Portfolio Review 30 May 2022.md
Late because I’m struggling to find time and bandwidth at the moment so apologies for that. It was a month where I succumbed to fear despite my best efforts.
YTD
I’m down -39% as at 31st May. Just when things looked bad, they got even worse. That puts me back at a 13% CAGR since 1 Jan 2019.
In retrospect, my expectation in November was “‘it’ was already priced in and will be temporary” was very naive. I was expecting Quantitative Tightening, as was everyone else, and that probably was priced in, but unexpected inflation is… well… unexpected, which led to the spectre of unexpected rate rises.
Inflation
Inflation, or in particular, unexpected inflation, can be devastating as we’ve seen. The past few days have seen a bit of a bounce, but what is the longer term story here?
Is inflation temporary? I don’t know. I do think however, that if inflation is not temporary, and it’s volatile, we’ll have a painful job getting it under control. I’m just unsure of what to do, and a big part of my thinking at this point is trying to come up with my 2022 to 2023 story.
Aswath Damodaran recently stated that "Ignoring macro worked really well in the 20th Century, because the US markets quickly ‘reverted to the mean’, ie, if macro got out of sync, it quickly came back to ‘normal’.
His question is: Do you believe the 21st century economy is mean-reverting going forward?
And I don’t know. I’m tending to think about raising cash, and waiting for clearer trends. The good thing about big drops is that stocks don’t tend to jump back as quickly as they drop, so I have plenty of time to ponder.
It may be that stocks will bounce back quickly. Or we might have an extended recessionary period. What I do know is we need to have some sort of expectation, and position our portfolios accordingly.
Tech stocks
Inflation impacts everyone (assuming it’s not temporary). I don’t know what macro will do, but SaaS companies on the face of it seem to be in a pretty good position. In particular,
- Gross margins are very high, so low fixed costs to deliver the product and receive revenue.
- Capital expenditure is low and/or can be delayed.
- Leasing commitments aren’t super high.
- Most are very well funded with lots of cash, and at most low-cost debt.
- Subscriptions tend to be sticky, aka mission-critical.
- Tech, at least the tech names commonly mentioned here, I would expect to be deflationary for their customers, ie, doing more with less people hours. Thats the digital transformation everyone talks about.
On the negative side, they spend highly on expensive labour which you would expect to go up in times of inflation, and customers may cut back as their businesses come under pressure. SNOW I imagine would be easy to cut back on, CRWD not so much. And lower stock prices probably have influence on stock-based compensation, which may be higher than previously anticipated.
Learnings to share
Fear and greed
I hadn’t realised quite how subtle those two emotions can be. For example, after behaving (reasonably) well during this down period, I sold MNDY after a big drop, locking in the loss. I haven’t yet redeployed the cash, and MNDY subsequently recovered somewhat.
On reflection, this was a FEAR sale, because I was tired of big drops in my portfolio. But at the time, I rationalised it with… I’m not really interested in the space… I have business doubts about MNDY… the position is too big for conviction… etc.
It was surprising for me to hit this limit, and how I had to act!.
Anchoring
My biggest impediment to returns has been anchoring to previous prices, a la:
- I’ll wait to get back to even.
- I’ll buy back when it gets back to the low I sold it.
- It’s hitting new highs, I’ll wait for a pull back to add.
I’m trying more to think of the portfolio on a daily basis, forgetting all-time-highs, and trying to think of what’s the best place for investing today.
Portfolio discussion
In size order:
Current stocks
| | portfolio% |
|:------|-------------:|
| CRWD | 12% |
| GOOGL | 11% |
| MSFT | 8% |
| DDOG | 7% |
| MELI | 6% |
| ZS | 6% |
| NVDA | 4% |
| NET | 4% |
| ROKU | 3% |
| S | 2% |
| SKX | 2% |
| AYX | 2% |
| SNOW | 2% |
| SHOP | 1% |
| TEAM | 1% |
UPST, MNDY
I had two sales during the month, both somewhat panicked. Upstart which I had held for longer than others here had a misstep with respect to carrying loans on their balance sheet, and rightly in my opinion got punished for it. Keeping loans on their balance sheet was never part of the thesis, so…
I sold immediately at $47.50, and they dropped to a low of $25. Subsequently, they recovered to around $50 now after they reportedly promised not to do so many loans on their balance sheet. I’m still watching Upstart closely.
I also (panic - call a spade a spade) sold MNDY. I’d previously sold out of ASAN, and didn’t like the space. To be honest, I was looking for excuses to sell MNDY, the space doesn’t interest me, so that was part of the rationlising that went on after I sold. I doubt I’ll get back into MNDY for those reasons, but it was not my finest moment.
GOOGL, MSFT…
Strong quarters for both. Google annoyingly is still a (mostly) one-hit advertising wonder, but with some strong offerings in GCP, YouTube, but also moving into cybersecurity, particularly with the Mandiant acquisition.
Microsoft is probably the strongest company in existence. Wide portfolio, mission-critical software, Azure… whats not to like? And again, strong quarter here. The biggest issue for MSFT is that it has held up very strongly in this downturn.
The thing about both Google and Microsoft which I find important to remember is that they’re still growing revenue strongly (Google: +26% CC, Microsoft: +22%) at massive (profitable) scale. Sure, it’s not hyper-growth as defined here, but it’s a useful bar to keep in mind.
Both of these are AI/future-of-compute plays, and imo good places to park cash.
ZS
Had a good quarter, solid strength except in billings. Good growth in >$1m accounts. Q2/3 seems to be seasonally weak for billings so I think it’s acceptable to wait for Q4. Billings Q4 is guided to about $470m, which is 41% yoy.
<https://boards.fool.com/zscaler-a-disappointing-report-35121…
NET
NET last month was “high on my list of stocks to add to”. I’m less bullish now, but I have yet to update my thinking, and don’t want to delay this post more.
NVDA
Nvidia released earnings during the month, which were solid in my view. Strong gaming, RTX 30XX series “best gaming product cycle ever”. Impact of Ukraine and China. Some unknown negative impact from reduced Crypto (Afaik, Bitcoin mining has switched to ASICs (application specific integrated circuits), while Ethereum and others still work on GPUs).
All that equaled an expected revenue drop for the next quarter from gaming. Pro-vis is remarkably strong, automotive is not really a thing (and never has been).
Most importantly, Data Center revenue is in hyper-growth and has surpassed gaming at $3.8B. What the?!? That kind of means Nvidia isn’t a gaming company anymore. Data Center is growing 83% yoy. That’s SNOW growth at nearly 10x the scale.
NVDA is one of the big players in AI, and the success of Transformers in particular bodes well for their continued usage as companies explore and exploit these new compute-hungry technologies. Although Inference (the day-to-day use of trained models) is much less compute-intensive than training the models, inference scales with the number of users. So the demand for Nvidias chips in datacenters seems likely to continue for a long time.
As mentioned previously, their stellar gross margins (the Nvidia tax) will make it attractive for hyperscalers and others to produce their own chips.
ROKU
I haven’t studied ROKU much, an older Beth Kindig rec, so did a bit more of a personal deep dive in the last few days. My conclusion: Holy smoke, this is a challenging one. Massive players, massive trends, content spending, supply chains, …
ROKU is a future-of-advertising play, and definitely not a Saul stock. Still pondering ROKU, and more particularly, do I want to be part of such a (for me) complicated (and slightly terrifying) story?
S
S are growing strongly still, although not as well as CRWD at the comparative point in time (eg: S Q1 2023 ? CRWD Q1 2020). I wonder why that is, given the market should be larger than it was in 2020?
They also have an excellent return on their Sales and Marketing spend paying back last quarter with new ARR revenue in about a year, which is one of the best of the companies I track. Gross margins are improving but GAAP operating margins are horrendous, and non-GAAP are less horrendous and tending to improve.
However, back in the halcyon days of 2019, CRWD had an EV ± $16B, vs S right now with an EV of around $6B. We were paying a lot more for CRWD back then.
SentinelOne spent roughly $617m in cash and shares to acquire Attivo which is a big chunk of its market cap. Big acquistions can be problematic, and it suggests to me that S needed Attivo to compete.
All up, theres a bunch of orange tending red flags for me. My suspicion is that the market is bigger now, but it’s also demanding a richer feature set and S will have to keep spending to build out their offering to compete with the CRWD’s, PANW, and FTNTs of the world.
A robust discussion here:
<https://boards.fool.com/my-response-on-zscaler-and-sentinelo…
SNOW
SNOW released earnings this month, and there’s been a lot of discussion about what they meant, good, bad, somewhat in the middle. I ended in with the “somewhat in the middle” camp. Their free cash flow increased significantly, and they have a heap of short-term assets on the books, so SNOW is in no danger of running out of cash.
On the other hand, growth slowed. And they added $34m in revenue compared to the previous quarter, despite spending $200m on sales and marketing in the previous quarter. Now sure, their customers take a while to ramp up spending, but customer acquisitions were relatively low.
Further, SNOW is somewhat discretionary for new customers, that is, you’re solving your datawarehouse problem in some other way. So customers may dry up, spend less etc., if we hit a recession.
And on the other other hand, SNOW is meant to be cheaper, better, solution so that might accelerate growth 
Enthusiastic discussions:
<https://boards.fool.com/snowflake-my-thoughts-35119038.aspx?..
my post on SNOW expectations
<https://boards.fool.com/snow-what-are-we-expecting-35119242…
Watchlist
ESTC and MDB
Still following ESTC after selling previously after the CEO transitioned out. They’re in the same space as DDOG, but a fraction of DDOGs size. Seemingly a long way ahead in the security space, given DDOG only just started here, ESTC has been a perennial underperformer, but with plenty of opportunity for trades.
They recently reported a solid quarter again with subscriptions growing 40% yoy. An interesting comparision to MDB, who have recently accelerated their growth. I’ve always been puzzled at the MDB/ESTC divide, because MDB was always valued a lot higher than ESTC, despite very similar results. Seems the market knew what they were talking about, several years in advance.
Considering
NET, SNOW, ESTC, PANW, FTNT, GLAB, PSTG, Inflation, Hedging. Not in any hurry to act.