I glad to have finally finished my Q4 write up right before the Q1 reports start! I have to say, these things are no joke to write and I tip my cap to those of you who do it monthly. It also doesn’t help to have 13 positions as I do now. It was much easier to write when my portfolio only consisted of seven positions but these still help me to get all my thoughts together and hopefully provide value to some of you.
February was a fantastic month but things have trended downward since. I am not too worried because I thought the business performance for my holdings this quarter were strong. I haven’t made too many big changes to the portfolio since my December write up besides exiting Aehr and starting positions in Shopify and TransMedics in February. More on those below.
My YTD results:
Jan: 0.8%
Feb: 18.2%
Mar: 16.0%
YTD: 7.3%
My current portfolio:
The Trade Desk: 17.3%
Crowdstrike: 13.7%
Datadog: 11.1%
Celsius: 8.8%
Cloudflare: 8.2%
MercadoLibre: 8.0%
Axon: 7.5%
ELF: 7.2%
Nvidia: 6.0%
Snowflake: 5.4%
TransMedics: 2.5%
Telsa: 2.2%
Shopify: 1.2%
Cash: 0.6%
Earnings Thoughts:
The Trade Desk:
I thought this was another business-as-usual quarter for The Trade Desk yet shares went soaring 20% following this print. Ironically, I also thought the Q3 report was a typical TTD quarter and shares dropped 20% following that release so what do I know? I guess it turns out analyst estimates were too high in Q3 and too low in Q4. In the stock market, expectations are just about all that matter in the short-term.
As for the actual quarter, it really was more of the same. YoY growth of 23%, adjusted EBITDA margins of 47%, and FCF margin of 28% for the year. Slow and steady growth with strong cash flows and a lot of the same commentary on the earnings call yet again.
The one big item worth calling out is the Q1 guidance. TTD guided for $478M in revenue in Q1 and if we assume another 4% beat as they did this quarter, revenue growth would accelerate to 30% YoY. This would be their fastest growth rate since Q3 2022.
I have maintained TTD as my largest position because I assumed a reacceleration was likely. Everything is shaping up to give the company numerous tailwinds – election year political spend, summer Olympics, the ongoing shift to streaming, the improving macro backdrop, etc. Put all this together and it now appears extremely likely TTD will accelerate revenue in 2024. They grew 23% in 2023 and I expect this year will end up somewhere around 25-30%. Nothing earth shattering, but a solid reacceleration at scale nonetheless.
With that said, while 2024 is looking like it should be a strong year, my thesis for TTD is much bigger picture. I wrote the following last quarter and figured I would include it here and likely each quarter going forward - 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 has been on a bender! The share price has been on a rocket ship since the start of 2023 sending shares from $100 to $300. It has forced shareholders like myself to consider how to handle such gains after watching so many be erased in 2022. As I wrote in my Q3 updated several months ago, I planned to continue trimming as the share price increased and did so accordingly. In total, I have trimmed nearly a fourth of my position since the start of December beginning at $236 a share. As of today, most of those sells look like a mistake. Time will tell but I am pleased with the current allocation.
The share price has not been going up in a vacuum. Business performance for Crowdstrike has been strong and consistent. You will be hard pressed to find a business who has performed as consistently as Crowdstrike over the last few years. This consistency has been rewarded by the market without doubt and it’s easy to see why.
- They continue to grow revenue around 7.5% sequentially
- They continue to improve operating income margin
- They continue to expand more modules with customers
- They continue to grow adjusted EPS (23 out of 24 quarters in a row!!)
- They continue to produce significant FCF
Reliable as ever! It is also encouraging that we appear to have finally reached the end of the deceleration of growth. Crowdstrike grew 33% this quarter and forecasted 29% growth for the next fiscal year. Seeing as Crowdstrike has never once failed to beat their quarterly guidance, we can feel confident they will exceed this. FY revenue growth will likely end up around 32% YoY if I had to guess indicating that the downward slide has finally come to an end. If they can compound revenue at a 30% clip (along with 35% FCF margins), then the stock will produce incredible returns for shareholders.
Looking at the valuation, shares are trading at about the highest valuation of any SaaS business. I would argue this is warranted as they have been the most consistent and dominate SaaS business of the last few years but there is still a ceiling on what can be considered reasonable. I expect Crowdstrike to produce about $4B in revenue and $1.3B in FCF next year. This put shares at about 56x forward FCF. Not cheap by any measure, but also not absurd for such a high-quality business.
At 14% of my portfolio, I plan to leave it be for now and trimming on any further strength. In my opinion, this is about as strong a business that is out there and I plan to be a shareholder for many more years. They are a leader in a massively growing market with phenomenal leadership. I expect shareholders to continue to be rewarded for years to come.
Datadog:
Datadog delivered a decent quarter, with some good and some bad. Here is what I liked:
- Sequential revenue growth of 7.7%, the fastest in six quarters
- RPO growing 27% sequentially and 74% YoY
- A record non-GAAP operating margin of 28.3%
- A record FCF margin of 34.1%
- Customers using 2, 4, and 6+ modules all increasing by one percentage point
And what I did not like:
- Q1 guidance indicates growth slowing to ~4% sequentially
- Only 500 new customer additions, the fewest I have on record
- Only 60 large customer additions ($100K+), the fewest in 14 quarters
- NER continuing its steady decline
In total, there was more good than bad in my opinion but the slowing customer growth is becoming worrisome. The last three quarters have seen a big drop in customer additions and I am not sure what is driving this. The good news is current customer seem to have no problem signing longer contracts and adopting additional modules. But with fewer new customers funneling in, more pressure is placed on the NER to sustain growth rates. Unfortunately, this has been decreasing over the past year as it has been for every other SaaS business.
I have been trimming shares as the allocation is a bit higher than I would like it to be. I am questioning what kind of growth to expect from Datadog but I still believe they will be a solid growth company for many more years.
Looking at the valuation, shares are not cheap but they never really have been for Datadog. They are trading at 73x TTM FCF which is in line with other peers such as TTD, SNOW and CRWD. For 2024, I am expecting Datadog to grow around 25% and produce $800M in FCF, giving them a multiple of 55x forward FCF. Like I said, certainly not cheap.
I want to continue owning this company but likely somewhere in the neighborhood of 7-10% of my portfolio. Given the consumption nature of their business, I could foresee growth accelerating should everything play out with AI like many people expect. Time will tell but as long as EPS continues to grow 40%+, I expect the shares should do just fine.
Celsius:
Celsius reported a strong Q4 and the market was drinking it up like a drunken sailor. At the time of the report, Celsius was trading around $60 in mid-Feb. Since then, it has been on a rollercoaster ride. It turned on the jets and rocketed 50% higher to over $95 but has since come back down to earth around $70. While it was certainly a good report, I don’t think it warranted that kind of price appreciation.
Revenue grew 95% to $347M. Celsius produced $39M of net income, an 11% margin, and 19% adjusted EBITDA margins. 2023 marked the third straight year of triple digit revenue growth, which has catapulted revenue from $131M to $1.32B in just a few years. This is tremendous growth that would put even the best SaaS businesses to shame. However, the million-dollar question is where will growth go from here?
Unfortunately, Celsius does not provide any guidance so we are stuck taking our best estimates and reading between the lines. Analyst are expecting just under $1.9B in revenue and $1.1 EPS for 2024. I expect them to beat both handedly.
Celsius is focusing on driving growth through three areas – “increasing total distribution points at each location, growing in non-tracked channels and international expansion.”
They are making solid progress on the first two of these vectors:
Our pursuit of our perfect store resulted in a 60% increase in display activity across the United States and we placed more than over 10,000 Celsius branded coolers in 2023 and an increase of over 300% year-over-year.
Non-tracked channels continue to be a tailwind for us as well. Club sales for the fourth quarter were $77.1 million, up 64% year-over-year. We achieved the number one energy drink position on Amazon in 2023, finishing the full year revenue at $100.1 million, a 72.9% increase year-over-year… In 2023, we gained distribution in over 2,000 Jersey Mike stores and are authorized to sell in more than 3,000 Dunkin’ Donut locations nationwide. We believe there is incremental growth opportunities for Celsius and non-tracked outlets, such as vending, hospitals, corporate cafeterias and college campuses and more.
The third of these, international expansion, is the most promising in my eyes. It is still way too early to judge how the global expansion is going since they are just dipping their toes into the first new markets. With that said, I am hoping we might see some early impacts from Canada in the Q1 report. With only $14.6M in international revenue this quarter, it will not take much to move the needle.
I am expecting this number to rise throughout the year as they continue with the launch in Ireland and the UK in Q2. The company won’t be stopping there – they recently announced plans to enter Australia and New Zealand. This is encouraging to see and I am pleased with the pace of this rollout. Wisely, they are targeting all the low hanging fruit of the English-speaking countries. I think international expansion will be the story for 2024-25 and a possible game changer for the business.
Management is happy with the early signs from their efforts as well:
We are very pleased with our sales in Canada after 2 months in the country. Consumer enthusiasm and acceptance has exceeded our expectations.
All in all, a really strong quarter. They are executing well and poised to continue growing strongly at scale this year. I thought the stock ran too far too fast as I was up nearly 100% on my position which I initiated in November, so I trimmed a small bit of it at $95. In hindsight, perhaps I should have sold more at those prices. I am tempted to add it back with shares at $70 but am pleased with the current allocation. Even after the drop, shares trade around a P/S of ~14 which is rich for a company that sells energy drinks.
Cloudflare:
After a choppy first half of 2023, Cloudflare finished the year strongly. By most accounts, it seems their efforts to revamp the sales staff is starting to pay off. The company came out of the gates strong this quarter with the largest beat (2.7% over the midpoint) in five quarters. This may be meaningless to some, but I take this as a positive sign that the company is surprising to the upside and take comfort they are not flirting with missing their own guidance like they did in Q1.
Much like Crowdstrike, Cloudflare appears to be stabilizing revenue growth in the low 30’s. The biggest difference is that Crowdstrike is at a much larger scale and far more profitable, although they are worth more than double. Interestingly, both trade at the exact same TTM P/S of 24 at today’s prices which is the highest across my portfolio excluding Nvidia (they don’t count :p).
While revenue is stabilizing, cash flow is starting to finally arrive after being promised for many quarters. Adjusting operating margin was 11% and FCF margin came in at a record 14%. Cloudflare should continue to produce positive FCF from here on out.
Cloudflare added over 7,700 customers, which is ~1,700 more than were added in Q4 last year. Large customer share as a percent of revenue continued its march higher to 66% of revenue. Large customer revenue has been growing about 10% sequentially the last few quarters which should help provide a solid floor to overall revenue growth.
Cloudflare provided a full year guide of $1.65B for 2024, which is good for 27% growth. I hesitate to predict they will beat this by any significant margin, especially considering they had to cut the FY guide in Q1 last year. My hope is they will end up somewhere closer to 30% but this might be wishful thinking.
It is hard to look at Cloudflare without seeing it as wildly overvalued given its growth rate and scale, but this has been the case for the history of the company. The best explanation I can give is that the market is expecting durable and consistent growth as Cloudflare continues to generate more cash flow.
One of the biggest expected drivers for Cloudflare is related to AI. This can be said for many companies in my portfolio, but I think it rings especially true for Cloudflare. Here is what leadership had to say about AI in the call (bolding mine):
The breadth and potential impact of the use cases we are seeing with Workers AI are extraordinary, and we’re super excited about the opportunity to establish Workers AI’s serverless model built on Cloudflare’s trusted global network as the best infrastructure for running AI inference tasks. From our launch in September to the month of December, the average number of daily Workers AI requests increased 9x. Furthermore, one-third of the thousands of Workers AI accounts are new to the Workers platform, suggesting that Workers AI is not just significant opportunity in and of itself, but also a potential accelerant to adoption of the Workers overall platform. Inference, however, is only part of the AI equation. We are also extremely encouraged by interest in Vectorize, our vector database, which makes it easy, fast, and affordable to index and store vectors to support use cases that require access, not just to running models, but customized data too, as well as AI gateway, which gives organizations the tools to cache, rate limit, and observe their AI deployments regardless of where they’re running…
AI is not yet contributing materially to revenue, but it has contributed materially to developer excitement over the platform.
Excitement doesn’t generate cash I’m afraid. It certainly all sounds promising but as they say, talk is cheap, and I think I speak for all Cloudflare investors when I say – show me the money! There are few companies who talk up their portfolio offerings like Cloudflare does, but I would argue the results have not yet fully lived up to all the hype over the past few years. That said, I still believe there are few companies who are better position to benefit from what’s to come. The market is pricing it as such but it will be up to Cloudflare to deliver.
I don’t have any plans to add at these prices as I am pleased with the allocation. In fact, the last time I added was in November 2022 when shares were below $40. I am more likely to trim than add should the price climb back to $110+.
MercadoLibre:
I feel like a broken record every time I write about MercadoLibre. I am blown away after each earnings report. The business performance in 2023 was phenomenal and I am hard pressed to find another company who is executing so well at this scale. Take a look at some of the incredible metrics for the full year:
• Revenue was $14.5B, up 37%
• Net Income was $987M, up 105%
• Net Income margin was 6.8%, up from 4.6%
• Diluted EPS was $19.54, up from $9.54
• TPV was $183B, up 48%
• GMV was $45B, up 30%
Keep in mind the growth rates I provided above are in USD. The FX neutral growth rates are significantly higher and should provide a boost if we see any weakness in the USD.
This quarter was impacted by some one-off expenses which negatively impacted income by $351M. Without these, the net income margin would have been 8.3% for the year. MercadoLibre plans for gradual margin expansion as they continue investing in growth so this number is likely to improve once again in 2024.
I am not sure if these one-off expenses surprised the market or if the price has been under pressure due to the environment in Argentina. My guess is more the latter since Argentina makes up 22% of sales and growth has started to slow compared to Brazil and Mexico. I see this as a temporary headwind and something they should be able to navigate as they have in the past.
The actual business performance is nothing short of stellar. They are executing well in every facet of the company – ecommerce, fintech, credit, logistics, margin expansion, you name it! I could provide more numbers and examples, but I would instead point those interested towards the earnings presentation.
I added to my position at $1650 in late February following the earnings release as I thought it deserved to trade higher after such a good quarter. The market clearly disagrees as it has only traded lower since then. I think this is one of the more undervalued stocks in my portfolio at the moment and am contemplating adding further but am happy with an 8% allocation.
Axon:
As I have written in the past, I view Axon as the old man in my portfolio. Compared to the rest of my holdings, I feel like I can ignore this one more than the others and expect them to churn out slow and steady results. Ironically, 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.
The last five years of revenue growth has been 26% → 28% → 27% → 38% → 31%. Hence my old man comments. But there are several reasons to believe growth could pick up from here:
• ARR up 47% YoY
• Future contracted revenue up 54% YoY
• NRR holding steady at 122% (this is increasing instead of dropping like my SaaS holdings)
• Cloud % of sales at 38%, a new record high
• Cloud revenue up 44% YoY and 11% QoQ
• Taser 10 recent release
• Expanding into new markets (international, enterprise, etc.)
Not only is Axon delivering on the top line, but they are also GAAP profitable and producing strong cash flow. Non-GAAP EPS was up from $2.19 to $4.14 for the year while adjusted EBITDA margins are holding steady at around 20% consistently. There is a lot to like here and I am wondering why I don’t own more.
The reason for this is mainly the valuation. The company trades at a well-deserved premium given the quality and consistency. I would be happy to add should shares pull back but I am content with a 7.5% allocation for now.
ELF:
I thought this was a home run report. I was expecting revenue in the neighborhood of $240M and Elf came in at $271M! I almost forgot what it was like to be surprised on the upside like that. This resulted in YoY growth accelerating to 85%, which is the highest growth I have on record for Elf.
On the flip side, margins decreased across the board on both a sequential and YoY basis. Net income and adjusted EBITDA margins dipped marginally, while adjusted EPS continued its slide downward.
Given the incredible growth mentioned above, this is a tradeoff I will take every single time. Elf is in full blown growth mode. They are stealing market share at an impressive rate and growing like a weed internationally. International sales were up 119% this quarter! As far as I am concerned, they should keep the gas pedal on full throttle to maximize on the growth opportunity.
Elf is still solidly profitable on a GAAP basis so it’s not like cash is going to be a problem. I have full confidence that Elf can pivot back to operational leverage when the time comes but right now, that is not the focus.
I have been extremely impressed with the execution of this company since owning it in September. The stock fell following the earnings report which made absolutely no sense to me, so I took advantage and added at $162. Then, shares torpedoed upwards to $220.
The wise thing to do would have been to sell some there as shares came tumbling back down after Ulta warned about slowing sales. I personally view this as noise. Elf is stealing share from the incumbents and drive a lot of sales online. I don’t think the Ulta results are going to have much of an effect on Elf but we shall see. I have been adding on the recent weakness back around $165.
I like where the position is at around 7% of my portfolio. I don’t feel comfortable letting this become too much larger given the nature of the business and since they will have some extremely difficult comps to bump up against next fiscal year. I just don’t have a good sense for what to expect for fiscal 2025 but this company is clearly on a roll so I plan to be along for the ride until that changes.
One interesting thing to note – excluding tiny TransMedics, Elf is the only company out of the other 12 in my portfolio with a market cap under $10B and TTM revenue of less than $1B. For comparison, 7 out of 12 of my positions had less than $1B in revenue at the end of 2021. This just goes to show how the lack of IPO’s and companies coming public at larger valuations has changed the landscape over the last few years. It’s unfortunate as bigger returns can be made when investing in smaller companies. For now, Elf somewhat fills this void in my portfolio.
Nvidia:
This is probably the most well covered business on earth at the moment so I don’t have anything profound to add other than highlighting the fact that we have never seen anything like this before at such scale. It is truly remarkable to watch.
The million-dollar question is where growth goes from here over the next few years. No one has the answer, but my gut tells me there is a lot of growth left in the hopper since I believe the AI boom is just getting started. See what I did there? 
I don’t anticipate adding to my position but plan to let the current allocation run and see where it goes.
Snowflake:
Sigh. Snowflake has been a frustrating stock to own. The stock came public at over $200 per share in late 2020 and now trades about 20% below that value. Over that time, revenue has grown from $600M to $2.8B, adjusted FCF has increased from a loss of $72M to $810M, and total customer count has more than doubled. Under the hood, things seem to be going swimmingly, yet the stock has been a dog for most of its time on the public market. Lesson – valuation matters! For most of its history, Snowflake has been the most expensive stock in the SaaS world. With growth coming down to earth, this is no longer the case.
I trimmed Snowflake last year from a 17% position to 7%. While their performance was a bit below my expectations, I decided I wanted to continue owning a piece of this business as I believed they were likely to experience durable growth. That thesis is now very much in question for me.
The results this quarter were solid. Not great, but not bad. There was plenty to like such as a 42% adjusted FCF margin, adjusted EPS increasing 150%, and most importantly, RPO growing 40% sequentially and 41% YoY. However, there were several problems worth highlighting.
First, the bar was set high for Snowflake this quarter. The stock was up more than 20% YTD ahead of this result as the market (and myself) was anticipating a strong report and forecast. Other software peers were mentioning the end of optimization efforts and the start of new workloads associated with AI. Snowflake had been tagged as a likely beneficiary of the AI efforts, especially as Slootman discussed this previously with comments such as “there is no AI strategy without a data strategy.”
Secondly, speaking of Slootman, who saw his retirement coming? I was caught off guard by this, and so was the market it seems. It is impossible to determine how much this accounted for the 18% drop after earnings, but I am sure this played some part in it. Whether or not this is a good or bad thing remains to be seen but I personally am excited about a new CEO coming in who has a clear focus on AI. That said, Slootman was regarded as a SaaS power hitter. We’ll see how this goes but one thing is for sure, Ramaswamy has his work cut out for him.
Third, the quarterly and full year guidance was very disappointing. Snowflake gave several reasons for this such as not including newly released products in the forecast, customers moving over to iceberg thus reducing revenue in the short-term, and forecasting last year’s consumption trends into this year despite optimization efforts improving making this an ‘extra’ conservative guide.
Several people suggested this was Snowflake’s way to ensure there is a low bar for Ramaswamy to clear in his initial quarters as the CEO. To be honest, I don’t have enough experience with CEO changes to say whether or not this is something that holds water for me. At face value, I can see why it would make sense but I don’t want to assume this only to be proven wrong in Q1.
Personally, I believe Snowflake might be a bit spooked after what happened last year. Snowflake had to reduce full year guidance twice last year (in Q4 and Q1) which sent shares falling. The guide started at 47% YoY and two months later was at 34%. Then, the next quarter (Q2), they failed to raise guidance! Talk about a massive mishandling of guidance. I wrote extensively about this last year, and consequently, I lost a lot of trust in management. In summary, Snowflake guided to 47% growth initially and ultimately finished at 36%. Not great, Bob.
Taken together, I can see why Snowflake would want to be uber conservative to an extreme degree this time around. That said, there is still plenty of room for the stock price to fall should this guide not turn out to be conservative. In essence, I see more risk with Snowflake than I do with most my other holdings since I am ‘hoping’ guidance is conservative, and ‘hoping’ the new CEO is the man for the job. I prefer not to invest on hope.
Snowflake should produce about $1 to $1.2B in FCF this year. Even after falling 25% YTD, shares are still trading at ~50x forward FCF. That is not cheap for a business expected to grow around 25%. I am not sure what I will do with my position but if we see shares rise again between earnings, I will likely trim the position or exit entirely. I just see too many uncertainties at this price to feel comfortable. The good news is the position has organically shrunk as most other positions are positive YTD. For now, I plan to think things over but Snowflake is on a short leash.
TransMedics:
I have also had this company on my watch list for some time. I followed it from afar as I felt like there were too many uncertainties and risk for me to jump in. After seeing the Q4 results, I had seen enough to warrant a small starter position. This company has been growing revenues in the triple digits for the past two years and is starting to do so at a meaningful scale. I was not all that impressed when revenues were smaller, but they are now generating $80M in a quarter. TransMedics first had my curiosity, but now has my attention.
It appears they will do well over $400M in revenue this year, my guess is likely closer to $450M. To be able to grow at this speed and scale deserves some recognition. The other factor which caught my attention was the fact they posted positive GAAP earnings. I am not certain these will continue in the short-term, but I feel confident TransMedics will be a firmly profitable company in the not-so-distant future. Triple digit growth plus GAAP profitability at a sub $3B market cap? I had to jump in!
TransMedics has only captured less than a fifth of the market so there is plenty of room to run. While it would have been nice to have initiated a position back when it was trading around $40/share, I am content with having waited as I think much of the dust has settled. The company has executed exactly as it said it would and the move to purchase planes is looking brilliant thus far. So far, this company has consistently done a couple things – sandbagged guidance with massive beats and executed on their plans. This I can get behind!
I plan to keep the position smaller as there is still far more risk associated with this business and I am bit hesitant of the healthcare industry at large. I also prefer to get to know each business more before I make them larger positions. My hope is they can grow into the bigger allocations. But at a sub $3B market cap, I am delighted to finally have a true small cap back in the portfolio and think a lot of upside remains should they continue to execute. And lastly a huge shoutout to all those who have covered this company so well on the board!
Tesla:
Tesla reported what I thought was a decent quarter all things considered but the market sold it off due to the outlook calling for potentially ‘notably lower’ volume growth in 2024. I like to think I own all my companies for the long-term, but Tesla is more unique than any other position in my portfolio. With Tesla, I am not too worried what 2024 is going to look like – it is 2025 and beyond that is more meaningful for me.
I think there is a good chance Tesla trades sideways, or even down, over the short term (3-9 months). Some may read this and wonder why I would hold on to something that I think has a good chance of going nowhere or down, which is understandable. I am wrestling with it myself and reconsidering my approach with Telsa. But all it takes is one big announcement and the shares could go flying. I have decided I am comfortable holding onto this smaller position to see how things unfold as I believe they are extremely well positioned to grow revenues in the coming years.
In a nutshell, this is how I view Tesla: By owning this company, I am getting the chance to reap the benefits of projects such as robotics/Optimus/AI/Dojo/FSD/robo-taxis/next-gen vehicle/Cybertruck/NACS rollout/growth of energy storage & services revenue/and more I am likely missing.
Obviously, lots of these items overlap but the point is, Tesla has an incredibly exciting pipeline of future revenue generating projects. And all the while, I get to own the undisputed leader in a massively growing market (EV’s). The Model Y was the best-selling vehicle globally last year. That is amazing when you stop and think about it.
You could argue that I am investing in hope, but I would counter that Elon and Tesla have a pretty impressive track record when it comes to making good on promises, albeit usually well later than originally promised. And I don’t need every single one of those opportunities to be successful, just one or two could move the needle in a massive way.
These two charts demonstrate why I want to own the stock:
I believe Tesla is fixing to reach a tipping point and one of these projects is going to blow the doors off. It could be the next-gen vehicle that meaningfully increases vehicle deliveries, or huge progress on robotics or FSD. Who knows when or where it will come from, but this company is on the cutting edge of so many thrilling and world changing technologies that I can’t help but want to be a part of it. So, while 2024 may be challenging, there is too much potential for me to walk away. I plan to keep this position smaller given that I expect shares to tread water but am considering adding should shares continue to decline.
Shopify:
Well, I finally took the plunge and purchased shares of Shopify for the first time in my taxable account. I have owned this name for years in retirement accounts but have never bought it in my taxable account for whatever reason. I have been keeping this on my watch list for some time and decided to dip my toes in following the sell off after earnings. I don’t love the idea of bringing in another large cap as I would prefer smaller, faster growing companies but given the lack of alternative options, this seemed like a good place to invest.
I view Shopify in the same lens as I do companies such as The Trade Desk and Crowdstrike. While Shopify is a larger business, I see these companies as leaders in their field who should all experience durable growth for a long time. I believe these businesses are world class compounders who are operating in a massive and growing market. A company that can compound revenue and earnings at a 20% rate for a long time is going to make for a terrific investment and that is what I think Shopify can achieve.
Shopify has been the model for consistent growth over the last decade**. It has grown revenue from $200M to $7B over the last nine years.** That is a remarkable feat. Any business that can achieve that kind of growth is clearly doing something right. I am betting this will continue, albeit at a lower rate of course.
Shopify grew 26% YoY in 2023, which I find quite strong given the concerns with the macroeconomic environment last year. They expect revenues to grow in the low to mid 20’s for Q1. I am guessing Shopify will generate revenue growth around ~25% for the full year, right between the growth rate of the previous two years. Steady 20-25% growth is plenty good for a company of this scale, in my opinion.
While the top line is growing steadily, the bottom line is what grabbed my attention. 2023 was the year Shopify really proved it can scale and put its operating leverage to use. Just look at the improvements made last year:
- Non-GAAP operating income was $782M, up from $6M
- Non-GAAP operating margin was 11%, up from 0%
- FCF was $905M, up from a loss of $186M
- FCF margin was 13%, up from -3%
- Adjusted EPS was $0.73, up from $0.04
I anticipate margins will continue expanding from here. Now that they have proven they can produce consistent FCF, it should help reduce some of the risk associated with owning shares. Previously, this was a question mark, but I believe this has been firmly answered now.
I am only starting with a small starter position because the valuation is still quite high. Shopify is trading at a TTM PE of ~95 and 98x FCF. But since this business is still scaling, I think it makes more sense to look forward. My guess is Shopify will end up with FCF of ~$1.7B and adjusted EPS of ~$1.25 this year. This is just a bit above current analyst expectations. Using these figures, Shopify is trading at a forward PE of 56 and 52x FCF. I certainly would not call that cheap, but it is not wildly unreasonable for a business of this quality.
I am hoping to get the opportunity to add at a better valuation. If we see shares in the $50’s, I will add significantly. Until then, I plan to keep it smaller to see how things play out. I believe 2024 should be a good year for the economy and ecommerce and expect Shopify to benefit accordingly. I would not be surprised to see them significantly outperform expectations for 2024 on both the top and bottom lines. We will see where this position goes but I think there is a decent chance I end up owning this for a long time.
Watch List:
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MDB - Growth is slowing and customer additions were weak. This is more likely to get removed from the watch list than to be added to the portfolio at these prices.
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IOT - Still keeping an eye on this one but I have too many doubts about their durability given the way growth is starting to slow at this size so I am keeping it on the watch list for now.
Concluding Thoughts:
While I am far from a macroeconomic expert, I personally feel pretty good about where things stand in the economy today. Looking specifically at the market, I think the recent sell-off was warranted as some of the valuations were getting quite rich (looking at you Crowdstrike!). For the first time, I have been trimming some of these positions due to valuation alone but I have found other places for the money.
Personally, I am bullish on the outlook for the remainder of the year and want to remain fully invested. I think business performance has been strong and feel good about how things look for 2024. The biggest reason for this is AI. The more I read and learn about AI, the more exciting it becomes. I personally believe this has the chance to become as big a game changer as the internet, smartphones or the cloud has been. It is far too early to tell but the initial signs are promising (looking at you Nvidia!). We will see how this plays out over the coming years but I am hoping it can lead to reacceleration for some of the SaaS names in the portfolio.
With regards to my portfolio, I am a bit disheartened at the average size of my positions. All but one (TMDX) are valued north of $10B, and most are significantly larger than this. While I am pleased with the quality of the companies I own, outsized returns are going to be challenging from here. I thought Bear had a terrific post a few days ago and agree completely with his argument here –
I do agree with this, yet the top four holdings make up over half my portfolio and I have owned them all for over four years. So while I acknowledge I am not early on these businesses, I still view them as the best of the breed. However, I would be more than happy to bring in some smaller businesses into the fold but the lack of alternatives makes this difficult.
It’s a shame, companies are now waiting longer to come public and are arriving at massive valuations (looking at you Snowflake!). Retail investors are severely disadvantaged as a result. Unfortunately, I am afraid there is not much we can do about this other than hope the tide changes and things heat up again in the IPO space. Until then, I will continue to hunt down the best businesses I can find.
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
