Good afternoon, everyone –
I thought it would be helpful to perform a checkup on my original post above and also provide some additional analysis on recent earnings. My original post was made on June 15, 2022, when market sentiment was arguably at its lowest. Since the inflation reading on Tuesday, sentiment is still pretty low. Let’s take a minute to ignore all the financial media fear mongering and see what’s really been going on in our world.
I. Introduction
“It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity, it was the season of light, it was the season of darkness, it was the spring of hope, it was the winter of despair.”
? Charles Dickens, A Tale of Two Cities
These famous lines were used by Mr. Dickens to summarize the radical differences in London and Paris during the French revolution. If Mr. Dickens was still alive and a wise growth investor, I like to think he might post these words on Saul’s Investing Discussions to describe the current environment. It is the best of times for our companies, who continue to church out fantastic results. But it sure feels like the worst of times in the macro world around us. Remember, if our companies are doing this well in the current environment, how do you think they will do as things improve? I continue to accumulate shares in all the companies discussed in this post, because I believe they will return to ATHs and that it might just happen as quickly as they dropped.
Now, onto the on-topic stuff. My original post on June 15 was to determine “what companies I see doing best in the second half of this year” and “to see how they [our companies] are going to do in this environment going forward.” My list of companies best positioned for a rebound starting with my favorite was: (1) DDOG (strongest rebound), (2) CRWD, (3) ZS, (4) SNOW, and (5) NET (least strongest rebound).
Well, how have I done so far? Not so good. Below is a summary of where we are since my original post:
DDOG 87 (June 14) → 98 (present day). Rebound = 13%
CRWD 183 (June 14) → 183 (present day). Rebound = 0%
ZS 142 (June 14)–> 181 (present day). Rebound = 27%
SNOW 113 (June 14)–> 191 (present day). Rebound = 69%
NET 41 (June 14) → 59 (present day). Rebound = 43%
While I got the order of the companies wrong (so far), I still would not change my overall opinion that these five companies are the best suited for a large rebound. Let’s look under their hoods to see how they have been doing, despite the macro craziness around them.
II. EARNINGS RECAPS
A. DDOG
On August 4, 2021, DDOG reported earnings for its Q2. During the prepared remarks, DDOG’s CEO “recognize[d] the macro environment is uncertain as we look into the back half of 2022. But we also see no change to the long-term trends towards cloud-based services and modern DevOps environments , and Observability remains critical to that journey.” The CEO explained DDOG’s products drive “value, efficiency and cost savings to solve [customers’] complex monitoring problems.” Because of this, the CEO summed up the future of DDOG as follows: “As a result, we continue to feel very confident in our opportunities. We believe cloud migration and digital transformation are drivers of our long-term growth and our multiyear trends that are still early in their life cycle. And we believe it is increasingly critical for companies to embark on these journeys in order to move faster, serve their customers better and in times like these become more efficient with their infrastructure and engineering investments. So we plan to continue to invest in our solid priorities to execute on these long-term opportunities.”
DDOG’s CFO’s prepared remarks were not quit as strong. He admitted “[W]e did see some customers beginning to manage costs in response to macroeconomic concerns, which impacted our usage growth with some of our existing customers.” The decrease was concentrated in large spend customers. Importantly, the declaration appeared to be limited to one small segment of DDOG’s business: “Amongst our industries, we saw relative deceleration in consumer discretionary customers, which represents low teens percent of our ARR.” The CFO made a point to follow up this comment with “we are highly diversified in industries and segments. And we saw lower expansion rate weighted towards areas of our platform that have volume-based components like certain aspects of log management and APM. Infrastructure monitoring ARR growth was relatively steady year-over-year.” The CFO confirmed gross retention remained steady and that DDOG “saw strong continued new logo acquisition and ARR growth, broadly by geography and across industries and company sizes.”
What people did not like at first was the CFO’s guidance (This is why you never stand next to a CFO at a party). There was a small 1% raise in guidance, as opposed to DDOG’s usual cadence. However, the CFO did say this guidance was based on “conservative assumptions as to the organic growth of customers” and took “into account the macroeconomic uncertainty and recent variability of the growth among certain customers.” The CFO concluded by recognizing there is “greater uncertainty in the macro environment,” but that “we see no change in the importance of cloud migration and digital transformation, which are critical to our customers’ competitive advantage.”
During the analyst Q/A, the CFO confirmed that DDOG’s guidance was “lower, more conservative than we have done in previous quarters. And the reason for that is the macro uncertainty where we can’t be as confident about what happens given the macro uncertainty.”
During the analyst Q/A, the CEO talked about how DDOG will have certain advantages during a potential downturn: “[T]here’s no doubt in our minds about the long-term profitability profile of the company. So what this does is that it affords us opportunities to invest in times like this, that the rest of the market will not have.” The CEO talked about using their cash in a downturn to continue to hire aggressively and innovate.
The market reaction to DDOG was interesting. Once the numbers came out, it immediately dropped about ten percent in pre-market. It then walked back to about break-even during the conference call. I think a lot of people were scared of initial guidance because they thought something was wrong with the business, but then they jumped back in as soon as they learned the guidance was just the CFO being unusually “cautious” based on macro uncertainty.
I still think DDOG is about as good as it gets for a growth investment. I think of it as a “pillar” of any growth portfolio. And I think the low guidance sets it up for larger beats in the coming quarters. It is comforting to know that I am not alone. Beth Kindig had a nice twitter post, which highlighted DDOG as one of the top tech stocks purchased by institutions last month:
https://twitter.com/Beth_Kindig/status/1567924954959695872?s…
I’m still hoping this is a spring being loaded and will bounce back ahead of the pack by year end. One important thing to remember is that SNOW and NET had such big bounces after earnings because people were expecting them to get hit hard by Macro (discussed more below). That shoe might have now flipped, putting DDOG into the driver’s seat of who the masses might think will have a slow down based on DDOG’s conservative guide.
B. CRWD
On August 30, 2022, CRWD reported its Q2. During the prepared remarks, CRWD’s CEO was confident in CRWD’s abilities: “[W]e believe we have the ability to continue to grow at scale, generate cash and invest in initiatives that will further widen the gap between CrowdStrike and the competition, especially at a time when companies are forced to reduce their spending and hiring plans. ” Kurtz went on to confirm the cybersecurity market is doing fine: “The demand environment we see is more robust today than this time last year as cybersecurity is not discretionary … We continue to see powerful tailwinds fueling our market, and we do not currently see any indication that these trends will abate anytime soon. ” Kurtz further stated “cybersecurity is an essential technology” and is a “growing priority” among company directors.
CRWD’s CFO described the company as investing “aggressively in our business” and “add[ing] a record number of net new hires during the quarter.” The CFO described the customer base, sales motion, gross retention rate, and SAAS model as factors that “will provide resiliency in any type of environment as we build a durable cash generator for today and years to come.” He also raised guidance: “We continue to remain optimistic about the demand for our offerings, record pipeline and our ability to execute on the powerful secular trends fueling our markets, and as a result, we are raising our guidance for fiscal 2023.”
During the Q/A, an analyst asked what happens to CRWD if Macro gets worse. Kurtz responded that “security is not going away.” He also said they would look at “M&A opportunities,” “contin[ue] to hit the gas,” innovate, and continue to get “stronger and stronger.” He concluded with: “if it gets worse, we think we’re in a great position, enterprise software, SaaS, security, long-term contracts, great cash flow.” The CFO followed up by referring to security as “recession-resilient.” He also said CRWD’s balance sheet puts them in a great position for a downturn and will let them hire some great people during a downturn.
CRWD is not a company that usually has big bounces after earnings, even before all this macro stuff. It usually has a dependable and steady march up between reports. I think that steady march will continue. When CRWD’s steady gains over the years are coupled with its “recession-resilient” product, this company also forms a solid pillar of any growth portfolio. Investment bank UBS named CRWD No. 1 on its disruptor stock list, describing “Strong secular tailwinds from growing cloud computing market will help to bolster its topline growth."
C. SNOW
On August 24, 2022, SNOW released its Q2 2023 earnings. In the CFO’s prepared remarks, the CFO explained: “We are monitoring our key business metrics, which we believe are leading indicators of the macro economy impacting our business. We are not seeing these metrics soften across the customer base. For example, our corporate sales team that addresses small and medium-sized businesses outperformed their net new bookings goal for the quarter. Our EMEA sales team contributed 4 of our top 10 new customer wins in the quarter. And as mentioned earlier, the largest organizations in the world continue to increase their use of Snowflake. These indicate that companies globally are prioritizing Snowflake right now.” The CFO also explained they are continuing to hire like mad, adding almost 1,000 net new employees this year. He closed with: “Our long-term opportunity is stronger than it has ever been and we look forward to executing.”
During the analyst Q/A, management was asked if SNOW is “insulated” for an economic slowdown. The CEO said “I would say that Snowflake gets prioritized fairly high inside the enterprise. And the reason is we are sitting right on the intersection of cloud computing, artificial intelligence, machine learning, advanced analytics.” He went on to explain: “this is why we feel that this is not one of those expenses that people are going to casually cutback on, because it’s strategically compelling and important.” The CFO followed up by stating “by and large, most of our customers are still ramping, moving workloads to us. And we think that is going to continue on average with our customers.” The CFO also referred to SNOW’s guidance as “prudent” based on Macro factors.
Later on, in response to another question about macro, the CEO explained that companies cannot resist going to the cloud: “You can’t take advantage of innovations that are only available on the cloud [if you stay on premise]. So if anything, I can to agree with you that we’re going to see acceleration out of this as opposed to people holding back.” Slootman went on to repeat his theory of acceleration in response to another question: “Just a quick follow-up, I actually think the dynamic that you are describing. I mean we are going to see the exact opposite of that. We think people because of the nervousness that they may have about the macro, they are going to accelerate to a cloud computing platform. ”
Wow! SNOW is anticipating accelerating in the current environment, even if it gets worse. What did I learn? Don’t trust analyst downgrades based on “field checks,” such as those that were handed out before SNOW’s earnings (for those that sign up for Bert’s Ticker Target service, he had a great explanation for why those “field checks” were unreliable which helped me to ignore them … if you haven’t signed up with him yet, you are missing out!). Since earnings, analysts have been quick to show SNOW the love. A Morgan Stanley analyst was amazed at SNOW’s performance in the current environment: "Sustained 80%+ product revenue growth in a quarter when the broader demand environment for software softened likely boosts investor confidence that Snowflake’s cloud data platform is viewed as a strategic (and durable) area of investment by enterprise customers.” Just last night, Goldman Sachs rated SNOW a buy with a $220 price target based on its post-earnings conversations with the CEO:
https://twitter.com/BigBullCap/status/1570002942664781825?s=…
If you need to hear this, here you go: SNOW is not too expensive! I continue to accumulate when I can.
D. NET
On August 4, 2022, NET reported Q2 earnings. Prince was very charismatic in his prepared remarks. He joked about how stern his comments were on the last earnings call: “It didn’t make me particularly popular around the CEO club, where the first rule of recession is not to talk about recession.” (I also thinks this applies to his comments at that Jefferies conference last June). But he followed up that he prides himself on being transparent. He explained that things are getting better: “In Q1, our pipeline generation slowed, sales cycles extended, and customers took longer to pay their bills. We watched those metrics closely throughout Q2 and saw them all at least stabilized. They’re not where we throw up hooray yet, but the metrics are trending in the right direction.” He talked about NET shifting its message to saving customers’ money and consolidating their spend. He called their ability to achieve these things for their customers a “superpower.” He admitted it is harder to get new customers but easier to talk to existing customers about doing more: “I believe it’s fair to say that it’s harder today than it was a year ago to sign up a new customer, but it’s gotten easier to talk to our broad set of existing customers about doing more with us.” Prince said that “[w]hile our business remains strong, I believe this is a time for prudence and caution.” Prince gave a long metaphor about how last year the road was wide open so it was time to open up the throttle, where now the road is not quite as open so time to keep your eyes on the road and let up a bit on the accelerator. Recession or not, Prince confirmed nobody is going to abandon the internet, go back to on premise, or stop getting hacked. “We are not recession-proof, but I wouldn’t trade places with any other CEO right now.”
In the analyst Q/A, there was a particular question and answer exchange that I think is worthy of a full repeat here:
Brent Thill [Jefferies Analyst]
Question: “I appreciate that. You’ve had the crystal ball and everyone appreciates your candor, and I think you were the first one to come out and say, hey, things are feeling a little different than they felt. I was just trying to understand, when you look at the perspective of what’s happening now, you mentioned things have stabilized. I mean, I just want to make sure we understand from your perspective, it hasn’t gotten worse. It’s come in that your – the stabilization trend that you’re seeing, have you seen that extend into July and the rest of the summer. What’s your sense of kind of the trajectory from where things came in, where are you at now?”
Matthew Prince [CEO of NET]
Answer: “Yes, you got me in trouble with a lot of my peers at your conference, where I said that the economy was not as rosy as people think, and I think you’ve heard a lot of those folks echo those comments now in Q2.
Let me be clear. I think that the economy is still in really rough shape. And I don’t know – and again, I’m not a member of the – I’m not an economist. But from what we hear from customers, customers are really still suffering, And the economy, I wouldn’t say that the economy itself has stabilized. What I would say is we have had the flexibility in our business to be able to adapt to a very difficult environment. That environment continues to be difficult, and I think it will be difficult at least through the rest of the year. But being able to deliver products that deliver real value, have an incredible ROI, can save customers’ money and are must haves, not nice to haves, puts us in an incredibly powerful position. And as I said in the prepared remarks, I would not trade places with any other CEO.”
This Q/A is comforting to me, because (although I was wrong) it makes me feel like I was not alone in my jitters about Prince’s Jefferies Conference remarks. I want to give a great big chunk of credit to those Board Members (including Saul), who saw through the Jefferies remarks to see a business nowhere close to slowing down.
Lessons Learned? I am hesitant to give as much credence to statements during these investment/software conferences. I think earnings remarks are carefully rehearsed so they pack a whole lot of meaning, while these conferences are more casual in nature.
Well, “fool me once, shame on you; fool me twice, shame on me.” I’m not reading any of Prince’s earning statements as negative. I think he just likes to keep expectations in check b/c he knows that’s the best way to keep his company marching upward. I’m happy with my NET shares and continue to accumulate when I can.
E. ZS
On September 8, 2022, ZS reported for its Q4 2022. During the prepared remarks, ZS’s CEO confirmed he was not scared of Macro. He explained “my conversations with hundreds of IT executives confirm that cybersecurity remains the number one IT priority and a top Board level issue.” He used my favorite word “accelerate” – “We believe periods of macro uncertainty can accelerate adoption of disruptive technologies like ours, which offer better security and user experience while substantially reducing cost and IT complexity.” He also closed his remarks by again stating they are not afraid of macro: “In closing, even with uncertain macro conditions, we continue to see favorable demand for our Zero Trust Exchange platform, which makes businesses more agile and competitive, simplifies IT, consolidates point products and reduces cost.” Just like every other company, the CFO chimed in that their guidance was “prudent” based on the “uncertain economic outlook.” In response to an analyst question, he did admit to seeing “higher deal scrutiny in Q4,” but confirmed that was already “played into guidance.” To address macro issues, ZS’s CEO described focusing on helping customers save money by getting rid of their legacy debt products and also focusing on adding value to businesses.
Similar to SNOW and NET, a lot of investors thought ZS would see a big slowdown due to macro. I think this quarter put a lot of that to bed. ZS’s high RPO growth (68%), steady increase of government customer adds (25 new federal customers in just that quarter), and prudent guidance all set this company up for a solid rebound from here.
III. CONCLUSION
This is arguably one of the worst macro environments in the last several decades. But our companies are still doing awesome! They are not afraid of macro issues so you shouldn’t be either. I am confident these companies will have an even larger rebound from here, and I plan to be fully invested in them when they do.
Take care of your mental health and hang in there, everybody. Things will turn around. They always do.
Best,
BTL
@Laneylawyer on Twitter
(Feel free to follow me for daily financial musings)
Long DDOG, CRWD, SNOW, NET, and ZS
No financial advice in this post – Everybody must do their own due diligence.