Happy New Year to you all, and let’s hope that the new year will be a big improvement over the old one for the whole world, which has really suffered during this horrible pandemic year. However, paradoxically, during this same year we have undertaken a wonderful investing voyage together, which has turned out to be beyond successful, and we have undertaken it with a spirit of camaraderie and cooperation and working together for the common good that I have rarely before seen in any endeavor.
This was by far the best year in investing that I, and probably you as well, have ever had. I have to begin by thanking all of you who have contributed so much to making it so successful for all of us who have taken part on this board. It was really a group effort all the way.
As far as my own results, you remember that to my surprise, my portfolio finished October up an astounding 174%, then finished November up an even more astounding 217% (more than a triple in one year!), and now, after hitting a high on December 22nd of up 273%, getting close to a quadrupling in one year, my portfolio fell back 10.7% in the last six trading days and finshed the year up a “piddling” 233.3%, a third of the way between a triple and a quadruple. What can I say? This isn’t the kind of results that mortals are supposed to see!
I have had to ask myself how did this year happen? Gains like this seem almost magical. This is not supposed to happen. A traditional money manager is happy if he or she can keep up with the S&P (about 7% to 8% per year average, and 10% to 11% if you count dividends), and beating the S&P by 3% in a year is something to brag about. Tripling or quadrupling would be a long term goal for them, which might occur after many years, not something that could conceivably be dreamt of happening in a single year. No way!
So how did so many of us finish up well over 200% (more than tripling). How did we finish up well over 200% more than the market indexes, and up over 200% more than almost every professional money manager, hedge fund manager, mutual fund manager, financial advisor, etc?
I suspect that it was because we understood the SaaS world one or two years before almost everyone else. This was when all the “smart” people were saying that our SaaS companies were too highly valued, because they were still applying conventional EV/S to them. We also had the huge advantage of crowd sourcing on our board. It would have been very, very hard for any of us to have the courage to invest as we did as a single individual, but we discussed at length and shared our knowledge and opinions, and it gave us the courage, and the realization that we knew what we were doing. We realized and recognized that this was a breed of company that had never existed before in any numbers.
We understood that companies that are leasing software through the cloud, and thus can double capacity almost instantly, that are not selling physical things that require building factories and using capex to increase capacity, that are growing revenue often at 50% to 90% per year, that have 70% to 90% gross margins, that have a subscription model with recurring revenue, that have 125% net retention rates, and that are selling products that all enterprises need in order to adapt to the cloud and the digital world, are going to have much higher valuations than conventional companies. Well, if you think about it, what else would you expect? But at the time few other investors understood it, and many don’t understand it now.
For example, Schwab sends me analyses on my portfolio companies from a renowned analysing firm, and in each report the analyzing firm says that my company that they are discussing is a great company, and has great results, and they are full of excitement over it, but unfortunately “it is overpriced and overvalued”. They raise their price target each time, but their price target is always at about half, or maybe three-quarters, of my company’s current stock price. And they’ve been following it up like that through hundreds of percent of stock price rises, but they never could see their way to recommend it. Too “overvalued.”
To give you an example of us recognizing and getting into these companies early, looking back I see that a year ago, at the end of 2019, I already had Crowdstrike, Datadog, Zoom and Okta making up almost 60% of my portfolio and I’m sure that others on the board were similar. I also had Alteryx, Coupa, and Zscaler making up another 35%. While you could say that Alteryx isn’t a pure SaaS company, I had about 95% of my portfolio in software subscription, fast growing, recurring revenue, capex light, high margin companies, back when no one with any “sense” would have had such overvalued companies making up such a large part of their portfolios.
And during this very difficult year, when many conventional companies were struggling just to stay afloat, our companies were thriving, growing rapidly, and expanding their valuation, as more and more investors came to recognize them. It wasn’t a mystery. And thank goodness for this board, and all the people who contributed, and shared their knowledge, and helped us learn about these companies and understand them. I, for one, would not have had the technical knowledge to understand them without the contributions from all of you.
And remember that there are hundreds, perhaps thousands, of others who are silent on the board due to shyness, or due to feeling that they don’t know enough to contribute, who learn and gain from our posts. I can’t tell you how many emails of appreciation I have received this year alone, thanking me and the other contributors to the board, and telling me that they have been able to retire five years earlier than they had expected, or they gained the money to send their daughter to college, or to buy the house they’ve always wanted, or been able to pay for an expensive medical treatment that their parent needed, etc. We are doing good for others as well as ourselves..
I have to say that I have never, in any previous year, been up over 230% in a year (that is, more than tripled my portfolio in a year), and it really and truly astonishes me. It’s almost embarrassing! Please don’t expect me to duplicate this, or anything like it, every year. It just aint gonna happen!
To think that people really pay those high fees for these results!
The average hedge fund underperformed the wider stock market in 2020 but saw less volatility while stock-picking funds got a lift from technology and stay-at-home shares in a year beset by a pandemic and uncertainty around the U.S. election… Hedge funds, which aim to protect assets in market downturns and have faced criticism for many years for high fees and lacklustre returns….
The average hedge fund made 7.3% in the first 11 months of the year… an index tracking the S&P 500, would have made 14% over the same time … Investors said the performance was still solid given that many of the hedge funds in their portfolios had produced double-digit returns or otherwise preserved assets during the March rout ….
“Hedge funds broadly managed the year up to March really well… and they have ended in positive territory,” said xxx, Chief Investment Officer at zzz.
The standouts were long-short hedge funds, which … raked in gains of 12% over the period…. While that result underperformed the broader market…etc, etc
Please keep remembering how, at the October 2019 bottom, a little over a year ago, all those trolls showed up on our board and were telling us that our “overpriced” stocks would “NEVER see the ridiculous highs of 2019 again”, and asking why didn’t we get smart and sell out and invest in S&P ETF’s. It was pretty scary back then, and even some of our regulars were thinking we might have to wait two years before our stocks would regain their highs. It all seems pretty funny now, doesn’t it, when our portfolios are up by 100% or 200% or more this year? It’s worth keeping that in mind the next time that there is a correction and trolls show up trying to get you to sell out. Because there WILL be corrections, and our companies WILL fall temporarily, and the trolls WILL show up. Remember to pay attention to the company, and how it’s doing, and what its prospects are, rather than the stock price when they are all falling in a “market rotation” or “correction”. Our companies will come back.
While we have done better this year than our wildest dreams, many people are suffering, have been laid off, and don’t have enough to eat and to feed their families. Please consider sharing a piece of your gains with those in need. Wherever you live there are bound to be food banks and other charities that serve those in need. Thanks.
MY RESULTS YEAR TO DATE
My portfolio closed this month and the year up 233.3% (at 333.3% of where it started the year)! Here’s a table of the monthly year-to-date progress of my portfolio for 2020.
**End of Jan + 21.3%** **End of Feb + 22.9%** **End of Mar + 13.4%** **End of Apr + 33.3%** **End of May + 73.6%** **End of Jun + 115.9%** **End of Jul + 135.1%** **End of Aug + 132.9%** **End of Sep + 184.3%** **End of Oct + 173.8%** **End of Nov + 216.7%** **End of Dec + 233.3%**
HOW DID THE INDEXES DO?
Here are the results year to date:
The S&P 500 (Large Cap)
Closed up 16.2% YTD. (It started the year at 3231 and is now at 3756).
The Russell 2000 (Small and Mid Cap)
Closed up 18.4% YTD. (It started the year at 1668 and is now at 1975).
The IJS ETF (The S&P 600 of Small Cap Value stocks)
Closed up 1.1% YTD. (It started the year at 80.4 and is now at 81.3)
The Dow (Very Large Cap)
Closed up 7.2% YTD. (It started the year at 28538 and is now at 30606).
These four indexes
Averaged up 10.7% YTD.
Then we have the Nasdaq, made up of tech stocks, a real outlier this time, which started the year at 8973 and is now at 12888, and is up 43.6% (33% more than the average of the others and about 25% higher than the highest of the other indexes, profiting of course from our tech stocks that contributed to pushing it up).
If we throw the Nasdaq in we get an average for the five indexes of up 17.3%. Even that up 17.3% is miniscule though, compared to the up 233% that my portfolio was up, and I know of other board members who were up well more than I was.
How often have we heard that no one can beat the indexes? That stock picking is a waste of time and effort? That we will all “return to the mean”? That “books have been written that prove it!” Well, guess what, Folks, the books are wrong!!! Obviously wrong!!! Just look around you!!! However, I still regularly read things like “A managed portfolio can never beat a passive portfolio or the averages” repeated as if it is a known truth. How ridiculous!
And if you look at the past years you will see that picking our “overvalued” stocks has done ENORMOUSLY better than investing in cheap, or “undervalued” stocks.
Again, my results are 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, and some even a lot better .
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.
THOUGHTS ON TRADITIONAL EV/S, AND WHY EV/S HAS NOTHING TO DO WITH OUR COMPANIES
I posted this the last three months, but I think it is so basic and important for the purposes of our board that I should keep posting it. After all, there are new investors on our board each month, and this is fact is crucial to what we are doing.
Some who are new to the board seem almost personally offended that I don’t calculate EV/S on any of my stocks, and that I don’t pay attention to it, or to the fact that all our stocks usually have EV/S ratios which are very high by traditional EV/S standards.
I don’t have the answer to what is “overvalued,” but I know that traditional EV/S ratios have NOTHING TO DO with our companies! Our companies are profoundly different than the companies that EV/S was traditionally used for. Why? Here are some reasons:
First of all, a company with 70% to 90% gross margins is worth a much higher EV/S ratio than a company with 30% or 40% gross margins because each million dollars of sales is worth so much more to the company in take home dollars.
Just think about this for a minute. If you have 85% gross margins, a million dollars in sales is worth $850,000 to you. If you have 42% gross margins (still quite acceptable), the same million dollars in sales only brings you $420,000. Now really think about that. How can you put the same million dollars in the denominator of EV/S and expect to get a sensible value? Our company with an 85% gross margin is naturally worth twice the EV/S of a normal company with a 42% gross margin, other things being equal.
And a company with a 28% gross margin (believe me, there are plenty of those too, in the real world) only keeps $280,000 out of that million in revenue. How can you put the same million dollars in revenue in the denominator of EV/S for all three of those companies??? Our company with 85% gross margin is naturally worth three times the EV/S sported by the 28% gross margin company, other things being equal… But… other things aren’t equal!!!
Secondly For a company that is leasing software that becomes integrated into the core of the customer’s business, and with a subscription model that brings in recurring revenue, each million dollars of sales today is not just for this year. It’s for next year too, and the year after, and the year after that, and…. pretty much forever. No one, simply no one, is going to tear out a system that is core and essential to the smooth running of their business, and that would disrupt their entire business to pull out, to save a few dollars. It ain’t gonna happen folks.
Okay now, you have a million dollars of sales this year that will, for all practical purposes, be there next year, and the year after too and new sales next year will be an extra bonus added on. When you put that million dollars into the denominator of the EV/S equation, what do you have to multiply that million dollars by to take into account all those future years of recurring revenue? By three? By four? By five? That sure brings down the real EV/S for our SaaS companies, doesn’t it?
Compare it to a clothing manufacturer (just for instance). It sells 100,000 coats this year, but has no idea if it will sell 100,000 coats next year, or even 50,000 (maybe another brand will be in fashion). Recurring revenue on a subscription sure beats the heck out of that, doesn’t it? At first glance that clothing company example may seem irrelevant. But no, the EV/S of maybe 3 or 4 that it carries, has helped to shape the idea in your head of what a EV/S normally is. But if the clothing company’s EV/S is 3, if one of our companies has the same revenue (the same S in the denominator), what should its EV/S be? Four times that? Six times that? Ten times that?
Thirdly. But wait! Our companies also have a dollar-based net retention rate maybe averaging 125% or so. That means that this year’s sale revenue isn’t just going to recur next year, but it will be 25% bigger next year, and bigger the year after that. Well of course a company with a 125% dollar-based net retention rate of recurring and growing revenue will have a higher EV/S ratio, than a normal company with the same revenue, the same S value, down there in the denominator, which may not even be there at all next year … (duh!)
Fourthly. And then there is growth rate! Well, of course a company that is consistently growing revenue at 50% to 70% is going to have very high EV/S ratios, because in just two years a consistent 60% growth rate means they will have more than two and a half times as much revenue as they have now. That’s in just two years!
And in three years, more than four times the revenue they have now!
And in four years, more than six and a half times the revenue they have now! That will sure bring that EV/S ratio down, won’t it? I won’t go beyond four years but that’s enough. (You won’t believe it but a fifth year will bring the revenue to more than ten times what you started with. Obviously they don’t need to keep a 60% growth rate to really push up their revenue! That S in the denominator is going to grow rapidly.)
Fifthly, and finally, of course a company that is leasing a software solution that every enterprise on the planet needs, and that the vast majority don’t have yet, and that all those companies will keep indefinitely once they install it, will have a higher EV/S ratio than a company selling a product that anyone can put off getting a new model of, or stop buying for the duration of a recession, etc.
Here’s the key to this: You can live another year with your old cell phone, or computer, or car, or raincoat, or refrigerator, or kindle, or ski jacket, or your old factory, or whatever, without buying a new one next year, but once you lease this software, you keep leasing it indefinitely, no stopping for a year.) If you think about that and understand it, you’ve gotten the message!
And of course, of course, of course, companies that have ALL these features…
Leasing software, not a physical thing that requires capex to expand
70-90% gross margins AND
a subscription model with recurring revenue AND
125% net retention rates AND
growing revenue at 50% to 80%, AND
selling products that all enterprises need …
are going to have very high EV/S rates (…duh), and I don’t know what is high, but I will NEVER sell out just because the price has gone up, and because some people think the EV/S is too high. I just don’t know where these companies will ultimately end up. Sure I didn’t buy into SNOW when it opened at three times the planned IPO price and during day one got up to $319 (four times the planned IPO price), but that was just a crazy feeding frenzy, and I wasn’t going to pull money from my high confidence positions to buy into it.
My decision about my confidence in a company is based on gross margin, recurring revenue, growth rates, dollar-based net retention rates, necessity to their customers, dominance in their field, my confidence in management, and how all that looks to me for the future. Traditional EV/S simply doesn’t enter the equation.
LAST FOUR MONTHS REVIEW
September I made very few buys or sells as I was out of action with a fractured shoulder, and busy with doctors’ appointments and physical therapy. I did sell out of my remaining tiny position in Alteryx, and trimmed Zoom twice when it got over 30% of my portfolio (it’s grown to be back over 30% again), and added some to Fastly and a little to Cloudflare. On Wednesday morning I also pulled some cash out of the market permanently and put it into my family emergency fund.
October. I was more active this month. In the first two weeks I took what is now an 11% position in Docusign, mostly using money I was trimming from Zoom (see below). In the second week when I was up 236%, I pulled a little bit more cash out of the market permanently and put it into my family emergency fund. This money will not be reinvested in the market. I got it by selling 4% of the number of shares in each of my positions to keep the relative sizes of the positions unchanged. In the third week of the month Fastly delivered an incredibly negative pre-announcement, at the same time Cloudflare was announcing two weeks worth of announcements of what seemed like dozens of stupendous new products. I exited Fastly and put most of the money into Cloudflare at about $56.50. This has been adequately discussed on the board already.
Luckily, and with no foreknowledge, I had sold about 15% of my Fastly at $129 to try to even out my Fastly and Cloudflare positions. This was before Fastly preannounced. I started selling the rest of Fastly in the aftermarket at $95, but sold most of it at about $89.50, for an average price of about $90.50. It finished the month at $63.50. I also added a little Crowdstrike during the month. I sold my Okta down from a 7.5% position at the end of last month, to a 5% position, due to the chorus of “It’s slowing down!” but I don’t expect to sell any more at all. I bought a tiny 0.7% Snowflake position, with tiny buys starting at $245 and ending at $268. Since then it’s been up to $297 and right back down to $250 where it is now. Finally, last month I trimmed Zoom twice when it got over 30%, but it ended September at 31% anyway. I said I’d trim it again and I trimmed it down this month to about a 23% position to bring it in line with my other highest confidence positions, Crowdstrike and Datadog.
November. Our stocks sold off near the beginning of this month with what was called a “market rotation,” which means “for no discernable reason.” It seemed to be buying cyclicals and airlines, and hotel stocks and cruise ship companies, and selling the companies that are doing well, and was stimulated by reports of effective vaccines. That’s not investing, it’s just speculating on hope for a turnaround. Most of our companies are now back from that sell off and up to, or close to, their alltime highs, by the way.
I added to Cloudflare a couple of times during the month, but not a huge amount, having added so much in October when I sold out of Fastly. Cloudflare is now in 3rd place in my portfolio with a 19.5% position, and up 32% from that large October purchase at $56.50, and is at new highs.
Crowdstrike has also been very strong and is at a couple of percent of its all-time high. Datadog got hit after a very strong quarter, and I actually bought a little as low as $82! I’ll discuss Datadog at length below. I got a chance to add a little to my Docusign at $195 to $210, which I was surprised to see as Docusign fell with all the rest of my stocks, although for no discernable reason.
I’m still out of Fastly. For those who like to keep track of those things, Fastly is still 6.9% below where I, and others, sold it, while Cloudflare, where I immediately put the money, is up 32.3% since then. That means that I have 42.1% more than I would have had if I had just held the Fastly and hoped. (1.323/0.93.1 = 1.421). Netflare is setting new all-time highs, while Fastly will have to rise 62% to get back to its high. The message is clear: When there is an apparent disaster, give thought to getting out and putting your money to work in a higher confidence company, instead of hanging on and hoping that the company will get it figured out.
Okta also is back to within a few percent of its all time highs. I sold out of my tiny, less than 1% position in Snowflake, wanting to put my money elsewhere (it wasn’t much money of course). And finally, I didn’t buy or sell any Zoom this month, but as its price has ended up almost unchanged while the price of my other companies have generally risen, its percent of the portfolio has falled.
December. After Zoom announced I decided that I didn’t want as large a position as I had. I sold one-fifth of my total shares in the pre-market the next day, luckily getting about $446.40 (down $32 from the previous close). Unfortunately for the other 80% of my position, Zoom closed that day at $406.30, or down $40 more. I continued to gradually reduce my position, which currently is about 3.6% of my portfolio. The shrinkage was mostly due to my reduing my position but also due to its stock price falling relative to the others. My sales were from $508 to about $384 (with a single sale at $351), and my average sale price was about $440. It closed the year at $337. I did write repeatedly trying to warn people that Zoom had already conquered the world and there wasn’t anything that would move the needle much next year.
Since I had cash from my Zoom sales I reinvested the money in Cloudflare ($72.75), Docusign ($214.24), a little more Crowdstrike ($147.00). I have continued to add to Cloudflare all month. I also added back to Datadog earlier in the month
I also again took a little 2% position in Snowflake (at $302.02). It was strange to take a position on a Tues morning and have the stock finish up 28% by the end of the week. I added some more at the higher prices. But then Snowflake fell from over $400 back down to about $300 when part of the lock-up was being released. The fall represented no fundamental change in the company’s business so I added about 40% additional shares in three purchases at $315, $312, and $307. I continued adding small amounts subsequently. It finished December at $281.
Early in the month I took a little position in JFrog ($68.80) when Bert Hochfeld recommended it. However I sold out at a small loss (4%) when I had that chance to add to my Snowflake. I sold out because what they sell is a tool for developers to use, and it is thus obviously not infinitely scalable like the others I have high confidence in.
I almost started a position in Peleton too. They were down because they couldn’t keep up with orders, but I thought that that was a positive more than a negative. However, when I compared them to Crowdstrike and Cloudflare and Snowflake, that could grow forever, I decided I preferred my money in the expansion of data which will go on forever, rather than the number of people who could or would buy and keep a Peleton bike and subscription, which number was inherently limited. That’s just my bias. PS – I now learn that they are doing an acquisition (Precor) so that they can start manufacturing their own equipment themselves. So with this they are becoming even more of a hardware company. Boy, this is not my kind of company to invest in! Sorry if that hurts anyone’s feelings. For the month, by the way, I would have been better off in Peleton than most of the others.
HOW THE INDIVIDUAL STOCKS HAVE DONE YTD
Here’s how my current positions have done this year. I’ve arranged them in order of percentage gain. As always 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 2020, and not from when I originally bought them if I bought them in earlier years.
For example, I bought Okta originally at $29.95 about three years ago, but I listed it at an entry price of $115.37 because that is the price at which it started 2020.
**Zoom from 68.04 to 337.32 up 395.8%** **Crowdstrike from 49.87 to 211.82 up 324.7%** **DataDog from 37.78 to 98.44 up 160.6%** **Okta from 115.37 to 254.26 up 120.4%** **Cloudflare from 34.97 to 75.99 up 117.3% (Bought in July)** **Docu from 210.5 to 222.3 up 5.6% (Bought in Oct)** **Snowflake from 302.0 to 281.4 down 6.8% (Bought in Dec)**
Granted, a lot of my gain was from Zoom, but you will note that five of my seven positions are up over 100% YTD, even though my first purchase in Cloudflare wasn’t until July. Docusign and Snowflake, which are the two positions not up over 100% were just bought in October and December.
As often happens at times of great stress and uncertainty, I sold off lower conviction positions and have concentrated my funds in my highest conviction companies. I now have seven positions.
My portfolio now has an extremely large position in Crowdstrike, and very large positions in Cloudflare and Datadog and the tree of them make up 75% of my portfolio. Keeping the number of my stocks down really makes me focus my mind and decide which are really the best and highest confidence positions. Crowdstrike is MUCH larger than what I usually feel comfortable with, but I haven’t been trimming it. It has, for the most part, grown into its size.
Here are my positions in order of position size, and bunched by size groups. I also have taken a very small (under 1%) position that I’m not ready to talk about yet.
**.** **Crowdstrike 34.0%** **Cloudflare 21.7%** **Datadog 19.2%** **Snowflake 8.0%** **Docusign 7.5%** **Okta 5.1%** **Zoom 3.6%**
STOCK REVIEWS Please note that when I discuss company results, I almost always use the adjusted values that the companies give.
Zoom, is currently my smallest position, greatly reduced in size at 3.6%. I continued to trim it in December. Zoom went from an obscure little company to a household word known by almost everyone in a couple of months. Their April and July quarters were two of the most amazing quarters ever seen by man, with revenue up 169% yoy, and then up 355% yoy. Those revenues were up 74%, and then up 102%, SEQUENTIALLY! Their Adjusted Net Income in their July quarter went from $24 million to $275 million, and it was all like that. For example, Free Cash Flow went from $17 million to $373 million, and Customers with over 10 employees grew by 458%.
However, then came the October quarter and their sequential revenue growth fell from 102% in July to just 17% in October. Their sequential free cash flow growth fell from 826% in April to 48% in July, and then to 4% in October. After you have conquered the world, what can you do for an encore?
Yes, they grew revenue by 367% if you consider it yoy, but they didn’t actually GROW revenue by 367% in the quarter. As I posted on the board, that was “a dead man walking”. They grew revenue 17% during the quarter. The rest of that revenue represents what their recurring revenue grew to during the April and July quarters. You have to understand that revenue being up 367% year-over-year sounds very impressive, but it was basically their steady state recurring revenue now, plus 17%. Zoom is still a terrific company but their video business can’t grow that fast any more. It’s already done it all. And it’s so big that new products will have trouble budging the needle. Which is why I cut my position way down (see the December monthly summary above), and which I warned about over and over.
Crowdstrike is currently my largest position at an enormous 34% of my portfolio. I couldn’t help myself and I added small amounts several times this month at an average price of $159 even though it was such a large percent of my portfolio. It closed the year at $212. Although it is MUCH larger than I can remember ever having before, I have never considered reducing it. It also announced results for its October quarter this month.
Crowdstrike is a security company built entirely on the cloud and that started out securing endpoints, but now is expanding into many other aspects of security, and seems to be heading towards being one of the world’s dominant security companies. A key advantage it has is its AI. When it detects an attempt at an intrusion in one of its customer clients it instantly flags and stops that intrusion in that customer, but at the same time stops that intrusion from occuring in each and every one of its customers pretty much instantly. It has a record of everything that has ever been tried on any of its customers so it keeps increasing its knowledge base. That’s a Wow! Feature, and no on-premises firewall company can come even close to what it does.
I read about FireEye’s security breach a couple of weeks ago. I looked at a five year graph and saw that FireEye’s stock price was almost exactly still where it was five years ago. It’s never gone much above and never much below. Same market cap. And I wonder why any responsible company would still rely on a static old-line security company like FireEye, when there are companies like Crowdstrike around. Then this week it was a breach in all the Federal government computers. What was the government security thinking? How could they have not been using Crowdstrike? All of this has to be extraordinarily good for Crowdstrike! However, they didn’t really need it.
Let’s look at their Oct quarter results: Here is what Annual Recurring Revenue (ARR) has looked like for the past four Oct quarters: $113 million, $254 million, $502 million, and $907 million! Just look at those numbers (an octuple in three years!). Their total revenue was up by 86% yoy, reaccelerating sequentially from 84% the quarter before. Free cash flow grew from $7 million to $76 million, subscription customers grew 85% from 4561 to 8416, and they added almost 1200 subscription customers sequentially. They are my highest confidence position.
DataDog, is the third of my big three high confidence companies at 19.2% of my portfolio. I added to my position at $101.60 during December. Their most recent earnings quarter was their Sept quarter. As the results were somewhat controversial, I thought I’d give you more details than usual.
Revenue up 61% to $155 million
$100,000 ARR customers, were 1,107, up 52% from 727 a year ago. They make up 75% of revenue.
Total Customers were 13,100, up about 3600 or 38% from about 9,500 last year.
Dollar-based net retention rate continues to be over 130%.
Current customers always provide the majority of the growth in a quarter, with the new business adding to it.
Remaining performance obligations (RPO) was $316 million
“We are pleased with our strong results, which demonstrated continued high growth at scale… With eight new products and major features announced at our annual user conference, we have maintained our strong track record of innovation and extended our leadership as the most complete and cloud native end-to-end observability platform. We continue to make meaningful R&D investments toward what is a very significant long-term opportunity.”
• Adj operating income was $13.8 million;
• Adj operating margin was 9%.
• Operating cash flow was positive $36 million,
• Free cash flow was positive $29 million.
• Cash, was $1.5 billion
• Announced 8 new products and features at our annual user conference, attended by over 7,000 people in our first all-virtual event. Product announcements included:
• The introduction of the Datadog Marketplace, to enable technology partners to build applications on our platform, and allow our customers to browse, purchase and use these applications.
• The general availability of Continuous Profiler.
• Extending Synthetics, which enables customers to test the viability of new features earlier in the development process.
• Introducing Mobile Real User Monitoring (RUM), to enable full visibility into the performance of mobile.
• The general availability of Error Tracking, which enables engineering teams to aggregate, triage, and prioritize frontend application errors.
• The beta launch of Incident Management, which unifies documentation, data, and collaboration in a centralized pane of glass for DevOps and security teams when an incident occurs.
• The beta launch of Compliance Monitoring, which extends our security solutions to proactively notify DevSecOps teams of misconfigurations and compliance drift.
• The beta launch of Recommended Monitors, a suite of preconfigured, curated, and customizable alert queries for key infrastructure technologies.
• Announced a strategic partnership with Microsoft which will make Datadog available directly from the Azure console. Azure customers will be able to purchase a Datadog plan with the ability to draw from their committed Azure spend, implement Datadog with just a few clicks, as well as manage Datadog natively from the Azure Portal. Lastly, Azure and Datadog sales teams will increase collaboration for co-selling to enterprise clients.
• Announced the extension of a strategic partnership with Google Cloud Platform (GCP). In addition to expanding the current partnership from EMEA to North America, this will extend go-to-market collaboration and deliver deeper sales alignment between Datadog and GCP.
• Achieved “In Process” status on the Federal Risk and Authorization Management Program (FedRAMP) Marketplace for moderate-impact SaaS. Datadog is currently working with the U.S. Dept of Veterans Affairs and the General Services Administration, based on our earlier FedRAMP Authorization for Low Impact SaaS workloads.
• Delivered additional product innovations and integrations, including Tracing without Limits to enable ingestion of all tracing with no sampling and live search, Deployment Tracking to identify when performance issues are caused by new code deploys, a suite of DNS monitoring features to troubleshoot internal and external DNS resolution issues, and the extension of Watchdog anomaly detection to Kubernetes clusters, as well as new or enhanced integrations with AWS Step Functions, Snowflake, Slack, etc
• Recognized as a 2020 Gartner Peer Insights Customers’ Choice for Application Performance Monitoring. Datadog scored a recommendation rating of 91% based on 132 verified IT customers.
• Achieved AWS Outposts Ready designation, which recognizes that Datadog has demonstrated successful integration with AWS Outposts, a fully managed service that extends AWS infrastructure, AWS services, APIs, and tools to virtually any datacenter, co-location space, or on-premises facility.
Throughout the quarter, usage growth of existing customers was robust which was a return to more normalized levels after slower usage expansion in Q2. To be more specific, the pace of usage growth in Q3 was broadly in line with pre-COVID historical levels. As a result, we feel comfortable that some of the rationalized cloud usage from our larger customers that we saw in Q2 was transitory, as many of those customers have now returned to steady growth in multiple markets. Strength was broad-based across customers of different sizes and within different industries. However, while Q3 usage growth was back to pre-COVID levels, the weakness experienced in Q2 will still be reflected in our year-over-year comparisons for a number of quarters.
In addition to that, new logo generation continued to be robust with customer additions in line with pre-COVID levels and churn remained consistent with historical rates. Taking all of this into account, total ARR at the end of the quarter was a new record for the company making this a very successful quarter.
71% of customers are using two or more products, which is up from 50% last year. Approximately 20% of customers are using four or more products which is up from only 7% a year ago. We had another quarter in which 75% of new logos landed with two or more products, and we continue to be pleased with the uptake of our newest products, including Synthetics, RUM ,NPM, and Security.
Synthetics has now been commercially available for about a year. And today, it is used by thousands of customers, has reached eight figures of ARR and continues to be in hypergrowth.
Frictionless adoption is a key value proposition of our platform, which we expect would benefit all of our products.
Our ability to both land and expand during a time of uncertainty demonstrates our importance, as companies of all sizes and across all industries, even in the most challenged sectors, are turning to their digital operations as the most strategically important segment of their business.
We hosted DASH, our annual user conference. This was our first time hosting it in an wholly virtual format, and it enabled us to reach a broader audience of over 7,000 attendees, which was more than 5x last year’s count.
We continue to see a meaningful opportunity to innovate and expand our platform and therefore plan to continue to make meaningful investments in R&D.
Saul – My Take, a very positive conference call. Here is more of what they said:
Q - I get you’re not going to give us guidance right now for next year, but how are you thinking about it, and the rate of investment against that opportunity? And along with that how would you characterize the ability to hire in this environment?
A - Right now we are SO EARLY in the opportunity that the way we think about how to grow our teams isn’t directly related to the way we think about the growth we’re going to get next year. We really think of it in terms of HOW FAST we can grow our teams (!) while optimizing for both short-term and long-term growth. So WE ARE GROWING THE TEAMS AS FAST AS WE CAN basically (!), and we think there’s enough opportunity to justify it. And that’s true both on the R&D side and on the S&M side, and WE ARE VERY CONVINCED THAT THE OPPORTUNITY IS THERE (!)….
Saul here: (Caps were mine of course) How could they have been more positive, and how could anyone have read that and sold it down to $80 at one point? I guess the bots don’t read conference calls which gives us a big advantage. However, remember that the yoy comparisons may not show it for the next two quarters. To clarify, they say they are growing almost as fast as before, but that, because of the slowdown in Q2, the year-over-year numbers are coming off a lower base than they would have been for yoy comparisons, until they get four quarters under their belt. (It’s the opposite in a smaller way, of what I described with Zoom above).
They are saying that because of Q2 dropping the baseline, you can’t look at yoy revenue growth for this just reported quarter, Q4 or next Q1, but should look at sequential dollars of revenue growth. Then in Q2, year over year revenue growth should return to normal. But that’s just the way I interpret it.
Look at it this way, they grew revenue, in sequential quarters,
$17 million — Q1, hit for maybe $2 million because of Covid in last two weeks of March, assuming they would have hit $19 million
$09 million — Q2, hit for maybe $9 million more (full pandemic panic)
$15 million — Q3, they are almost back in line
So they are saying that because of the (say) $9 million that they lost in Q2, and perhaps $2 million in the last two weeks of March, this quarter looks light if you look yoy. However if you put that $11 million of recurring revenue that they didn’t get back into the base they’d be growing off, and imagine they were growing off a base $11 million higher, the yoy, instead of 155/96 = 61%, you get 166/96 = 73% revenue growth.
And that’s even though they were not quite all the way back as far as sequential dollars of growth, at $15 million, although it’s a lot better than Q2’s $9 million. And if they accelerate their sequential growth of revenue to $20 million in Q4, I won’t worry at all about the yoy percentages.
I guess I should have also included that they onboarded about 1000 new subscribers this quarter, which is up 59% SEQUENTIALLY!!! That means they onboarded 59% more subscribers this quarter than the roughly 630 that they onboarded in the June quarter, in case anyone has a doubt that business has really improved. And finally, all of the massive recent hacks will undoubtedly impel more customers to use Datadog.
Cloudflare (NET) has grown into a very substantial 21.7% position in 2nd place, as I put most of my Fastly money here a couple of months ago, and I‘ve continued adding small amounts almost every week in December, and also because the stock price has risen. As you have probably figured out from the size of my position, Cloudflare is becoming a high confidence company for me. I suggest you read muji’s deep dive from a week and a half ago. (https://hhhypergrowth.com/flare-ups/)
Here are some results from the September quarter, as announced in November. It was an amazing quarter. Read it and pay attention! :
• Revenue of $114 million, up 54%, and accerating from 48% sequentially and from 48% a year ago.
• Remaining Performance Obligations or RPO, is $342 million, up 25% SEQUENTIALLY(!!!) and up 81% yoy. (This is subscription revenue backlog).
• Adj gross margin was 77.3% down slightly from 78.9% a year ago.
• Adj operating loss was $4.5 million, or 4% of total revenue, improved from a loss of $18 million, or 24.5% of revenue, a year ago.
• Operating expenses as a percent of revenue decreased 5% sequentially, and 22% year-over-year to 81%. (Good)
• Adj net loss was $5.7 million, less than a third of the loss of $18.5 million a year ago
• Adj EPS was -2 cents, improved from -16 cents
• Operating cash flow was $2 million, up from a LOSS of $17.8 million a year ago.
• Free cash flow was negative $18 million (or 16% of revenue), improved from negative $34 million (or 45% of revenue) a year ago.
• Cash was $1.05 billion.
In four weeks during October, November and December, Cloudflare announced a staggering number of exciting new products. For more on this, see Stocknovice’s post: https://boards.fool.com/cloudflare39s-crushing-it-34646557.a…
About half of our new revenue in the quarter came from new logos and about half from expanding relationships with our existing customers.
None of our customers account for more than 5% of revenue. And our top 20 customers remain well under 20% of total revenue.
We’ve been able to hire great people. In Q2, we’ve received more than 40,000 applications and extended offers to a mere 0.6%. In Q3, we had over 60,000 applications and extended offers only 0.4%. We believe whatever company is able to attract and retain the best people will win.
Seeing how many businesses were struggling with the shift to remote work, in the spring we had decided to make Teams free through September 1. We had thousands of companies ranging from small businesses to fortune 500 corporations take us up on our offer. Over the course of Q3, we began conversations with all of them to transition from the free offer to becoming paying customers. We are happy with how that went. 75% of customers transitioned from free to paid accounts.
For some customers, who are still struggling to get through COVID, we allowed them to continue with the free offering until they can get their feet back under them. Teams is a very high margin product for us, so this doesn’t cost us much.
It’s great to see more use cases every quarter, I think we’re just scratching the surface. Most use cases today have focused on performance. Over time, I expect those use cases will pale in comparison to what is a much bigger opportunity, helping customers manage the challenges of compliance. As governments around the world increasingly insist on data localization and data residency, sending all your users data back to AWS feeds for processing will become unacceptable.
They are partnering with Okta and other identity management companies and don’t expect to go into identitiy management and compete.
“Sometimes you hit on all cylinders. We had one of those quarters”.
They finished November at an all-time high, and continued to rise in December. They are obviously a high confidence position for me.
Docusign was a new position in October now in 5th place at 7.5% of my portfolio. I trimmed a little bit in December to buy other choices. Docusign announced October quarter earnings in December. The way I think about it is that, like Zoom, it benefited greatly from work-from-home, but while there is some worry expressed about Zoom falling back some when the pandemic peters out, no business customer is going back to manual signing of ducuments, with Fedexing them back and forth over a period of days, when they can do it online. Just isn’t going to happen! On the other hand, its stock price hasn’t been rising like my other companies either. In fact, they’ve hardly budged in three or four months, while other companies’ stocks have been going straight up. Here are some figures from their earnings reports:
Before Covid, they averaged about 27,000 new customers per quarter plus or minus a couple of thousand or so. In the last three quarters they signed up 68,000, 88,000 and then 73,000! How’s that for acceleration!
They’ve added 38,000 enterprise customers, in the past three quarters, up about 51% in just 9 months from the 75,000 that they had in January, which was the end of the last fiscal year. This quarter, revenue growth accelerated to 53%, up from 40% the year before and up from 45% sequentially. Billings growth went to 63%, up from 36% a year ago.
It’s to be noted that their eSigning business is what is carrying the business right now because it is so easy to sign up someone without any need for Docusign service personnel. However, their platform has been MUCH slower to take off during Covid because it requires a set-up, and because it costs more.
As with Zoom, what do they do, now that they have pretty much conquered the world? While they may have considerable possible international growth before them, as well as exciting sounding platform modules, since they already have so much signing revenue, will any of that really be able to move the needle enough to keep the revenue growth percentage in the 50’s? I don’t know the answer.
Okta is a 5% position in 6th place. A lot of people I respect have sold out because they feel it’s slowing down, but I feel that it still dominates its category with no effective competition, management is very confident, its numbers were very respectable, and it just keeps chugging along hitting new highs.
• Guidance increased for fiscal 2021
• Record operating cash flow and free cash flows.
• Total revenue was $217 million, up 42% yoy.
• Subscription revenue was $206 million, up 43% yoy, and was 95% of total revenue.
• Remaining Performance Obligations (RPO), or subscription revenue backlog, was $1.6 billion, up 53% yoy.
• Current RPO, backlog to be recognized over the next 12 months, was $753 million, up 46%.
• Adj gross margin 78.3%, up 0.5%
• Adj operating expenses grew 30%, while revenue grew 42%, showing positive leverage.
• Adj operating income was 2.5% of total revenue, up from a LOSS of 5.3% a year ago.
• Adj net income was $5.7 million, up from a LOSS of $3.8 million a year ago.
• EPS was 4 cents, up from a loss of 3 cents a year ago
• Op cash flow was $43 million, up from $11 million a year ago.
• Free cash flow was $42 million, up from $9 million a year ago.
• Cash was $2.50 billion
• TTM Dollar-Based Retention was 123%, up from 121% sequentially
Announced the availability of the Okta Identity Cloud in AWS Marketplace. Global Okta prospects are now able to quickly and seamlessly purchase both Customer Identity and Workforce Identity products in AWS Marketplace, while also benefiting from new integrations that take advantage of both Okta and Amazon Web Services (AWS), including AWS Control Tower, a service that provides the easiest way to set up and govern a new, secure, multi-account AWS environment.
Okta has remained 100% remote since mid-March, and we continue to execute at a high level. We’re fortunate that the nature of our business allows us to operate successfully in this work environment.
The three mega trends that have been driving our business for the past several years, the adoption of Cloud IT, Digital Transformation and Zero Trust security, are all being accelerated.
We added nearly 100 customers greater than $100,000, and once again over half were new customers. Large enterprise customers now contribute 80% of our total annual contract value. The total number of $100,000 plus customers now stands at 1780, up 34%. And we’re seeing our base of customers with bigger ACV grow even faster. For example, our customers with an ACV greater than $500,000 grew over 50% to 320 customers.
We looked at the top 25 contracts we booked this quarter by total contract value. This includes both new and upsell contracts. All 25 were over $1 million, and 6 were over $5 million. What’s more, the average contract size of our top 10 new customers was up over 60% from the same quarter a year ago.
Expanding our footprint internationally is a long term priority. We opened our new office in Tokyo, and hired our first country manager in Japan.
We win because we have the most modern and extensive cloud based platform. Our customers value our independence and neutrality. And our Integration Network is unmatched in the industry. We’re also in the enviable position of being in a market that’s coming toward us. We’re confident in our ability to maintain this high level of execution, because we are just scratching the surface of the massive market opportunity.
We have a great four way partnership with Netskope, CrowdStrike, and Proofpoint. Its going very well. And this is a deep product integration, we’re actually using the products together, they talk to each other, there’s API translation, and you can actually enhance the performance of each of the products with the partnership.
When you have organizations like FedEx talking about going live with 80,000 plus employees on hundreds of applications over a weekend, that’s a stronger advertising message than anything that we could say as a management team. Because other customers will look at that and say, wow, that’s the kind of result I want.
The competitive landscape - it’s something we look at a lot. And we think about it a lot. And there is no change.
Saul – My Take – They are strong, and doing remarkably well, and not fading away at all. The biggest number for me was RPO or Remaining Performance Obligations, which was $1.58 billion!!! And up 53% yoy. This is subscription revenue backlog, and that’s an enormous number, more than seven times this quarter’s alltime-high subscription revenue! I’ve never seen a company with that much Remaining Portfolio Obligation! It comes because their customers have made a decision to stay with them long term and have set up long-term multiyear contracts.
Another thing I like about Okta is that, while it may not have gained as much as some of the others ytd (“just” 120% this year), it just keeps a slow grind upwards and never seems to have signs of weakness or big drops like the other companies. That seems to say that the market has confidence in it. It also should be accelerated by all these breaches we’ve just seen, raising awareness for the need for security.
Finally, Snowflake. I took and built up an 8% position and it’s in 4th place in my portfolio. All my purchases are currently underwater. It also announced Oct quarter results in December. Here’s a taste of what they were like:
Total revenue was $160 million, up 119%
Product revenue was $148.5 million, up 115%
Adj Product Gross Margin was 70%
Remaining performance obligations were $928 million, up 240%.
Net revenue retention rate was 162%. That’s about the highest I’ve ever seen.
Total customers were 3,554
Customers with TTM product revenue over $1 million were 65, up 110% from 31
Cash was $5.1 billion
Saul - You should especially look at RPO up 240%, revenue retention rate of 162%, and customers with revenue over $1 million, up 110%. And this was in the middle of the pandemic! And its growth should also be accelerated by all the breaches that we’ve just seen.
An important explanation:
Product Revenue is a key metric for us because we recognize revenue based on platform consumption, which is variable at our customers’ discretion, and not based on contract terms. Customers have the flexibility to consume more than their contracted capacity during the contract term and may have the ability to roll over unused capacity to future periods. Our consumption-based business model distinguishes us from subscription-based software companies that generally recognize revenue ratably over the contract term and may not permit rollover. Because customers have flexibility in the timing of their consumption, the amount of product revenue recognized in a given period is an important indicator of customer satisfaction and the value derived from our platform. Product revenue excludes professional services and other revenue.
Saul – Product Revenue seems roughly the equivalent of when a SaaS company gives subscription revenue (also excluding service and other revenue).
Let me remind you first, that I have NO IDEA what our stocks will do next month. I’m terrible on predictions. But I know that the businesses of our companies will do just fine for the most part.
I feel that 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.