Jason’s July Portfolio Summary

Total Portfolio +5% Month of July; +29%Year to date

Current Portfolio
Crowdstrike 21.50%
Cloudflare 17.60%
Datadog 16.42%
Upstart 14.76%
Snowflake 12.67%
ZoomInfo 7.98%
Docusign 6.32%
Zscaler 2.75%

This month I’ll try to give a more clear description of how I gain confidence when I make buy or sell decisions. Spoiler, I learned it all here. I feel fortunate to have read the work of many here on this board when there where several discussions on topics like this. After some time researching posts here, I wasn’t too surprised that the common definition of confidence, as it is used when making investment decisions by many here is used similarly when compared to other situations in life. In some sense our level of confidence depends on both the purchase from which we make the jump and our expectations of where we’ll land. I’ll start off by saying that I now believe having an exit strategy when buying shares is essential to my confidence when holding those shares.

Last month I quoted a few different posters here to help me explain why I trade within my portfolio. Within that thread of discussion from which those quotes where taken, Saul repeated something he’s said here often regarding his ‘confidence’.

The following post is from Bear re-capturing the conversation.
me: but you still allocate more to the ones you feel have the greatest potential for appreciation.

Saul: Actually that’s not my criteria. It’s not the ones that have the greatest potential for appreciation, but the ones I currently have most confidence in that I have the largest positions in.

And then Branmin quoted something else you said and really drove it home for me: I just figure that as long as DDOG is a great company, it will remain “overvalued”.

Wow, that’s it. I think I finally just got it. You see these companies as future behemoths, and I just see them as good businesses with a great business model (SaaS),but not necessarily future $100 billion companies or really anything of the sort. Just solid software businesses that happen to benefit from the SaaS model.

I don’t know if you’re expecting too much or if I’m being too skeptical, but I really think that’s what it is!

That bit Bear said about Saul’s confidence in his vision of these companies as behemoths …his confidence in how these companies will be that has been difficult for me to fully appreciate. I believe I’ve been under appreciating Total Addressable Market as one of the criteria I use to gain confidence before a buy or sell decision.

Saul wrote ‘In answer to an off-board question’ on 7/29/21: As far as confidence levels, they depend on how well the above numbers are doing, and in addition to what extent the company seems to dominate its niche, and how much room it seems to have to expand, and to a lesser extent, because it’s hard to determine, how difficult it would be for a challenger to displace it.

This months chunked down perhaps over simplified iteration of why I did what I did:
I traded when new information lead me to believe a company’s abilities had changed, regarding how they are efficiently riding the combining adoption curves of the tech up the hockey-stick toward becoming behemoths.

Skip inside the brackets +[- +]- Here unless you want further explanation of how and why I got to this iteration:
**-[+**An S-Curve of technological adoption is seen as an S on its side. resembles a sign wave. The hockey-stick is that portion of the curve where a company may experience hyper-growth. Hyper-growth of revenue occurs as a company efficiently sells their primary technological solution while that technology is being adopted at scale.

This hyper-growth of revenue occurs as long as a company hasn’t saturated their TAM and/or keeps expanding their total (serviceable) addressable market and efficiently expands selling into those adjacencies. The companies within my portfolio demonstrate a level of efficiency (as measured by their top and bottom line numbers) in how they ‘ride’ the s-curves (waves) of technological adoption for the technological solutions they’re selling.

Unpacking my investment criteria further: Combining each wave of all the tech being developed and then sold, how to read management and how efficiently each company is riding the combined waves toward becoming behemoths…”this is not simple.”. Perhaps surprisingly, I do totally agree with Saul when he says I truly don’t need to understand the tech. Revenue growth (along with ARR and RPO) tell me whether their customers like the way their products work, and how well they are marketing those products. Profitability and free cash flow tell me how well management is running the business. (Selling a lot of product way below cost, at a loss, may give you a lot of revenue growth but a failing business.). I do try to stay out of the technological weeds as much as possible. Where I stray from this is due to my also wanting to be in the current/future disruptive paradigm of doing business, not just the business model the tech solution being sold also. Saul says he has ‘people he trusts tell him if the tech is right’. Now that Muji finally started his Premium Service and Smorgasbord, Rafe, and many others here continue to be generous, I got people that I trust in this also🙏.
Because I may get the elevation wrong when deciding how closely to look at the tech being used and sold by each company, I also maintain what I had written in the last few months summaries: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?
Going forward I will now emphasis more clearly the Total addressable Markets in what I’d written as an explanation here: 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 improving from here. And then how well is managements’ vision executed: as measured by growth in Revenue, Gross Profit Margin and improvements in Operational Margins and Free Cash Flow.
To fully breakdown and unpack my new found chunked down version of why I trade, it might be better to go through all eight areas of how I value a company as written out in my https://discussion.fool.com/jason8217s-jan-port-summary-34738748…

Why didn’t I just point you all to the post Saul wrote yesterday first or secondly to Saul’s knowledge base? Well firstly, I’ve been working on this months summary for a month and Saul just wrote this quote yesterday🥴. But secondly, after my having written out all of Saul’s Principles for high growth Investing, IMO, I now have an actionable single serving size idea to ruminate on…like this idea I can chew on and take apart…” I trade when new information leads me to believe a company’s abilities have changed, regarding how they are efficiently riding the combining adoption curves of the tech up the hockey-stick toward becoming behemoths”. .…IMHO, this chunked down version captures all the bits in a principled approach on which I can confidently base the financial risks associated with buying and selling when investing.

Going through this process has given me more confidence when trading to invest,:man_dancing:. My actionable take-away: making an effort to better understanding a companies TAM, before making a purchase, I will have more confidence than ever throughout my holding a position😊.+]-

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 in June to get here and Why:

June 30,2021
Crowdstrike 22.36%
Cloudflare 16.48%
Datadog 16.21%
Upstart 13.85%
Snowflake 12.10%
Docusign 10.88%
ZoomInfo 8.12%

I sold a little Docu @$190 to add to Upstart @$115 today. This gave Upstart a full position, 14%, in my portfolio, and returned Docu back to 10%.
As I see it, the AI utilized by Upstart, and how they are able to harness it , see one recent example here https://discussion.fool.com/-use-your-existing-application-proce… , is carrying this company into the Tornado of technological Adoption more so than the technologies being implemented thus far by Docusign.
This is an example of where on the adoption curve these technologies are and therefore when these two Cloud Category Leaders might become Cloud Category Crusher Behemoths and how this can be more important than a business model that does or doesn’t includes Annual Recurring Revenue, IMO.

I sold a third of my 10% position in Docusign to restart a 2.75% position in Zs, adding a little more to Upstart.
Short version:
Docusign isn’t breaking out Contract LIfecycle Management numbers yet and Docusign’s CEO is saying that CLM won’t be moving the needle for perhaps a year or more. Given Docusign’s company performance is growing very well along side the rate of adoption of eSignatures this company overall is doing very well. But, Zscaler’s numbers have been accelerating as the technologies they’re selling have expanded, increasing their Serviceable Addressable Market, their now taking on cloud workloads and machine to machine security.
Long version here:
Up until now I’d felt as though my overweight positions in Crowdstrike and Cloudflare had accurately reflected my understanding of the growth rates of adoption and the Total Addressable Market in AI enabled Cloud Security (Cloudflare obviously more than ‘just’ Security). I added more to the security space with this purchase of Zscaler, partially due to the fact that I’d lowered my allocation in Cloudflare significantly to add to Upstart. I see the tailwinds for security as greater than ever (compression of the S-Curves in this market) mostly due to Muji’s Premium write up Green Light for Zero Trust at HHHypergrowth.com and Nvidia’s May Q1 Conference Call where Jensen Huang went on and on about Zero Trust and the necessity of rearchitecting the entire public cloud with this in mind. Jensen was emphatic, saying Nvidia would expect next year to have meaningful, if not significant revenues contribution from this. Muji explained how the US government will be contributing to these tailwinds, adopting Zero Trust en mass , around 2022.
I chose Zscaler, in order to buy into more of the AI enabled Cloud Security, instead of Cloudflare primarily due my having just read Peter Offringa’s new write up on the technology adoption in the decentralized cloud here https://softwarestackinvesting.com/decentralization-effects/… . Not saying anything’s wrong with Cloudflare.
I had not been following Zscaler very closely since I sold out of it about a year ago. Peter Offringa made a compelling Bull case for buying back in to Zscaler today (primarily I now see them with a larger and potentially faster growing SAM, I see more clearly now how likely they are to become a behemoth. I had wondered, before reading Peter’s work, if Cloudflare would eventually eat Zscalers lunch (lunch = greenfield TAM).
Peter Offringa-(bolding is mine)
Zscaler’s target is to increase their coverage to 200M users and 100M workloads connected to their network. This was revealed at Analyst Day in January. This target would represent a 10x increase in users and many more times that for workloads, as workload protection is a newer product.
Zscaler’s revenue growth toward this Servicable Addressable Market will be driven by two contributors. First, they will expand usage by adding more users and workloads to the platform. Second, enterprise customers will increase their spend per user or workload by adopting add-on services. This generates a target of $145 per user and $155 per workload. Current average spend per user is in the mid-$20 range, providing a 6x upsell opportunity.
Zscaler leadership estimates this serviceable addressable market to be $72B. This is based on data from IDC reports for network security spend through 2022. This estimate represents the combination of user protection ($45B) and workload protection ($23B). Given that Zscaler’s current annual revenue run rate is about $700M, they have plenty of room to grow. This also doesn’t take into account some future opportunities, particularly the full spectrum of machine-to-machine communications.

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 Portfolio Summary https://discussion.fool.com/jason8217s-jan-port-summary-34738748…
February Portfolio Summary https://discussion.fool.com/jason8217s-march-portfolio-review-34…
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…

Heartfelt thanks to every one on Saul’s Investing Discussions for following the rules of this great Board! I believe, when a group of individuals come together with an agreed upon goal success is inevitable

Special thanks to Saul for insisting on these rules and his tireless efforts in making this, without a doubt, the Best place to discuss Hyper-Growth Companies.