The last portfolio update was posted as of the end of March. Rather than provide a portfolio update at the end of April, I decided to wait an additional week to capture the earnings results for DDOG and NET which both reported on 6May. I plan to post the next portfolio update after the first week of June which is the week during which I expect ZM, CRWD, and DOCU to report their Q1 results.
PRIOR PORTFOLIO UPDATES
31Mar 2021: https://gauchorico.com/2021-03-31-portfolio-update/
12Feb 2021: https://gauchorico.com/2021-02-12-portfolio-update/
31Jan 2021: https://gauchorico.com/2021-01-31-portfolio-update/
31Dec 2020: https://gauchorico.com/2020-12-31-portfolio-update/
All updates since 2020: https://gauchorico.com/category/blog/portfolio-updates/
**GR YTD S&P500 YTD** Jan 3.1% -1.0% Feb -1.2% 1.7% Mar -13.2% 6.2% Apr -1.5% 11.8% 7May -17.5% 13.3%
The last ATH for the portfolio remains 12Feb, and the trough since then remains 8Mar. Toward the end of March the portfolio was getting close to testing the 8Mar trough, but then the portfolio rallied for the first three weeks of April and turned positive 6%+ YTD by 26Apr. This was quite a turnaround: the trough was -22.8% YTD so the turnaround to +6.1% YTD turned out to be an increase of 37.4%. Since then growth stocks and the GR portfolio have sold off sharply again. The portfolio saw a third dip through 6May to hit -21.1% YTD, coming close the 8Mar low once more. Such volatility really does come with the territory when running a concentrated portfolio of growth stocks. Comparison against the S&P 500 benchmark further shows how specific the selloff in growth stocks has been since mid-February. The S&P 500 is at an all-time high. The gap between the GR portfolio and the S&P 500 Index is now about the widest (-30.7%) it’s been during 2021.
I wrote about the previous GR portfolio selloffs in a recent post: https://gauchorico.com/big-drops/
No one can know when the 12Feb ATH will be surpassed; it could take as little as a couple of weeks or as long as a couple of years. The answer will probably be somewhere between. What we can do is continue to focus on the companies’ results with an eye toward the factors will determine the continued success (or not) of the businesses. Later in this post, I’ll write more about my take on the collective portfolio companies sentiment, recent industry developments, future prospects, and valuations.
2021 Notable Days for the Portfolio
Below are some of the notable days in 2021.
**Date YTD Return Notes** 01/27/21 -2.2% local bottom 02/05/21 +12.6% new ATH 02/08/21 +14.0% new ATH 02/09/21 +16.6% new ATH 02/10/21 +16.8% new ATH 02/11/21 +17.8% new ATH 02/12/21 +18.3% new ATH (current ATH) 02/25/21 -3.4% -6.3% on the day 03/03/21 -6.3% -7% on the day 03/04/21 -13.6% -9.2% on the day 03/05/21 -17.1% -4.1% on the day 03/08/21 -22.8% -6.9% on the day (YTD low) 03/09/21 -11.0% +15.3% on the day 03/11/21 -4.3% +9.6% on the day 03/18/21 -10.2% -6.7% on the day 03/24/21 -15.6% -8.6% on the day 03/29/21 -19.0% near to 3/8/21 trough 03/31/21 -13.2% +6.6% on the day 04/13/21 +4.0% +8.0% on the day 05/04/21 -10.9% -6.1% on the day 05/06/21 -21.1% -9.6% on the day 05/07/21 -17.5% +4.6% on the day
Weekly Performance (YTD)
**DATE GR S&P Delta** 1/8/21 6.5% 1.9% 4.6% 1/15/21 6.4% 0.4% 6.0% 1/22/21 10.2% 2.4% 7.9% 1/29/21 3.1% -1.0% 4.2% 2/5/21 12.6% 3.6% 9.0% 2/12/21 18.3%* 4.9% 13.3% 2/19/21 14.2% 4.2% 10.0% 2/26/21 -1.2% 1.7% -3.0% 3/5/21 -17.1% 2.6% -19.7% 3/12/21 -6.3% 5.3% -11.6% 3/19/21 -7.7% 4.5% -12.3% 3/26/21 -15.8% 6.2% -22.0% 4/1/21 -9.5% 7.4% -16.9% 4/8/21 -3.3% 10.4% -13.6% 4/15/21 0.0% 11.9% -11.9% 4/23/21 3.1% 11.8% -8.7% 4/30/21 -1.5% 11.8% -13.4% 5/7/21 -17.5% 13.3% -30.7% *2021 peak and all-time portfolio high
**7May 30Apr 31Mar 12Feb 31Jan 31Dec** CRWD 25.8%* 30.2%* 27.7%* 31.2%* 31.2%* 31.5%* DDOG 17.5%* 12.0%* 12.9%* 10.3% 10.7% 10.4% NET 16.7% 16.6% 15.2% 17.7%* 17.9%* 17.8%* LSPD 12.6%^ 13.1%^ 13.2%^ 6.2%^ 4.8%^ 3.3% ZM 12.0%* 11.0%* 12.3%* 11.6% 11.5% 11.0% SNOW 7.4% 6.9% 3.0% 0.7% 0.5% --- DOCU 5.4%* 5.7%* 5.6%* 12.6% 16.2%* 16.4%* UPST 4.6% 4.4% 5.7% 2.7% --- --- GOLD 2.2% 1.6% 1.7% 1.2% 1.4% 3.0% NEM 1.3% 1.0% 1.1% 0.9% 1.0% 1.0% PATH --- 0.1% --- --- --- --- PTON --- --- 4.0% 3.7% 4.0% 4.2% BPRMF --- --- 1.2% 1.3% 1.3% 1.4% Cash 1.3% -0.2% 1.2% 1.0% 0.8% 0.7% * includes LEAPS; ^includes 17Dec call options
The LEAPS and other call options on CRWD, LSPD, ZM, DDOG, and DOCU will amplify the portfolio’s gains to the upside (and to the downside). This form of leverage is not without risk; for the most part, these options positions could be worthless if the underlying shares do not rise prior to the expiration of the options contracts. For more on how I use LEAPS to amplify upside (including when and how), please see this post: https://gauchorico.com/using-leaps-for-growth-stocks/
Changes since 31Mar2021
Sold all PTON shares: I sold my entire PTON position in April after the company’s response to the Consumer Product Safety Commission’s (CPSC) press release about the safety of the Peloton Tread+:
Publicly fighting with a safety oversight body is a terrible response. PTON could have at least attempted to turn this negative into a positive. The CPSC told customers with children and pets to stop using the PTON treadmills and urged a recall of the Peloton Treadmills. This past week PTON’s response came home to roost with an apology from PTON’s CEO and a full recall of Peloton Treadmills and a complete halt of treadmill sales. Here’s the CEO Foley’s apology issued in a joint statement with the CPSC on 5May 2021:
I want to be clear, Peloton made a mistake in our initial response to the Consumer Product Safety Commission’s request that we recall the Tread+. We should have engaged more productively with them from the outset.
Sold all BPRMF shares: I sold my entire position in (Blue Prism) BPRMF on the day of the UiPath IPO. In my 31Mar portfolio update, I had discussed Blue Prism being very undervalued compared to competitor UiPath. After the BPRMF shares did not increase as a result of the UiPath IPO, I decided not to wait around and hope for a more “fair” valuation particularly since Blue Prism is not the top company in the RPA space.
Bought more SNOW: Using the proceeds from the PTON and BMPRF sales, I increased my position in SNOW.
Sold all CRWD Jan 2022 $60 call options: These options were bought in March/April 2020 and sold for a gain of about 830%. The options were also about 10% of my entire portfolio. A full 23.8% of the proceeds (or 2.4% of my portfolio) will go to the taxman (unless any capital gains tax increase enacted becomes retroactive to the beginning of 2021 in which case the tax bill for this gain will be considerably higher). The rest of the proceeds were redeployed into DDOG shares and CRWD options (see below).
Bought more DDOG: I increased my 12% DDOG allocation to a 16% allocation by purchasing more DDOG shares.
Bought CRWD Jan 2023 $200 call options: These options essentially replaced the $60 options but they come with an extra year before they expire.
PORTFOLIO COMPANIES UPDATES
Since the last portfolio update, DDOG and NET reported their 31Mar (Fiscal Q1 2021) quarterly results. The next portfolio update will include updates for the remaining companies in the portfolios shown in the table below. The top guidance for revenue growth is also shown in the table; I excluded LSPD’s growth because the company has made three substantial acquisitions during the past 12 months so the revenue growth would not be an apples-to-apples comparison. DOCU has not yet confirmed its earnings release date (3Jun is my estimate).
**Date Rev Guide** UPST 5/11/21 84.4% LSPD 5/20/21 SNOW 5/26/21 83.8% ZM 6/1/21 175.8% CRWD 6/3/21 64.0% DOCU 6/3/21(E) 46.8%
DDOG (reported 6May)
DDOG reported results for the 31Mar quarter on 6May. Overall, I would call the quarter’s results excellent. Below are some of the highlights.
Revenue growth was 51.3%, and it had been slowing as shown by the quarterly year over year growth (oldest to most recent): 84.5%, 87.4%, 68.2%, 61.3%. 56.2%, 51.3%. Notice that this quarter’s 51.3% is compared to the year ago quarter that saw 87.4% growth making it a very challenging comparable. Looking at the sequential dollar increase in revenue for the same quarters sheds more light on what’s happening with the business: +$17.8M, +$17.6M, +$8.8M, +$14.7M, +$22.9M, +$21.0M. As stated by management last Spring/Summer, DDOG’s business hit a brief speed bump as customers cut back on their spending at the start of the pandemic lockdowns. The business quickly returned to full strength with the most recent quarter being very strong in spite of Q1 typically being a seasonally weak quarter. The guidance for next quarter is for 52.1% growth, and for the past three quarters DDOG has beaten the top of revenue guidance by an average of 7.1%; a similar beat in Q2 would produce 62.8% revenue growth and a very strong re-acceleration of growth. The third quarter will also provide an easy comparable so we can probably expect a couple of great quarters coming. The company also raised its full year guidance from $835M to $890M (an increase of 6.6% with two more quarters available to further increase guidance).
Customer adoption remains very solid with 7.3% more customers added sequentially and 32% more added year over year. DDOG’s addition of large customers (with ACV >$100K/year) was extremely impressive: 14.7% more added sequentially and 50% added year over year! DDOG now has nine products in general availability which makes it that much easier for the customers to spend more with DDOG. The percentage of customers using 2+ and 4+ products continued to increase to 75% and 25%, respectively.
Operating Leverage and Cash Flow
Our growth companies need to eventually make money so we love it when they exhibit operating leverage and begin to generate cash flow. DDOG has had a positive operating margin for almost 2 years now. The best in class SaaS companies strive to achieve 20% or more in operating margin. As our companies scale, we will expect their operating expenses (Sales & Marketing, Research & Development, and General & Administrative) to drop as a percentage of revenue. As the table below shows, DDOG’s operations have exhibited a downward trending S&M expense (as a percentage of revenue), a stable G&A expense line, and an increasing R&D expense line. Over the past five quarters, DDOG has also seen its gross margin drop by 3.2%. However, it should be noted that the 80% gross margin achieved in Q1 2020 was the highest in the company’s available history. We might typically expect DDOG to achieve around 77-78% gross margins so in that light the current margins appear to be stable. Thus, further operating leverage will likely come primarily from the business scaling causing a drop in R&D expense and S&M expense as a percentage of revenue. Hopefully, DDOG will soon show more progress in achieving operating leverage as CRWD and DOCU have done recently. The good news is that DDOG is already self-funded and still has at least 12% points of operating leverage to realize if it eventually attains a 20%+ operating margin.
**Q121 Q420 Q320 Q220 Q120** GM 76.8% 77.3% 78.4% 79.7% 80.0% S&M Exp 28.9% 30.0% 33.0% 33.4% 32.1% R&D Exp 31.8% 30.6% 30.0% 26.4% 26.6% G&A Exp 8.1% 7.8% 8.0% 7.4% 9.2% OpMarg 8.1% 8.9% 7.4% 12.5% 12.1% non-GAAP (excludes SBC)
DDOG has shown very impressive increases in cash flow generation. Here’s the sequence of quarterly FCF (oldest to most recent): $10.9M, $19.3M, $18.6M, $28.6M, $16.7M, $44.5M. Strong revenue growth contributes to growth in cash flow, but SaaS companies also receive payments from customers that cannot yet be recognized as revenue and show up as deferred revenue (and more cash) on the balance sheet. In Q1 2021, DDOG’s deferred revenue balance increased by $21M from the prior quarter.
In summary, DDOG is beginning to show that its business is about to re-accelerate growth. In addition, all the important financial metrics and positive comments by management are showing that DDOG is maintaining a dominant position in a very fast growing market. I didn’t see any yellow flags in the most recent quarterly report and am happy with my 17.5% allocation.
NET (reported 6May)
NET reported results for the 31Mar quarter on 6May. NET produced a solid quarter. Here are some of the highlights.
Growth ticked up from the prior quarter but has been in a fairly tight range for more than two years. Given the quantity and pace of new product/improvements introductions, I’ve been expecting growth to accelerate for the past two quarters. It seems to be another quarter of “maybe we’ll see it next quarter”. A revenue growth acceleration must come eventually, right? Last quarter, we did see a substantial increase in large customer (>$100K in ACV) adoption with a 14.1% sequential increase and a 70% year over year increase in the large customer count. Also, 88% of customers now use four or more of Cloudflare’s products. Next quarter’s revenue guidance was for 46.9% growth, and full year guidance was raised modestly by 3.8%. Thus, it’s safe to assume that we probably won’t see growth slowing. Also, DBNER increased to 123%, a substantial increase from recent quarters, so expand within existing customers is going strong as one would expect for a company releasing a ton of new products.
Operating Leverage and Cash Flow
While NET still produces negative operating margins, the company has shown significant improvement from Q1 2020. However, the improvement has recently stalled. Most of the gains have come from the company’s R&D team which is already within striking distance of the company’s long-term target; I find this remarkable in light of the number of new products that the company has been launching. The Sales & Marketing team has a long way to go, but if they can manage to convince customers to adopt all these new products then the S&M organization will scale as well. Similarly, G&A should easily scale since a company only needs one CEO, one CFO, and a limited number of VPs and department heads.
**Q121 Q420 Q320 Q220 Q120 LT Target** GM 77.1% 77.3% 76.7% 76.1% 77.5% 75-77% S&M Exp 45.7% 46.2% 44.9% 47.5% 47.5% 27-29% R&D Exp 20.6% 20.4% 20.6% 21.3% 28.6% 18-20% G&A Exp 16.7% 15.8% 15.8% 17.5% 24.7% 8-10% OpMarg -5.9% -5.1% -4.6% -10.2% -23.4% 20%+ non-GAAP (excludes SBC)
NET management seems to know what it is doing. CEO Price is also very focused on the customer and doing the right thing by the customer (as Eric Yuan from ZM is). In addition, the company operates in an expanding market that requires lots of upgrading and transforming. I have seen a lot of great things from NET without any stumbles, and I’m continuing to be patient while I wait for all these products to turn into dollars for NET. My patience is not unlimited though so I’m continuously re-evaluating my position in the company against alternative choices.
It’s been a rough three months for growth stocks and the GauchoRico portfolio. We’ve experienced the third round in a series of drops from the portfolio’s all-time high on 12Feb. It can feel gloomy and disconcerting to see one-third of the portfolio’s value evaporate. Despite what so-called experts will tell you, no one really knows for certain why these drops occur and when exactly the stock prices will turn around. Interest rates? Inflation? Sector rotation from growth to value? I hear daily from pundits what the cause is, what will happen, and what should be done about it. I listen, but I don’t heed their advice because I know that most of them don’t focus on individual businesses to the level of depth that my collaborators and I do. We examine businesses and the markets in which they operate to predict their future success. There’s a lot that I don’t know including when stocks (or a particular stock) have hit bottom or what the macro economy will do in the near-term. I also don’t know whether valuation multiples will fall, rise, or stay the same. But here are a few things that I do know (or think I know):
My companies are booming in booming markets: NET and DDOG just reported great quarters. My remaining hyper growth companies will report results in the coming four weeks, and I’m expecting great results from them as well. The cloud titans and many other SaaS companies reported tremendous quarters. All signs are pointing toward continued strength in cloud adoption and digital transformation with many years until saturation is reached. If any of my companies disappoint or I see greener pastures then I will make portfolio changes.
Valuation multiples have expanded in the past few years: IT software companies have seen their valuation multiples increase over the past several years. However, I cannot say whether the valuations are too high, fair, or too low currently. These multiples have fallen sharply in the past 12 weeks so I can say with 100% certainty that the valuations are much more attractive today than they were a quarter ago: we’ve seen multiple compression along with tremendous business fundamental growth. If multiples re-inflate, we’ll see stock prices soar, and if we see further multiple compression then it’s only a matter of time before the growth in business fundamentals overwhelms the compression causing stock prices to rise at some point.
What’s in favor today won’t be in favor tomorrow: Many momentum traders and some investors move money around based on what’s in favor today, and they will move their money back into growth when the tide turns as it always does. Investing favors those who do their homework and those who are also patient.