Now that all my businesses have reported their latest quarterly earnings, I am following my trend of posting my thoughts on each report. The last two quarterly post are linked below. I have also decided to share my portfolio breakdown for full transparency. My plan is to continue updating this each quarter after all my companies report - you can think of it as a quarterly portfolio report rather than a monthly. Also, for the sake of full transparency, here are my returns over the last few years. I found Saul’s board late in 2019 and began fully adopting this strategy in 2020.
I lagged well behind the folks here with 200%+ returns in 2020 as I was still in the process of consolidating my portfolio from businesses like JNJ, PG, MCD, PEP, etc. until Q2. As for last year, my big mistakes were holding onto Zoom and Peloton for far too long. My goal this year has been to learn from these mistakes and be more ruthless with my holdings. As for this year, here are my 2022 YTD results:
2019: 30.2% 2020: 125.1% 2021: 0.3%
As you can see, I am right on par with most YTD returns of those who post monthly updates. In other words, I am in the trenches taking grenades with the rest of you :)
Jan: -22.8% Feb: -16.9% Mar: -22.9% Apr: -39.3% May: -51.1%
Here are my current holdings and position sizes as of today:
DataDog: 19.0% The Trade Desk: 13.7% Crowdstrike: 12.1% Cloudflare: 10.5% Sea Limited: 9.8% [Bill.com](http://Bill.com): 8.7% Snowflake: 8.3% SentinelOne: 7.5% Upstart: 5.8% Options: 0.5% Cash: 4.1%
Without further ado, here are my thoughts on the companies and their latest earnings results.
DataDog: Well, let’s just say there is a reason why this company is the largest holding for the majority here. It’s hard to find much not to like as this company is scaling into a profitability machine. Just take a peep at these figures - Non-GAAP gross margins at 80.4%, Non-GAAP operating margins at 23.1% and FCF margin at 35.8% all set new records for the company. That’s a clean sweep on the profitability front, Roger.
If I were to get picky, the Q2 guidance was a bit lighter than I would have liked, although seeing as they are now at a $1.5B+ run rate, I will cut them some slack. Additionally, I would have liked to have seen DataDog add more than 1,000 customers this quarter (same customer additions as Q1 '21), but this concern was more than offset thanks to the strength of the 240 new customers with greater than $100K ARR. Seeing as the vast majority of their revenue comes from customers in this cohort, I’d say things are in good shape. I have added to my position every month so far this year and expect that to continue in June.
The Trade Desk: This allocation is slightly higher than I would like it to be as it has grown in size since the stock is ‘only’ down 41% YTD. I first bought this stock nearly three years ago and have never found a good reason to sell. I have a ton of confidence in Jeff Green and believe they are growing into a massive TAM. It also doesn’t hurt they are one of the few companies in my sphere who have been consistently GAAP profitable.
Their Q1 was business as usual with growth coming in at 43% YoY and adj. EPS growing 49% YoY. Growth is going to slow next quarter however, I am expecting it to accelerate nicely in Q3 & Q4 with the midterms upcoming. I am reading that political advertising spend is expected to hit a record this year. As the macro environment is becoming more challenging, I feel confident TTD will be able to weather the storm thanks to the continued growth of CTV and the political backdrop. As it stands, TTD is currently trading at a PE of ~55 using adj. EPS figures. While they aren’t likely to ever grow north of 45-50% ever again, I sleep easy at night holding this 30%+ grower with 35%+ adj. EBITDA margins and Green at the helm.
Crowdstrike: Here’s another stock I have held since 2019. Similar to Green, Kurtz has given me no reason to sell my shares. The business keeps humming along, seemingly undeterred by the economic earthquakes that have been tossed their way over the last two plus years. Q1 revenue grew 61% YoY continuing the slow and steady decline while the profitability machine continues to ramp up. They continue to execute exceptionally well. DataDaog and Crowdstrike are masters at the land and expand strategy. It is a thing of beauty. I am glad they will now be reporting the number of customers with 7 or more modules - it will be yet another metric I will get to watch go up and to the right. Hopefully like the stock price soon enough…
Cloudflare: You might begin to notice a trend with my largest four holdings. I consider them to be the steady Eddie’s of the portfolio. My blue chips, if you will, all will killer management. Cloudflare is another company I would consider to be a well oiled machine. Their consistency is quite mind boggling to me, so much so to the point I have thought at times they might be cooking the books (only half joking :P). I mean seriously, look at these revenue numbers (QoQ, YoY):
2019 Q1: N/A Q2: 9.2%, 48.9% Q3: 9.6%, 48.0% Q4: 13.5%, 51.0% 2020 Q1: 8.8%, 47.8% Q2: 9.3%, 47.9% Q3: 14.5%, 54.5% Q4: 10.2%, 50.1% 2021 Q1: 9.7%, 51.3% Q2: 10.4%, 52.9% Q3: 13.1%, 50.9% Q4: 12.3%, 53.8% 2022 Q1: 9.6%, 53.7% Q2: 10.2%, 53.4% (assuming a normal size beat)
This is the definition of consistent. QoQ growth has only ever ranged from 8.8 - 14.5%, although the range is really much tighter than that. All the while, we have seen adj. operating margins improve from -27% to 2%. According to Prince, it sounds like that is where they will stand for the foreseeable future as they pour profits back into the business. This is not necessarily a new trend for Cloudflare; their adj. EPS has been between $(0.04) - $0.01 for the last nine quarters!! Given they are ‘only’ at about a $1B run rate, I will accept the practice of forgoing profits for added growth today but I do want to see some continued scaling over the next 1-2 years. I am not asking for 30%+ operating & FCF margins, but just some steady improvement will make this (major)fool happy. One metric did stand out this quarter - paid customers increased by over 14,000 - they added 4,000 more customers than their previous record!! Now, my hope is to see this translate to growth in customers with greater than $100K spend over the next 12 months.
Sea Limited: Along with TTD, this is another outlier in the SID realm. I can understand why, as this company is far more complex and lighting cash on fire to boot. The stock could do no wrong in 2020-21 and can do no right in 2022. I’ve been along for the ride since 2019 and have garnered a lot of trust in Forrest Li, the CEO. Here are a few reasons why this company carries a ~10% allocation in my portfolio.
– Sea is riding three major tailwinds: gaming (Garena), e-commerce (Shopee) and fintech (SeaMoney) in several emerging markets
– Growth has been outrageous, north of 100% the last four years growing to nearly $10B in revenue last year
– Gross profit has steadily grown faster than revenue, resulting in gross margins improving from 28% → 31% → 39% over the last three years
– Sea is well positioned to ride out any macro-economic difficulties with more than $7.6B in cash on the balance sheet
While growth has been blistering over the last handful of years, it has finally started slow down. Q1 revenue was $2.9B growing 64% YoY. The Covid tailwind has subsided and is now serving as a headwind to YoY comps for their two largest businesses, Garena and Shopee. While I do have my concerns around Garena (aka Free Fire), I believe the e-commerce arm Shopee is poised to perform well for the foreseeable future and SeaMoney is beginning to explode. The question is, can Shopee become a profitable business? It won’t be anytime soon, but I want to see continued progress towards this goal.
All told, this is a position I will likely trim as the allocation is more than I would like. 2022 is going to be a tough year for Sea but I believe they will come out the other side stronger. While Free Fire (the game that drives Garena) growth is starting to slow, it was still the most downloaded mobile game globally in Q1. Shopee is stealing market share from Lazada and had the most time spent in the app globally for Google Play phones. And SeaMoney just posted revenue of $236 million, up 360% YoY!! Yes, I would say this business is doing just fine.
Bill.com: I thought Bill’s quarter was somewhat disappointing as we saw organic core revenue growth drop severely to 5.3% which was down from 24.8% last quarter. Of course, there is seasonality at play here and this quarter is always their weakest but this was a much lower number than I anticipated. The lowest sequential growth reported over previous six quarters was 12.0% a year ago! The good news is based upon their quarterly guidance, I expect we will see organic core revenue rebound to more typical growth next quarter.
In more good news, customer growth was extremely strong as they added a record of 11,600 customers this quarter. The cross selling seems to be working well for Bill. Additionally, I was pleased to see Bill report their second ever quarter of positive free cash flow with a 14% FCF margin. Here’s to hoping that is the start of a trend. Ultimately, I find Bill to be more complicated than most of my other holdings due to the acquisitions and the volatile transaction revenue factor. They are also more exposed to macro economic conditions so I am planning to keep this allocation where it is. I believe there is a lot of upside from their current $14B market cap, but it does come with higher risk.
Snowflake: I posted my initial thoughts on the quarter here (https://discussion.fool.com/really-quick-thoughts-revenue-sequen…). After listening to the CC and reading others thoughts on the quarter, I come away with a pretty neutral feeling. I am not very happy to see revenue growth fall as quickly as it did, from 20% QoQ to all the sudden 10-12% currently. I have decided I am going to trust management that Q1 & Q2 are going to be lower due to the product improvements and believe we will see a reacceleration in the back half of the year. If that fails to come to fruition, then I will lose a lot of faith in Slootman and his team and potentially exit the stock.
In addition to the slowing growth, the number of customers added was also very disappointing. They added 378 customers which is the fewest amount of customers added since… 8 quarters ago!! I understand they are trying to target larger, quality customers but I can’t imagine this is a super rosy sign for future growth. Add to the fact they expect the NRR to drop by many basis points and that feels like a deadly combo. With all this being said, I can’t help but feeling like this company is on its way to becoming an absolute behemoth one day, so I would like to stick around for when that day comes. However, I can only look the other way and trust management for so long. The results need to follow over the next 2-3 quarters.
SentinelOne: I thought SentinelOne’s report last week left a lot to be desired. I wouldn’t call it thesis busting, but it certainly did not increase my conviction. Growth came in a little lower than I was hoping for however, it was the lack of profitability that frustrated me. Non-GAAP operating margins had improved the previous four quarters but took a step back in Q1. To be fair, the same thing happened last year so this appears to be the trend for Sentinel as they front load expenses to ramp up headcount for the year. The guidance was also disappointing and a touch confusing thanks to the Attivo acquisition. According to the CFO’s answers on the CC, the organic guidance would have been about ~$88 million for Q2. Assuming a similar beat, that would mean organic revenue would slow to about 16-17% QoQ which is the slowest growth reported in the last seven quarters. Ultimately, I think this is probably splitting hairs and is something I am willing to look past since it is such a small company. There will be volatility at this scale - I cannot expect it to perform with the consistency of a Crowdstrike.
On the bright side, gross margins ticked up to a record at 68% and management said we should expect 70%+ by Q4 this year. Sounds good to me! I want to see operating margins improve each quarter as they did last year and based upon the guidance, it looks like this is what we will get. DBNRR also reached a new record of 131%, so let’s hope this number continues to trend up as well as they roll out the Attivo business in the coming quarters. Ultimately, for a company slated to do over $400 million in revenue while growing 100%+, I think there is a lot of upside from a $6.5B market cap. The question is, can they scale the way Crowdstrike has to become a profitable business? I am not sure, but you better believe I will be paying close attention.
Upstart: sigh So, it appears I have not learned from my mistakes of last year as I have rode the Upstart rollercoaster for over a year now to the pinnacle of $400 all the way down to the depths of $25 a share. All the while, I haven’t sold a single share. I believe there is a ton of potential for this business but there is a reason it is my smallest holding. At this point, I think the most pessimistic view has been priced into the stock and there remains massive upside if they can execute. It is trading at an adj. P/E of 17 for crying out loud! Of course, any stock can go lower but I am willing to take that risk at a sub $4B market cap.
As for the business, there is no way to sugarcoat it, Q1 was a total stinker. They barely beat their guidance, operating margins fell, the number of loans transacted fell, the conversion rate fell, they added auto loans to their balance sheet and to put the cherry on top, they revised their FY guidance down! And that comes just three months after telling investors not to worry much about interest rates or macro economic events as the stimulus headwind was going away. Again, sigh. I have decided I will give this company one more quarter to prove themselves and start to regain my trust. I expect I will likely tax loss harvest and reduce my exposure leading up to the next quarter but will hold out some hope they produce a beat like they did in Q2 last year.
ZoomInfo: I sold out of ZoomInfo about a month ago following their earnings report for a couple reasons. It had been my smallest holding for the majority of the time I owned it as I never got fully comfortable with it and I decided I liked other opportunities much more. I don’t see ZI having the same kind of runway for growth as the businesses above, although their profitability is quite impressive. I don’t think it is a bad business, I just have higher conviction in my current holdings and wanted to move the $$ to those names. So far it has proven to be the right call.
Monday.com: I was pretty unpleased with Monday’s recent quarter and began to trim the position in May and ultimately exited the stock altogether about a week ago. Growth is starting to slow from the 90%'s to the 70%'s while expenses show no sign of improving. I understand this quarter was frontloaded with expenses however, I can’t get comfortable with a business that is spending 80-110% of revenue on S&M all while revenue growth is tapering. Operating expenses have been consistently north of 120% while revenue has dropped from 110 → 95 → 80% YoY. I understand revenue cannot continue to grow at 100%+ forever as they get larger but I do want to see some signs of scalability. Who knows, they may get there in time but I did not want to wait around to find out.
Consequently, I now have a large cash position for me. I generally never have more than 1-2% of my portfolio in cash as I am typically fully invested. I am looking into MDB as a potential home for this cash, or I will reinvest it back into my current holdings throughout June. As for the options, these consist of either LEAPS or short term call options on my holdings above. I am very far from an options expert and do not recommend them for most. This is OT so please no questions on this topic.
Here’s to hoping for a better Q2 - best of luck to all.