Mekong22 November 2022 Portfolio Update

[mekong22]

November was another weak month overall for my portfolio, but I do feel like light at the end of the tunnel is getting closer.

I waited until today to post my review in order to get MongoDB (MDB)’s earnings report into the writeup, and they certainly did not disappoint, as MDB is up more than +25% after hours this afternoon

Here’s my YTD performance through November

-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
-54.4% YTD Aug
-64.5% YTD Sep
-65.8% YTD Oct
-69.3% YTD Nov

And my breakdown at November 30th:

TTD    44.0%
MDB    25.8%
SNOW   11.4%
DDOG    7.7%
MGNI    6.3%
NET     2.9%
CRWD    2.0%

My Magnite (MGNI) position, although small, nearly doubled as the stock went from about $7 to $12 during November. I didn’t add any new shares, it was purely the improved stock price that moved it up.

I completely sold out of my very small PUBM position in November too, spreading the proceeds among a few of my existing holdings in small amounts.

For some of the reasons I described in my October writeup last month, I’ve been less enthusiastic about SNOW, even at today’s realtively low historical valuation, despite their impressive growth rates, so on Monday (yesterday) I sold about 4.5% and shifted it to MDB. That’s isn’t reflected in the above which was as of 11/30, but in December I dropped SNOW down to about 7% and increased MDB to about 30% (which is likely to expand tomorrow if today’s after hours gains hold).

Although MDB was already a pretty big position, I really felt that their stock had been beaten down with more pessimistic expectations than it deserved. I was betting that they wouldn’t see as significant a slowdown as they did in the early COVID days (which seemed to be priced in) and I thought it was worth the risk of adding right before earnings. And I’ve always felt great about the long term runway for Mongo over the next 3-5 years or more. At least so far, that seems to have been a good move.

Thoughts on the companies

The Trade Desk (TTD)

Looking at the YoY growth rates by quarter over the last few years:

       Q1    Q2   Q3   Q4
2020   33%  -13%  32%  48%
2021   37%  101%  39%  24%
2022   43%   35%  31%  24%(q4 guide)

And sequential growth (note that Q1 is typically going to be negative sequential growth given the seasonally strong holiday quarter in Q4)

       Q1    Q2   Q3   Q4
2020  -26%  -13%  55%  48%
2021  -31%   27%   8%  31%
2022  -20%   20%   5%  24%(q4 guide)

The Q3 ’22 +31% growth (+5% sequential) and +24% guidance for Q4 was definitely better than I expected after hearing pretty negative ad industry news from Google, Facebook, and other ad tech companies before Trade Desk announced.

Not much new to add here beyond what I wrote last month, but TTD is back below $50/share again and I have to use a lot of restraint not to add even more to my position at these prices. With TTD at 44% already, I think I’ll stand pat.

MongoDB (MDB)

MDB YoY growth

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

And MDB sequential growth

      Q1   Q2  Q3   Q4
2020  6%   6%   9%  13%
2021  6%   9%  14%  17%
2022  7%   6%  10%   1%(q4 guide)

I said last month that Mongo has a tendency to be conservative, and that certainly seems to be the case with the results announced today. Their guidance was for flat 0% sequential growth and it came in at +9.9%. I suspect that next quarter’s guide of +1% sequential will prove to be sandbagged as well.

I’m typing this as I’m simultaneously listening to their earnings call, but a couple of the quotes I’ve written down so far (these may not be exact quotes):

“rebound in consumption across the board” (across industries and geographies, not all the way back to pre-pandemic, but bounce back from Q2)

“improvement in Atlas consumption trends in Q3”

“stronger underlying usage, particularly in midmarket and in Europe”

And one of the analysts just commented how impressive it is for Enterprise Advanced (EA) (“incredibly strong EA quarter”) business is showing momentum, while the peers are moderating.

At the beginning of this year, they warned investors not to expect income until next year, but it looks like, at least on a non-gaap basis, they are going to get there early.

Non-gaap income (Loss)
($58 million) loss – Two years ago
($38 million) loss – Last year
$21 million income! – Guide for this year based on $0.31 per share new guidance

They are already at $18 million non-gaap income in the first nine months of this year so I bet they finish the year even better than their (likely conservative) $21 million FY guidance.

I have to believe that they are going to see revenue outpace operating expenses next year to continue to expand profits and start to see even more meaningful income going forward. Will be very interested to see what the initial guidance for next year looks like in March.

Snowflake (SNOW)

SNOW YoY growth

       Q1    Q2    Q3    Q4
2020  149%  121%  119%  117%
2021  110%  104%  110%  101%
2022   85%   83%   67%   50%(q4 product rev guide)

Snowflake only provided guidance for product revenue, but product revenue accounts for 94% of total revenue, and both product revenue and total revenue grew at +67% last quarter so I think it’s safe to pencil their +50% product revenue guide for Q4 into the above chart as an estimate of total revenue growth.

And SNOW sequential growth

      Q1   Q2   Q3   Q4
2020  24%  22%  20%  19%
2021  20%  19%  23%  15%
2022  10%  18%  12%   3%(q4 est. guide)

As I described in more detail last month, it took me a long time to buy my first SNOW shares this year, and to be honest, SNOW still scares me a bit, even with the price where it is today. I have no doubt they will grow much faster than most any other company I own for the next couple of years, but a lot of that does look, to me, like it’s baked into their valuation already.

A lot of much smarter tech people than myself hold SNOW in really high regard and I’m betting they’re right. But I’m keeping my eye on them closely. If their growth rate can’t stay significantly higher than the other companies I follow for at least the next couple of years, I can see my Snowflake investment unperforming, not necessarily losing money, but potentially not doing as well as other stock holdings.

Taking all of that into consideration, and given the weak MDB stock price lately, I decided that I would be more comfortable with a smaller percent of my portfolio in SNOW, so I sold about 4.5% of my SNOW yesterday reducing my SNOW allocation from about 11% to 7%, and put all of the proceeds into Mongo, making that already large holding even larger.

Honestly, I still feel “iffy” with my Snowflake shares. I don’t think I’ll lose money on them from here, but thinking ahead 2-3 years about some of my other holdings and where their valuations could potentially move from where they are today, I don’t have a lot of confidence that SNOW will outperform.

Datadog (DDOG)

DDOG YoY growth

      Q1   Q2   Q3   Q4
2020  87%  68%  61%  56%
2021  51%  67%  75%  84%
2022  83%  74%  61%  38%(q4 guide)

And DDOG sequential growth

       Q1   Q2   Q3   Q4
2020   15%   7%  10%  15%
2021   12%  18%  16%  21%
2022   11%  12%   7%   3%(q4 guide)

Datadog is another one that I’m particularly interested in seeing what their 2023 full year guidance looks like, although it will still be a few months until we get it when they report Q4. The soft Q4 guidance could be a combination of conservative estimates given the macro uncertainty right now, but hopefully isn’t going to be a sign of things to come. It’s a great company with great products that I feel will navigate whatever comes in the near term.

Cloudflare (NET)

NET YoY growth

       Q1   Q2   Q3   Q4
2020   48%  48%  54%  50%
2021   51%  53%  51%  54%
2022   54%  54%  47%  42%(q4 guide)

And NET sequential growth

        Q1   Q2   Q3   Q4
2020    9%   9%  14%   10%
2021   10%  10%  13%   12%
2022   10%  11%   8%    8%(q4 guide)

I was also late to buy in to Cloudflare. I like what I see here. I like the long term IT security growing needs for products like the ones NET offers. I think the post-earnings stock reaction was way overdone.

They don’t have to hit the lofty $5 billion in five years revenue goal to make this a really good investment. I could see myself wanting to reallocate a bit more into Cloudflare.

Crowdstrike (CRWD)

CRWD YoY growth

       Q1    Q2    Q3   Q4
2020   85%   84%  86%  74%
2021   70%   70%  63%  63%
2022   61%   58%  53%  46%(q4 guide)

And CRWD sequential growth

       Q1    Q2   Q3   Q4
2020   17%   12%  17%  14%
2021   14%   12%  13%  13%
2022   13%   10%   9%   8%(q4 guide)

I admittedly haven’t dived into CRWD’s quarterly results as closely given that it’s a pretty small position for me. Obviously the stock tanked after earnings. I personally don’t see the results as being so bad. Sure, they didn’t beat by as much as they have in the past, but given the valuation and that they are still growing around 50%, it feels a bit overdone and I’m more likely to want to add to my CRWD from here than to reduce it. That being said, I need to do some more homework given that this is a company I have less of an overall grasp on.

Thanks as always to Saul, and the rest of you that contribut to continued great discussion on so many companies here

-mekong

[RaptorD2]

Hi Mekong,

With no intention to critique your report, and considering that I know nothing about you (age, life-stage, etc.), let’s just say I’m consistently intrigued by your large TTD position.

While I think it’s a fine company (I have a smallish position myself) even you have often mentioned near-term headwinds for advertising in the coming months which may increase considerably.

While it is not a judgement call on my part by any means, all the headwinds I perceive in place for the company just make me wonder why you are putting so many eggs in the TTD basket at this particular time.

If you don’t care to comment, no problem, it’s certainly none of my business anyway. I’m just a curious cat always eager to learn from others, but who would prefer not to be the cat who gets killed by curiosity.

[mekong22]

Hey Raptor

In a nutshell, I would say my confidence in TTD stems from the following factors

• I feel like I understand the company and its prospects and opportunities better than other companies I follow
• They are in an industry (programmatic digital advertising including CTV) that is going to grow significantly overall for several years
• They are the clear leader in their space (DSP) and are taking more and more market share
• Leadership (CEO Jeff Green)

I’ll try to keep this post on topic and not get into portfolio management here, but I will note that I didn’t exactly put 40%+ of my money into a single stock. I don’t think I ever invested even 20% into TTD. TTD has just grown a lot as my largest group of shares were bought for less than $12/share in 2019, so even with the stock now at half of what it was at the highs last year, it’s still up 300%+ in a few years while other stocks I own such as Cloudflare are quite a bit lower than my cost basis, so that caused TTD to become a outsized. Strangely enough, TTD is likely to become a smaller percentage of my portfolio, likely down into the high 30%’s tomorrow simply by MDB gaining 25-30% assuming Mongo’s post earnings pop sticks tomorrow. But both TTD and MDB have been among my three top holdings consistently since 2019, which I guess is fairly unique around here. Combined they are lot to have in two stocks, and if multiples start to expand again and the portfolio gets large, I would probably be less comfortable and reallocate more, but right now, I think they are two great places to have my money.

Back to The Trade Desk

To your point about near term headwinds. Yes, it’s true that spending pullbacks can have an immediate impact on TTD’s results and that is less predictable than companies that have more traditional recurring revenue, such as from subscriptions. However there is a flip side to the equation where TTD’s revenue can suddenly spike in a way that subscription based businesses cannot.

TTD’s business is set up very similar to a non-advertising company that I used to be very familiar with. Think about it this way…they create the platform, then sign up the owners of the advertising inventory, and also sign up the customers/buyers of the ad inventory, and then as long as their tech/platform is good and they keep adding good tools to make their platform capable of much more than any of these companies could manage by going it alone, TTD can sit back and really doesn’t have to touch anything or incur additional sales expenses while the sales come in and grow. They essentially set up both parties (buyers and sellers) and those two parties could transact double, triple, even ten times as much next year and there is really no need for TTD to actively participate or incur costs to support that growth, but they’ll keep collecting their take-rate commissions on those expanding sales on the TTD platform. It scales beautifully.

Now of course there is more to it than that, as they certainly need to invest in growing infrastructure and bandwidth and a roadmap of new tools and who knows what else. There will be incremental costs as transaction levels rise. But I expect they will be quite small in order to support even significantly growing volumes from existing ad inventory owners transacting with existing ad buyers.

Then throw in some of the things they are doing like their Walmart deal. I don’t know all of the details of how it works, but I believe it somehow links Walmart’s advertising activities on TTD’s platform to live sales data, not only from Walmart.com but also from sales being transacted in their physical stores. So they can do test ad campaigns and get quick feedback on how it is causing people to buy both online, and in person, and enabling them to decide if the campaign is effective and whether it should be rolled out across larger geographies or country wide. Tools like that are worth their weight in gold and can help manage return on advertising investments in ways that were never possible in the past. The way Jeff Green talks about it, it sounds like the kind of program that they feel many other large companies can implement too.

I also love the way they structured their CEO stock based compensation. I wrote a whole post about it, which I can find a link to if it isn’t easy enough to search from my profile (it’s on the TMF TTD premium board). And I equally love the fact that Jeff Green was confident enough to accept the SBC structure that he did.

In short, Jeff’s options:

• Aren’t worth anything to him unless the stock is over $90/share
• Are worth much much more if the stock is over $250-$340/share
• Even when the stock goes above the various vesting thresholds between $90-$340, it has to stay above that amount for 30 days before each tranche of Jeff’s options vest, so it can’t just spike up for a day or two
• Even after some of the options vest, when the 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 the stock awards are very shareholder friendly. As with any stock based comp, there would be dilution when large amounts of his options vest, but they are structured in a way that the dilution only occurs when every share of stock is worth much more than it is today. That essentially means there is no way for the CEO to profit much from them without other common shareholders also making huge gains too because the stock price would need to appreciate a lot and would be a win-win for both CEO and shareholders. And he already owns millions of shares of TTD so his interests are very much aligned with the rest of us invested in The Trade Desk.

Jeff Green has made a lot of (predictions? prognostications?) about the future of the industry, e.g. he said for years that all streaming services would eventually have an ad-supported tier, including Netflix. Netflix said for a long time that it would never happen. And here we are with Disney+, HBO Max, Netflix, all announcing ad supported tiers. Hulu has said in the past that they make more money from their low cost subscribers that watch the ads than they do from the people that pay extra for ad-free, so it’s not a big surprise that things are moving this way. Netflix, Disney, etc don’t need to worry about cannibalizing themselves and risking higher paying ad-free subscribers shifting to lower fee ad supported tiers, because it’s actually a good thing and if they set it up right, the streamers will make more money from them when they move down a tier.

So Jeff seems like he’s been so right about so much, he’s certainly positioned his company to be where it needs to be a the right time, that I’m betting he’s going to be right a lot in the future and I’m betting he’s going to continue to grow the company to the point where his options are going to vest a whole lot of their tiers in coming years. Maybe he doesn’t max out and vest the top tier that needs the stock to be $340/share, but I’ll be surprised if they aren’t successful enough to get it up to where the stock is $200 or more a few years from now. It could be lumpy with lots of ups and down in between, but I haven’t seen anything that doesn’t make me confident that this is where they’re headed.

Oh yeah, and they’ve been consistently profitable for many years, and manage their spending really well, while growing at a high clip year after year. You know, just that little thing that investors and owners love called net income and cash flow

Not to mention some of the industries that haven’t had to advertise much in recent years because they haven’t had enough product to sell (e.g. automotive and most any company suffering from microchip shortages, luxury wristwatches, any company with supply chain issues that saw their product flying off the shelves as soon as it arrived without needing to spend on ads). Some of these companies are eventually going to have a tougher time selling what they have and that is going to be a good thing for advertising, more competition and more pressure to move product will mean more ad spending and companies wanting to spend in the most effective ways (programmatic targeted ads). In some ways, a recession could actually lead to increased ad spending for some companies.

TTD thinks that when cookies completely go away, that’s going to be positive for The Trade Desk, and could increase their market share further, as they feel they are better prepared, with UID2 and other tech they have been planning for a cookie-less world for a long time.

That was a lot of stream of conscious, but I think I hit on a lot of the key things in my mind that make TTD a great company to own for a long time. If there is a recession in 2023, TTD may not grow as much as they otherwise would. But I have to believe they will continue to make market share regardless and no matter what the next few quarters bring, I think they’ll be growing strong and getting bigger and more profitable in 2024, 2025, and beyond

-mekong

[RaptorD2]

Thanks, Medong, I’m glad I asked and hope that our off-topic conversation helps someone here. That’s an excellent “defense” which of course you don’t need. Strangely, your first point resonates strongest with me, in that TTD is relatively easy to understand, especially for non-techies like me, who must rely mostly on numbers when investing in high-tech companies.

I suspect the biggest difference between our viewpoints is indeed our respective life stages. Since I just turned <gasp!> 70 it has become harder than it was earlier in my investing career to look out 10-20 years into the future when evaluating my investments.

Obviously, none of this reflects on the overall long-term quality of the company at all, and my concerns are much shorter term. Bottom line: I think we are both doing what we need to do to meet our goals.

Well done and good luck!