HorseplayAndrew Portfolio Review Oct 2022

Summary

Pretty much a year on from when the good times died, I think we’re all truly understanding what they meant when they said growth stock investing wasn’t for the faint of heart. The market is just crazy right now and we’re all just hanging in to survive.

We’ve had several of our key companies report so we’re beginning to see what lies ahead in 2023. But of course the macro continues to control what happens to our portfolios. The FED told us they remain on course with higher rates but the CPI flirted with perhaps a trend change in inflation which resulted in quite a bounce back in our growth stocks.

My background

Entrepreneur, ex-founder of SaaS & marketplace business, exited, now founder of horseplay.ventures, sendtrumpet.com, joinsequel.com angel investing & building other startups.Tweeting here:

https://twitter.com/andrewwebster11

Performance

2022 > -58%

2021 >21%

2020 > 209%

2019 > 41%

October 2022 -58%

October 2022 Portfolio

SNOW 20%
NET 19%
S 17%
BILL 14%
CRWD 14%
DDOG 8%
Cash 8%

SOLD

The only position I sold out fully were my crypto plays. I’m taking a breather there to see how the dust settles (ouch).

I’ve done a little trimming along the way to build up my cash position to try and take advantage of the crazy swings we’re seeing.

BUYS

I topped up a little bit on CRWD and BILL after earnings.

My companies

SNOW

We await the Q3 earnings. Q2 was a strong report and I came out bullish but after seeing how the cloud titans, DDOG and NET reported, I’m a little nervous going into this one.

NET

I think there was certainly a change in optics on NET after Q3. Their remarkable 50%+ growth consistency is now over, so the market decided their premium should be punished.

Management are very open and honest, sharing increased sales cycles and FX issues weighing on revenue. But there was still a lot of positivity, customers over 500k growing at 88% YOY, the security product now seeing some significant tailwinds and bit more detail on the potential for R2 as a revenue line. I also liked the discussion around the push to annual billing that will be a big lever for improved cash flow.

And of course the 5b by 2027 target puts a floor on the revenue growth, quite a clever and confident move by Matthew Prince.

My main concern, which really applies to all of our SaaS growth companies, is what does growth look like in 2023? We’re already seeing a significant wobble in revenue growth in Q3 2022, but from what I am seeing out in the field, earnings and growth are going to come under even greater pressure in 2023, so I think there is a significant chance NET could be hitting 35-40% revenue growth next year. So what does that mean for the multiple? Looking at historical p/s rates for ServiceNOW and Salesforce, would suggest it could settle in the 12-15 range, a fair way south of last week’s bounce back to 19.

S

Awaiting earnings. It’s really hard to predict what the market will think even if they put up robust revenue growth.

BILL

So I liked a lot of the numbers and felt like they are executing very well. They are seeing a slowdown in discretionary transactions but management are developing the narrative that the BILL platform acts as a “deflationary force” and it is clear there is a lot of core value that SMBs will continue to use even if things head south but remember if SMBs revenue falls, so will BILLs due to the transaction fee model. I came away a little bit on the fence. On one hand they were saying there are opportunities for upside on growth numbers, talked about the snowball effect and exciting projects like Finmark, a back office data dashboard. But on the other hand, they did state they are not assuming a severe economic downturn, that is not built into their models, so look out below if that was to materialise. I think this kind of brought home to me that the market is definitely not pricing in a big recession at the moment, which again applies to all my companies.

CRWD

Awaiting earnings. I think if they can avoid a noteworthy drop in growth, and can continue on the solid and steady growth they’ve been serving up, then I think there is a strong case for CRWD to become one of my biggest positions.

DDOG

There is still a lot to like and positive things about this company but right now I think there is a higher chance that the growth tails off vs a bounce back. Management, in contrast to NET, seemed a little downbeat to me, saying that if the macro deteriorates, we will deteriorate, and we know DDOG is a fair bit more sensitive in revenue to other companies. Admittedly they stated the Q4 guided is super conservative due to the holiday season slow down and the multi product strategy is clearly expanding and working so we could see some stability in the growth, but it looks like to me DDOG will be growing next year in the 35-40% range, quite a dramatic slowdown from 2022 so what kind of multiple will the market apply for that?

Watch List

I wanted to share a few thoughts related to my concerns above about the short term future of our SaaS companies. My reading of earnings so far is that H1 of 2023 is going to be rough, especially when full year guides come out in Q4 earnings, so there is an argument to say that it might be a good time to balance out the portfolio with some other growth stocks that might have a better chance of sustaining their hyper growth going into a recession. So I am debating whether to take advantage of this SaaS bounce back and look at some other positions.

My candidates are below:

TMDX - they have been discussed on the board by prominent board members recently. I have previously held them and they are now delivering growth that they promised. It feels like its still early days here.

ENPH - solar energy platform, significant tailwinds in the US & Europe. Hyper growth and very impressive cash flow and profitability.

CELH - an energy drink brand taking on the likes of Redbull and Monster. A fair bit out of my wheelhouse but their revenue growth is stunning ,they have 40% margins and very impressive growth to the bottom line. Pepsi have just made a strategic investment so thesis centres around international growth and the impact they could have, like Coke provided for Monster.

AEHR - This would be a EV/semi/data centre growth position. They have built testing products for silicon carbide and silicon photonics, new components that are rapidly being adopted by EV makers and edge computing data centres. This is a small cap and high risk play due to the lack of visibility in orders and revenue.

GTLB - although SaaS, I read their Q2 report again and really took notice of their CEO’s positivity including “The current environment is not slowing down customer decisions, nor elongating our sales cycles. Buying cycles have actually sped up across all the business, “

Contrast that to DDOG and NET, and its a very different picture. Now I know things could have changed a fair bit since Q2 but DDOG and NET were talking about a slowdown in Q2 even then so GTLB could be able to sustain higher rates going forward.

Appreciation to those on the board who keep sharing their insight and wisdom despite these very tough times.

Andrew

Previous updates

July 2022 - TMF: HorsePlayAndrew Update July 2022 / Saul’s Investing Discussions

June 2022 - TMF: HorsePlayAndrew Update June 2022 / Saul’s Investing Discussions

April 2022 - TMF: HorsePlayAndrew Update April 2022 / Saul’s Investing Discussions

March 2022 - TMF: HorsePlayAndrew Update March 2022 / Saul’s Investing Discussions

Feb 2022 - TMF: HorsePlayAndrew Update Feb 2022 / Saul’s Investing Discussions

January 2022 - TMF: HorsePlayAndrew Update Jan 2022 / Saul’s Investing Discussions

December 2021

November 2021 TMF: HorsePlayAndrew Update November 2021 / Saul’s Investing Discussions

October 2021 TMF: HorsePlayAndrew Update Oct 2021 / Saul’s Investing Discussions

September 2021 TMF: HorsePlayAndrew Update Sep 2021 / Saul’s Investing Discussions

August 2021 TMF: HorsePlayAndrew Update August 2021 / Saul’s Investing Discussions

July 2021 TMF: HorsePlayAndrew Update July 2021 / Saul’s Investing Discussions

June 2021 TMF: HorsePlayAndrew Update June 2021 / Saul’s Investing Discussions

May 2021 - TMF: HorsePlayAndrew Update May 2021 / Saul’s Investing Discussions

April 2021 - TMF: HorsePlayAndrew Update April 2021 / Saul’s Investing Discussions

March 2021 - TMF: HorsePlayAndrew Update Mar 2021 / Saul’s Investing Discussions

February 2021 - TMF: HorsePlayAndrew Update Feb 2021 / Saul’s Investing Discussions

January 2021 - TMF: HorsePlayAndrew Update Jan 2021 / Saul’s Investing Discussions

December 2020 - TMF: HorsePlayAndrew Update Dec 2020 from London, UK / Saul’s Investing Discussions

November 2020 - https://boards.fool.com/horseplayandrew-update-nov-2020-from…

October 2020 - https://boards.fool.com/horseplayandrew-update-oct-2020-from…

September 2020 - https://boards.fool.com/portfolio-update-from-london-uk-sep-…

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