Nilvest 1Q21 update

Saul’s board has been fantastic to learn and grow as investors. I have been regularly visiting and occasionally posting for a few years now and I owe a great deal to Saul and this board for training to achieve life changing returns.

For my personal progress tracking (which has been slowly evolving as well), I have settled on quarterly tracking for about a year now. With that, I hope to make this quarterly report to share going forward.

A quick background on myself. Based in the SF Bay area, I am an engineer by education, marketer by profession and an investor by passon. Technology / health care / consumer are areas of most interest to me. Though I do not have much experience in the IT / software industry, being in the semiconductor / electronics / telecom world, I get the concepts at a high level. In healthcare, I try to avoid pharma or biotech and generally gravitate to med-tech or medical device type businesses that are somewhat less dependent on the binary outcome of the FDA approval process.

Now to portfolio update.
2018 return: 38%
2019 return: 45%
2020 return: 204%

2021 1st Q return: 0%

Yes, after seeing 28% YTD up in mid February, my portfolio was exactly at break even at the end of the day on 3/31, for which I feel lucky compared to most of the tech investment results.

Current positions with %allocation (% at the end of Dec 20)
CRWD 22.5% (27%)
NARI 11% (3%)
PINS 10% (5%)
ROKU 8% (14%)
DDOG 4% (7%)
SNOW 4% (1%)
LSPD 4% (0%)
ICAD 4% (2%)
SQ 3% (9%)
TDOC 3% (8%)
TWLO 3% (0%)
ZS 2% (2%)
ASAN 2% (2%)
UPST 2% (0%)
OPRX 2% (0%)

Beyond these, I have multiple small positions that I am looking to either increase or eliminate in next few months. They include Zoom, Magnite, Voyager digital and Pubmatic that are familiar to this board to various extent. I also hold a few positions in microcap, see bucket 4 info below.

My approach to investing has been evolving like most of us here. I put investments into following buckets.

First bucket - High growth, recurring revenue, strong moat businesses. These are high conviction businesses (strong numbers supported by strong narrative supported by strong numbers!) and confirmed based on the latest quarterly results. These businesses are phenomenal and in their prime growth life delivering unmatched metrics for multiple quarters in a row. For companies in this bucket, I will sustain the position despite price running up or higher valuation, specially in the taxable account. In other words, I am less sensitive to valuation (within reason) for companies in this bucket.

Today, there are two companies in this bucket - SNOW and CRWD.
CRWD has been well known and most discussed here, and it is also reasonably valued today, so justifiably it is my largest position.
On SNOW, I feel it is even stronger business than CRWD with a longer growth runway and fantastic execution. Ofcourse the question with SNOW is valuation which is why I am taking an approach of slowly building this position. I expect it to be my #1 or #2 position within a quarter or two, I am not in a rush, just looking to keep building opportunistically for the long term.

Last year this bucket included Zoom, Livongo and Datadog alongwith CRWD. Zoom and DDOG have fallen out of this bucket for me. While I am bullish on TDOC in general, it is also not in this bucket.

Second bucket consists of companies delivering strong or growing business metrics yet I am still not as confident in the business as bucket 1.

Usually companies in this bucket have something of a question mark for me - either competitive moat or longevity or some near term challenge (e.g. NARI, PINS, ROKU, SQ). Or sometimes it’s simply too small or too early in its journey (e.g. ASAN, UPST, PUBM and OPRX). I feel like I do not want to ignore their strong performance yet I need to control size of position and keep a tight watch on it.

Today, this bucket consists of NARI, PINS, ROKU, LSPD, SQ, ASAN, UPST, PUBM and OPRX

Third bucket is somewhat orthogonal to the second bucket. These businesses I am very comfortable with, usually SaaS but also others like TDOC in this category. However, these businesses have either relatively lower growth metrics (or expected to slow down like Zoom and Teladoc).

Today this bucket consists of DDOG, TDOC, TWLO, ZS, ZM, DOCU, TTD, NET, MDB, OKTA, ZEN, ESTC and SMAR.

Fourth bucket consists of moonshots. Being in the tech world, I find myself getting carried away with promising technology and / or businesses transitioning to much more attractive models. Usually, these opportunities come with very high upside potential due to both revenue and multiple growth. However, there are too many of them out there with most of them not delivering on the promise. Therefore, to make it a controlled investment, I have this bucket where I put in something of the order of 0.25% to 1% into multiple of them and track them over a period of time to ultimately either boost up the size or replace them with a new shiny story!

Today this bucket consists of 25 companies of which I hold a small position in 20 of them. Magnite and Voyager Digital are somewhat familiar to this board. I will not list the rest of them here to respect the sanctity of this board. Only one I will talk about is ICAD which is now a much higher conviction for me and therefore built up to a 4% size position.

The way I approach is to prioritize higher allocation to bucket 1. And then bucket 2 and 3 in that order with bucket 4 holding at-least a total of 10%. In other words, bucket 1 gets first and highest priority while bucket 4 has fixed allocation. Remaining money gets spread over bucket 2 and 3 in which I trade those positions opportunistically, specially in IRA accounts.

Notes on individual positions - let me comment only on positions that are less talked about here or I have something to add to.

NARI: I have to say that NARI has been one of those stocks where I can not find enough confidence in its business, its position size is purely driven by strong metrics delivered by the company. This is a perfect example where my left brain would never let me make this investment. On the face of it looks like a “hardware device sell” with no recurring revenue, just a better mousetrap. Yet, you have to give credit to a management which found this opportunity and executed on it delivering one of the highest growth and profitability metrics in the market. What I infer here is that not only I may be wrong in assuming this as just a better mousetrap business, but also very likely that a management like this should know how to build upon this success and should remain an interesting investment for a while. However, watching closely and will be sensitive to valuation on this one.

PINS and ROKU: are also well discussed here. They are in bucket two because they are simply advertisement businesses and not SaaS or such businesses where they have strong hold / retention of customers (which means advertisers for both of them).
I raised PINS and reduced ROKU this quarter primarily as it seems to be a better opportunity today. E.g, PINS is growing at 16% higher rate (76% vs 60%) while delivering 23% higher gross margins (73% vs 50%) and yet trading similar valuation (PINS 29 PS vs ROKU at 26 PS).

To add to these names, overall I feel digital ad and adtech are growing opportunities yet relatively less discussed here outside of old favourite TTD. Specifically ROKU and PINS both have long growth runway and they continuously deliver on execution. I am also holding / adding to SNAP as well as MGNI (Magnite) and PUBM (Pubmatic), though these are very small positions at the end of March.

SQ: Let me share a quick thought on Square (SQ) which has been a strong performer for me in 2H20 as well as in the first quarter, though I have reduced it really only in March. At the onset of the pandemic, I was very concerned with its concentration on SMB and sold out early on, even though I have had very high conviction on SQ as a business. To their credit, SQ executed extremely well on their Cash app growth through the pandemic and also leveraged their strong position in bitcoin. As a result their top line growth in 2H20 has been equal or better to almost anyone other than Zoom. This is why I jumped back in and had 9% position exiting 2020. However, at this point, I worry that bitcoin has become too large a portion of their revenue with some tough comp this year can make it harder for SQ price to appreciate. While I agree that their SMB business will rebound this year that should drive higher gross margin, I worry that their guidance for 3rd quarter may not be very exciting for the market.

Upstart (UPST): is a recent IPO and has literally burst into the scene. It’s 2021 guidance of ~100% growth is very impressive. It is successfully applying AI to a large consumer market and in the process enabling better outcomes for both lenders and borrowers.

Optimize RX (OPRX): has had tremendous 2020 growing at 76%, although from a very small base of $25M to $43M. This company looks and feels like a pharma / healthcare focused version of Twilio. Also reminds me of Veeva. OPRX has built a dedicated communication channel between pharma companies and doctors / pharmacies. This has become very effective for pharma sales people to reach out to doctors in the pandemic where face to face meetings stopped happening. It is not so much of video conferencing as it offers im / text / email solution that complies with regulations. On the conf call the CEO talked about large growth in the new business pipeline for 2021. I think conservatively, they will grow >50% in 2021.

ICAD: This is a new company, not yet discussed to my knowledge, on this board. Icad is a very small med-tech company I have been following for two + years. It has two primary businesses both of them are undergoing transformation that will catapult into hyper growth, likely starting this year. Its total revenue in 2020 was $30M which was about flat from 2019. However, I believe this year will grow 50% to $45M and likely accelerate from there. At ~$500M market cap, ICAD still has tremendous upside even after recent share prices run up from $7 to $20. For those interested, please see my next post with a dedicated thread on ICAD so we can discuss it over there.

That concludes my this quarter update. Hope this is helpful. Best wishes to everyone for Q2 now.