And just like that the first half of the year is in the books. So far, so good! Let’s hope the second half brings more of the same.
With most of my companies more mature and firmly profitable now, I will be looking more at valuations and include this in my write ups below.
My YTD results:
Jan: 0.8%
Feb: 18.2%
Mar: 16.0%
Apr: 9.7%
May: 15.4%
Jun: 24.2%
YTD: 26.4%
My current portfolio:
The Trade Desk: 15.7%
Crowdstrike: 14.8%
ELF: 9.9%
MercadoLibre: 9.6%
Nvidia: 8.0%
Axon: 7.3%
Datadog: 6.3%
Celsius: 5.6%
Cloudflare: 5.1%
TransMedics: 3.5%
Telsa: 3.1%
Snowflake: 2.9%
Atlassian: 2.8%
Shopify: 1.8%
Super Micro: 1.7%
Cash: 1.8%
Earnings Thoughts:
The Trade Desk:
Another boring, business as usual quarter for The Trade Desk. This company simply continues to plod along executing consistently. Revenue growth accelerated to 28% this quarter, which is the fastest growth rate since Q3 2022. Assuming a similar beat again next quarter should result in 28% growth once again.
Looking further ahead, the company should have a very strong second half of the year. The summer Olympics are fixing to get started and after this concludes, we will get inundated with political ads from every facet of media. The Trade Desk sits there well positioned to benefit from all of the above.
This is likely a big reason why the stock finds itself up over 40% on the year. The market seems to be pricing in the strong second half so to speak as shares trade near the ATH at a high valuation. Consequently, I have been trimming my position the last few months.
I personally think the valuation is too high considering the growth rate and don’t want to have such a large position. If I had to take a guess, I would estimate the company to end up with just over $3B in revenue next year, which would likely produce FCF of close to $1B. So shares are trading at around 50x next year’s FCF. While not insane for a business of this quality, it quite rich for one growing in the 20’s. I want to keep this allocation closer to 15% than 20%. As it continues to rise in price, I will continue to trim.
There really isn’t a whole lot to add about the quarter. The company continues to execute and grab market share as the overall CTV pie grows. If I had one bone to pick, it would be the adjusted EPS. The last two quarters has seen revenue grow by over 20%, yet the adjusted EPS has only increased by 8% and 13%. I would prefer to see EPS growth outpace the revenue growth.
I will add my comment I have made for the last few TTD write ups: This company is my largest holding because I expect it to compound revenue and earnings at a 20% clip for a very long time. If it can do that, it will reward shareholders handsomely. As far as I’m concerned, that thesis is still very much intact.
Crowdstrike:
This company really is something special. Revenue grew 9% sequentially which is the fastest since fiscal 2023. Given the challenges other SaaS business had this quarter and the scale of the business, this is a really impressive feat. Growth now appears to be leveling out at 33%. Very impressive indeed.
It feels like Crowdstrike is now firmly entrenched as the leader in the cybersecurity world. They have executed exceptionally well for many years now and they find themselves in an perfect position as the leader in a massively growing market. I don’t have much to add on the quarter as it was near flawless. All the supporting metrics such as net new ARR, customer module adoption, EPS growth, and meaningful FCF are all on track.
The only thing I can find to dislike is the valuation. I sold a fourth of my position at prices ranging between $236 - 321 per share as the stock price continued to rocket higher. Whoops! Looking forward, I estimate Crowdstrike will end up with roughly $5.2B in revenue and $1.8B in FCF next year. So, like TTD, shares are trading at around 50x next year’s FCF. I would argue Crowdstrike is more deserving of a premium than TTD given they are growing faster at a larger scale so this valuation is more acceptable, in my opinion.
With that said, I certainly don’t plan on adding at these prices and will rather be trimming this should we see shares rocket pass $400 and beyond. Shares have pretty much been going straight up since the start of 2023 so I figure this one is probably due for a breather sometime soon.
ELF:
Another strong report from the Elf! This was Elf’s Q4 report rather than Q1 due to their weird fiscal year calendar. Because of this, they had to provide their first full year guide for the upcoming year. Sure enough, Elf did what they do best - sandbagged! They are like that golfer that shows up as a 20 handicap and comes in under par to win the tournament.
As others on the board already pointed out, this guidance is laughable and the analyst rightly called them out for it several times on the call. Again as a reminder, Elf guided to $713M in revenue last year and $1.75 adjusted EPS and came in at $1,024M and $3.18. Just slightly above! 
Personally I was happy about this as it gave me the opportunity to add to my position around $160 in May. I guess the market finally woke up and realized this initial guidance was likely to be beat significantly once again as shares are back up near ATH as of this writing.
My hope is the adjusted EPS can finish this year around $5 which would give them a forward PE of ~40. While certainly not cheap, I don’t think that is unreasonable given their growth. And by all measures and reports, the international launches seem to be going swimmingly so I am hoping there is a lot of growth left in the hopper. At a 10% allocation I plan on leaving this as is for now and will revaluate based on how the next report goes.
MercadoLibre:
Last quarter I wrote the following - I feel like a broken record every time I write about MercadoLibre. I am blown away after each earnings report. The same applies to this quarter. They continue to execute at such a high level.
• Revenue was $4.3B, up 36%
• Net Income was $344M, up 71%
• Net Income margin was 7.9%, up from 6.6% a year ago
• Diluted EPS was $6.78, up from $3.97 a year ago
• TPV was $41B, up 35%
• GMV was $11.4B, up 20%
Things in Argentina are challenging as seen by the -22% growth rate. However, what is remarkable is how limited of an impact this is having on the overall business. And to be fair, revenues are growing 239% YoY in Argentina in local currency. It is the inflation that is killing the results when converting to USD. With both Brazil and Mexico growing over 50% (in USD), they can still produce strong results despite Argentina accounting for 14% of total revenue.
Analyst estimates call for EPS to finish the year around $34 which feels reasonable to me. At current prices, shares are trading at a forward PE of 50. Given the growth at this scale, the quality and track record of the business, and the likelihood that they surpass expectations, this feels like a fair valuation.
I added to my position at $1400 in April and since the earnings report in early May, shares have traded higher. At nearly a 10% allocation, this is probably as high as I want to take this given the added geo-political risk. If shares continue to trade higher, I will likely trim it down closer to 7-8%.
Nvidia:
Wow, what a run this company is on. I haven’t made any changes to this position all year yet the position has doubled from 4% to now 8%. I have no concerns with the size of the allocation. In fact if anything, I would prefer it closer to 10%. I have a hard time adding to it at these prices at over a $3 trillion valuation but I do believe we still might be more towards the beginning of this growth story than many people think.
This is probably the most well covered business on the boards so I have nothing novel to add here. I am just sitting back and watching this one with amazement.
Axon:
Last quarter I wrote the following - I am hoping for reacceleration for many of my SaaS holdings as the AI trends gain steam, but Axon might be the most likely to accelerate revenue growth. Well what do you know, sure enough, Axon delivered!
Revenue grew 34% this quarter, which is the fastest since 2022 for Axon. This was of course led by growth of cloud revenue, which was up 8% sequentially and 52% YoY. However, I was also pleased to see taser revenue grow 11% sequentially and 33% YoY. The release of the Taser 10 was one of the key growth vectors I was hoping to see unfold and this appears to be exceeding expectations based on the commentary from leadership on the call.
Supporting metrics point to a strong and healthy business as well - ARR up 59%, future contracted revenue up 47% and NRR staying steady at 122% which is more than most SaaS businesses can say these days. And the new Draft One tool looks like an incredible addition to the platform and a strong use of AI. It is all systems go for Axon.
Looking at the bottom line and valuation, Axon continues to deliver here as well. Adjusted EBITDA margin was 23.6%, which is the highest since 2020. Non-GAAP EPS was $1.15, up from $0.88 a year ago. Once again, all good on this front.
Interestingly, analyst aren’t expecting much EPS growth for Axon this year. Current expectations sit at $4.49 per share which feels way too low given the way the business is growing. I am hoping for something closer to $5+, which would put the forward PE at ~60. Like all the other businesses above it, this is far from cheap but not terribly expensive for a business of this quality and growth rate.
I have been adding small amounts to my position around $280. I don’t see why shares traded lower after this strong earnings report and wanted to increase my allocation. I plan to leave it as is for now until we see the Q2 report.
Datadog:
Well, revenue growth accelerated for the first time in ten quarters, now to 27% YoY, up from 26%. Aside from this, the quarter was more of the same – the company continues to churn out ample cash with 30% FCF margins and 27% operating margins. They continue to see customers adopt more modules across their platform. They continue to add ~700 customers each quarter while maintaining a NER of ~115%.
One small highlight worth mentioning is the 150 new $100K customers since this is the most additions since five quarters ago, albeit still well below what they used to add 2021-22. Considering these customers constitute 87% of the ARR, this is what drives the revenue growth for the business. Aside from this, there is not a whole lot to call out, just more business as usual for Datadog.
As I wrote last quarter, my allocation was a bit larger than I wanted. I reduced my position over the last few months down from 11% to 6%. I may reduce this further since I am starting to believe their best days might be behind them.
I predict Datadog will produce somewhere around $1B in FCF next year, so they are trading at about 45x next year’s FCF. You might look at this and wonder why I am ok with TTD at a similar valuation and growth rate. The reason is durability. Datadog’s revenue growth rate has fallen off dramatically the last ten quarters while The Trade Desk continues to grow steadily. I have much more faith that The Trade Desk can grow 20%+ long term versus Datadog.
Cloudflare:
I already shared most of my thoughts on Cloudflare’s quarter here. Rather than rehashing everything about the quarter, I would instead recommend readers to explore this thread. It was a great conversation and ultimately forced me to think long and hard about my thoughts on this company.
My main issue was the fact that Cloudflare blamed a weaker macro economy for not raising the FY guidance. However, since writing that post, the rest of the SaaS industry has reported earnings and as a whole, the results were quite weak. I would recommend reading Jamin Ball’s posts for an overview of software earnings. Many other SaaS businesses pointed to a weaker macro impacting sales which does help validate what Cloudflare was calling out.
That said, I still feel wary about the outlook for Cloudflare and am losing hope in Cloudflare’s ability to grow meaningfully at scale. The valuation for Cloudflare has never made sense as so much was driven by the narrative, but it feels like cracks are starting to show. In a bullish scenario, I could see Cloudflare producing ~$2.2B in revenue next year, with a 25% FCF margin. This would equate to around $550M in FCF. At 50x FCF, that would be a $27B market cap, which is less than the current market cap today.
Essentially, the valuation is still very rich and leaves little upside for shares unless the company far exceeds my bullish expectations. The market is still pricing this like a premium company, but should it? I have reduced this position several times this year and the allocation is down from 9% to 5%. I will give them at least one more quarter to see how things play out but they are on a short leash.
Celsius:
This has been a rollercoaster last two months with Celsius. The company reported earnings on May 7th and shares proceeded to climb higher from the mid 70’s up to $95 per share in the following weeks. I was confused at the price action as I didn’t think the earnings report wanted such a rise in the price and sold a small portion of my position around $95. In hindsight, I should have sold a lot more!
Since then, shares have continued to trade lower following the Nielsen data and comments from the executive team stating that Pepsi’s inventory reduction efforts would impact Q2 by another $20-25M. Considering that Celsius does not provide guidance, it has left the market scrambling to try and predict what comes next for the company.
I must admit, I am feeling a bit uneasy. Revenue growth dropped down to 37% in Q1 and analyst predict it will fall to 23% in Q2. That would make for quite the fall from grace from triple digit revenue growth just a few quarters ago. It has undoubtedly caught the market by surprise and has left everyone considering what kind of premium and multiple is deserved.
Aside from the revenue drop, the rest of the quarter was strong. Gross margins came in at a record at 51%. Net income grew to $65M with margins of 18% up from 13% a year ago. Diluted EPS doubled to $0.27. And the company remains #1 on Amazon. However, no matter how great the secondary metrics or profitability is, all is a remote second to the revenue growth.
The question is what kind of revenue growth can be expected for Celsius going forward? Triple digit growth is long gone at this scale but investors like myself want to see growth continue at a healthy rate. Even after the big drop in the stock price, the company still trades at a premium. It will be critical that leadership can convince shareholders that meaningful growth still lies ahead.
I have not my any changes to my position since selling shares at $95 in mid-May but the allocation has dropped from 9% to 5.5% as a result of the price action. I want to see how the next quarter plays out before making any further changes.
TransMedics:
TransMedics reported a fantastic Q1 and the stock has been on a tear ever since. I only started a position in late February and am already up 74% on this. Thanks again to all who have covered this stock so well on the board.
Revenue growth continues to plow ahead well into the triple digits even at nearly a $100M quarterly run rate. I certainly did not expect revenue growth to hold up this well at this scale. The decisions to purchase planes is already looking like a brilliant decision.
The bottom line is exploding as well. EPS was $0.35 this quarter, up from $(0.08) a year ago and $0.12 last quarter. If this trend can continue, the stock should continue it’s incredible run.
When I posted my last quarterly write up in April, the valuation was just below $3B. Today it sits at close to $5B. I struggle to determine what a reasonable valuation is for this business since it is so different from what I am typically invested in. Coupled with the fact it is growing 100%+, it is challenging to evaluate. One could probably argue it is cheap while another could argue it is outrageously expensive.
Analyst expect $0.80 EPS this year which feels way too low. I would like to see this above $1 but given the stage this company is in, EPS is not the priority. It needs to capture as much of the market as it can and keep the revenue growth pedal to the floor. If it can do that, the EPS will fall into place.
I am wishing I had a larger allocation but given the run up in the share price since May, I plan to let the dust settle and see how Q2 unfolds.
Tesla:
I really don’t have much to say here that hasn’t already been said. The long story short is that this is a long-term play and the short-term results are not as critical to me as they are for most my other holdings. I am choosing to hold onto my shares for now as I expect big things for Telsa in the years to come but don’t plan to add to this small position since I think it will be at least a few quarters before we get there.
Snowflake:
The question last quarter was whether or not the guidance was sandbagged for the new CEO. So far, it appears the answer to that question is yes. Snowflake beat their Q1 guide by 6%, which is the largest beat in seven quarters. On the flip side, the FY guidance was only raised a smidge.
Revenue growth came in at 33%, which is actually a small acceleration from 32% last quarter. Unfortunately, this seems like a one off as the guidance for Q2 indicates revenue growth closer to 30% after accounting for a typical beat.
The secondary metrics were all same old, same old. Huge Q1 FCF margin as usual, RPO decreased sequentially as usual for Q1, 385 new customers added, on par with prior quarters, 24 new $1M customers, also on par with prior quarters, 18 new G2K customers added, and another drop of the NRR to 128%. Pretty meh. The one highlight I saw was the explosion of stable edges. Perhaps this will translate to stronger revenue growth eventually.
The market clearly was not impressed by the quarter, as shares have traded lower from $160’s down to near all time lows. To put it plainly, this has been a terrible stock to own since the IPO and I am questioning why I still own it. I trimmed the position in May and June and the allocation is down from 8% at the start of the year to 3% today.
Based off what I am hearing, it appears Databricks is growing at a much faster rate, although I believe they are at a smaller scale. Regardless, the optimism that always has surrounded Snowflake appears to be gone. I plan to see what Q2 has in store but expect I will be parting ways with this position before long.
Atlassian:
I started a position in Atlassian in June kind of out of nowhere. It wasn’t on my watch list but I have always been vaguely familiar with the business and it crossed my radar since the shares have been so beat up this year. I looked into it and liked what I saw. Essentially, I bought into this stock because I think it is undervalued.
I still have more research to do and would welcome thoughts from anyone who is familiar with the business but this is my short overview -
The company is transitioning customers towards their cloud products. This has been an ongoing effort for the past few years and from what I can tell, it is going well. This most recent quarter (Q3 for Atlassian) saw a big jump in data center revenue. Much of this was a pull forward as they discontinued server products this quarter which had been planned for some time. In addition, one of the co-CEO’s and founders announced he was stepping down. I am not sure what impact this had on the stock price but I am sure it had some part to play in the sell off.
Taking a step back, I found a lot to like. Revenue is still growing over 20% which I find to be quite strong given the fact they are producing over $1B in revenue per quarter. Since they are a mature company, the profit spigot is fully on - adjusted operating margins are well north of 20% and FCF margin is around 30%. Adjusted EPS looks like it will be up about 70% this year as well.
In total, we have a business producing over $4B in revenue while growing just over 20% with FCF margins of close to 30%. FCF should finish their fiscal year (next quarter) around $1.3B. Shares currently trade at a $47B market cap at a multiple of ~35x FCF. This is the lowest FCF multiple the company has ever traded at.
I believe a business at this scale, growth, and profitability deserves a higher premium than that. I think 50x TTM FCF would be a fair multiple for this business. Of course, a lot of that will depend on its future growth rate but its track record is solid.
To me, the risk reward is skewed towards the reward side and there are not a lot of places in the market where I feel that way today. This is undoubtedly the position I am most excited about building up in the short-term. That said, I don’t think this is something I will own long-term. It is more of a short-term play to try and capitalize on the multiple expansion.
I am curious to get the thoughts of others here but I think this could make for a good investment for the second half of the year.
Shopify:
Shopify reported what I thought was a good first quarter, but the market seemed to have different thoughts. Revenue grew 23%, or 29% when adjusting for the sale of the logistics business. Subscription Solutions revenue, while only 27% of total revenue, was up 34% YoY, the fastest growth rate for sub revenue since Q3 2021. While I am hoping this trend will continue, much of this was driven by the price increase from 2023 which is fixing to be lapped so I suspect sub growth will fall significantly next quarter.
I believe the market was disappointed by the Q2 guide. Shopify expects growth at a high-teens percentage rate, which would be in the low-to-mid-twenties when adjusting for the sale of the logistics business. I am sure Shopify will beat this guide. Given the scale of the business (revenue should surpass $2B next quarter), I am satisfied with a ~20% growth rate.
Meanwhile, Shopify continues to outperform on the bottom line. Non-GAAP operating margin was 11%, up from -2% a year ago. FCF margin was 12%, up from 6% a year ago. Adjusted EPS was $0.20, up from $0.01 a year ago. This is exactly what I want to see as they continue to scale.
At the time of my last post in April, shares traded at a TTM PE of ~95 and 98x FCF. Since then, the shares have traded lower and the profits have increased which has dropped the TTM PE to ~70 and 80x FCF. Still rich but becoming more reasonable each quarter.
I said I would add if shares traded down into the $50’s and I did just that during May. I nearly doubled my position, although that only increased it to a 2% allocation. I am still hoping to get the chance to add closer to $50 than $60 but will probably leave it be at current prices and wait to see how Q2 unfolds. I see this as a long-term durable grower and believe I have plenty of time to build the position up should I choose to do so.
Super Micro Computer:
I don’t have much to say here since this is a new position for me. The basic premise is that I expect AI driven revenue to continue for the foreseeable future. Aside from Nvidia, I did not have another pure play way to benefit from the AI boom. I may be too late to this party, time will tell, but my guess is there is still a lot of room left to run.
Watch List:
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ZS - I actually bought Zscaler at $170 in June and sold it this month at just under $200. My basic idea with Zscaler is that it is a good company and $170 is a fair price. I don’t think it comes close to matching the quality of a company like Crowdstrike and I don’t care to own it at $200+.
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IOT - I was not very impressed with the most recent quarter. It may have been a good buy below $30 but I am not remotely interested at these prices. With how many positions I already have in my portfolio, it is very unlikely Samsara gets added any time soon.
Concluding Thoughts:
Well, another quarter is in the books. This turned out to be another strong quarter overall. My concern is I don’t know where the returns will come from in my portfolio the second half of the year. I feel like most my positions are already trading at the high end of their valuation range so I don’t expect much multiple expansion from here, save for Atlassian.
Ultimately, I don’t want to get caught up trying to trade in and out of stocks based exclusively on valuation as that is a game I anticipate I would lose. Rather, I would prefer to just own the best stocks I can find. My plan is to trim when I think things get over extended which is mainly a byproduct of seeing my portfolio soar and then crash in 2021-22.
I am excited for the Q2 earnings reports to begin flowing in the coming weeks as I expect another set of strong results for the most part. Here’s to hoping for a strong second half of the year!
Rex
Q3 2021: https://discussion.fool.com/majorfool39s-earnings-thoughts-34977…
Q4 2021: https://discussion.fool.com/majorfool39s-q4-earnings-thoughts-35…
Q1 2022: https://discussion.fool.com/majorfool39s-q1-earnings-thoughts-po…
Q2 2022: MajorFool’s Q2 Earnings Thoughts & Portfolio
Q3 2022: MajorFool’s Q3 Earnings Thoughts & Portfolio
Q4 2022: MajorFool’s Q4 Earnings Thoughts & Portfolio
Q1 2023: MajorFool’s Q1 Portfolio Update
Q2 2023: MajorFool’s Q2 Portfolio Update
Q3 2023: MajorFool’s Q3 Portfolio Update
Q3 2023: MajorFool’s Q4 Portfolio Update