Well, this sure turned out to be a nice first half of the year! I am not sure how much of it was deserved, but I certainly won’t complain. May in particular was a fantastic month, as the world and market became obsessed with all things AI sending stocks up in a hurry. Obviously, the market is looking ahead and I am having a hard time coming to terms with it. Essentially, I don’t feel like my portfolio should be up ~35% YTD, but like I said, you won’t hear me complaining!
My YTD results:
Jan: 8.6%
Feb: 10.2%
Mar: 13.0%
Apr: 5.0%
May: 30.2%
Jun: 34.8%
My current portfolio:
The Trade Desk: 19.4%
Datadog: 14.6%
Bill: 13.3%
Cloudflare: 10.6%
Crowdstrike: 10.4%
Snowflake: 8.0%
Enphase: 5.0%
MercadoLibre: 4.9%
On Holding: 3.3%
Axon: 1.3%
Options: 1.4%
Cash: 7.7%
*The options all consist of Cloudflare and On Holding LEAPs, so you can think of their allocations as a bit higher. Please, no comments on this since it is OT.
Rather than give an overview of the earnings for each company, I thought I would change the format a bit and instead share the changes I have made to my portfolio over the last few months and my thinking for doing so. Of course, most of this will be tied to their latest earnings report but I thought it would be helpful share what is driving my decision making rather than read a fifteenth breakdown of the same companies earnings.
In my last quarterly write up, I wrote back to Bear about how I was likely on my way to trying out new positions and that turned out to be the case. I’ve added four new positions since then which is pretty uncharacteristic for me. My portfolio typically doesn’t change as much as it did this quarter which is why I wanted to shift the format.
New Positions:
Enphase:
This is a company I have been familiar with for years but was influenced to research it thanks to others here who started posting about it. I was very impressed by what I found. Here’s a company who has grown revenues from $775M to nearly $3B in less than a few years, and with ~30% adjusted FCF and operating margins to boot! They are putting the SaaS portion of my portfolio to shame - not a single one has more TTM revenue.
Meanwhile, adjusted EPS has grown from $0.08 to $4.92 since 2018. I am just disappointed I didn’t look into this company earlier. It’s no wonder shares are up 23x over the last five years!
What I really like is the valuation. After selling off following the Q1 ER, the stock currently trades at an adjusted PE of 32 and only 29x FCF! While I admit I am new to this company and industry, that strikes me as incredibly cheap given their track record and margins.
But of course, the market is not interested in past success, but rather what the future holds. I will confess that I don’t have as good a grip on this, but from what I have been able to gather tells me that this is a terrific company, with a leadership position in a growing industry. It is clear a slowdown is coming, but I am willing to bet this will be temporary and they will return to stronger growth.
Lastly, I have also really liked everything I have read on the CEO. He strikes me as an incredibly knowledgeable and capable leader. Also, Enphase has never once missed (been below) the midpoint of their guidance in the 16 quarters which I have data. For some folks, that may not mean much but to me, it is a reassuring sign that management has their finger on the pulse of this business. We have SaaS businesses with predominately reoccurring revenue who can’t say the same, after all.
Since I am so new to this business and uncertain as to what the short-term future holds, I do not plan to add to this position beyond the 5% allocation until I see one more quarter of results. Ultimately, I am happy to welcome business into the portfolio and believe it could be one I own for several years.
MercadoLibre:
I first owned shares of MELI several years ago but sold it when I was consolidating my portfolio. I have kept it on a short watch list since then and was happy to add it back to the portfolio a couple months ago.
While growth is certainly slowing, what attracting me is MELI’s strong shift towards profitability. Diluted EPS grew from $1.69 to $9.54 last year, a whopping 464% increase! And what’s more, is that trend seems to be continuing as Q1 EPS was $3.97, up 205% YoY. Pretty remarkable growth.
Looking at the top line, MELI reported just over $3B in revenue, up 35% YoY in USD but up 58% in constant currency. The strong USD is proving to be quite a headwind to growth. Regardless, 35% growth at this scale is very strong. They generated more revenue this quarter than any other business in my portfolio in the TTM.
Furthermore, I believe MELI will have durable growth, as they are deeply entrenched in two of the fastest growing markets - ecommerce and fintech. I view this as a bit of a diversification play from my predominately SaaS portfolio, as well as a bit of international exposure. The CEO and founder, Marcos Galperin, has a proven track record as he has built this business from the ground into a $60B enterprise. I expect to own this business for many years.
On Holding:
I have written pretty extensively about On here. I would point anyone interested in the company to that thread. Back when I originally posted in October, shares were at $18 and have since climbed to over $31. Unfortunately, I didn’t get in until May but I expect the trend to continue.
Anecdotally, I am still seeing their shoes everywhere, worn by people of all ages. As for the fundamentals, growth accelerated in Q1 from up 68% to 78% YoY with revenues of $420M. Adjusted EPS is also growing, up 200% this quarter to $0.15. That’s more than half of the EPS they reported for all of last year!
I don’t expect this stock is for everyone, and unlike the two business above it, I don’t anticipate holding this for years. But with a market cap of $10B, I think there is a lot of upside if they can continue to execute as they have been. I will likely keep this position at less than a 5% allocation for the time being.
Axon:
This is the newest and the smallest of the bunch. I’ve also had my eye on this business for years and am pleased to add it to the portfolio for the first time. They have grown steadily over the years: 26%, 28%, 27%, and 38% most recently, which has led to revenue growing from $531M to $1.2B.
Profitability has grown in tandem, as adjusted EPS increased from $1.04 to $2.19 over the last four years. And what’s most encouraging, is profitability seems to be picking up steam as cloud makes up a bigger portion of revenue. Adj EPS was $0.88 in Q1, which was up nearly 100% YoY.
Speaking of cloud, this is what really led me to initiate a position. The percentage of overall sales from Axon Cloud was 34% this quarter, which is up from 27% a couple years ago. The cloud business grew 51% in Q1, well above the overall growth of 34%. The cloud business should continue to take share while providing a solid floor to the overall growth rate.
Their two newer products, the Taser 10 and Axon Body 4 also seem poised to do well. This, in conjecture with the growing cloud business + profitability led me to buy in. I plan to keep this position smaller for now as I get more comfortable with the business, but I saw enough to like at a $14B market cap to jump in. We’ll see where it goes.
Added:
Bill:
I was very pleased with the quarter Bill reported. One of the bigger highlights was the subscription revenue, which increased 8.5% sequentially, which is the highest number since five quarters ago. Unfortunately, it is not growing fast enough to keep up with the other portions of the business and as a result, subscription percent of total revenue has dropped from 31% last year to 24%. Although, this is primarily due to float revenue which was virtually non-existent a year ago.
The other big highlight was the bottom line. Bill produced a second straight record adjusted operating margin of 13%, and another record EPS of $0.50. I have to give a lot of credit to management - they made a commitment to profitability at the start of their fiscal year and they have more than exceeded my expectations. It gives me confidence that Bill can become a cash flow machine in a few years time.
I only added a small amount to the position, about 5%, when shares were below $100 in May. I don’t expect to add anymore as I am content with the allocation and don’t want more than 15% allocated to Bill. There are too many moving parts for me to feel comfortable with a larger position. If anything, I more likely to trim this to bring it down closer to a 10% allocation to align better with my conviction.
With that being said, shares were an absolute steal back at $70 in March and I still believe it is undervalued today. What will really confirm this will be next quarter’s report. Since Bill will be reporting their Q4, we will get a look into their FY 2024 guidance, along with an updated NDBRR figure. I expect management will give an extremely cautious guidance, which may send shares down. I would like to see guidance of at least 25% YoY growth, with the opportunity for several raises throughout the year.
Crowdstrike:
I also added about 5% to my CRWD position in May as I thought they reported a strong quarter, all things considered. It was really just a steady-Eddie quarter, which in this market is a sight for sore eyes. Let’s see:
- Another beat of the revenue guidance? Check (16 in a row, for those counting)
- Another increase of the FY guide? Check
- Another quarter of 120%+ DBNRR? Check
- Another quarter of expanding module usage amongst customers? Check
- Another quarter of 15%+ adj operating margin? Check
- Another quarter of 30%+ FCF margin? Check
- Another quarter of growing adj EPS sequentially? Check (only once have they missed this in 21 quarters, and by only one penny no less)
That is undoubtedly my favorite metric of Crowdstrike - they increase their adj EPS like clockwork. And it has virtually always grown faster than revenue - it was $0.57 this quarter, up 84% from $0.31 last year.
I have owned CRWD for nearly four years and have really grown to appreciate this business and the consistency. I mean, how many businesses are you aware of that has grown EPS every quarter for 21 straight? That’s simply incredible and I put it in my SWAN bucket - sleep well at night.
I would also argue CRWD is fairly valued at the moment and I would add on any weakness back to $120 or so. It is currently trading at 46x FCF, which I think is potentially undervalued if anything for a business with this kind of track record, growing at 30%+ YoY at this scale and with 30%+ FCF margins. I am happy with my 10% allocation and wondering why it’s not higher, if anything.
Trimmed:
Snowflake:
I cut this position following the poor earnings report in May and continued to trim into the strength of the share price throughout June. In total, the allocation has been cut in half from 16% to 8%. I would likely continue to trim if shares reached $190+ again before the next earnings report, although I am content with the 8% allocation as this aligns with my conviction.
The Q1 earnings were disappointing. This is two lackluster quarters in a row, in my book. I wrote pretty extensively about how surprised and upset I was at the reduced full year guidance last quarter, so this second consecutive cut to the FY guide was a tough blow. It is now abundantly clear that management does not have the visibility into this business that I thought they did. Yes, we are in a challenging macro environment but to guide down from 47% growth to 34% in two quarters is inexcusable.
However, it wasn’t all bad. $1M customer growth remained strong, as did the number of customers with stable edges and powered by partners. Adjusted EPS was a record at $0.15 and I am happy with the way this metric is trending. And perhaps most importantly, the Q2 guidance indicates that sequential growth is likely to accelerate a 2-3%.
My hope is that Q4 & Q1 were the bottom for Snowflake’s growth rate and it will accelerate back to the land of 8-12% QoQ growth moving forward. Ultimately, to hit their $10B goal this will have to happen. If they revert back to ~6% QoQ growth, I’d expect the stock would take another beating.
The share price action for Snowflake over the last few months has been interesting. The price fell from ~$180 in late May to $150 following the earnings report. I thought the fall was deserved given the poor performance, but it didn’t stay down for long. The stock rose steadily after this drop and even came within shouting distance of the 52-week high!
I believe Snowflake got swept away with the AI hype as nothing I saw justified that kind of rise. I took advantage of it and cut my position in half. I really have no idea what kind of impact AI will have on Snowflake, or any of my holdings for that matter. It is too early for me to tell and I am certainly no technical expert.
I do believe shares are well overvalued at 27x sales and 100x FCF considering their recent financial performance, but I do still believe in this business long term. The consumption based aspect of their business model is proving to be a headwind in the current environment but I am betting it will be a benefit once the tide turns. Time will tell whether this is the right decision or not.
Cloudflare:
Much has already been written about Cloudflare’s Q1 so I won’t repeat it all. These were the most disappointing aspects, in my opinion:
- Missed guidance for the first time
- Reduced the FY guide for the first time
- Continued drop of the DBNRR to the lowest level in ten quarters
- Fewest $100K customers added since nine quarters ago
- Poorly handled conference call by CEO Matthew Prince
This was the worst Cloudflare quarter I’ve seen by a wide margin. It’s no wonder that many folks here exited the position. I don’t blame them.
Cloudflare’s share price followed a similar path as Snowflake’s. Shares were pummeled from $60 to $40 following the report, only to rocket all the way to $70! It makes no sense when looking at the financial performance. Again, it appears Cloudflare was caught up in the AI hype and investors are expecting them to benefit.
I don’t know whether this is appropriate or not, but I was happy to get the opportunity to offload some of my stake at higher prices. It is down from about a 16% position to 12% today (including LEAPs), but I plan to reduce this one closer to 8% alongside Snowflake. The allocation is too high for my conviction after the Q1 report.
I also am struggling to see how they will achieve their $5B goal in five years. I found it telling that it was not mentioned proudly on the call as it has been in the past. When asked about it during the Q&A, the CFO stated “it (the environment) doesn’t change our thinking around where this journey is going to take us.” Hmm…
On the bright side, at least they are making good on their profitability promise…!
Datadog:
The Datadog quarter wasn’t great but the good news is much of it was already priced in, I believe. Similar to Cloudflare, I found a lot to dislike in the report:
- Slowest sequential growth ever
- Fewest organic customers added since 11 quarters ago
- Fewest $100K customers added since 11 quarters ago
- Smallest percent revenue beat ever (14 quarters total)
- Only a $10M raise to the FY guide, which is less than the $14M revenue beat
However, the biggest difference between Cloudflare and Datadog are the business models - Cloudflare is subscription based and has boasted in the past about how this leads to happier customers and more reliable growth, whereas Datadog is consumption based. Given the state of the current environment and impacts we are seeing to the hyperscalers, I am willing to give more leeway to Datadog (and Snowflake, for that matter). And importantly, Datadog actually beat and raised (albeit barely), versus Cloudflare who missed and cut guidance.
Additionally, Datadog is already a proven cash flow machine. Everything was business as usual this quarter with an adjusted operating margin of 18% and 24% FCF margin. And like Snowflake, Datadog’s Q2 guidance indicates that growth should return closer to 7% QoQ assuming a typical beat. These factors give me a lot more confidence Datatdog.
Like the two names above it, Datadog’s share price rose steadily throughout May. I took advtange of this to sell a small portfion of my DDOG holding. Given the headwinds they are facing, I don’t want more than 15% allocated at this time but am happy with it as one of my larger holdings since I have a lot of long-term conviction in Datadog.
Sold:
SentinelOne:
Man this earnings report sucked. The only silver lining is I had a Han Solo moment and had a bad feeling going into earnings. Since SentinelOne was one of my last companies to report, I anticipated things would go poorly considering how bad the Cloudflare, Snowflake, Datadog, hyperscalers, etc. reports were. I figured if those stronger businesses were struggling, then things did not bode well for SentinelOne. I cut over 1/3 of my position ahead of earnings but wished I had completely exited.
Rather than recap the poor earnings, I want to share the mistake I made with this company. Maybe it will prevent someone else from making a similar mistake.
For the last couple quarters, I held onto shares recognizing that performance was trending the wrong direction and I lacked a lot of confidence they would turn it around. The reason I held, was because I thought the valuation was compelling and the risk/reward was favorable. Here is what I wrote back in March; I think a lot can be learned from this:
All this to say, I walked away feeling underwhelmed. This is my lowest confidence position and it is allocated accordingly. To be honest, the biggest reason I own it is because I view the risk/reward as favorable.
Sentinel has $1.2B in cash & equivalents and no debt. This means it is currently valued at less than $3B. It feels like the market has left this company for dead. It is trading at a fwd EV/S of less than 5.
If the company can execute and grow 40%+ for the next few years while continuing to climb towards profitability like they say they will, then I expect shareholders to be hansomely rewarded. The question mark is all around the growth durability. My confidence is not super high based off their current results.
I must admit, I don’t love the idea of owning something because I think it is cheap but that seems to be my strongest reason for holding this. While I don’t think its performance has been terrible or even thesis busting, I do believe there are other businesses performing at a higher rate. The problem is, they aren’t valued at $3B. I will likely give this one a bit longer to see how the story plays out but very well may reduce the position. It is on a short leash.
My takeaway is, don’t own something simply because it is cheap, especially without much confidence. Things are cheap for a reason. I think I have a much better chance at beating the market by owning the best companies. SentinelOne clearly does not fit that mold at the moment.
It’s frustrating because it’s all written out right there in black and white. I wish I could go back and kick myself for writing those words and then holding onto that business but no sense in beating myself up. It’s all a part of the game and learning process. An expensive lesson to learn no doubt, but one I think I will be better for.
Unchanged:
The Trade Desk:
Interestingly enough, the only position I haven’t touched since March is my largest. It has earned the top spot this year as shares are up a cool 71% YTD, well above any of my other holdings. I am not sure how much of this is deserved, but I don’t plan to trim this unless it grows to more than 20% of my portfolio.
This company is my ultimate SWAN. I have a ton of faith in management and believe they will have durable growth well into the future. By this I don’t mean growth of 40%, but I expect TTD to be able to grow 20-25%+ for the foreseeable future as they are well positioned in a massive market. Few companies produce cash the way TTD does, which means I expect this business to compound for years. I have owned shares for four years and believe the best is still yet to come.
Q1 was a really solid report, especially when considering the macro environment. They produced a way bigger revenue beat than I anticipated, along with strong guidance for Q2. It is really encouraging to see that TTD is using this tough market to gain share as they offer a much more measurable ROI which advertisers are flocking to. They want to be sure they are getting the most out of every dollar in this economy.
Once advertising budgets start to return, and political spend starts to pick up, I believe revenue growth may accelerate to 30%+ again. It appears the market may be making this assumption as well given the share price appreciation. Regardless, I feel confident in the future for this company.
Cash:
While technically my cash position has grown, I wanted to mention it here as an 8% cash position is pretty unusual for me. I typically am close to fully invested, with usually no more than 2-3% in cash.
The biggest reason for this is I don’t see a ton of super attractive places for my cash currently. With my portfolio up 33% currently, and the Nasdaq up 38% YTD, it feels as if things have gotten a bit ahead of themselves.
The most enticing opportunities amongst my holdings are one of the four new positions I’ve added, but I move a bit slower than others who post here. It generally takes me at least a few quarters to really get comfortable with a position in order to make it a 10%+ allocation. I prefer my companies to earn their spot, if you will. There could be new additions to my portfolio, however, which brings me to…
Watch List:
- MDB - I thought they reported an excellent quarter and they seem likely to benefit from the AI wave. However, the current valuation is keeping me out following the 107% YTD gain as it feels pricey considering its growth rate. I do like the trend towards profitability and would be happy to bring this one back into the portfolio if I get the opportunity around $300-325.
- TSLA - I am becoming more and more impressed with Tesla and am beginning to believe in the long-term vision. With many other auto majors adopting Tesla’s NACS, I believe they are further entrenching themselves as the dominant leader in a massive growing market. I would like to buy this closer to $200, however, as the valuation seems stretched following the 150% YTD gain.
- TMDX - I can’t quite get comfortable enough with this one to purchase it, especially with the decision to work towards taking over the air freight portion of the business. Very interesting and cool company however, and one I will be watching.
- CELH - I owned this several years ago and sold around $60. Oops! I have written about Celsius on the board a few times, but never had enough conviction to build up and hold the position. The Pepsi agreement is a big deal however, and makes me much more interested in owning shares again.
- AEHR - Influenced by others on the board, I have looked into this and think it could be a big winner if all goes well. I view this as a riskier investment given the customer concentration and smaller size. I am not familiar enough with the industry to build up conviction yet to purchase it, but will be very interested in their upcoming earnings. They do seem like an excellent picks and shovels play on the growth of the EV market.
Concluding Thoughts:
It feels great to be up 33%, but I am struggling coming to terms with it. However, after getting crushed -68% last year, it does put things into perspective. I just view the Q1 earnings reports as pretty weak in aggregate, which is why I am a bit surprised by the appreciation of the portfolio YTD.
The market is forward looking though, and it seems to be signaling that perhaps the bottom for SaaS is in or near, and a return to higher growth could be in store in the coming quarters. Much of this seems to be a direct result of the AI boom. As I said, I am unsure how this will impact our companies but it will surely be net positive for most.
Inflation is cooling, the Fed is almost done raising rates (or so they say), and things still feel fairly steady in the economy. Maybe a soft landing is in the cards after all. But who knows? Certainly not me! I simply plan to keep investing in the best businesses I can find and holding for the ride.
Cheers
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