May was rough for all growth/tech companies. Suddenly the prices and valuation of a wide variety of strong companies are really intriguing. I did expand my portfolio with a company that I haven’t owned in a while (DDOG) this month, but others like SNOW continue to tempt me but I find myself hard pressed to sell much of my other core holdings.
Here we go
Year to Date Performance
-29.3% YTD Jan -21.2% YTD Feb -29.8% YTD Mar -43.3% YTD Apr -60.4% YTD May
Not much to add here, my companies were down pretty much across the board, although June is off to a good start, especially after today.
May 31, 2022 Allocation
The Trade Desk (TTD) 33.9% MongoDB (MDB) 30.2% Magnite (MGNI) 21.8% Datadog (DDOG) 9.0% Nutanix (NTNX) 5.1% Pubmatic (PUBM) SOLD
So Trade Desk and MongoDB, which have played leap frog at the top of my holdings nearly every month of 2022 so far, continue their game, with TTD hopping back on top in May. And with MDB’s post earnings jump today, it’s already moved back ahead of Trade Desk once again in June.
After Pubmatic’s earnings release, I still think they are in a good position in a great, young industry, but, especially with companies like MDB and TTD so cheap, and another company I wanted to own again (DDOG) also so cheap, I decided I don’t need to own both PUBM and Magnite (competitors). Pubmatic may ultimately do better from here, but if I have to put my chips on one, it’s MGNI. I think Magnite, although they haven’t had the strongest past couple of quarters, I believe are better positioned with their offerings and still at a really compelling valuation today.
It really wasn’t that long ago that Datadog was my biggest holding, although I sold out completely about a year ago, and regretted it for the better part of the past year. With DDOG in the low $90’s/share, and the business chugging along, and a positive outlook, it was time to get back in the game. I contemplated splitting those funds between DDOG and SNOW, but ultimately decided I’d rather have a larger DDOG position and will continue to stay on the Snowflake sidelines for now.
Just a couple comments on some of the companies that I didn’t touch on above already:
The Trade Desk (TTD) and Magnite (MGNI)
Both of my remaining ad-tech companies reported in May. Trade Desk continued their string of really solid performance, while Magnite continues to position themselves well but not give us too much to celebrate just yet.
a) TTD Stock Based Compensation
On TMF’s TTD premium board, there was a discussion with concerns about Trade Desk’s stock based compensation. Much of the expense that is hitting Trade Desk’s financials in recent periods relates to CEO Jeff Green’s big option grant that he received in 2021. I did a writeup to assuage some of the misconceptions and assumptions that were being made, which if you have a TMF subscription (and if you don’t, get one!) is available here:
The summary version is that:
- Although the expense is going to look high for the next year or two, the big CEO portion is all from last year’s grant and is probably the only grant the CEO will get for the next several years
- In order for his options to vest, the stock price has to increase significantly from the $50/share it is today, to $90-$340/share (he vests more at various price targets as the stock moves up from $90 to $340.
- The stock has to close at the target prices, on average, for 30 days before his options vest, so they won’t vest if it just spikes up and come right back down
- Even after they vest, when CEO eventually executes his options, he has to hold the stock for a full year before he can sell the shares (except he is allowed to sell just enough to cover his income taxes related to the gains)
- So this award is very shareholder friendly and essentially means there is no way for CEO to profit much from it without other common shareholders making huge gains too, because the stock price would need to appreciate a lot and would be win-win for both CEO and shareholders.
and Jeff Green already owns millions of shares of TTD so his interests are very much aligned with the rest of us invested in The Trade Desk
b) Snapchat warning
A week ago Snapchat (SNAP) warned investors that “Since we issued guidance on 21 April 2022, the macroeconomic environment has deteriorated further and faster than anticipated,”.
This led to pretty much all advertising related companies, including Google/Alphabet, TTD and Magnite’s stock prices to drop, in some cases, double digit percentages that day in sympathy, I imagine under the assumption that all advertising spend would be reduced and that Snapchat’s issues were indicative of a broad situation.
Well it didn’t take long for Trade Desk to respond in a filing that they had not seen any change since providing their guidance at the beginning of May and is not lowering guidance:
Item 7.01. Regulation FD Disclosure.
On May 10, 2022, The Trade Desk, Inc. (the “Company”) reported its financial results for the quarter ended March 31, 2022, and provided guidance for the quarter ending June 30, 2022. As of May 26, 2022, the date of the Company’s annual meeting of stockholders, the Company continues to expect revenue to be at least $364 million and Adjusted EBITDA to be approximately $121 million for the quarter ending June 30, 2022.
which pretty quickly caused TTD to regain the 20% or so it had lost after the Snapchat warning. I’m betting that SNAP’s issues are more related to their own service and user engagement. Overall advertising will face some headwinds of the economy goes through a rough patch, I still think there are a lot of positive opportunities ahead of companies like TTD and MGNI that are going to benefit them in coming quarters and years, which I had spelled out in my SBC writeup:
- Travel Advertising increasing as people can travel more
- Auto advertising growing when microchips catch up and auto production catches up
- Other products needing to advertise more when supply chain problems eventually go away and supply/demand normalizes (today, many products sell out practically as soon as they hit the shelves and there is little need for brands to advertise as much as in the past)
- Election spending. Of course this is cyclical. It was impressive that TTD grew in Q4’21 even without election spending that quarter and a big election spend in Q4’20’s comparison period. This year, it goes the other way and we’ll have midterm election spending in Q3 and Q4 2022 without any in the comparison period last year, which should boost the growth in the second half of the year. On the earnings call last week, they said 2022 could be the highest election advertising year ever…and it isn’t even a presidential cycle! That’s nuts
- Overall shift from traditional linear advertising to digital programmatic spend will almost certainly continue for the next few years
- CTV will get a higher and higher percentage of advertising spend, where TTD has invested heavily
- Third party cookies go away and UID2 likely gets more and more adoption, making TTD’s tools and technology more valuable to advertisers, potentially moving share away from the traditional walled gardens of google, facebook etc
- And that’s not even considering the potential for some growth internationally where TTD currently has very little revenue today
I wrote up a post on MDB’s really nice quarter yesterday when they reported:
I continue to be really happy to hold MDB atop my portfolio and expect more and more business success from them in the future.
I’ve been the lower case f, foolish one to stick with Nutanix for some time. My confidence that their transition to subscription software would reap rewards especially once the first batch of subscriptions started to renew at the end calendar 2022 resulting in very low cost revenue that would finally start to shine through with accelerating growth in their GAAP results.
Well, their latest quarter reported this month was actually quite good. But there are so many ugly things with their guidance for next quarter, right as I had expected growing strength, that it’s time for me to agree with what many on this board have long suspected (for years), that this story probably isn’t going to play out like I hoped it would.
In their earnings press release, the filing is dominated by a big paragraph at the beginning that basically warns investors of new unexpected challenges during the beginning of the new quarter, primarily losing new sales of their software and subscriptions because customers can’t get the hardware needed due to supply chain problems (which really calls into question just how much of a pure software play NTNX has really become despite moving away from passthrough hardware sales as part of their solution a couple years ago).
Maybe it’s an accurate depiction of the current hardware fulfillment environment, but it definitely strikes me as strange that they have navigated all of the supply chain environment when it was at its worst over the past year and now that other companies are saying the supply chain is improving, Nutanix is telling us their customers can’t get the hardware and therefore are at a minimum postponing signing on. They claim that there is just as much customer demand as they were expecting, but they just can’t fulfill and it’s due to products that they don’t even supply (although I believe they have some kind of agreements with several manufacturers that were intended to prevent this sort of bottleneck from occurring). And unless there is a huge pent up demand that all catches up in a couple quarters (unlikely) then every loss of postponed sale really hurts the compounding growth trajectory when the new subscription model relies on it.
They also say they’re having a hard time with talent leaving the company and needing to replace them, which I’m sure is challenging everywhere these days, but I tend to think Nutanix is not going to be at the top of too many strong desired destinations given the recent past. So I think this is going to be a real issue for them for some time, probably even more so than any supply chain problems.
This all resulted in their projecting a decrease in revenue next quarter. Even during the worst of the pandemic in 2020, they had consistent YOY revenue growth. 2019 was the last time they’ve really had a decrease, even with the moves from hardware to software and then to subscription which muted their GAAP revenue quite a bit due to the accounting rules.
So my reaction is that I think the stock is going to be dead money for the next couple of quarters and it doesn’t make sense for me to continue to hold on to it, while there are such compelling valuations on other companies that are more likely to outperform.
I sold about half of my NTNX stake that was in my IRA last week, fortunately at a time when the companies I put the money into (DDOG, MDB, TTD, and just a little to MGNI) were at lows and have already bounced nicely. I’d say it’s likely I’ll sell off most, or all, of the rest of my Nutanix during June.
That’s It For Another Month
So at the end of a really ugly five month stretch to start 2022, I’ve got a really concentrated portfolio, mostly made up of companies that I’ve owned for 3+ years, that I would say I’m likely to own for at least a few more years. I’ve definitely had days in recent weeks where I’ve thought about my investments and portfolio more than usual. All this talk about the overall economy and possible recessions can be hard to ignore, but at the end of the day, you don’t need to get all of your investments right. Just one life changing investment can change the trajectory of your portfolio for years to come. I’ve had a couple of those over the years, and I’d say there is a good chance that I’ll be looking back at the companies I own today and thinking about one or more of them in that same way in the future too.
Everyone have a great start to your summer, take care, and I look forward to another month of great discussions