This is my summary of my positions at the end of November. As usual, I do my summaries at the last weekend of the month, and you got five full weeks this month. As always, I’d welcome questions or comments on what I did or didn’t do, and I will try to respond. Please note also that in my discussions of company results, I almost always use the adjusted values that the companies give.
By the way, if you have a tendency to skip through parts of my monthly summaries, feeling they look familiar from the month before, I’d suggest that you read through instead, as I constantly make changes and include new reflections, thoughts, and observations each month, even in parts which superficially may seem repetitive. Also some ideas are worth reminding yourself of, even if you’ve read them before.
If you want to learn more about why our companies have such high valuations , I really suggest you reread the explanation in June’s summary.
This has been a tumultuous few months. I was up 77% at the end of July, but after that there was a marked meltdown of our SaaS stocks. It seemed remarkable to me that while all of my stocks were hit hard, and a couple were down more than 50% from their highs, I was never truly worried, undoubtedly because I had lived through many of these drops previously, and especially because my portfolio was always in positive territory year-to-date. Its low was on October 22nd when it had fallen to be up only 9.9% on the year (roughly 2% more than the average annual rise for the S&P to put it in perspective).
There was a lot of moaning at the time, but how upset could I reasonably be, when at the bottom of a horrendous meltdown for all my stocks to way oversold levels, I was still up for the year. It sure says a lot about the validity of our investing premise! Others on the board were still up lot more than me. Being up for the year, on top of the two hugely positive past years, and having confidence in my companies, sure helped my peace of mind.
We’ve come back quite a bit, but it’s been a slow tough slog, and here we are on Nov 29th, a month and a week later, and my portfolio is now roughly half way back to its high, up 41.5% year to date, gaining 31.6 points in those five weeks. (That quadrupled my year-to-date gain, of course, from that 9.9% bottom, and made me feel a lot better). Throughout, I stayed consistent with my investing plan of staying fully invested and not trying to time the market, a plan which has paid off for me very well over 30 years of investing. This year isn’t over yet, but all in all this has been an amazing three years!
MY RESULTS YEAR-TO-DATE
Here is the monthly progress of my portfolio results since the beginning of 2019:
**End of Jan +16.5%**
**End of Feb +28.0%**
**End of Mar +36.9%**
**End of Apr +40.7%**
**End of May +42.2%**
**End of Jun +57.7%**
**End of Jul +77.4%**
**End of Aug +64.0%**
**End of Sep +22.1%**
**End of Oct +19.7%**
**End of Nov +41.5%**
MY THOUGHTS ON VALUATION
I clarified some of my thoughts on valuation on a thread on the board, but I thought I’d repeat them here as I think that they may be valuable for others who weren’t reading that thread.
People keep asking me whether I consider EV/S and other metrics of valuation, this time in relation to Crowdstrike. I responded roughly as follows: Nope, I don’t even look at those valuation metrics. I’ll buy it at the price the market has given it, with the expectation (and confidence) that a company with its metrics of very high growth, ease of use, gross margins, net retention rate, etc, is sure to be worth more in the future (in other words, that the market will give it a higher price in the future).?
It’s the same with Datadog. Everyone who looks at it says “Wow! What an amazing, remarkable, fantastic and terrific company!” but half of them won’t buy it because they think it’s “overpriced”. I think that is very, very, very short term thinking.
The question ISN’T whether it is currently overpriced.
The question ISN’T whether it has the most “possible future CAGR” because it’s “cheap.”
The question for me IS whether I can be very confident that it will be worth more in the future. And if ever there was a company that I have felt sure will be worth more in the future, I’d have to say Datadog is it.
There were a lot of smart people on the board who argued against buying Datadog even at $31, EVEN at $28, because “It’s so overvalued. Its EV/S is so high it has no room for CAGR”. I bought my initial large position from $28 to $34, at an average price of roughly $31.50. It’s now at $40.77 after announcing incredible earnings, and then Security Monitoring, and an AWS coordination.
Datadog is up 29.4% in two months since I bought it, and it’s still overvalued. I’m sure it will stay overvalued. You just can’t make your decisions based on EV/S alone. You have to consider the whole company, and why it is “so overvalued.”
And above all, remember that I make mistakes often, and I could be totally wrong about this, so don’t act on anything I say without investigating it yourself and making your own decision!
A LITTLE PERSPECTIVE
For those who said that the SaaS stocks will never again see this year’s highs again, and other such foolishness, let’s look. At one point last year (2018), my portfolio dropped 51 points from up 96% to up 45%. They certainly could have said the same thing then: that our stocks would never see 2018’s highs again!.
But at my high this year, my portfolio had gained 204% from the beginning of last year, or more than twice that 96% gain that it topped out at last year. I hope that that helps put things in perspective. A drop like we just experienced is NOT the end of the world.
A LITTLE WAGER FROM A NON-BETTING MAN
At the end of September, when everyone was panicked, and sure that our stocks were finished, I wrote that I felt that our stocks were massively oversold, and said that if I was a betting man I’d bet that my portfolio will finish this year up 10 points, at least, from Sept’s close. That meant finishing the year up 32.1% or more. I felt that the chances that the market for our rapidly growing stocks would be able to maintain a massively oversold position for three months was infintesimaly small. Well my portfolio is now up 41.5% which is up 19.4 points from that Sept close of up 22.1% I still feel the same way.
ON WHAT’S GOING ON WITH OUR STOCKS
At the end of August I thought our SaaS companies would have clear sailing for the rest of the year. Well that shows how little I can time the market. I was totally wrong. Our stocks melted down temporarily, and there was a lot of talk about repricing of SaaS stocks, sector rotation, recession coming, and all the rest. (Where are those guys now who were sure that our stocks were permanently repriced? We don’t hear a word from them any more.) It was pretty scary if it was the first time for you. But what was to be scared about? We aren’t investing in high capital expense, low margin companies, with high debt, that make things like automobiles, refrigerators, sneakers, and houses, that people can decide to just go another year or two with the old ones, or even with microchips or tech appliances, where orders can totally dry up, and revenue can actually FALL.
Our companies are in the biggest wave of our time, the wave to bring all the enterprises of the world into the Cloud and AI. And 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 they use to run their business, and that is saving it money. Our companies may see their RATE of revenue growth fall, but they are extremely unlikely see their REVENUE fall unless their customer companies go out of business.
And where else is someone going to go to look for companies growing at 50% to 90%? And which have high gross margins too? And have subscription-based recurring revenue? And most with over 120% net retention rates? And which reduce costs for their customers so they are valuable additions and not extravagances? But that’s just the way I see it, and you have to decide for yourselves.
I am surely not going to sell out of great companies because their share prices have fallen with no company specific bad news at all, or because the market is going down. My portfolio closed last year up 71.4% in the midst of the biggest meltdown of stocks in ten years. Many others on the board had similar results, a little better or a little worse. We are not magicians. We just invested in great companies. Picking good companies makes much more sense to me than trying to pick good companies AND trying to time the market too.
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 25.3% year-to-date. (It started the year at 2507 and is now at 3141).
The Russell 2000 (Small and Mid Cap)
Closed up 20.4% year-to-date. (It started the year at 1349 and is now at 1625).
The IJS ETF (Small Cap Value)
Closed up 19.3% year-to-date. (It started the year at 131.9 and is now at 157.4).
These three indexes
Averaged up 21.7% year-to-date.
If you throw in:
the Dow, which is up 20.3%, and the Nasdaq, which is up 30.6%, the average of the five indexes is up 23.2% year to date.
Since the beginning of last year (2018), when the average of the indexes was down 8.5%, the five indexes are up 12.7%. (0.915 x 1.232 = 1.127).
My portfolio’s gain of 142.5% in those same 23 months (1.714 x 1.415= 2.42.5), is still immeasurably ahead of the averages’ gain of 12.7%, but that doesn’t change the fact that we came through a challenging couple of months.
And 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.
LAST FOUR MONTHS REVIEW
August. Let’s look at it alphabetically. In the first half of the month I added a little to my Crowd position. I also trimmed a little Mongo. When I needed cash, that’s one of the places I looked. I added some back to Trade Desk after their great earnings, replacing some of the shares that I had prematurely sold last month, and brought it back to a 10% position. Then there is Twilio. I was really a bit disappointed having been taken in by all the exaggerated hype about how Flex and Sendgrid were going to explode their revenue. I guess I was expecting a lot more than we got. So when I wanted money to add to my Trade Desk position, I reduced my position in Twilio a bit. It was still about tied with Okta for 3rd place, but at 13.1% down from 17.5% in July.
Zscaler suffered a decline due to a negative article by a boutique analyst company and I added more shares even though it was my largest position at the time. I added a small amount to Smart.
I made no significant changes in Alteryx, Okta, or Zoom. And finally I took a little 0.8% position in Guardant Health after their excellent results.
And how about Square ??? You’ll remember that at the end of last month it was in last place at 2.5%. When the share price fell precipitously after earnings I thought that it was ridiculous and added at about $69. But after reflecting, the story just seemed too complicated for me, and I sold out of my small position completely. I didn’t look back, and it never crossed my mind to get back in. I almost felt a feeling of relief that I was out.
Why? Well, look, Square was still bouncing around slightly lower than where it was well over a year ago … while at least four of my other nine companies were up over 100% just from the beginning of this year. I seem to have been correct last December when I sold most of my previously large Square position.
My reasons at that time were: First that its customers were unbanked tiny merchants, and also restaurants, both of which would be hit hard in a recession. Second, they were really in a small niche, and while they could move upstream somewhat, there was no way they could “take over the world” the way some of my other companies could. Third, Sarah Friar left, and although she was adequately replaced, it now seems possible that, as CFO, she saw the handwriting on the wall… that Square might continue to be a successful company, but that the glory days were over. That’s a complete speculation of course. She may have also disagreed with the focus on bitcoin. Back when she left I couldn’t understand why she would leave a prominent, successful company like Square, where she got enormous exposure and became an icon in the investing world, to join a little no-name company that no one ever heard of. Fourthly, Square has plenty of competition (PayPal, Shopify, etc), while companies like Alteryx, Twilio, Okta, Zscaler, etc, don’t seem to have much effective competition. Fifthly, Square’s market cap was over $20 billion and that is much harder to quadruple than a company with a market cap of $3 billion. And you can add two more factors, first, their relatively low gross margin compared to our other companies, and second, Jack Dorsey in a recent conference call saying “I love bitcoin!” which promises even more focus on bitcoin. Well, I probably should have listened to those reasons and sold out sooner, but I often have to bounce around a little before I get it right. At any rate I sold out at an average price of about $69.50. Remember that I first bought it in March 2017 at $17.50, which comes out to about a quadruple in under two and a half years. It is currently at $69.10 (end of Nov).
September. I sold out of my very small Guardant Health position when I needed cash. On the drop of our Saas companies, I added a little to my Alteryx, a lot more to Crowd, a little to Mongo, a lot to Okta, to Zoom and to Zscaler. I also took a little position back in Elastic (2%), and on the last day of my month, a little 1% position in DataDog. To raise the cash, I sold a bunch from my Trade Desk position, and cut my large Twilio position in half, and sold out of Smartsheets. The reasons I chose those are: Trade Desk because it’s part of a complicated advertising scene instead of a SaaS company, and Twilio because it’s relatively low margin, and because it acquired a large, much slower growing company. Comparing the combined revenue to last year’s revenue makes it look like it’s growing at 90%, but it grew organically at 56% and Sendgrid was growing at 20%-ish, so that in three quarters, when you are comparing apples to apples, it will look as if revenue growth dropped from 90% this year to 40% next year. Finally, I sold Smart because I felt that they weren’t making any progress towards arriving at breakeven. Not saying I was correct with any of these sales, just telling you what I did when a bunch of super companies were on sale. (Saul currently: It now looks like I made a mistake selling down the Trade Desk as it is certainly doing well.)
October. I started Datadog on the last day of Sept, and it is was already a 12.3% position at the end of October, and my third largest, in just a month. I can’t remember ever building a position as quickly as that, except perhaps Alteryx two years ago. Coupa wasn’t even a position September, and it moved up to my sixth largest at 8.7% in October. I didn’t keep those a secret but I wrote them both up during the month. Where did the money come from? A lot from Zscaler, as I described earlier this month, and as I described again in my Zscaler summary below, and the rest partly from Trade Desk, for reasons I have described several times. I also trimmed a little Mongo, and a little more Twilio, and sold out of my tiny Elastic position (see my mid-month summary). I trimmed 2% from Alteryx, as 22% was too large a position. I feel happy with my current portfolio allocations.
November. Last month I had reduced Alteryx by 2% as it was too large at 22%. This month I added back more at an average price of about $96 and it’s back up to almost a 23% position at a price of $113.53.
Last month I mentioned that Datadog just started the last day of September, and it had grown to a 12.3% position, and my third largest, in just a month, and that Coupa wasn’t even a position in September, and it had grown to be my sixth largest position at 8.7% of my portfolio. This month I added great gobs more to Datadog before earnings at $27.80 to $34.50, and then after the big earnings rise I added a smaller amount at an average price of $40.00. It’s now become my second largest position in two months at 16.5% and a price of $40.77. It’s certainly one of my highest confidence stocks, and maybe my highest confidence one.
I kept adding to Coupa this month as well at an average price of $134, and it is now my fourth largest (after Alteryx, Datadog, and Okta), at 10.2% and a price of $153.49. You’ve probably figured out that I like Coupa a lot (but not in the same class as Datadog).
I added some Crowdstrike at an average price of $52. I bought a tiny amount of Zoom at $67.50. I’ve been afraid to add much to Zoom as it was already an 8% position or so, and contrary to some of the others, it seems less sticky and a bit moat-less.
I bought some Mongo early in the month at $126 to $133, but sold it back for cash later in the month at $129 to $138. As always, Mongo is one of the stocks I tend to trim when I need money. It remains my 6th largest though and a 7.7% position.
I also continued to trim Zscaler, and I eliminated my previous 7.7% position in Twilio. I sold out of the rest of my Twilio because, on top of all the other reasons for which I’d been trimming it for the last three months, I felt the CEO was trying to intentionally mislead the public. He twice referred to their “tremendous” and “incredible,” “revenue growth of 78% at scale” (in the press release and again in the conference call), which clearly implied that they were growing 78% even at such a large scale. It was, of course, entirely untrue. The 78% was due to combining the revenue of two companies and comparing it to the revenue of just one company the year before. Bragging about that was just false! Twilio was growing at 52% organically and Sendgrid was growing at 30%, so the combined company was growing about 48% or 49%, as close as I could figure it. I don’t invest in a company where I can’t trust the CEO. My average sale price over the last three months in reducing and then selling out was $110, which was more than a quadruple from my purchase price of $25 and change.
To summarize. Sold out of Twilio. Trimmed Zscaler. Trimmed a little Mongo. Bought a lot of Datadog and also added to Alteryx, Coupa, Crowdstrike, and a tiny bit of Zoom.
HOW THE INDIVIDUAL STOCKS HAVE DONE
Here’s how my current positions have done year-to-date. I’ve arranged them in order of percentage gain. I’ve used the start of the year price for stocks I’ve been in all year, and my initial buy price for stocks I’ve added during the year (For Datadog, because I accumulated it so quickly I used my average starting price instead of my first buy. It’s only a difference of 42 cents). Please remember that these starting prices are from the beginning of 2019, and not from when I originally bought them if I bought them in earlier years.
**TradeDesk from 116.10 to 263.34 up 126.8%**
**Okta from 63.80 to 129.78 up 103.4%**
**Alteryx from 59.47 to 113.53 up 90.9%**
**Zscaler from 39.21 to 52.13 up 33.0%**
**DataDog from 31.50 to 40.77 up 29.4% new in Oct**
**Coupa from 129.20 to 153.49 up 18.8% new in Oct**
**MongoDB from 131.47 to 148.70 up 13.1% 3rd time**
**Zoom from 77.63 to 74.5 down 4.0% new in May**
**Crowd from 73.06 to 58.00 down 20.6% new in July**
As you can see from this, Alteryx, TradeDesk, and Okta are each up more than 90% so far this year, in spite of the melt-down, while Zscaler has lost a lot its gains and Mongo just never got going. On the other hand, the smaller positions in Zoom and Crowd that I took just before the meltdown started, and which missed the January to July gains, are down considerably. Crowd especially got hit hard. It and Zscaler seem to have been hit the hardest in the decline, but Zscaler seems to have made more of a recovery. Datadog and Coupa of course, are doing very well for being in my portfolio for just two months.
Exited positions this year showing my gain or loss from the beginning of this year, or from when I first bought if it was during the year, and my average exit price. Please remember that these are from the beginning of 2019, and not from when I originally bought them if I bought them in earlier years. You’ll note that almost all of these were tiny little try-out positions that I ended up deciding against, and don’t represent actual churn of the body of my portfolio
**Square from 56.09 to 69.50 up 23.9%**
**Docusign from 43.75 to 56.80 up 23.4%**
**Twilio from 89.30 to 110.00 up 23.2% sold out over three months**
**Zuora from 19.80 to 24.00 up 21.2%**
**Elastic from 71.48 to 83.80 up 17.2**
**Guardant from 37.59 to 41.50 up 10.4% 1st time**
**Anaplan from 28.75 to 31.05 up 8.0%**
**CrowdStrike from 60.80 to 64.81 up 6.6%**
**Mongo from 95.0 to 99.9 up 5.2% 1st time**
**Coupa from 91.95 to 93.13 up 3.0%**
**Abiomed from 325.0 to 334.0 up 2.8%**
**EverBridge from 73.58 to 73.95 up 0.5%**
**SmartSheets from 39.21 to 39.22 up 0.0%**
**Vericel from 17.40 to 17.38 down 0.1%**
**Guardant from 70.70 to 69.50 down 1.7% 2nd time**
**Mongo from 83.74 to 76.20 down 9.0% 2nd time**
**Nutanix from 41.59 to 36.00 down 13.4%**
**Guardant from 99.20 to 82.90 down 16.4% 3rd time**
**Elastic from 90.64 to 74.60 down 17.7%**
MY HERO COMPANIES.
Alteryx, Okta, Trade Desk and Zscaler have all been in my portfolio for a year or more now. In spite of this huge sell off, they’ve done well since I bought them
Alteryx is a quadruple, at 4.1 times what I paid for it in December 2017, a year and eleven months ago, at $27.72, or up 310%.
Okta is well over a quadruple, at 4.3 times what I paid for it ($29.95), also a year and eleven months ago. It is up 333%.
Zscaler is up 45% since I bought it a year and five months ago in June 2018, at $35.84. It got killed in this decline, and is fighting its way back.
And finally Trade Desk, is more than a double at 2.2 times what I paid for it ($121.0) a year and one month ago. It’s up 118%.
(I also quadrupled my initial investment in Twilio, at my average sell-out price).
This is how you make money in the stock market, buying exceptional companies and holding them as long as the story doesn’t change. As you see just above, the great majority of my portfolio’s profit came from companies that I bought and held on to, and let them double, triple or quadruple.
And another great point from this is: Do you think I care, or even remember, whether I bought Twilio (for example) at $25.90, $25.70, or $25.50, when I sold it for over a quadruple at an average price of $110? Think about that for a moment! The decision that matters as far as making money in the market is “Do I want a position in this company?” and not “Can I buy it 25 cents cheaper?” If you have a stock that you want to buy because you believe it will triple or quadruple, and then you put in a buy order for it 25 cents, or 50 cents, or even a couple of dollars below the market, and hope that it will FALL to your price, you are out of your mind! But that’s just my opinion. If I want to be in a company because I think it’s a great company and that its stock will go up, I at least take a starter position that I can add to. I don’t wait around for the sell-off that may never come.
POSITION SIZES.
I’m still trying to keep my portfolio concentrated and streamlined. I’m at nine positions now which is quite concentrated. My top three positions (Alteryx, Datadog, and Okta), make up about 55% of my portfolio. The biggest changes this month are that Twilio is gone and Datadog and Coupa are a lot bigger. 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, and bunched by size groups. Alteryx is still in first place, followed by Datadog and Okta. The big changes are the additions of Datadog and Coupa in 3rd and 6th places
**.**
**Alteryx 22.9%**
**Datadog 16.5%**
**Okta 16.0%**
**Coupa 10.2%**
**Zoom 8.1%**
**Mongo 7.7%**
**Zscaler 7.6%**
**Crowdstrike 7.6%**
**The Trade Desk 3.9%**
STOCK REVIEWS
Alteryx is now at 22.9% of my portfolio, and in unchallenged first place. They announced earnings since my last report, with earnings growth accelerating both year over year and sequentially to 65%, the highest I’ve ever seen them. That was up from 59% in June and 51% in March! Unfortunately, they got caught up in the SaaS meltdown anyway, because of “calculated billings” not being up to some analysts’ fantasies, and because of “weak guidance”.
Their revenue percentage growth looks like this:
**2016: 57 67**
**2017: 61 50 55 55**
**2018: 50 54 59 57**
**2019: 51 59 65**
As you can see, it looks solid as a rock.
Their adjusted gross margins were 90%, 91%, and 92% for the last three quarters! Can you believe a company with results like that got sold off???
Their dollar based net retention rates were 134, 133, and 132% for those three quarters.
They had positive EPS of 24 cents, and positive Operating Cash Flow of $13.5 million
What they do 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.”
We’ve had some discussion on the board about whether Alteryx is really a SaaS company, since it’s not on the cloud, and whether or not it really matters as its revenue is recurring and its net expansion rate is 132%.
Their long term goals are:
Gross margin 90-92%
Operating Margin 35-40%
FCF Margin 30-35%
They recently announced a new collaboration to work on Smart Cities.
The stock finished 2018 up 135% yoy, and they are up 91% this year on top of that, in spite of the big sell-off. They hit a low during the sell-off of about $87, and they have now bounced back 30.5% off that low to about $113.50. I feel very justified in calling Alteryx a Category Crusher, with very high confidence level. I’d give it six confidence stars out of six. It seems to control its space and is growing like mad.
Datadog is a new position that I built from zero to 2nd place, at 16.5% of my portfolio in two months. I bought in at an average price of $31.50. It got as low as $28 in the meltdown and it is now about $41. Going from zero to 2nd place in two months is really extraordinary for me, so let me tell you a bit about Datadog: It is a SaaS software company that leases subscriptions to software that monitors infrastructure, analyzes application performance and provides log management. Recently it has added new products that provide what it calls experience monitoring (what the experience of your customers is), and a network performance management product.
What makes it 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 a platform that offers all the monitoring, and the analysis of logs, 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.
I wrote a very extensive summary of their earnings report here: https://boards.fool.com/datadog-earnings-and-cc-my-summary-3… but I’m including a short summary below.
• Revenue grew 88% to $96 million. (Note that it’s ALL subscription revenue)
• GAAP Gross margins were 76%
• Adj operating income was $0.6 million;
• Adj operating margin was 0.7%.
• Adj EPS was breakeven.
• Operating cash flow was $3.8 million,
• Free cash flow was $(3.7) million (due to real estate capex expenses).
• Cash, was $771 million.
We are currently “In Process” on the FedRAMP Marketplace, initiating the certification process.
Conference Call
As you all know, a massive IT platforming is underway. Companies are moving from static on-premise architecture to public and private cloud as well as other ephemeral technologies like containers, microservices and serverless computing. These newer technologies allow for increased agility and innovation, but they also compound complexity. Developers and IT operations teams which used to be separate must come together in order to manage IT chaos and better collaborate around a shared view of the IT stack. These challenges are affecting companies across all industries, geographies and sizes. We believe we are at the very early stages of an existential market opportunity, which we estimate to be approximately $35 billion.
All our functionalities are offered within the same tightly integrated platform. Our customers can frictionlessly add new products. We win in the market for several reasons. One we are a truly integrated platform allowing us to solve our customers end-to-end problems and innovate rapidly. Two, we were built for the modern dynamic stack offering end-to-end visibility. Three, we are simple but not simplistic, easy to install with no professional services. And Four, we are designed for use in collaboration across development ops and business teams.
From a business perspective, we have an efficient operating model which has enabled us to have huge growth with very modest cash burn. Despite significant and ongoing investment in R&D and S&M we have only burned approximately $30 million in cash since we began. We have a very strong cash pay back.
About 50% of our customers are using two or more products, up from 40% sequentially and 15% yoy. And our newer products are no more than about 2.5 years old.
Customers with an annual revenue rate of $100,000 grew 93% to 727 from 377 a year ago. Given that more than 70% of our ARR is generated from these customers, we expect this cohort of customers to be a large driver of our future growth.
We get high returns on our S&M investments, benefiting from our very efficient business model, and driven by our land-and-expand model.
We generate revenue from the sale of subscriptions to our SaaS platform. Our revenue is all subscription as professional services are not required to implement our products. Customer contracts typically have either annual or monthly commitments. Additionally, customers are billed for on-demand usage in excess of their committed amount, typically monthly in arrears. Given the mix of annual and monthly invoicing and the variability in billing, calculated billings is not a very useful metric to evaluate our business. In any one period, billings growth can vary substantially from revenue growth.
Q&A Session
Q - Many folks out in the industry say that maybe only 5% of apps are being monitored. I’m curious why that is?
A - You are talking about legacy APM (Application Performance Management) that was used in the traditional data center apps. The reason for the low rate of use is that these legacy APMs are very, very, very heavy weight and they’re very expensive. It’s very hard actually to deploy them and get value out of them and it ends up being limited to a small set of extremely high value apps, for which you can be convinced to make an investment and get some ROI out of it.
When you think of the world of the cloud, the world of companies that are becoming increasingly software companies, they’re going to have many, many, many, many more apps. The solutions we’re providing to them are a lot easier to deploy and it’s actually a lot more affordable for each unit of compute. So, we’re going to end up with a market that is significantly larger and there’s going to be a lot less investment needed to get to see returns. So, that’s the big difference between this world of the 5% of the apps being monitored with APM to the world of the future, where companies will be mostly digital and they will end up monitoring most of the applications.
Olivier Pomel - In closing, we are incredibly proud of what we’ve built. We believe we’re in the early stage use of a substantial re-platforming opportunity. We are very focused on executing on our growth strategy today and we believe we have the potential to be a much larger and profitable company in the long-term.
Okta in third place, is a 16.0% position, and is at a five star confidence level. It will announce earnings next week. 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. Last quarter the rate of revenue growth “fell” from 58% to 50% sequentially. That’s the bad news. The good news is that they do a lot more than smart sign in, more than I can understand for sure, and it seems likely their revenue growth will take off again. It’s also very sticky and unlikely to be replaced. At the bottom of this meltdown it got as low as $99 and it’s now at $130, up 31% from that bottom. This is a Disruptor and Category Leader, a Cloud-based New Market Stock, and is becoming a Catgory Crusher as well.
Coupa was another new stock in October and is now in 4th place at 10.2% of my portfolio. Its low in the meltdown was $120, and it’s now back up 28% to $153.50, and is within 1.6% of its all time high. You’ll remember that it had been one of the four little second-tier Saas companies that I had taken trial positions in but sold out of in March. My reason for selling was that they were all growing at 30% to 40% and had net retention rates of just 110% to 120% and I could do better elsewhere.
I had lost sight of Coupa until recently when a portfolio summary from another poster on our board alerted me. When I sold in early March, the percentage revenue increases for the past two years had looked like this:
**2017: 44% 41% 43% 34%**
**2018: 41% 37% 38% 42%**
**2019: 39%**
**It looked very unexciting. But since then the two quarters that have been reported have given a different picture:**
**2017: 44% 41% 43% 34%**
**2018: 41% 37% 38% 42%**
**2019: 39% 44% 54%**
Thus in the June quarter we had growth of 44%, up from 37% yoy, and up from 39% sequentially… Which was followed in Sept by growth of 54%, up from 38% yoy, and up from 44% sequentially. That was very impressive.
Subscription revenue was up 46% and 51% for the two quarters.
Adjusted Operating Income for the two quarters was $2.2 million, up from $0.3 million, and $4.8 million up from $4.0 million (all positive numbers).
Adjusted Net Income for the two quarters was $2.1 million, up from a loss of $0.1 million, and $5.3 million up from $3.3 million (last two quarters again were positive numbers).
Adjusted TTM EPS was positive 23 cents
Calculated Billings were up 50% and 57% for the two quarters.
This was a different picture than the one I had been looking at, and I decided to take a position.
For a little background on the company, here’s a little paraphrased excerpt from the introduction to Bert’s multi-page write-up in January. Bolding is mine.
Coupa is a leader in the e-procurement space. It has continued to exceed its targets for growth, earnings, and free cash flow. It has built a substantial competitive moat that may not be fully appreciated. It has grown its TAM prodigiously by expanding into ancillary spaces that enhance the value of e-procurement. At this point, it seems destined to become the absolute leader in its space, and to achieve the kind of profitability that leaders often deliver in the enterprise software world.
In 5th place at 8.1% of my portfolio is Zoom, but remember that Zoom, Mongo, Crowd and Zscaler are all crowded into a range of a half a percent from top to bottom, so they can easily change place. They all also announce earnings next week.
Zoom had a low of $62 in the sell-off and is now at $74.50. There were a couple of long write-ups on Zoom several months ago, around the time of their IPO, which you might want to look at. Here are some financials, through their July quarter results, and which will probably amaze you.
**Fiscal Q1 Q2 Q3 Q4 YR**
**Revenues (in millions of dollars)**
**2017: xx xx xx xx 61**
**2018 27 33 41 51 151**
**2019 60 75 90 106 331**
**2020 122 146**
**% Increase**
**2018 149%**
**2019 122% 127% 120% 108% 119%**
**2020 103% 96%**
**Adj Gross Margins %**
**2018 81 82 82 80 81%**
**2019 82 84 84 86 84%**
**2020 81 82**
**Gross margins look great.**
**Op Cash Flow (millions of dollars) Yr Total ($)**
**2017: 9**
**2018: 19**
**2019: 03 14 51**
**2020: 22 31**
**TTM Op Cash Flow is thus currently $87 million**
**Free Cash Flow (millions of dollars) Yr Total**
**2018: xx**
**2019: -01 08 30**
**2020: 15 17**
**TTM Free Cash Flow is thus $55 million. Note that those cash flow numbers are positive numbers! I don’t think that any other of our SaaS companies have cash flow numbers like those.**
**Cust with ARR over $100,000 At year end**
**2017 54**
**2018 143**
**2019 184 228 344**
**2020: 405 466**
**% Increase !!!!!!!!**
**2018 165%**
**2019 141%**
**2020 120% 104%**
**These figures don’t need any explanation and show how well the business is doing.**
**Dollar based net retention rate**
**2019 138 139 140**
**2020 >130 >130**
• Adj Operating Income was $20.7 million, up from $4.5 million a year ago.
• Adj Operating Margin was 14.2% up from 6.7% sequentially.
• Adj net income was $24 million up from $5 million, and up from $9 million sequentially
• Adj EPS was 8 cents, up from 2 cents
• Cash was $755 million
• Op Cash Flow was $31 million up from $14 million a year ago.
• Free cash flow was $17 million, up from $8 million.
For a word on customer wins:
HSBC is one of the largest financial services organizations in the world with over 3,900 offices in 67 countries. It will standardize on Zoom’s platform by deploying to 290,000 hosts and to 5,500 conference rooms. HSBC will consolidate onto Zoom’s communications platform for both internal and external meetings. This enterprise-wide deployment represents one of the largest customer commitments to Zoom in our history and reflects our growing momentum with global customers. (Awesome)
In the financial sector Moody’s and Morgan Stanley also became Zoom customers in Q2
One example of Land and Expand was with a large luxury brand. This customer began their relationship with us last year and quickly deployed Zoom meetings to approximately 3,800 users to replace their legacy conferencing provider. Because of their trust in Zoom, they then invited us to provide a modern solution for the phone service in their corporate offices and stores. After a full evaluation, they selected Zoom Phone in Q2. They cited call quality, ease of use, cost savings, and the unified Zoom platform of meetings, chat and phone as important benefits to their organization. They have already begun the rollout of 4,700 Zoom Phone licenses within their organization. They also plan to roll out Zoom Phone to their 750 domestic retail stores starting in early 2020, and in the rest of the world soon thereafter. (Also awesome)
Saul: I doubled the size of my Zoom position in Sept. I was very impressed with the HSBC win. “290,000 hosts and 5,500 conference rooms” is enormous in a single sale. I’m also impressed that this company is so profitable at such an early stage. Yes, I know that there is a lot of argument about whether or not they have a moat, and that has held me back from increasing it further.
MongoDB is now in 6th place at 7.7% of my portfolio. It hit a low of about $115 at the bottom of the sell-off and is now up 29% from that low at $149. I’ve been in and out a couple of times, each time having to buy back at a significantly higher price than the one I had sold at. That’s life! I won’t sell out again except for bad operational results, which I don’t think will happen, but I do tend to choose it to trim it when I need money for other stocks.
Mongo has pretty much invented its solution and category, although it does have competition. It’s the leader in NoSQL data storage. It has chosen to put almost all its money into growing, and thus is still running an adjusted loss, which was 28% of revenue for 2018, down from a loss of 49% of revenue in 2017. I really don’t like that. (Under the new ASC 606, the loss was only 19.5% of revenue for 2018).
What has changed Mongo is Atlas, which gives it a fully managed cloud solution.
Here are some highlights from the last quarter:
• Total revenue was $99 million, up 67%.
• Subscription revenue was $94 million, up 71%.
• Adj gross profit was $71 million, for a 72% adj gross margin.
• Adj op loss was $15 million, improved from $18 million
• Adj op margin was minus 15% up from minus 30% a year ago.
• Adj net loss was $15 million or 26 cents per share, improved from $17.5 million or 34 cents a year ago.
• Cash was $437 million
• Op cash flow was minus $13 million
• Free cash flow of minus $14 million, improved from minus $18 million a year ago.
They adopted ASC 606 effective Jan 31, 2019 and applied it on a full retrospective basis.
• They made significant product announcements in June.
• Saw growing momentum with all three major cloud providers.
Conference Call – [Shortened. For more information on the conference call read last months summary].
One of our key competitive differentiators is the freedom to run anywhere, and our customers can choose Atlas to take advantage of the benefits of each major cloud provider as they see it fit. We continue to see rapid adoption of Atlas, which grew over 240% and now represents 37% of total revenue compared to 18% a year ago and 35% last quarter.
We grew our customer base by over 800 customers sequentially, bringing our total count to over 15,000, up from over 7,400 a year ago, or up over 100%. The growth in our total customer count is being driven in large part by Atlas, which had over 13,200 customers at the end of the quarter, compared to over 5,300 a year ago.
Our net ARR expansion rate in the quarter remained above 120% for the 18th consecutive quarter. We ended the quarter with 622 customers with at least 100,000 in ARR, up from 438 a year ago.
We continue to expect that we will see some modest reduction in overall gross margin, as Atlas continues to be a bigger portion of our revenue. Atlas revenues are recorded on a consumption basis, whereas Enterprise Advanced includes a term license component that is recognized upfront. Atlas also has a lower overall gross margin than Enterprise Advanced because of its infrastructure component. Finally, many Atlas customers pay us monthly in arrears instead of annually upfront. In other words, Atlas which is an increasing portion of our overall business, usually does not involve an upfront cash payment or give us deferred revenue. We believe that offering customers the ability to pay as they go is a key benefit of the cloud model. We’re seeing a lot of interest from very, very large organizations. We’ve talked about banks, insurance companies, tech companies and so forth, all very, very interested in Atlas. And we’re really, really excited about the interest level.
We expect to burn cash in the third and fourth quarter of fiscal 2020, as we continue to make significant investments in the business.
We don’t see any headwinds in terms of competition. It is a big market. There are a lot of competitors, but we feel really good about a competitive differentiation, as evidenced by our growth rates, as evidenced by some of the most sophisticated customers in the world choosing MongoDB for some very, very mission critical workloads.
I’ll call Mongo a Disrupter, a Category Leader, and a Big Data New Market Stock, and I’ll give it four and a half confidence stars for now.
Crowdstrike is in a tie for 7th place, at a 7.6% position. It’s a recent IPO and there were a couple of extended threads on it in November on the board, so I’ll just give you my take on their earnings report (which caused them to sell off). It hit a $45.20 low in the sell off, and is now up 28% from that low, at $58.00.
Let’s start off with revenue. It was $108 million, up up 94% from $56 million yoy, and up from $96 million sequentially. If you just look at those numbers in isolation they look fantastic, but I have to admit I was expecting more. The last four quarters they had grown by $9, $10, $14, and $16 million sequentially, so growing by only $12 million sequentially was a disappointment.
Then we’ll look at subscription revenue. That was up 98%, and made up roughly 91% of total revenue. Can’t complain about that.
And their ARR (Annual Recurring Revenue) is $424 million, up 104% from $208 million a year ago, and up 371% from $90 million two years ago. That’s zowie!
They also had huge, accelerating customer growth? I’m not kidding about huge. January fiscal year-end customers in 2016 thru 2019 were
**165**
**450**
**1242**
**2516**
Just look at that stack for a minute. And in the last two quarters they already grew by a little more than they grew all last year, and they now have 3789. And they say that they are focusing on larger customers, and those customers are asking for longer contracts. Longer contracts mean more dollars that they have signed up but can’t recognize yet. Also, they have a land and expand sales plan so those new customers will increase their spend in the future.
Okay, Gross margin was 36%, 54%, and 65% of total revenue for the past three years. This quarter it was 71%, and subscription gross margin was 74%, up from 70% yoy.
Adjusted net profit margin was -173%, -114%, and -56% the last three fiscal years, and this quarter it was -21%. That gives an idea where it is going.
Dollar based net retention rate was “over 120%” for the umpteenth consecutive quarter.
Op Cash Flow was neg $6 million, improved from neg $29 million a year ago.
Free Cash Flow was neg $29 million, improved from neg $36 a yr ago (the increased loss from the op cash flow was do to capex of real estate and equipment).
Cash was $827 million.
That gives you a thumbnail sketch.
Now here are some quotes and paraphrases from the conference call:
CrowdStrike stops breaches, and we are transforming endpoint security. Our clear technology differentiation is driving our growth which continues to significantly outpace the industry. In addition to stopping breaches, we help customers simplify their security stack with our single agent architecture and cloud modules. This sets us apart from others in the security industry. We reached a new milestone with 50% of our subscription customers having adopted four or more cloud modules. The strength of our Falcon platform is also rapidly gaining industry recognition.
To help foster innovation within the CrowdStrike store ecosystem, we have established the Falcon Fund. Our cloud-native open architecture was built to provide a shared security ecosystem where developers and partners could dramatically shape the future of security in IT operations. Through the Store, third-party applications can be developed utilizing the massive amounts of endpoint data that our lightweight agent already collects. The Falcon Fund will invest in the next generation of innovators, leveraging the Falcon platform to solve the most pressing security and IT challenges.
CrowdStrike was cloud native from day one and we enjoy first mover advantage in cloud delivered endpoint protection. We have the architecture that others strive to emulate and we possess unique technology that allows us to operate effectively at scale. We are putting growing distance between ourselves and competitors. This is reflected in our position in the Gartner Magic Quadrant versus all other fossilized and NexGen players.
Our rapidly growing international business highlights the global nature of the security industry, the massive market opportunity in front of us, and our continued success penetrating these markets
We’ve seen a tremendous increase in Spotlight. Why are we seeing that? Well, it just works. Companies don’t need other agents if they have a scalable agent which is going to deliver real time vulnerability information. That’s what they’re looking for. And the ability to actually have a customer try it with their own data, with our frictionless in-app trial, has been a big boon to us. So we’re seeing a lot of activity there.
If you look at our threat intelligence modules, our Falcon X, the ability to automate a triage and take something that would normally take eight hours, and reduce that time to five minutes with our Sandbox technology, and our malware search capabilities and our integrated intelligence, these have been very, very well received. And we’ve seen tremendous adoption in those areas.
So the feedback has universally been customers actually accelerating moving to CrowdStrike from our competitors as they try to transition from an on-premise solution which has been slow and cumbersome.
And as other competitors try to move to the cloud it actually just helps us and validates us. If a customer is going to look at a cloud vendor they might as well look at the best out there. So we like that dynamic.
Q - Where and when you actually do see Palo Alto and how they stack up?
A - Well, we don’t see much of them to be candid, and if you look at the Gartner Magic Quadrant, rather than me saying where they stack up, you can tell where the analysts think they stack up. And it’s not even close to us. So I’ll the reader be the judge of that.
Saul here: Okay, so what did I do? I roughly doubled my Crowd position too on the way down. But please don’t just follow me. Decide for yourself. I make mistakes I can assure you.
Zscaler was my second largest position at 18.8% of my portfolio at the end of September. I reduced it greatly In October, and a little in Novermber and it’s currently also a 7.6% position and tied for 7th. It hit a low of $40.75 in October and has bounced 28% from that bottom to $52.13. Here’s the story, reprinted from my post on the 14th of October.
Zscaler hit its peak at about $89 in July. It was tied for my largest position at about 18%. Over the next few weeks it drifted down with the market to about $82, but then, near the end of August, it suffered a large decline attributed to a negative article by a boutique analyst, and I increased my number of shares at $72.50 even though it was one of my largest positions. I thought that that was a ridiculous response to an analyst article.
However, over the next two weeks, leading into earnings it continued to fall, with panic feeding into itself. Even excellent earnings didn’t help as the sell off in SaaS stocks in general hit, and it dropped in the next week to $47.50. It was down almost 47% from its high on no clear bad news at all.
I had not added since that purchase at $72.50 because I didn’t understand what was going on. I knew that they had guided conservatively but all these companies do that so that they can beat. I knew that they were encountering longer sales times with larger enterprises, but I also knew that they had hired a superstar to take over sales and marketing motion. I added a considerable amount at an average price of about $49 or so.
But then I reconsidered, and over the past 11 weeks I greatly reduced my position. Well why?
First of all, I do feel that the old firewall paradigm, as represented by Palo Alto, is obsolete. The CEO of Palo Alto, the number one in security, making a huge point of crowing about how his company beat out Zscaler, a little company one-tenth the size of Palo Alto, in a few sales, shows how scared they are. Think about it! Why would a really dominant company even mention, or care about, beating out a little company a tenth their size, unless they fear that that little company has a better product?
But now that the legacy security companies are aware of the threat to their very existence, they will fight tooth and nail, with lies, and false and distorted claims, and whatever they can, to hold on to the bulk of their business for as long as they can. Zscaler may take over a large part of the security world, but it definitely won’t do it overnight. It will be a long struggle.
Second, Zscaler was clearly worried about their lengthening sales cycles as the early adopters have been worked through and they have to sell to the C-level executives of larger enterprises who may know nothing about security but will worry about changing their security system, may have IT departments worried about losing all their beloved hardware (and maybe their jobs, some of which will become unnecessary), and who have the CEO’s of their legacy security companies, who they have known for years,whispering in their ears. Clearly Zscaler made the right move in hiring someone really competent in order to deal with this situation, but you don’t overhaul a sales process overnight. There may be a couple of disappointing quarterly reports before things pick up (or don’t pick up).
So here I am, with Zscaler, with a tailwind of inevitability, sure, but which is asking huge enterprises to revamp their entire security systems, and which has a lot of temporary obstacles in its path which may cause growth rates to diminish in the near term, such as desperate large competitors, customer IT departments that don’t want to lose their jobs, and enterprise CEO’s who don’t really understand security… while I have other companies, growing like mad, and without these execution problems, so it made sense for me to reduce the size of my Zscaler position from huge to moderate, and to use the cash to buy into companies like Coupa and Datadog. It was a question of evaluating what was going on and acting on it.
The Trade Desk is in 9th place at 3.9% of my portfolio.
They had a pretty good earnings report and conference call in Nov, but there were clear signs of slowing growth.
Revenue was $164 million, up only slightly sequentially from $160 million, and up 38% year over year, which was down seqentially from 42% last quarter and down from 50% growth a year ago.
Adj EBITDA was $48 million, down $10 million from $58 million sequentially, and was only 29% of revenue, down from 36% of revenue sequentially.
Adj Net income was $36 million, down from $46 million sequentially, but up from $30 million yoy, and was 22% of revenue.
Adj EPS was 75 cents, up from 65 cents a year ago, but down from 95 cents last quarter.
They raised estimates for the year. It took off after earnings, I guess because they raised low estimates. It made little sense to me, and I reduced my position, but I seem to have been wrong, because they just kept going.
I’d rate it 3.5 confidence stars now, because of my mistrust of a complicated advertising milieu and what I see as a mixed quarter, in spite of feeling that this is a very unique innovative and creative company. The Trade Desk seems to be a Leader in a Rapidly Growing niche Market within the larger field of advertising, which up to now has been controlled by the behemoths.
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.
Illogical Investing Fallacies
I hope this has been helpful.
Saul
