mekong22 July 2022 Portfolio Update

I didn’t get a chance to do a June update, although there hasn’t been a lot of news on my companies in the past 60 days, so I’ll cover anything pertinent this month. The only real update on my portfolio is that I bought my first shares of Snowflake in June and then made very trades at all in July.

Year to Date Performance

-29.3% YTD Jan
-21.2% YTD Feb
-29.8% YTD Mar 
-43.3% YTD Apr
-60.4% YTD May
-65.6% YTD Jun
-62.2% YTD Jul

So three straight months now that my portfolio has really just drifted in a relatively tight range with lots of individual days where the portfolio swings as much as 5%, but it’s tended to flip flop and have a down day no sooner than we came off a nice up day, back and forth.

June 30 and July 31, 2022 Allocation

                       7/31    6/30
MongoDB (MDB)         42.7%   38.2%
The Trade Desk (TTD)  27.9%   27.7%
Magnite (MGNI)        13.3%   18.3%
Datadog (DDOG)        10.9%   10.7%
Snowflake (SNOW)       5.2%    5.2%

MDB, TTD, and MGNI have been among my top holdings for the past three years or so. I haven’t added to MDB lately, it’s stock has just performed better than most of my other holdings lately and has grown into a pretty large percentage, but many of my MDB shares were purchased long ago and have a very low cost basis (the majority of my MongoDB shares have a cost basis between $57-84/share).

In July, MDB was +20% and MGNI was -15%, and my other companies each drifted up a little bit, so that explains the shift between those two holdings this month, I didn’t buy or sell any shares of either of those.

SNOW – Snowflake was a new holding for me in June. Since it’s IPO, the valuation had always kept me away. It’s still the company that I own that I feel I have the least understanding of, but given the current valuation is more reasonable and all of the positive indications that we continue to receive from many users on this board that understand the technology and industry better than I do, I decided it was time to purchase my first shares.

In June I also added a little bit to my relatively new Datadog stake, and added a very small amount of Trade Desk shares too.

In July for all intents and purposes, I really had no significant transactions. I added a very tiny additional sliver of both DDOG and SNOW with some new funds that I had available for investment, but that’s it. If I find myself with additional new funds to invest next month, I’ll likely be adding more small amounts of SNOW, DDOG, and potentially TTD.

I feel like this upcoming earnings season is going to be one of the most unpredictable ones that I can remember. While I can’t imagine any company reporting blowout earnings and significantly raising guidance in a surprising way in this environment, I could see any of my companies having any other scenario:

  • Good quarter with unchanged guidance or insignificant raise
  • Average quarter with no raise
  • Disappointing quarter with no raise or reduced guidance

The good news is of course, that some really weak expectations are probably already baked into many tech stocks, but even despite that, a bad report (like ROKU last week, which was VERY bad) can still tank a stock price -20% or more.

Since there won’t be much new to discuss on MongoDB until their earnings come out, and DDOG and SNOW get well covered on this board already, I’ll just speak a bit about TTD/MGNI and ad-tech in general, where there have been some interesting developments lately.

The Trade Desk (TTD) and Magnite (MGNI)

Not surprisingly, both of my ad-tech companies have been performing pretty bad considering some of the macroeconomic conditions and various headwinds that I’ve written about in the past. All of the headwinds are likely to be temporary and will eventually come to pass. Both of these companies are still positioned really well to benefit from future trends in digital programmatic and particularly CTV advertising.

Trade Desk is already very strong and profitable, while Magnite still has a lot to prove and hasn’t been as consistent. Granted Magnite could potentially offer a bigger reward if MGNI gets it right and can close some big deals while keeping a solid relationship with Disney as they move towards an ad supported tier later this year.

There have been two newsworthy matters lately impacting these companies and their industry, neither of which is directly tied to TTD or MGNI, but have certainly impacted their stock prices.

Snapchat/Google(Alphabet)/Roku earnings

In late May, Snapchat warned that conditions had deteriorated and their quarter was going to be weak, which caused all ad-tech stocks to drop. A few days later, TTD put out a communication that they still expect to achieve their previous guidance and it was implied that they weren’t seeing the weakness that SNAP was. More recently SNAP reported their quarterly results, which were bad, and TTD again saw it’s stock drop despite no news from them.

It’s very possible that Snapchat’s issues are snapchat related and not going to impact the overall ad-tech space at least not as significantly as what they are feeling. TTD’s business is much more spread out across different industries.

The next day, Google’s earnings were better than expected (tho still not exactly fantastic), and then last week ROKU reported a terrible quarter and really bad guidance, which again drove TTD and Magnite’s stock down.

Both Trade Desk and Magnite are reporting in about two weeks on August 9th. I could see either one of them surprising with good news or disappointing news. There is a part of me that hopes that TTD’s earnings are so-so and the stock goes down more than it deserves and I can add more at what could be a really great price considering their longer term prospects. But I already own a lot of TTD so I may not want go too nuts. I suppose if Magnite makes me feel like their story isn’t playing out and TTD still looks good, I could potentially reallocate some from one to the other and still not increase my overall exposure to ad-tech, but we’ll see.

Netflix Microsoft deal

This one was a bit of a shocker. Not long after Netflix announced that they would be adding an ad-supported tier and CEO Reed Hastings specifically said they would be “have other people do all of the fancy ad-matching and integrate all the data”. Most people figured these “other people” would be established players in the CTV and streaming ad tech market (Google, ROKU, Trade Desk, or even potentially a Magnite or Pubmatic). I suspected they would use a combination of those companies and get the best of everything out there to ensure they were maximizing the monetization of their ad inventory.

Well surprise surprise, when they announced that they would be partnering with Microsoft:…

Microsoft did buy a digital advertising company, Xandr less than a year ago, which didn’t seem to get a lot of attention, but maybe it should have…

So it’s interesting. First of all, I don’t think many Trade Desk (or Magnite) investors were banking on a huge boost from Netflix business in the near future. Netflix probably won’t even roll out their ad supported tier until 2023 and it could be a while before it grows too significantly. If you asked me at the beginning of 2022, I would have said I bet it would be three more years or more before Netflix even decided to ad an advertising supported tier.

But either way, it sounds like Microsoft will be largely building something new for Netflix here, rather than Netflix relying on the experience of the major players that are already established. I won’t be surprised if Netflix saves a lot of money/fees/commissions by going with Microsoft, but for every dollar they save, they lose several dollars of revenue by not monetizing their ads as well as they could have, and they end up profiting less from the ad-support, than they could have. Or I might be wrong and Microsoft ends up being amazing.

I haven’t seen any real discussion from Netflix on this beyond the joint press release that they put out with MSFT, so I’m eagerly awaiting hearing the Trade Desk analyst call next month where this will certainly be a hot topic for discussion. At the end of the day, TTD doesn’t need Netflix, but of course a significant about of new revenue from them would have been great. And there is always the chance that TTD does eventually get a piece of Netflix’s ad revenue if it is eventually (maybe a few years down the line) opened up to independent DSP’s, even if Microsoft is still their main partner.

And let’s not forget that, what could be the biggest advertising spend on any political cycle may happen this year, despite it being a midterm election. Some of that spend will certainly happen in Q3, with a larger amount in Q4. I would bet that these companies are going to be pretty conservative with their guidance on the political boost for Q3 when they announce Q2 earnings with a strong possibility of beating that particular estimate, regardless of what happens to other ad markets that have been constrained for several quarters already (auto, travel, most any consumer product impacted by supply chain to get enough stock on the shelves to make it worthwhile to advertise, etc). And as advertising budgets get constricted, smart companies should want to move their remaining budget to where it can be most effective, and targeted programmatic digital advertising fits that bill nicely.

Wrap Up

That’s it for another month. It hasn’t been fun watching tech company stock prices lately, but at the end of the day, these are great companies whose impact and relevance should continue to grow in coming years. I won’t get them all right, but it only takes a few good picks to make a market beating, life changing investing run. It feels like the pain could linger longer this time than rough markets in the past, but maybe it always does and it’s hard to go back and remember once things turn positive.

Good luck to all. Thanks as always for the wonderful discussion, and enjoy the rest of the summer!