Happy Friday everyone! I am late with this quarterly update as work has been busy and I have been traveling lots lately but wanted to get it posted before the majority of my holdings report earnings starting next week. Things have been very choppy since my last update in July. My portfolio lost ground in August and September and is currently on track for its worst month since last November. Needless to say, this has not been a fun quarter!
My YTD results:
Jan: 8.6%
Feb: 10.2%
Mar: 13.0%
Apr: 5.0%
May: 30.2%
Jun: 34.8%
Jul: 47.1%
Aug: 35.6%
Sep: 30.3%
YTD: 16.3%
My current portfolio:
The Trade Desk: 18.6%
Crowdstrike: 14.3%
Datadog: 11.9%
Cloudflare: 8.2%
MercadoLibre: 8.2%
Bill: 7.5%
Snowflake: 7.0%
Axon: 7.0%
Enphase: 4.0%
Aehr: 4.0%
ELF: 3.0%
NVDA: 2.4%
TSLA: 1.2%
Cash: 2.7%
I figured I would change up the format again since the Q2 earnings reports were so long ago now and have been well discussed. Instead, I will give a quick overview on how I am currently thinking about my portfolio and holdings.
Core Positions:
These are the companies I feel most confident and comfortable with. Most of these I have owned for well over two years. Essentially, these are the businesses I believe will have the most durability. I expect they will be able to compound growth at 20%+ for many years. Additionally, all of them are already FCF positive and I believe they will all produce significant amount of cash for investors over time. The combination of these two factors (growth + cash flow) means I expect to hold onto these companies for many more years. The allocations towards them will fluctuate depending on a number of factors, but I want to be invested in these businesses for the foreseeable future.
The Trade Desk:
This is my longest holding and my largest position by a wide margin. While Q1 & Q2 earnings for many of my holdings have been sluggish, The Trade Desk keeps churning out one quality report after another.
Growth looks poised to accelerate from the low 20’s to upper 20’s in the upcoming Q3. Accelerating revenue is a rare feat these days! Additionally, early reports from others in the ad space such as Google and Meta have looked pretty strong, at least with regards to their advertising revenue. This should bode well for TTD, one would think.
Ultimately, it is the combination of the leadership (namely Jeff Green), and the massive TAM that make me so confident in this company. Considering how the advertising market should continue to grow steadily each year, and with lots of dollars transitioning to programmatic & streaming, I see a massive runway for TTD for years to come.
I sold a small portion of my position in mid-July when shares were trading around $89 as the position went above 20% of my portfolio but I bought some of that back yesterday with shares down to the 60’s.
Crowdstrike:
My second longest holding has been another staple in the portfolio. It has been an extremely consistent performers, which is something myself and the market can appreciate. Over the years, growth as gone from ~20% QoQ, to 12-15%, and most recently to 7-9% where we find ourselves today. I am betting that Crowdstrike will be able to maintain sequential growth around 6-7% for at least the next few years. This would equate to revenue growth in the upper 20’s.
Additionally, Crowdstrike updated their long-term financial targets last month and is now aiming for 34-38% FCF margins. They have been hovering around 30% for some time now, so this should be achievable rather quickly. If they can compound revenue at ~25% while maintaining a FCF margin of ~35%, I expect this company should outperform the market handedly. Cybersecurity threats aren’t going away any time soon, and Crowdstrike should be well positioned to continue growing durably for many years.
Datadog:
My third longest holding has been testing my patience this year. 2023 has been a challenging year for Datadog as consumption rates have taken a beating. Revenue growth has fallen sharply from 80’s down to the low 20’s in just a handful of quarters. To make matters worse, I am not confident we have seen a bottom yet. I think there’s a good chance things will get worse before they get better.
The reason I still hold such a large position in the company is because I view it as a leader in its field, similar to the two businesses above. With all the advancements and increased developer productivity expected over the coming years thanks to AI, I am expecting revenue growth to accelerate meaningfully from here.
With that being said, I did trim a portion of the position in September and will likely reduce it further as the allocation is a bit higher than where I would like it. I believe this will be a long-term winner but things will be challenging in the short-term.
Cloudflare:
Here’s another company that is struggling this year. I’ve reduced my stake throughout the year, from a 15% position to 8%. This allocation aligns more with my conviction and I expect to keep the rest as is for now.
Out of all the core positions, this is probably the one I am least confident in but I still expect Cloudflare to be able to grow at least 20%+ for many years. The company is an innovation machine and they are seeing solid traction with customer adoption, much like Crowdstrike and Datadog.
Over the last four years, customer attach rates have been steadily increasing:
- 8+ Products: 24% → 48%
- 9+ Products: 13% → 34%
- 10+ Products: 6% → 22%
I believe Cloudflare will be able to have durable growth, but if I start to see continued signs of decelerating growth, my confidence will waver. Q3 guidance indicates growth will accelerate from ~6% QoQ to 8%, so things could be starting to turn in the right direction following the revamp of the sales team.
Snowflake:
Stop me if you’ve heard this before… another struggling company! This has been a challenging year for software businesses, and most businesses in general. Q2 was a better quarter compared to Q1, but that’s not saying much. Like Datadog, this fellow consumption SaaS business has seen its revenue growth fall from the 80’s to the 30’s in a hurry.
I have been pretty displeased with the performance and reduced my position from 17% to 7%. Like the two companies ahead of it, the business results have been lacking so I have reallocated away but I don’t want to exit the positions completely. I still believe they are all long-term winners and will rebound and accelerate from here.
This could be a poor decision. Sticking with companies whose performance is lackluster may not be the best call but I don’t see a whole lot of other compelling opportunities. In fact, the majority of the positions that I have reallocated towards (i.e. AEHR, ENPH, ONON, ELF, NVDA, TSLA) are all in the red. There just aren’t many places to hide in this market. As a result, I am choosing to stick it out with companies that I think have a competitive edge and durable growth. Essentially, these are what I think are the best businesses. My starting five, if you will. I am sticking with them through thick and thin; we will see if it pays off. I am betting it will over the long run.
Tier II Positions:
Essentially, these are businesses I like a lot but am not comfortable enough with them to include them as a core holding. They are just a tier below due to a number of factors. I still fully expect these businesses to be winners, but I just don’t have the same confidence in the durability.
MercadoLibre:
The LatAm beast! I thought Q2 was really impressive. After all, they are growing revenues 30%+ (in USD) while producing well over $3B per quarter. But what I like most is the improving profitability. Net income margin hit a new record of 7.7% last quarter which is driving significant EPS growth. Their diluted EPS was $5.16 last quarter, this is more than half of the entire FY EPS last year!
Given the challenging macro-environment, this kind of performance is quite strong. Between e-commerce and fintech, this company is enjoying tailwinds from two major themes. The international aspect does give me a bit of hesitation as I am not very familiar with these markets and see them as additional risk, but it is nice to have some different exposure within the portfolio.
This company is a proven winner, imo. I think the shares could see some positive momentum now that they have firmly flipped the profitability switch. I took the opportunity to add to my position recently with shares trading below $1200.
Bill:
This is just a complicated business. There are so many moving parts which makes it more challenging to evaluate. That said, I did think their most recent quarter (Q4 for Bill) was solid. A solid beat on revenue, another quarter with record EPS, a new record for FCF margin, and so on.
On the other hand, customer additions were extremely weak and management gave lots of comments on this, especially with regards to the FI customers. It’s just another example of the complexity around Bill. My takeaway is that I think it will make for a challenging fiscal 2024 for Bill. Revenue growth seems poised to drop to the 20’s next year. I am not sure how the market will react to this, although one could argue a lot may already be priced in, so to speak.
As for me, I continued to trim the position. It is down from 13% to 7.5%. This more aligns with my conviction. My hope is we will see transaction revenue pick back up but I see this as unlikely given the state of things. There very well may be more pain ahead but at least Bill is making incredible progress on profitability.
Axon:
Here’s a business that is executing well! While revenue growth has been solid, I have been most pleased with the earnings growth. Adj EPS has increased significantly - through the first two quarters of the year, EPS has grown well over 100%. Meanwhile, ARR is also accelerating. And to put the cherry on top, the FTC dismissed the antitrust complaint against Axon a few weeks ago. All is well in the Axon world!
I am expecting new Taser sales to ramp up in the coming quarters with the recent release of the Taser 10. Axon Body 4 should also provide a boost to sales. Meanwhile, cloud revenue is accelerating, with growth up 62% most recently! The company seems to be firing on all tasers (ignore the poor joke) and I am happy to be along for the ride. I have steadily added to the position over the last few months and the allocation has grown from 3% to 7%. I plan to keep it where it is for now.
Tier III Positions:
These are all smaller allocations as I am just testing the waters. Confidence in these holdings is the lowest and they will be the first to go if I decide to move money around. You can think of them as try-out positions, as they need to earn their way to an increased allocation with strong reports and price appreciation.
Enphase:
Oof. I held this going into earnings knowing the results would be bad but I didn’t think they would be that bad. This is reminiscent of SentinelOne, where I was holding onto a business with deteriorating fundamentals but I gave Enphase a longer leash because of the strong cash flows, low valuation, and longer track record. It was trading at 17x FCF going into the earnings after all! Turns out it was another mistake. Valuation can’t save you when your sales are cut in half. I suppose I have to learn a lesson a few times to actually learn it…
This stock no longer belongs on the board seeing as growth is now very negative, and I will likely sell the position with my 50% loss soon. I think 2024 is going to be a brutal year for Enphase and believe there is more pain ahead. Ouch.
Aehr:
I bought into this one a couple months ago influenced by the board but never really got comfortable with it and kept the allocation small. I didn’t think the most recent earnings were all that bad, but I can’t get myself to buy more at these prices. If anything, I am more likely to exit and watch from the sidelines as this investment has lots of risk (who knows if and when customers will place orders) due to the small size of the business.
I don’t foresee a ton of upside in the short-term either so the risk/reward seems unbalanced. I also expect the auto indsutry to remain under pressure so wouldn’t be surprised if some of the orders slow due to challenges with EV sales. Just my $0.02 but this has been well discussed on the board so I won’t add more here.
ELF:
I bought into this business in mid-September at $130 and the stock proceeded to fall by over 20% the following week - whoops! I don’t have much to add here since I am still learning about the company and haven’t even owned it through a single earnings report yet but I really like what I see.
Growing 70%+ at this scale is strong, especially with a firmly positive bottom line. More so, if the economy does take a dive, I’d expect their products to gain even more share as a price point under $10 will look even more compelling. And most folks don’t forgo their makeup, even if the economy is in the tank. Historically, I have not done very well with hardware businesses so I will keep the allocation smaller as I warm up to it.
Megacaps:
Not much to say here, everyone knows these two businesses. Both are riding massive tailwinds that should be around for many years. I expect long-term durable growth from both of these two businesses which should lead to outsized gains. These are smaller bets since this is a different type of investment for me. I am testing the waters here as I am not sure what else to buy and they seem like two juggernauts.
Nvidia:
Their two most recent earnings reports have been unbelievable. I haven’t ever seen anything like it at that scale. Analyst estimates have been so far off it’s remarkable. Ultimately, this is a bet that the AI trend is going to last longer / be bigger than the market expects. Based off what I have been reading, it sounds like AI is here to stay and NVDA will be the picks and shovels to support the gold rush.
I believe they will have huge growth for the next 1-2 years at least and the market is underestimating this as they did the previous two quarters. I still plan to keep the allocation smaller for now as I have a hard time loading up on a business valued at $1T but I will likely add ahead of their next earnings.
Tesla:
It feels like this company is on the forefront of every major innovation. Tesla is a special kind of company and has a futuristic feel to it. I have a lot of confidence that this company is going to be a heck of a lot bigger down the road than it is today. They are absolutely dominating the EV world and I believe this will continue.
With that said, I do think the next year or so will be challenging. Short-term, Tesla seems like dead money to me. With interest rates where they are, I don’t foresee auto sales holding up which will likely weigh on the stock. Long-term, Tesla seems like a sure fire winner. There is too much going their way. As such, I am at a bit of a crossroads. I am not sure if I should exit and try to re-enter as things with the economy clear up (who knows when that’ll be) or to just stick along for the volatile ride. With Tesla, all it takes is one major announcement and the stock could go flying. Regardless, I will keep the allocation small if I do decide to hold onto it as I don’t think I could ever get comfortable enough to hold an outsized position in Tesla. Too many wild variables…
Watch List:
- MDB - They reported another excellent quarter with significant acceleration. The AI wave is certainly lifting this business. However, the guidance was pretty soft, although they are massive sandbaggers. I don’t see enough to buy right now but am very interested in the Q3 ER and will be watching closely.
- 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. Again, another hardware business and these are harder for me to buy in to.
- IOT - Influenced by others on the board, I have added it to the watch list. I wasn’t interested at the valuation when shares were north of $30 but things are more appealing today at $22. I still can’t get comfortable with it however as I don’t believe this business will have durable growth. For now, it remains on the watch list but hoping it does well for all who hold it here.
Concluding Thoughts:
Well this has been a crappy few months. Looking at the economy, it feels like we are about to run into a wall but that has been the feeling for awhile. I am not sure where we go from here but I am expecting more turbulence.
As I look at my portfolio, I have a lot of positions I expect to trim or exit but don’t really have anywhere I want to put the cash. Enphase, Aehr and Tesla could free up ~10% of my portfolio but I don’t have anywhere I’d like to put that and generally don’t sit on so much cash.
In summary, my confidence in the broader market is low right now, although that could just be due to the fact that my portfolio has dropped pretty significantly the last few months. We will get more answers in the next few weeks as most the portfolio begins to report. Hopefully there will be more good than bad but if the first few (Aehr, Tesla and Enphase) are any indicator, I could be in for a rough time. We will see!
Best of luck and thanks for reading.
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
Q1 2023: MajorFool’s Q1 Portfolio Update