May started off pretty negative when two of my largest positions, Magnite and The Trade Desk both dropped by more than -20% during the first week. After being up +45% YTD overall in mid February, my portfolio hit a low point in May of about -30% YTD before coming back a bit over the past week or so. This makes two years in a row with huge gains over the first six weeks of the year followed by a more than -50% drop from the peak to the low point. Needless to say, I’ll be thrilled if the second half of 2021 goes even half as well as it did in 2020.
Here’s where things stand at the end of May:
+5.0% YTD Jan +14.6% YTD Feb -9.2% YTD Mar -8.2% YTD Apr -19.7% YTD May
In addition to Magnite and Trade Desk’s steep drops this month (despite earnings releases which weren’t all that bad, and I believe show signs of great things to come in the future), two companies that didn’t report earnings this month and didn’t really have much of any significant news, Teladoc and Docusign, also dropped quite a bit, -12.6% and -9.6%, respectively, just simply due to market fluctuations. My lone bright spot this month was Nutanix, which reported earnings last week, and was up +16.5% during May. My other holdings, MongoDB and Smartsheets, were essentially flat this month.
Next week, we get quarterly earnings from MongoDB, Docusign, and Teladoc, so June’s performance could be driven by what happens during week 1, once again.
Only six months ago, I owned 14 different stocks. Valuation compression on some of my highest confidence companies has led me to concentrate further this month and I’m currently down to only 7 holdings.
The two casualties this month were Datadog and Lightspeed, both of which I’ve now sold out of completely. Datadog is a solid company that has done really well for me and I bet shareholders will continue to be rewarded, but the steep drops in Docusign and Teladoc, in particular, led me to bid farewell to DDOG and consolidate my portfolio further. Lightspeed is a slightly different story. I bought LSPD with the expectation that they would really thrive as the post-pandemic reopening unfolded, particularly as restaurants came back. While I still think that will be the case, I have less confidence that businesses like restaurants will be able to get enough employees to come back to work as quickly as they would like, and it is going to prevent the reopenings from being as strong as I was hoping for. So combine my less enthusiasm for Lightspeed, and at the same time other companies that I am enthusiastic about selling for a discount, and it felt like a no brainer to move out of LSPD.
So here is my new allocation at May 31st:
30.6% Magnite 16.7% MongoDB 15.9% Nutanix 12.9% The Trade Desk 10.3% Docusign 8.0% Smartsheets 5.6% Teladoc
After selling Datadog and Lightspeed, I used the proceeds to add larger amounts to Docusign, MongoDB, Smartsheets, and Teladoc, and I added just a little bit more to Trade Desk after it’s stock price came down so much post-earnings. Although I didn’t add to Magnite and Nutanix, Nutanix has grown into a larger percentage of my portfolio due to NTNX gains in May while the other holdings dropped.
Thoughts on the Companies
Magnite and Trade Desk
I wrote up my thoughts on MGNI and TTD after they reported earnings this month here:
Not too much has changed since then, although it was announced that HBO Max is adding a lower priced, ad-supported tier. I’m not surprised, as TTD CEO Jeff Green has been saying for a long time that all streaming services (including Netflix) will eventually have to add an ad-supported tier. Netflix has always said it won’t happen, but I bet in a few years, they may change their tune. Hulu has been saying for a very long time that they make more money off subscribers that choose the cheaper ad-supported tier, compared to subscribers that pay the higher monthly price for ad-free viewing, and I suspect that is true of most services that offer both types of subscriptions. That is likely to expand further as more advertising moves to programmatic, which should enable advertisers to better target ads, even despite some of the changes being made by Apple, etc. to enhance privacy.
Based on what I’ve read, Peacock (NBC)’s $4.99 ad-supported tier makes up 96% of their subscriptions with only 4% of subscribers paying the extra $5 for ad-free. 70% of Hulu’s 82 million viewers are on the less expensive ad-supported version. All of this bodes well for the future of businesses like Trade Desk and Magnite.
I also highly recommend anyone interested in Magnite listen to the great interview that Laura Martin of Needham conducted with their CEO and CFO, which will be available on video on MGNI’s investor relation page for a limited time
Also keep in mind, both companies are up against their most pandemic impacted quarters of 2020 in Q2. TTD will certainly do close to, if not exceed, +100% revenue growth in Q2. I’m betting Magnite’s organic/proforma revenue growth will surprise over the next couple of quarters as well.
Not much news from them this month. They’re the leader in the NoSQL db market, which is only going to keep gaining share of the overall database market as companies rely less and less on traditional SQL databases. The change won’t happen suddenly overnight as many companies move a portion of their db needs to MDB first and then expand over time. I expect Mongo to be a MUCH bigger company 5 and 10 years from now.
This one has taken longer to play out than would have guessed a year ago, due to the three major transitions in their business and sales model over the past couple of years, but all of the changes have been, in my opinion, the right ones, for their business in the long term. I think others are finally starting to see the true recent growth of this company that has been disguised if you are just looking at their GAAP revenue, but nearly every analyst that follows them raised price targets after this week’s earnings release, and I believe they are all still very conservative.
What can I say, they are the leader in e-signature, they still have lots of room for growth, particularly internationally, in that core market, and they have their agreement cloud ready to go, which I believe is also going to be a winner and will fuel continued growth for the next several years. And I’d consider today’s DOCU price to be downright cheap, even with pretty conservative future growth estimates.
While their growth rates in the high 30%’s to low 40%’s recently is slower than many of the companies we follow here, in my opinion, it still warrants a much higher valuation than SMAR currently has. I still don’t understand why the market cap is as low as it is given the potential for continued growth, and I still won’t be surprised if they get acquired at a nice premium if the stock doesn’t soon start to reflect the valuation that I feel they deserve.
Make no mistake, competition in virtual telehealth services is going to be fierce for years to come. But I think the market expects this to impact TDOC’s growth rates a lot more than it will. The don’t even expect to really significantly cross selling with Livongo customers for a couple more quarters. TDOC is still down about -50% from it’s highs earlier this year.
At one point Teladoc (now combined with Livongo)’s market cap was valued nearly as low as the acquisition price for the LVGO purchase alone! Consider that many Livongo shareholders thought that TDOC’s acquisition was a bad thing because the company could have grown to be worth even more than the purchase price. And consider that now you’re paying that same price and getting both LVGO and Teladoc’s telehealth business. Unless you think that Teladoc is going to completely screw up Livongo, and their own business too (which there is no evidence that I’ve seen suggesting that is happening or likely to happen), then I think TDOC shares are still just an absolute steal at these prices.
Although I wasn’t wise enough to buy Upstart like many of you, it’s been fun watching the gains that UPST shares have had the past couple of weeks. It reminds me a bit of when I first bought into Magnite last November and they reported a great quarterly result, yet the stock dropped about -10% the next day giving us an opportunity to load up further. Three months later the stock had risen 500%+. Stock market inefficiencies can be scary, but they can really drive gains over the long term when you stay disciplined.
Despite the weak performance so far in 2021, I’m excited about my concentrated portfolio right now. Many of my companies (MGNI, NTNX, TTD) are likely to show significantly higher growth rates over the next few quarters compared to what they did over the past few quarters. Most of them are existing or burgeoning leaders in industries that are going to become more and more. And most of them are just downright cheap, compared to how I value them. I probably won’t be right with 100% of them, but I’m betting that a year or two from now, this portfolio will be worth a whole lot more than it is today.
Everyone enjoy the long holiday weekend and have a great start to the summer!