sarksnz first portfolio review

Portfolio Review 28 Mar 2022.md

My first portfolio review! This will be a different format to most, with less focus on individual companies and more on the themes I look at. Some companies are board companies, others not.

I run a broader portfolio than most here, with roughly 17% in Google and Microsoft for example, as well as reasonable positions in a number of other companies that aren’t part of the current board discussion (eg: NVDA, MELI, SHOP)

As such, my portfolio underperforms Saul et al by a significant margin. I’m not too concerned by this, because most of my challenge is dealing with my emotional responses and learning. I’m sort of retired so no new money into the account. My main concern is not to lose money, and feel like I understand a little more today (about the market and myself) than I did yesterday.

Results yearly

2018 - +30%
2019 - +35%
2020 - +66%
2021 - +18%
2022 YTD: -16%

Themes

My portfolio is more themes-based because that suits my (current) thinking and temperament. The major themes (with current and (watchlist) examples) are:

  1. AI/Hyperscalers - GOOG, NVDA, MSFT, (FB, AMZN)
  2. Ecommerce - MELI, SHOP, (FB, AMZN)
  3. Cybersecurity - CRWD, ZS, S, (OKTA)
  4. Analytics/Big data - DDOG, (ESTC), SNOW, AYX.
  5. Business 2.0 - (ASAN), MNDY, TEAM
  6. Others
  • Consumer - (AAPL), UPST, ROKU
  • A better internet - NET

At the moment, I am 100% invested, and have sold out of my AAPL position to invest in others (bad move to date!).

AI

This is my big “step-change” belief which is longer term and yet to pay off. Most on this board would say “Greg, why don’t you just wait until revenue growth shows that it’s paying off?”. My counter to that would be that MSFT and GOOG are still growing rapidly, with improving margins. AMZN AWS as well, although I sold AMZN to buy MELI as part of the ecommerce theme because I thought the reward would be greater.

My underlying belief with AI is that it will benefit those companies that can centralise their operations, so the AI can operate on data in their own datacenters. Also, the worlds cutting-edge AI talent is pretty centralised to Google, Microsoft, Facebook, maybe Alibaba, and a few others, and those companies are the ones that will retain most of the benefits. Long GOOG, MSFT. Watching FB, AMZN.

Ecommerce

I believe everything that can be ‘ecommerced’ will be, and the things that can’t (clothes? shoes?) will be subject to increasing attempts to ‘ecommercify’ them. Everything will be transacted online, and we’re only a small way to building out this (possible) future. SHOP and MELI will be a big part of that, and I believe Facebook will as well. Long SHOP, MELI. Watching AMZN and FB.

Cybersecurity

My belief is that cyber-attacks are commodities, and will become increasingly commoditised and hence cheap. It will make economic sense to extract $50 out of a small florist for example. The costs of cybersecurity software will be cheap enough to make sure everyone has it. I also expect that this field will become more concentrated through acquisitions. Long CRWD, ZS, S, MSFT. Watching ESTC, PANW.

Analytics/Big data

A must have with software development and who doesn’t develop? Long term holder of ESTC which didn’t pan out as well as DDOG, and sold after the CEO change. Now only in DDOG and SNOW (small position). Recently repurchased a position in Alteryx, which has jetisoned its previous CEO and has new management with a lot to prove - hopefully it makes them super motivated. Funnily enough its one of my best performing positions this year :blush:

Business 2.0

I’m less sure of B2.0, which in my view just means not using email, Excel etc to run your business. Slack (WORK), Asana, Atlassian, Monday. This is a bit different to things like Salesforce, ServiceNow and Workday, but very related. Mainly unsure of the timing and who the winners will be. I was a long-term shareholder in Slack, which was purchased by Salesforce for a reasonable return. I sold out of ASAN recently because of the disparity between the management messaging and their forecasts eg: Dustin said "We’re entering the new year with incredible momentum” and then subsequently they guided sequential +3% which is a few million dollars. Long MNDY, TEAM.

Others

Apple is (still) IMO an under-appreciated company. Their new processors are the best consumer processors on the planet, and it is very unclear if anyone can stop them. My new Macbook Pro has fast charging which charges to 80% in about 30 minutes and it lasts all day. I have been long AAPL for ages, until recently where I sold because I wanted cash to invest in faster growers (to date, a bad call). Will look to add on any weakness which is unlikely because it is unsurpassed IMO as a company.

ROKU is another consumer play, a favourite of Beth Kindig which was the major catalyst for purchasing. It’s an interesting play on the consumer, ad tech, and cable-cutting, and I think is worth a longer-term bet. Not high confidence, and probably first on the chopping block.

UPST has had forests written about it. I’m still holding, because as far as I can see, the premise is still there. FICO sucks, what comes next? All smaller banks et al will struggle immensely to develop their own alternatives, but what option do they have? Just stick with FICO? UPST seems to me like a good longer term bet.

NET is a bit of an odd company. They’re essentially creating an alternative to the large cloud providers (“a better internet”), providing the picks and shovels (eg: website/app performance, analytics, vpn, security, edge compute, etc) that are necessary to have an internet prescence. They’re moving more into security now, which makes them an interesting alternative to ZS, and probably CRWD, and OKTA in the future. They’re priced for a very long runway

Ultimately…

In order to outperform, my stocks must do something the entire market is not expecting. The biggest lever for outperformance is revenue growth. That is, they need to grow revenue faster and/or for longer than the market is expecting.

Thats why investing is so difficult. SNOW might conquer the entire world, or they might just do really, really well. For example, if SNOW/NET etc do really well, the stock price probably won’t do very much. But if they do unexpectedly well… :rocket:

cheers
Greg

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First - congrats on posting your portfolio review. I’m sure you realize it’s a bigger effort than one might think reading them here, and my guess is it forced you think about your investments more than you would have otherwise.

Hope you don’t mind some commentary/dissent/discussion - your format encourages that.

My underlying belief with AI is that it will benefit those companies that can centralise their operations, so the AI can operate on data in their own datacenters. Also, the worlds cutting-edge AI talent is pretty centralised to Google, Microsoft, Facebook, maybe Alibaba, and a few others, and those companies are the ones that will retain most of the benefits. Long GOOG, MSFT. Watching FB, AMZN.

Until Google starts using AI for the search recommendation engine I don’t see AI as having an impact to the company’s results. Similarly, I think AI is a tiny part of MSFT. Facebook is probably using it more, but it won’t save them. Amazon has tried AI without real success in a few instances. I can’t find the link, but I recall they tried using AI in their stock re-ordering process and ended up screwing seasonality up royally, getting like a ton of XMas stuff after XMas was over.

Upstart is betting big on AI, as we all know. Crowdstrike has already struck it pretty big using AI, and SentinalOne is using AI as well. Your NVDA play is reasonable as their chips are often used on both sides of the machine learning process. Salesforce has been buying small AI companies for a while now and they have a product called “Einstein” for things like Recommendation Builder, scorecards, and in-depth navigation insights. But, that doesn’t make the stock a buy for me.

My view is that AI is in its infancy, and so the companies where it has/will shortly have a big impact are few or very small in size. Lemonade is using AI for insurance, and at first seemed to hold real promise, but the company’s execution stumbled badly and hasn’t recovered. Finally, of course, there’s the big play from the company-not-to-be-named run by Elon Musk, who is talking about “Optimus” - AI robots, and claims it will be the main driver of profits in the latter part of this decade. That’s a moon-shot, or perhaps I should say “Mars-shot.”

BTW, I’d place DataDog in the “Hyperscalers” bucket. It’s not business data analytics, and it’s not Big Data at all. It’s Cloud Monitoring as a Service, which helps companies keep their web sites and your web applications up and running with performance (and even potentially reducing costs). So, the more you have running in the cloud, the more you need something like DataDog. I don’t think the true hyperscalers (AWS, Google Cloud Platform, Microsoft Azure) are a big growth business anymore - at least as we define “big growth” here.

Everything will be transacted online, and we’re only a small way to building out this (possible) future. SHOP and MELI will be a big part of that, and I believe Facebook will as well. Long SHOP, MELI. Watching AMZN and FB.

I don’t agree with your “small way to building out” eCommerce. After all, Amazon is one of the world’s largest companies and its recent growth comes not from eCommerce but from Cloud Services, which has already gone through its “S” curve growth phase. SHOP and MELI both did well finding holes in Amazon to exploit. I don’t really know what the future for them is, though. Both SHOP and MELI are roller coaster rides as investors sell them out when Amazon burps.

I think most of us agree with your assessment on Cybersecurity and many are invested accordingly. The danger here is that it’s an ever-changing field with new technologies coming into play all the time. Yesterday’s winners (Symantec, Checkpoint, Palo Alto, etc.) are today’s losers, and at some point it’s likely today’s winners will turn into tomorrow’s losers. Covering the field is one way to play this, but on this board we try to do better. While some here like the up and coming SentinelOne, Crowdstrike and ZS might get a bigger boost from US government adoption this year.

The Analytics/Big Data bucket is quite large and contains a variety of companies. The problem with Alteryx was that their product was desktop only and needed a complete re-architecture and rewrite to be cloud native. I see they introduced a cloud product about a month ago, but I haven’t followed the company in a long time. I think the world may have moved on from easy/no-code analytics on a small (departmental) scale to bigger, enterprise-level analytics. Which is why I agree with your investment in SNOW. Other companies to watch here are Databricks (not yet public) and MongoDB. I was smart/lucky enough to buy back into MDB (smallish position) when the reaction to SNOW’s ER took down MDB as well for no good reason, but it’s bounced back like 1.6X in a month and I’m hesitant to add to my position at these levels. If you believe transactional NoSQL database use will grow, then MDB is the obvious place to put your money, though.

The “Business 2.0” bucket is interesting in that it’s small players going after non-IT-central budgets or adoption by smaller companies. The role of IT in enterprises has been up and down for the past half century. The first disruption was the IBM PC, where people at big companies could now buy a computer without going through the hassle/paperwork/time-delay of going through IT for a terminal connected to a server in the data room. No more batch jobs (I’m showing my age here), or waiting for IT to expand or fix things. Spend several thousands and buy some software and your were off and running with spreadsheets and such right on your desktop. Unfortunately, Microsoft screwed the pooch by having a terrible OS (DOS came from QDOS which actually stood for “Quick & Dirty Operating System”) and update processes, and so IT departments wrestled those PCs back into the fold since end users often couldn’t keep them running well/safely on their own. Skipping ahead, Cloud Services enabled department/group level running of applications on a large scale without getting IT to install servers. And today, I see companies like Monday, Asana, Slack, etc. as easy purchases by groups/departments without going to the big central and slow IT department. Heck, even Zoom got its pre-covid boost from making video conferencing easy and cheap and not going through your company’s IT department (until some companies issued prohibitions on it).

So, will companies like Monday grow into something bigger? Will enterprise offering up their game to that groups and departments don’t have to go out on their own? Or, will adoption on this “retail” scale and level be adopted widely? I don’t know. At this point, I’d just follow the business numbers and bail when adoption slows.

Apple is (still) IMO an under-appreciated company.
No, I think Apple’s too big to see big growth. Its service/subscription business needs to really take off, and while that is growing, it’s not growing quickly enough to have a big impact (compared to what AWS did for Amazon, for instance). Heck, Apple even pays a dividend since it doesn’t know what to do with the money it makes. Apple either doesn’t have new ideas (what’s new since Jobs?), or can’t deliver on them (Apple Car). Yeah, Jobs himself did the Newton thing and it was a long time before they actually dialed it in with the iPhone, so maybe there’s hope, but when ex-Tesla Dave Field leaves Apple for Ford, my hope goes away.

ROKU is another consumer play, a favourite of Beth Kindig which was the major catalyst for purchasing. It’s an interesting play on the consumer, ad tech, and cable-cutting, and I think is worth a longer-term bet. Not high confidence, and probably first on the chopping block.

Roku doesn’t make money on their hardware, so their profits are from ads, those few people who sign up for streaming services via Roku instead of their phone/laptop, and whatever TVs are using them for their OS. Like Zoom, they were in the right place to ride the Covid wave, but also like Zoom the market got saturated real quick. With Amazon and Hulu already having free with ads streaming and rumors of Netflix going that way, how can Roku, without any good original content, grow? I’ve had a Roku for many years. When Roku decided to obsolete my box, they sent me a 50% off coupon and so I bought a new unit for pretty cheap. I’m now renting a vacation house and it has AppleTV, which is a better experience. When I upgrade my TV to 4K I’ll go the Apple route rather than a new 4K Roku. There was an argument that Roku could capture a huge portion of the low-end of the market that couldn’t or didn’t want to subscribe to a half-dozen monthly subscription streaming services and so would watch ads like OTA TV, but that’s not happening in the US/Canada and Roku isn’t doing a good job expanding internationally.

In order to outperform, my stocks must do something the entire market is not expecting.

Sure, I’ve said in the past that Investing success is predicting the future better than Mr. Market. This is true no matter if you’re investing for value or growth. But, my non-scientific observation over the past several+ years of investing is that Mr. Market never fully appreciates how fast truly fast growing companies will grow. TMF has a paid service called Rule Breakers, and one of the characteristics of a Rule Breaking company is that it appears to be overvalued by almost any metric one can find.

The so-called “Dean of Valuation,” Aswath Damodaran, has gotten valuations of fast growing and/or disruptive companies like Amazon and Tesla and Netflix wrong. His blog is a good read because he’s honest about his mistakes and is looking for ways to improve. But, at the end of the day, I believe he’ll continue to fail because disruptive, high-growth companies don’t behave as any formula, even DCF, predict.

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There are some misconceptions here that I think are worth clarifying.

Until Google starts using AI for the search recommendation engine I don’t see AI as having an impact to the company’s results. Similarly, I think AI is a tiny part of MSFT… Upstart is betting big on AI, as we all know. Crowdstrike has already struck it pretty big using AI, and SentinalOne is using AI as well…

“AI” is used as a buzzword these days, but typically it refers to systems that consume data and generate insights or actions through complex logic that has been learned rather than designed. “Machine learning” is usually an appropriate synonym, and it is in this sense that all of the companies you mentioned make extensive use of AI. Google’s set of search features are nothing if not AI, and Microsoft is a leading institution for AI research in addition to the multi-billion dollar AI Platform business on which other companies build their systems. Google is similarly positioned and AWS also delivers such a platform. The hyperscalers are not creating everyone’s AI use cases, but being the platforms on which they are built is lucrative.

Upstart, Lemonade, Crowdstrike, Sentinel One – these are all building the same kinds of machine learning as numerous other companies in addition to what the hyperscalers themselves deliver. That’s not a knock; they’re doing a great job and it shows in their financial results! (Except for Lemonade.) Their competitive advantages may lie in their datasets or their head start, but just doing “AI” is not unique. It’s a big contrast between, say, UPST and FICO; not so much between CRWD and MSFT security solutions.

I don’t think the true hyperscalers (AWS, Google Cloud Platform, Microsoft Azure) are a big growth business anymore - at least as we define “big growth” here.

It’s true that our threshold for “big growth” seems to keep rising, but do note that GCP continues to take market share in the cloud, and Azure delivered 50% YoY growth in the last quarter (which was an acceleration). These are still very high-growth businesses, at least the hyperscaler portion of them.

Softie
Long MSFT, UPST

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Thanks for the comments Smorg. I definitely don’t mind dissent/discussion and appreciate the time taken to do it!

re: AI, I agree AI is in it’s infancy, and very few companies are generating any sort of value with it, Google being the exception.

My bet is that AI will be a step-change the likes of which are hard to predict, and that most of the benefits of that step-change will accumulate to the Googles, Microsofts of the world. Who else has the compute power and budgets to hire, build and train the systems?

So yes, its a long-term (5 to 10+ years) bet. Google is using AI extensively already (eg: search, translate, image search, youtube etc) and my belief is that those investments are translating to the top line, but not in a very transparent way. Eg, through delivering better results, faster, and increasing the size of the Google moat.

Microsoft are taking a bit of a different tack (I think!) very much focussed on datacenters and cloud.

Will it pay off? I think so. Every step change (internet, cloud, motorcars…) seems to redefine how big companies can get and how fast they can grow.

re: Ecommerce, approximately 14% of total retail is ecommerce. My thesis is that will tend to 100% over time, perhaps through the metaverse, which is why I consider we’re a “small way to building out eCommerce”.

re: AAPL. A few years ago, Apple passed the $1T mark which is “big”. But just being “big” hasn’t stopped them growing to almost $3T now. I think their new processors are significantly superior to almost every other laptop processor, and in a way that can’t easily be replicated. I believe they could dominate the laptop market, growing from maybe 8% now to… 50%+. Once you have a macbook, its an easy in to the rest of the ecosystem. They also have the supply chain expertise to actually produce new products (glasses? metaversy things? whatever my 1 year old granddaughter will want for her 15th birthday) in ways that very few other companies could.

I’ll stop here, but thanks for the discussion!

cheers
Greg

8 Likes

Google’s set of search features are nothing if not AI…

Thanks for the nudge. Apparently my information was out of date. This page lists 15 projects within Google using AI: https://research.aimultiple.com/ai-is-already-at-the-heart-o…

Google’s search engine was always driven by algorithms that automatically generate a response to each query. But these algorithms amounted to a set of definite rules. Google engineers could readily change and refine these rules. And unlike neural nets, these algorithms didn’t learn on their own. But now, Google has incorporated deep learning into its search engine. And with its head of AI taking over search, the company seems to believe this is the way forward.

Amazon, Google, Microsoft: These are still very high-growth businesses, at least the hyperscaler portion of them.

From https://news.microsoft.com/2022/01/25/microsoft-cloud-streng… I see that Microsoft Cloud grew 32% YoY (MSFT doesn’t break out Azure separately according to https://www.cnbc.com/2022/01/25/microsoft-msft-earnings-q2-2… ). But, overall revenue YoY growth was only 20%, down from 22% the quarter before.

Now, 20% is pretty fine for a company as big as MSFT, and for those people content with trading off high growth for stability, an investment there can make sense. With LinkedIn and now Activision Blizzard, Microsoft acknowledges it needs acquisitions to grow. But it’s not for this board.

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The so-called “Dean of Valuation,” Aswath Damodaran, has gotten valuations of fast growing and/or disruptive companies like Amazon and Tesla and Netflix wrong

To be more accurate and fair, Aswath has owned Amazon several times and Tesla as well as recently as 2020. His Feb 2022 post specifically showed that Amazon was undervalued at $3068. Obviously we all should have bought Amazon 20 years ago and never sold [or 15 or 10…]

In Aug/Sept 2020 he said NFLX was overvalued at $445. It is now $363. Seems like he nailed that valuation. And he’s far from the only one worried about their ever-higher scaling content costs.

He also did very well owning FB, AAPL, and MSFT over the years, all disruptive firms.

Not every top valuation expert/investor is going to get every analysis right of every company: Saul got in MNDY at 360, it’s now $148. AMPL he got in at $54 and took a big loss on, now $18 and he’s sold out previously. S from $47 to $35. SNOW from $338 to $211. Etc.

Nobody’s perfect.

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“My view is that AI is in its infancy, and so the companies where it has/will shortly have a big impact are few or very small in size.”

Just a note on this…
Last week I took my daughter to get consultations on braces and all orthodontists offered Invisalign. One doctor mentioned how “smart” Invisalign is getting for her particular problem. Upon further questioning, I learned Invisalign uses AI to learn what works and what doesn’t on problematic teeth shifting. Doctors upload teeth scans and get an automatic treatment plan (doctors do have discretion to change this.)

Orthodontics is a small market compared to Financial Lending (UPST) so my example supports Smorgasbord’s statement, but I do find it fascinating to encounter AI in my simple, everyday life. If AI is taking over orthodontics, what else can it do?

Lurking on this board this November. Perhaps I am to blame for our bad luck since then. Yikes. Thank you to Saul and other board members. The knowledge I’ve gained here and continue soak up has the potential to change my legacy.

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