Saul’s Portfolio at the end of Feb 2023 — Part 2
COMPANY REVIEWS
Please note that when I discuss company results, I almost always use the adjusted values that the companies give.
I sometimes mention what I might do about each position, but DON’T just follow me. Make your own decisions. I may change my mind tomorrow and probably not mention it for a month. And what I invest in may not be right for you. And besides, I don’t understand anything about the tech.
Bill
They announced results of their Dec Q on Feb 2nd. The numbers have been discussed extensively on the board so I won’t repeat them, but I will give you my impressions and thoughts. Here they are:
The results hit me, like everyone else, as a shock. Revenue growth fell from 94% in the Sept Q, and from 190% a year ago, to 66% this quarter. That’s a SHOCK! They say that they are seeing macro effects which make trying to find lots of new customers a waste of money, so they have decided to down-focus on customer growth, and hiring new sales people, and focus on profitability, cash flow, and spending on improving their offering to their clients. Whether that’s the best thing to do, I don’t know, but I assume they know better than me. However I am impressed that they seem to have enough control over their business to have swung it in one quarter with wild increases in operating profit, net profit, and FCF, but the overall tone was one of “We can’t grow much in this macro so we are hunkering down”. Their guidance was for 48% revenue growth at the midpoint next quarter.
Market Reaction – Bill sold off about 27% the next day. The bounce back since has been minimal, and they broke through and went down even further on Friday.
My Reaction - This was not a disaster but it changes the picture greatly. They could still have a large bounce back when macro changes. Divvy is still growing very fast. They are turning out profits and cash flow. But the company is hunkering down for now, and I decided I’d be more comfortable with a third of the huge position that I had before earnings, and I trimmed accordingly. I have no current plans to add or to trim further at the present moment but I will modify my position according to what I see and feel.
Perspective - At the market peak in November 2021 (as of the Sept 2021 quarter), Bill had $308 million in trailing revenue. Now, they have $857 million in trailing revenue (or 2.8 times as much revenue, almost a triple).
On the other hand, the stock price at the high was $257, and it is now $86, or 33% of the high price.
In simplistic terms, you are getting 8.4 times as much revenue per dollar of stock price now as you would have gotten then. Even accounting for some dilution over the past year, you are getting a heck of a lot more revenue now.
They also lost 32 cents per share in that quarter (EPS), and this quarter they made 42 cents per share, and have improved FCF similarly.
That gives you an idea why, although I cut my position by two-thirds, I haven’t sold out.
Cloudflare
Cloudflare announced December quarter results on Nov 9th. The numbers have been discussed extensively on the board so I won’t repeat them, but I will give you my impressions and thoughts. Here they are:
My quick summary: This company had been delivering revenue growth in the high 40% to mid 50% range for many quarters sequentially. In addition they innovate and come out with new products and improvements at a pace that neither I, nor anyone else, has ever seen before. Quarterly revenue growth this quarter slipped to 42%, but they finally showed that they can make a profit and collect FCF, and management was incredibly positive in their presentation. For example(all quotes may be paraphrased):
“We expect to be free cash flow positive in 2023, and in the years after that.”
“We still see a clear path to NRR over 130% … and we won’t be satisfied until we get there.”
“In 2022, we had over 400,000 people apply for about 1,300 positions. That has allowed us to continue to hire incredible talent while remaining disciplined in overall compensation”.
“As our products become more complicated and we are selling to larger and larger customers, it’s increasingly clear that we need to step up our game in S&M…”
“Marc Boroditsky joined us last quarter to lead our sales organization. Last week, he briefed us on his first 100 days. My initial reaction, if I’m honest, was embarrassment over some of the basic things we should have been doing better. But my second reaction was excitement, as there are so many opportunities for us to improve.”
“I’m aware that these efforts can take time. That’s why we’re not relying on any improvement in S&M efficiency, or any rebound in the economy, as we formulate our guidance.”
I should point out that they had record operating income, operating cash flow, and free cash flow.
Market Response – Cloudflare initially rose about 10% after announcing results, but have settled back with the market and are now up only 2% since announcing results, BUT, as you remember, they are up 31% ytd, the most of any of my companies…
My Reaction – Management came to the realization that they have over-focussed on R&D without enough focus on actually marketing and selling all those wonderful new products, and they have started to correct that oversight. That sounds extremely positive to me. They haven’t included any improvement from the new S&M, or from macro improvement, to their guidance, so I would guess they will beat their annual guidance considerably. I added to my position, and Cloudflare is back up to 16% and in 3rd place in my portfolio.
Perspective – Cloudflare’s November 2021 high share price was around $221, about 3.7 times the current price of $59.20, while current trailing revenue is about 1.49 times trailing revenue back then, so you are getting about 5.5 times as much revenue per dollar of stock price now as you were getting then, and the company now is profitable and cash flow positive, as well.
Datadog
They announced Sept quarter results before the market on Thurs Feb 16th. The numbers have been discussed extensively on the board so I won’t repeat them, but I will give you my impressions and thoughts. Here they are:
Datadog is truly dominant in its field, but their revenue is usage based and they may struggle for a number of quarters, as their customers continue to apply “optimization” to their usage. Longer term they will probably do just fine, with easy comparisons to this year. Revenue growth this quarter fell to 44% from 84% a year ago, and from 61% sequentially. That’s a massive slowdown.
They are moving into security in a big way and succesfully, In October, at their DASH conference, they announced 30 or so new products and new features, looking like another Cloudflare for innovation. Datadog is shifting further left, giving developers observability and security earlier in their product development.
Market reaction – The stock price fell 10% in the two days after results were announced, but these were down days for most of our companies so it’s hard to judge.
My reaction – I had gradually trimmed for about 5 weeks before earnings, and trimmed again in the premarket after earnings were announced. Datadog is now my smallest position of my big five at about 12%, but still a very respectable position.
Perspective – Datadog’s November 2021 high share price was up around $200, about 2.6 times the current price of $76.70, while current trailing revenue of $1,680 million is about 1.9 times trailing revenue of $881 million back then, so you are getting about about 4.9 times as much revenue per dollar of stock price now as you would have gotten then, and they are now profitable and very cash flow positive, as well.
Monday
Monday reported results of their December quarter on Feb 13, and they were great. The numbers have been discussed extensively on the board so I won’t repeat them, but I will give you my impressions and thoughts. Here they are:
I’ve been adding small amounts for the last couple of months in spite of my annoyance about all the offices they were opening, etc. but because the business was doing well, the stock price was doing well, and because of their new products, like Monday Sales CRM, that they were selling to larger enterprises, and weren’t even yet selling yet to exisiting customers. This quarter they made it clear that I had been correct in adding, as revenue was up 57%, gross margin was 90%, strong demand for their products, etc.
Here’s a couple of example of their enthusiasm:
“Customers tell us they love Monday sales CRM as it’s more customizable and easier to use than any traditional CRM tools. As we begin to slowly roll out monday CRM to our existing customers, we remain focused on adding more powerful features and functionality to make it the best CRM in the industry.”
Sales CRM total accounts
1st Q - 187 + 187
2nd Q - 532 + 345
3rd Q - 1366 + 834
4th Q - 2458 +1092
S&M was 54% of revenue, down from 79%. We had a lower S&M spend due to the fact that it cost us less to acquire customers. It can be because of some of the the competitors have pulled back. And we believe this is an opportunity for us actually to take market share and to grab land. We see that we can get the same ad placements for a lot lower cost. So that’s essentially what we mean when we say less competition. We are able to be in first place while paying way less. And we get a lot more customers in because of that. Also, this year, we’re going to expand our marketing channels, a more B2B enterprise focused marketing.
Market reaction - They had closed the Friday before at $131. They then announced on Monday morning, and by Tues they closed at $164, and on Weds at $170. They are now about $155, up 18% since announcing results.
My reaction – What an entirely different story than all the caution we were hearing everywhere else! They see opportunity and are going for it full speed. I kept adding and by now Monday is in 2nd place in my portfolio at 18.4%.
Perspective – Monday’s current share price of $154.70 is about 34%, of the November 2021 high share price of about $450.
The current trailing revenue of $519 million is about twice the trailing revenue of $263 million back then.
That means that you are getting 5.75 times, almost six times, the amount of revenue per dollar of stock price that you were getting back then.
And they are now profitable and very cash flow positive, as well.
And just by the way, on Friday, Goldman Sachs just named Monday as one of their seven top choices for 2023 for bullish clients (Crowdstrike was another of the seven).
Sentinel.
Waiting for results. In December I gave a very long discussion of Sentinel, which I won’t repeat. Here’s a link to that discussion, which I feel is very worth reading if you have interest, pro or con, in Sentinel: Saul's portfolio at the end of 2022 - part 3
Snowflake .
Waiting for results. A little apprehensive because they are also a usage based company, but the ROI their customers experience may keep them out of too much optimization.
Transmedics
They reported December quarter and annual results this Wednesday after the close.
The numbers – Revenue for the quarter was up 225% (remember that it’s small numbers here). Gross Margin was 66%, down a little due to so much demand that they had to use charter airplanes at times to fulfill. While revenue more than tripled, operating expenses were up only 50%, leading to net income margin improving from minus 130% a year ago to minus 21% this quarter. Guidance for next year was revenue up 51% or so [Profound sandbagging: ie. If everything goes wrong, this is what we expect. Look, if they flatlined at this quarter’s revenue for the next 4 quarters, with no growth at all, 2023 would be up 34.3% over 2022! And they guided for up 51%!]
Market reaction – The stock price rose 20.55% the next day.
My reaction – I have added almost every week for the last three months or so. I added a little more after results were announced. It’s now an 8.6% position in 6th place
FINISHING UP
Let me remind you first, that I have NO IDEA what our stocks will do next month. I’m terrible on predictions. But I know that the businesses of our companies will do just fine for the most part.
I feel that my portfolio is made up of a bunch of great companies. But that’s just my opinion, and I can’t say often enough that I’m not a techie and I don’t really understand what most of them actually do. I just know what great results look like. I figure that if their customers clearly like them and keep buying their products in hugely increasing amounts, they must have something going for them and, as I’ve often said, I follow the money, the results. And I listen to smart people about the prospects of these companies.
When I take a regular position in a stock, it’s always with the idea of holding it indefinitely, or as long as circumstances seem appropriate, and never with a price goal or with the idea of trying to make a few points and selling. I do, of course, eventually exit. Sometimes it’s after months, and sometimes after years, but I’m talking about what my intention is when I buy.
I do sometimes take a tiny position in a company to put it on my radar and get me to learn more about it. I’m not trying to trade it and make money on it, I’m just trying to decide if I want to keep it long term. If I do try out a stock in a small position and later decide that it’s not what I want, I sell it without hesitation, and I really don’t care whether I gain a dollar or lose one. I just sell out to put the money somewhere better. If I decide to keep it, I add to my position and build it into a regular position.
You should never try to just follow what I’m doing without making up your own mind about a stock . First of all, you may have a completely different financial picture than I have. Different age, different income, different assets, different debts, different expenses, different financial and family responsibilities, etc.
Besides, in these monthly summaries I’m giving you a static picture of where I am currently, but I may change my mind about a position during the month. In fact, I not infrequently do, and I make changes in the position. I usually don’t announce these changes until the end of the month, and if I’m busy or have some personal emergency I might not announce them even then. And besides, I sometimes make mistakes, even big ones! Don’t just follow me blindly! I’m an old guy and won’t be around forever. The key is to learn how to do this for yourself.
THE KNOWLEDGEBASE
Since I began in 1989, my entire portfolio has grown enormously. If you are new to the board and want to find out how I did it, and how you can try to do it yourself, I’d suggest you read the Knowledgebase , which is a compilation of my “words of wisdom”, and definitely worth reading (a couple of times) if you haven’t yet. It’s on the panel to your right.
I hope this has been helpful.
Saul