Golf Caddy for Peter Lynch, Portfolio Summary September 2021
YTD by Month:
Sep + 99%
Month End Summary
What a difference the last three months have made? I am up 99% for the year, who would have thought that was possible in March?
I sold out of Crowdstrike. Crowdstrike is still a great company, but they are now over $60B in market cap and hyper-growth is just going to get harder and harder for them to maintain.
I started a position in Monday, but changed my mind and sold. I already own Asana and I am going to stick with that for now and didn’t want to concentrate more in the same space.
Just after that, I bought a few shares in Lightspeed but sold them the next day when they were attacked by short-sellers. I spent the morning reading through Spruce Captial’s tweets and think the entire thing is much ado about nothing. It’s a short seller trying to make a quick buck. I may get back in.
I didn’t make many other changes. But I have been researching new ideas. There are just so many companies going public. Some of them are great companies, early in their growth cycle, and could make fantastic investments. I am happy to see that the public markets have become friends once again with early-stage companies. Many unicorns like Uber, stayed private and went public way too late for them to be interesting to growth investors. I am glad the pendulum has swung back in favor of the public markets.
Since many others post this, I thought I would as well. Portfolio returns since I started closely tracking it in February 2020 is 319%. I was a bit conservative in 2020 and slowly plodded along doing what makes sense to me, as I will continue to do.
I have worked in internet media and technology on the business side my entire career. I live in the SF Bay Area and focus on investing in what I know, high-tech growth companies.
I like to buy small positions, this gets me focused to learn about a company. Then I sell, or I add to it over time in small increments depending on a variety of factors. Some positions I hold for years, others for only a few months. My goal is CAGR. Not 10-baggers and I try hard not to fall in love with a stock. My aim is to maximize my returns and I have no allegiance to any particular method or style of approach.
I have an obvious bias to SF Bay Area-based high-tech companies and for good reason. It’s an ecosystem that I know well and like. I focus on mostly SF Bay Area/Silicon Valley companies as I think it gives me a slight edge, beyond the numbers when investing.
Upstart (UPST) 32%
Asana (ASAN) 20%
Affirm (AFRM) 15%
Sea (SE) 14%
DataDog (DDOG) 10%
To trim or not to trim? That’s my current dilemma. On the one hand, I have seen the mix of my portfolio change drastically all year and haven’t done any trimming. Sea was at one point over 20%. But the growth of Asana and Upstart have now far surpassed Sea. Affirm is up significantly for me, but is not even close to the size of UPST. I am going to hold on at least for now. If it starts to interrupt my sleep I will make adjustments, but I am sleeping like a baby.
FYI: I just started another portfolio with other picks that I am not tracking here. I want to keep my updates for this Saul’s board portfolio consistent for 2021. I will combine all the reporting next year. Why am I mentioning this? Because if I say I have a position in something not listed above, that’s why. I am just trying to be transparent and reduce the potential for drama.
Affirm (AFRM) New and Updated
Still my favorite pick after Upstart (UPST). I know Saul and others posted their concerns regarding them, and many good have been made. Yes, it’s true if there is a recession, they have a lot of exposure. But I did some research regarding the loans on their books and they are securitized and sold to Wall Street banks as debt instruments. It’s similar to what credit card companies do. They just started doing this and it’s why if you listen closely to what Max Levchin has said about their capabilities in capital markets continue to improve.
If you want to read more use this link:
It is correct that in a recession, all of these fin tech companies will have issues, and I don’t think singling out Affirm for that is fair, but that’s just me. A recession would be bad for stocks overall given the multiples they are trading at. Also the issues regarding customer concentration, is no longer true. Peloton is not their biggest merchant.
As for Affirm’s growth prospects, in my opinion, the Amazon deal is just the beginning. I see these as the big opportunities that they have for growth:
International Expansion: They still are only operating in North America, so international expansion is a huge opportunity for them that they haven’t tapped.
Affirm Card: They also are excellent at product development and I think the Affirm Card will accelerate repeat purchases significantly. Credit card companies are already scrambling to compete with this new offering, did you see the announcement from Citi Card?
Reward Points: A credit cards style points system will be introduced at some point and I think that will be the nail in the coffin for traditional credit card companies who will need to evolve or decline.
New products including Crypto support: Affirm recently announced they offer the ability for people to buy crypto through their platform. There is also an impressive list of new products that Affirm plans to release which you can see in this presentation. I think Affirm’s ability to roll out new products is vital to my thesis. It’s something that I look for in innovative and disruptive companies. I like companies that can keep innovating and rolling out new features. It is an essential part of why I think Affirm will dominate because they can do it in a non-linear fashion.
Partnerships Have Room to Run: On the earnings the CEO says regarding Shopify, “When we reported earnings back in May, we shared with you that we had onboarded 12,500 Shopify merchants at the time. And today, that number stands at hundreds of thousands.” Now, in the ER this is what they say the total number of active merchants, “??Active merchants grew by 412% to nearly 29,000 for the fourth quarter of fiscal 2021, including several thousand newly integrated Shopify merchants.” Just for clarity, Onboarded is the stage before Active.
Saul is correct that it’s a complex company. I would argue that if successful, ecosystem businesses that are able to leverage all of their assets together are extremely powerful, like Google for example. It does require smart management who can lead that type of organization. This brings me to my last point, Max Levchin is a CEO I trust and believe in. If he was to ever leave, that would be the end for me. Much like how Elon is intertwined into Tesla’s success. That is a single point of failure. It’s a risk that needs to be weighted appropriately.
Sea (SE) New and Updated
There isn’t much posted about them on this board, but with total GAAP revenue up $2.3 billion, up 158.6% year-on-year, and total gross profits of $930.9 million, up 363.5% year-on-year there should be. Sea is headquartered in Singapore which is one of the few foreign markets that I feel comfortable investing in. Yes, they are listed on the NYSE so theoretically they need to follow SEC compliance, but here is what the SEC says regarding enforcement in China:
Although China-based Issuers that access the U.S. public capital markets generally have the same disclosure obligations and legal responsibilities as other non-U.S. issuers, the Commission’s ability to promote and enforce high-quality disclosure standards for China-based Issuers may be materially limited.
Sea has three main business areas:
Digital Entertainment: They own a gaming platform called Garena and their hit game Free Fire throws off a ton of cash. In June, GAAP revenue from digital entertainment was US$1.0 billion, up 166.8% YoY. And their self-developed global hit game, Free Fire, hit over 1 billion downloads on Google Play. This is massively profitable and how they fund the other two growth areas. Adjusted EBITDA for entertainment was US$740.9 million, up 69.8% YoY in the same period.
eCommerce: For eCommerce in June they reported GAAP revenue was US$1.2 billion, up 160.7% YoY. Their biggest market is Malaysia and they are expanding all over South East Asia, South America, and now even parts of Europe. Yes, they face lots of competition, but expansion has been going well. The combination of entertainment and commerce seems to work well and differentiate them from competitors like Mercadolibre.
Payments: In June their mobile wallet total payment volume exceeded US$4.1 billion for the second quarter of 2021, an increase of close to 150% YoY. This business is the most nascent of all three, but as you can see from the numbers it’s also growing rapidly. But they did not raise guidance for this area like they did for the other two divisions, an important side note.
When I first heard of Sea, I will admit that I was skeptical. I remember Gree and DeNA from Japan. They embarked on bold international expansion plans ten years ago and failed. Plus there are a ton of Asian-based entertainment juggernauts that have repeatedly tried and failed to expand outside of their home markets. But, Sea’s strategy is different. They have stuck to their area of competence which is optimizing for low-cost Android devices in second or third-tier markets where the competition isn’t as strong as it is in America, Australia, or Great Britain.
Can the rapid growth continue? The pandemic in areas outside of developed markets continues to rage on and continues to push digital transformation forward this year, accelerating Sea’s business. It’s not reported on much in Western media, so it’s not top of mind. I think that the pandemic coupled with their aggressive push into international markets beyond South East Asia will keep the growth engine humming along. That’s not to say that this isn’t without risk, their big cash machine is entertainment and consumers can be fickle, which could slow down at some point. But there is nothing to indicate that’s happening, at least at this stage, in fact, it appears to be gaining popularity. Garena Free Fire has outperformed PUBG Mobile once again to become the world’s highest-grossing mobile game on the Google Play Store in the month of June 2021.
I don’t have much that I can add to Upstart, DataDog, or Asana. All have been covered extensively on this board.