Jason’s August Investing Decisions

August 31,2021
Total Portfolio +24.3% Month of August; +60.5%Year to date (at 160.5% of where it started the year)

Current Portfolio

Upstart 22.47%
Crowdstrike 19.12%
Datadog 16.43%
Cloudflare 14.45%
Snowflake 10.32%
ZoomInfo 7.75%
Docusign 5.06%
Lightspeed 4.40%

July 31,2021
Crowdstrike 21.5%
Cloudflare 17.60%
Datadog 16.42%
Upstart 14.76%
Snowflake 12.67%
ZoomInfo 7.98%
Docusign 6.32%
Zscaler 2.75%

When reading the following keep in mind that although my portfolio has now grown to be more than 95% of what we will live on in retirement, this portfolio is what is in our non-taxable Roth and Rollover IRAs only. We have not added any money to these accounts for many years. To buy something I’ve sold something else. I don’t trade options or use any leverage. I stay fully invested at all times and keep less than 1% in cash.
What I did and why during the month of August.

I sold more Docusign. This took Docusign from 6% down to a 3% position. I did this in order to add a 3% position in Lightspeed.
After reviewing why last month I sold 40% of my Docusign position to add to Upstart and restart a 2.5% position in Zscaler, I took a closer look at Lightspeed, thinking that my belief that Docusign, the company, will outperform is less now than when I bought the shares. All due respect for Docusign’s operating efficiency at scale with eSignatures; but, I had believed that Contract Lifecycle Management would move the needle sooner than Management had said. I’m choosing to listen to the Management of Docusign more literally than I had.

There hasn’t been the relative amount of interest in Lightspeed here compared to some others. Shout outs of thanks for prior posts on Lightspeed from Ethan, Stocknovice, and ExponentialDave. Lightspeed CEO, Dax Dasilva, is ebullient about this companies immediate future. I’m seeing a very nimble emerging leader in Lightspeed and mostly because of their successes in M&A onto their robust platform.

IMO despite the Pandemic, Lightspeed was, save margins, able to ride the adoption wave of the solutions their selling well. Having built an obviously robust Cloud based Platform facilitating commerce, throughout the pandemic they’ve monopolized on the prospects for themselves adding solutions to this platform. Lightspeed went deep and proved their value around the underserved edges of a very large market. I’m betting that in this sense like other upstarts, Lightspeed will be able to continue to take larger and larger share of the overall market.
Q2CC JPChauvet, President
You might see us in the next acquisitions, focus more on technology and scale…
In many ways Lightspeed competes with Square and now partnering with Stripe Lightspeed is entering eComm where they also compete to some degree against Shopify. I do see enough greenfield opportunity in this currently fragmented TAM for Lightspeed to be every bit as successful as square and perhaps Shopify.
Q2CC JPChavet, President
Re Shopify competition question:
What we want to do is we want to be strong within the segments that we serve, which are merchants that have kind of heavy inventory lifting. And in that market, I think we’re stronger than ever, and we’re not feeling any kind of threats from other companies. This may sound strange as many here refer to Lightspeed as being focused on SMBs. I’m still learning about this company and hope this post will generate some discussion on Lightspeed’s Total Addressable Market?

Although I’ve eliminated most of my previous reservations about increasing allocation to Lightspeed, gross profit margins of this company continues to be something to watch closely (now ‘only’ 50%). Regarding declining gross margins, CFO, Nussey in Q1FY22 CC stated, The decline in gross margin year-over-year reflects the growing impact of our payments business and lower hardware margins achieved this year due to various incentives we extended to our customers to encourage adoption of our solutions as economies reopen. This does not make me want to add to this position here. Although, I do expect that along with scaling solutions that are accretive to margins, Lightspeed’s overall gross profit margins should improve accordingly. When/if they do I’ll likely add to my position.

Thanks to many posters here, specifically Jon and Bear, I was anticipating a large beat from Upstart. I’m gobsmacked. The fact that they ramped S&M 50%, since last quarter, and their funnel is so efficient (eg: increasing conversion rate +41% Q1 to Q2), and the Upstart engine hasn’t found diminishing returns yet, after increasing S&M 50% QoQ!?! I now believe Upstarts ability to scale is much great than I had believed when I kept a full position.
I wanted to add shares here; but, I didn’t. With today’s 26% rise in share price and share price drops in my other holdings, Upstart is now my largest position at 19%. Saul said he added here. I’m just not quite the mountain climber Saul is. He seems much more comfortable on higher peaks.
Having dug into the Conference Call and reading the analysis here, I’m questioning my reasons for not adding more to Upstart. I did let Crowdstrike rise to about 28% of my portfolio for a short while, having added to it on the way up some; but, it had gotten to that high percentage primarily from growth of the company over more than a year. To follow my own advice and add when my understanding of a companies abilities have improved, I’d have to think of myself as more like a captain of a rocket ship and I just don’t see myself that way, yet.
Upstart share price is up an additional 13% today. Upstart is now 21% of my portfolio, up from 15.5% three days ago just prior to earnings. Not adding yesterday came with an opportunity cost. However, I did sleep well. So there’s that😊

Upstart 21.39%
Crowdstrike 17.8%
Datadog 17.31%
Cloudflare 15.55%
Snowflake 11.97%
ZoomInfo 7.98%
Lightspeed 2.83%
Docusign 2.70%
Zscaler 2.46%

I sold half the 2.5% position I had in Docusign to top up Snowflake before earnings. OKTA’s announcement of their move into, IMO, competition with eSignatures is likely a ways off; but, I suppose that I can keep my eye on Docusign by maintaining a 1.35% position as well as I can with 2.5%.
I just don’t want to kick myself for not having a full position in Snowflake before this earnings call, August 24th. I really try not to add so close to earnings after such a strong move in share price; but, I think the market is just not understanding how Snowflake is a totally ‘world changing business’. And I think this quarter the market will wake up to what 100% revenue growth, close to 100% growth endurance, looks like. A good example of how they’ll achieve my expectation is what Snowflake is doing for The Trade Desk. Being able to layer instantaneous compute with this data sharing is a total game changer, paraphrased from what Jeff Green, TTD CEO/Founder, said on their last Q Conference Call. There are other companies growing faster; but, will they scale like I believe Snowflake will?

I sold the rest of the Docusign and the small position I had in Zscaler to make Lightspeed a 4% position, adding a little to Snowflake.
Digging deeper into Light-speed, IMO all the recent acquisitions perfectly showcase why their platform is making Lightspeed the brand to beat. Now with a more complete set of solutions, Lightspeed has a fundamental advantage when competing in this fragmented industry. Lightspeeds’ top line last quarter helped prove this thesis. My confidence that this company will efficiently ride their technologies enormous waves of adoption into the immense greenfield of, at least SMB, Commerce has increased.
I added the rest to Snowflake. Snowakes share price dropped 11% on, IMO, FUD. Their was a speculative note about lengthening sales cycles from an investment house that IMO, their not having a position in Snowflake, likely wrote the note because they hoped to lower the share price before they initiated a position.
I sold Zscaler instead of Cloudflare because Zscaler, as far as I know, does not have equal or better ability to move into adjacent markets. They, for some reason see the need for partnering in order to provide Software Defined Wide Area Networking capabilities. This makes me wonder why. Is the fact that Zscaler is being more tightly focused on fewer products better in the long run? I don’t see them moving into other obvious adjacent possibilities (Not even SASE when SASE is at the top of the Hype-Cycle) and this lowers my confidence, relative to Cloudflare. Despite the massive TAM available to Zscaler in ‘just what they offer’, I like a more concentrated portfolio than most here, possibly due to my feeling vulnerable to my thinking too much when I have more than 7. For those that embrace this vulnerability themselves, IMO you’re more courageous than I.

I sold 1/3 of my position in Snowflake after earnings.
After reading the transcripts, I posted here trying to argue why RPO is not growing as fast and the customers count is not increasing as fast as prior quarters; but, in the end thanks to Bear for sticking to this argument, I was persuaded to listen to these Quarter over Quarter numbers over everything else, at least enough to bring my allocation down to 10%.
Snowflake currently counts roughly 25% of the G2000 as customers. This is amazing for such a young company. Is their narritive pointing to their focusing on expansion across their existing user base over landing new customers? Looking at Year over Year no. Snowflake’s customers generating more than $1 million in trailing-12-month revenue for the company more than doubled year over year, growing to 116%. Looking at Q on Q, customer adds and RPO growth both are severely slowing. Yet, Snowflake’s revenue for its second quarter of fiscal 2022 more than doubled, rising 103% year over year to about $255 million and they are showing more than adequate leverage in their business model. I’m content that operating margins has gone from -44% to -8% over the past year, and FCF from -33% to -4% (despite back to negative after the past 2Qs were positive). They do anticipate being positive FCF going forward.
Nonetheless, RPO has been pointed out by management as, at least in combination with Revenue Growth, where to look for company progress. And Snowflake’s growth in RPO QoQ is not where I’d like it to be at this time, at least not where it needs to be for me to keep Snowflake at a full size position. I believe this is a category crusher newly listed company making adjustments in their sales motion. Thanks to all the arguments on both sides here.

I re-initiated a 5% position in Docusign with the proceeds from taking Snowflake down to a 10% position. Although I don’t wish to bet on when their Contract Lifecycle Management product will move their revenue growth needle; I very much appreciate Docusign managements’ ability to efficiently ride the adoption wave for eSignatures. I believe Docusigns’ CLM is a game changer for every enterprise in the world and there’s a lot of Total Addressable Market for eSignatures while CLM ramps up.

The Standards I’m trying to meet in making my Investment Decisions:
(Please compare these to what I did and why. If you don’t see how I tried to apply these principles, let me know how I may have been off the mark)

  1. Buy Cloud Category Crushing companies< https://discussion.fool.com/how-i-pick-a-company-to-invest-in-33…
    (This means companies with the ability to scale what their selling, to match the rate of technological adoption.)
  2. Category Crushing Companies will always be expensive. Buy on the way up.
    (This one is crazily enough as difficult for me to do as the other two here.)
  3. I trade only when new information leads me to believe a company’s abilities have changed, in how the company is at this time efficiently riding these combining waves of adoption, with the company becoming an eventual behemoth.

The confidence I must have before making a company into a full or greater sized position is determined primarily by:
What level of confidence do I have in the CEO/Founders of each company and their ability to manage my money for me.
My confidence in the CEO is determined by their ability to communicate their vision of (my being able to understand) how the growth trends within the company- operations, number of customers, platform, and expanding market - How will all these be Scaling (growing exponentially from here). And then how well is managements’ vision presently being executed: as measured by growth in Revenue, Gross Profit Margin and improvements in Operational Margins and Free Cash Flow.

Still my favorite quote taken from this Board:
You do not beat the market by thinking you are “smarter” than the market. You beat it by understanding what the market never understands as it always either overreacts to FUD or underreacts to those few extreme world changing businesses.

January Porfolio Summary here: https://discussion.fool.com/jason8217s-jan-port-summary-34738748…
February Portfolio Summary https://discussion.fool.com/jason8217s-feb-portfolio-summary-347…
March Portfolio Summary here: https://discussion.fool.com/jason8217s-march-portfolio-review-34…
April Portfolio Summary here: https://discussion.fool.com/jason8217s-april-portolio-review-348…
May Portfolio Summary here: https://discussion.fool.com/jason8217s-may-investing-decisions-3…
June Portfolio Summary here: https://discussion.fool.com/willo2006-june-investing-decisions-3…
July Portfolio Summary here: https://discussion.fool.com/jason8217s-july-portfolio-summary-34…

Heartfelt thanks to every one on Saul’s Investing Discussions0 for following the rules of this great Board! I’m proud to be one in a group of individuals who’ve come together with an agreed upon goal, such as this.

Special thanks to all the Board Managers for insisting on these rules and to Saul specifically for his tireless efforts in making this, without a doubt, the best place to discuss Hyper-Growth companies.