Boy am I glad 2022 is behind us. This year has gotten off to a much better start but it is obvious the volatility will be here for a while. Inflation, interest rates, regional banks collapsing, you name it! And I have a feeling this is still only the beginning.
My portfolio has been tossed around like a sailboat in a hurricane this year. It hit a high in early February up 23% but gave this all up and was in the red by mid-March. It’s funny, the drop in my portfolio coincided with the timing of my companies earning reports. I don’t think the market (or myself) liked everything it heard.
My YTD results:
2022: -68.3%
Jan: 8.6%
Feb: 10.2%
Mar: 3.5%
I have made few changes to my portfolio since December and my allocations remain mostly unchanged. I have added to Bill and Snowflake this year, along with some Crowdstrike. I’ve actually trimmed a small portion of my NET and TTD positions but their allocation has still grown thanks to their strong performance.
My current portfolio:
The Trade Desk: 19.2%
Snowflake: 16.0%
Cloudflare: 14.4%
Datadog: 13.2%
Crowdstrike: 11.8%
Bill: 10.6%
SentinelOne: 7.2%
Options: 5.0%
Cash: 2.6%
*The options all consist of Cloudflare and SentinelOne LEAPs, so you can think of their allocations a couple percent higher. Please, no comments on this since it is OT.
Earnings Thoughts:
The Trade Desk: Out of all the companies I follow, I thought TTD had one of the stronger reports. That may seem odd considering revenue only grew 24% YoY, but given the context, this is an impressive feat. Jeff Green summed it up better than I could (bolding mine)
We grew 24%, and most of our large competitors were posting between negative 9% and negative 2% growth. I don’t think we’ve ever had the level of industry outperformance in our six years or so as a public company as we did in 2022.
And it means that we can be very confident that we’re gaining share and that our platform continues to gain traction with advertisers.
While Q1 guidance does indicate growth will drop to the mid to high teens, I am okay with this so long as revenue continues to grow while it is shrinking for the competition. My hope is for TTD to continue taking share so they will be well positioned to capture the growth when it returns. The combination of the shift to programmatic and CTV means they should see solid tailwinds for years to come in the advertising market.
It now makes more sense to value TTD on their bottom line versus the top line. I think this goes for other larger, more mature holdings as well like CRWD (more on that below).
TTD ended the year with an adjusted EPS of $1.05. They have grown their EPS by 560% over the last five years! That is more than six and a half times! From $0.16 to $1.05 - a steady increase every year.
This means TTD trades at about 55x trailing EPS. I remember not so long ago when companies traded at 55x sales.
Ultimately, I have a lot of confidence in this company and its leadership. They are operating in a massive market with an enormous TAM which gives me confidence they will be able to have durable growth well into the future and churn out significant cash along the way.
This allocation is a bit higher than I would like, even though I have trimmed a portion of it. I would like to see it closer to 15% but have no plans to trim further at these prices.
Snowflake: Snowflake followed up two strong quarters with an absolute stinker this go round. By far, the biggest blunder was the guide lower. After guiding to 47% for FY 2024 last quarter, Snowflake put it in reverse this quarter with a fresh outlook of 40%. Gut punch!
In my opinion, this is a pretty significant misstep for a management team of this caliber. I don’t think you should guide to something a quarter ahead without absolute certainty you will be able to meet that 90 days later. They didn’t even need to guide to FY 2024 revenue growth in Q3 for crying out loud!
I was really surprised to see Snowflake make an error of this magnitude and felt confident this was not a mistake such a seasoned team would make. I wrote this in my December post:
Of course, whether or not they hit this guidance is another question but I trust management would not share this unless they felt extremely confident they will at least hit this mark… Ultimately, I think this boils down to whether or not you trust management to make good on this guidance… A lot will be riding on the full year guidance they officially share next quarter.
Well, suffice to say, my trust was misplaced. Frustrating, to say the least, but enough of the guidance mishap.
I thought the figures this quarter were decent. I am not happy to see revenue only growing 5.7% sequentially (and expect a similar figure next quarter), but believe this is temporary rather than the new standard growth rate.
The CFO probably stated on the call about ten times that the slowdown was predominately due to younger customers ramping up slower and being more cautious with spend along with existing customers hesitant to lock in long term contracts. I am choosing to believe him (again) for now, that this is atypical behavior driven by the macro environment and will eventually revert to the mean.
The main reason I am choosing to trust management and keep this as one of my larger holdings is because the secondary metrics are holding up strongly
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Total customer growth was strong, up 7.4% QoQ and the most added since two years ago
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$1M customer growth was also strong, up 15% QoQ with a record of new adds
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Stable edges continue to expand from 22% to 23%, adding a record number of edges
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The number of marketplace listings grew 8% QoQ
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The number of powered by partners grew 16% QoQ, up 188% YoY
Lastly, Snowflake has already become a FCF machine. They achieved 25% adjusted FCF margin this year and guided to the same for FY 24. This means they should produce about $700M of FCF, giving SNOW a multiple of ~70x fwd FCF. While I will admit this is expensive, it is a heck of a lot more practical than trading at 70x sales like it was.
I still believe Snowflake is on a path to becoming a behemoth. To achieve this, I do not expect Snowflake’s revenue growth to drop below 30-35% for the foreseeable future. Considering their revenue growth has already dropped from 106% → 69% → mid 40’s (my guess for this year), they are on a slippery slope. If revenue growth does not stabilize or even potentially accelerate (one can dream right), then I expect the shares will be re-rated and I would likely exit. Time is ticking.
Cloudflare: Like Snowflake, the main takeaway for investors from Cloudflare’s earnings was the guidance. However, unlike Snowflake, this is because Cloudflare came out with a strong initial FY guidance calling for 37% growth.
Ironically, it is odd to be touting this guidance as ‘strong’ when it is for 37% growth and shaming Snowflake for their 40% guidance while at a larger scale but Cloudflare did not guide down and is not valued quite like SNOW.
As for the actual quarter, I thought it left a lot to be desired. While there were some clear highlights, I found a several things to gripe about such as
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Cloudflare eked out the smallest of beats at just 0.3%, their smallest beat on record. This succeeds their previous smallest beat of 1.1%
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If we assume a similar size beat next quarter, growth will slow to ~7% sequentially, their slowest on record
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Paid customers grew only 4% sequentially, adding 6,086 which is fewer than the 8,088 added last year
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$100K customers grew only 7% sequentially, their slowest on record adding only 134 which is fewer than the 156 added last year
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DBNRR decreased for the third straight quarter, down to 122%
The obvious highlight was with regards to profitability where Cloudflare produced record operating and FCF margin. The best news is that it is here to stay according to Matthew Prince
While there will be some variability in our free cash flow quarterly, we expect to be free cash flow positive in 2023 and the years after that.
My one big issue was that I struggled to see how Cloudflare would beat their FY guidance based on their current revenue trajectory. Initially, I was weary that Cloudflare would even meet this guide, as I wrote here, but I have since shifted my thinking after reading Peter’s fantastic earnings review and the breakdown of the large customer spend trends. He wrote:
This growth in large customer revenue is likely the driver of the optimistic full year revenue guide. If we perform an exercise in which we project the Q4 sequential growth rate for both customer cohorts forward for all 4 quarters in 2023, we get a total of… $1.353B. The midpoint of the full year guide was $1.336B.
It’s the fairly consistent and elevated sequential growth rate of revenue generated from the large customer cohort that provides the support for the full year 2023 guide. This doesn’t require improvement of close rates or the macro environment from the trajectory coming out of Q4.
This was terrific analysis and directly answered my question regarding Cloudflare’s ability to meet and beat their guidance. Great work as always, Peter.
As I mentioned, I sold a small bit of NET following the run up after earnings but am happy with the current allocation. I would likely add back what I sold if it were to drop to below $50.
Datadog: This dog must be getting a little tired! Like to the two businesses above it, the story for Datadog came down to the very weak guidance. Both the Q1 and FY guide were well below what I was looking for.
It does not take a rocket scientist to determine that Datadog is facing significant headwinds. They are manifesting all over the place
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Aside from the covid quarter, Datadog produced its smallest beat on record for the second quarter in a row
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Q1 guidance indicates sequential growth will drop to ~5%, the slowest on record
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Customers grew only 4.5% sequentially, their slowest on record adding only 1,000 which is fewer than the 1,300 added last year
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$100K customers grew only 6.9%, their slowest since the covid Q and added only 180 which is fewer than the 210 added last year
Unfortunately for Datadog, they did not issue the same confident FY guide that Cloudflare did and the shares took a beating accordingly. You may be looking at this and wondering why I still own it. The reasons are simple
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Customers are still expanding their usage of the platform, as indicated by the number of customers using 2, 4, and 6+ pillars
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Incredibly consistent profitability - FCF margin has held between 15% and 36% the past two years and operating margin between 10% and 23%
We can also start to value DDOG based on their bottom line. Like TTD, Datadog has seen their Non-GAAP EPS explode over the last few years from $0.22 → $0.48 → $0.98. So long as their EPS doubles every year, I will be one happy camper! 
The $354M of FCF Datadog has produced over the last 12 months means they are trading at about 65x FCF and 68x trailing EPS. I would consider this very reasonable for a business with this kind of track record and growth trajectory.
I don’t see Datadog as a business that is falling apart by any means. Like Snowflake, I believe these consumption based businesses are facing temporary headwinds as IT budgets are scrutinized and optimization efforts take place. I will be looking for growth to rebound as they expand again.
Crowdstrike: I think I would give Crowdstrike the MVP ball this quarter for the best performance out of my holdings. To be fair, much of this is due to the low expectations after such a poor Q3. They set a very low bar but I am pleased to say they more than cleared it and turned it a strong set of results, all things considered.
Despite warning that net new ARR could be down by up to 10% this quarter when compared to Q3, Crowdstrike ended up with net new ARR increasing by 12% sequentially. This kind of beat was a sight for sore eyes. Yes, this is still down substantially from years past but given the environment we are in, I consider this as a win.
Unlike Cloudflare and Datadog, Crowdstrike produced strong customer growth. They added a record number of customers, 1,873 which is up from 1,638 a year ago. While they are moving down market to smaller customers, it is nice to see a company that is setting a record for a new high rather than low in this category.
Customers with 5, 6, and 7+ modules all expanded at a healthy clip once again. It is great to see customers continuing to expand their usage of Crowdstrike’s platform.
Operating and FCF margin also held steady at 15% and 33%, respectively. Few companies are as consistent as Crowdstrike when it comes to these figures.
Q1 and FY guidance was also in line with what I wanted to see. Assuming a similar size beat next quarter, growth should fall between 8-9% sequentially which is in line with the past few quarters.
This should put Crowdstrike on its way to mid to upper 30% growth for the year. While that may not be the sexiest proposition out there, I will certainly take it given their scale, the macro environment, and their profitability.
Speaking of which, Crowdstrike too has been on a tear increasing their adjusted EPS. Over the last three years, it has grown from $0.26 → $0.68 → $1.54. They have grown their EPS by 492% over the last three years! That is nearly more than six times! Incredible.
This means Crowdstrike currently trades at about 87x trailing EPS. Not too crazy for a company who has 6x’d EPS in three years! They also already guided to $2.30 adjusted EPS for FY 24 at the midpoint which they will almost certainly beat.
Additionally, Crowdstrike produced $677M in FCF this year meaning they are trading at roughly 47x FCF.
Looking forward to FY 24, I expect Crowdstrike to end up with ~$3.1B in revenue with a 30% FCF margin. This would put their FCF close to $1B. Based off the historical averages for CRM, I would argue a company growing 35%+ at a $3B scale with 30%+ FCF margins should trade at about 50x FCF.
Therefore, I would argue CRWD should be valued around $50B by this time next year, assuming they achieve their guidance. This would represent an increase of 56% from today’s price at a $32B valuation.
I personally think Crowdstrike is cheap and have been impressed with their steady performance. I added to my position a bit following earnings and may add more if the opportunity presents itself.
Bill: Much like my other holdings, Bill provided a decent quarter with a weak outlook. Bill was the first to report (since this was just their fiscal Q3) and at the time, their guidance seemed horrible. As more companies began to report, their guidance did not look quite as bad.
Revenue grew 13% sequentially, which I was pretty pleased with. To be fair, much if this was propped up by the additional $29M in float revenue but I don’t think the company should get dinged for this. If anything, I view it as a deflationary force that should help to keep revenue growth more stable than it otherwise would be in this environment. My hope is that when this decreases, the increase in transaction revenue will more than make up for it.
By far, the biggest highlight this quarter was Bill’s rapid rise in profitability. In short order, they produced records across the board - adjusted operating income, EPS and FCF! Management wasted no time when they said Bill would shift towards profitability.
The secondary metrics came in a bit weaker than I would have liked, especially after learning that many of the new customers are Financial Institutions which are producing a lower TPV. This really downplays the strong customer additions recently.
Rather than rehashing all the figures, I would point anyone interested to this terrific thread. The report was well discussed last month.
Since the earnings report, Bill was caught up in the Silicon Valley Bank drama. The share price plummeted from $80 to the upper $60’s in a blink. Bill posted a press release indicating there would be limited impact from the banks fallout but that has done little to appease the depressed share price.
As a result, I view Bill as presently undervalued and have added around $70. They are trading at a sub $9B valuation with nearly $1B in sales. The question is, what kind of growth can we expect going forward but the good news is, there is a ton of upside if Bill can execute.
SentinelOne: After the strong Crowdstrike report, I had high hopes for SentinelOne. I was not nearly as impressed with this report. While they did at least beat their ARR guidance they provided last quarter, they produced their smallest beat as a public company and issued guidance that I thought was on the weak end. I won’t even discuss the guide down from 50% to 47% ARR growth… 
It appears sequential growth of 15-20% is a thing of the past and the new normal is somewhere closer to 9-12%. While this isn’t necessarily bad in a vacuum, this is much slower than I would like to see for a company at a $500M run rate. I don’t think it bodes well for Sentinel’s durability.
Considering the fact that Crowdstrike is not growing much slower and is 5x the size, I find myself unimpressed. While the environment is certainly challenging, I would still like to see Sentinel growing at a faster rate. They seem to be stuck adding about $10-14M per quarter in revenue.
It isn’t all bad news, however. Sentinel is making steady strides towards profitability and produced record adjusted gross and operating margins. This trend will have to continue for the stock price to appreciate much.
Customer growth was mediocre, nothing to get excited about. Again, they seem to be a bit range stuck and having a hard time crossing a hurdle.
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.
Watch List:
- MELI
- ONON
- TMDX
Concluding Thoughts:
I wrote this in my previous earnings write up in December
It is clear cracks are starting to show this quarter and the macro environment is making its impact felt. I walked away feeling more disappointed with this set of results versus any other quarterly earnings that I can recall. The scary part is, I think it will likely get worse before it gets better.
Unfortunately, this very much so turned out to be the case. SaaS business have been re-rated over the last ~18 months and I initially thought it was overdone but now I am beginning to rethink this.
I am struggling with how to make sense of the current environment. It is trying times to be a growth investor. Things were a lot easier when companies were firing on all cylinders but we are now at a point where more and more businesses are missing and reducing guidance. After a 10+ year bull run, this is a bit of unchartered waters so I am wrestling with how to piece it all together and set the right expectations.
While business performance has been weaker, it is still by no means poor. These businesses are still growing 20%+ and expanding margins and profitability. Most businesses would kill for results like this. It just feels poor when compared to the days of 50%+ growth from the last few years. As a result, I am trying to determine what good looks like in this environment and how these businesses should be valued. When just about every SaaS company is facing headwinds and seeing a steady deceleration, it makes it challenging to judge who is performing well and who is not.
I still believe this will serve as a temporary slowdown for the best businesses. The key is identifying these companies and then holding them through the turbulence. I expect the patience to be rewarded but I am thinking this recovery could be much longer than I originally anticipated. The reality is I have no idea when it will come so I plan to stay fully invested for the foreseeable future.
Ultimately, my conviction in this strategy of investing in the best high growth businesses is still rock solid which is most important. I have been reading through Richer, Wiser, Happier by William Green lately and was encouraging by this and thought I would share:
"It’s not enough to find a smart strategy that stacks the odds in your favor over the long haul. You also need the discipline and tenacity to apply that strategy consistently, especially when it’s most uncomfortable.
It helps immeasurably, says Greenblatt, “if you have simple principles that you can just stick to… simple principles that make sense, that are unshakable.”
It’s particularly hard to keep the faith when you’re losing money… You start to wonder if your strategy still works or if something has fundamentally changed. But the truth is, no strategy works all of the time. So these periods of financial and psychic suffering are an unavoidable part of the game. Inevitably, weaker players fall by the wayside, creating more opportunity for those with the sturdiest principles and the strongest temperaments."
– Green
Keep the faith everyone, things will get better!
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
