My portfolio at the end of July 2020
Here’s the summary of my portfolio at the end of July. Please note that when I discuss company results, I almost always use the adjusted values that the companies give.
A CALMER MONTH
It’s been a wild five months starting with March, although this month was a smidgin calmer. It’s like we’ve been in an alternate universe from everyone else with unbelievable results! I’m sure that many of you have done just about as amazingly well as I have. Well, here’s how it happened:
March was a terrible month, because the coronavirus turned into a really, REALLY, scary pandemic. It was an awful month for the markets. My portfolio hit a low of DOWN 16% YTD on March 16th, and finished March at up 13.4% just two weeks later. Does that make any sense? That was a 35% gain by the entire portfolio in two weeks!!! The five market indexes finished March averaging down 27% year-to-date. I acted on my own advice and stayed fully invested, and I added to my highest confidence stocks.
April was a better month, as the market started anticipating that there will be an end to this eventually. My portfolio gained 20 points and finished April up 33% year-to-date. The five market indexes also came back a little from the depths, but their average was still down 19% year-to-date.
Then May turned out to be an extraordinary month for us. While the averages ended still down 11.0% YTD, incredibly, my portfolio finished May up 74%.
June was surreal !, I understand that Covid was accelerating the Cloud and digital adoption by perhaps three or four years compressed into one, but it was still truly bizarre to have my entire portfolio up over 116% in six months. And six months in which the market as a whole was losing money, still negative year-to-date, and in which the economy had tanked in the middle of a horrible pandemic.
Just consider that my ENTIRE portfolio grew to more than two and a half TIMES its March 16 low in just three and a half months. Who would have believed it in March? Not me! Not you either probably! Again, this showed the true idiocy of trying to time the market!
Then July. My portfolio stayed in a narrower range. Coming off that up 116% at the end of June, it hit a high of up 143% on July 9th, and a low of up 113% a week later. (The advantage of having a big cushion like that was that a big 30 point drop only put me back about where I was at the end of June, and left me still up well over 100%). Then two trading days later it was back at up 128%, and four days after that (a week ago), it tested the up 113% level again, and finally finished the month at up 135%, having tacked on a rather calm 
19 points this month. (The average of the five indexes is still down 4% for the year. It gained 7 points this month).
THIS IS NOT WHAT THEY TAUGHT YOU IN MBA SCHOOL!
What our overvalued stocks have done goes against everything you’ve always been told about how “overvalued” and “overpriced” stocks like ours would fall much faster than the “safer” stocks in a falling market.
Finishing the seven months up 135% when the market is DOWN xx% almost doesn’t sound plausible to me, but this is the third year out of the last four with this kind of implausible results.
Here’s why it is happening: While old economy stocks are having severe revenue loss from the virus pandemic (retail, travel, hotels, concerts, theatre, manufacturing [supply chain problems, shipping to customer problems, and customers closing down for the duration of the epidemic]), our “wildly overpriced” SaaS companies are seen as a safe refuge, a port in a storm as their revenue is recurring, and they are enabling the shift to digitalization, and to the Cloud, and to WFH, while other companies were bleeding revenue.
DEALING COMFORTABLY WITH HIGH-PRICED STOCKS
I posted this a year ago and am reposting it now as I think it’s useful. It’s a way for dealing more comfortably with high priced stocks. It seems relevant as about half of the stocks in my portfolio, and perhaps in many of yours, are selling at prices over $100 per share, and several are over $150 or $200.
If you have shares of a stock selling at $270, and it drops (or rises) $10 in price to $260 (or $280), that $10 seems like a very big move in one day. I’d suggest that you think of it as if you have ten times as many shares, but of a $27 stock (which is EXACTLY the same thing for all practical purposes). Then that $1 move from $27 to $26 (or to $28) is still a good-sized move, but not nearly as scary as a ten dollar move. It’s a very effective mental exercise.
Here’s a quick example: Say that stock XYZ was down on Friday from $142.34 to $139.37, about three dollars… Worrisome big drop? Well just move the decimal place over one. It fell from $14.23 to $13.94. A snoozer. Wouldn’t even wake you up.
REFLECTIONS I
I find it wonderful that there are still people around talking about how overpriced our stocks are. If everyone realized what was going on I’d be worried. When Zoom, for instance, had just announced earnings early in June, and was priced at $207.60, I pointed out that all eight articles on Seeking Alpha were telling us to sell or short Zoom, because it was overvalued. That didn’t sound to me like a bubble. In a bubble you’d have seven out of eight telling you to buy!. At any rate Zoom is now at $253.91, which is up $46 and 22% in less than two months since all those “sell it now” articles.
REFLECTIONS II
I think that we have enough distance now that we can look back at what happened with the troll and short attack that hit Zoom in mid March. We are four months away, and Zoom is up over $140 per share, over 120% (more than doubled) in three months, from when those guys were trying to scare you out. Those guys, for the most part, had never posted on our board before, had rarely if ever posted on the MF anywhere before, and then suddely show up to say very earnestly, over and over again, how they are SOOOO concerned because you can’t trust the “integrity” (I remember that that was the word they used), of Zoom’s CEO. Several of them kept using the same word, “integrity,” as if it was in a script that they had been directed to use. It was almost comical to me, for if there was one thing people who knew Zoom would swear on, it was Eric’s integrity. He might have been naïve about how many awful people might show up to Zoombomb little kids with pornography, but “integrity”???
I want you to notice that after their four or five days of multiple posts about Zoom’s security lapses and integrity, they NEVER have posted on our board again. Thus they never posted before the troll attack, then they show up for several days of repeated attack posts, then they never post again, on Zoom or anything else. They were gone. They were trolls who had finished their job. Bye-bye !.
I tried on several occasions to warn the board about what was going on, to prevent people getting scared out by these guys who just showed up out of nowhere, but some well-intentioned people on the board kept saying we shouldn’t shut out opposing points of view.
If the opposing points of view came from respected members of the board, if we were getting urgent warnings from Muji or GauchoChris for instance, that would be true, but opposing points of view from guys who just showed up to troll, was an entirely different thing. That’s the way I saw it anyway. And I suggest you be aware if people you’ve never seen before show up suddenly to earnestly attack our stocks
EARNINGS COMING UP
Fastly, Cloudflare, Datadog and Alteryx are all announcing next week.
MY RESULTS YEAR TO DATE
My portfolio closed this month up 135.1% (at 235.1% 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%**
HOW DID THE INDEXES DO?
Here are the results year to date:
The three indexes that I’ve been tracking for years closed this month as follows.
The S&P 500 (Large Cap)
Closed up 1.2% YTD. (It started the year at 3231 and is now at 3271).
The Russell 2000 (Small and Mid Cap)
Closed down 11.3% YTD. (It started the year at 1668 and is now at 1480).
The IJS ETF (Small Cap Value)
Closed down 23.2% YTD. (It started the year at 160.8 and is now at 123.5). So much for value stocks outdoing overpriced stocks!!!
These three indexes
Averaged down 11.1% YTD. Gained about 6.7 points this month, which wasn’t bad!
If you throw in the Dow, which started the year at 28538, is now at 26428, and is down 7.4%, … and the Nasdaq, which started the year at 8973, is now at 10745, and is up 19.7% (the only market index that’s up at all) … you get down 4.2% for the average of the five of them YTD. The average gained 7.2 points for the month. And if you remove the two outliers (the Nasdaq and the IJS), it’s practically the same result, down 5.8%.
So the market averages are still slightly negative, while a portfolio made up of our stocks is up 135%.
What does that tell you? Clearly, that picking concentrated portfolios of stocks that will be winners, the way we do, beats investing in Indexes and ETF’s, and by huge amounts. We are not magicians. We just invested in great companies. Of course they are overvalued!
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!
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.
WHAT’S GOING ON WITH OUR STOCKS
With the pandemic, companies in the travel and entertainment industries collapsed. Companies in traditional retail are going bankrupt. Companies that make things are having a tough time. The oil industry… well you can read the news. Pretty much the only traditional companies that are making money are those who sell food and staples. Companies who sell things online, like Amazon, can’t keep up with demand. Companies who have their own supply chains to deliver groceries are doing fine.
So how are our companies doing? Well, we aren’t investing in companies that require a customer to come into a store. We aren’t investing in high capital expense, low margin companies, or companies with high debt, or that have maintain high-rent retail outlets, or have to build factories or wrestle with supply chains in order to make things like automobiles, refrigerators, sneakers, and houses, all things that people can decide to just go another year or two with the old ones, or even companies that make tech appliances, where orders can totally dry up, and revenue can actually FALL…. A Lot!
Our companies’ revenue comes from subscriptions and doesn’t require retail outlets. Besides, they are in the biggest wave of our time, the wave to bring all the enterprises of the world into the Cloud and AI. They sell subscriptions to the software that enterprises use to run their businesses. This software saves their customers money, rather than costing them extra money. People may hold off on buying a new refrigerator in a recession, but no enterprise is going to pull out the software that it uses to run its business, and that is saving it money.
Our companies may see their rate of revenue GROWTH fall, but they are extremely unlikely see their actual revenue fall unless their customer companies go out of business. Right now everyone has been in a justified panic about the coronavirus, and our companies are concerned that they may be affected somewhat and are guiding conservatively, but it’s hard to see how they will be affected the way Old Economy companies will be affected. Some of their customers may go into bankruptcy, and some may hold off on paying their subscriptions, or ask for temporary reduced rates, but they will be a minority.
Paradoxically, this pandemic, with so many working from home and ordering from home, has accelerated the move to digitalization and move to the cloud that our companies benefit from, so some are feeling tailwinds instead of headwinds. We’ll have to wait and see, but our companies seem to ve doing MUCH better than the economy as a whole.
LAST FOUR MONTHS REVIEW
April was a very positive month for my portfolio, and a moderately positive month for the market. I continued to sell my Coupa position, not because of anything wrong with Coupa, but because it had fallen less than the others, and because I had more confidence in my other positions, especially in the pandemic, and because the other companies were growing faster. I still had more than half of my original Coupa position, and sold it all the last week of April. I added to Zoom, Alteryx, Crowdstrike, and Okta during the month, and took a small try-out position in Roku after some excellent discussion on the board.
May was another very positive month for the portfolio, and I made some changes during the month. I exited Roku early in May.
I went back into Coupa, starting at $172.50, and adding as it went up, after exiting my last big chunk of it in April at about $163.00. (Note that I didn’t even think about the fact that I was buying it at a higher price than the one I had sold it at. That was irrelevant). At the end of June it was at $227.50, up a substantial 32% since that first repurchase early in May.
I sold almost 40% of my Alteryx at roughly $130 for reasons I discussed on the board, and took a 4.0% position in Livongo at $53. I added to Datadog after its spectacular earnings report. All of the above was concentrated near the beginning of the month, but in the last week of May I took a 3.6% position in Fastly at about $39.98, thanks to all the intelligent discussion on the board. It closed June at $86.51, up a rather astonishing 116% in a month…
In my End of the Month Summary for May I linked to what I thought was my biggest mistake in April (selling Coupa), and a deep dive into Coupa and why I was buying it back, to another update about why I was selling Alteryx and buying some Livongo and Datadog, and finally, to why I bought Livongo.
In June I added no new positions and deleted no positions. I increased my Fastly position as much as I could, but I was limited because I didn’t have anything I was really anxious to sell. I mostly trimmed Livongo, as I felt that Fastly’s growth potential, like many of our companies, was based on the growth of data and usage and thus was basically unlimited, while Livongo’s was large but that they’d eventually come to the end of it in several years. There is a limit to how many illnesses can be usefully managed by little devices on-line, but data increases forever. It may be a mistake but that’s what I did. I also trimmed a tiny bit of my Okta and Alteryx for cash to buy more Fastly.
I decided to increase my Fastly largely because they gave guidance for revenue growth of 54% next quarter, which is up 16 percentage points sequentially(!) from the 38% growth in the quarter they just announced. They implied that this was due to increased usage because of the move to the Cloud, accelerated by the pandemic. Well, This was an extraordinary sequential gain in the growth rate, but in the world we live in, no CEO going out on a limb and forecast 54% growth unless he’s
“sure” they will have revenue growth of 60%, at least, next quarter. I’m happy with my purchases. As you remember, my initial 3.6% purchase was at $40 at the end of May. I bought more this month at $45 and $47, and added small bits at various prices from $51 to $64, and this week, a couple of tiny adds even higher, happily adding at “worse and worse value points”, as Fastly continued to rise. I bought at the price it was at. It closed June at $86.51, up over 100% in one month, and up 33% even from my $64 purchase a week ago. It is worth reflecting that if I HAD waited for “better vaue points”, I would have missed the entire 100% rise trying to save 2% or 3%…
And then, with my portfolio more than doubled in size in six months, when I decided to set 4.6% aside in cash, I sold out of my Livongoat $75.56 to raise part of the cash. That was up 26% from my May purchase price in a month.
July I sold out of my remaining Coupa to add to Fastly.
Then, after reading the initial write-up on the British tech company Blue Prism early in the month by Ethan, I got excited and took a 3% small position. But then I started thinking to myself: “I think we made a real mistake here!”
After re-reading the information in the write-up, going on to the earnings report, the comments on Blue Prism board threads by guys with much more tech knowledge than I have (and who are actually working in tech in the field), I became concerned that I was investing in:
a second tier, troubled, company
with rapidly slowing growth,
rapidly shrinking market share,
losing gobs of money,
very negative cash flow,
clunky interface,
using programs based on very old technology,
with poor marketing,
getting left behind by the category leader,
with a falling price for the last year and 9 months,
and a lower price even than the price two years ago.
It seems very much as if we are hoping for a turnaround or an acquisition instead of investing in a category leader.
I learned that is a company which trades not on the main London exchange, but on a “funky” secondary exchange (according to a spontaneous comment by the Schwab Global representative with whom I was placing an order), and a company from which we only get a report every six months… and that what we are doing is investing in the hope of a bounce when the actual market leader goes public, and gets a lot of publicity and hype. What we are missing about that is that all that publicity that the category leader will get will actually risk pushing Blue Prism even further into the second tier background as far as their chances for getting new customers.
I asked myself “What am I doing investing in a company like this?”
I decided to sell half of my 3% position, and then decided to sell it all, which I did at a small loss (5%), less than a week after I bought it. I’m perfectly aware that my decision may turn out to be a mistake, but that’s what I did and I have no regrets. Oh, I put most of the money into a new little position in Cloudflare, and a some into Zoom and Fastly. I also kept trimming Alteryx and a little of Okta and added to Crowdstike and more to Fastly.
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 Alteryx and Okata originally at $27.72 and $29.95 over two and a half years ago, but they are listed below at entry prices of $100.07 and $115.37 because those are the prices at which they started 2020.
**Zoom from 68.04 to 253.91 up 273.2%**
**DataDog from 37.78 to 93.86 up 148.4%**
**Fastly from 39.98 to 96.49 up 141.3% (Bought in May)**
**Crowd from 49.87 to 113.2 up 127.0%**
**Okta from 115.37 to 220.98 up 91.5%**
**Alteryx from 100.07 to 175.49 up 75.4%**
**Cloudflare from 34.97 to 38.62 up 10.4% (Bought in July)**
POSITION SIZES
As often happens at times of great stress and uncertainty, I sold off lower conviction positions and concentrated my funds in my highest conviction companies. This brought me down in April to just five large positions, but I guess that I’ve relaxed a little as I’m now back up to seven positions
My portfolio now has three positions clustered around 22%, followed by Fastly at 13.4%, then Okta and Alteryx clustered roughly around 8%, and Cloudflare at about 4.4%. Keeping the number of my stocks down really makes me focus my mind and decide which are really the best and highest confidence positions.
Here are my positions in order of position size, and bunched by size groups…
**.**
**Crowdstrike 22.9%**
**Datadog 22.6%**
**Zoom 21.1%**
**Fastly 13.4%**
**Okta 9.3%**
**Alteryx 7.0%**
**Cloudflare 4.4%**
STOCK REVIEWS
Crowdstrike is in 1st place in my portfolio at a 23% position. It hit a low of $33 in the March panic and is now about $113, so it is up 240% from that low!!! I added to Crowd during the month.
Crowd reported a very strong quarter, but it was on the same day that Zoom reported so it somewhat paled by comparison. Crowd had results that would have been wildly great for any normal company, but for Crowd some of us were slightly disappointed that they weren’t even better. It shows how spoiled you can get! When you read the following you’ll wonder how we possibly could have been disappointed at all. Here’s what they looked like:
“Our results exceeded our expectations across the board. We achieved 88% ARR growth and 105% subscription customer growth. We drove substantial operating leverage, achieved adj operating profitability for the first time, and generated record positive operating cash flow and free cash flow.
Total revenue was $178 million, up 85%
Subscription revenue was $162 million, up 89%. It was 91% of total revenue.
Annual Recurring Revenue (ARR) was up 88% to $686 million, of which $86 million was added in the quarter.
Adj Subscription Gross Margin was 78%, up from 73% a year ago
Adj operating income was $1.2 million, up from a LOSS of $21.9 million a year ago.
Adj net income was $4.5 million, up from a LOSS of $22.1 million
Adj EPS was 2 cents, up from a LOSS of 47 cents!!!
Operating Cash Flow was was $98 million, up from a LOSS of $16 million!!!
Cash rose to $1,005 million.
Dollar based net retention rate (DBNRR) over 120%
Added 830 net new subscription customers in for a total of 6,261, and 105% growth year-over-year.
Subscription customers with four or more cloud modules increased to 55% and those with five or more increased to over 35%.
Our Falcon endpoint protection platform received the highest possible score in 11 criteria in the Forrester Wave.
For the 2nd consecutive year, we earned the highest overall rating in Gartner’s Customers’ Choice for Endpoint Detection and Response (EDR) with an overall rating of 4.9 out of 5 from 106 verified customer reviews.
Announced partnerships which make the Falcon platform widely available across Germany, Austria, and Switzerland.
Conference Call (edited from sjo’s notes)
100% of our workforce are now WFH. We’ve been able to get to our customers via WFH “very, very effectively”.
Hiring like crazy and most people we i make offers to are accepting the offers.
Customers continue to prioritize cybersecurity spend as mission critical. The heightened threat environment is worst they’ve ever experienced.
CRWD is easy to deploy and manage from a remote location, no matter where employees are located.
Symantec is rapidly being abandoned by their customers and CRWD is onboarding them.
We continue to innovate and spend on R&D. We get $3.77 of ARR for every $1 spent
AWS has been a fantastic partner who has removed a lot of the friction experienced previously.
Falcon for containers and AWS: This is a greenfield opportunity. Big difference between what CRWD does and competition, because there is zero friction since CRWD can navigate outside the containers.
Gross margins - More modules mean more gross margin for CRWD. In the future, they see even more opportunities to expand margins.
Lots of growth is coming from new endpoints, with so many new laptops being sold. Workload protection (cloud, on-prem, etc.) is really what we are focused on, and it’s a much broader market than endpoint protection. We have an advantage due to the digital transformation because of our cloud architecture vs. legacy systems.
Seeing more people asking for CRWD services on their personal home computers.
CRWD spends a lot of time working on Kubernetes, very differentiated product that goes into the run time of Kubernetes. Lot of future opportunities to streamline this. It’s so easy to deploy.
Opened up the platform and now have 11 high-quality, vetted partners who produce results.
11 modules now, and always working on more modules based on feedback from customers.
What’s driving our exceptional performance?
Customers have suffered breaches and are looking for a system that just works.
Incumbents losing market share,
Cloud adoption, digital transformation
Work from home
It’s simple and easy to use and the mobile tool has great traction.
Saul here: Crowdstrike is a top tier confidence level company for me, for obvious reasons.
Zoom is in 3rd place, at 21% of my portfolio. As you all know, in March and April Zoom had an existential event change its entire world. It went from being a rapidly growing and successsful little niche company that most people had never heard of, to probably the most talked about, and the most rapidly growing, company in the world!!!
They suffered from a sudden, very organized, hacker and short attack from mid-March through early April, with a stream of attacks dealing with Zoom’s security (which was set up for enterprises who had IT departments, but just wasn’t set up for the huge flood of unsophisticated users).
The price tanked for a while in March down to $113, but it came back, and is now at $254 (up 125% since then), as Zoom has greatly worked on and improved their security, as well as making other changes to inspire confidence, like opening two large engineering complexes in the US.
Obviously all the myriads of new users won’t all stick, and they certainly won’t all become paying, but Zoom being the go-to name for video conferencing and video communication will stick!
I think that Zoom will grow revenue at least 200% this year (triple it), or probably considerably more. That’s only $1,870 million, and it is VERY hard to see how they will not beat that. They are already predicting (and thus expecting to beat) $1,800 million already, and they will raise that in each of the second and third quarters, and beat in the fourth.
Here are the results of Zoom’s Apr quarter, which was announced this month. It has been widely seen as the most astonishing and best quarter by any enterprise ever seen by mankind.
Total revenue of $328 million, up 169%
Adj op income was $55 million, up from $8 million yoy!!!. (That’s up 587%, in case you are counting those things).
Adj op margin was 16.6%.
Adj net income was $58 million, up from $9 million!!!
Adj EPS was 20 cents, up from 3 cents
Cash was $1.1 billion.
Op cash flow was $259 million up from $22 million !!!
Free cash flow was $252 million up from $15 million !!! (I won’t bother with percents, but that is more than 16 TIMES as much as a year ago.)
Customers with more than 10 employees were 265,400, up 354%
Customers with than $100,000 in TTM revenue up 90% to 769 from 404 a year ago, and up 128 or 20% sequentially from 641.
[But this was in older customers, and looking backward, because it was Trailing Twelve Month Revenue. They also told us they signed up over 500 NEW customers with more than $100,000 in ARR in the quarter, which weren’t counted in the TTM figure because they haven’t been around for 12 months. (They are forward looking contracts over $100,000). This was huge, coming off a base of 641 total customers of that size, and will show up in the TTM metric in future quarters.]
Net dollar expansion rate in customers with more than 10 employees was over 130% for the 8th consecutive quarter.
Remaining Performance Obligation (RPO) is $1068 million, up 183% from $377 million last year, and up 77% sequentially !!!.
Saul here: And keep in mind that they accomplished all this while they had to support an unimaginable number of millions and millions of NEW free accounts during the quarter, fought off attacks on their reputation by their competitors and shorts, and had to redo their entire security set-up to accomodate all these new free accounts. They predicted $500 million in revenue for this next quarter we are now in, which means they are sure of let’s say 7% more or $535 million. That will be up 266% from $146 million last year!!! It will also be up 63% sequentially!!! (That’s not a misprint, it’s up 63% sequentially. Of course the sequential rises will slow in the October quarter when sequential comparisons will no longer be New Zoom vs Old Zoom, but New Zoom vs New Zoom.) They will be raising estimates every quarter.
I wouldn’t get too carried away by that $252 million Free Cash Flow. A lot of those new customers they signed up must have paid in advance, and that gave them $552 million in deferred revenue (RPO already paid in but not yet billed). I don’t think we’ll see anything like $252 million each quarter, because I don’t see them signing up that many NEW customers each quarter.
One more thing: Share Count guidance for 2nd Q is 299 million and for fiscal year is 300 million, guiding to almost no dilution
Zoom also is a top tier confidence level company for me. Also, for obvious reasons.
Datadog is in 2nd place at a 23% position. It is a SaaS software company that leases subscriptions to software that monitors infrastructure, analyzes application performance and provides log management. In the last quarter it added new products that provide experience monitoring (what your customers are experiencing), and a network performance management product.
And it also announced the general availability of Security Monitoring, which is fast, low cost, integrated with the other things Datadog is monitoring, and it’s turn-key but can be modified and adjusted without learning a coding language.
What makes Datadog unique is that its competitors have single products that work in silos, while Datadog integrates them all and its “three pillars of observability can be observed on a single pane of glass.” As Bert says, “DataDog built a product that is self-serve in nature and can be installed in minutes. And having it all in a single platform is more unique than you imagine.” And that ability users have to look at their entire IT operation holistically and on a single pane of glass is a great differentiator, and it facilitates different departments working together.
They are announcing results of their June quarter next week, but here are the results of their March quarter, which was an incredible quarter which shot Datadog’s price up enormously. Keep in mind that March (the peak of the pandemic) was included in these amazing quarterly results, and that March and April are often included in the conference call remarks.
Revenue of $131 million, up 87% (which is up from 76% growth a year ago.)
Gross margin was 80%, up from 73%, and up from 78% sequentially.
Customers, with over $100,000 ARR at 960, up 89% from 508.
Total Customers of 11,500 up 40% from 8,200.
Customers added: about 1000, which is twice the number added last year.
Op Cash Flow was $24 million, for a 18.5% margin.
Free Cash Flow of $19 million, or 15% margin.
Cash was $800 million
Dollar-based net retention rate was over 130, as usual.
Customers using two or more products was 63%, almost double the 32% last year, and up from 58% sequentially. About 75% of our new logos landed with two or more products.
Remaining Performance Obligations or RPO was $256 million, up 82%. Billing was only up 50% because some customers switched to quarterly payments instead of annual to manage their cash in the pandemic. The higher growth of RPO indicates increases in longer-term commitments even when billing terms may be altered.
Regarding the way the pandemic may affect Datadog, there are a few important structural points to understand about our business.
First, we have a very diverse customer base and less than 10% of our ARR comes from the most negatively impacted verticals such as hospitality and travel, airlines, and in person entertainment. On the other hand we also have customers who have experienced increasing traffic in streaming media, gaming, food delivery, e-commerce, and collaboration.
Second, we have a great diversity of customers. We have low concentration, and about 75% of our ARR comes from customers that pay us $100,000 or more. Less than 15% of our ARR comes from a long tail of small businesses.
Third, we price according to our customers’ infrastructure footprint and not per seat. So, our product usage is not directly affected by reductions in the workforce.
Fourth our business model is low-friction land-and-expand and our platform is adopted bottom up. We often land fast and small as enterprises begin their cloud migration and then we frictionlessly expand from there as more workloads move to the cloud. This makes our sales effort less dependent on physical meetings and makes our model extremely efficient and less reliant on large upfront deals.
Fifth, we are pure SaaS and require no professional services or in-person implementation.
Turning to what we saw in March and April.
First of all, the pandemic did not seem to materially affect our financial results for the quarter. Throughout the quarter, we saw consumption continue to increase across the platform and growth has remained consistent with historical trends.
We started to see some negative effects in impacted industries such as travel, hospitality and airlines. But we’ve also seen substantially increased usage from other categories of customers who scaled up their operations in this environment.
We saw a surge of usage and surge in accounts in March in response to COVID that could be more transitory in nature and may normalize over time. In terms of new deals, we did have a strong end of the quarter with limited impact from COVID.
Enterprise sales teams, who are serving companies of more than 5,000 employees, have been especially successful in adapted to selling by phone and video.
Our user conference Dash is going virtual, likely in Q3.
We believe it is more important than ever for businesses to operate online, and that the trends of digital transformation and cloud migration may even be accelerated or amplified.
We believe we are well positioned to be a primary beneficiary of this trend and continue to win in the market. And we also believe that the efficiency of our business, and our ability to innovate will be advantages in a difficult market.
As such our plans remain clear. We are investing across the board.
We’re investing in the development of existing and new products including aggressive R&D recruiting and taking advantage of the opportunity to attract talent that would otherwise not be on the market.
We’re investing in the growth of our S&M team across segments and geographies.
We’re investing in our relationship with customers as some of them go through difficult times, and it is more important than ever for them to operate digitally.
And we’re investing in our existing employees to keep them safe and sane through this crisis.
To conclude on this point, I would say that while I can’t promise for macro reasons that we’ll see the same incredibly fast return on these investments as we have historically. We are very confident in the mid and long-term opportunity in front of us and in our strategic plan to live up to it.
Saul here: I thought that this Datatdog report was extraordinary. They accelerated right through March and April and are going great guns. However, because of uncertainty they are being a little cautious as to guidance. A very different picture than Alteryx, which dropped from 75% growth to 43%, and guided to 14% at the midpoint. DataDog is also a top tier confidence level company for me. Also, for obvious reasons.
Alteryx is at 7% of my portfolio, and in 6th place. It announced March quarter results in May. Revenue growth dropped from 51% yoy, and from 75% sequentially, to 43%, and I have trimmed almost two-thirds of my position size. For more on why I did so, I’d suggest reading two of my posts on the subject:
https://boards.fool.com/sorry-but-here-is-another-update-345…
https://boards.fool.com/saul-mentioned-quotalteryx-is-pullin…
What Alteryx does is to enable non-techies and techies to quickly and easily analyze data. Their clients therefore love them. Management feels they have no competition. From one of their earlier conference calls: “We are in a space where there’s little to no competition and a much larger TAM.”
Alteryx is a very solid company but is deep in the second tier confidence level for me, because of the problems it seemed to be having with adjusting to Covid. Long term I think it will do just fine.
On Friday, Bear wrote a post asking Why Keep Alteryx, and mentioned that he had cut his position under 8%. I answered him with the following:
I am seeing it pretty much the same way you are. I figure that they will come in at least at double the midpoint of the growth they guided to (which was 14%) but I don’t see them going back to 75% growth any time soon. I have also trimmed more and am also under 8% now (at 7.5%, actually).
As far as the title of your post, which was Why Keep Alteryx? I have some thoughts.
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- They will come in WAY over guidance, even if they only grow at 30% (I think they may even beat that). They may have even just been scared when they reported (it was the end of March and through April when the world felt like it was coming apart, after all), and they might even come in at 40%.
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- They are a Category Crusher. They are dominant in their market, and all their customers love them and benefit from having them.
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- They are continuing to innovate and have introduced their Analytic Process Automation platform.
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- And finally, if you are like me, the shares you have left are ones you bought at about $28 in a taxable account, and selling them at $173 would create an awfully big tax expense, which might make thinking past the end of Covid make more sense.
And when Gary asked why I thought that they could come in at 40% growth, I responded that back when they reported they were still somewhat in shock, and talking about retrenching, and stopping all hiring, and cutting back on this and that, and now, as you point out, they they are “hiring like crazy.” That makes me feel that their guidance is very outdated.
Okta in 5th place, is a 9% position. It was up 81% in 2019, and is over a septuple since I first bought it over two years ago at $29.95. What Okta does is control individual sign-on to all the apps you use using a native cloud SaaS platform. It’s called identity and access management. It is loved by the people who use it, because they no longer need a million passwords for each program they sign on to. They do a lot more than smart sign-in, more than I can understand for sure. It’s also very sticky and unlikely to be replaced. At the bottom of the March meltdown it got as low as $96 and it’s now up over 100% from there.
In May they announced their April quarter results. Here’s My Take: This quarter included the two worst pandemic months, March and April. Okta did great in the pandemic, and almost all their metrics were very good. They accelerated revenue growth slightly. They seemed very positive and excited for the future, but felt they had to be conservative in their guidance for the next two quarters because of the uncertainty of the Covid progression in the next two quarters. I got the impression that they made that decision to guide very conservatively a couple of weeks before announcing earnings, before things lightened up. I wasn’t the least bit disappointed. And obviously neither was the market. Okay, starting below is my greatly edited, shortened and paraphrased version of their press release, investor presentation, and conference call:
Okta is at the forefront of aiding adaptation to this environment where secure remote access has become a top priority across industries. Our strong performance reflects our market leadership and ability to effectively and quickly shift to a fully remote workforce. This shift is enabled through our core technology, which allows secure access to any technology from anywhere. When this crisis is over, we don’t expect organizations to revert to their prior ways of working. We hope to seize the opportunity to emerge in an even stronger position.
Total Revenue was $183 million, up 46%. This accelerated slightly from 45% sequentially.
Subscription revenue was $174 million, up 48%, and made up 95% of total revenue. Growth accelerated by 2% from 46% sequentially.
Remaining Performance Obligations (RPO) was $1.24 billion, up 57%.
Current RPO, which is contracted subscription revenue that will be recognized in the next 12 months, was $619 million, up 49% yoy. [Note that this is already 112% of the $553 million in subscription revenue they had in all of last year!!!]
Adj gross margin was 77.5%, up almost 2% from 75.7% a year ago
Subscription adj gross margin was 81.8%, flat with a year ago.
Adj operating loss was -$12 million, or 7% of total revenue, improved from -$25 million, or 20% of revenue, a year ago
Adj net loss was -$8 million, improved from -$21 million a year ago.
Adj EPS was -7 cents, improved from -19 cents a year ago.
Op cash flow was a record $39 million, or 21% of revenue, up from $21 million, or 17% of revenue, a year ago.
Free cash flow was a record $30 million, or 16% of revenue, up from $13 million, or 11% of revenue, a year ago.
Cash was $1.45 billion.
TTM Dollar Based Net Retention Rate was 121%, up 2%, and highest level in seven quarters.
Total Customers were 8400, up 28%
Customers over $100,000 were 1580, up 38%
While we believe it’s prudent to continue to expect some near-term business headwinds as the economic impacts from the pandemic further unfold, we remain highly confident in our long-term success as the leader in the massive identity and access management market… we have a very strong and robust pipeline right now, not just for Q2, but also Q3 and Q4.
For the second quarter, we expect adj operating loss of $5.0 million to $4.0 million and adj net loss per share of 1 to 2 cents.
Conference Call
Okta announced new and expanded partnerships with Australian Red Cross, Moody’s, State of Illinois, T-Mobile, Workday, Zoom, etc.
We made the early decision to close our offices around the world and transition 100% of our 2,000-plus employees to work from home. We were able to transition rapidly and seamlessly because over a year-ago we began an initiative that we call Dynamic Work, in which our employees utilize our core technology to enable secure access to any technology from anywhere. This allowed us to build a more agile, flexible workstyle into our culture, ensuring our employees around the world can be successful regardless of their location. This agility helped us continue to execute as we entered this new environment and we are very pleased with our Q1 results.
The vast majority of our overall business is generated from large enterprise companies. Within these customers, we did experience some projects getting more scrutiny, but believe the project decisions have been pushed out to a later date rather than canceled. These delayed decisions were primarily within the industries most impacted by the pandemic.
We also experienced demand from both new and existing customers that needed to fast track their identity and access management plans as a key element of their emergency response.
Fedex rolled out Okta for 85,000 employees in 36 hours!!! Their roll-out was planned to go out gradually over several months. However, with Covid, they called us and said, “Instead of doing it gradually over a few months, as we had planned, we want to do it next weekend”. We did it! We helped them deploy the Okta Identity Cloud to enable more than 85,000 remote and essential employees to connect to critical applications amid increased demand during the crisis. This was a massive deployment accomplished in less than two days.
Recently, T-Mobile successfully completed its merger with Sprint, creating the second largest U.S. wireless provider… Given its prior success with Okta, T-Mobile is relying on Okta to be a foundational part of their day-one architecture helping onboard an additional 30,000 employees.
The total number of 100,000K plus customers is now nearly 1,600 and the annual contract value of this cohort increased nearly 50%.
A much smaller portion of our overall business is generated from SMBs. As expected, we did see some business activity slow in the sector, but this sector has less impact on our overall business.
We had nearly 20,000 registrations for the virtual Oktane20 Live, which is over 3x what we had expected for the in-person event.
During Oktane, we announced important new strategic technology partnerships with leading endpoint protection and management providers, VMware Carbon Black, CrowdStrike and Tanium.
While we are excited about the current state of our business and believe the future is extremely bright for Okta, we understand that we are in the midst of an uncertain economic environment, and that millions of people and businesses around the world are facing difficult times. We don’t expect organizations to revert to their prior ways of working. We have no doubt that a much higher percentage of workforces will be connected remotely and we see that as an inevitable long-term trend. I believe that this pandemic is fast-forwarded the adoption or at least the mindset around adoption of cloud in general, by five years.
Usage overall of our products is really accelerating, which is exciting. We’re a company built on customer success and we’re seeing our usage of all our products shoot up as people work-from-home, particularly in the Multi-Factor Authentication product… Customers are having a ton of success with that, which is great.
Competition: Our leadership position in Identity positions us really well. It was clear before the recent pandemic, but if anything you see it accelerating now as customers are really differentiating between legacy on-premises vendors where it’s difficult to implement, difficult to maintain and in this day and age, difficult to even access your servers and modern cloud solutions.
A great example this quarter was we had an upsell Zoom, where they obviously were massively expanding the number of servers that they were using as well as servers under management. And they turned to our Advanced Server Access product for thousands of servers across multiple different platforms that they have, because it’s a very easy, scalable way to deploy modern next-generation technology. Saul here: I’m glad to see that Zoom is again getting the best in security.
Landing: with the depth of the different products, we’re really starting to get the opportunity to land in a whole bunch of different ways. And you’re seeing a lot of these products becoming so feature complete that you can land with something like Multi-Factor Authentication, or you can land with a Customer Identity and Access Management project and then crossover.
Albertsons, obviously, one of the largest food retailers in United States, has over 20-plus banners like Safeway, Vons, Jewel-Osco. And they turned to us to create a streamlined omni-channel experience for the millions of shoppers they interact with each week. So that you as a end consumer are going to have one way to authenticate whether you’re going into a Safeway or whether you’re paying with your Vons card at the gas station.
Saul: I added to Okta at $118, $124, and $130 in April, and at $151 in May. I sold some at about $208 this month for cash to add to Fastly. Okta is between first and second tier confidence level for me. It’s obviously strong and sticky but just isn’t growing as fast as the first tier companies.
Fastly in 4th place and has grown from a 3.6% position at the end of May to a 13.4% position now. I decided to increase my Fastly position so rapidly in June and July largely because they gave guidance for revenue growth of 54% next quarter, which is up 16 percentage points sequentially(!) from the 38% growth in the quarter they just announced. They implied that this was due to increased usage because of the move to the Cloud, accelerated by the pandemic.
Well, This was an extraordinary sequential gain in the growth rate, but in the world we live in, a CEO going out on a limb and forecasting 54% growth means that he is ‘sure’ they will have revenue growth of 60% at least, next quarter. After all, he could have predicted 44% (up from the current 38%) and everyone would have thought it was spectacular. But he chose to predict 54%. Think about that for a second…
I’m happy with my purchases, which at the current price of $96.49, is up well over 140% from the $39.98 that I started buying at.
Here are my abridged notes from muji’s excellent recent write up:
muji’s stance: Last quarter, revenue growth dropped to 38% from 44% sequentially. But regardless of the lack of immediate glitter in the numbers, it seems clear from the guidance that their extreme focus on high-end enterprise customers with heavy needs is paying off huge during this swell in web traffic during the pandemic. Their usage-based pricing model is getting a large boost, to the tune of 16 points (probably more) of rev growth sequentially. QUITE A TAILWIND, I’D SAY!
They focus on a high-end customers, and ARPU continues to rise +5.8% sequentially. Their retention rate of 133% is showing that these high customers, once landed, only spend more. Their low gross margins will be helped going forward by higher margin add-ons like Compute@Edge. Operating margins and operating cash flow margins are moving upwards while FCF margin is becoming more negative as building out edge networks is costly, and they seem busy – they had $11.6 million in CapEx this quarter alone vs $19.5 million in all of FY19. Adding a POP is initially expensive, but luckily then has way lower costs to maintain & expand once in place. They are signaling more expansion in 2020 - so don’t expect FCF to improve much in the near-term.
FSLY is extremely popular all of a sudden. And that is for a reason. They are a best-of-breed solution in edge networks. They have a top notch technical crew that solves difficult problems in a VERY future-forward way. This means an EXTREME detail for speed and performance, and an EXTREME long-term view over their operational architecture. Their edge network uses software-defined networking on lower-cost commodity networking gear. This allows every single aspect of their product line to be programmable and scalable. Think of those building block APIs that TWLO and OKTA use to make their platform into usable components? Think of that times 100 with Fastly. This isn’t just APIs to do some set of operational behaviors, this is about customers being able to control the very global network their services and content run on.
Smorgasbord has been arguing against the dismissal of Fastly as being just a CDN in a commodity market. I agree. I believe the naysayers are solely looking through the lens of delivering content, so not viewing the potential here correctly at all. That is the old Fastly – the capabilities they built to get here, and that they have succeeded at thus far. This current Fastly needs to be thought of as one giant programmable global network, and soon are extending that programmability into edge nodes themselves (edge compute & storage).
Smorg points out that Fastly’s focus is on programmable edge, not CDN/Streaming. One thing that is critical to understand with edge networks like Fastly and Cloudflare, is that “programmable edge” means programmable EDGE NETWORK (the switches and the global interconnections) plus programmable EDGE SERVER (compute at points of entry). Things can then built on this combination. CDN is now just a specific application on top of this edge cloud platform, that Fastly leveraged to be able to fund this architecture and get to where it is now. But that is not the focus of the business anymore. Another potential application is Secure Web Gateways (Zscaler ZIA) or Zero Trust (Zscaler ZPA), as Cloudflare is now delivering. And there are countless more use cases & product lines & verticals to come, to be discovered by Fastly itself, or by their customers, who are building their own solutions on top of their platform. The potential here is unknowable, but sure to be large. Please keep that mind.
What is abundantly clear right here and now is that more and more web traffic is being generated. Cloudflare is rising to a steady 50% growth for a reason. Fastly is jumping from 38% to 54% growth for a reason. Owning these companies right now is not an aspirational gamble on future technologies! These are companies executing well, rising quickly on the tailwinds of the effects of this pandemic (rising web traffic from stay-at-home & remote working), so are having a lot of success just with their EXISTING programmable edge network and CDN capabilities. Edge compute is still to come – and will MAKE REVENUE GROWTH RISE MORE FROM HERE.
Saul here: I think of Fastly, along with Okta, as a company between the first tier and second tier.
And finally, Shopify just reported extraordinary revenue growth, and since Shopify says that their system is built on Fastly, this omens very well for Fastly’s earnings next week.
Blue Prism I bought and then almoost immediately sold a little position in this company during July. For the reasons why, please see the LAST FOUR MONTHS REVIEW above (look in July).
Cloudflare! Finally, I took a little 3.0% position in Cloudflare this month. I consider this a second tier company, but their extraordinary press release last week about Cloudflare Workers Unbound made me wonder if they are moving up into a position midway between first and second tier, to join Fastly and Okta. I increased my postion to 4.4%.
FINISHING UP
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.
THE KNOWLEDGEBASE
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.
Saul