GauchoChris portfolio check-up 3/15/19

Investment Analysis Clubs Saul’s Investing Discussions
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Now that all of my companies have reported their results, I decided to do a portfolio check-up to see if my rankings match my allocations. I did that over the weekend. Here is that write up:

Portfolio Stock Rankings
3/15/2019

#1 TWLO (20.9% allocation)
• TWLO’s revenue growth (y/y) has been very strong and accelerating: 40.6%, 47.8%, 54.2%, 68%, and 77.3%. Amazing!
• The SendGrid acquisition just closed which just about doubled the company’s customer count which had been growing organically above 30%. I look forward to seeing how effective the cross-selling efforts will be, and I expect good things there because TWLO’s customers have been asking for email communication to be added.
• The Net Dollar Based Expansion has also been increasing sequentially for the past 4 quarters (some of the other companies are showing stable expansion rates): 118%, 132%, 137%, and 147%. This is just amazing particularly in light of the Uber business decline making ex-Uber expansion even greater.
• TWLO is the clear market leader in its category.
• The company has been adding additional services that they identify what new applications are being built by their 140,000 customers. Very likely that there will be more successful new products/services to come in the years ahead.
• Execution has been outstanding.
• Its margins are stable but relatively low at 54%. The company says that it sees margins in the mid-60% range eventually but is for now focusing on expanding within the market.
• The world’s companies are digitizing their communications and TWLO is the leading company that is enabling this transition that is still in the very early stages. The market cap is $14.3B; I believe that it is possible for TWLO to grow 10x to a$140B company.
• EV/sales (TTM) is 21.5 and 13.2 in a year assuming the same 1 year growth rate.
• In summary, TWLO deserves the highest allocation and I plan to keep it at it’s currently allocation (neither sell nor buy more).

#2 AYX (18.6% allocation)
• AYX’s revenue growth rate has been stable for the past 8 quarters: 55.2%, 51.8%, 52.1%, 54.6%, 50%, 54.4%, 58.7%, and 56.8%. Very solid.
• The gross margins are above 90%. This company has less than 900 employees and cranked out $204M in revenue TTM. Love those gross margins! Makes their revenue more valuable than a company with lower GMs.
• Customer growth 38.4% y/y and net dollar expansion rate of 132%.
• Management claims virtually no competition and open greenfield opportunities.
• EV/sales (TTM) is 22.8 and 14.7 in a year assuming the same 1 year growth rate. Under ASC 606 the EV/sales (TTM) is 18.4 and 11.8 in a year (assuming the same growth rate since AYX didn’t restate prior FY financials).
• Data analytics is still in the very early stages and the potential market has barely been scratched. AYX should have many years of hyper growth in front of it.
• Management seems to be doing a great job in executing.
• In summary, AYX is an incredible company and deserves the #2 allocation in my portfolio. I plan to keep it at my current allocation of 18.6% (neither buy more nor sell any shares).

#3 MDB (15.6% allocation)
• MDB’s subscription revenue growth rate (y/y) has been very rapid with an sharp acceleration in the last quarter: 53.2%, 53.7%, 59.1%, 53.9%, 52.7%, 62.7%, 58.6%, and 86.9%. Wow.
• There is some competition but MDB appears to be the clear market leader/winner in the database of the future. Rapid adoption of MDB’s solution is happening and accelerating. MDB’s competitive position in this fast growing market seems incredibly solid.
• MDB is only a $7.2B company. Will it become similar in size to Oracle ($190B)? I think its possible assuming MDB becomes the standard DB. That would be more than a 25x increase from here.
• Gross margins are around 73% but are being hurt this year by the mLab acquisition. They should move back up to around 77% in 2020.
• Dollar based net expansion has been very stable at 120% for several years. This is great but not as outstanding as some of the other companies (TWLO, AYX, ESTC).
• The EV/sales (TTM) is 27.5 and the forward ratio is 16.7.
• Management is executing very nicely.
• In summary, MDB deserves the number #3 (possibly #2) position in the portfolio allocation. Need to watch carefully for any changes in the growth rate as MDB has a high multiple. Consider adding some more LEAPS paid for by in the money short puts.

#4 ZS (10.5% allocation)
• ZS’s revenue growth has been accelerating for the past 3 quarters: 58.7%, 54.7%, 48.9%, 53.1%, 49.1%, 54%, 58.6%, and 65.1%. The last 3 quarters look particularly strong and last quarter the billings growth rate hit an all-time high at 74.2%!
• ZS’s approach to security is gaining traction and ZS seems to be the only company of scale that is taking this approach. This could mean that there are many years of hyper growth to come particularly since ZS has only captured a small percentage of the TAM.
• Gross margins are 80% and have been stable around this level for a couple of years. The net dollar based expansion rate is 118% so this means that much of ZS’s growth is coming from new customer additions.
• ZS has shown incredible gains in operating leverage, improving 19% to +13% in the most recent quarter. ZS is now self-funding which virtually eliminates the financial risk and positions ZS for great cash generation.
• Management seems to be doing an outstanding job in growing the business.
• The EV/sales (TTM) is quite high at 35.7 and the forward ratio is 22.7. ZS must maintain or increase its growth rate while also maintaining many of its other financial metrics to justify such a high ratio.
• In summary, ZS’s 10.5% allocation is about right given the growth and the potential. The high valuation will keep me from adding any shares at this time and ZS will need to be watched very closely for any changes to its growth rate as a drop in the rate would likely cause multiple compression. In this case, it would make sense to reduce the allocation a bit.

#4 SQ (13.2% allocation)
• SQ is a challenging company to value because it has several different revenue contributors that have different margins and different growth rates. The service and subscription portion is high margin and growing incredibly fast: 84.4%, 96%, 97.8%. 126.9%, 155.3%, and 144.5%. Absolutely incredible. This portion of the business is becoming a quickly increasing portion of adjusted revenue (now at about 42%). Since this part of the business is very high margin, its increasing portion of the business.
• SQ’s customer acquisition cost is probably the lowest of all the companies that I own. Even the largest customers are self-onboarding. This is a very attractive aspect of SQ’s business.
• The ecosystem of intertwined products and services makes SQ very sticky. Why would a customer switch when it would be so difficult to replace all of the different SQ components? Also, the ecosystem enables a lot of cross-selling of different products and services.
• SQ has been visionary and creating in seizing on opportunities to add new, first-of–a-kind services. Who know what else they will introduce?
• SQ’s market cap is the largest of all my companies at $37B. Can it grow 10x? Possibly, since SQ is disrupting some pretty big markets within the enormous financial services industry.
• SQ’s valuation is a bit difficult to evaluate because of the multiple businesses and revenue sources within SQ. The stock is still 24% below its peak but the peak was likely attained due to the cryptocurrency bubble which likely propelled SQ to those heights.
• In summary, while SQ’s future is promising and SQ should grow nicely over the long run, I think reducing my allocation to SQ a bit (to may 10%) would enable those dollars to be deployed to smaller, faster growers.

#6 TTD (9.3% allocation)
• TTD’s revenue growth has been strong: 54%, 50%, 42%, 60%, 54%, 50%, 56%. I think it may accelerate going forward because the company is now growing quickly in Asia, especially in China.
• TTD is profitable and it becoming increasingly so. Last quarter showed an amazing 102% y/y EPS growth. Will this continue at this pace or was the quarter unusually strong?
• TTD’s resells advertising and it is impressive that the company can do so well when much of this market is controlled by Google and Facebook. TTD’s long-term success is still an open question for me.
• In summary, I would not add more shares to TTD but so long as it delivers on the growth and earnings, I would be reluctant to sell too many of my shares.

#6 OKTA (3.7% allocation)
• OKTA’s revenue growth has been very strong: 59.8%, 56.9%, 57.8%, and 49.8%.
• It seems that OKTA has won the single sign-on market that enables its customers to secure their data and information.
• I got into OKTA late because I was concerned that they might get disrupted. I have become much more confortable that switching costs are very high.
• OKTA is introducing new services that can really enable them to expand the business they get from their customers. The net dollar based expansion rate is 120% and has been stable around this level for a couple of years. I think it might increase as new services are sold to their existing customers.
• Customer additions are very strong at 40% per year.
• Management is executing well and is very excited about the future (they say they are seeing faster growth and increasing traction).
• The EV/sales (TTM) ratio is 21.1 and the future ratio is 13.6.
• In summary, I believe that OKTA deserves a higher allocation than 3.7%. I will be looking to increase the number of shares that I own.

#6 ESTC (1% allocation)
• ESTC’s revenue growth has been incredibly fast: 90.4%, 73.7%, 80.5%, 82.4%, 79.1%, 71.9%, and 69.8%. The rate has been trending down a bit but it is still higher than any of the other companies except MDB in the most recent quarter.
• The net dollar based expansion rate is at 130%. Very nice. Customer growth is strong with >14% sequential growth in the past 2 quarters.
• This growth cannot be beaten by many (any?) companies.
• One open question is whether the recently announced open source consortium announced by AMZN, NFLX, and EXPD will cause any big trouble for ESTC. Until this threat is deemed not serious, I would be reluctant to greatly increase my allocation.
• The share lock-up expiration in April is another reason not to add many shares in the next few weeks. There could be some more pressure on the shares in the coming weeks.
• The EV/sales (TTM) ratio is 23.7 and the future ratio is 13.6.
• In summary, ESTC, if the threats to the business model can be considered not serious, deserves a much higher allocation (around 8%). The near-term share lock-up expiration warrants caution on adding too many shares. This company should continue to be evaluated over the next month before a decision on adding too much is taken.

# 9 NKTR (1.6% allocation)
• NKTR is a biotech that has some very promising drug candidates in its pipeline. As such, the success of the company and the shares will be dependent on the success of the many ongoing clinical trials.
• NKTR’s market cap is at $6.2B. Other companies in the immune-oncology space have been acquired for around $11-15B range. If NKTR is acquired it would likely be after a successful clinical trial that makes approval of NKTR-214 almost certain.
• NKTR has the potential to not be acquired and become a big biotech. It could perhaps be worth $60-100B if NKTR-214 and NKTR-262 become blockbusters that become first line treatment drugs for a wide range of different cancers.
• The field is advancing quickly so NKTR’s drug may not be the best in the long run even if they become blockbusters.
• In summary, NKTR is not the most certain investment. I realize that I have an emotional attachment to the success of NKTR’s drugs, and it is prudent to keep this position very small. I may decide to trim it down a bit to add to my positions that I expect to grow faster and to a higher level.

#10 NTNX (0.2% allocation)
• I believe NTNX to be greatly undervalued, and until recently, it was the stock that I believe could grow the most in 2019.
• The guidance and earnings call commentary changed that and I have sold all of my shares. I do not intent to buy any more shares. My other companies offer a better risk/reward profile.
• I still hold some options positions that currently represent an insignificant value of my portfolio. I will probably hold on to these as I do expect NTNX to recover and I think it’s likely that NTNX can get back on track.

This morning I acted on the above and sold some SQ and TTD to buy more OKTA.

My new allocations are now the following:


TWLO 20.9%
AYX  18.9%
MDB  15.7%
SQ   11.7%
ZS   10.7%
TTD   8.2%
OKTA  6.0%
NKTR  1.6%
ESTC  1.1%
NTNX  0.2%
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Chris-

Thank you for the excellent write up on your portfolio. I especially like your explanation of how you think of each company in relation to your position size.

We are doing the opposite with OKTA. You are adding and I am reducing my position size. I was up to between 9 and 10%, and I have cut back to a 6% position.

I see more risk with OKTA with the last report of about 50% growth, noticeably below previous quarters. From here I can see a 50/50 chance of the growth going back to mid 50%+, or dropping down into the 40’s next quarter. If the later happens I would say there is a high probability of multiple compression until the growth were to stabilize.

I love the company, just not sure if growth is starting to slow.

Jim

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•In summary, I believe that OKTA deserves a higher allocation than 3.7%. I will be looking to increase the number of shares that I own.

Wouldn’t that time be now? It was down a bit on Friday, climbing back slowly today.

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I see more risk with OKTA with the last report of about 50% growth, noticeably below previous quarters. From here I can see a 50/50 chance of the growth going back to mid 50%+, or dropping down into the 40’s next quarter. If the later happens I would say there is a high probability of multiple compression until the growth were to stabilize.

It might slow. One never knows for sure. But after listening to the earnings call, I tend to think that revenue growth acceleration is more likely than slowing.

Chris

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Chris, thx for the write up.
VFF must be in another account of yours…I was in at 2.45, sold out at 8 and change, back in at 4.50.

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Thank you Chris, and all the others that post your results. I find this to be valuable in helping me sort through my own portfolio. I write down what others are doing, compare it to my own actions and notes, my reasoning behind buy or sell, and this effort helps me to better defend (or question) what I’m doing.

I know that it takes time to put this together…Chris, Retirementdough, SettingDTone, JAFbrblev, XMFBreakerForce, Bear, StockNovice, putnid, bjuasz, Champico33, DreamerDad, CMFLieberman, RaptorD2, and Saul (please forgive me if I forgot someone!)- thanks.

~TracyK

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Great summaries and congrats on the success so far. I wanted to point out that it is somewhat misleading to state that TTD resells advertising. The model of many other ad tech companies was/is to buy ad inventory and re sell at higher prices to their customers.

Making revenue through arbitrage in this fashion sets those ad tech company’s interests at odds with the inventory providers, who would make more through direct sales, and also with customers, who could buy direct and pay less.

TTD’s strategy is counter to this conflict of interest in that they do not select or carry inventory at particular sites and don’t have incentives that run counter to their customers or suppliers. Their model is to take 20% or so of the ad spend running through their platform. They don’t care who the other 80% of spend goes to and can optimize campaigns for maximum effectiveness using their AI toolset to get max ROI for the agency/client with no conflict of interest. Given that the ads sell in an auction format, the client getting the most value will be willing to pay higher prices and can apply a logical strategy to what they will pay based on value. This gives pricing power to the inventory owners (engage many buyers who know the value of a specific placement) and the power of discrimination (pay based on value) to the buyers.

This is a win win win scenario for TTD, inventory owners, and buyers and eliminates the conflicts of interest their competitors have. It explains why they are growing at 2x the rate of their market, which in my view is vastly larger at $750B, than most other companies discussed on this board.

Today they are largely shut out of the Google and FB walled gardens. My guess is when they are moving $50B (3-5 years from now) per year in ad inventory through their platform, you will see them start to get access to Google and FB inventory too because it just doesn’t make sense for inventory owners to restrict the scope of who is bidding on their product. If there is a TTD client running a campaign that sees more value in a slot and will pay 30% more, they will want to sell to that client. At minimum, these clients will boost prices Google’s existing customers are paying.

This will start to drive the same kind of marketplace network effects we see in Amazon- merchants join for the buyers using the system, and buyers go because that’s where the merchants are. Provided the campaigns work and the targeting remains effective, of course. :slight_smile:

Just a few thoughts- take them for what they are worth.

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Hi Gilliganopolis,

That was a very clear and insightful explanation on The Trade Desk. Welcome to the board. I see that in your entire career you’ve only made three posts, but I hope that you will feel welcome to make more posts on our board.
Best,
Saul

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Hi Chris, What do you feel now about Elastic. I’m afraid of their business model, but I keep feeling I can’t ignore a company that is growing as fast as it is.
Saul

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What do you feel now about Elastic. I’m afraid of their business model, but I keep feeling I can’t ignore a company that is growing as fast as it is.

I still own ESTC, and it’s a 4.5% position which is my second smallest. I’m in it because of the growth. If I felt more comfortable with the non-financial aspects (i.e. my confidence level that the growth would continue) then I’d allocate more. In a way the near term historical growth signals that the business model is working (or has been working). The big questions are will it continue and for how long. This gets back to your angst about the business model.

I am more comfortable with my higher allocation stocks (AYX, TWLO, MDB, ZS, SQ, OKTA, and TTD). Some of these companies have slower growth than ESTC so that tells you something about where I place ESTC. My 9th stock is SMAR (I have only 9) so that tells you that despite their growth I have some concerns about the sustainability of their growth. I intend to buy ZM for their growth but I have some concerns about their moat. brittlerock outlined these concerns very elegantly today.

So back to ESTC…I’m not that well versed on how their service works and how this Open Source business fits in. I suspect that for the enterprise customers, which are the ones that keep the lights on for ESTC, the open source is not a big deal. If ESTC innovates quickly and provides great support then the important customers will pay. But in the end the financial numbers matter so we will find out if your concerns about the business model are well founded or not. For now, I plan on keeping a position. But my positions in ESTC, SMAR and ZM will be lower confidence than mine in AYX, TWLO, MDB, SQ, OKTA, and TDD.

Tier 1: Growth plus high confidence in prolonged competitive position.
Tier 2: Growth with lesser confidence.
Tier 3: Not worth the trouble.

So AYX, TWLO, MDB, SQ, OKTA fall into Tier 1.
TTD falls between Tier 1 and Tier 2.
ESTC, SMAR, and ZM fall into Tier 2.

Chris

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I do have some concern on SQ:

  1. The relative price action between SQ and SHOP is too wide, SQ is far behind, I remember Saul exited SHOP around $140 and SQ price at that time around $70. Consider both companies targeting similar small business, if price strength can reflect business prospect, I would think SHOP may do much better at least in short term;
  2. Jack Dorsey, I hardly can recall any CEO overseeing two large corporations and do well over long term. Don’t know why he holds both CEOs, is the leadership bench at SQ or Twitter so weak? I guess that may be part of reason SQ former CFO quit, as she cannot see her opportunity to be CEO in this company;
  3. as a payment company, SQ has a good start in mobile payment space, but at end of day, SQ does not control a true end-to-end payment network as Visa, MA or PYPL, so SQ’s business does not have as strong moat as other three. That may be the reason SQ branching out many different directions but none of them dominating the niches;

So I don’t see SQ belonging to your Tier 1 company category. Just my opinion and we will see next earning release.

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So I don’t see SQ belonging to your Tier 1 company category. Just my opinion and we will see next earning release.

Here are some thoughts that I posted about SQ on NPI earlier today:

https://discussion.fool.com/duma-i-can39t-argue-with-your-decisi…

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along with cypto, the drop was also do to the ceo (I think) leaving. She was stellar, and the jury might still be out about filling her shoes.

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I don’t disagree on your numbers, and they do look quite impressive so far. But sometimes we may need to check more than just past financial numbers. Here is a link I read through, which give me bad tastes from many of reviews from real customers. I don’t know if they are important or not, as these one star review may be just from a small group of customers.

https://www.merchantmaverick.com/reviews/square-review/

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I still own ESTC, and it’s a 4.5% position which is my second smallest. I’m in it because of the growth. If I felt more comfortable with the non-financial aspects (i.e. my confidence level that the growth would continue) then I’d allocate more. In a way the near term historical growth signals that the business model is working (or has been working). The big questions are will it continue and for how long. This gets back to your angst about the business model. I am more comfortable with my higher allocation stocks (AYX, TWLO, MDB, ZS, SQ, OKTA, and TTD). Some of these companies have slower growth than ESTC so that tells you something about where I place ESTC.

Thanks Chris,

This is the first time I remember that you and I have exactly the same positions. I also have nine positions. My largest five, which I have a lot of long term confidence in, and feel are the most essential to their customers, are Twilio, Zscaler, Alteryx, The Trade Desk, and Okta. They range from 20% to 11% positions, and make up 77% of my portfolio.

Mongo is in sixth place at a respectable 8.5% position, and probably should be up with the top five. I would build it further, but I do not have anything I want to sell for cash.

These are followed by Smart, Square and Elastic, at 5%, 4.5% and 1%, and I have a few percent in cash prepared to try to get a small position in Zoom on Thursday, although it may just open too high. They just raised their IPO range to $33 to $35 by the way.

I have the same concerns about Zoom that you do. It is a peripheral service for all of its customers, in the sense of not being integrated into the body of the business, and is thus easier to replace. As with Elastic, I am caught between feeling that I do not have to be in all the good stocks on one hand, and having trouble resisting the siren call of the huge growth rate on the other.

As for Elastic, I see that you increased your position from the 1% on 3/15 to 4% now. I have not had the courage to do that. Or, a better way of saying it is that I have trouble allocating money there that could be in one of my higher confidence positions.

I have Square further down than you because of its larger size and possible vulnerability to a downturn in the economy. Smart is down with it because it just is not as high confidence as the others, but both of them are respectable size positions.

Thanks,

Saul

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As for Elastic, I see that you increased your position from the 1% on 3/15 to 4% now. I have not had the courage to do that. Or, a better way of saying it is that I have trouble allocating money there that could be in one of my higher confidence positions.

I have Square further down than you because of its larger size and possible vulnerability to a downturn in the economy. Smart is down with it because it just is not as high confidence as the others, but both of them are respectable size positions.

Yes, Saul, I increased my ESTC position since 3/15. The reason is the growth rate is so high and I became more comfortable with the likelihood that Amazon would be successful with their own open source consortium.

On 3/15, I had no SMAR and I’ve since added a small position, again because of the growth rate. My confidence level with SMAR is low because I see them as more replaceable by a competitor than my high conviction companies. I feel the same about ZM, but the growth!

Yes, I’ve noticed that our highest conviction stocks are usually pretty similar. Usually, our lower conviction stocks were not the same. But I think part of the reason is that you typically would have some tryout positions while I don’t usually buy many tryout positions.

BTW, I’ve never owned GH so this may be the only difference in the composition of our portfolios at the moment. I still see GH as a story stock that needs to prove itself with actual, significant revenues to back up the story. Also, others may develop other liquid biopsy tests…I’m not convinced that GH will become a universal standard.Just my opinion.

Chris

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