2021 is now in the past! The last two months have been BRUTAL for my portfolio. Went from my high-water mark of 62% YTD to finish under 13%.
Like many here, I’ve been reflecting a lot on the past year (and really, past couple years). There has been a lot of good. So good in fact that despite trailing most Saul posters in 2021 performance, my high water mark was very very close to complete financial freedom!! However, right as I was about to taste that sweet nectar, we hit another rotation. Rotations no longer bother me as much as they used to as I now know it’ll come back and usually a lot quicker than most people would realize. However, combined with my hit rate in my positions being much lower this year than previous years, this drove to more introspection and modification to my investing plan.
I said this last month too but there are a couple HUUUUUUUGE lessons. Getting away from SaaS and not taking advantage when the market over-reacts to the positive side.
My first big mistake was getting too far from SaaS companies which fueled my previous outstanding performance. The worst part is I know and understand why SaaS is such a better business model. I let the risk/reward of other positions drive well over half my portfolio. Some great companies for sure and I think over the long-term, they will continue to dominate their fields, however I most definitely should not have that much of my portfolio in non-SaaS companies. I had over 60% of my portfolio allocated to companies like UPST, SE, Roku, Fubo, MGNI. My new guideline is SaaS of at least 70%. Currently sitting around 96%.
My second big mistake was not taking advantage of market over-reactions. As we all know, the market is irrational in the short-term but very predictable in the long-term. We might have a company, like DDOG report Q1 2021 earnings indicating acceleration in the 2nd half of 2021 but the market doesn’t pick up on it for a few months. Or we’ll have Fubo or MGNI or UPST double or triple in 1-2 months. I had decided after the Fubo & MGNI coming back down that in the future, I’ll take 25-30% or so if its doubled that quickly and re-allocate that. However, its very very hard to do when you’re conditioned to let winners run. So when UPST doubled then doubled again, I did not follow thru. I didn’t take some gains and it came all the way down to about where I started buying. Hopefully the next time, I’ll have the resolve to act upon this.
December
-10.69%
YTD
12.7%
Month Perf Dec Allocation
Data Dog -0.1% 27%
Snowflake -0.4% 22%
ZScaler -7.4% 20%
Monday -14.2% 17%
Upstart -26.2% 7%
Crowdstrike -5.7% 6%
SentinelOne -6.45% 3% NEW
Sea Limited SOLD
Transactions:
SE
Sold SE. Still think they have a huge runway for growth, but with the markets further tanking, and the excellent quarterly reports from many SaaS companies, I decided to consolidate a bit more into my highest conviction positions. Put this money into SNOW & ZS.
Part-way thru the month, I decided to take a tiny position in SentinelOne. I sold a small portion of Crowdstrike for this position. An extra big consideration here is that the rest of my CRWD is in a taxable account. So I need to decide if I think S will outperform enough. I for sure was going to wait until 2022 though.
End of year position reviews:
Datadog
OUTSTANDING company and outstanding year. In 2020 they showed signs of slowing then re-accelerated in 2021. DDOG is a great close to pure-play into the cloud migration processes that are continuing. They’ve got great partnerships with major cloud datacenters (AWS, Azure, GCP). In addition, they are kicking the @#%$@ out of their competition. The company I work for is entering a partnership with Dynatrace and I work with a guy who used to be in sales at Dynatrace. I hear a lot how much better the DT product is than any of their competitors. I don’t know if it actually is a better product, but if that is true, then the DT sales team or sales strategy or marketing team has major issues because DDOG seems to be eating their lunch. DT’s growth rate is almost the same as their DBNRR.
The thing I love about the DDOG (and DT) business model is that its IDEAL for the cloud world we live in. I hear it mentioned that its more usage based. I guess this is true but kinda depends on your view of it. Its based on the number of devices monitored. If there are 10 servers, gonna pay for 10 licenses. Its not really based on the usage of each server. In my mind, its not too different than like Microsoft Office. For each employee, a company needs to purchase for each of those. We don’t consider that to be usage based.
The brilliance of this business is that the number of devices needing to be monitored will increase over time. Even without adding new product lines (which further juice DBNRR). If the company above started with 10 servers year one, they might have 12 or so year two. Then year 3 they might have 15.
Another thing that IT people understand that maybe others might not is that its easy to add another server but very difficult to take one away. Its kinda a joke within IT. I don’t know how many times a company I work with says, “we’ll spin up a temporary server”. The intention is to keep it up a month or a couple months… something short-term. 90% of the time, that server will be there for years; if not permanently.
One client of mine had a server that was used for testing before rolling code to production. They set up a new, more proper testing environment that did not include this server. They then let a developer use this server for a short-term project. I would ask every couple months or so if we can get rid of it and was always told that they need it just another month or so longer. Finally, after 3 years of this, we were able to get rid of that server. Think about company turnover, I’ve gone into companies to do assessments and such and asked about some servers and NOBODY knows what the servers are. They don’t know if they’re actively used or if they’re production or test. They are afraid to turn it off because of the unknown potential impact.
Anyway, that’s just a couple long-winded ways to indicate how great the Datadog business is. Monitoring would be on these servers for ALL this time!
Snowflake
Going from one OUTSTANDING business to another one. This just might be the best one I can think of. I’ve spoken many times about Snowflake and why its such a great business. As a long-term database administrator who focuses on performance of databases, I know well how bad most developers write code that interacts with databases (mostly SQL). I also know well the impact of more data has on a query. In addition to this, how quick many companies are to overwhelm the poorly written queries on huge datasets with hardware, even when its very expensive. Saying things like, We’ll add a couple CPU or some Memory until we have time to go back and re-write that query… well, just like the Datadog example above, it is very easy for this good intention to slip thru the cracks. Howe does this apply to Snowflake? Well, they make it TOO easy to add hardware for a single query to make that one query run faster when it executes. Each time you hit that button, it costs double but… companies convince themselves they’ll circle back and rewrite the query. Being able to granularly add hardware at this level; per query… complete brilliance!
In addition to that, databases are very sticky. Even if a they are hated, companies will still pay for it. Slootman came from Oracle. Oracle is a perfect example. I have worked with a lot of companies and government entities that run Oracle. Have not met a single one that likes or is even indifferent about them. Companies HATE HATE HATE Oracle. Why? Because Oracle rakes them over the coals in licensing costs. They nickel and dime for everything. For example, you have to pay an additional cost to Oracle if you have an instance house more than one database. All other database platforms allow this for free (SQL Server, MySQL, Postgres). Companies have the option to move to a different database platform but this undertaking is HUUUUUUGE and very very risky. Once a company gets onto a data platform, it’ll be a very rare case that they change that platform.
ZScaler
Relatively new re-entry into ZS for me. I was in them, then out when they had sales issues and now back in. They look to be following the re-acceleration path (but from a deeper low) that Datadog is doing. My conservative estimates whow them sitting mid 60s YoY growth for a bit. I think there is a decent chance we’ll see them accelerate into the 70% range. I dream that last Q’s QoQ is indicative of where they can grow but… don’t want to get my hopes up that much (last Q annualizes to 87%). haha.
Why are they accelerating? Their SASE security edge network. Its a real paradigm shift. I have one client that is utilizing Palo Alto’s SASE but they are still reliant on VPN. At some point, Palo Alto is gonna have to shift even more I think… however, they’re playing catch-up.
Monday.com
I’m not nearly as into the details on Monday as many others here. The numbers look fantastic. I’d feel a bit more comfortable about it if we had a few more quarters of reports showing more of a history in their guidance/beat stuff. However, they blew away my expectations last quarter so I entered. Turns out the whole lockout thing was mostly a non-issue. I held out of getting in due to that. Another lesson learned I guess.
I’m excited about Monday and their ability to be a non-code replacement for internal company apps. I’ve seen the headaches of companies relying on custom built things that end up legacy and nobody knows what or how to fix. Even came across some where the source code was uh… LOST. Anyway, if they follow thru and can empower the building of needed applications, that’ll greatly help with productivity.
One thing I absolutely love about this business model is again… its SUPER STICKY! I’ve seen companies relying upon uber dated tech for internal functions for decades. Once a company is building apps on monday and relying on the product on a daily basis, they aren’t going anywhere!!
My biggest concern on Monday is there seems to be a whole lot of competition. Hopefully they can continue to distinguish themselves and become the defacto; by far; player in this space.
Upstart
Well, I mean… pretty sure everyone here knows what they do and their prospects. I’m looking forward to seeing how their auto lending piece plays out next year! I think they have a HUUUUUGE TAM. One question is will they get into it quickly or at a much slower pace. The stock price is beaten down quite a bit but probably had been too high for a non-SaaS company. Market over-reacts both in the positive and negative directions. I think we’re seeing the negative overreaction now where we saw the positive in the months leading up to November’s report.
Crowdstrike/Sentinel One
So… I find myself in a bit of a predicament on these. CRWD of course, as we all know, is an OUTSTANDING company. They are slowly decelerating; might have hit their spot for law of large numbers. However, if we take a look at others that have slowed, there are still many great outcomes in the SaaS world. For example, Okta slowly slowed; clocked 45-50% or so growth for many quarters and the stock price chugged along great. They eventually slowed to under 40, which is where they now sit (organic growth). Another possibility is DDOG where they slowed then re-accelerated. I think they are more likely to do the Okta route but if the government business takes off sooner (I know I know, saying the government moves at a snail’s pace is unfair to the snail).
On the other hand, we have a direct competitor that is growing at triple digit YoY rates with improving profitability; usually an ideal Saul stock. Its not quite the infamous FSLY/NET conundrum of 2020 as both FSLY and NET were looked upon as around the same place along their S Curves. It seems CRWD is at the peak and going to have a slow, Okta-like bunny-hill rather than the deep part of the S curve but Sentinel One is most definitely at the beginning of the S, the ideal place for a Saul stock. I’m currently sitting with one foot in the CRWD side and half a foot in the Sentinel One side. I feel the need to choose one and ride with it. As mentioned above, the rest of my CRWD is in a taxable account (long-term cap gains) so that’s an extra consideration.
Watch list:
I’m VERY interested in two other companies, Cloudflare (NET) and MongoDB (MDB).
Cloudflare
Although I’m so bad with valuations, I still can’t make myself take the NET plunge, even after their 30% drop this month.
MongoDB
I’m also very excited about MDB as well. While they’re at a slower YoY growth rate from others, they are showing all the signs of ACCELERATION, which I love, especially in a sticky platform B to B company.