Earnings season for my companies is now complete so it’s a good time to reflect on the results and examine the portfolio allocations to determine if these allocations are “optimal” given last quarter’s results and my view of the future for the companies. Here are my current allocations as od May 29:
NTNX: 15.8% (21.5% with call options) AYX: 14.9% SHOP: 12.8% (15.3% with call options) SQ: 10.8% (11.0% with call options) NVDA: 9.9% (13.1% with call options) NKTR: 8.2% TWLO: 7.2% (8.4% with call options) PSTG: 6.3% (7.5% with call options) ANET: 1.7% (2.4% with call options) Options: 10.9% (incl long calls and short puts) Cash: 1.2%
The portfolio is currently up 51.1% YTD which is quite a bit better than the YTD result as of the end of April (up 41.1%) but off of the peak of +61.9% on May 10th. I would be a buyer of all nine of my positions at current prices, but buy and sell decisions should be based by comparing relative opportunities. So for this update, I will look at each company and then do some comparing between these companies. Ideally, the portfolio allocations should match my rankings of the stocks.
NTNX: NTNX continues to be my highest allocation investment. I first invested in NTNX in September after taking a detailed look at the company and determining that I believed it to be worth double to triple of the price at the time. Here are my posts from back then:
I bought a large position in September between $21.90 and $24.47. I bought more between late January and early February between $31.59 and $31.98. I bought more aggressively in late March between $48.84 and $50.07. Then I bought more after the most recent earnings result between $52.34 and $52.56 despite it already being my largest position. In addition to owning shares, I also own the following long call positions which all expire in January 2020: $25 strike price, $30 strike price, and $50 strike price. These call options represent 5.7% of my total portfolio value. My allocation is substantial so why am I confortable with such a large position and why was I comfortable adding more after earnings?
Here are some key stats that I look at for NTNX:
EV / Sales (TTM): 7.4
Sales growth (full year TTM): 45%
EV / Sales (1 year forward): 5.1
Net promoter score: 90
Customer number growth (y/y): 57%
Gross margin: 68%
Note: revenue growth of 45% is full year growth of SW and Support growth. However, that growth should be really awesome in the next 2 quarters because in the prior year SW and Support growth was only 30% and 23% (these are year over full year growth numbers), respectively.
Note: gross margin includes some hardware so GM is actually higher and is guided to increase to 73-74% next quarter!!
Note: the company has penetrated 670 (33.5%) of the Global 2000 companies so there are 66.5% left to capture. And these large customers are spending more and more on a recurring subscription based spending plan. With a NPS of 90, these customers are going to leave NTNX.
If you put the all of the above together, I see that NTNX the stock could easily double again between now and a year from now. I’m not saying that it will double because no one could know that; but I would not at all be surprised if a year from now NTNX were double the price and I wouldn’t think that it would be overvalued if the business results turn out how I expect. And my boldest statement of all is that if I were forced to invest in only one company it would be NTNX (but I would never do that).
AYX: AYX occupies the second largest allocation among my stocks. I first bought a large position in early January and added a little in late January and a bunch in late February. I added more in mid-May. I have no call options positions only because there are no leaps available; I generally don’t buy calls unless I can buy expiration dates that are at least 18 months out. So why have I allocated almost 15% to AYX? Here are the numbers:
EV / Sales (TTM): 12.0
Sales growth (full year TTM): 52%
EV / Sales (1 year forward): 7.9
Customer number growth (y/y): 43%
Net dollar-based retention: 132%
Gross margin: 88%
The valuation is not as good as NTNX’s in my opinion. But if you look at the margins and the Net Dollar-based retention, wow that amazing! If those leap options were available, I would be buying, but I can’t risk a short to mid-term hit to the stock and the overall market. I am happy with my allocation where it is, and I do believe it deserves the #2 spot behind NTNX.
SHOP: SHOP is #3. I’ve had SHOP for more than 2 years. Thanks to Andrew Left I was able to add last year. I also have the following call options positions that expire in January 2020: $100 strike and $120 strike. I had previously owned the $100 strike call options that expire in January 2019 but I closed those positions and took my profits due to near and mid-term price risk to SHOP and the market. Here are some of the stats on SHOP:
EV / Sales (TTM): 17.2
Sales growth (full year TTM): 71% (wow)
EV / Sales (1 year forward): 10.1
Shopify Plus number growth (y/y): 44%
Gross margin: 77% (subscription) 41% (merchant)
I can justify the high EV/Sales because of the very high and sustained revenue growth. Shopify Plus merchants are growing. In the past, it grew due to self on-boarding and little sales effort. That is changing and SHOP is investing in actually trying to go out and sell Shopify Plus. International expansion is also a big opportunity. I also have a lot of confidence in SHOP’s very dominant competitive position in the market. There is a huge untapped market opportunity still ahead for Shopify to capture. I would certainly be adding to SHOP at current prices and I would add to my call options position but I need to be disciplined and only add leverage carefully. I am very happy with SHOP’s #3 and current allocation in my portfolio.
SQ: SQ is #4 in the portfolio. I can’t really compare SQ to NTNX, AYX, TWLO, etc directly on a EV / Sales ratio basis. This is because SQ is really comprised of multiple businesses. Specifically, the recurring revenue portion is growing very, very fast….95% full year over full year growth!! But a significant portion of the net revenue is from a percentage of the GPV which makes the EV/ Sales multiple of 23.5 not comparable to NTNX, AYX and the like. SQ should really be valued as 2 separate components which I haven’t tried break apart and analyze separately and then recombine to arrive at a valuation. SQ’s market cap is getting higher…currently at $26.3B and $25.5B after backing out the net cash. This is something to watch as a 10x return would value SQ at more than $250B. Can it get there? Maybe. Who knows. What I like most about SQ is that it is accelerating growth at scale. This is so impressive. Year over year revenue growth for the past 4 quarters has been accelerating: 40%, 44%, 47%, and 50%. Very, very impressive. Customers are flocking to SQ with little effort on SQ’s part. Eighty percent of customers self-onboard and this is being maintained even for the large merchants. SQ is thus able to focus its efforts on adding valuable new services that make its offering indispensable to customers. The customers LOVE SQ as evidenced by a Net Promoter Score of 70. This is VERY impressive. NTNX’s NPS of 90 is unheard of and a score of 70 is still incredible. I have some call options expiring in January 2020: $50 strike. I wish I had bought more of these and I would be adding them but I am restraining myself and being disciplined not to add too much leverage. I previously had a bunch of call options that expire in January 2019 but I took my profits on these for the same reason I took my profits on the January 2019 call options on SHOP. I am happy with my current allocation on SQ, but won’t increase it much due to the market cap size.
NVDA: NVDA is #5 in allocation. My view on NVDA differs from the views of several other investors (including Saul’s) whose opinions I respect. Those other opinions include the following arguments:
- NVDA is too large to grow 10X or even 4X from here
- NVDA is priced for perfection
- NVDA is a hardware company
- NVDA doesn’t have recurring revenue so they must sell more and more product each quarter in order to maintain its fast growth rate
- NVDA’s value is dependent on it maintaining a very high revenue (and earnings) growth rate
Now before I state my reasons for owning NVDA and explain my reasons for my NVDA allocation size, I must say that my allocation was recently higher so I have redeployed some of my NVDA position into other stocks. However, after earnings I rebought some of the NVDA shares that I had sold. I recognize the arguments above and understand that I may be wrong about NVDA. I must say that I disagree with #1-3 above but I very much agree with #4 and #5. I think that while #4 is true, NVDA’s markets are growing very fast and have a lot of growth ahead. I agree with #5 but I believe that NVDA can maintain a very high growth rate for several years into the future. NVDA is not a hardware company and I don’t think that NVDA can be compared to SWKS which was selling into a much more saturated cyclical market (smartphones). As I mentioned, I rebought shares after the earnings report which was so good and showed me that NVDA’s growth is not at all declining. I would encourage anyone considering buying NVDA to watch the keynote presentation of the March 2018 GTC conference:
The video presentation is 2.5 hours long but it really shows how fast NVDA is innovating new products and advancing its technology on many fronts. I was so wowed by the video that I had to increase my position.
Should NVDA be my 5th largest position? I actually think that my 7th largest position (TWLO….see below) should perhaps be my 5th largest. NVDA should be my 6th largest. In addition to shares, I also own the following call options expiring in January 2020: $150 strike, $160 strike, $170 strike, and $230 strike. These call options add 3.2% to my allocation. I think NVDA stock will likely surpass $300 during 2018. We’ll see…
NKTR: NKTR is the 6th largest allocation stock. I had originally bought only a 1% position in late August and early September for around $20 per share. This position grew to a 5% position without me buying more shares. I did not add shares until April and May at prices between around $92 and $77. Normally, I would not want more than a 5% allocation in any biotech stock. But NKTR is an exception because I have a high degree of confidence in their I-O development pipeline. My opinion is based on the NKTR-214 clinical results and the NKTR-214 partnering success (BMS and Takeda). I can’t value NKTR on any financials; the valuation and my reason for holding is purely based on the pipeline, the partnerships, and the clinical results. The cash infusion from BMS increased my confidence because that cash greatly reduces the financial risk (i.e. they don’t need to worry about raising more money to fund their efforts). The clinical results so far have been so outstanding and the partnerships so favorable that I added to my position and violated my own guidance of not putting more than 5% into a biotech. I expect to know later this year or sometime next year if my decision turn out to be prudent.
TWLO: TWLO is #7. As I mentioned, I think TWLO deserves to be #5 for sure, definitely not #3 (SHOP) and probably not #4 (SQ). I don’t think TWLO should have an allocation higher than NTNX, AYX, or SHOP. It should have a higher than or similar allocation to NVDA but not a higher allocation than SQ. In this case, Saul and I agree because Saul has TWLO at #4 in his portfolio. Here are some of the metrics that I track for TWLO:
EV / Sales (TTM): 10.1
Sales growth (full year TTM): 44% (60%)
EV / Sales (1 year forward): 7.0 (6.3)
Customer number growth (y/y): 33%
Net dollar-based retention: 132% (ex-Uber)
Gross margin: 54%
TWLO is sure growing fast and its growth is still disguised due to the Uber business decline. Sales growth without considering Uber is around 60% and the forward EV / Sales ratio would be more like 6.3 without Uber. Existing customer spending on TWLO without Uber is 132% which is amazing. The comparative negative with TWLO is the relatively low gross margin of 54%. NTNX’s GM is 68% and growing fast due to transition away from HW. AYX’s GM is 88% (huge!). SHOP’s margin on recurring revenue is 77%. This tells me that the EV to sales ratio for NTNX, AYX, and SHOP deserve to me higher because more of the revenue of these other companies is able to drop to the bottom line compared to TWLO. This is why I am being careful in adding significantly more to TWLO.
PSTG: PSTG is #8. It is growing fast and I really like it for several reasons. I see it as cheap. Also, it has a recurring revenue component that is not seen with other storage companies. Yet, it is being value like a HW company. The partnerships with NVDA, CSCO, and ANET are very significant. I believe that PSTG can ride the AI wave on NVDA’s coattails. Yes, I have considered that my investments in NVDA and PSTG are linked and if NVDA’s growth slows then PSTG’s growth won’t be as high. However, I see no signs of NVDA slowing which gives me more confidence in holding PSTG. In addition to my PSTG shares, I also hold the January 2020 $25 calls; the number of shares controlled by this options position is almost as many as my shares owned. The shares of PSTG dropped recently but I have refrained from adding or selling any shares. I want to see this play out and I suspect that the market will eventually award PSTG a higher multiple. If the growth and the high gross margins continue then a higher multiple on top of stock appreciation due to growth will result in the stock price increasing significantly.
ANET: ANET is in last place. I reduced my position recently (during May) after reconsidering what management has been guiding for growth for the past 2 earnings reports….25% revenue growth. I wasn’t listening or believing management thinking that it would be higher. It may well turn out to be higher but I decided that my money is better off in other investments. I used some of the proceeds to add to NVDA and some to add to NTNX , AYX, and PSTG. There was a lot to spread around because earlier this year ANET was my largest holding. This week I closed out most of my January 2020 calls on ANET. I am considering selling the rest of my ANET shares but haven’t done so because I have some shares with significant gains that would result in short term capital gains. I think I will hold them until I’ve had them for a year. Now some of you may have noticed that Saul also sold most of his ANET and we hold a similar allocation. How did that happen? Did I follow Saul? Here’s a little story. I have been watching Saul and learning much from him since he started this board more than 4 years ago. So I think I’ve learned a thing or two and I have adopted Saul’s method. As I’ve mentioned before, I am very grateful for this board and for Saul’s teachings. I do feel that Saul is like a mentor to me. Last week Friday I finished a long work business trip that took me close to where Saul lives. I had a chance to visit Saul and spend some time with him. We went for a walk last Saturday, and I mentioned to Saul that I had sold most of my ANET. He immediately responded that he also had sold most of his ANET. I then told him why and he said that he sold for the same reasons. I wasn’t completely surprised because we had previously over the past 6 months independently made similar allocation and sell decisions. The decision to sell mostly out of ANET may turn out ok or perhaps the stocks that I moved the money into will not do as well as ANET going forward. It’s a decision made, good or not so good but I won’t be looking back or second guessing the decision. For those of you who ever watched the Kung Fu series with David Carradine, that moment on my walk with Saul felt like I had just snatched the pebble from Saul’s hand:
I’m not planning on leaving this board any time soon. I hope others find this post helpful; I tried to explain the rationale 1) behind the evaluation of my portfolio after earnings, and 2) the adjustments or not made to allocations.