I feel we didn’t get a lot of discussions about these three companies recently, so below is a quick summary of my current thinking about Snowflake, Datadog and Cloudflare, which combined make up almost 50% of my portfolio. Detailed thoughts and discussion of their numbers can be found, among others, in my last monthly recap, here: Ben’s Portfolio update end of August 2023
Given the current economy and generally speaking, I view consumption based businesses as currently having an edge over subscription based business. That’s because we have been going through a deep decline in revenue growth rates in the last 12+ months and I believe that when they turn, revenue growth rates will turn around quicker in consumption based businesses. So, if a turn-around is imminent - and I believe the data we saw in Q2 shows strong hints of that - consumption based businesses will re-accelerate faster than subscription based businesses. Combine that with the prospect of AI revenues trickling through from GPU sales (Nvidia) to software & compute consumption (e.g. Snowflake) in the near future. This sets up a nice narrative for Snowflake’s near-term outlook, which builds on-top of the original long-lasting growth story of Snowflake.
Coming to the numbers, I think the short term guidance suggests that Snowflake will stay close to 8% QoQ revenue growth in the next two quarters which still compounds to 36% YoY growth (note: I had a mistake in my guide number for Q3 in my last recap - goes to show you should always do you own DD!). My main take-away from the secondary metrics is that, surprise!, RPO growth accelerated again after it saw a largely criticized drop in Q1 - not the first time this happened in SNOWs history and it’ll probably not be the last time. So that, and their great progress on the data-sharing front (fly-wheel!), as well as their continued, although wobbly, progress on gaining new customers, nicely supports my hypothesis of future growth re-acceleration or at least growth durability. Combine that with their outstanding profitability developments and we have what I believe is a great investment - still what I feel under-appreciated by the market and even by many growth investors, with great narrative outlook and healthy secondary metrics supporting that narrative.
Datadog’s narrative feels like it is in a similar situation like Snowflake’s. Their last earnings report, largely misunderstood by the market Datadog: No, Its High Growth Era Isn't Over, It's Just Starting (NASDAQ:DDOG) | Seeking Alpha, didn’t look very impressive at first sight. But looking a level deeper reveals some great things happening with this company. The short story in my mind is that revenue growth and net new sequential revenue growth already showed a big turn-around in comparison to Q1 and while still hampered by seasonal headwinds in Q3, I believe they are bound to continue revenue re-acceleration in Q4. What makes me believe so? We need not look further than RPO and billings, which are great leading indicators for revenue growth: Both jumped up by a lot in Q2. So while we can scratch our heads, trying to interpret their current NRR and customer growth declines, the latter of which, as Bert Hochfeld says in above referenced article, might just be due to a focus on their largest customers, RPO and billings tell a clear story. And Datadog’s multi product expansion tells us as much: Their customers love their products and continue to get more of them. So again, just with Snowflake, we have what I feel is currently an under-appreciated company by the market with great mid-term narrative outlook and secondary metrics supporting that.
Cloudflare’s revenue guidance for Q3 and implied guidance for Q4 suggest revenue growth will accelerate QoQ not only from Q2 to Q3, but also from Q3 to Q4. What is there not to like? Especially if combined with large customer growth AND RPO growth re-accelerating in Q2, after it had dropped sequentially in every of their previous 3 quarters. All that while they continue to expand their profitability margins. Another great setup in my mind.