April was fairly quiet in the grand scheme of things. There wasn’t much news from many of my companies and my only earnings reports (SHOP, TWLO, ZEN) weren’t until the very last day of the month. Being that I’m mostly following the money when making decisions, there’s not much to do on many days besides skim the headlines and wait on earnings. As we enter what should be a busy May, I’m finding that focusing on fundamentals – and more specifically having an idea of the type of fundamental performance I’m looking for – makes it much easier to mentally and emotionally navigate the normal gyrations of the market. I’m also finding the process over results philosophy is much easier to execute when your process has a method and conviction behind it. In the end April turned out to be a nice break between the time I spent shoring up my allocations in March and the start of the current earnings season.
April Portfolio and Results:
%Port %Port 30-Apr 31-Mar 1st Buy Return TWLO 13.7% 13.3% 08/27/18 57.3% AYX 12.3% 11.1% 08/27/18 37.6% TTD 12.1% 11.0% 06/08/17 104.3% MDB 12.0% 13.4% 08/29/18 86.7% ZS 9.8% 10.3% 08/27/18 56.8% OKTA 8.9% 8.7% 06/15/18 59.6% SMAR 7.1% 7.3% 01/07/19 32.7% SQ 6.3% 7.0% 08/27/18 -9.0% SHOP 5.2% 4.8% 08/06/18 52.1% PS 3.5% 3.4% 03/04/19 9.3% PD 3.4% - 04/11/19 23.1% ZEN 3.3% 3.4% 02/08/19 16.8% EVBG 2.4% 2.6% 02/21/19 10.1% PLAN - 3.9% 01/22/19 6.3% Cash 0.04% 0.02% Return +/- S&P Month: 5.8% 1.9% 2019: 54.0% 36.5%
Past recaps for anyone who’s interested:
I remained at 13 stocks this month. As my portfolio evolves though I find myself gravitating more and more toward the idea of limiting myself to 10 keepers and 2 tryout slots. I don’t want to discount the possibility everyone scheduled to report in May nails earnings and holds their spot. In fact, I’d love that to happen. However, the more likely outcome is I ditch a company that either disappoints or has their story change and then spread the proceeds around to settle in at 12 positions. To be continued…
AYX – AYX’s April was like watching paint dry as there wasn’t much of note either in the news or on the boards. I did add a few shares near the end of the month when I trimmed some Okta. Alteryx’s 5/1 earnings should put the company back on the front burner for most of us.
EVBG – EVBG is currently my lowest conviction holding, which is why it’s also my smallest allocation. The stock spent most of April drifting slightly downwards, but as far as I can tell the thesis is still intact. I guess I’ll find out if that’s indeed the case when they report on 5/6.
MDB – Mongo unsurprisingly dipped a bit this month after soaring almost 45% in March. I guess I could have trimmed some since I thought a pullback was in order, but hindsight is always 20/20 and I stink at timing. I plan on holding for the foreseeable future and fully expect MDB to resume its upward trek as the year progresses.
OKTA – After expressing quite a bit of enthusiasm for their annual Oktane event on last Q’s conference call, Okta didn’t disappoint. They announced several new offerings at the conference and received positive coverage on just about all of them. The company seems to be in a good spot right now and the stock was my best April performer with a 25.7% gain (holding off a late charge from PD). Kudos to Bear for having the foresight to increase his position “substantially” at the end of March. I’ve targeted 8-10% of my portfolio as my current OKTA comfort level, so I trimmed some late in the month when it exceeded that range and then added the proceeds to my higher-conviction AYX position. Nonetheless I’m very happy with Okta and it will continue to hold a healthy allocation.
PD – My first-ever IPO purchase. PagerDuty provides a real-time platform for monitoring digital assets, identifying events and notifying the right staff when action might be needed. The stock jumped from $24 to $38 before it became publicly available, but even at the elevated price I found it interesting enough to grab a starter spot. So far so good on that decision in what is admittedly the VERY early going. The Cliffs Notes:
Revenues: 46%, 49%, 49% and 47% the last 4 Q’s. Based on prior results I believe it’s reasonable to estimate a sequential gain of $3M (~9%) next Q. That would mean $36.8M in revenue and continued 47% growth. If they can beat that number by just $700K, revenue growth would accelerate to 50%. I think it’s worth seeing if they can pull off that acceleration over the next Q or two, especially with the added exposure they’ll get from being a public company.
Operating Expenses: OpEx as a percentage of revenues dropped from 132% last FY to 121% this FY. Last Q’s 105% is the lowest they’ve posted. That doesn’t appear to be out of line with many other young hyper-growth companies I’ve looked over at the same stage.
Customers: They have 11,212 customers growing steadily in the 14-15% range YoY. That in and of itself doesn’t wow me, but what grabs my attention is their growth in customers with ARR >$100K has accelerated from 50% to 54% to 58% the last three Q’s and now stands at 228 total. They have plenty of base from which to grow that number, especially when you consider that their…
Retention Rate: …is accelerating. 136%, 138%, 139% and 140% the last 4 Q’s.
GAAP Gross Margins: Plenty strong and holding steady at ~85%. Just the way we like it.
Non-GAAP Operating Margin: Operating losses as a percentage of revenue are moving in the right direction. Their recently completed FY was -14% vs -25% last year. The last 4 Q’s have been -15%, -15%, -18% and -9%.
Non-GAAP FCF Margin: Also trending the right way at -5% this FY vs -15% last FY.
I had a good exchange on this deep dive thread (https://discussion.fool.com/pagerdutypd-a-deep-dive-34191497.asp…) where I ended up expressing my initial PD outlook as follows:
“In the short-term I’m relying on PD’s increasing expansion rate and momentum with $100K+ customers to lead the way until the bigger picture clarifies itself. Even with a smaller TAM, I believe their current run rate is small enough to support hyper growth for the next few quarters at least. That being said, any hint of decline in their revenue growth or recent margin improvement would have me heading for the exit in a hurry. That might require me to be nimble, but I’ve got a small enough position that I’m willing to take my chances. More importantly I feel I have the time and requisite ruthlessness to walk away the second I don’t like what I see. I probably wouldn’t have made this purchase if I didn’t believe that to be the case.”
PLAN – I sold out of Anaplan to make room for PagerDuty. My three lowest conviction positions entering April were PLAN, PS and EVBG, so I compared the three by taking a look at the numbers. PLAN was the best as far as growth in the most recent Q and second in both gross margins and retention rate. However, it finished last across the board in operating, net and FCF margins. Anaplan also had the lowest guided growth of the three for both next Q and next FY. Assuming all three companies are sandbagging at a similar rate, that still leaves PLAN as the third horse in a three horse race. It ended up being a pretty close call versus EVBG, but in the end Anaplan appeared to be the furthest from profitability with the lowest guided growth for getting there. That put them on the chopping block and I closed my position at a small profit. They remain near the top of my watch list though.
PS – Pluralsight continues to rebound from its early-March dip due to a secondary offering announcement. Earnings are May 1. I’m looking for them to maintain 40%+ growth while continuing their recent improvement in margins and retention rate.
SHOP –Retailers had a surprisingly strong March as U.S. consumer spending posted its biggest gains since 2009. This in turn created positive momentum for e-commerce providers like SHOP that host them. Shopify also announced the release of point of sales hardware that potentially increases their stickiness with merchants who also have a brick and mortar presence (https://investors.shopify.com/Investor-News-Details/2019/Sho…). Those developments helped the stock climb another sneaky-good 9.3% this month before their pre-market earnings announcement on 4/30.
Those earnings were solid as the company posted a beat, kept revenue growth at 50% and raised guidance slightly for the year. The law of large numbers continues to come into play, but SHOP should comfortably grow somewhere in the low-to-mid 40’s this year and their secondary numbers continue to fall right in line with prior results. The market liked what it saw enough for one final shove, making SHOP’s final April tally up 17.9% and 75.9% YTD. My portfolio allocation continues to organically creep as a result.
Thinking about it I wonder if SHOP hasn’t found some sort of temporary market sweet spot where it provides the headline growth of much smaller companies at a market cap that’s more comfortable for many individual and institutional investors. In fact, I can’t see how anyone managing a growth mutual fund of any size can avoid owning it (TDAmeritrade lists 75.1% institutional ownership). I have no doubt at some point SHOP’s slowing growth will force me to look elsewhere. However, it appears today is not that day.
SMAR – Smartsheet holds steady for me in both allocation and conviction. Tinker’s recent SMAR soliloquies echo most of my thoughts. I think he even wore Duma down into buying some shares. It’s always nice to get confirmation bias!
SQ – After a big January run, Square has been disappointingly flat for 3 months now. While I continue to like the company, the truth is my other stocks have simply been performing better. In fact, SQ has been the laggard of my top 10 holdings since 1/31 and year-to-date overall. Due to their strong financials I continue to hold my shares into May 1 earnings. However, tepid results and/or a weak market response would likely lead me to consider at least trimming this position. We’ll see.
(As an aside, this site is awesome for quick stock comparisons over recent time periods: https://stockcharts.com/freecharts/perf.php?TWLO,TTD,MDB,AYX…. You just use the sliding scale at the bottom to adjust the timeframe. I don’t remember from whom here I stole it, but thanks.)
TTD – I had a little bit of cash remaining when I swapped PLAN for PD since I capped PD’s initial allocation at ~3%. I had already bumped TWLO and ZS with my monthly contribution, so I used this surplus to increase TTD by ~0.6%. The Trade Desk reports 5/9.
TWLO – I made a small TWLO purchase in early April with half the monthly cash I added to my account. TWLO returned the favor at month’s end with yet another strong earnings report. They posted $233.1M in revenue and 80.6% growth. Their guide for next Q – which history suggests they will surely beat – is $265M and 79.4%. Gross, operating and net margins all improved YoY with $.05 EPS falling to the bottom line (vs a $.04 loss in 1Q18). I know there’s some question about how exactly to weigh the SEND addition, but I’ll let others more knowledgeable than I am chime in on that topic. In my opinion any management that can post a profitable quarter with 81% revenue growth (yes, I know it’s not all organic) and a 146% expansion rate deserves the benefit of the doubt. I’m content for now to roll right along with TWLO as my biggest allocation.
ZEN – Zendesk joined TWLO and SHOP in kicking off my personal earnings season on 4/30. I had previously identified ZEN as a candidate to simultaneously accelerate revenues and improve margins as 2019 went along. That still looks like a possibility after reviewing their Q1 numbers. Revenue of $181.5M was a slight beat and 40% growth YoY (vs 38% in 1Q18). Gross margins held steady at ~74% and are expected to increase a point or so going forward now that ZEN has completed migrating their services to the cloud. Remaining Performance Obligation – which they use as their measure for future revenues not yet recognized – increased 53.7% YoY to $441M. In the end ZEN continues to execute its plan while earning some profits along the way. I’m happy to hold, but will pay close attention to next Q’s results for continued signs of the momentum I’m looking for.
ZS – I added a few shares after an early-April dip. Otherwise, steady as she goes. I know Zscaler is expensive, but I also believe it has one of the clearest paths in my portfolio to continuing its high-growth ways.
ZM – I was really hoping Zoom would follow PD as my second-ever IPO purchase. That turned out to be wishful thinking. I love the company’s numbers but just can’t get on board with the current price. When it hit my screen at $62 on day one, I immediately recalled my Zoom comments from last month:
“The wild card with Zoom is how crazy the price might get on opening day. That was my issue last October with Elastic when their estimated $26-$29 IPO soared to $70 by the time it actually hit the public. That spike was really frustrating for me. It was classic fear of missing out (https://en.wikipedia.org/wiki/Fear_of_missing_out), but I successfully forced myself not to chase it. My transactions history says I begrudgingly – and I mean every bit of begrudgingly! – split the cash earmarked for ESTC into additional nibbles at MDB, OKTA and ZS. As I take a look now my return history says my 14% in missed ESTC gains since that time has turned into 119%, 48% and 96% instead. Wait…WHAT?!? I can honestly say I’d never checked those numbers before researching Zoom and doing this write up. I guess I don’t feel so bad now. Not to mention the fact this makes me even more certain of the benefits of writing things down every once in a while. Things that make you go hmmm…”
I’d still like to own Zoom at some point, but it’s staying on the watch list for now…
…and that current watch list in very rough order is PLAN, ZM, ESTC, TEAM, GH, COUP, PAYC, DOCU, NEWR and VCEL. ABMD is barely hanging on with its May 2 earnings likely determining whether it stays or goes. I’d previously dropped WIX, but I notice out of the corner of my eye they’ve had a nice run lately. I’ll at least take a peek at their 5/16 earnings to see if they’ve plugged some of last Q’s leaks.
And there you have it. Despite an early-April dip, my stocks bounced back to finish in the black for the fourth month in a row. Even when I acknowledge that the broader market has done the same, that’s nothing to sneeze at. With one-third of 2019 now in the books, my companies continue to outperform and my portfolio continues to challenge new highs – as a matter of fact, I’m sitting at a new all-time high as I type these very words. For what seems like the umpteenth time, my continued thanks to everyone who is so willing to share their insight and expertise on these boards.