This year is now ¾ of the way through. I did not post an August portfolio update so this update includes the period between Aug 7 and Sept 30.
YTD Performance **GC port S&P500TR** Jan +25.7% 0.0% Feb +27.7% -8.3% Mar -2.9% -19.6% Apr +16.7% -9.3% May +64.7% -5.0% Jun +110.3% -3.1% Jul +144.7% +2.4% Aug +144.3% +9.7% **Sep +187.0% +5.6%**
Since I didn’t report an update for August, I’ll just say that my portfolio YTD return was virtually unchanged from the end of July to the end of August. However, in August there was a lot of movement including a huge two day drop in my portfolio’s value of almost 20%! September, on the other hand, showed portfolio gains every week; in fact, my portfolio has gained every week for 6 weeks in a row while the S&P 500 had weekly drops for the past 4 weeks in a row. Yes, everyone was talking how horrible September was, but, in fact, September was a great month for my portfolio.
I did a lot of options trading in August and September (running up to the earnings reports for some of the stock that I own). I do not want to talk about the details here because it is off-topic. But I do want to point out that my portfolio would have been down in August if not for these trading activities. Some might wonder why my returns are different from portfolios with similar allocations. In 2020, 16% of my YTD returns (in dollars) are from trading (not investing). This means that my portfolio would be up only 153.2% YTD instead of 187.0% YTD if I had done no trading (i.e. investing only) this year. Bear didn’t say it in his August portfolio update, but I’m sure that jump from 154% at the end to July to +211% at the end of August had a lot to do with trading:
No replies to the above paragraph please!
Below I’ve appended new portfolio highs onto the table that I posted in my last update. The entries from 02/18/20 through 08/07/20 are reposted and the entries after 08/07/20 (bolded) are new.
02/18/20 +40.7% <<< YTD high prior to lockdowns 03/06/20 +21.9% <<< portfolio down 10% on the day 03/09/20 +3.6% <<< portfolio down 15% on the day; Fear index=3 03/11/20 +0.6% <<< portfolio down 8.8% on the day; Fear index=4 03/12/20 -11.0% <<< portfolio down 11.4% on the day; Fear index=2 (1 intraday) 03/16/20 -22.8% <<< portfolio down 18.9% on the day; Fear index=3 05/22/20 +61.0% <<< new all-time high (ATH) 05/27/20 +47.5% <<< portfolio dropped 15% (intraday 5/27) in 3 trading days 05/29/20 +64.7% <<< new ATH (end of May 2020) 06/03/20 +78.8% <<< another ATH; day after CRWD and ZM earnings 06/10/20 +79.4% <<< another ATH 06/15/20 +84.6% <<< another ATH 06/16/20 +89.4% <<< another ATH 06/17/20 +92.1% <<< another ATH 06/18/20 +101.7% <<< another ATH 06/19/20 +103.3% <<< another ATH 06/22/20 +111.4% <<< another ATH 06/25/20 +114.6% <<< another ATH 07/01/20 +119.7% <<< another ATH 07/02/20 +121.4% <<< another ATH 07/07/20 +125.7% <<< another ATH 07/08/20 +139.9% <<< another ATH 07/09/20 +147.0% <<< another ATH 07/13/20 +118.6% <<< portfolio down 10.5% on the day (biggest $ drop ever) 07/16/20 +113.1% <<< July trough 08/03/20 +156.9% <<< another ATH 08/04/20 +158.7% <<< another ATH 08/05/20 +158.8% <<< another ATH 08/07/20 +108.3% <<< OUCH! Biggest dollar drop ever (and -19.5% in 2 days!) **08/11/20 +94.6% <<< August trough** **09/01/20 +177.9% <<< another ATH (day after ZM reported)** **09/22/20 +187.1% <<< another ATH**
Shortly after my last portfolio update (Aug 7th), the portfolio hit a trough. The peak to trough drop was 24.8% which was smaller than the 3 major portfolio drops (37.4%, 37.4%, and 45.2%) since 2018. The day after ZM reported the portfolio was up 13.4% in a single day, and hit a new high of +177.9%, but it has been dropping every day since (only 3 days though). It took exactly 3 weeks to hit a fresh, new portfolio high on 09/22/2020. On the last day of September, the portfolio YTD return stood at +187.0 just shy of the 9/22/2020 all time high of +187.1%.
Below is the weekly portfolio YTD performance.
**GC S&P Delta** 01/03/20 4.5% 0.1% 4.4% 01/10/20 14.8% 1.1% 13.7% 01/17/20 19.6% 3.1% 16.5% 01/24/20 22.1% 2.1% 20.0% 01/31/20 25.7% 0.0% 25.8% 02/07/20 28.1% 3.2% 25.0% 02/14/20 39.8% 4.9% 34.9% 02/21/20 29.1% 3.6% 25.5% 02/28/20 27.7% -8.3% 35.9% 03/06/20 21.9% -7.7% 29.5% 03/13/20 -4.8% -15.7% 10.9% 03/20/20 -6.8% -28.3% 21.6% 03/27/20 -2.4% -21.0% 18.5% 04/03/20 -12.5% -22.6% 10.0% 04/10/20 3.1% -13.2% 16.2% 04/17/20 18.7% -10.5% 29.2% 04/24/20 20.5% -11.7% 32.1% 05/01/20 13.8% -11.8% 25.6% 05/08/20 37.7% -8.7% 46.4% 05/15/20 47.8% -10.7% 58.5% 05/22/20 61.0% -7.8% 68.8% 05/29/20 64.7% -5.0% 69.7% 06/05/20 67.4% -0.3% 67.7% 06/12/20 74.8% -5.0% 79.8% 06/19/20 103.3% -3.2% 106.5% 06/26/20 107.8% -6.0% 113.7% 07/02/20 121.4% -2.1% 123.5% 07/10/20 144.2% -0.4% 144.6% 07/17/20 115.4% 0.9% 114.5% 07/24/20 113.2% 0.6% 113.5% 07/31/20 144.7% 2.4% 142.3% 08/07/20 108.3% 4.9% 103.3% 08/14/20 102.9% 5.7% 97.3% 08/21/20 124.4% 6.5% 118.0% 08/28/20 135.5% 10.0% 125.6% 09/04/20 142.9% 7.5% 135.4% 09/11/20 143.6% 4.8% 138.8% 09/18/20 161.7% 4.2% 157.5% 09/25/20 181.0% 3.5% 177.4%
**9/30/20** 9/4/20 8/7/20 7/31/20 CRWD **22.3%** 23.3% 20.0% 19.8% ZM **22.2%** 18.4% 15.0% 12.5% DDOG **17.8%** 14.8% 16.2% 17.2% FSLY **14.5%** 10.4% 11.9% 9.8% NET **10.5%** 8.2% 9.4% 3.6% PTON **4.7%** --- --- --- GOLD **4.4%** 4.8% 4.8% 3.1% NEM **2.6%** 0.7% --- --- BPRMF **1.2%** 1.4% 1.6% 1.1% AYX --- 3.7% 7.2% 25.2% OKTA --- 2.2% 2.7% 2.4% LVGO --- --- --- 7.8% Cash **2.7%** 12.8% 13.4% -1.7%
The above allocations include leaps on CRWD, FSLY, and NET. I won’t get into the details of the breakdown of options versus shares, but these options amplify the upside and the downside of the positions.
Changes since the last update (After August 7th through September 4th)
Compared to the prior month in which I made some major portfolio changes, August was a quiet month with relatively few changes. I did not add to ZM or CRWD, and the allocations of these were higher because their stock prices rose.
I almost sold my remaining position in OKTA, but decided to wait until after the Q2 earnings result. I changed my mind and decided to keep my small position in OKTA. My reason for keeping it is that I am reminded by SHOP’s rise from $140 to over $1000. Sure, SHOP’s rise has a lot to do with the enormous benefits from the acceleration to eCommerce. But I can’t help but think that part of SHOP’s success has to do with the increased certainty of its inevitable dominance. OKTA seems to me to have a VERY high chance of dominance for a long while ahead. Perhaps I could make more shifting from OKTA to a faster grower, but for now, my OKTA shares have remained in the portfolio.
I sold more AYX including all of my options. I agree with others who have posted that AYX will probably be dead money for the remainder of 2020. Unless I get new information, I intend to increase my position in AYX when it becomes clear that the growth is back on track.
I bought a small position in NEM, the largest mining company in the world. I promised Saul that I would not discuss my reasons for holding GOLD and NEM as it is off-topic.
I added more to my NET position.
My cash position is quite high now at 12.8%. About 80% of this cash will go to Uncle Sam on September 15th so my true cash position is about 2.5%.
Changes after 9/4/2020 through 9/30/2020
Sold the remaining shares of AYX. I decided that there are better places for my money. I agree with others who stated that AYX will probably be dead money through the end of 2020 (the results of their Q4 will not be reported until February 2020 so I’m not waiting around anymore). Once AYX shows strong evidence of a resumption in their high revenue growth rate, I will consider reentering.
Sold the remaining shares of OKTA. I just think that their revenue growth rate is too low so I prefer faster growing alternatives.
Cash position dropped significantly because I paid my Q3 estimated federal income tax. I realized a lot of gains in Q3 so this one tax payment was for about 10% of my portfolio.
The proceeds of my ~3.5% position in AYX were allocated to FSLY (2/3) and NET (1/3).
Doubled my position in NEM (gold miner). Gold is now a substitute for cash and I split my investment in gold between 2 gold mining companies (NEM and GOLD).
Started a new position in PTON. I used the proceeds from my OKTA sale to buy PTON. The initial purchase was a 2.3% position. My intention is to build up the PTON position to up to 10%.
Sold some CRWD to add more PTON. 80% of the value of my CRWD position was in the form of LEAP options so the actual CRWD position (if you could each option as a share) was more like 33% rather than 25%. Thus, I about doubled my PTON position from 2.3% to 4.7% a week after my initial purchase.
OKTA, ZM, and CRWD RESULTS
OKTA (8/27): OKTA had a good quarter. Steady as she goes….a consistent mid-40%s grower. I’m pretty ruthless about cutting low performers, and I’ve been contemplating cutting this 45% grower for a while, and now especially since the guidance for revenue growth keeps going lower. I kept OKTA for a while but after taking a close look at PTON, I sold all my remaining OKTA share to free up funds to buy PTON shares.
ZM (8/31): ZM had another blowout quarter. I expected this:
The guidance for next quarter is likely too low to what they will actually do. They guided for $690M, and I would expect them to come in above $800M. I didn’t add or sell any and intend to hold my position as it is. My position size spiked up to 20% of my portfolio the day after earnings. It dropped back down a few days later then back up. Now ZM and CRWD are neck and neck for the number one position in the portfolio.
CRWD (9/2): CRWD strike had a great quarter, a similar result to Q1. I thought that maybe they might see a decent acceleration in growth due to all the COVID tailwinds. I now think that if not for the pandemic, CRWD probably would have seen a revenue growth deceleration. Perhaps the effects of the pandemic just allowed CRWD to maintain their growth this year. We’ll find out more in 2 months when they report the quarter ending on 10/31/2020.
I first ran the numbers on Peloton about two and a half weeks ago (a few days before my first purchase of the stock and a few weeks after ordering a Peloton Bike for myself). PTON went public a year ago. I hadn’t considered buying the stock before, but I just couldn’t ignore the growth in revenue so I had to look at the financials.
As a side note, I have been working out (resistance training and cardio for almost 40 years), and I have been a member of a gym during that entire time…until COVID-19 led to a freezing of all of my memberships. I had 2 memberships because the 24 Hour Fitness membership was such a good deal that I just couldn’t cancel (yes, $20 a year forever); even though I rarely used my 24 Hour Fitness membership, they have many locations around the country so I can often find a gym when I’m travelling (even using it only once a year was worth it). I was also a member of Equinox which is a higher end chain that cost me about $240 per month. There was a time when I had a third membership (yes, three at once) which was a Krav Maga gym for learning that self defense technique. That was $160 per month. When I lived in San Francisco, there was a Soul Cycle gym a few blocks from me. That place was always packed, and I don’t think they have memberships; people just pay like $30-40 PER CLASS. Seems crazy that people would pay so much for one class, but that place was always packed usually with women in their 20s to 40s. I guess that crowd also attracted a few men to go to the classes. The Spin (biking) classes at Equinox and 24 Hour Fitness were very popular too; they were usually fully booked, and you had to sign up at least a day before to get into the morning, evening, and weekend classes. So these 45-60 minute cycling classes have been very popular at gyms for years. Then the pandemic hit, and all the gyms closed. No more cycling classes. Demand for Peloton surged. Here are some of the metrics.
Seems like PTON’s burst in revenue growth since the pandemic is second only to ZM. The top of their guidance for Q1 2021 (the quarter that just closed today on 9/30/2020) is for 220% growth. Holy smokes!! And their full year guidance is for 100% growth! On top of that, they are growth constrained because they currently can’t make enough Bikes to meet demand. When I ordered my Bike in late August, I had to wait a month to get it. On Monday, I canceled my Bike (for a return) to exchange it for their new Bike+. The backlog is now 7 weeks (a month ago the backlog for the Bike+ (my friend ordered one) was only 3 weeks). My point is that Peloton would be growing sales even faster if they could make more bikes more quickly.
Guide Revenue RevGr %Beat FitRev FitGr SubRev SubGr Q1'19 112.1 80.4 31.7 Q2'19 262.8 225.5 37.3 Q3'19 316.7 265.6 51.1 Q4'19 223.3 162.3 61.0 Q1'20 228.0 103.4% 160.8 100.0% 67.2 112.0% Q2'20 420 466.2 77.4% 11.0% 389.1 72.5% 77.1 106.7% Q3'20 480 524.6 65.6% 9.3% 426.4 60.5% 98.2 92.2% Q4'20 520 607.1 171.9% 16.8% 485.9 199.4% 121.2 98.7% Q1'21 730 220.2%
The table above shows revenue, revenue growth, top of revenue guidance range from the prior quarter, and the percentage beat over the top of revenue guidance. There are 2 sources of revenue which include Connected Fitness Revenue (which is the hardware that they sell which is mostly Bike and now Bike+ but they also sell Treadmills) and Subscription Revenue (which is the monthly subscriber fees). I paid about $2500 for the Bike so it is a large expense. Customers have the option to pay for the Bike monthly (I think it’s around $70/mo for 3 years after which the Bike is owned by the buyer). The other source is revenue is the subscription revenue which is $40 per month and gives you access to all the content which includes live classes and recorded classes. The classes are interactive with metrics and rankings against other riders in the class. Since the Bike is standard (same for everyone), the interactive classes allow direct comparisons (i.e. competitive racing) between and among the riders. This makes the classes more fun and competitive. Everyone has a user account that stores all your rides. Peloton also offers a subscription that allows people with difference bikes (i.e. not Peloton bikes) to view the classes and follow along, but since the bikes are not connected and standardized, these subscribers can’t compare their results to the real Peloton Bike riders. This lower membership is $13 per month. The vast majority of subscribers have the Peloton Bike and pay $40 per month as can be deduced by the average annual subscription which is $445 per year ($40 per month would be $480 per year).
The gross margins on the Fitness Revenue is 45%, and the gross margins on the subscription revenue is 60% (and it has been rising….was 54% a year ago). Also, I calculated the non-GAAP margin to be 60%, but the company claims a “contribution margin” for subscription revenue of 64.1% in Q4 2020. The subscription revenue is the kind we like because it is recurring and higher margin.
Note the huge increase in Fitness Revenue last quarter (+199%)!!! They sold a ton of Bikes. And if you think about the backlog they must have also sold a ton that could not be shipped yet and therefore could not yet be recognized as revenue. The December quarter will contain the holiday season, and I expect the second half of 2020 to be huge.
Subs CustAdd Gr(seq) Gr(y/y) Churn WO(M) AvgWO(mo) Q4'18 246 246 Q1'19 277 31 12.8% 0.50% 7.1 8.9 Q2'19 362 85 30.8% 0.52% 9.3 9.7 Q3'19 457 95 26.1% 0.68% 18.0 13.9 Q4'19 511 54 11.8% 108.1% 0.79% 17.8 12.0 Q1'20 563 52 10.1% 103.2% 0.90% 19.2 11.7 Q2'20 712 149 26.5% 96.5% 0.74% 24.3 12.6 Q3'20 886 174 24.5% 93.9% 0.46% 44.2 17.7 Q4'20 1091 205 23.1% 113.4% 0.52% 76.8 24.7 Q1'21 1330 239
Fitness subscriptions is for the most part the number of people who have paid subscriptions. So in Q4 2020 (the latest reported quarter which ended 6/30/2020) they had 1.09 million paying subscribers who, in aggregate, paid $121.2M in subscription fees which calculates to $111 per user for the quarter or $37 per month. They also added 205,000 subscribers during the past quarter which is an additional $91M in annual recurring revenue ADDED JUST LAST QUARTER! Their full year guidance for the FY ended on 6/30/2021 includes guidance for Fitness Subscriptions. For FY 2021, they are targeting 2.1M subscriptions for which calculated to growth of 92% (this guidance could be raised in each of the next 3 quarters since they are only in Q1 now). Looking forward a year, this guidance calculates out to $932M in ARR, but they will probably deliver over $1B in recurring revenue with a TTM growth rate of 100+%. The market cap is about $28.6M so next year’s ARR will give them a multiple of about 29x on TTM subscription revenue. In addition to the subscription revenue, they will likely have 45% margin on another $2.B of hardware revenue. This stock seems like a good price at today’s prices if you assume a large number of memberships will not be cancelled after COVID-19.
Will people keep their subscriptions? Their monthly churn has been very low for the past 2 years (between 0.5% and 0.9% per month which is 6-10% per year). Churn metrics include the time before the pandemic, but they have also added a lot of new customers during and because of the pandemic. Some people may prefer to return to the gym when they can. It’s a valid question and a possible concern that the churn may increase after people feel safe to go out again. There are some counter arguments to this idea. First, the community the Peloton has developed is sticky. Second, working out at home as some benefits including saving time, not having to look good when you show you face in the gym, not risking the lack of an available Bike at the gym during peak hours, and the ability to multitask while on the Bike (I watch the financial news, text friends, and trade stocks while on the Bike). Then there’s the cost of the hardware (Bike or Treadmill); it’s a large expenses that most probably choose to pay for monthly over a multiyear period. Someone who is in contract to pay $70 per month for three years is less like to stop paying the $40 per month subscription to get access to the interactive classes, and three years is a long time to get a subscriber to stick to the various aspects of the Peloton ecosystem (friends, stats, goals, benefits of workouts and training). Peloton also added other kinds of fitness classes like yoga, strength training, barre, etc.
As of Q4 2020 (quarter ending 6/30/2020), Peloton has offered the Bike for sale in only, the US, Canada, the UK, and Germany. In FY2020, only 4.5% of PTON’s revenue was from outside the US. Thus, there is significant room for international expansion. After evaluating PTON, I tried to identify a good comparable company. The company that I think is quite comparable to PTON is Netflix (NFLX). Like PTON, NFLX charges its customers a monthly fee. What makes NFLX sticky is access to a continuous supply of interesting new content. NFLX makes it easy for a subscriber to cancel and then come back but they still manage to keep most subscribed. This is where PTON is a bit different because while Peloton subscribers get access to old and new content, where Peloton hooks people is in the interactive experience. I think there’s also some aspects of the good feeling of attaining goals and achievements which can get called out during live classes. In addition, I think that users can develop an identity and sense of community within the Peloton community and a feeling. Back to international expansion, there was a time when NFLX was primarily a US company with relatively few customers outside the US. Once Netflix made a concerted effort to expand internationally, their sales and stock price experienced another leg of very strong growth. Netflix also spent a considerable amount of resources to develop localized content for various international markets. I think that Peloton will have similar opportunities for international growth and international content/studio development.
Three quarters of the year through and the portfolio is getting close to a triple. That’s pretty incredible. The elephant in the room is the upcoming election and what that might mean for our portfolios. I think there could be some volatility. Maybe, maybe not. Maybe stocks will drop or maybe they will go up. I have no idea of knowing. The more I think about this, the more I accept that I don’t know what will happen in the next three months. So I have decided to look past the next three months and consider the following:
I am invested is a handful of very rapidly growing companies. This will not change regardless of who will win the Presidency or who will control Congress. These companies will keep going. Even a raise in taxes in the US would not crater stocks (my opinion) because there is too much stimulus (see #2 below).
It seems pretty clear that more fiscal stimulus is coming. At the moment, the political parties agree that more fiscal stimulus is needed, but they can’t agree on how much is needed and exactly where it should be spent. The companies in the portfolio will not really be affected by this delay; it is the small businesses with liquidity issues that will suffer or go bankrupt. While this is unfortunate, I believe that the portfolio companies financial results will continue to be great and when the stimulus comes they will get an additional boost.
The digital transformation is still accelerating. We did not see the effects of this acceleration reflected in the Q2 numbers that were reported in the past 2 months. Yet, everyone is still talking about the acceleration. When will this show up in accelerating revenue growth of our portfolio companies? In Q3? Maybe. If not in Q3, I expect an acceleration to show up in the numbers at some point in 2021. This will be a big tailwind.
So I am not raising any cash going into November 3rd. I am currently planning to ride through this fully invested. While I don’t know what the future holds, I would not be surprised to see another portfolio doubling within the next 18 months.