This is my summary of my positions at the “end” of August. I recently realized that I will be coming home at the end of the actual month, traveling six time zones, and will therefore be very jet lagged, and very busy with unpacking and stuff, and in no shape to put this together next weekend, so what you get is a “four-week summary” a week early instead. As always, I’d welcome questions or comments on what I did or didn’t do, and will try to respond.
By the way, if you have a tendency to skip through parts of my monthly summaries, feeling they look familiar from the month before, I’d suggest that you read through instead, as I constantly make changes and include new reflections, thoughts, and observations each month, even in parts which superficially may seem repetitive. For example, my end of June explanation of the valuations of our companies was considerably modified, simplified, clarified, and improved, from the end of May version. Also some ideas are worth reminding yourself of, even if you’ve read them before.
Please note also that in my discussions of company results, I almost always use the adjusted values that the companies give.
If you want to learn more about what is going on with the valuation expansion of our companies, I suggest you reread the explanation in June’s summary.
DEALING COMFORTABLY WITH HIGH-PRICED STOCKS
Let me start this month with a way for dealing more comfortably with high priced stocks. This seems relevant as the majority of the stocks in my portfolio, and perhaps in many of yours, are selling at prices over $100 per share.
If you have shares of a stock selling at $270, and it drops (or rises) $10 in price to $260 (or $280), that $10 seems like a very big move in one day. I’d suggest that you think of it as if you have ten times as many shares, but of a $27 stock (which is EXACTLY the same thing for all prictical purposes). Then that $1 move from $27 to $26 (or to $28) is still a good-sized move, but not nearly as scary as a ten dollar move. It’s a very effective mental exercise.
Here’s a quick example: Mongo was down on Friday from $142.34 to $139.37, about three dollars… Big drop? Well just move the decimal place over one. It fell from $14.23 to $13.94. A snoozer. Wouldn’t even wake you up.
ON MARKET TIMING
I’m no good on timing the market, and I don’t try. Think about it like this: If I was using market timing, exiting all my positions at the end of April 2017 would have made great sense. I was up a “ridiculous” 26% in four months. I had already beaten my total results of the previous two years, COMBINED!.. for God’s sake! That gives you an idea how ridiculous 26% in four months looked to me. It was clearly time to get out and wait for the “inevitable” pullback (that never came), and I would have missed all the 450% gains of the past two years!
It’s the same now. The amount I’m up in eight months seems even more ridiculous, but I don’t know the future, and I am surely not going to sell out of great companies because their share prices have risen.
Picking good companies makes much more sense to me than trying to pick good companies AND trying to time the market too. I have stocks in a small group of remarkable companies, in which I have high confidence for the most part. I feel that they mostly dominate their markets or their niches, they are category crushers or disruptors, they have customers that really need them, they have long runways, and they will have great futures. Investing in great companies pays off.
All enterprises, whatever industry they are in, use more and more software. Most of our companies provide the picks and shovels for enterprise companies switching over to the cloud, and the enterprise companies NEED what our companies have to offer.
MY RESULTS YEAR-TO-DATE
I would truly have been happy at the beginning of this year with a gain of 25% for the whole year, after the huge gains the last two years. Well, my portfolio closed this week up 64.0% year-to-date. This down 7.6% from my July close of up 77.4%. (164.0 divided by 177.7 is .924 = down 7.6%).
Here is the monthly progress of my portfolio results since the beginning of 2019:
**End of Jan +16.5%** **End of Feb +28.0%** **End of Mar +36.9%** **End of Apr +40.7%** **End of May +42.2%** **End of Jun +57.7%** **End of Jul +77.4%** **End of Aug +64.0%**
As I said above, I never expected a rise in my portfolio like this for a third year in a row. Well, what has happened to cause this rise???
In 2017 and 2018, we were the lonely few who understood what was happening with our SaaS companies. In 2019, as we can see from the IPO’s of Zoom and Crowdstrike, the investing public has finally caught on to the wave of high growth, high gross margin, recurring revenue, SaaS stocks that we’ve been riding for the last two and a half years (and whose valuations I explained at length in my June end of month summary). This recognition by the investing public caused those two IPO’s to get bid up into very high EV/S valuations. But this was not indiscrimminate buying. Investors showed plenty of discernment, as other hyped IPOs like Uber and Lyft bombed.
This has led me to speculate in various posts that this year, 2019, may see the valuations of the rest of our SaaS portfolios get bid up further, though certainly not as high as ZM & CRWD, which were growing at over 100%, after all.
A weighted average revenue growth rate for the companies in my portfolio would probably be about 60%. If my portfolio grows with the revenue increase and tacks on some valuation increase due to the general investing public’s increased desire to have a piece of these companies, it may help us to understand this extraordinary rise for a third year in a row.
HOW DID I GET THERE?
After a tumultuous March through June, in which my portfolio had four drops averaging 13.4 points each, my July was tranquil, with no major meltdowns, just a zigzag rise. Then in August I had a low of up 60.9%, which was down 16.5 points from July’s high of up 77.4%. But if my last “low” is up 60.9% year to date, that seems pretty good.
HOW DID THE MARKET INDEXES DO?
Let’s look at results year-to-date. The three indexes that I’ve been tracking against for ages closed year-to-date as follows.
The S&P 500 (Large Cap)
Closed up 13.6% year-to-date. (It started the year at 2507 and is now at 2847). It was up 20.7% four weeks ago so it lost 34% of its year-to-date gains in these four weeks.
The Russell 2000 (Small and Mid Cap)
Closed up 8.2% year-to-date. (It started the year at 1349 and is now at 1459). It was up 17.0% four weeks ago so it lost 52% of its year-to-date gains in these four weeks.
The IJS ETF (Small Cap Value)
Closed up 5.3% year-to-date. (It started the year at 131.9 and is now at 138.9). It was up 13.9% four weeks ago so it lost 62% of its year-to-date gains in these four weeks.
These three indexes averaged up 9.0% year-to-date. This average was up 17.2% four weeks ago so it lost 48% of its year-to-date gains in these four weeks
If you throw in:
the Dow, which is up 9.9% and lost 40% of its year-to-date gains, and
the Nasdaq, which is up 16.8% and lost 34%% of its year-to-date gains
The average of the five indexes up 10.8% year to date. As it was up 18.8% four weeks ago, it lost 42.5% of its year-to-date gains in these four weeks.
Since the beginning of last year (2018), when the average of the indexes was down 8.5%, the five indexes are up 1.4%. (0.915 x 1.108 = 1.014). Is this the big bull market that the skeptics have been telling us has been fueling our rise?
Now compare that result with my portfolio’s gain of 181.1% in those 19 months (1.714 x 1.640 = 2.811). Read that again! Up 1% for the indexes, up 181%, almost a triple, for my portfolio. Tell me what about those results makes investing in the averages seem “prudent” to you?
And, if you want a real shocker, my results from the beginning of 2017 are above a quintuple, 518% of what I started with, or up 418%! (1.842 x 1.714 x 1.640) = 5.178. Clearly, picking stocks that will be winners, the way we do, has beaten investing in ETF’s and Indexes, and by huge amounts. Let’s put it in table form and round off the numbers for easy clarity:
**Since Jan 1, 2019** **Market indexes + 11%** **My portfolio + 64%** **Since Jan 1, 2018** **Market indexes + 1%** **My portfolio + 181%** **Since Jan 1, 2017** **Market indexes + 16%** **My portfolio + 418%**
And that’s without using any leverage, no margin, no options, no penny stocks, no fancy stuff, just investing long in great individual companies. And I’ve told you each month what my positions are, and what proportion of the portfolio they are, so anyone who doubts it can check for themselves. And I’m no genius. Plenty of other people on the board have done about the same, a little more, or a little less, but about the same. So if you didn’t read my explanation in June about what’s going on with our stocks, maybe you should go back and read it carefully.
To simply state my goals, I’m merely trying to measure my performance against that of the average return for an investor in the stock market, and combining those five indexes should give a pretty good approximation.
FOCUSSING ON THOSE YEAR-TO-DATE GAINS
This is really an extraordinary number to look at!
The “Market,” the average of those five indexes lost 42.5% of its year-to-date gains, in the last four weeks.
My portfolio of overvalued stocks, which was supposed to lose multiples of what the indexes lost in a decline, only fell from up 77.4% to up 64.0%, a loss of just 17% of its year-to-date gains, in the same four weeks.
And while the “safe and conservative” indexes are now up 11% on the year, the risky portfolio is up 64%. Just saying.
LAST FOUR MONTHS REVIEW
In May, there were a lot fewer changes. Basically, I sold my 1% position in Elastic and took a small position in Zoom. I had written the month before about how overpiced Zoom was, but then I started taking into account the high margins and higher growth rate, and I decided to take a smallish position. As far as Elastic, in spite of muji’s and others’ enthusiasm, I haven’t been able to get my confidence level up to where it needed to be. I just can’t own them all. The rest of my portfolio is pretty much unchanged.
In June, believe it or not, I made almost no changes in my portfolio. I took a token quarter of one percent position in Crowdstrike at $60.80, But then, when Verizon announced its partnership with Zoom for all of Verizon’s business customers, I sold the tiny position in Crowd and moved it into Zoom. That was it for the month, pretty much.
July was another quiet month which means I was basically happy with my positions. I did take back a small position in Crowdstrike at $73.06, and then grew it to 4.1% after great earnings. I got the funds for the most part by trimming my Trade Desk position and taking a little from my small Square position. Trimming Trade Desk turned out to be very bad timing as Amazon announced later in the month that it will open its platform to Trade Desk. It’s just a reminder that I don’t always get it right. However, my Trade Desk position was still twice the size of my Crowd position, so no worries and no regrets.
August. Let’s look at it alphabetically. In the first half of the month I added a little to my Crowdstrike position and it has moved up from 4.1% to 4.7%. Then Mongo, I finally started to lose patience with Mongo. I had held it for 21 weeks at that point, and it was up 7% in the 21 weeks while the rest of my portfolio was hitting it out of the ballpark. I trimmed a little, just dropping my position size from 11.6% to 10.2%. I’m well aware that losing patience is not a valid reason for trimming, but I’m human too, and when I wanted to increase my Trade Desk position, that’s one of the places I looked. I added some back to Trade Desk after their great earnings, replacing some of the shares that I had prematurely sold last month, and it’s now back to a 10.1% position. Then there is Twilio. I was really a bit disappointed having been taken in by all the exaggerated hype about how Flex and Sendgrid were going to explode their revenue. I guess I was expecting a lot more than we got. So when I wanted money to add to my Trade Desk position, I reduced my position in Twilio a bit. It’s still about tied with Okta for 3rd place but at 13.1% down from 17.5% last month. I have no current plans to trim Twilio or Mongo further.
Zscaler suffered a decline due to a negative article by a boutique analyst company and I added six percent more shares even though it was my largest position at the time. I added a small amount to Smart.
I made no significant changes in Alteryx, Okta, or Zoom. And finally I took a little 0.8% position in Guardant Health after their excellent results.
And how about Square ??? You’ll remember that at the end of last month it was in last place at 2.5%. When the share price fell precipitously from $82 to $68 after earnings (dropping its position size even further) I thought that it was ridiculous and I added a goodly sized amount at about $69. But then came the warning about the Fed setting up its own payment system and it just seemed too complicated for me, and I sold out of my small position completely. Even though further excellent discussion of the Fed announcement on the board showed that what the Fed was doing was unlikely to impair Square, I didn’t look back, and it never crossed my mind to get back in. I almost felt a feeling of relief that I was out.
Why? Well, look, Square is still bouncing around where it was over a year ago, that’s OVER A YEAR AGO (!) … actually maybe even slightly lower than where it was then, while at least four of my other nine companies are up over 100% just from the beginning of this year. I seem to have been correct last December when I sold three quarters of my previously large Square position and reinvested in other positions.
My reasons at that time were: First that its customers were unbanked tiny merchants, and also restaurants, both of which would be hit hard in a recession. Second, they were really in a small niche, and while they could move upstream somewhat, there was no way they could “take over the world” the way some of my other companies could. Third, Sarah Friar left, and although she was adequately replaced, it now seems possible that, as CFO, she had a good view and she left because she saw the handwriting on the wall… perhaps that Square might continue to be a successful company, but that the glory days were over, but that’s just a speculation of course. She may have also disagreed with the focus on bitcoin. Back when she left I couldn’t understand why she would leave a prominent successful world-beating company like Square, where she got enormous exposure and became an icon in the investing world, to join a little no-name company that no one ever heard of… “CFO of Square” seemed a lot more important than “CEO of no-name.” It seemed like a terrible career decision by a very smart woman, and didn’t make any sense. Now that Square hasn’t moved in a year and two months (and is actually considerably down from where it has been in most of that year and two months), I’m speculating as to why she left when she did. It’s just a little throw-away speculation, not a determining factor in me selling. Fourthly, Square has plenty of competition (PayPal, Shopify, etc), while companies like Alteryx, Twilio, Okta, Zscaler, etc, don’t seem to have much effective competition. Fifthly, Square’s market cap is over $20 billion and that is much harder to quadruple than a company with a market cap of $3 billion. And sixth and finally, Square was (and still is), below where it was more than a year ago, which means others are seeing it the same way I am. And you can add to that two more factors, first, their relatively low gross margin compared to our other companies, and second, Jack Dorsey in the recent conference call saying “I love bitcoin!” which promises even more focus on bitcoin. Well, I probably should have listened to those reasons and put the money somewhere more profitable, but I often have to bounce around a little before I get it right.
At any rate I sold 40% of my Square at about $78.50 and about 60% at $63.50, for an average price of about $69.50. Remember that I first bought it in March 2017 at $17.50, which comes out to be just about a quadruple in under two and a half years. It is currently at $61.8, down quite a bit from my average exit price, and even down a little from my lowest sell price.
HOW THE INDIVIDUAL STOCKS HAVE DONE
Here’s how my current positions have done year-to-date. I’ve arranged them in order of percentage gain. I’ve used the start of the year price for stocks I’ve been in all year, and my initial buy price for stocks I’ve added during the year. Please remember that these starting prices are from the beginning of 2019, and not from when I originally bought them if I bought them in earlier years.
**Alteryx from 59.47 to 139.03 up 133.8%** **Trade Desk from 116.1 to 246.4 up 112.3%** **Okta from 63.80 to 132.46 up 107.6%** **Zscaler from 39.21 to 71.28 up 81.8%** **Twilio from 89.30 to 127.96 up 43.3%** **SmartSheets from 39.21 to 50.32 up 28.3%** **Crowdstrike 73.06 to 88.43 up 21.0% new in July** **Zoom from 77.63 to 91.63 up 18.0% new in May** **MongoDB from 131.47 to 139.37 up 6.0% 3rd time** **Guardant from 99.20 to 94.64 down 4.6% new in Aug**
Exited positions this year showing my gain or loss from the beginning of this year, or from when I first bought if it was during the year, and my average exit price. Please remember that these are from the beginning of 2019, and not from when I originally bought them if I bought them in earlier years. You’ll note that almost all of these were tiny little try-out positions that I ended up deciding against, and don’t represent actual churn of the body of my portfolio
**Square from 56.09 to 69.50 up 23.9%** **Docusign from 43.75 to 56.80 up 23.4%** **Zuora from 19.80 to 24.00 up 21.2%** **Elastic from 71.48 to 83.80 up 17.2%** **Guardant from 37.59 to 41.50 up 10.4% 1st time** **Anaplan from 28.75 to 31.05 up 8.0%** **CrowdStrike from 60.80 to 64.81 up 6.6%** **Mongo from 95.0 to 99.9 up 5.2% 1st time** **Coupa from 91.95 to 93.13 up 3.0%** **Abiomed from 325.0 to 334.0 up 2.8%** **EverBridge from 73.58 to 73.95 up 0.5%** **Vericel from 17.40 to 17.38 down 0.1%** **Guardant from 70.70 to 69.50 down 1.7% 2nd time** **Mongo from 83.74 to 76.20 down 9.0% 2nd time** **Nutanix from 41.59 to 36.00 down 13.4%**
MY HERO COMPANIES.
Alteryx, Twilio, Okta and Zscaler have all been in my portfolio for well more than a year now. The Trade Desk has now hit ten months from when I bought it last October.
Twilio is about a quintuple in a year and seven months, at 5.0 times what I paid for it in January a year ago ($25.70). It is up 398%.
Okta is 4.4 times what I paid for it ($29.95), also a year and seven months ago, more than a quadruple. It is up 342%.
Alteryx is up 401%. That means it’s 5.0 times what I paid for it in December 2017, a year and eight months ago, at $27.72, or a quintuple.
Zscaler is up 99%, just about a double, since I bought it a year and two months ago in June 2018, at $35.84.
And finally Trade Desk is up 104%, a double in ten months, from when I bought it at $121.0 last October
This is how you make money in the stock market, buying exceptional companies and holding them as long as the story doesn’t change. As you see just above, the great majority of my portfolio (and my profit), is invested in companies that I bought and held on to, and let them quaduple or quintuple.
And another great point from this is:
Do you think I care, or even remember, if I bought Twilio at $25.90, $25.70, or $25.50, now that it’s a quintuple and its price is $127.96? Think about that for a moment! The decision that matters as far as making money in the market is “Do I want a position in this company?” and not “Can I buy it 25 cents cheaper?” If you have a stock that you want to buy because you believe it will triple or quadruple, and then you put in a buy order for it 25 cents, or 50 cents, or even a couple of dollars below the market, and hope that it will FALL to your price, you are out of your mind! But that’s just my opinion.
In May I read a ”Roundtable” Discussion put out by the sponsors of our board, and I came across this sad paragraph by one of the participants. I don’t remember what the stock was:
If we get a sell-off I would definitely consider buying in. It’s a stock I’ve always wanted to get into! Unfortunately, though, this approach has been killing me because the stock is up 60% in the last three months. So I keep waiting for the sell-off, but the sell-off was actually right then, three months ago, when I should have bought it.
I don’t have to say anything else. The guy wanted to get into a company. But he wanted to buy it a few percent lower so that he could congratulate himself that he got a bargain, and think, “Wasn’t I smart?” So he missed a 60% rise in three months, and undoubtedly more since. How many times would he have to succeed at scalping a few percent in order to make up for a 60% gain that he missed?
If you want to be in a company because you think it’s a great company and that its stock will go up, at least take a starter position that you can add to. Don’t wait around for the sell-off that may never come.
I’m still trying to keep my portfolio concentrated and streamlined. I’m at ten positions now which is still quite concentrated. My top two positions, about 20% each make up 41%, the next four positions (between 10% and 13% each), make up 46% of my portfolio, then three small postions at about 4% each, making up another 12%, and finally a little try out at 0.8%. By the way, keeping my number of stocks down really makes me focus my mind and decide which are really the best and highest confidence positions.
Here are my positions in order of position size. Note that the Zscaler, and Alteryx positions are larger than I usually like, but they are high conviction Category Crushers. Note also that if you compare with a month ago, the top two are the same companies. The next four are the same as a month ago also, and in the same order. Of the last four, the small positions, Square, which was smallest last month, is gone, and Crowdstrike, and a tiny position in Guardant, are added. .
**.** **Alteryx 21.1%** **Zscaler 19.7%** **Okta 13.1%** **Twilio 13.1%** **Mongo 10.2%** **The Trade Desk 10.1%** **Crowdstrike 4.7%** **Zoom 4.0%** **Smartsheets 3.7%** **Guardant 0.8%**
I didn’t make any major changes this month. As I said above, my largest positions are Zscaler, and Alteryx. They are both small companies but in my opinion they each dominate the market they are in with little credible competition (except do-it-yourself). I’d have to call the two of them Category Crushers, and juggernauts.
Zscaler is at 19.7% of my portfolio, up from 18.2% a month ago. It has an interesting, innovative, and revolutionary idea in Internet security. They feel that putting a hardware firewall around a company doesn’t work anymore, now that the enterprise company is partly in the cloud and people can sign in from anywhere, and sign on to other outside programs from within the enterprise. Zscaler provides native cloud-based security, and as far as I can tell they are far and way the leader in this, if not the only player. They have 100-plus data centers all around the world, which would be difficult for most potential competitors to replicate. Zscaler has been operating them for eleven years.
Here’s what their last earnings looked like:
Revenue was up 61% to $79 million. This was an acceleration from 49% growth a year ago.
Why is Zscaler’s revenue growth accelerating instead of slowing down by the law of large numbers. Well their quarterly revenue was only $79 million. It’s a small company. And they aren’t selling something trivial. It’s the security of the customer’s entire company. For a big enterprise to trust Zscaler with the family jewels of its security requires an act of faith.
Therefore, as Zscaler became a listed company, grew larger, and also signed up more and more large enterprises as customers, they could show more revenue, and more large company references, and thus other large enterprises feel better and better about trusting them. So it snowballs, and with each signing it becomes easier and easier to sign the next large customer, and they seem to have passed that inflection point, and are taking off.
Calculated billings were up 55% from $55 million to $85 million, but billings are lumpy, depending on when contracts start and are billed.
Adj net income was $7.4 million, up from a LOSS of $2.6 million.
Adj operating income was 8% of revenue or $6 million, improved from a LOSS of 6% of revenue or $3 million, a year ago.
Adj EPS was 5 cents, improved from a LOSS of 2 cents
Free cash flow was $4.6 million, or 6% of revenue.
Named a leader in Gartner for the 8th year in a row.
Zscaler Private Access (ZPA) is the first zero trust architecture to achieve AWS Security Competency status, and it achieved FedRamp authorization. This sets the stage to further expand its growth within the Federal market.
The only reasonably recent news is from June, when Zscaler announced a global alliance partnership agreement with NTT Communications (a subsidiary of Nippon Telephone and Telegram) to deliver cloud-based internet and web security that scales to all users, regardless of location, enabling enterprises to securely embrace the cloud.
You’ve probably figured out by now why I’ve built Zscaler into one of my top two positions. In my opinion Zscaler is a Disruptor, a Category Crusher, and a juggernaut like Twilio and Alteryx. The traditional security providers can’t compete with Zscaler because their businesses are built around high-priced hardware and firewalls, and they don’t have the data centers all over the world that Zscaler has. I now give it a full six out of six confidence rating. It sells at a high valuation, as you might expect. Here’s a little plug from a recent post by Tinker which helps explain his and my high confidence.
…Cyber-security is such a core necessity of our modern world that a company like Zscaler - a “mere provider of security services”, but in a different manner - is enabling an entirely different network framework that is far more efficient and useful than what exists….
There seems to be no more core and essential technology today, or one that is more important… than SECURITY…. You cannot run a business today of any scale without serious security – period! Heck you cannot even run a home website showing off baby pictures without keeping the wolves at bay…. Your entire business can be destroyed, demolished, without security. But security that encumbers you is almost as bad. That is what makes OKTA and Zscaler so successful. They not only secure, they simplify and unemcumber you….
Alteryx is now at 21.1% of my portfolio, up from 17.9% last month. Its stock price just keeps going up. No wild jumps, just slow and steady. What they do is to enable non-techies to quickly and easily analyze data. Their clients therefore love them. They changed accountants near the end of 2018 because their accountant, Price Waterhouse, was reselling so much Alteryx software to their other clients, that they could no longer consider it non-material, and wanted to avoid any appearance of conflict of interest. They were happier having Alteryx as a valued technology partner than keeping it as just one more accounting client.
When Alteryx announced December quarter results, they prepared us for their forthcoming change from ASC 605 to the new standard 606. First I’ll give you the 605 results for comparability to previous quarters. their revenue percentage growth looked like this:
**2016: 57 67** **2017: 61 50 55 55** **2018: 50 54 59 57**
That looked solid as a rock to me. However the change to the new accounting system confused things as it involved more revenue being recognized upfront, and therefore less in subsequent months.
Going on to the next two quarters it looks like this:
**2016: 57 67** **2017: 61 50 55 55** **2018: 50 54 59 57** **2019: 51 59**
As you can see, it still looks solid as a rock. Revenue not only is growing, but the rate of growth is growing.
Their adjusted gross margins were 90% and 91% for the two quarters!
Their dollar based net retention rates were 134 and 133.
Their number of customers, which is almost triple the number of customers that they had three years ago, was up 35% and 34% yoy.
They feel they have no competition. From one of their earlier conference calls: “We are in a space where there’s little to no competition and a much larger TAM.”
We’ve had some discussion on the board about whether Alteryx is really a SaaS company, since it’s not on the cloud, and whether or not it really matters as its revenue is recurring and its net expansion rate is 134%.
Here’s a paraphrase of Ethan’s post from the Analyst Day in June.
AYX has a Net Expansion Ratio (NER) of 134% overall, but 143% with global 2000 customers which is pretty crazy.
Customers with over $500,000 annual recurring revenue (ARR) have a 70% increase per year!!! That is an insane number. Customers with over $1,000,000 have a 50% increase.
They list their growth drivers as.
Land and expand
Channel and partner ecosystem
Community expansion and extension
They really harped how Alteryx simplifies and automates complex processes They identify their ease of use as the number one reason people choose Alteryx. If you look at the Gartner peer review website you will see similar things in the reviews.
Long term goals are:
Gross margin 90-92%
Operating Margin 35-40%
FCF Margin 30-35%
….Zero concerns here about their business model, operating leverage, and execution at this stage.
The stock finished 2018 year up 135% for the year, but they’ve gone straight up this year as well. I feel very justified in calling Alteryx a Category Crusher, with very high confidence level. I’d give it six confidence stars out of six.
Actually I think of both Zscaler, and Alteryx as juggernauts. They are each a one-of-a-kind company. Each seems to control its space and is growing like mad.
Twilio is down to a 13.1% position, down from 17.5% position a month ago. As I mentioned above in my four month summary, I was disappointed in it and decreased the position size, but I have no current plans to further decrease it.
Twilio provides communication services and it seems to have no viable competition in what it does besides “do-it-yourself”. For the March and June quarters its base revenue growth accelerated from 46% a year ago to 88%, and from 54% to 90%. The last seven quarters’ growth rates have been:
However the 88% jump was partly due to one big customer, and partly due to the acquisition of Sendgrid, and the 90% jump was from combining the revenue from two companies for the entire quarter. The organic growth increased from 54% a year ago to 56% now which is much less exciting.
Now the dollar based net retention rate: The last six quarters have been:
They hit adjusted profit in the June quarter last year unexpectedly, and have stayed profitable since.
They had 162,000 Active Customer Accounts, a little less than triple the number they had a year ago. This was driven partly by customer acquisition but mostly by their SendGrid acquisition. It doesn’t take much imagination to think about the cross-selling that can come both ways from that!!!
They continue to have euphoric conference calls:
And the average revenue per customer continues to grow at a 25% to 30% rate.
… I think that that means there’s a runway for us for many, many years to be replacing old legacy technology… I think there is going to be no shortage of opportunity for us to do that for years to come.
…It’s still day one of this journey.
There was a lot of obsessing on our board and elsewhere about “weak” guidance. For the life of me I don’t understand why anyone even looks at the guidance figures for these companies. Have you ever seen even one of our SaaS companies that doesn’t simply destroy their guidance at least 95% of the time? Why waste your time unless reduced guidance is due to an actual problem with the business (ie Nutanix). Follow the actual results! There has also been concern that Twilio is too big, that the Sendgrid acquisition caused dilution, or that it would slow down growth, that it’s stock is up too little this year (“only” 68% so far), or whatever. We’ll have to see what happens.
In July Twilio announced the first roll-out of its Narrowband IoT collaboration with T-Mobile. Not one that moves the needle by itself, but just another reminder that Twilio isn’t sitting still, and that IoT could become another large market for them. They ten announced a half dozen more new products at their conference a week after earnings. I’ll still give Twilio six confidence stars, it’s just that the way they were enthusiastically talking about Flex 18 months ago (an oversubscribed beta, etc), I expected it would be doing somethng significantly by now, and four months after the acquisition of Sendgrid there was nothing to show for it (which may be just impatience on my part, again.) No further plans to taper my position.
Okta is tied for third place with Twilio and is a 13.1% position, and is at a five star confidence level. What Okta does is control individual sign-on to all the apps you use using a native cloud SaaS platform. It’s called identity and access management. It is loved by the people who use it, because they no longer need a million passwords for each program they sign on to. I almost backed it down from 5 stars to 4.5 stars because the rate of revenue growth “fell” from 58% to 50% sequentially. That’s the bad news. The good news is that it became evident from the conference call, and their recent acquisitions, that they do a lot more than smart sign in, more than I can understand, for sure, and it seems likely their revenue growth will take off again.
In early April, while some on the board were reducing positions or selling out because the price had risen so much year-to-date and was then “overvalued”, I added considerably at about $83, and added much smaller amounts at $92 and $103. It’s now over $132. That’s up 59% from that April purchase I just told you about. I don’t sell out of stocks because they have gone up. I only sell out if the story has changed for the worse. This is a Disruptor and Category Leader, and a Cloud-based New Market Stock.
MongoDB is still in 5th place at 10.2% of my portfolio. I’ve been in and out a couple of times, being scared out by Amazon, Red Hat and a lot of other FUD, each time having to buy back at a significantly higher price than the one I had sold at. That’s life! I can’t think of anything that will make me sell again except bad operational results, which I don’t think will happen, but I did trim about 0.6% because of impatience (see the four month summary above).
Mongo has pretty much invented its solution and category, although it does have competition. It’s the leader in NoSQL data storage. It has chosen to put almost all its money into growing, and thus is still running an adjusted loss, which was 28% of revenue for 2018, down from a loss of 49% of revenue in 2017. (Under ASC 606 the loss was only 19.5% of revenue for 2018).
What has changed Mongo is Atlas, which gives it a fully managed cloud solution, and Atlas is growing at about 300%, although off a small base.
They announced April earnings in June. Here are some highlights:
We delivered excellent quarterly results driven by strength across all products and geographies. Our success is being driven by growing customer interest in a modern, general purpose database for use on premise and in hybrid and multi-cloud environments to help users innovate more quickly and efficiently.
The continued success of Atlas, our fully managed global, multi-cloud database service, reflects the powerful combination of the move to the cloud and customers’ desire for sophisticated managed database offerings. These trends are reshaping the market and we believe will provide a significant growth opportunity for us for the foreseeable future.
Revenue: Total revenue was $89 million, up 78%.
Atlas Revenue was 35% of Total Revenue, and was up over 340%
• Subscription revenue was $84 million, up 82%
• Services revenue was $5 million, up 33%.
• Adj gross profit was $63 million, giving an adj gross margin of 70%.
• Adj op loss was $13 million, improved from a loss of $19 million a year ago.
• Adj net loss was $12 million or 22 cents per share, improved from $19 million or 37 cents a year ago.
• Cash is $477 million
• Op cash flow was positive $3.2 million
• Free cash flow of $2.8 million, improved from minus $8.4 million a year ago.
• A new business partnership with Google Cloud Platform (GCP) that will provide deeper product integration and unified billing for joint customers. MongoDB Atlas will be integrated directly within the GCP Console and we have expanded our marketing relationship. Offering Atlas as a first class service on GCP means customers will get a seamless experience as Atlas will be tightly coupled with core GCP services…
• Acquired Realm, the company behind the Realm mobile database and synchronization platform, to expand MongoDB’s mobile product offerings and deepen its relationship with developer communities focused on mobile and serverless development. There are more than 100,000 active developers using Realm.
• Named a Leader by Forrester Research in two recent reports. gave MongoDB the highest scores possible in the Data Security, Performance, Scalability, High Availability, Global Distribution and Ability to Execute criteria, as well as High Availability, Disaster Recovery, Multimodel Support, Automation, User Access and Roadmap criteria.
In June Mongo announced new cloud services and features that will provide a better way to work with data beyond the database. The Beta versions of Atlas Data Lake and Atlas Full-Text Search allow users to access compelling new features in a fully managed MongoDB environment with no additional infrastructure or systems to manage. Furthermore, the general availability of MongoDB Charts lets customers create charts and graphs, build and share dashboards and embed them directly into web apps. (Don’t be fooled, I don’t know what any of this means!)
In July they announced that MongoDB now has the ability to encrypt data by field: It calls the new feature Field Level Encryption. It works kind of like end-to-end encrypted messaging, which scrambles data as it moves across the internet, revealing it only to the sender and the recipient.
Also, this last week we just learned that Amazon AWS has, for all intents and purposes decided that since it can’t beat Mongo it will promote it! What a turn-around!
I’ll call Mongo a Disrupter, a Category Leader, and a Big Data New Market Stock, and I’ll give it four and a half confidence stars for now.
The Trade Desk announced stupendous results at the end of February, and rose $47, or more than 31%, in one day. Revenue was up 56%, with growth accelerating from 42% a year ago. Earnings were up just over 100% (!) Then, in May, they announced results that beat estimates, and all the analysts raised target prices, most by $25 to $30, but the market didn’t like it, because revenues were “only” up by 41%. Management was very upbeat and raised estimates for the year. EPS was up 44% yoy. The stock sold off rather massively but is now back at all time highs, partly because Amazon just announced that they’d let Trade Desk into its “Walled Garden”.
It is a 10.1% position up from 8.2% a month ago, and is in 6th place in my portfolio. I reduced it some in July for money to take a position in Crowdstrike because of all my larger companies I felt that I had the least confidence in Trade Desk (because it’s in advertising). Sorry, just the way it was for me…. Yes, I know that a week later Amazon announced that it would open its platform to Trade Desk, but I obviously didn’t know that when I trimmed it. At any rate, I added back this month and it’s back to a 10.1% position.
They had incredibly strong earnings report and conference call this month, which was extensively discussed on the board. I’d rate it five confidence stars now, somewhat getting over my mistrust in them over them being an advertising company, because I feel that this is a very unique innovative and creative company. The Trade Desk seems to be a Leader in a Rapidly Growing niche Market within the larger field of advertising, which up to now is controlled by the behemoths.
Crowdstrike is in 7th place at a 4.7% position, up from 4.1% in July. It’s a recent IPO and there were a couple of extended threads on Crowd in July on the board, so I won’t repeat them. I’ll just give you my tables on their progress, and a little discussion following. Here they are:
**Q1 Q2 Q3 Q4** **ARR Total (Annual Recurring Revenue)** **2017 59** **2018 71 90 113 141** **2019 170 208 254 313** **2020 365** **ARR YOY % gain** **2018 139** **2019 139 131 125 122** **2020 114** **ARR Sequential % gain** **2018 20 27 26 25** **2019 21 22 22 23** **2020 17** **Total revenue (millions of dollars)** **2017 53** **2018 119** **2019 47 56 66 80 250** **2020 96** **Total revenue growth rate** **2017** **2018 125%** **2019 110%** **2020 103** **Subscription revenue** **2017 38** **2018 93** **2019 40 219** **2020 86** **Subscription revenue growth rate** **2018 144%** **2019 137%** **2020 116** **Subscription revenue % of total rev** **2017 72%** **2018 78%** **2019 88%** **2020 90** **Subscription gross margin percent** **2017** **2018** **2019 62** **2020 73** **Gross Profit % of revenue** **2017 36%** **2018 54%** **2019 65%** **2020** **Op Cash Flow Margin** **2019 -7%** **2020 +1%** **Free Cash Flow Margin** **2017 -123%** **2018 - 80%** **2019 -36% - 26%** **2020 -17%** **Adj Net Profit Margin** **2017 -173%** **2018 -114%** **2019 -67% - 56%** **2020 -23%** **Dollar based net retention rate** **2017 103%** **2018 119%** **2019 147%** **2020** **Subscription Customers Yr End Grew By % growth** **2016 165 --- ---** **2017 450 285 176%** **2018 1242 792 173%** **2019 2516 1274 103%** **2020 3059 543 in one quarter**
As the pioneer of cloud native endpoint security, we provide the only endpoint protection platform built from the ground up to stop breaches, while reducing security sprawl with its single-agent architecture. Our continued innovation strengthens our category leadership, and positions us as the fundamental endpoint platform for the future.
What you have just seen is a company with a revenue run rate of about $400 million, which will have revenue this year of roughly a half a billion dollars, with a rate of revenue growth last quarter of 103%, with subscription revenue making up 90% of the total and growing at 116%, with annual recurring revenue growing at 114%, with subscription gross margin of 73% which is up 11 points from 62% a year ago, with operating cash flow margin of +1%, improved from -7% in the quarter a year ago, with free cash flow margin of -17%, which improved 19 points from -36% the year ago quarter, with adjusted net profit margin of -23%, which improved 44 points from -67% the year ago quarter, with a dollar based retention rate between 120% and 147% (and some reason to think it’s about 140%), and over 3000 customers, with the mumber of customers growing by 21.6% SEQUENTIALLY last quarter, which compounds out to growing at 119% over four quarters (growth was “only” 103% last year, but over 170% the two previous years). My guestimate for revenue growth next quarter is 104%, but that is just a common sense guess, based on the cadence of yoy dollar growth of revenue in recent quarters. What you’ve just seen is a true powerhouse of a company. I added a little this month.
While it has been stated on the board that end point security is a commodity, companies selling commodities just don’t grow revenue 100% per year, year after year, and especially not with RISING MARGINS, both gross and net. Sorry, but that just doesn’t happen to commodity sellers.
In 8th place at 4.0% of my portfolio is Zoom, which at first I said was multiples too high. What happened? Well, I thought about the reasons for the high valuations of our SaaS stocks, and that changed my mind.
There were a couple of long write-ups on Zoom a couple of months ago, around the time of their IPO, which you might want to look at. Here are some financials, which include their April quarter results, and which will probably amaze you.
**Fiscal Q1 Q2 Q3 Q4 YR** **Revenues** **2017: xx xx xx xx 61** **2018 27 33 41 51 151** **2019 60 75 90 106 331** **2020 122** **% Increase** **2018 149%** **2019 122 127 120 108 119%** **2020 103** **GAAP Gross Margins %** **2017: 80%** **2018 79 79 81 79 80%** **2019 81 83 81 82 82%** **2020 80** **Adj Gross Margins %** **2018 81 82 82 80 81%** **2019 82 84 84 86 84%** **2020 81** **Gross margins look great.** **Op Cash Flow (millions of dollars) Yr Total ($)** **2017: 9** **2018: 19** **2019: 03 51** **2020: 22** **TTM Op Cash Flow is thus currently $70 million** **Free Cash Flow (millions of dollars) Yr Total** **2018: xx** **2019: -01 30** **2020: 15** **TTM Free Cash Flow is thus $46 million.** **Note that those cash flow numbers are positive numbers!** **I don’t think that any of our SaaS companies have cash flow** **numbers like those** **Cust with ARR over $100,000 At year end** **2017 54** **2018 143** **2019 184 344** **2020: 405** **% Increase !!!!!!!!** **2018 165%** **2019 141%** **2020 120%** **These figures don’t need any explanation and show how well the business is doing.** **Customers with over 10 employees (in thousands)** **2017: 11** **2018 26** **2019 51** **2020 59** **% Increase** **2018 137%** **2019 97%** **2020 86%** **Dollar based net retention rate** **2019 138 139 140** **2020 >130**
• Adj Operating Income was $8.2 million, up from a loss of $0.8 million a year ago.
• Adj Operating Margin was 6.7%, up from a small negative.
• Adj net income was $8.9 million up from a loss of $0.5 million.
• Adj EPS was 3 cents, up from a loss of 0 cents
• Cash was $737 million and included $544 million in proceeds from the IPO.
• Op Cash Flow was $22 million up from $3 million a year ago.
• Free cash flow was $15 million, up from minus $1 million.
• 58,500 customers with over 10 employees, up 86%
• 405 customers contributing more than $100,000 up 120%
• Net dollar expansion rate in customers with over 10 employees over 130% for the 4th consecutive quarter.
Then, a month ago Verizon announced a partnership with Zoom, available to ALL their business customers. For me, that was a big Wow!
Verizon Business Group has joined forces with Zoom to offer its global customers a new, unified communications solution that aims to improve organizational collaboration. Zoom’s video-first unified communications platform is now available to all Verizon business customers as a cloud service.
What impressed me especially was that it was Verizon that announced it, not Zoom, and Verizon, a major large company, was bragging about offering Zoom to its customers.
Yes, I know! I don’t really see what Zoom’s moat is either, except that it is obviously doing what it is doing better than anyone else is doing it. Because of this and its high valuation it’s not a high confidence position, so I’m keeping my position small, but I keep nibbling away, adding little bits.
SmartSheets is in 9th place at 3.7% of my portfolio. I currently consider it as a long-term hold. I added a tiny bit this month. Here are the results of its Apr quarter, announced in June.
• Total revenue was $56 million, up 55%.
• Subscription revenue was $50 million, up 57%.
• Prof services revenue was $5.9 million, up 38%.
• Adj operating loss was $14.1 million, or 25% of revenue, compared to $11.0 million, or 30% of revenue, a year ago.
• Adj net loss was $13 million, compared to $11 million a year ago.
• Adj EPS was -12 cents, flat with a year ago.
• Operating cash flow was negative $9.2 million, compared to negative $8.2 million a year ago
• Free cash flow was negative $13.1 million, compared to negative $9.7 million a year ago.
• Cash was $209 million
• Ended the quarter with 80,280 domain-based customers
• Customers with ACV of $5,000 or more up to 6,779, up 56%.
• Customers with ACV of $50,000 or more up to 518, up 117%.
• Customers with ACV of $100,000 up to 189, up 139%.
• Average ACV per domain-based customer was $2,675, up 48%.
• Dollar-based net retention rate was 134%
It’s kind of odd but I don’t really see any real weak spots to worry about. I could mention revenue growth rate, but it’s hard to worry about a subscription revenue growth rate of 57% for the last quarter and 60% for the last fiscal year. And as far as not moving yet towards a profit, they are still a very small company (TTM revenue not quite $200 million!), and trying to grow as fast as they can. I’d give them four stars of confidence for now.
I feel that most of my portfolio is made up of a bunch of great companies. But that’s just my opinion, and I can’t say often enough that I’m not a techie and I don’t really understand what most of them actually do at all ! I just know what great results look like. I figure that if their customers clearly like them and keep buying their products in hugely increasing amounts, they must have something going for them and, as I’ve often said, I follow the money, the results. And I listen to smart people about the prospects of these companies.
When I take a regular position in a stock, it’s always with the idea of holding it indefinitely, or as long as circumstances
seem appropriate, and never with a price goal or with the idea of trying to make a few points and selling. I do, of course, eventually exit. Sometimes it’s after months, and sometimes after years, but I’m talking about what my intention is when I buy.
I do sometimes take a tiny position in a company to put it on my radar and get me to learn more about it. I’m not trying to trade it and make money on it, I’m just trying to decide if I want to keep it long term. If I do try out a stock in a small position and later decide that it’s not what I want, I sell it without hesitation, and I really don’t care whether I gain a dollar or lose one. I just sell out to put the money somewhere better. If I decide to keep it, I add to my position and build it into a regular position.
You should never try to just follow what I’m doing without making up your own mind about a stock. In these monthly summaries I’m giving you a static picture of where I am currently, but I may change my mind about a position during the month. In fact, I not infrequently do, and I make changes in the position. I usually don’t announce these changes until the end of the month, and if I’m busy or have some personal emergency I might not announce them even then. And besides, I sometimes make mistakes, even big ones! Don’t just follow me blindly! I’m an old guy and won’t be around forever. The key is to learn how to do this for yourself.
Since I began in 1989, my entire portfolio has grown enormously.
If you are new to the board and want to find out how I did it, and how you can try to do it yourself, I’d suggest you read the Knowledgebase, which is a compilation of words of wisdom, and definitely worth reading (a couple of times) if you haven’t yet.
A link to the Knowledgebase is at the top of the Announcements panel that is on the right side of every page on this board.
For some additions to the Knowledgebase, bringing it up to date, I’d advise reading several other posts linked to on the panel, especially:
How I Pick a Company to Invest In,
Why My Investing Criteria Have Changed,
Why It Really is Different.
Illogical Investing Fallacies
I hope this has been helpful.