My portfolio at the end of Mar 2019
Here’s the summary of my positions at the end of March. As I the last weekend of this month was also the end of the month, I got in five full weeks in March.
This month I’ve included a section on Mistakes I’ve Made so far This Year (see section further down below). And I’ve included An Important Plea this Month near the end of this month’s summary.
As always, I’d welcome questions or comments on what I did or didn’t do, and will try to respond. Please note that I almost always use the adjusted figures that the companies give.
A MESSAGE FROM GEORGE BERNARD SHAW
My wife and I were invited to a party with a George Bernard Shaw theme, and they gave out coffee cups with a Shaw saying on them. Well, my GBS cup was speaking to our board.
Some people insist that what we are doing can’t be done, and that we will all “return to the mean”, that it’s “impossible to beat the averages” and “books prove it”, that all our gains are “just due to valuation expansion,” and all the rest (and that’s after some of us have more than quadrupled the value of our portfolios in a little over 2 years). Well, the saying on my coffee cup was:
People who say “It cannot be done!” shouldn’t interrupt those who are already doing it!
I love it!
MY RESULTS YEAR-TO-DATE
I would have been happy this year with a gain of 25% for the whole year, after the huge gains the last two years. Well, my portfolio closed March up 36.9% year-to-date. My high for a daily close during the month was up 42.7%.
Yes, forget that high close! Even the current close is ridiculous! In fact, the 36.9% is much larger than the 20.4% that I was up at the end of March in 2017, when I finished the year up 84.2%, and it’s even considerably larger than the 29.1% that I was up at the end of March in 2018, last year, when I finished the year up 71.4%. I don’t know what else to say. It‘s just ridiculous!
Here is the monthly progress of my portfolio results since the beginning of 2019:
**End of Jan +16.5%**
**End of Feb +28.0%**
**End of Mar +36.9%**
What can I say? Just that investing in great companies pays off.
ON MARKET TIMING
Let me remind you that I’m no good on timing the market, and I don’t try. If I did, I would have exited all my positions at the end of April 2017, when I was up 26% in four months and my portfolio had already beaten my total results of the previous two years. It was time to get out and wait for a pullback, right?.. So I’m not timing this year either. I’m riding with the market and will see what it brings.
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 it.” Honest to God, I’ve heard that all of their charts and indicators proved it in 2010, 2011, 2012, 2013, 2014, 2015, 2016, again in 2017, and loads of it in 2018, especially in December. Now it’s that the curve inverted. Eventually they’ll be right, and they will say, “See! I told you so! I was right all along!” But what a price those people paid for “keeping their powder dry” and staying out of this market for the past ten years, waiting for the big correction that never came.
Picking good companies makes much more sense to me than trying to pick good companies AND trying to time the market too. I have stocks in a small group of remarkable companies, in which I have high confidence for the most part. I feel that they mostly dominate their markets or their niches, they are category crushers or disruptors, they have customers that absolutely need them, they have long runways, and they will have great futures.
HOW DID THE MARKET INDEXES DO?
Let’s look at results year-to-date. The three indexes that I’ve been tracking against for ages closed year-to-date as follows.
The S&P 500 (Large Cap)
Closed up 13.0% year-to-date. (It started the year at 2507 and is now at 2834).
The Russell 2000 (Small and Mid Cap)
Closed up 14.2% year-to-date. (It started the year at 1349 and is now at 1540).
The IJS ETF (Small Cap Value)
Closed up 12.0% year-to-date. (It started the year at 131.9 and is now at 147.7).
These three indexes
Averaged up 13.1% year-to-date.
If you throw in the Dow, which is up 11.2% and the Nasdaq, which is up 16.5% you get up 13.4% for the five of them year to date.
The five market indexes were up 14.6% at the end of February, and up 13.4% at the end of March, so they were down this month while, in spite of all the turmoil, my portfolio was up 8.9 points for the month. What happened to the “rule” that “overvalued” stocks fall more than the averages.
Since the beginning of last year (2018), the five indexes are up 3.8%. Now compare that result with my portfolio’s gain of 134.6% in those 15 months (1.714 x 1.369 = 2.346). Read that again: 3.8% for the indexes, 134.6% for my portfolio. Tell me what about those results makes investing in the averages seem “conservative” to you?
And, if you want a real shocker, my results from the beginning of 2017 are more than a quadruple: 1.842 x 1.714 x 1.369 = 4.322. Clearly, picking stocks that will be winners, the way we do, has beaten investing in ETF’s and Indexes, and by huge amounts.
For more on why I use those indexes, please see my summary at the end of 2018. To simply state my goals, I’m simply trying to measure my performance against that of the average return for an investor in the stock market, and combining those five indexes gives a pretty good approximation.
HOW CAN WE EXPLAIN THE DISPARITY between our results and the averages? Well the Cloud has come into its own and Software-as-a Service (SaaS) has blossomed. We have caught a secular wave. Our companies are exploding in function and importance, as well as in mostly recurring revenue. It’s the wave of software, big data, the cloud, and AI. All enterprises, whatever industry they are in, are using more and more software, wanting to use the cloud, AI, and the rest, and they need the software that our compaies are leasing. Most of our companies provide the picks and shovels for enterprise companies switching over to the cloud, and the enterprise companies NEED what our companies have to offer.
LAST FOUR MONTHS REVIEW
December. Early in the month Mongo, Okta, Elastic and Zscaler all released their October quarter results at once. They were all beautiful results, and I added to all four of them, continuing to trim New Relic and finally sold out of it for cash as it continued to not rebound off its lows. I didn’t know why not, which made me very uncomfortable!… Square was also way down from its highs too, but I was assuming that was because Sarah Friar, the CFO, was leaving them.
At the end of the second week, I decided to buy back into a 4.5% position in Nutanix. I cut my position in Square by about half and used that cash to buy the Nutanix and add to Mongo, Elastic, Okta, etc. Then during the next week, with the big sell-off, I sold another quarter of my Square and added to Alteryx, Trade Desk, Mongo, Twilio, Nutanix, Okta, etc.
Why would I have cut Square? Well, companies like Mongo, Okta, Zscaler, Elastic, Twilio, and Alteryx have huge goals, and huge expectations of literally taking over worldwide fields of storage, identity, security, search, communication, and data analysis, and have huge runways, while other companies are successful in little niche markets but have limits to where they can go. This made me think about how Square’s market is restaurants and tiny merchants, and: their clients will be hit hard in any recession, and while they can go up-market from ‘tiny’ merchants to ‘very small’ merchants, they are really in a small niche with no way to actually take over the world. As far as leadership, their admired CFO, Sarah, left. They have plenty of competition (PayPal, etc), while companies like Alteryx, Twilio, Okta, Zscaler, etc, don’t seem to have much effective competition. And unlike the above mentioned SaaS companies, Square went down much more than the SaaS companies, and didn’t bounce with the them, and finally, Square’s market cap was $23 billion, which is much harder to quadruple than a market cap of $3 billion.
I didn’t feel I needed to sell out of all my Square. After all, their rate of growth of adjusted revenue for the last 7 quarters had been accelerating each quarter, and had been (in percentage of growth): 39…41…45…47…51…60…68%. That’s pretty amazing, but I felt that it sure shouldn’t be my 3rd largest position, and probably shouldn’t be in the top half of my portfolio.
Okay, why did I buy back into Nutanix? Well, a lot of posts on the board influenced me, and press releases from Nutanix, and Bert’s confidence in it.
Finally in December I also added another small biotech, Vericel. All three of my little biotechs moved down with the market and didn’t move with my SaaS stocks, but then bounced later. They march to a different drummer.
In January, I was busy. I sold out of Vericel which I had recently added, feeling that of the three try-out biotechs, it seemed to have the smallest niche. I took small positions in three little SaaS companies (Anaplan, Zuora, and DocuSign). But I said that these were small get-to-know-you positions and may be gone in a couple of weeks, or a month. I later exited my small position in Abiomed for cash to add to these and other positions.
In January, one of my stocks, MongoDB, had a very uncomfortable month, with Amazon entering the field as a competitor, and then Red Hat, representing the open-source point of view, attacking Mongo too, for veering away from pure open-source. I decided that Mongo was just too much of a battleground stock for me, since I have zero technical knowledge to help me decide which is right, or if the truth is somewhere in-between, and I sold out of part of my position, and then all of it.
I was in no way sure that I was correct in doing so. I said that I may have been completely wrong. In fact the preponderance of evidence seemed to be that this could be even a positive for Mongo, and I knew that they will have great results for their Jan quarter, but it made me worry about the long term viability of their open source business model. I simply had other companies without that kind of issue and existential worry. It turns out that I was completely wrong but that’s what I did.
I continued to build up my Nutanix position throughout the month, encouraged by its partnership with Intel, Darth’s great collection of comments by users, Bert’s enthusiasm, the general release of Xi cloud services, and Nutanix achieving FedRamp ready designation. I also added to Okta, Elastic and others.
February. I decided that I had been wrong about Mongo, and I bought back in in early in February, and built it up to a 3.5% position.
Square grew back to 5.2% of my portfolio. I added significant amounts as my confidence returned as they kept coming out with amazing new products.I still feel though that it doesn’t belong in my top four positions.
To get money for these purchases I reduced Alteryx from over 20% to 17%. (Having 0% in Mongo and 20% in Alteryx just didn’t make sense to me).
I also exited my speculative position in Guardant Health after thinking about all the things they are hoping for in the next six months which might not happen just the way they think. I decided I would rather speculate in little SaaS companies instead. [Saul currently again: I was wrong again, they shot up the week after I sold out, this time because of a prominent recommendation, and because they would be reporting great results from their NILE study. In my defense I had no way of knowing either of those was coming].
I had taken small positions in three little SaaS companies (Anaplan, Zuora, and DocuSign) in January, and said that these were really get-to-know-you positions and may be gone in a month, and asked you to please don’t buy them because I dipped my toe in! This month I did exit my smallest one, Anaplan and replaced it with Coupa. Nothing wrong with Anaplan. I just liked Coupa better.
In March, Nutanix announced that their sales were falling off a cliff and I exited at $34.60, and am not looking back. On this one I will say “Never again!”.
Guardant Health announced that their Nile Study was a success, and I felt that this would ensure that the FDA will approve it, and I bought as much as I could at about $70.70, inspite of a 70% or so rise from when I sold. Then when they announced earnings, and said that in the 4th quarter BC/BC and Cigna as well as more Medicare sectors also approved Omni360 fro approval, even before FDA approval, I bought more at $70, and kept buying as it rose. It’s now at $76.70, up 8.5% from my $70.70 purchase, early this month.
Mongo again! I exited when I thought that they had backed down on their new licensing rules, but bought back after they blew out their quarterly report, even though it ran up after earnings. You are probably tired of hearing about my wavering on Mongo, and I am too. I can’t think of anything that will make me sell again except actual poor operational results, which I don’t think will happen.
I told the board that I considered my little SaaS positions like Docusign, Coupa, Zuora, EverBridge, with 30-40% growth and 110-120% retention rates seemed like weak relatives to our dominant positions. I got a huge outpouring of good advice and finally sold all of them and started a real position in SmartSheets, which was not slow-growing at all with revenue growth of 58% and a retention rate of 134%.
MISTAKES I MADE THIS QUARTER
I thought it would be worthwhile to review the mistakes I made this quarter, and what I could learn from them. Here they are as I see them:
Selling out of Guardant Health at $41.50
So why did I do it? Partly it was, as I’ve said, that there was a risk that their big NILE study wouldn’t turn out, and that the price would drop precipitously. I was a little gun-shy about medtech companies. Secondly, I thought that speculating in little SaaS companies made more sense. Thirdly, I guess I was just impatient.
How did it turn out? Well not entirely a disaster. I did sell Guardant for a 10% gain when I sold. I sold each of the little SaaS companies for a gain: DucuSign up 23%, Zuora up 21%, Anaplan up 8%, Coupa up 3%, and EverBridge up 0.5%. And that was over less than two months, so that wasn’t the problem. The problem was that when it became clear that the NILE results were great, I had to buy back into Guardant at $70.70, and I missed a 70% gain that I would have had if I had just stayed in.
What could I have done differently? I’m tempted to say I should have known that the results would have been great, but it’s not true. They could have had very good test results but just, let’s say, 15% less than the actual scalpel biopsies. That still would have been very good for just a blood draw, but the prognosis for the company would have been a quarter of what it is now. I have to say in retrospect that I handled it as best as I could without having inside information.
Buying back into Nutanix at $41.59
Well, this one I should have known better. I sold out because it was a totally confused picture, even before the latest fiasco. Here’s what it looked like: Nobody on the board could actually figure out what they did (we probably had 100 posts on the board trying to elucidate it). Secondly, they weren’t really dominant in their space as most of our companies are. They shared it with VMWare. And thirdly Nutanix was switching from a business model of software-installed-in-hardware to a pure software model, and in the middle of the switch they decided to also switch from leasing their software to a SaaS model. This must have confused their sales and marketing people no end, as well as confusing their customers. (And that may have accounted for their revenue falling off a cliff later).
This was not a clean picture by any means. I knew all this and I should never have let myself be talked into buying back in. What were the results? I had to sell out at about $36 for a loss of 13%, which isn’t a disaster, but a learning lesson. I don’t think I’ll ever be talked back into investing in Nutanix again.
Selling out of Mongo at $76.20.
This was really a complicated situation with an enormous amount of FUD. In the first place Mongo had an open source model, which I had a lot of misgivings about in the first place. Then they decided to establish a license so that the killer whales couldn’t just copy their code and sell it to their own customers themselves. Then that was exactly what seemed to be happening: Amazon developed their own copy of Mongo on the one hand, and then Red Hat and the open source community got mad at Mongo for not being pure open source. And Microsoft stuck their nose in there too. And then it looked as if Mongo was backing down on their licensing (actually I discovered later that they had just withdrawn it from consideration by the open source community).
So the price fell, and I didn’t know enough about all the arcana to figure it out, and I got out at $76.20 for a 9% loss. But that wasn’t the problem. The problem was that I had to buy back in at $131.47, so I missed another 70% gain, as I did with Guardant.
Could I have seen this one coming? I’m not sure. There was a lot of mixed opinion on the board, but the preponderance of opinion was that Amazon trying to copy them was a validation for them, rather than a threat, and we all knew that their next earnings report would be great because it closed before the amazon product was announced, but I have to say it was still a toss-up for me as I lacked the tech and industry knowledge, and saw Amazon as a killer whale, and Mongo as a minnow, or a salmon at most. So I can’t say now that I should have known better, but I can say that I won’t be chased out of Mongo again by FUD… ever! It would have to take a significant change in business execution to get me out.
Buying into the weaker SaaS companies.
Buying into Anaplan, Zuora, Coupa, DocuSign and EverBridge wasn’t a disaster in itself. As I pointed out above, I sold out of all five of them at profits, but they contributed to me exiting Guardant, which did turn out to be a major opportunity loss. I shouldn’t have gotten into them as they were clearly inferior to our other positions and they weren’t going to lead anywhere. I was never going to build them into large positions.
Reducing my position in Elastic as much as I have?
I don’t know yet whether this will turn out to be a mistake or not. But I do know they have a pure open source model, which I have misgivings about. I do know that they have an enormous lock-up expiring in April, and possibly some dilution as well. I do know that they are selling at a very high valuation. I do know that Amazon is attacking them as it attacked Mongo, but in Mongo’s case they could only copy it, while in Elastic’s case, as it is a purer open source model, they could use (some of) Elastic’s own code. …I have clearer stories all around me. Even a couple of new IPO’s soon to happen. I think I took the correct course, and will wait and see. At any rate, Elastic was down 15.2% on the month (its share price dropped from $94.15 to $79.87), and it’s below where I sold it some weeks ago, while almost everything else in my portfolio has gone up. For example, Zscaler, which I added to this month and is now my second largest, was up 42% this month. If Elastic goes way up, so be it, but I probably won’t chase this one.
HOW THE INDIVIDUAL STOCKS HAVE DONE
Here’s how my current positions have done this 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. Please remember that these starting prices are from the beginning of this year, and not from when I originally bought them if I bought them in earlier years.
**Zscaler from 39.21 to 70.93 up 80.9%**
**Trade Desk from 116.1 to 198.0 up 70.5%**
**Twilio from 89.30 to 129.18 up 44.7%**
**Alteryx from 59.47 to 83.87 up 41.0%**
**Square from 56.09 to 74.92 up 33.6%**
**Okta from 63.80 to 82.73 up 29.7%**
**MongoDB from 131.47 to 147.02 up 11.8% 3rd time**
**Elastic from 71.48 to 79.87 up 11.7%**
**Guardant from 70.70 to 76.70 up 8.5% 2nd time, new this month**
**SmartSheets from 39.21 to 40.79 up 4.0% new this month**
Exited positions this year showing my gain or loss from the beginning of this year, or from when I first bought if it was during the year, and my average exit price. Please remember that these are from the beginning of this year and not from when I originally bought them, if I bought them in earlier years. You’ll note that almost all of these (except just Nutanix and Mongo) were little try-out positions that I ended up deciding against, and don’t represent actual churn of my portfolio
**Docusign from 43.75 to 56.80 up 23.4%**
**Zuora from 19.80 to 24.00 up 21.2%**
**Guardant from 37.59 to 41.50 up 10.4% 1st time**
**Anaplan from 28.75 to 31.05 up 8.0%**
**Mongo from 95.0 to 99.9 up 5.2% 1st time**
**Coupa from 91.95 to 93.13 up 3.0%**
**Abiomed from 325.0 to 334.0 up 2.8%**
**EverBridge from 73.58 to 73.95 up 0.5%**
**Vericel from 17.40 to 17.38 down 0.1%**
**Mongo from 83.74 to 76.20 down 9.0% 2nd time**
**Nutanix from 41.59 to 36.00 down 13.4%**
MY HERO COMPANIES.
Square, Alteryx, Twilio and Okta have all been in my portfolio for more than a year now, and Zscaler since last June, although I did reduce my position in Square a couple of months ago and built it partially back in February.
Square is up 328% (that’s 4.3 times what I paid for it, or more than a quadruple), since I first bought it in March 2017 at $17.50, now two years ago.
Twilio is a quintuple in a little over a year, at 5.0 times what I paid for it in January a year ago ($25.70) and up 403%.
Okta is 2.8 times what I paid for it ($29.95), also last January, up 176%.
Alteryx is up 203%, or is triple what I paid for it in December 2017, a little over a year ago, at $27.72.
And finally, Zscaler is up 98% since I bought it nine months ago, in June 2018, at $35.84.
This is how you make money in the stock market, buying exceptional companies and holding them as long as the story doesn’t change.
And another point from this is:
Just imagine if I had decided that these companies were overpriced and I had decided to “wait for a better entry point” or “buy on a pull-back” or “wait until it hits my entry point,” and it never did? How would I feel now? You can guess.
Do you think I care, or even remember, if I bought Twilio at $25.90, $25.70, or $25.50, now that it’s a quintuple and its price is $129.18? Think about that for a moment! I know that I belabored this in the Knowledgebase, but the decision that matters as far as making money in the market is “Do I want a position in this company?” and not “Can I buy it 25 cents cheaper?” I think that you guys, who have stocks want to buy because you believe they will GO UP, and then put in buy orders for them below the market, and hope that they will FALL to your price, are out of your minds! But that’s just my opinion.
POSITION SIZES.
I’m still trying to keep my portfolio concentrated and streamlined. I’m now back at 10 positions, where I like to be. Three of them make up 57% of my portfolio, and the top five of the ten make up 77%. By the way, keeping my number of stocks down really makes me focus my mind and decide which are really the best and highest confidence positions.
Here are my positions in order of position size. Note that the Twilio, Zscaler, and Alteryx positions are larger than I usually like, but they are high conviction Category Crushers. Note also that if you compare with a month ago, Zscaler and The Trade Desk increased their percentages a lot, Mongo’s percent almost doubled, Guardant is back on the list and Nutanix disappeared. Square’s percentage dropped a little because most everyone else’s share price rose during the month, while Square’s dropped a little, Elastic is almost gone (and its share price dropped from $94.15 to $79.87), and the little try-out positions are completely gone
**Twilio 20.8%**
**Zscaler 18.9%**
**Alteryx 17.6%**
**The Trade Desk 11.1%**
**Okta 8.2%**
**Mongo 6.5%**
**Guardant 6.4%**
**Smartsheets 4.9%**
**Square 4.5%**
**Elastic 1.1%**
STOCK REVIEWS
My largest positions are Twilio, Zscaler, and Alteryx. As you can see, they are by far my largest positions. They are all small companies but in my opinion they each dominate the market they are in with little credible competition (except do-it-yourself). I’d have to call the three of them Category Crushers, and juggernauts.
Twilio is a 20.8% position. It provides communication services and it seems to have no viable competition in what it does besides “do-it-yourself”. In February Twilio announced enormous results for the December quarter and proved it is still a Category Crusher, a Juggernaut, a One-of-a-Kind company, and a pure phenomenon of nature. Its base revenue growth accelerated from 40% a year ago to 77% this quarter! It was up 21% sequentially! The last five quarters’ growth rates have been:
40%
46%
54%
68%
77% !!!
Yes I know that they made excuses for the great growth and said it was partly due to one big customer, and partly due to the acquisition. But these companies always try to damp down expectations like that, so they can beat expectations regularly. Next quarter they will have a different excuse for their great growth and for their low guidance.
Now look at dollar based net retention rate: 118% a year ago. That was great. But now it’s 147%. That’s greater! The last five quarters have been:
118%
132%
137%
145%
147%
They hit adjusted profit in the June quarter unexpectedly, and have stayed profitable since.
They had 64,286 Active Customer Accounts up 31% from a year ago. But, from the Conference Call: Together, we and Sendgrid have more than 140,000 customer accounts. It doesn’t take much imagination to think about the cross-selling that can come both ways from that!!!
And the average revenue per customer continues to grow at a 25% to 30% rate.
Back a quarter ago they also had a euphoric conference call:
… I think that that means there’s a runway for us for many, many years to be replacing old legacy technology… I think there is going to be no shortage of opportunity for us to do that for years to come.
There was a lot of obsessing on our board and elsewhere about “weak” guidance. For the life of me I don’t understand why anyone even looks at the guidance figures for these companies. Have you ever seen even one of our SaaS companies that doesn’t simply destroy their guidance at least 95% of the time? Why waste your time. Follow the actual results!
I’ll give it six confidence stars. To be honest, probably seven stars on a one to six scale. Do I like it? I’ll let you figure it out.
Zscaler is now in second place at 18.9% of my portfolio. I’ve continued to build my position. It has an interesting, innovative, and revolutionary idea in Internet security (and insecurity). They feel that putting a hardware firewall around a company doesn’t work anymore, now that the enterprise company is partly in the cloud and people can sign in from anywhere, and sign on to other outside programs from within the enterprise. Zscaler provides native cloud-based security, and as far as I can tell they are far and way the leader in this, if not the only player. They have 100-plus data centers all around the world, which would be difficult for most potential competitors to replicate. Zscaler has been operating them for ten years.
Here’s what their last earnings looked like:
Revenue was up 65% to $74 million. This was an acceleration from 53% growth a year ago, and an acceleration from 59% sequentially, from 54% the quarter before that, and from 49% the quarter before that. Now go back and read that again!
Calculated billings were up 74% from $66 million to $115 million. Read that over carefully too.
Adj net income of $11.6 million, up from a LOSS of $2.8 million.
Adj operating income was 13% of revenue or $10 million, improved from a LOSS of 6% of revenue or $2.7 million, a year ago.
Adj EPS was 9 cents, improved from a LOSS of 3 cents
Free cash flow was $12 million, or 16% of revenue, up from a LOSS of $4.6 million, or 10% of revenue
Cash $340 million, up $26 million sequentially, and No Debt.
Named a leader in Gartner for the 8th year in a row.
Zscaler Private Access (ZPA) is the first zero trust architecture to achieve AWS Security Competency status, and it achieved FedRamp authorization. This sets the stage to further expand its growth within the Federal market.
You’ve probably figured out by now why I’ve built Zscaler into my second largest position. In my opinion Zscaler is a Disruptor, a Category Crusher, and a juggernaut like Twilio and Alteryx. The traditional security providers can’t compete with Zscaler because their businesses are built around high-priced hardware and firewalls, and they don’t have the data centers all over the world that Zscaler has. I’ve been building my position steadily, and I now give it a full six out of six confidence rating. It sells at a high valuation, as you might expect.
Next is Alteryx. This is my 3rd largest position at 17.6% of my portfolio. What they do is to enable non-techies to quickly and easily analyze data. Their clients therefore love them. They announced splendid fourth quarter results, and had a euphoric conference call. They changed accounts this last quarter because their current accountant, Price Waterhouse, was reselling so much Alteryx solutions to their other clients, that they could no longer consider it non-material, and wanted to avoid any appearance of conflict of interest. Thus their choice showed that they were happier having Alteryx as a valued technology partner than keeping it as just one more accounting client.
Going to the December quarter results, they changed from ASC 605 to the new standard 606, this quarter. I’ll give you the 605 results for comparability to previous quarters. their revenue percentage growth looks like this:
**2016: 57 67**
**2017: 61 50 55 55**
**2018: 50 54 59 57**
That looks solid as a rock to me.
Their adjusted gross margin was 90%! (If you think that’s high, it was 93% under the new accounting standard).
Their dollar based net retention rate was 129, after having been 130 or more for eight quarters…
Their number of customers, 4700, is three and a third times the number of customers that they had three years ago, and up about 39% yoy.
The number of shares is growing fairly slowly, which is remarkable for one of these super fast growing companies.
They feel they have no competition. From one of their conference calls: “We are in a space where there’s little to no competition and a much larger TAM.”
They finished 2018 year up 135% for the year. I still feel very justified in calling Alteryx a Category Crusher, with very high confidence level. I’d give it six confidence stars out of six. I reduced my position from 20% to 17% last month for cash to buy back into Mongo. (Having 20% in Alteryx and 0% in Mongo just didn’t make any sense).
Actually I think Twilio, Zscaler, and Alteryx as juggernauts. They are each a one-of-a-kind company. Each seems to control its space and is growing like mad.
The Trade Desk announced stupendous results at the end of February, and rose $47, or more than 31%, in one day. Revenue was up 56%, with growth accelerating from 50% sequentially and from 42% a year ago. Earnings were $1.09, up just over 100% (!) from 54 cents in the same quarter a year ago.
It was a new try-out position five months ago, at the end of October. Now it’s now a 11.1% position and is in 4th place in my portfolio. I’d rate them five confidence stars now, gradually getting over my mistrust in them because they are an advertising company, which is a field that I have zero confidence in, even though I feel that this is a very innovative and creative company. The Trade Desk seems to be a Leader in a Rapidly Growing niche Market within the larger field of advertising, which up to now is controlled by the behemoths.
Okta is now in fifth and is an 8.2% position, and is back down to a four and a half star confidence level. What Okta does is control individual sign-on to all the apps you use using a native cloud SaaS platform. It’s called identity and access management. It is loved by the people who use it, because they no longer need a million passwords for each program they sign on to. The reason I backed it down from 5 stars to 4.5 is that the rate of revenue growth “fell” from 58% to 50% sequentially. That’s the bad news. The good news is that it has become evident from the conference call and their recent acquisition that they do a lot more than smart sign in, more than I can understand, for sure, and hopefully their revenue growth will take off again. But that, and a small drop in its price during the month, is why it’s dropped from 4th to 5th place, and from 11.3% to 8.2%.
This is a Disruptor and Category Leader, and a Cloud-based New Market Stock.
MongoDB. As I wrote in my four month summary, I’ve been in and out a couple of times, being scared out by Amazon, Red Hat and a lot of other FUD, each time having to buy back at a significantly higher price than the one I had sold at. Such is life. You can’t go back in time and buy it two weeks ago. [SMILEY FACE]. You are probably tired of hearing about my wavering on Mongo, and I am too. I can’t think of anything that will make me sell again except bad operational results, which I don’t think will happen. It’s now in 6th place at 6.5% of my portfolio.
This company has pretty much invented its solution and category, although it does have competition. It’s the leader in NoSQL data storage and last quarter its revenue growth accelerated to 85% from 50% the year before. (That’s under ASC 605, but from now on it will be reporting under 606, which will confuse comparisons for a while). It has chosen to put almost all its money into growing, and thus is still running an adjusted loss, which was 28% of revenue for 2018, down from a loss of 49% of revenue in 2017. (Under ASC 606 it was only 19.5% for 2018).
Bert likes it, the MF likes it, and Mongo has come out with Atlas which gives it a fully managed cloud solution, and Atlas is growing at about 400%, although off a small base. I’ll call Mongo a Disrupter, a Category Leader, and a Big Data New Market Stock, and I’ll give it four confidence stars for now.
Next is Guardant Health in 7th place at 6.4%. To way over-simplify, they do cancer biopsies by drawing blood instead of cutting the patient open, mostly lung cancer biopsies at present, as far as I can tell, but they are moving towards biopsies in general. They call their blood draw biopsies “liquid biopsies.” Their workhorse is called Guardant360 …As you might expect, patients greatly prefer them, and biopharmas working on immuno-oncology are a very large set of customers. Guardant now works with more than 40 biopharma partners. Many oncologists also use Guardant360 even though it has not yet been approved by the FDA (it is fast-tracked though). What’s amazing is that Guardant has got reimbursement approval as a medical necessity for lung cancer from Blue Cross/Blue Shield, Cigna, and even Medicare (in several of its areas of the country). All this without Guardant360 yet getting FDA approval. Actually not yet even formally submitted, as I understand it.
Guardant has a new set of tests called GuardantOmni, released last year, and growing fast, which has more tests in a single panel. It’s more expensive but biopharmas seem to love it.
Guardant are one-third owned by SoftBank, who is also partnered with them to expand in Asia.
In October they had a lung cancer study published in JAMA Oncology (and carried out at the U of Penn cancer center, which shows that their liquid biopsy outperformed tissue biopsy alone in identification of targetable mutations).
Aside from additional indications, management set three main drivers for themselves in 2019:
The first were results from their NILE study, a prospective trial measuring Guardant360 head-to-head versus tissue in a first line non-small cell lung cancer. If it successfully demonstrated non-inferiority of Guardant360 for biomarker discovery, could enable a blood-first paradigm in clinical testing. (Note that it didn’t have to be better than a tissue biopsy for a positive result, just not inferior, in which case doctors and patients would almost certainly choose it).
Second would be FDA approval of Guardant360 with a pan-cancer tumor-profiling label, which they hoped would follow successful Nile results.
And finally they hoped for pan-cancer Medicare coverage, based on FDA approval.
Well the NILE study came through a few weeks ago and the stock price went from $40 to $70 overnight, and kept on going to almost $100, and has now settled down to its current price of $76.70
Note that they have competition from Ilumina, and maybe others, but that Guardant is way ahead at this point in time, and that SoftBank is a potent partner. I’d give it four confidence stars now, subsequent to the positive NILE study results.
And by the way, I had sold out at $40 feeling it was too much of a straight speculation and if the NILE didn’t come through, it could all collapse. A week later the price started its meteoric rise and when the NILE results were announced I bought back in at $70 and kept on adding. I feel that this could become a huge and very profitable company if results keep coming in positive.
And Starrob’s recent caution is good to keep in mind: Guardant has a lock on first mover place for the moment and the next few years, but there are plenty of deep pocketed potential competitors and there might be a situation where Guardant gets a certain test approved and 5 years later someone could come out with a test that has a better rate of detection which could wipe a Guardant money maker off the board, which could be a issue if at the time that money maker is Guardant’s largest product. So, people should be careful in projecting unending growth to infinity.
That makes very good sense to me. Guardant is clearly one you have to keep your eye on, but I guess you could say that for all our fast growers.
Oh, and this week they just acquired a small company, Bellwether Bio, involved in epigenomics (whatever that is), which will help them expand into early cancer detection.
SmartSheets is in 8th place at 4.9% of my portfolio. I had said when I asked for help, that my three little SaaS companies (DOCU, ZUO,COUP), with 30% to 40% growth and net retention rates of 110% to 120%, were good companies but they seemed like weaker versions of my full position companies. Well, you guys found Smartsheets for me, and it was what I had been looking for. I established a position and I am currently considering it as a long-term hold.
Revenues were up 58% last quarter, and up 60% for the year (down from 66% the year before). Current guidance to 45% for the next year is just silly.
Subscription revenue was about 89% of total revenue and was up 57% for the year (down from 61% the year before).
Adjusted gross margins were 82% for the year, up from 81% the year before. Subscription gross margins were 88%, which is in the range we are looking for.
Billings were 121% of revenue for the year and were growing at 59%.
Customers with ACV over $50,000 and $100,000 were 444, up from 189, and 147, up from 65, (up 135% and up 126% !!!).
The net retention rate was 134% last quarter, up from 132 sequentially, and from 130% the year before.
They hit positive free cash flow for the first time last quarter.
It’s kind of odd but I don’t see any weak spots to worry about. I could mention revenue growth rate, but it’s hard to worry about a growth rate of 58% for the last quarter and 60% for the year. I’d give them four stars of confidence for now.
Square, in 9th place, was 2.6% of my portfolio at the end of December but is now back up to 4.5% as I regain confidence in them. I explained why I had decreased my position in my four month summary above.
Its stock price was traumatised in December by their CFO, the charismatic Sarah Friar, leaving to be CEO of a little start-up.
Square has been annoucing incredibly good results. Its total revenue has grown year-over-year by 39%, 41%, 45%, 47%, 51%, 60%, 68%, and 64% in its last eight quarters. Instead of revenue growth returning to the mean, as they get larger their rates of revenue growth have been increasing. That 64% last quarter was up from 47% the year before.
How is that happening? It’s because its Subscription and Service Revenue which is its high margin revenue, the good stuff, is growing at over 100% (last eight quarters it’s grown year-over-year by 104%, 97%, 86%, 98%, 98%, and 131%, 155%, and 151% (!) the last three quarters.
Adjusted EBITDA was $81 million, up about 100% from $41 million the year before, and was 17.5% of adjusted revenue.
They’ve were adjusted profitable in 2016, 2017, and 2018, and EPS grew from 4 cents to 27 cents to 47 cents. We also learned that Square’s Cash App passed PayPal’s Venmo in total downloads (which was a big surprise for most of us.
Square also released Square Payroll App in September, and Square Payroll and Square Terminal in October, and Square Reader SDK, and Square Installment somewhere in there, and now Square Card andSquare Payments, and Square Payroll, and Square for Retail, and Square Online Stores (competing with Shopify) so Square is still rolling along for now! I can’t keep track of all of them so I may have missed some. Somewhere in there they added Square Appointments for service businesses, and last week it was Square Invoices.
As far as Sarah Friar leaving, I’ll miss seeing her but Square will probably get along without her.
So why in the world did I cut my position so markedly? Read my reasons in my 4-month summary above.
I didn’t feel I need to sell out of all my Square, and I’ve added a considerable amount back since December as I’ve regained confidence with the hiring of a new CFO and with some of their announcements of creative new products, but I felt that it shouldn’t be my 3rd largest position, and probably shouldn’t be in the top half of my portfolio. I’ll call it a Rapidly Growing Company in a Rapidly Expanding Market, and I’ll rate them four confidence stars out of six.
Last is Elastic, which I have reduced down to a 1.1% position and it’s in 10th place. I’ve reduced it because of a number of factors which make me have less confidence in it than I have in my other companies. Here they are:
It has a very high sales to market cap ratio, but it’s growing revenue at 70% to 80% yoy, so what would you expect?
Amazon recently announced a competing product based on Elastic’s own code, but it may not really be effective competition at all.
There is talk of a “Consortium” formed to possibly compete with Elastic, which I don’t understand at all.
Elastic claims to a pure open source company, which has worked very well for it so far, but I am not sure about the long term sustainability of the model as well financed companies will continue to compete against it using its own code.
Putting the whole thing together, I think of it as a Category Crusher currently. However, I rate it as only 3 stars of confidence, because I only have three stars of confidence in their business model. But, since they are growing revenue at 70%, who am I to complain? There is, of course, some ambivalence there.
AN IMPORTANT PLEA THIS MONTH
Please, please, please, don’t expect me, or yourself, to be up 36.9% every quarter this year. It was a fluke! It was a crazy market. I missed 70% rises this quarter in both Mongo and Guardant because I made choices that turned out to be wrong, and was STILL up 36.9%. That’s crazy! And remember that up 36.9% for four quarters compounded would be up a ridiculous 251% on the year. It just isn’t going to happen! So keep your expectations reasonable to avoid being disappointed.
FINISHING UP
I feel that most of my portfolio is made up of a bunch of great companies. But that’s just my opinion, and I can’t say often enough that I’m not a techie and I don’t really understand what most of them actually do at all ! I just know what great results look like. I figure that if their customers clearly like them and keep buying their products in hugely increasing amounts, they must have something going for them and, as I’ve often said, I follow the money, the results. And I listen to smart people about the prospects of these companies.
When I take a regular position in a stock, it’s always with the idea of holding it indefinitely, or as long as circumstances
seem appropriate, and never with a price goal or with the idea of trying to make a few points and selling. I do, of course, eventually exit. Sometimes it’s after months, and sometimes after years, but I’m talking about what my intention is when I buy.
I do sometimes take a tiny position in a company to put it on my radar and get me to learn more about it. I’m not trying to trade it and make money on it, I’m just trying to decide if I want to keep it long term. If I do try out a stock in a small position and later decide that it’s not what I want, I sell it without hesitation, and I really don’t care whether I gain a dollar or lose one. I just sell out to put the money somewhere better. If I decide to keep it, I add to my position and build it into a regular position.
You should never try to just follow what I’m doing without making up your own mind about a stock. In these monthly summaries I’m giving you a static picture of where I am currently, but I may change my mind about a position during the month. In fact, I not infrequently do, and I make changes in the position. I usually don’t announce these changes until the end of the month, and if I’m busy or have some personal emergency I might not announce them even then. And besides, I sometimes make mistakes, even big ones! Don’t just follow me blindly! I’m an old guy and won’t be around forever. The key is to learn how to do this for yourself.
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.
I hope this has been helpful.
Saul
