I thought that MajorFool20’s recent post #85950, summarizing his portfolio and his companies, was excellent and I’d like to give you a couple of examples of discussions of companies. I’m giving these as examples of two different but very useful ways of presenting a company. First his discussion of Sea Limited (which I have never owned):
Sea Limited: Essentially, my decision to sell boiled down to a few major concerns:
• Growth overall has run into a wall, as GAAP revenue dropped from 159% to 29% YoY. Talk about a declaration! This major drop was driven by two big factors – 1) e-commerce revenue is up against very difficult comps. This goes for all e-commerce businesses (take a look at Shopify, for instance). While Shopee (their e-commerce arm) was still able to grow 51% to $1.75B, this is still down from 161% last year. 2) digital entertainment (gaming AKA Garena AKA Free Fire) is also up against difficult comps and is now reporting negative growth YoY. The good news is I don’t think their massive global hit Free Fire is losing much steam based off app data, however, the entire gaming industry is facing difficult headwinds. In summary, their two main businesses are facing stiff comps and headwinds compared to the last two years where they saw nothing but strong tailwinds.
• As a result of the slowing growth of Garena, Sea is now seeing their bottom line deteriorate. Garena is their cash cow that is no longer producing as it once was. Garena’s adjusted EBITDA was cut in half YoY resulting in overall adjusted EBITDA falling from -1% to -17% margin. Slowing growth and deteriorating profitability make for a tough combo in any market, much less a bear market.
• I am starting to lose hope that Shopee will ever turn a meaningful profit. Additionally, I am beginning to conclude that e-commerce does not make for a great investment because it is so difficult to make any sort of net income. While Shopee is showing promising top line growth, they are at least 1-2 years away from even reaching break even on an adjusted basis. They are starting to pull out of several countries where they have introduced Shopee in years past which can be viewed as a bullish thing (making a prudent move to conserve cash and focus on key markets) or a bearish thing (gained no traction and did not have the ability or leadership to break into an emerging market). Considering Shopee is 60% of their revenue, how valuable is this business if over half of Sea’s revenue will never make a big impact to the bottom line?
• Consequentially, Sea’s cash reserves are dropping rapidly. Their war chest has dropped from over $11B three quarters ago to under $6.5B today. The good news is they are slowing their cash burn but regardless, based off the estimations, Sea will almost certainly need to raise cash again within the next year or two.
The one bright spot was their financial services business (SeaMoney) which is continuing to explode. Unfortunately, at a $1B run rate, it will be a while before this starts to move the needle for the company. And oh, by the way, they are losing millions on this business as well. I analyzed all this and came to an easy decision to sell the position. While Sea might do really well in the long run, the next 12 months are going to be very challenging and I decided there were much better places for my cash. I will continue to monitor this one from the side lines and contemplate jumping back in if I can see both revenue accelerate and losses show big improvements.
One brief portfolio management comment - this is now the fourth instance where I have held on to a stock with big gains (200%+) only to ultimately end up selling at a loss recently. The other examples include Peloton, Upstart, and Roku. Obviously, much of this had to do with the massive valuation spikes we saw in 2020/21 however, learning when to sell has proved to be a difficult task for me. It is something I am hoping to improve upon as I look to focus on owing just the best businesses and putting them under the microscope consistently so I can head for the exits before I am in the red. Please no replies regarding this since it is OT for the board.
He also analyzed SentinelOne, which is one of my full sized positions presently:
SentinelOne: I thought SentinelOne had a much stronger report than Crowdstrike. My biggest gripe with SentinelOne is that it is difficult to get a clear understanding of how the company is performing organically because everything is reported including the Attivo acquisition. In my opinion, there is more than enough to like here that I am willing to look past the added complexity and murkiness to own SentinelOne. Just look at these ridiculous numbers (and yes, I know Attivo is included and responsible for part of this):
• Revenue increased by 124% YoY from $46M to $103M
• Adj. Gross Margins improved from 62% to 72% !!!
• Adj. Operating Margin improved from -98% to -57%
• Adj. FCF Margin improved from -98% to -65%
• ARR increased by 121% YoY from $198M to $439M
• Customers with over $100K ARR increased by 117% from 348 to 755
• DBNRR expanded from 129% to 137%
That is pretty much a clean sweep if you ask me. I own less of SentinelOne because I see it as a bit riskier than my other positions. It is far less proven, but at a ~$8B market cap, there is a lot to like. If they can continue executing, there is a ton of upside. Ultimately, it will come down to two main things:
1. How durable is their growth? Crowdstrike is still growing 50%+ while producing more revenue in a quarter than SentinelOne makes in a year. It is paramount that SentinelOne can continue to grow at a high rate.
2. Can they continue to improve the bottom line? They must continue to show operational efficiencies and drive towards positive adjusted operating income. Again, compared with Crowdstrike at a similar scale, CRWD had -19% adj. operating margins and they improved this almost every single quarter. SentinelOne is already behind in this regard so it is critical they continue to show increased profitability.
If SentinelOne were to slip drastically with either of these two, I’d expect the stock would be sent down in a hurry and I would likely aim to reduce or exit my position. As it stands, they are executing on both fronts and as a result, will have a home in my portfolio until I see otherwise. I have been adding to this position as well.
Discussions like these are what our board is all about. I suggest that you read the rest of his post at #85950.
Saul