Quarterly Portfolio Update end of year 2019.
Firstly, thank you to Saul and to all the excellent contributors to this fantastic forum. I have learn’t so much from you all, and am a better investor because of you all. I have made great strides this year in building a great future for my son. My son has a one in a million genetic condition, that inhibits brain function and development. I am looking forward to seeing him continue to grow, and to be able to contribute to his community, and being (hopefully) valued by his community when I am long gone.
Results Summary:
US portfolio gains for CY 2019 (ex. Currency gains): 26.7%
Non-US portfolio gains for CY 2019: 64.8%
I know many of your US portfolio’s have performed far greater than mine. But I believe I have benefited greatly by applying some of the methodologies I have learnt on this board on the Australian stock market.
I am quite happy with my performance, and I expect my US portfolio will bounce back in 2020, for reasons outlined below.
Introduction
My investments are made via our superannuation trust (retirement fund) and our family trust. I have combined the holdings of these two trusts and have split the portfolio into two. US and non-US holdings. I thought my non-US holdings would be of some interest, and includes names that are not mentioned on this board.
My approach is to take a more cautious approach to buying and selling, so I tend to change positions less frequently than other posters on this board, this has adversely impacted my portfolio performance this year, particularly my slow exit from twilio.
I use Sharesight to monitor returns of my portfolios. Sharesight uses a dollar-weighted (also referred to as a ‘money-weighted’) return methodology. A dollar-weighted return measures investment performance taking account of the size and timing of cash flows. I love this platform, and highly recommend it.
So here goes:
Current cash position (4%)
I have increased my cash position, I typically use cash as a hedge in my portfolio, and I have learnt that holding cash is necessary to exploit buying opportunities whilst living in a completely different time zone to the market. I find selling a holding and then buying on the same day can be difficult whilst living on the opposite side of the globe
US Portfolio
No. 1 – TTD (8.8% - steady)
• CONTRIBUTION TO RETURNS = 41.2%
• Market leader and innovator outside walled gardens
• Top US position due to steep valuation discount in December.
• Sector tailwinds, high margins, high growth.
• Keep an eye on: Walled gardens, disrupters, agencies starting up own platforms, Chinese adventure.
I sold a small proportion for shares, and re-allocated to Alteryx .
No. 2 – AYX (6.4% - up from 5.1% previously)
• CONTRIBUTION TO RETURNS = 11.1%
• Undisputed market leader.
• Continuing strong growth.
• Keep an eye on competition. Tableau buyout a positive
Increasing portfolio position, and targeting a weighting of 8-10%.
No. 3 – STNE (5.7% - up from 5.4% previously)
• CONTRIBUTION TO RETURNS = 4.9%
• Unique and effective customer service model.
• Continuing strong growth.
• Great profit margins.
• Great operational leverage.
No change in holding, however, Does it really justify being my No. 3 US holding? Will await Q4 results and review. It is the most profitable “US” stock I hold, and is growing revenue well above 50% pa, with excellent optionality and tailwinds.
No.4 – MDB (5.4% – up from 5.1% previously)
• CONTRIBUTION TO RETURNS = 11.2%
• Undisputed market leader.
• Growth moderating, with tough yoy comparisions, but Atlas high growth continues. Crossing the chasm???
• Major transition to NoSQL database in the early stages.
• Keep an eye on competition from AMZN, and GOOGL. Watch for issues with Atlas (reliability/security/onboarding).
No change to holding.
No.5 – CRWD (4.7% – up from 0% previously)
• CONTRIBUTION TO RETURNS = -0.2%
• Unique cloud based end point security disruptor.
• Accelerating growth, with great sales execution
• Keep an eye on competition.
New holding, transferred Twilio holding to Crowdstrike. Higher growth, higher gross margins, profitability inflection point, more transparent management (I hope).
No.6 – ESTC (3.5% - 5.3% previously)
• CONTRIBUTION TO RETURNS = -8.1%
• Leading data search provider.
• Leading innovator in the search space.
• Ever growing optionality.
• Open source model – keep an eye on copycat competitors.
I am concerned about Shay’s scatter gun approach, and I don’t hear a consistent message. Will review after next quarterly report.
No. 7 – ZS (3.3% down from 4.2% previously)
• CONTRIBUTION TO RETURNS = -0.8%
• Undisputed market leader.
• Growth moderating, but huge TAM. Sales execution is a concern. Watch the new CRO’s work over the next 6 months.
• Keep an eye on competition. Although competition hindered by legacy products, and fear of market cannibalism.
No. 8 – OKTA (1.2% down from 1.9% previously)
• CONTRIBUTION TO RETURNS = 3.4%
• Undisputed market leader in identity / sign-on as a service.
• New product innovations increasing TAM.
• Strong growth.
• Keep an eye on new product adoption, net revenue per customer expansion. Questions regarding size of TAM.
I have not increased my weighting in OKTA, as I think they as still just too expensive for my liking.
No. 9 – FB (0.1% steady)
• CONTRIBUTION TO RETURNS = 7.3%
• Leading social media platform.
• Growth slowing, regulatory risks, taxation risks.
• Holding to retain daughter’s interest in investing.
Positions sold since September 19, 2019:
I have only sold down to holdings.
• TWLO (100% of holdings)
• TTD (15% of holdings)
Sold out of Twilio in the quarter, and re-invested into Crowdstrike and Alteryx. I decided that Twilio management were not being transparent, were overly greedy (stock based compo), merger execution not playing out, and no evidence of operational leverage. I considered Crowdstrike was showing better execution, operational leverage, better margins, and higher growth at a better price.
In the previous quarter, I sold out of Square and transferred all my holdings into Elastic. This has not played out so well in the short term.
Positions acquired since September 19, 2019:
Positions I added to include:
• CRWD
• AYX
US Portfolio percentage = 39.6%, down from 40.0% previously.
US Portfolio Return since January 1, 2019 = 26.6% (includes currency gain -0.1%)
Non- US portfolio
No. 1 - Xero – XRO (ASX) – (5.8% down from 5.9% previously)
• CONTRIBUTION TO RETURNS = 12.2%
• Leading SAAS accounting platform.
• Pure cloud play (unlike INTUIT).
• Revenue growth = 32% pa ; gross margins = 82.8% !
• Top dog in AUS, NZ, and UK.
• Watch performance in USA (Intuit fighting back hard), watch to see UK growth and dominance continues.
• UK is growth engine going forward for next 1-2 years. It is unclear where the growth will come from 2-3 years out – If a new market is not identified, revenue growth will slow to 20-25% pa – Consider reducing weight in portfolio to fund future winners (if small, high risk picks execute).
I sold down 20% of my holding due to valuation concerns, after a strong run.
No. 2 - Pushpay – PPH (ASX) – (5.2%, up from 4.4%)
• CONTRIBUTION TO RETURNS = 3.7%
• Leading SAAS provider in the faith donations administration sector.
• Top dog - First mover.
• 35% revenue growth. Reached cashflow breakeven. Management recently re-affirmed guidance and identified long term revenue goal of $1 billion pa (Current revenue = $130 M USD).
• Increasing gross margins.
• Demonstrating great operational leverage, and is beginning to pump out cash.
• Announced acquisition of Community Church Builder (CCB), using a combination of cash and debt funding. CCB founder acquired stake in PPH off PPH founder as part of the deal, and will join the PPH board. Will contribute 15-20% additional revenue and cross selling opportunities across the US church sector.
No. 3 - Altium -ALU (ASX) – (5.1% down from 5.4%)
• CONTRIBUTION TO RETURNS = 7.6%
• Chip design software company.
• Top dog / market leader
• IoT is a huge tailwind for the company.
• Strong cashflow.
• Revenue growth of 23%, but net profit growth of 40% due to operational leverage. EBITDA Margin expansion at about 10-20% pa.
Steady as she goes.
No. 4 - A2 Milk – A2M (ASX) – (5.0%, up from 3.6%)
• CONTRIBUTION TO RETURNS = 4.5%
• A2 the only A2 only protein milk producer.
• Capital light model – A2M outsources production.
• High margin for “premium” milk product.
• High growth in china, US. Currently 16% revenue growth in US! 46% growth in China.
• UK market expansion scrapped to focus and building on US success –
• Great optionality, with infant formula yet to be released in US markets. Huge growth runway.
• Watch for branding – vulnerable to customer whims, and reputational damage.
• China announced regulatory changes that may impact Daigou channel. Economic risks could greatly impact A2M. Monitor Daigou channel, and sell on signs of channel stuffing.
• Founder has returned to lead company after recent CEO resignation. CEO and board didn’t see eye to eye it seems.
I brought more in late September. Supermarket shelves remain devoid of A2 product due to demand outstripping supply, so steady as she goes.
No. 5 - Electro Optic Systems – EOS (ASX) – (4.5% up from 3.6%)
• CONTRIBUTION TO RETURNS = 7.9%
• Defence technology company, being a world leader in remote weapon systems, and satellite tracking/defence systems.
• Founder led, with impressive management team.
• Over $600 m order backlog, with a further pipeline of around $1.5 B in orders. It recently upgraded forecast revenue growth of 70% pa over the medium term. IT HAS REPORTED IT IS WINNING EVERY CONTRACT IN THE RWS SPACE. To fund the accelerated growth, it raised further capital.
• Satellite tracking and high power laser system also has non-military uses, such as clearing out space junk to protect commercial satellite assets. EOS is the fifth largest space agency in the world. I BELIEVE THIS ASSET IS MASSIVELY UNDERVALUED, and EOS anticipates it will begin monetising its IP, at very high margins, in the near term, with a $200 M contract currently tendered, where there is no equivalent competitor.
• Anti-drone weapon systems is a new market, and is a $700 m opportunity.
• Watch for sovereign risk, and reputational risk with defence orders.
• INCREASE POSITON OVER TIME TO 5-6%
Acquired more EOS in November. I believe this is a very high quality business, with a huge backlog of orders, AND a technology / innovation backlog. The chairman recently reported that two thirds of their IP is effectively stockpiled while competitors catch up with their current technology. Once they do, they release their next round of innovation, thereby protecting their industry leading margins.
No. 6 - Appen -APX (ASX) – (4.4% down from 4.6% previously)
• CONTRIBUTION TO RETURNS = 10.7%
• AI Data feeder.
• 60% HY revenue growth, underlying NPAT up 62%.
• Consistently beats guidance.
• Establishing top dog status through strategic acquisitions (competitive threats)
• Recently acquired Figure eight
• Threats – Watch out for AI disruption to service. Look out for top customers DIYing (akin to UBER and Twilio).
It enjoyed its annual November guidance upgrade. October is a great time to buy into this business. MUST ADD THIS TO MY DIARY.
No. 7 - Afterpay Touch – APT (ASX) – (4.0% down from 4.7%)
• CONTRIBUTION TO RETURNS = 2.2%
• World’s leading buy now pay later lender.
• Business model is to take 4% of purchase price of item up to say, $1200, with the customer repaying Afterpay over 4 fortnightly installments. Retailers win by raising sales and bringing forward customer spending. Customers win by having a frictionless way of buying goods and services NOW, and not having to save for it (Very millennial).
• Current sales growth over 100% pa and accelerating.
• Successful establishment in the US, with 14000 new customers signing up PER DAY. Afterpay active US customers have gone for 0 customers to 1.5 million in 12 months! It looks like Afterpay has crossed the chasm in the US, with a long way to run.
• With its runaway success. Australian regulators are auditing Afterpay’s anti-money laundering policies and safeguards. There is regulatory risk now for Afterpay in Australia, and costs will increase to address regulators requirements in the short term.
• UK launched with even greater success, 200 000 subscribers within weeks. Success demonstrates the powerful network effect in the model, as international retailers using Afterpay in Oz and US became launch partners in the UK. Geographic expansion risk appears to be ameliorated by this network effect.
• Afterpay appoint Frerk-Malte (Malte) Feller (ex. Facebook exec) as global COO, giving some more operational clout to the team. The business, I think, has outgrown the capacity of the founders, so I think this is a good move.
• Visa seeking to cut a deal with Afterpay – a partnership to develop financial innovations in the US market. This is a huge validation of the model, IMO. Visa shareholders should take note.
• Many more copycat competitors launching, but they lack the network effect Afterpay has established.
• INCREASE POSITON OVER TIME TO 5-6%
Added to position in November, and will seek to increase weighting.
No. 8 - Audinate – AD8 (ASX) – (3.5% up from 3.0%)
• CONTRIBUTION TO RETURNS = 4.2%
• World’s leading AV networking protocol, Dante (converts audio / video to digital signal).
• Sells to OEMs – Dante AV use cases – Sports Bars, conference rooms, classrooms, Courtrooms, retail AV, transport hubs.
• Adoption accelerating – Dante now the leading protocol.
• 40% revenue growth, with huge TAM.
• Tailwind with the adoption of zoom, which integrates with Audinate.
• Market penetration – 7-8% of audio, and 0% of video.
• Video product to be being released this year to double TAM.
• Cashflow positive.
• Watch for decline in adoption, slowing revenue growth.
• Management appear quite conservative, targeting 25-30% annual revenue. I think they are sandbagging.
• INCREASE POSITON OVER TIME TO 5-6%
Will seek to acquire more at the right price.
No. 9 - Pointerra – 3DP (ASX) – (3.2% up from 1.7%)
• CONTRIBUTION TO RETURNS = 1.6%
• Enables massive point cloud data sets to be compressed, stored, analyzed, and edited via a cloud platform, saving substantial resources and time for enterprises in the Engineering, Utilities, Property, and Surveying Sectors.
• Uses proprietary technology that reduces the cost to store massive 3D data sets.
• Nascent opportunity, with a massive, untouched TAM.
• Recurring revenue model, with high revenue expansion rates - +150% at this early stage.
• Annualised Contract Value growing at about 30% Quarter on Quarter (albeit off a very low base).
• High gross margins - +80%.
• Capital raise in Q2. Added to my position.
• Management have a good reputation in relation to cost control, and the business was co-founded by Dr Newman (Founder of Nearmap).
• Some recent misfortune with one co-founder’s untimely death early this year.
• Very early days, with high execution risk. Unsure of how effective / strong their IP is. Really needs capital to exploit the opportunity – High risk of squandering this huge opportunity without a large effort to grab market share whilst there is no competition.
• If Management show strong sales execution in the next update, I will consider adding to my holding in a capital raise.
• Will sell if: Analytics as a service turns out not to be recurring revenue, if they customer churn increases, or failure to execute required sales team expansion, or the sales pipeline slows, or a strong competitor emerges and appears to be winning. Long list that will hopefully shorten over time.
Added to position in November. Steady as she goes, but need to see good sales execution.
No. 10 - Advance Nanotek – ANO (ASX) – (2.9% up from 2.5%)
• CONTRIBUTION TO RETURNS = 2.0%
• ENIGMATIC LEADERSHIP. I HAVE NEVER SEEN A MANAGEMENT TEAM COMMUNICATE THE WAY THEY DO. ARE THEY DODGY, OR JUST ODD? I think the answer is, they are just odd, with a hyper focus on saving costs, which adversely impacts their IR presentation / communication.
• Innovator in cosmetics, with patented technology to produce nano particles of zinc oxide, making them invisible to the eye, yet the most effective sunscreen on the market.
• 100% revenue growth for 2019, 150% revenue growth FORECAST for 2020, and gross margin is expected to expand on increased scale.
• ANO struggling to keep supply up with demand.
• Massive tailwind as the demand is driven by desire for reef safe products and US FDA considering banning alternative sunscreen chemicals.
• Net profit margins good at around 40-45% as the company scales.
• MAXIMUM ALLOCATION: 4% - gained more faith in management.
Steady as she goes, but will participate in recent (very tiny) capital raise. A 1 to 50 rights issue is very bizarre. Again it shows management’s reluctance to spend / dilute capital.
No. 11 - Nearmap - NEA (ASX) – (2.6% down from 2.7% previously)
• CONTRIBUTION TO RETURNS = 8.7%
• Leading SAAS geospatial service in Australia. Hyper growth in USA.
• First mover.
• 45% revenue growth, and accelerating from low 30s. US growth = 108% pa.
• Watch for disruption from GOOGL, and other competitors.
Nervous about competition in Australia. I think NEA’s pricing power is eroding. Will need to watch HY report closely.
No. 12 - Raiz Invest – RZI (ASX) – (2.1 % down from 2.5%)
• CONTRIBUTION TO RETURNS = 1.7%
• Mobile micro investment platform (Oz version of Acorns). Targeting millennials.
• Expanding to Indonesia and Malaysia.
• Provides access to ETFs, cash savings plans, at low fees. Revenue through 3 streams. Platform advertising, buy/sell spreads, and account fees.
• Revenue per customer growth: 40%
• Active customer growth: 21% pa.
• Advertising revenue growth: 180%. Only about 15% of customers use Raiz Rewards – still a large opportunity ahead.
• Aim to signup up 2 000 000 Indonesian customers over the next 4 years.
• Announced new debit card initiative, which will drive more advertising revenue, as it enables customers to use the Rewards program in “bricks and mortar” shops.
• Increased my conviction in this business, as CAC is at an impressive $20 per customer, noting customer churn is around 20% pa. Converting 1% of customers to their super product per annum. This doesn’t seem like much, but the LTV of a standard customer is about $104 vs $4390 for a Super customer. Think about that for a second – one Super customer is 40 times the value of a regular account customer. This steady 1% conversion alone will add 40% of value PER ANNUM. This is on top of the 100% increase in account maintenance fees announced for this year, and the +100% growth in advertising revenue.
• Super fund is in the lowest quartile for management fees (i.e. very competitive offering).
• Will sell if there is a decline in active customers – would be a sign of an adverse reaction to the maintenance fee increase. Will sell if FUM slows significantly.
Looking to gain evidence of success in Indonesia before increasing holding. But FUM is growing well.
No. 13 – Selfwealth – SWF (ASX) – (2.0% up from 1.8%)
• CONTRIBUTION TO RETURNS = 1.2%
• Low cost online broker platform.
• Lowest cost broker.
• Peer-to-peer portfolio provides interesting differentiator.
• CAC have plummeted over the past 6 months as the business learns how to efficiently acquire customers.
• On the verge of cashflow breakeven.
• Releasing Selfwealth ETF, based on top investors, which will drive additional revenue.
• Releasing advisor platform, providing a further revenue channel.
• Revenue up 128% , albeit off a small base.
• Inflection point approaching with breakeven anticipated Q4, 2020.
• Risks: Zero interest rates. A portion of Selfwealth’s income is interest off trading accounts. This is likely to head to zero. Customer acquisition becomes tougher as competitors react to the recent traction Selfwealth appear to have gained. Sell if trade growth slows, customer acquisition costs grow, taking into account market conditions.
No. 14 - Serko – SKO (ASX) – (1.7% up from 0.0%)
• CONTRIBUTION TO RETURNS = 0.8%
• No. 1 corporate travel platform in Australia.
• Over 30% revenue growth.
• Bookings holdings buys stake to support expansion of the “Zeno” platform into US and Europe.
• Zeno platform showing very high growth rates of around 200%, and is not more than 12% of revenue. Revenue growth rate should accelerate and continue over a sustained period.
This look to be a really exciting opportunity, and I will seek to increase my holding should the roll out of Zeno platform be successful (Bookings Holdings seems to think it will).
No. 15 - Livetiles – LVT (ASX) – (1.9% up from 1.1%)
• CONTRIBUTION TO RETURNS = -2.4%
• Enterprise software that is an add onto O365.
• ARR at July 2019 was $40.7 M up 167% yoy.
• Targeting +$100 M ARR by June 2021.
• Poor cost control – Using external contractor for sales – Burning heaps of cash as a result. I don’t trust management entirely on managing costs.
• Started talking about longer sales cycles (RED FLAG)
• High risk of capital raise before achieving cashflow breakeven.
• Key stakeholder risk as Livetiles relies 100% on Microsoft to allow it to add its “tiles’ to O365.
I added to LVT in October – bad call. It remains to be seen whether management can scale the business and manage costs. They really need to show some operational leverage & cost control in the short term. It they can demonstrate this, without impacting growth rates, I may add.
No. 16 - Readcloud – RCL (ASX) – (1.4% down from 2.0%)
• CONTRIBUTION TO RETURNS = 1.3%
• No. 1 digital learning / e-book platform in Australia.
• Over 100% revenue growth (off a low base).
• Gross margins were only around 35-40%., but hey appear to be increasing to 50% as they gain scale.
• Expansion into tertiary / vocational training is widening the TAM.
• Their sales team is executing well, and I like how their revenue per school is expanding at a rapid clip.
• With the recent share price falls, and good sales execution, I am gaining more confidence in the business, and will look at add more if the opportunity arises.
Will seek to increase holding in January if I can.
No. 17 – Schrole Group – SCL (ASX) – (1.1% up from 0.0%)
• CONTRIBUTION TO RETURNS = 0.5%
• Leading HR platform for international schools, and teachers. Also a training platform.
• Revenue growth rate of around 30%.
• High margin.
• Expanding addressable market.
Need to gain confidence in the quality of its platform. Mixed feedback about this. Will hold to see if it can execute on its expansion strategy.
Positions sold since September 19, 2019:
I sought to reduce my “de-worsificiation”, and offloaded a number of holdings where the thesis had broken, or their prospects did not compare favourably with other opportunities. .
• TNY– Thesis broken, with only 22% advertising growth yoy (they reported over 100% growth over the calendar year, but quarterly numbers revealed slowing growth).
• WTC – Short report prompted me to review the business. I quickly realized how little I understood the business, and decided to sell.
• Trimmed Xero.
Positions acquired since September 19, 2019:
Positions I added to include:
• A2 Milk – Great opportunity to buy GARP.
• Pointerra – Nascent industry, with a first mover opportunity ahead of it.
• Livetiles - Enterprise software. I should of been more patient, and awaited demonstration of thesis.
• Afterpay – Added to the global leader / disruptor position.
• Electro Optic System – hi quality business, & well run. I think there is significant unrealized value in its Space / Satellite business. It has years of growth ahead, and is resistant to recessions / market downturns.
• Serko – I think it is a very high quality business, with a great opportunity ahead of it.
• Livetiles, Shrole Group, Selfwealth, and Pointerra are highly speculative investments, and it is possible they may disappear from the portfolio in a short space of time.
Non-US Portfolio percentage = 59%
Non-US Portfolio Return since January 1, 2019 = 64.8%
If you have any feedback, I would really appreciate it.