My portfolio at the end of July 2018

My portfolio at the end of July 2018

Here’s the summary of my positions at the end of the wild month of July. As usual, I figure as of the last weekend of the month. This month the last week ended on the 27th, so the 30th and 31st will be carried into August. Note that I almost always use adjusted figures when the company gives them.

I feel very fortunate about my current portfolio. I have stocks in a small group of remarkable companies which I have high confidence in for the most part. I feel that they mostly dominate their markets or their niches, are disruptors, and have long runways, and will have great futures.

As you know, last year (2017) was an extraordinary year, in which I was up an incredible 97.0% at the end of November, and finished the year up 84.2%. At the end of the year I begged everyone not to expect that this year would be anything like that. I’ve kept saying that each month, but our stocks keep going up in spite of my warnings.

A month ago (at the end of June), I was up 44%, which was considerably ahead where I had been at the same time last year. This month, July, my portfolio hit a remarkable high, last Monday, of up 64.3%, and even after Friday’s rather horrific melt down it is “only” up a still remarkable 55.3%, which is still way ahead of what had seemed to be an amazing 45.7% at the end of July a year ago.

What seemed to me to have happened on Friday was that the government announced great growth of the economy (GNP). This caused the robo-computers to sell-off stocks because good economic growth means the Fed will feel better about raising interest rates. It reminded me of one of those Flash Crashes from a few years ago. Of course, if there had been a negative surprise, with low economic growth, they might have sold because of “bad” news. On the other hand, this could be the beginning of the long awaited Bear Market. (Not of “The Recession” though, as with economic growth at 4.1%, an actual recession seems like an outlier possibility). Trying to guess this stuff is impossible!

By the way, going back to that 64.3% high that I was up on Monday: at that point my whole portfolio had more than tripled so far in 2017 and 2018 combined! That’s beyond remarkable! (You can check the calculation with a little hand calculator: 1.842 times 1.643 equals 3.026, or 302.6% of where it had started). After this “horrible sell-off” my portfolio is still at 286% of where it started in Jan of 2017. I’ll take it!

The three indexes that I’ve been tracking against closed Friday as follows. The results are given from Jan 1st to date:

The S&P 500 (Large Cap)
Closed up 5.0% for the year. (It started the year at 2684 and is now at 2818).

The Russell 2000 (Small and Mid Cap)
Closed up 7.8% for the year. (It started the year at 1542 and is now at 1663).

The IJS Small Cap Value ETF
Closed up 8.1% for the year. (It started the year at 153.6 and is now at 166.0).

These three indexes
Averaged up 7.0% for the year so far. And if you throw in the Dow, which is up 3.0% and the Nasdaq, which is up 12.1%, you get up 7.2% for the five of them. So it’s clearly a raging Bull Market that’s accounting for our large gains. As the skeptics have said, “Anyone can be a genius in a raging Bull Market!”

Raging Bull Market??? The three indexes I follow are up an average of 7.0% so far this year. Last year they were up 14.4% on average. If we combine the two years together, the indexes are up all of 22% while many of us are up well over 150%. It’s hard to explain my portfolio’s 186% gain as due to the market being up 22%, or my 55% gain this year as due to the markets being up 7%. Think of it this way: this month alone, even with the tech sell-off, my portfolio tacked on 11 points (from up 44% to up 55%). The markets have risen just 7 points all year!

How can we explain the disparity between our results and the averages? I have to say again that we seem to have caught a secular wave, in which our companies are exploding in function and importance as well as in revenue, which is mostly recurrent. It’s the wave of big data, the cloud, artificial intelligence, and all the rest. I had some big winners outside of that area, but it’s been that big wave that has carried us. Here is a great summation by JAFbrblev on our board:
The sweet spot of transformation is turning information into actionable intelligence.
Never before has so much data been available
Never before has so much data been stored
Never before has so much data been retrievable
Never before could data across systems be assembled into information at a speed that supported decision making
Never before have we moved past “can we relate the data” and into the world of “how should we relate the data”
Hence, we are moving from the age of information into an age of actionable intelligence and we still don’t know how best to do that.
But the companies here are all support that wave, remove the technical obstacles, make it simple, and and turn all the information into cognitive, actionable intelligence.

You may ask, “Why these three indexes?” When I started this board I started comparing my results to the S&P 500, because that’s what the MF uses. Then, to be fair, I added the Russell 2000, a small and mid-cap standard. Then we were told that the IJS, which tracks the S&P 600 Small Cap Value Index, has the best long term results. So I added the IJS. This gives me 500 large caps (the S&P), 2000 small and mid caps (the Russell), and 600 small cap value stocks (the IJS), which combined ought to give me a very representative set of standards to compare against. I’m sure some people will say “Why not drop this index and add that one?” but these are the three indexes I compare against currently, and I will probably continue to do so. I think they give me a pretty good approximation of how the market overall is doing.

(The averages would be very slightly higher if you use the S&P with dividends added, but I’m continuing to use the straight values for consistency with past results. I consider the roughly 0.1% per month that the average of the three indexes would be changed by including S&P dividends to be irrelevant considering the magnitude of the differences between our results and the results of the indexes.)

The last two months I’ve thrown in the Dow and the Nasdaq as well, so as to hit all the major indexes. I may continue to do that.

One or two chronic critics on the board have said I shouldn’t compare against the market, but should compare against indexes of Cloud and Internet based stocks because they are closest to what ours are like. I think that that is falacious and ridiculous. I compare against The Market, meaning all the companies out there that people invest in. I don’t compare against the stocks that are already in my portfolio :grinning:… …or against stocks that are just like the stocks that are in my portfolio (which is what these critics are saying I should do, and which amounts to the same thing). What would be the sense of that? You can only know to compare against indexes of stocks like mine when you already know what I’ve already invested in, and look backward to figure out some index close to my stocks. What nonsense.

Consider an anonymous investor who worked out over time that stocks in a particular industry are going to boom (natural gas, or copper mining, or commercial real estate, etc…let’s say natural gas). This decision wasn’t at all obvious at the time, but he figured it out, and he changed his portfolio and bought the best ten natural gas stocks he could find, and sure enough, natural gas booms and his stocks beat the overall market by a mile, and then some wiseguy comes along and says “Oh! That wasn’t so smart. You shouldn’t compare against the Market. You should compare against an index of natural gas stocks, etc.” Of course this critic didn’t figure it out, and didn’t invest in any natural gas stocks or any index of natural gas stocks, so an impartial observer might conclude that he was just jealous, but who knows?

Finally, let me point out that I’ve been comparing against the S&P (“The Market”) since I started this board in Jan 2014, over four and a half years ago, long before I ever heard the term SaaS (as far as I can remember) and certainly before I ever invested in a stable of SaaS related stocks.

I’ve compared against The Market irrespective of what my stocks have been. They’ve included companies in fields as varied as banking (Bofi, Signature Bank, First Internet Bancorp, and others), biotech (Celgene, Kite and Nektar), real estate (LGIH), a gas station and general store chain (Casey’s General Stores), a 3-D printing company (Arcam), medical device firms (Abiomed, Intuitive Surgical), some solar companies (SolarEdge, Solar City), an electric car company (Tesla), etc, etc. I’ve always tried to: first, be profitable, and second, beat the market, and that will always be my goal, and not to beat some index made up of a collection of stocks almost the same as the ones I happen to be in at the moment. That is just so silly as to be laughable.

The trick is to pick the right stocks to be in. Then, if you do well, someone can always look backwards and find some Index or ETF that has something similar, and did almost as well. So what? I never guarantee to be in the best stocks in my category. I’ve always said there will always be stocks that will do better than mine (or yours). I just want to do well and make a good rate of profit, and a better one than the market as a whole is producing.

Let me remind you that I’m no good on timing the market, and I don’t try. If I did, I would probably have exited all my positions at the end of April 2017, when I was up 26% in four months and was “aware” that “it couldn’t continue” like that. At that time, in just four months my results had already dwarfed those I had in the entire years of 2015 and 2016, so back then at the end of April 2017, up 26% seemed like a ridiculously enormous amount to be up in just four months, and my stocks seemed way “over-bought.”

I continue to believe that intelligent stock picking with a modified buy-and-hold strategy can beat any index or average? How could it not? When an “average” is just that: an average of good, mediocre, and poor companies?

Here’s a little table of the monthly progress of my results so far this year:

**End of Jan 		+16.9%**
**End of Feb		+21.4%**
**End of Mar		+29.1%**
**End of Apr 		+25.8%**
**End of May		+38.3%**
**End of Jun		+44.3%**
**End of Jul		+55.3%**

The stocks I’m still in since the beginning of 2018 are Alteryx, Nutanix, Shopify, and Square. They include four of my five largest positions (Twilio came later), and they make up 49% of my current portfolio.

Current positions that I’ve added since the beginning of 2018 have been:

**January - 	Pure, Twilio, and Okta.** 
**May – 		Pivotal, and MongoDB (which I had sold out of in April)**
**June - 		Zscalar**
**July - 		New Relic**

Here’s a last four months review:

April: During April I sold out of my small position in MongoDB, went back in, and then out again for cash to buy more of other things. I also net trimmed Nvidia and Shopify to buy more Twilio and Okta.

May In the beginning of May, when Arista sold off, I added a lot of it at about $243. Later in the month, when I wanted money to buy other things that I felt had a longer runway, I sold off a very large part of my position at about $258.

Now, MongoDB again! Have I ever been back and forth on Mongo. I’ve changed my mind so many times this year I can’t keep track of them. I finally started a new position in June at about $43.48. I believe I’ll keep this one. I also took a small to medium position in Pivotal, after reading Steppenwulf’s great write-ups and researching some myself.

Finally, I sold out of the remains of my Nvidia position at $248, for cash to buy other things. It had been in a trading range between $215 and $250 for 20 weeks, which is a long time for a company which is supposed to be conquering the world. As I write at the end of July it’s still at $252, nine additional weeks later, while my portfolio has gone from up 38% at the end of May to up 55% now. I know everyone loves Nvidia, and it controls the future and all that, but it’s still a huge company that would be difficult to double or triple in size, and mostly a hardware company at that. It seems to have outclassed all its competitors and I don’t understand why it has been stuck for almost seven months now. This is not some unknown newly IPO’ed little company that no one has heard of and everyone misunderstands. When something like this happens I have to conclude that someone knows more about it than I do. I used the funds to buy more stock in other companies which looked better to me. Please remember that companies that I sell often continue to go up, and some stocks I buy go right down. God knows I make mistakes regularly.

June I sold out of the rest of my Arista early in the month. I was reducing Nektar all month, but planning to keep a token position, but sold out of the last of it at the end of June to buy Zscalar. I took a small position in Wix early in June, but sold it back in the same month, to buy Zscalar. I reduced Pure Storage to buy Zscaler.

July I took a small position in New Relic. I have continued to reduce my position in Pure Storage, and coincidently it’s the only one of my stocks that’s down this month. I also trimmed a little bit of Pivotal. I kept building my position in New Relic, and added to Zscaler as well. I didn’t sell out of any positions, but I have segregated away a certain amount of cash. Why? You ask. Well, I’m getting not only older, but old, and there’s a limit to the amount of years I have to live. I have enough set aside for my family. I can cover our living expenses more easily as we live a reasonably simple life. And besides, it’s too much work for an old guy.

Here’s how my current stocks have done in the first six months of the year. 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.

**Twilio from 25.70 to 60.71		up     136.2%**
**Square from 34.67 to 69.85		up     101.5%** 
**Okta from 29.95 to 55.11		up  	84.0%**
**Alteryx from 25.27 to 41.95		up  	66.0%**
**Shopify from 101.0 to 160.15	        up 	58.6%**
**Nutanix from 35.28 to 51.89		up 	47.1%**
**MongoDB from 43.48 to 59.56		up	37.0%** 
**Pure  from 16.72 to 22.72		up 	35.9%**
**Pivotal from 19.18 to 24.33	  	up  	26.9%** 
**Zscaler from 35.84 to 37.38,  	        up 	 4.3%** 
**New Relic from 102.00 to 105.32	        up	 3.3%**

My recent big stars have been:
Nutanix, which at $51.89, is up 141% from when I bought into it nine months ago at $21.50,
Twilio and Okta, up 136% and 84% from when I bought them in January, just over six months ago,
Square, up 101% this year so far, and about quadrupling(!) since I bought it at $17.50 just a year and four months ago, in March of last year.

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.

**Nvidia from 193.5 to 248.0	 up  	28.2%**
**Nektar from 59.7.0 to 76.0       up  	27.3%  1st time**
**Talend from 37.48 to 47.50       up  	26.7%** 
**Hubspot from 88.4 to 108.0       up  	22.2%** 
**Arista from 235.60 to 274.0,     up     16.3%**
**MongoDB from 38.00 to 43.50      up 	14.2%  1st time**
**Wix from 102.5 to 98.1		down	 4.3%  2nd time**
**Mime from $32.34 to 30.85	down	 4.6%** 
**LGIH from 75.0 to 71.0 		down 	 5.3%** 
**MongoDB from 41.00 to 38.65	down 	 5.7%  2nd time**
**Wix from 69.2 to 61.8    	down	10.7%  1st time**
**Nektar from 103.0 to 54.0       down	46.6%  2nd time**

Well-intentioned people have been warning us constantly that another bear market and/or recession is coming. “The bull market is too old.” or “The market is too high.” or “This technical indicator proves the the market is in a bubble.” All of their charts and indicators proved it in 2010, 2011, 2012, 2013, 2014, 2015, 2016, and again last year in 2017. I’m hearing convincing stories about bond yields now fortelling a crash, and interest rates rising. The only trouble is that I’ve heard similar convincing stories about other technical indicators every year. Eventually they’ll be right, and they will think “See! I was right all along!” They may be right now! I certainly don’t know.

Of course a marked correction or bear market will come eventually. And rising interest rates, tariffs, and trade wars do eventually stop the market rises. Look, the next Bear may have started on Friday for all I know! But we never really know when. And what a price those people have paid in “keeping their powder dry” and staying out of this market for the past eight years, waiting for the big correction that never came.

Picking good stocks makes much more sense than trying to pick good stocks AND trying to time the market too. Just my opinion.

Now let’s look at my position sizes. I’m still trying to keep my portfolio concentrated and streamlined. I’m now at 11 positions, each of which I feel good about, which is a pretty good place to be. 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 the 11 positions in order of position size.

**Alteryx 		14.6%**
**Twilio			13.6%**
**Nutanix			12.6%**
**Shopify   		11.1%**
**Square			11.0%**
**MongoDB 		 8.2%**
**Okta			 8.0%**
**Pivotal 		 7.7%**
**Zscaler		 	 7.1%**
**New Relic		 4.6%**
**Pure		 	 1.4%**

It’s a very concentrated portfolio. With 14 positions, an “average position” is about 7%, but with just 11 positions, an average position is a 9% position. My top nine from last month are still my top nine, and in roughly the same order,.

I’m going to give you the stocks alphabetically instead of by position size, and I’d try you just a capsule of what each company does, and then a capsule of its most recent earnings report, to give an idea why I like it. None of them have yet reported June quarter results

Alteryx was a new position for me last December. It started this year at $25.27 and finished July at $41.95, up 66% for the year to date. I sort of understand what it does, which is to lease a software platform which allows techie’s and non-techies alike, to analyze and use the torrent of data coming in easier and more quickly. People who use it seem to love it. Here are the March quarter results:

Revenue was up 50%. However growth slowed from growth of 61% a year ago. That can be a bit deceptive, so let me give you some (rounded off) numbers for March quarter revenue for the last three years:
2016 - $18 million,
2017 - $29 million,
2018 - $43 million.
As you see, in 2017, revenue for the quarter grew by $11 million and in 2018 it grew by $14 million, so revenue actually grew by more dollars than the year before, even though the percent rate of growth dropped from 61% to 50%. The issue was coming off a very small base which makes the percentage gains look bigger.
The dollar-based revenue retention rate was 132%. This was the 6th consecutive quarter that it was above 130%.
Adj gross margin was 90%, up from 84% a year ago.
Adj operating loss of $1.3 million, improved from a loss of $3.6 million.
Adj operating margin was minus 3.0%, improved from minus 12.5% !!!
Adj net loss was $0.6 million, improved from a loss of $3.7 million.
Adj net income per share was a loss of 1 cent, up from a loss of 6 cents.
Cash was $206 million, up $8 million sequentially.
Op cash flow for the quarter was positive $12 million, up from $5 million a year ago.
They had 3,673 customers, up 43% yoy. Added 281 net new customers in the quarter, up from 237 a year ago.
New customers included some well-known companies such as 3M, Intel, Merck, Waste Management, Barclays Bank, Under Armour. And they emphasize that they are seeing larger “lands”.
Alteryx seems to be doing what it does very well.

MongoDB I started a small position two months ago, for the third time this year, at an average price of $43.48. It’s now at $59.56 so it’s grown by 37% in two months. They are trying to disrupt and replace a 40 year old database paradigm with something more flexible and adaptable to the modern cloud and big data environment. They are growing very fast but haven’t really started shrinking losses yet. Here are April quarterly results:

• Total revenue was $48 million, up 49%
• Subscription revenue was $45 million, up 53%
• Adj gross profit was $35 million
• Adj gross margin was 72.6%
• Adj loss from ops was $22 million, worsening from $15 million
• Adj net loss was also $22 million, worsening from $15 million.
• Adj net loss per share was 43 cents.
• Cash was $272 million
• Op cash flow loss was $8.0 million and $0.4 million in capital expenditures, leading to
• Free cash flow loss of $8.4 million, compared to a loss of $12.4 million a year ago.
With $272 million plus a cash raise they just did, they are obviously not going to run out of cash at $8 million a quarter. Their stated goal is to keep growing as fast as they can, and accumulate customers and recurring income, and disrupt their market. Sounds good to me.

New Relic is a new position that I started three weeks ago at $102.00 and added to as it rose, and it is now at $105.32, up 3.3% in three weeks. I had been in it a year ago, with Bear (who brought it to the board), and Chris as well, but exited it in the $40’s when it seemed that rates of revenue growth and of new customer acquisition both were nose-diving. (By the way, it’s worth noting that, although the price was up more than 100% when I bought back in from when I exited, I never even considered that as a reason to not re-enter. The situation has definitely changed, and I try my best to not price-anchor but consider the situation as it is now, and decide whether I should enter NOW, not back then).

What happened back then? I don’t really know, but I can take a guess. My guess would be that they were readying a new version with enhanced functions, and that customers were in wait-and-see mode. I have no regrets about having exited, by the way. I did what was the correct thing for me at the time, and the stocks I invested in instead (my portfolio) is has done judt fine since then.

Okay, what do they do? It’s something called Application Performance Management (APM), which means they provide software which can tell a company in real time what is working and what isn’t, and where the problems are and how to fix them. As opposed to most of its legacy competitors, New Relic’s solutions are native to the Cloud and not jerry-built add-ons. In addition, New Relic is expanding into areas beyond APM with two new products which have each grown to more than 10% of revenue.

As far as the last quarter, I wrote a piece on them a couple of weeks ago:…
Bert wrote a deep-dive even more recently than that, and Investing City wrote an excellent article on Seeking Alpha just after that.

Nutanix was a new position last September. I entered at about $21.70 with a fairly good sized position. It closed Friday at 51.89, so it’s up 141% in nine months. Sure, stock picking doesn’t work. We’ll all return to the mean some day. Statistics prove it! Hah!

Nutanix’s area is “hyper-converged infrastructure” in data storage. I don’t have a clue what that means, but Gartner rated Nutanix first on completeness of vision, and first on the ability to execute. It is doing away with the pass-through zero-margin hardware that it was selling, and pivoting to be a pure software company (also moving towards a SaaS model). This makes their revenue growth look deceptively slow because the hardware sales are no longer being counted, and because of subscription revenue being counted only month by month, even if all paid in advance. (Pretty odd to talk about revenue growth of 41% looking deceptively slow, isn’t it?). Nutanix apparently recently won a $45 million contract with the Air Force, its biggest contract ever.

Nutanix has a Net Promoter Score of 90 !!! (For those who aren’t familiar with it, NO ONE gets a Net Promoter Score of 90 !!! It means just about all your customers absolutely love you.)

Here’s what their April quarter looked like:

• Revenue: up 41%, but this is with the elimination of the pass-through hardware revenue that they are no longer counting. If you compare apples-to-apples, revenue was up 65.5%. That’s extraordinary revenue growth!
• And for a little consensual validation, Bert called this a blow-out quarter and came to the same 66% real revenue growth figure that I did. And he’s value-oriented and conservative.
• Software and support billings up 67%
• Adj Gross Profit up 57%
• Adj gross margin of 68.4%, up from 61.2% !
• Adj Net Loss of $34.6 million, improved from a loss of $45.7 a year ago.
• That’s a loss of 12% of revenue, down from a loss of 22% a year ago, as well as the dollar loss decreasing.
• Adj net loss per share of 21 cents, improved from a loss of 32 cents.
• Cash was $924 million
• Deferred Revenue: $540 million, up 62% !
• Operating Cash Flow of positive $13 million, improved from a loss of $16 million
• Free Cash Flow: A loss of $1 million, improved from a loss of $29.2 million !!!

Just read that over again and you’ll see why I don’t have to know what hyperconverged infra-structure is to know that Nutanix is a disruptive category leader. Start with the enormous growth (billings up 67%, gross margins up 7%, deferred revenue up 62%, operating cash flow of positive $13 million, improved from a loss of $16 million, etc), add on Gartner rating them #1 in two categories, and tack on that unbelievable Net Promoter Score showing that their customers are beyond satisfied. That’s enough for me.

Okta was another new position in January, a small cyber-security firm. They IPO’ed in April, 2017. What they do is called Identity and Access Management, or IAM, but they are expanding into adjacent security fields with a recent acquisition. They are a SaaS company, and are still racking up big losses in net income and even in cash flow. Their TTM revenue is $294 million, which is up 62% from $181 million a year ago. Here are some of the data from the April quarter results. It’s hard to even imagine a better quarterly report than this one:

• Revenue up 60%
• Calculated Billings also up 60%
• Operating cash flow margin was improved 23 percentage points (!) yoy; It was positive $4.0 million, or 4.8% of revenue, up from a loss of $9.7 million, or 18.5% of revenue.
• Free cash flow margin up 24 percentage points (!) yoy. It was a loss of 2% of revenue, up from a loss of 26%. In dollars it was minus $1.6 million, up from minus $13.3 million.
• Subscription revenue was up 59%, and was 92% of total revenue.
• Adj op loss was $11 million, improved from a loss of $19 million
Adj operating margin was improved more than 22% to a loss of 13% of revenue from a loss of 35% of revenue the year before.
• Adj net loss was $9.4 million, improved from $18.8 million.
• Adj net loss per share was 9 cents, improved from a loss of 21 cents
• Cash was $547 million.
Total customers grew by a strong 40% to over 4,700.
Customers with over $100,000 of Annual Recurring Revenue grew even faster at 52%, to 747.

• Dollar-based net retention rate continued at a healthy 121%

• Subscription gross margin was 80.7%, up 2.4% yoy,
• Prof services gross margin was minus 1.6%, up from minus 44.3% last year.
• Total gross margin showed continued improvement and was 74%, up 5%.
• Gross profit was up 72%.
Guidance was silly. “We feel like this is a very prudent guidance but we are very bullish on the business.”

If you remember I took this position back in January at $29.95 and I kept adding all the way up to $43.00. It closed Friday at $55.11, up 84% since my purchase in January.

Pivotal was a new position this May, having IPO’ed in April. Steppenwulf brought it to the board and he explains what it does better than I ever could:

Pivotal is a cloud solution for me and other application and enterprise architects. It is like a machine that automatically builds a cloud application for me. I give it the design, and the latest version of the code. I tell it to build it on AWS, or Azure, or Google, or on my own machines. 10 minutes later - it is done, tested, verified, and running. I don’t even need to tell it - it checks my systems, and knows when I’m ready for a build, knows where I want it, and builds it for me. It speeds up my productivity immensely, and let’s me avoid any sort of vendor lock-in - and I no longer even need to know how to spell “server”… It is just a matter of enterprises expanding it to all their IT, as they move to the cloud, maximize the productivity of their developers, automate their processes, and avoid vendor lock-in.

This was another hidden growth story, like Twilio was. Pivotal’s subscription business is growing very rapdily while their legacy service and consulting business has been very slow growing. But the subscription business is now more than half of the total revenue and the legacy, lower margin business will become less and less important. Here are the April quarter results.

Subscription revenue up 69%, and up 20% sequentially.
Subscription revenue is now 58% of total revenue, up from 44% a year ago.
Subscription gross margin was 92%, up 3% from a yr ago
Total revenue grew 28% year over year.
Total gross margin for was 64%, up 10% from 54% a year ago
Subscription customers up to 339; up 20% from a year ago
Dollar-based net expansion rate of 156%. Has been over 150% for seven quarters!
Adj net loss was $23 million, improved from a loss of $43 million a year ago.
Adj net loss per share was 10 cents, improved from a loss of 20 cents a year ago
Operating cash flow was $4.5 million improved from negative $4.4 million a year ago.
Free cash flow was $2.6 million, their first positive.
Cash was $646 million.

I bought my position at $19.18 in late May, and it closed July at $24.33, up 26.9% in just over two months. Recently there have been concerns over Containers, Kubernetes, and competition from RedHat. I don’t understand the technology, but in response to the concerns I’ve been hearing from knowledgeable people, I’ve reduced my position size from what was probably a too large 9.1%, to 7.7%, still a very respectable position.

Pure Storage was another new position that I took in January at $16.72. It’s now at 22.72, up 36%, but down for the month. It’s busy right now replacing spinning disc data storage for enterprises with flash arrays, as I understand it. And once that’s through they will replace first generation flash arrays with NVMeoF-enabled flash storage. And then the next advance, and the next. And meanwhile the demand for data storage will be expanding exponentially. At least that’s the investment thesis. And Pure is the leader in the leader’s quadrant on Gartner. But keep in mind that I am a tech illiterate. I don’t really understand much of all that above, and I am relying on other people’s advice. Here’s the kind of thing I do understand: It’s a little from the Apr quarter results.

Key quarterly highlights:
• Revenue: up 40%
• GAAP operating margin: -24%, improved from -32%%
• Adj operating margin: -6%, improved from -14%
Operating cash flow: $18.6 million,
Free cash flow $8.6 million, up from -$27 million !!!
Net Promotor Score of 84 !!!
Net Promotor Score of support team is in the 90’s.
I’ve reduced my position in Pure considerably during the month, although it was a fairly small position at the end of June. This was mostly to add to Zscaler and New Relic.

Shopify is next alphabetically. I do understand what Shopify does. It helps merchants set up websites for ecommerce. After four years of compounding 100% revenue growth (yes, you read that right) they “slowed down” in 2017 to grow revenue by just 73%. Here’s a little excerpt of what they reported for their March quarter:

Total revenue was up 68%.
Subscription revenue was up 61%
Monthly Recurring Revenue (MRR) was up 57%.
Shopify Plus revenue (big companies) was up 103% in dollars, and made up 22% of MRR, up from 17% a year ago.
Merchant Solutions revenue was up 75%.
Gross Merchandise Volume was up 64%
Gross profit was up 71%
Adj operating loss was 0.1% of revenue, up from a loss of 3.4% a year ago.

I bought Shopify in 2016 at about $27. It closed Friday at about $160, so in spite of various repeated short attacks, it’s at about 593% of what I first bought it for about two years ago, (almost a 6-bagger, for those who count that kind of thing). As I wrote above, Sure, stock picking doesn’t work. We’ll all return to the mean some day. Statistics prove it! … Again, I say, “Hah!”

Square is another company where I sort of understand what they do. They started helping merchants to accept credit cards with their cell phones or iPad, and then started adding a lot of other services, like lending money to their customers based on their knowledge of the customer’s business, etc. I started my position a year and a quarter ago in March 2017 at an average price of about $17.50, and the price is now 69.85, about quadruple the price I bought it at, in a year and four months.

Square is growing revenue like mad. For the last five quarters it grew revenue at 39%, 41%, 45%, 47%, and 51%. Revenue growth has been accelerating! And they guided to 49% for next quarter, which they obviously expect to beat. Subscription and Service revenue, the good stuff, was up 95% for the year, and up 98% last quarter, and up 22% sequentially(!) and obviously becoming a larger part of adjusted revenue. Square also has a lot of recurring revenue. It has been adjusted profitable for the past eight quarters (two years), but not a huge amount. And they raised even their GAAP net income guidance for this year up to breakeven at the high end (which I assume they plan to beat). They have an 80% self-onboarding rate. They have a net promoter score of 70! Square is amazing! The only fly in the ointment for me is the CEO’s fascination with bitcoin, which I don’t share, but I guess I can’t have everything.

Twilio is the dominant force in communications (call centers and customer/company interactions. It closed Friday at $60.71, which is up 136% from my original purchases at $25.70 in January. That’s up 136% from January of this year!!! Remember that when they tell you that intelligent stock picking doesn’t work, and that whole books have been written to prove it.

This was a new small position I took in early January. It’s grown as my conviction has grown, and as the price has risen. It’s a wonderful example of not price anchoring, as I added to my position with rising prices, instead of looking for sell-offs. For an explanation of why I bought back in January, see my April month-end summary.

Base Revenue was up 46%, and 12% sequentially!
Base Revenue was up 61% excluding Uber
Dollar-Based Net Expansion Rate of 132%, and up 145% excluding Uber
Adj loss from operations of $3.9 million, down from a profit from operations of $0.1 million a year ago.
54,000 Active Customers, up from 40,700 a year ago.
Unveiled Twilio Flex, the first cloud contact center application platform that’s programmable at every layer of the stack, giving businesses complete control of their contact center experience. They seemed very excited about Flex which is for big call centers of 1000 or more seats. In a recent interview they said “thousands and thousands” of customers have already signed up for it. Big customers.

The December quarter was the toughest comparison for Uber results, so this drag should lessen in future quarters.
My take: They turned the corner on growth, Dollar-based Retention Rate, etc. Raised guidance a lot for the full year. This is a great stock to hold

Zscaler is last alphabetically. I just took my position at the end of June at $35.84. It’s also a recent IPO. The current price is $37.38, up 4.3% in a month. Zscaler is disrupting a 20 year old paradigm of enterprise security with a new cloud based paradigm.

" We have the opportunity to dramatically change the legacy security market and to significantly reduce the costs of networking and security infrastructure."

I just watched a video in which the head of Microsoft’s cloud and Azure program explained how Microsoft is building all their web security on Zscaler. This company is quite expensive on a valuation basis, implying that analysts and investors seem to feel the same way about it that I do. Here are some tidbits from their April quarter.

• Revenue Up 49% to $49 million
• Calculated billings up 73% to $55 million
• Deferred revenue up 61% to $125 million
• Raised $205 million in IPO.
• Adjusted operating loss was $2.9 million, or 6% of revenue, improved from a loss of $5.0 million or 15% of revenue.

• Adj net loss was $2.6 million, or 5% of revenue, improved from a loss of $5.0 million or 15% of revenue
• Adj net loss per share was 2 cents, improved from a loss of 5 cents.

• Operating cash flow was $8.1 million, up from $0.2 million
• Free cash flow was $3.7 million, or 7% of revenue, compared to negative $1.8 million, or 5% of revenue, a year ago.
• Cash was $288 million.

These are 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 like them they 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.

Finishing up. 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 just try to 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 posts #4 through #8 at the beginning of the board, and especially the Knowledgebase that Neil keeps for us, which is a compilation of words of wisdom, and definitely worth reading (a couple of times) if you haven’t yet.

I hope this has been helpful.


For Knowledgebase for this board,
please go to Posts #17774, 17775 and 17776.
We had to post it in three parts this time.

A link to the Knowledgebase is also at the top of the Announcements column that is on the right side of every page on this board.


I had been in it a year ago, with Bear (who brought it to the board), and Chris as well, but exited it in the $40’s when it seemed that rates of revenue growth and of new customer acquisition both were nose-diving. (By the way, it’s worth noting that, although the price was up more than 100% when I bought back in from when I exited, I never even considered that as a reason to not re-enter. The situation has definitely changed, and I try my best to not price-anchor but consider the situation as it is now, and decide whether I should enter NOW, not back then).

good thinking from Saul. We need to live in the NOW with stocks while thinking hard about the FUTURE.
You can’t go back and buy stocks at PAST prices.

a quote from Berts last letter
What is happening with the cloud is a once in a generation paradigm shift that is upending traditional financial metrics. . Of course, Amazon shares seem expensive-because a paradigm shift of this magnitude is rare and is outside the experience cone for many Who will be the big winners? Got me, but none of them will be cheap today. I will try to understand the likely participants, but with many will just have to follow the money.


Saul, I continue to be as grateful for this board as I am unpersuaded by the explanation for your indulgent choice of comparators! A ‘very representative set of standards’? The S&P etc? (I especially like ‘small cap value’ for a group of investments on PS averaging something in the stratosphere!).

And it’s unnecessary for you to do so. Let’s assume your benchmark is Salesforce (CRM). That company is up a measly 109% or so since January 1st. 2017. You’re winning handsomely. You’re working very hard, your turnover is very high and you are very long on risk - but for you, it’s worth it!

For the record, SPY is up 25% plus the yield and QQQ is up 49% plus the yield over the same period.


Please define risk. I think what you might be referencing is volatility?

I can’t see how Saul is “long on risk”. At least not how I understand risk.

If his portfolio lost 50% which is possible, but unlikely, he would be back to where he was at some point in 2017, which is somewhere between 50% and 100% higher than 2015 or 2016.

He doesn’t use margin, has the spending money he needs out of the market, and lives a simple life, well within his means.

How risky is his portfolio when we look at it with that perspective?

I’m not saying these stocks aren’t volatile. They are.

However, risk is related to so many things other than just the stocks we are invested in and their short-term volatility.

Again, if you said he was running a volatile portfolio, I would agree.


I am unpersuaded by the explanation for your indulgent choice of comparators!

Hi Streina,
Perhaps you are overthinking this and misunderstanding what I am trying to do. I’m trying to measure my performance against that of the “average return for an investor in the stock market,” not the return of someone who is already smart enough to invest in the same stocks I’m in, or the same “kind” of stocks I’m in. It’s as simple as that.


If his portfolio lost 50% which is possible, but unlikely,

Even Saul would [probably]tell you it’s quite likely at some point in time, presumably during a market downturn. I think he’d be the first to tell you we don’t know when but it’s coming.

That’s the nature of volatility.

If you can’t handle a 50% drop you shouldn’t be in these stocks, nor FB, AMZN, et al.

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Quick reply so as not to distract:

CMFAleeb: No, I agree, volatility is the friend of the intelligent investor and does not equate to risk.

Risk arises in this case because, primarily but not exclusively, the multiples are both arbitrary and therefore wide open to revision, and because many here think they are irrelevant anyway! The momentum is therefore glorious and, er, long may it last.

Saul: Understood, but they enable you to ask, ever so slightly disingenuously (!) ‘What bull market?’. I reply ‘This one!’.

We have each selected our own racehorses. But the average speed an assortment of cart-horses, eventers, hacks and ponies would go round the course is of little interest. They are a much quieter ride and suitable for less-experienced jockeys.

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Quick one: my last line was incomplete. Nor only the less-experienced but many other kinds of investor too, including me. I would not part with the dear old Shire horse (the S&P) which I bought down to the bottom in '07-'09 for anything.


“For the record, SPY is up 25% plus the yield and QQQ is up 49% plus the yield over the same period.”

How did you come up with these %? I’m not getting the same thing. Are you calculating based on 12 months or YTD? This is what I come up with using closing figures for 12/31/17 & 07/27/18:

ETF 12/31/17 07/27/18 % inc/decr

SPY 266.86 281.42 5.45%
QQQ 155.76 177.62 14.03%

Or maybe I’m just misunderstanding you both? lol.


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