MajorFool's Q2 Earnings Thoughts & Portfolio

Well, another quarter has passed and it is time for my quarterly update! This quarter I continued to consolidate into what I think are the best business. Sea Limited and MongoDB (bought and sold in Q) are both gone. This cash has been dispersed amongst my current holdings. Consequentially, I am down to really just seven positions which make up 94% of my portfolio. This is the smallest my portfolio has ever been but I feel very confident with how my portfolio is positioned. My YTD results are as follows:

**Jan: -22.8%**
**Feb: -16.9%**
**Mar: -22.9%**
**Apr: -39.3%**
**May: -51.1%**
**Jun: -55.5%** 
**Jul: -51.6%** 
**Aug: -45.9%** 

My current holdings and sizes as of today:

**Datadog:          17.2%** 
**The Trade Desk:   16.7%** 
**Cloudflare:       14.0%** 
**Snowflake:        13.4%** 
**Crowdstrike:      11.6%** 
**[](         11.1%** 
**SentinelOne:       9.7%**
**Upstart:           3.1%** 
**Options:           0.3%** 
**Cash:              2.8%** 

Earnings Thoughts:

Cloudflare: Well, what do ya know, another business-as-usual quarter from Cloudflare. I was expecting 53.4% YoY revenue growth and they came in with a slightly larger beat than last quarter to post 53.9%. All other metrics were very Cloudflare-esq as they continue to hover around breakeven. They plan to continue this trend, however, reiterated the move to FCF positive in the 2H of the year. Matthew Price, CEO – “Our operating margin was right at breakeven, which continues to be our plan so long as we can deliver strong growth. What I’m watching closely is our free cash flow margin. It showed significant improvement quarter over quarter, and we continue to forecast it will be positive in the second half of the year.” I believe this had a large part to play in why the stock rose as it did following earnings. I was glad to see Cloudflare reiterate its promise it made earlier in the year and now look forward to watching them execute.

While new customer growth was a bit lackluster at 2% QoQ, the growth of large customers more than made up for this. Cloudflare added 212 customers > $100K which was a record by a wide margin. This was the highlight of the report for me considering that 60% of their revenue comes from these customers. I hope this number continues to grow 10%+ QoQ for the foreseeable future as they move upmarket.

I thought this was a terrific report. Cloudflare overcame a slow down of their pipeline and was able to shift their go-to-market strategy to drive more business with their current customers. It speaks volumes that the business was able to recognize this and adapt on the fly in real time to deliver another strong quarter. I added a small amount this quarter but plan on leaving the position as is for now.

Datadog: This was the first time I walked away feeling a bit disappointed in a Datadog report since the beginning of covid. While it certainly was not a bad report, it did not have that same oomph to it that is usually does. It is clear that Datadog is seeing some headwinds as a result of the slowing economy. Even so, they were still able to post 74% YoY revenue growth with strong operating and FCF margins. The problem is, revenue growth will likely drop to the mid 60’s next quarter. This was a fast drop from the mid 80% growth seen just a couple quarters ago. Given the difficult comps and large scale, this is not too surprising but still disappointing to see the rate of the deceleration.

Datadog did the opposite of Cloudflare with regards to customer growth. They added a record 1,400 customers (which was really 1,600 excluding the Russian related losses), but only added 170 customers with > $100K ARR. This is a pretty big drop from the ~230 customers they’ve been adding the previous three quarters. Given the fact that much of Datadog’s business model is consumption based, this makes more sense. Regardless, I would mark this as one of the more concerning elements of the report. I will be keeping a close eye on this metric.

The other big disappointment was the guidance. The macroeconomic environment is certainly making its impacts felts when looking at the guidance. I wrote here that I am hoping this extra conservative guidance proves to be exactly that and Datadog will surprise us all with a larger than normal beat in Q3 (…).

Ultimately, this quarter reduced my conviction ever so slightly but not enough for me to sell any of my shares. This company is still growing 50%+ with 20% operating margins and strong leadership. What’s not to like? The long term thesis is still intact and I expect Datadog to see robust growth for many years to come as they drive more customers to their growing list of pillars.

Crowdstrike: Much like Cloudflare, Crowdstrike has been the model of consistency for many quarters now. Unfortunately, unlike Cloudflare who is accelerating/stabilizing, Crowdstrike is consistent in the way their growth is dropping slowly but surely. Since Q1 2020, Crowdstrike has seen its revenue growth drop from 103% to 58% YoY, although their scale has increased from a $400 million run rate to over $2B in these 14 quarters! Over this time, Crowdstrike has added 16,627 customers and improved from a -23% to 16% operating margin. It goes to show how well this company has executed over the last few years.

With regards to this quarter, I was disappointed to see the smallest beat I have on record. While CEO George Kurtz claimed security spend is not discretionary, it seems to me the company clearly felt a bit of headwinds this quarter. Thankfully, I thought the guidance made up for this as a similar beat will see growth return to 11% QoQ.

I see Crowdstrike as one of the more boring, steady companies in the portfolio. This has been reinforced by the share price which is far less volatile than most of the other companies I own. Consequentially, I don’t see this as position I want to increase or reduce. In other words, I am not expecting the stock to outperform by a wide margin, however, I believe it has the highest floor out of all the stocks in the portfolio. While this company might no longer be the sexiest one on the block, it is still growing 50%+ with 15% operating margins in a booming industry with great leadership (much like DDOG). I am happy to have this business as a part of the portfolio.

Snowflake: I am giving Snowflake the MVP ball for its performance this quarter. I thought this was a fantastic report and quelled many of my fears going into the quarter. Just take a look at some of these incredible highlights:

• Total Revenue increased 83% from $272M to $497M
• Adj. Operating Income was $18M, up from a loss of $22M last year
• Adj. FCF grew from $3M to $59M, improving margins from 1% to 12%
• $1M customers more than doubled from 116 a year ago to 246
• NRR actually increased !!! from 169% last year to 171% despite warnings this would drop

This is a special company and I can’t help but think it is the most likely to produce massive returns from todays prices. Although they are at a $2B run rate, I feel like they are just getting started. They are consistently adding ~400 customers each quarter and these customers are slowly but surely moving workloads over to Snowflake and ramping up spend. It is obvious that customers are really starting to expand their spend on the platform. For example, Snowflake added 397 customers two years ago in Q2 fiscal 2021, however only added 8 customers with TTM revenue of > $1M. This quarter, they added a similar number of customers, 486, but 40 new customers which spend > $1M! Pretty amazing.

The one upsetting portion of the report was the guidance. I figured given this monster beat, Snowflake would increase guidance accordingly. Unfortunately, this was not the case. Naturally, the second question on the earnings call addressed this. Here is what the CFO, Mike Scarpelli, had to say about it - “Nothing has changed in our guidance philosophy since the time we went public. And what I would say is Q3 of last year was unusually high. So it’s not a good year-over-year comparison. And as I said, there is uncertainties in the macro environment right now, and I think the guidance is prudent that we put out.”

Because this quarter was so strong, I am willing to look past the guidance as ‘prudent’ for now. If they were to beat by ~2% as they did in Q1, that would raise some major alarms for me but given how impressive this quarter was, I have a hard time seeing that happen. As a result, I have been adding to this position and will likely continue to do so.

SentinelOne: I thought SentinelOne had a much stronger report than Crowdstrike. My biggest gripe with SentinelOne is that it is difficult to get a clear understanding of how the company is performing organically because everything is reported including the Attivo acquisition. In my opinion, there is more than enough to like here that I am willing to look past the added complexity and murkiness to own SentinelOne. Just look at these ridiculous numbers (and yes, I know Attivo is included and responsible for part of this):

• Revenue increased by 124% YoY from $46M to $103M
• Adj. Gross Margins improved from 62% to 72% !!!
• Adj. Operating Margin improved from -98% to -57%
• Adj. FCF Margin improved from -98% to -65%
• ARR increased by 121% YoY from $198M to $439M
• Customers with > $100K ARR increased by 117% from 348 to 755
• DBNRR expanded from 129% to 137%

That is pretty much a clean sweep if you ask me. I own less of SentinelOne because I see it as a bit riskier than my other positions. It is far less unproven, but at a ~$8B market cap, there is a lot to like. If they can continue executing, there is a ton of upside. Ultimately, it will come down to two main things:

  1. How durable is their growth? Crowdstrike is still growing 50%+ while producing more revenue in a quarter than SentinelOne makes in a year. It is paramount that SentinelOne can continue to grow at a high rate.

  2. Can they continue to improve the bottom line? They must continue to show operational efficiencies and drive towards positive adjusted operating income. Again, compared with Crowdstrike at a similar scale, CRWD had -19% adj. operating margins and they improved this almost every single quarter. SentinelOne is already behind in this regard so it is critical they continue to show increased profitability.

If SentinelOne were to slip drastically with either of these two, I’d expect the stock would be sent down in a hurry and I would likely aim to reduce or exit my position. As it stands, they are executing on both fronts and as a result, will have a home in my portfolio until I see otherwise. I have been adding to this position as well. If Snowflake gets the MVP ball, then Bill was the runner up. After a lackluster Q3, Bill brought the heat this quarter and then some. I was worried about how the macro environment might impact Bill but they eased those concerns in a hurry. Fiscal 2022 was a blowout year for Bill and put them firmly on the map as a top tier SaaS business. Take a look at these ridiculous numbers:

• Total Revenue increased 169% YoY from $238M to $640M !!!
• Organic Core Revenue increased 77% YoY from $222M to $392M
• Adj. Gross Profit increased 192% YoY from $185M to $540M, improving margins from 78% to 84%
• Added 36,600 customers, most of which coming in Q3 & Q4
• Increased TPV by 56% YoY from $140M to 219M
• Divvy customers increased 93% from 10,700 to 20,700

Pretty remarkable growth, even if much of it was fueled by acquisitions. They are proving to be extremely accreditive and management deserves lots of credit for this. Fiscal 2023 is going to be up against some very difficult comps but based off the initial guidance, Bill seems poised to grow 60%+ and blow past the $1B revenue mark.

My biggest complaint with Bill has been its slow progress towards profitability. Over the last few years, adjusted operating margins have moved from -8% → -5% → -3% while FCF has followed a similar path from -10% → -7% → -5%. Well, this brings me to the highlight of the quarter for me. Right out of the gate on the press release, the CFO, John Rettig, stated – “Looking ahead, we expect to deliver high revenue growth and to transition to being a non-GAAP profitable company in fiscal year 2023. We will continue to invest in our large market opportunity, while maintaining our rigorous operational discipline.” This was exactly what I, and the market, wanted to hear. I am glad to see the trend of improved profitability will continue and we will see adjusted income turn from red to black.

Unsurprisingly, the stock soared the day after earnings from $150 to nearly $175. Since then, the stock has inched lower to a price of $140 today. Amazingly, you can purchase this company at a lower price than it was before the earnings! That makes no sense to me but who am I to complain, I have been taking advantage of this gift and adding to my position. A business on track for $1B in revenue, growing 60%+, while transitioning towards profitability for less than $15B? Sign me up!

The Trade Desk: My thoughts were posted here -…. TLDR; this business is crushing it thanks to CTV and well positioned to possibly accelerate revenue growth in 2023. Oh and Jeff Green is very good at his job.

Sea Limited: Essentially, my decision to sell boiled down to a few major concerns:

• Growth overall has run into a wall, as GAAP revenue dropped from 159% to 29% YoY. Talk about a declaration! This major drop was driven by two big factors – 1) e-commerce revenue is up against very difficult comps. This goes for all e-commerce businesses (take a look at Shopify, for instance). While Shopee (their e-commerce arm) was still able to grow 51% to $1.75B, this is still down from 161% last year. 2) digital entertainment (gaming AKA Garena AKA Free Fire) is also up against difficult comps and is now reporting negative growth YoY. The good news is I don’t think their massive global hit Free Fire is losing much steam based off app data, however, the entire gaming industry is facing difficult headwinds. In summary, their two main businesses are facing stiff comps and headwinds compared to the last two years where they saw nothing but strong tailwinds.
• As a result of the slowing growth of Garena, Sea is now seeing their bottom line deteriorate. Garena is their cash cow that is no longer producing as it once was. Garena’s adjusted EBITDA was cut in half YoY resulting in overall adjusted EBITDA falling from -1% to -17% margin. Slowing growth and deteriorating profitability make for a tough combo in any market, much less a bear market.
• I am starting to lose hope that Shopee will ever turn a meaningful profit. Additionally, I am beginning to conclude that e-commerce does not make for a great investment because it is so difficult to make any sort of net income. While Shopee is showing promising top line growth, they are at least 1-2 years away from even reaching break even on an adjusted basis. They are starting to pull out of several countries where they have introduced Shopee in years past which can be viewed as a bullish thing (making a prudent move to conserve cash and focus on key markets) or a bearish thing (gained no traction and did not have the ability or leadership to break into an emerging market). Considering Shopee is 60% of their revenue, how valuable is this business if over half of Sea’s revenue will never make a big impact to the bottom line?
• Consequentially, Sea’s cash reserves are dropping rapidly. Their war chest has dropped from over $11B three quarters ago to under $6.5B today. The good news is they are slowing their cash burn but regardless, based off the estimations, Sea will almost certainly need to raise cash again within the next year or two.

The one bright spot was their financial services business (SeaMoney) which is continuing to explode. Unfortunately, at a $1B run rate, it will be a while before this starts to move the needle for the company. And oh, by the way, they are losing millions on this business as well. I analyzed all this and came to an easy decision to sell the position. While Sea might do really well in the long run, the next 12 months are going to be very challenging and I decided there were much better places for my cash. I will continue to monitor this one from the side lines and contemplate jumping back in if I can see both revenue accelerate and losses show big improvements.

One brief portfolio management comment - this is now the fourth instance where I have held on to a stock with big gains (200%+) only to ultimately end up selling at a loss recently. The other examples include Peloton, Upstart, and Roku. Obviously, much of this had to do with the massive valuation spikes we saw in 2020/21 however, learning when to sell has proved to be a difficult task for me. It is something I am hoping to improve upon as I look to focus on owing just the best businesses and putting them under the microscope consistently so I can head for the exits before I am in the red. Please no replies regarding this since it is OT for the board.

Concluding Thoughts:

This year has been rough and is not showing much signs of improving before year end. Inflation is showing little improvement which will lead the fed to continue hiking rates. I expect the economy will likely get worse before it gets better. The good new is, I believe most of the damage has already been done on our stocks so I would be surprised if we retested the lows seen earlier this summer. Regardless on how the economy is performing, it is clear that our companies are continuing to execute remarkably well. The majority of the reports discussed above were very strong and based off the guidance and commentary on earnings calls, I feel good about how the portfolio is positioned for the end of the year.

My concern is that it will be a long time before we see the 52-week highs for many of our stocks. I believe the highs seen over the last year or two were unrealistic as so much money was poured into the economy and the multiples were sent to absurd levels. I think it may be best to wipe these 52-week highs from my memory because they really were not sustainable over the long run. Valuations for SaaS are only slightly below their historic norms which makes me think it could be a while before our portfolios double to get us back to even. I could be wrong (and likely am), but this is the viewpoint I am starting to come to terms with. The good news is, as long as the multiples rise with the growing revenues and earnings, we should expect to see solid returns from these current prices. Ultimately, being rather young, I see this as a benefit for me to get to accumulate these impressive businesses at much better prices than we had a year ago. So long as they keep churning out strong results, I will continue to be along for the ride. Good luck in Q4, everyone.


Q3 2021:…
Q4 2021:…
Q1 2022:…