A Fool’s Year in Review
+130% YTD
And I don’t own ZM
It has been an unbelievably year. In so many ways. And here I am wondering, trying to parse my way though the big questions:
How much of this is temporary COVID surge?
How much TAM has been eaten up from recent growth?
How much has valuation expansion stretched?
I know the last question is not preferred for discussion on this board – however – it plays a real role in my management of my portfolio, especially with companies I love – SNOW- and how they compare to their peers.
So, what I’ve decided to do is review a few thing and share them with this group. My purpose is to try and wrap my head around why/how my portfolio is up 130% in a single year, what risks I see, and what actions I missed.
Current Portfolio by Position
16% - CRWD
13.8% - TTD
11.6% - AYX
6.5% - DDOG
6.3% - NET
6.2% - ESTC
4.4% - OKTA
2.6% - ZS
2.4% - ROKU
2.0% - TDOC
< 1% - INSP, ISRG, SFIX (Kept in a Roth Account for my Spouse who selects her stocks)
22.8% - CASH
Trading Activities 2020
Jan 2020
Sell ZM @ 63.40
Feb 2020
Trim ZS @ 57.50
Buy DDOG @ 39.25
March 2020
Sell MDB @ 116.32
Buy LVGO @ 23.63
Buy NET @ 21.92
Buy OKTA @ 115.49
Buy CRWD @ 46.89
Aug 2020
Trim AYX @ $142.25
Buy NET @ 40.24
Buy FSLY @ 77.58
Sept 2020
Trim CRWD @ 129.72
Trim ZS @ $145.35
Buy FSLY @ $81.29, $77.51
Buy DDOG @ 80.25
Oct 2020
Sell FSLY @ 89.05
Sell LVGO @ 143.86
Trim 20% of all stocks
Commentary
In review, I have been relatively quiet during all the COVID turmoil. I had a flurry of activity in December 2019 where I consolidated my portfolio during the downturn. Then again in March. When the market turns down, I typically consolidate. When it rises, I typically Trim and Buy, or sell during disappointing Earnings and Buy. The one exception here, for me, might be AYX. And the reason I didn’t sell… I didn’t see anything that I felt comfortable entering at the time, and I felt like it was worth the dice roll versus pushing to cash. Gambles sometimes work, and they sometimes fail (I also exited ZM at $63 in Dec, woof)
How I look at Stocks
I look at my portfolio as some stocks, and some buckets.
Cybersecurity
CRWD, ZS, OKTA ( ~25%)
My working theory is simple, this field is, and will always, be about evolving. There won’t be one winner, but a multitude of winners, so I kind of think of them as a bucket. In this bucket, I tend to focus Rev Growth + Gross Margin as proof that the stocks are succeeding. COVID only solidified my theory that Security is going to be the big winner in the movement to WFH, as I don’t think WFH will be eliminated for years to come.
I have a bad history in this space, largely, because the space is about innovating. This space has disrupters, so I pay very close attention to the leading edge. To date, CRWD, ZS, and OKTA are the fastest growing, highest margin companies in the space, I see no reason to move away from them.
Cloud Infrastructure
NET, ESTC, DDOG (~20%)
I do not claim to be a technical expert, just a beneficiary of the incredible material here and other places. What I do know is this: The movement to the cloud has been accelerated. The movement is just in its infancy. And many companies are just learning what they can do with data. Sure, FB, Google, Twitter, others know how to mine and predictive their advertising business, but outside of these groups, we are in infancy as far as cloud data, logging, and analysis tools. I don’t know the winner, but I want to be on the growth edge. Once again, all these companies are growing at ~50%+ with mostly high margins (>70% ).
Of note, I wanted to add SNOW here… but… more on that later…. As well as why I left FSLY.
Connected TV & Advertisement
ROKU, TTD (~15%)
Admittedly, I’ve been cord cutting for years. And as such, I see my ads getting smarter, and smarter. Not Instragram smart yet… but pretty darn good. I’m a big believer that we will always need entertained, and that even though there may be less opportunity for advertisers… they can all be much more successful in their lands using data (podcasts, connected TV, etc)
Data Analytics and Automation
AYX (~10%)
Full disclosure, this is how I make my money. Turning data into intelligence. Meshing data for business usage. I see the challenges between all the departments. And I see how the drag and drop low code of AYX resolves this.
I have a counter perspective to others to AYX. I think AYX is suffering from a sales strategy that was heavy on consultants (such as PwC) who rely on face-to-face sales motions. That motion is non existant currently. This is compounded by the fact that business budgets, specifically IT budgets, were either frozen or reallocated to support growth in security and communication tools for WFH users.
The product didn’t change. The value didn’t change. The need to refine and build business strategy did not change.
I’ve said this before, I will say it again, the threat to AYX is not SNOW, it is not Tableau, it is not SMAR, it is very much MSFT suite being able to automate data prep, data processing, and data visualization, with LOW CODE solutions. Doesn’t exist yet, but MSFT is iterating and I’m watching.
I’m hanging on here.
Healthcare Disrupters
TDOC, INSP, ISRG (~5%)
Similar to Cybersecurity, I have a mixed bag of history here. Winners, losers, and to be honest, I’m a little close to the business. That said, I was in LVGO and it was my big investment here, and then I sold it off in my recent cash raise, as I think I’ll have an opportunity to enter TDOC in the future beyond my current position. Probably more importantly, I’m not sure that TDOC will be the big winner here, but I want exposure in the space. I don’t love the leadership issues in the past. I don’t love M&A as a strategy. I don’t see the full vision. Yet, I know there are significant tailwinds. I know that ZM is not allowed due to security concerns at certain hospitals.
Reviewing my Actions in 2020
Companies I exited and Why
ZM
I exited ZM in January because… frankly…. I thought the valuation was out there and I might have a future opportunity. I was wrong. I never adjusted. And here we are. I blew my chance as a nimble investor MULTIPLE TIMES to reenter. But I am okay with it. I feel like everyone ZM’s now, and my question is, what is next for ZM? Has ZM plowed through its TAM? It feels like everyone is using it, so what is next?
Exiting ZM, and not reentering ZM, has been my WORST INVESTMENT DECISION in 2020.
MDB
I exited for very simple reasons. Growth deceleration. Perhaps some would say “But you stayed with AYX, and look at its growth!”. Well, Atlas was supposed to be a bottoms up subscription that sells itself. I watched Atlas decelerate significantly and even though I see a large TAM here, I want to see reacceleration in this space.
FSLY
I exited FSLY for one main reason. Missing guidance. High growth, high margin companies never, ever miss guidance. They might have reduced beats, they might guide for lower growth, but they don’t ever miss. Reading the small print, the issue was more than Tik Tok. Further more, while I had been thinking about FSLY like TWLO, what I realized on usage is that there are significant differences.
A usage model based on data incentives the user to improve data efficiency and data compression.
This impacts FSLY revenues
A usage model based on communications, the user would have to communicate LESS to reduce TWLO revenues.
This is not the same thing.
Therefore, I exited to learn more.
Cash Raise
At a point in October, I was up 150%, and I ran an analysis on P/S growth from the Maximum P/S in 2019. What I found, was that the P/S in my portfolio had expanded up to 103% for stocks outside of my COVID outliers consideration (ZM, TDOC). This pushed me to just trim 20% as a risk reduction manuveur for me.
https://imgur.com/99gwi24
Ok, how do I think about comparing these companies?
I think about a very simplistic view
- For every dollar of revenue, how much is at Management’s discretion to allocation?
- How fast is the pot of money for Management Discretion growing?
- How do each company’s Management Discretion growth rates compare on a P/S ratio?
The math I use is (Revenue Growth % * Gross Margin %) plotted on P/S
https://imgur.com/a/4BXjlan
On this post, you can see the relative rankings, but I’ve also kept historical charts that I’ve produced over time. The market continues to give High Growth, High Margin, longer leashes.
So, what’s next for me?
Honestly… doing…. Nothing. It’s earning season. Let’s see what we learn.
I expect to take advantages of any future dips. I see CRWD is the best investment out there.
I’m very interested in watching recent IPOs (FROG, JAMF, GDRX, SNOW) and their activities. Particularly, SNOW, which is 2x P/S vs ZM with half the growth rate… and I just can’t…. maybe I’m repeating the same mistake I made in January? But I can’t get behind SNOW at 200 P/S which has impressive revenue growth (120%) but low 60% margins.
Also, of interest, ZM and SNOW are the far, far outliers in my charting: https://imgur.com/a/YhVz6WB
Oh well, that’s it from me!
Just a Fool