Mekong22 Feb 2023 portfolio update

Overall February was a good month for my portfolio, although it was largely driven by The Trade Desk’s post earnings bump, partially offset by other holdings that stayed flat or lower last month.

I continue to hold outsized positions in TTD and MongoDB (MDB), which are driving the ups and downs of my portfolio overall.

Here’s my YTD performance through February

+11.3% YTD Jan
+16.2% YTD Feb

I didn’t really buy or sell much at all this month so that increase was mostly the result of my big Trade Desk holdings. I’m surprised to see that DDOG was actually up a little during February, despite the negative post-earnings reaction.

And my breakdown at February 28th:

TTD     42.1%
MDB     36.1%
DDOG     8.0%
SNOW     6.5%
MGNI     4.0%
NET      3.3%

I don’t particularly like having such a large allocation to two stocks, but right now, I really don’t have anyplace else that I really want to shift those funds to. Neither DDOG, SNOW, or MGNI did much to make me want to add to them. I could put some more in Cloudflare (NET) but I have a large upcoming purchase which will necessitate liquidating some of my investments, so I don’t particularly want to move money into something new that is not very high confidence for me and then have to re-sell the new positions right away.

Mongo’s earnings come out this upcoming week so the subsequent reaction is likely to drive my results for March next month.

The Companies:

The Trade Desk (TTD)

With all of the macro economic uncertainty going into 2023 and impacting advertisers, The Trade Desk is probably looking at a slower growth start to 2023, although I’m here more for the longer term story, so I won’t be as concerned with seeing low growth rates in the near term… Theirs is a business that is going to be subject to the day to day whims of their customers’ spending appetites. It’s not a subscription business so they could see sharper and more sudden negative impacts to their revenue…but they also can enjoy sudden jumps in their results too.

They were of course hit hard during the early days of the pandemic, (but they still grew and certainly gained a lot of market share throughout 2020) and then when they lapped those results, we can see the flipside when they grew 101% in Q2’21 (largely driven by the very weak Q2’20).

I’ll reiterate what some others have said on other TTD threads, that I don’t recommend looking at their P/S ratio. Remember, TTD presents their revenue “net” only showing the commission they keep (they bill their customers and collect about 5-6 times as much money as what they show as revenue in their income statement). They don’t disclose their exact “take rate” commission, but it’s likely in the mid to high teens percentage wise.

This required accounting treatment also makes their receivables look high and collections look slow if you compare what is on the balance sheet (the A/R on their balance sheet includes the full grossed up amounts that they collect from clients, so it’s not apples to apples with what flows through their revenue only showing the commission.) In reality, I believe they generally collect from their customers before paying to the advertising inventory owners (streaming services, etc) so a traditional Days Sales Outstanding (DSO) calculation looks misleading if using gross A/R and net revenue, when in fact they don’t have much collection risk.

Also, if anyone is researching the company and read a recent TMF article published this week called “The Trade Desk Is Giving $700 Million Back to Shareholders – Here’s Why It Matters”, I’d warn that I’m pretty sure that some of the numbers in this article relating to CEO stock options and the related expense are way off…off by hundreds of millions of dollars. Unfortunately I can’t find a way to message the author except via twitter.

I wrote a pretty comprehensive article about CEO Jeff Green’s stock compensation in May of 2022 (you may need to be a premium member to access this board), which I still believe has more accurate information.

Just as one example, in the new article published on TMF this week, it says that the CEO’s first tranche of stock options (that vest at $90 stock price) have a related $800 million expense and that the company still has $399 million of expense relating to the first, of eight tranches of stock options.

Unless I got something very very wrong (I don’t think I did), the $800 million of future expense relates to all eight of his tranches, some of which only vest and are worth anything to Jeff if the stock price exceeds $300 per share (It is around $55 today). I continue to believe that Jeff’s stock options grant are very shareholder friendly, as he doesn’t make money on his options unless we make a lot of money too.

I’m also pretty sure that all of the expense related to the first tranche (the $90 vesting ones) was fully expensed by the end of 2021 and there was no expense related to these in 2022 or in the future. The author also suggested that the expense for the second of his eight tranches hasn’t started yet, when in fact, I’m pretty certain that all eight tranches started expensing as soon as they were granted in 2021, with the lower vesting target ones would have much of their expense already recorded over the past two years, and the expense for the higher priced ones will likely go on for several more years (but the overall total expense will be much, much lower as they vest, compared to the last couple of years).

I didn’t check the new 10-K yet but I suspect the $399m number he quoted was all of the remaining expense for all eight tranches (e.g. in the first two years, half of the expense already hit us, and the other half will probably flow through over the next several years at smaller and smaller amounts per year (unless there is a big spike in TTD price such as to $200/share which will accelerate vesting, but not increase the overall lifetime expense related to the options)

I walk through the details in my post that I linked above for anyone interested in the accounting minutiae.

MongoDB (MDB)

Mongo’s earnings come out on Wedneday

MDB YoY growth

        Q1    Q2   Q3   Q4
2020    46%   39%  38%  38%
2021    39%   44%  50%  56%
2022    57%   53%  47%  26%(q4 guide)

They guided for +26%, but like TTD, MDB was also a company that got hit by headwinds (not tailwinds like most of our companies has) during the pandemic, and a weak economy during 2023 could have a swift impact on Mongo’s growth rates this year. But like with TTD, I’m a believer in the long term story of MongoDB, so I’m likely to continue to hold even if we see growth slide for a few quarters as long as the story continues to sound intact.

Datadog (DDOG)

I don’t have much to add to DDOG beyond what has already been well discuss on the board.

When I owned a lot of DDOG in early 2021, I prematurely sold out pretty promptly after one bad earnings and guidance result that I felt was part of a more significant trend than it ultimately turned out to be, and I proceeded to regret selling Datadog for much of the next year or two.

This time could be different and maybe I should be selling, but I tend to think that most tech companies are guiding conservatively right now given the softness in the prices of their stocks already and overall uncertainly about what is ahead with the economy. So I do think we could see some of the guidance we are hearing now (and next quarter too) as a bit more underpromising and hopefully overdelivering than normal.

So at least for right now, I’m planning to hold tight. I haven’t sold an of my DDOG and will likely keep most of it until we see another quarter’s results.

Snowflake (SNOW)

I admit that at least some part of my owning a decent amount of SNOW is the FOMO related. I haven’t had a chance to dig into their results much so I haven’t made any changes in my Snowflake holdings since earnings. It’s never been one of my highest confidence holdings as an investment. As a business, they will probably be great, I just don’t know what the right price or valuation for this company is, so I’ll keep my holding small, and, somewhat like DDOG, keep monitoring and be deliberate with any decisions I make.

Magnite (MGNI)

This is the supply side platform (SSP) that helps owners of advertising space (e.g. Disney+, Hulu etc) get the most for their streaming CTV and other ad space, as opposed to TTD which is a demand side platform (DSP) and generally helps the ad buyers get the right space to place their ads. MGNI’s earnings came out this month and were not anything to be excited about and the stock is lower. They continue to have a lot of potential but just haven’t executed and my patience is probably running out. I haven’t sold any but don’t plan to add to it. Will probably give them another quarter or two and see how thing go but my position will remain small

Cloudflare (NET)

Cloudflare also gets good coverage here too so I won’t add much, but if I “had” to sell a chunk of my TTD and MDB positions today and put it into another stock, I’d probably put at least some of it here.

That’s it. Big day coming up for me with MDB on Wednesday. Looking forward to continuing to follow and track our companies and their businesses with all of you.