships measured with what we call stable edges grew 112% year-on-year. 21% of our growing customer base has at least one stable edge, up from 15% a year ago. Among customers over $1 million in product revenue, 65% have at least one stable edge.

Snowflake’s famous net retention remains stubbornly high at an insane 171%, despite claims that its recent platform optimizations would lead to shrinking net retention rates.

RPO growth was a weak point for Snowflake, coming in at 4% QoQ and 77% YoY. This is a quick reminder that RPO is a secondary metric. It’s subject to the timing of deals, so I don’t think it’s a good measure of Snowflake’s business potential, especially because of Snowflake’s consumption based business model. Due to the recession, I would imagine more customers are trying not to sign large contracts but rather go month to month if possible, which absolutely hurts RPO.

Lastly, adjusted non-GAAP free cash flow was weaker this quarter than last quarter. This might be a seasonal thing, but it’s hard to say from just looking at the numbers. We do see that there was a drop in free cash flows last year from Q1 to Q2, although it was not as pronounced as this year’s drop.

On the whole, this quarter’s numbers looked fantastic I thought. But the guidance is giving me pause in the near term. Long term, Snowflake looks like it’s taking the right steps to becoming an absolute behemoth.