A couple of people were wondering about my allocations. I haven’t posted them in many months and I have made a bunch of changes. I typically make small changes and adjustments every week. But lately I’ve made some more significant adjustments. The bigger changes were after earnings results which prompted me to either increase or decrease positions based on my new altered view of the companies’ future growth and future business prospects. I have become a lot more ruthless about cutting stocks, I have become less concerned with realizing capital gains and paying taxes, and I have become more easily willing to take an initial large position or add large sums to a position which I have decide will probable grow the fastest. This last point is even more true for companies that I believe will grow fast AND are misunderstood or very undervalued.
Here are my monthly returns since the beginning of 2017:
**DATE YTD 1 mo S&P YTD EXCESS OVER S&P500**
1/31/18 25.59% 25.59% 4.85% 20.74%
2/28/18 37.45% 9.44% 0.99% 36.46%
3/31/18 40.74% 2.40% -1.58% 42.32%
4/30/18 41.05% 0.22% -1.20% 42.25%
5/31/18 55.78% 10.45% 1.18% 54.61%
6/18/18 80.65% 1.40% 79.26%
6/30/18 52.33% -2.22% 1.95% 50.37%
7/31/18 51.13% -0.79% 5.59% 45.54%
**8/24/18 97.08% 30.41% 7.97% 89.12%**
You may have noticed that I’ve included May 18th. My portfolio reach a local peak that day which was following by a steep decline all the way down to around +45% YTD. My portfolio has had 4 steep drops since last December: in Dec 2017, Feb 2018, May 2018, and Jul 2018. I want to start tracking these peaks which I may find useful to make decisions about how much leverage I want to use and when I want to take off the leverage. I have posted before that I use options to try to increase my returns. Since it is off-topic, I won’t explain the details but I would like to add that I have been steadily reducing my downside exposure, particularly during the past 2 weeks.
There is still one full trading week left in August and my largest holding, NTNX, will report results on Thursday. Then in September MDB and PVTL will be reporting results.
Here are my current allocations as of 8/24/18:
Shares +OptionsGain/% move of stock
NTNX 12.78% **17.23%** 1.84%
AYX 17.56% **17.56%** 1.00%
SQ 11.92% **13.20%** 1.33%
TWLO 9.28% **11.71%** 1.53%
NVDA 9.68% **10.77%** 1.29%
PVTL 8.83% **10.17%** 1.50%
MDB 8.26% **8.26%** 1.00%
PSTG 5.06% **6.05%** 1.67%
NKTR 2.11% **3.67%** 3.31%
SHOP 0.36% **1.05%** 6.00%
options 12.77%
cash 0.97% 0.97%
100.00% 101.05%
The position allocations are reported in 2 ways in 2 columns. In the first column, each allocation includes only the shares that I own and my aggregate net options position are shown at the bottom (12.77%). To arrive at net aggregate, I sum (1) in-the-money value of all my long call positions and (2) the time value of all my long call positions using the mid-point between the latest bid and ask prices; then I subtract (3) the in-the-money value of my short put positions and the time value of my short put positions (time value is also calculated by taking the midpoint of bid and ask). So the total net value of my options is about 12.8% of my portfolio. In the second column, I’ve assigned the net options value to each position. For example, for NTNX, the shares that I own represent about 12.8% of my total portfolio; however, since I own a lot of NTNX call options, my allocation to NTNX is a lot higher (17.23%). The last column shows the relative number of call options that I have on each position. For example, for NTNX I own 0.84 share equivalents in call options for each share that I own; this means that if NTNX stock goes up by 1% then my position in NTNX will go up by 1.84%. For AYX and MDB, I don’t own any options positions so I would gain 1% for every 1% gain in those stocks.
Ok, now that I’ve explained how my allocations are calculated, I’ll go over the allocations. In general, my allocation sizes for each position are a reflection of my opinion on the company’s future growth and the stock’s future appreciation.
NTNX: It’s been my largest holding for a while. It has been misunderstood but it is coming out of that as the results will no longer show the low margin pass-through hardware revenue. It has 68% gross margins (very good) but they will rise up to 74% as the last of the HW revenue falls off. The TTM EV/Sales is 8.2 and at its full 1 year growth rate of 45% (assuming it continues) the ratio in a year would be down to 5.6. It has an enormous amount of deferred revenue, $540M, on its balance sheet relative to its $1104M in TTM revenue. It’s net promoter score of 90 is out of this world; this tells me all customers are staying and recommending others to buy from them. This high NPS is one of the most important indicators for me on NTNX. The TTM stock compensation of $160M is reasonable at 1.7% of its market cap. I expect continued great things from NTNX and we will get the latest business results on Thursday, August 30.
AYX: AYX has the second highest allocation in my portfolio. AYX recently reported results and were they good. I LOVE the gross margins of 88%. It means that $90 of every $100 in revenue is available to cover OpEx and profit. The EV/Sales is 19.8 and with 53% revenue growth the future ratio is 13.0 (assuming growth continues at last years rate. The dollar based retention is 131% (excellent) and they have 40% more customers than they had a year ago (great growth). AYX also has a large amount of deferred revenue: $119M compared to $162M in TTM recognized revenue; as a percentage of TTM revenue, AYX’s deferred revenue is more than NTNX’s! The TTM stock compensation was $12.4M and only 0.4% of the market cap. The competitive position is excellent: management reported that they really have no competition (wow!). To be valuation matters and the EV/Sales ratio of AYX is more than double that of NTNX. So why is this ok? It is ok because there is a substantial difference in gross margin, a higher revenue growth rate for AYX, and a better competitive position (NTNX has to compete with VMWare). All three of these factors contribute to my conviction on this company and its valuation. In fact, I probably like AYX more than NTNX and the only reason why I don’t have call options in AYX is because leaps are not available (I don’t like buying near term calls).
SQ: SQ is in 3rd place. I REALLY liked the last earnings call and I added a lot to SQ at about $65 right after the earnings result. I used the proceeds from SHOP which had reported a day earlier. Moving money from SHOP to SQ was an easy decision. SQ is just crushing it with accelerating growth, an improving ecosystem with many cross-selling opportunities, and customers that just love SQ. And they are now profitable; they may choose to invest in growth which is just fine by me.
TWLO: TWLO reported a great quarter. I had previously limited by position in TWLO, but decided to increase it recently. The reason I limited it was due to the relatively low gross margins; they have been at 54% for several years. While it’s nice to see them stable, they are a lot lower than the GMs for my higher allocation stocks like AYX (90%), and NTNX (74%). However, I recently learned from the earnings call that TWLO is intentially keeping its GMs low and that in the long run management expects GMs at around 65%. I’d like to know more about why they are keeping them low. Are they keeping pricing low because they want to attract more customers to lock them into using TWLO or do they expect some of the newer product and services to give customers more value so they pricing can be higher? The EV/Sales ratio is 17.0 and with a 1 year revenue growth rate of 46% the future ratio is 11.6. However, the non-Uber growth rate is more like 60% which would drop the future ratio to 10.6. The dollar based net retention rate is 137% and 156% without Uber (huge!!!). And customers love TWLO; they have a very high NPS (can’t recall the figure but I think it’s in the 70s which is really great). This high NPS is reflected in 32% growth in customers to 57,350. TWLO is an excellent competitive position and advantage. They are basically a 21st century telecommunications company; they are really disrupting (through digitization) the old way companies communicate. Their business model is different from the other SaaS companies. TWLO is build a toll booth-like system that customers become dependent on and TWLO charges customers based on how much they use the communications apps much like how a telephone company charges customers based on how many minutes they speak on the system. In 1-2 quarters the hidden growth will be fully revealed and the stock price may already reflect the uncovering of the hidden growth. But I expect more great things from TWLO particularly because they are developing higher value tools and because they are continuously raising the barriers to entry.
NVDA: NVDA! I love NVDA. I need to be careful not to fall in love with this one. I know that my view of NVDA is different from many other people’s view. Many think NVDA is overvalued. I don’t think so. I see all of their target markets rapidly growing. I see that NVDA is improving their products faster than the competition if you can call AMD and Intel competition. I see that NVDA is changing the world. But while all this is great, it’s the numbers and the future numbers that matter. NVDA is profitable and should be valued on earnings and not sales. One year revenue growth is 42%. Gross margins are 64%. The P/E is 38.7. The TTM earnings growth was 83% so the 1 year PEG (this hasn’t been used here in a while!) is 0.46. I recently posted what I think about NVDA after hearing the earnings call and the 2 keynote presentations from SIGGRAPH 2018 and Gamescom 2018. Why does NVDA also give the keynotes (2018 CES too)? Seems obvious to me. I continue to be impressed by what NVDA is doing and my position size is more than just a love affair.
PVTL and MDB: I recently added a lot to PVTL. I agree that there is hidden value and I see future growth and a very strong competitive advantage. My conviction on PVTL is largely based on what I have learned from others on Saul’s board. Thank you everyone who has contributed to the discussion; I have found it incredibly value. The same is true for MDB.
PSTG: So is it a hardware company or not. It is a hardware company. It sells hardware but it is no ordinary hardware company. Seagate is also a company that sells hardware from memory. But Seagate is hardly comparable with GMs half of PSTG’s GMs. If PSTG were selling a commodity then it’s margins would be MUCH lower. If they were selling a commodity then there’s not a snowball’s chance that they would have a net promoter score of 86! 86! They are giving their customers A LOT of value. In fact, PSTG is giving them what they want and the customers are eating it up. PSTG is also now joined to NVDA’s data center GPU sales. Everyone is buying NVDA GPUs for data center so PSTG will hugely benefit from this. The world’s data center infrastructure is not even close to being build out. I think it’s very early: maybe 20% built out. TWLO’s CEO said (I think) that 90+% of TWLO’s target market is still on-prem. The cloud wave is going to continue for a while and the world is going to need a lot more data centers which will need memory. PSTG offers it in a way that data center operators want: it just works and they don’t need to think about it. PSTG’s revenue is growing at 42% (1 year growth) with 68% gross margins. The TTM revenue of $1181M and EV of 5.3 and a future EV/S of 3.8. Unlike the SaaS companies’ revenue, much less of PSTG’s revenue is recurring. However, the multiple is so low and with the market growing and PSTG taking share, I see this company’s stock preforming very well over the next few years.
NKTR: NKTR has a lot of potential. It’s a different beast than my other positions. I think the risk-reward ratio on NKTR continues to be very favorable. I cut my position substantially but I replaced a large part of what I sold with leap call options. The market, IMO, is underestimating the mechanism of NKTR-214 and the importance of converting the PD-L1 negative patients to PD-L1 positive. IMO, as more and more data from all the trials become revealed investors will realize what NKTR-214 can and will do: change how cancer is treated and cured. Why is NKTR-214 so promising: 1) can be used on many different cancers, 2) non-toxic, 3) can be used in conjunction with many checkpoint inhibitors, 4) one compound/therapy for all patients (unlike Kite’s or Juno’s I-O therapies). NKTR is my smallest position but I wouldn’t be surprised to see it perform as well as many of my other positions over the coming years.
SHOP: SHOP is now my smallest position. I’ve kept some shares and some call options that I bought less than a year ago. They will become long term holdings in early October, but I think might keep some shares just because I want to be forced to continue to monitor SHOP. I want to see if their revenues reaccelerate. I sold because of the deceleration and because I think my money can grow faster in other companies like SQ, NVDA, PVTL, and PSTG; this is where I put the proceeds. I think SHOP might be able to reaccelerate their revenues. We will see. But I will say that my conviction in SQ has by far passed my conviction in SHOP. I just think that SQ has a better business model and much more opportunities for growth and profits (SQ is trying to spend everything to grow faster but they couldn’t even do it; they just made too much).
I want to thank Saul again for starting this board about 4 ½ years ago. Who would have thought it would have been possible to be up more than 90% two years in a row. At the beginning of 2018, I posted that we might well see another year like 2018. Today some people have posted that they are uneasy with the speed of the stock advances. I think we will see more of these drops, like the 4 we have seen since last December. But I also think that as long as the companies that we own keep growing at the current pace our stocks will keep growing. None of the companies that I own are directly tied to the trade disputes. But the resolution of the trade disputes, IMO, will lead to a big jump in the global stock markets. I also think that Q4 2018 will be a HUGE quarter for many companies; this is because of the new tax cuts: companies will be highly incented to spend on CapEx before the end of 2018 so that they can expense all of that in 2018 rather than depreciating the CapEx of several years. I expect that we may well see the market and our stocks much higher (than today) after companies report Q4 in late January to mid-February.
Chris