stocknovice's August portfolio review

Phew! August turned out to be more complicated than anticipated. I knew I had several earnings reports to comb though, but just about everyone outside of AYX and ROKU posted results that I felt required a deeper look. Consequently, I spent a large chunk of time this month double checking my allocations against all the new info. One thing that has come through loud and clear this earnings season is this market has little patience for any softness in numbers. Several stocks in this neck of the woods – SQ, PS, EVBG, ZEN, TWOU, DOCU, NEWR – have been hit hard recently for anything even remotely resembling a slowdown in prospects. Only the cream seems to stay at the top.

In a broader sense it looks like the market is becoming much more selective with growth stocks. Being honest, that trade off seems only fair given the large premiums these stocks have received for most of 2019. My big takeaway is I not only need to be very discerning with my buys but also extra diligent in reconfirming my investing theses after each new piece of information. I know that seems intuitive enough, but the market has really hammered that point home in recent weeks.

2019 Results:


	Month	YTD	vs S&P
Jan	21.0%	21.0%	13.1%
Feb	11.5%	34.9%	23.8%
Mar	7.9%	45.5%	32.4%
Apr	5.8%	54.0%	36.5%
May	-0.4%	53.4%	43.6%
Jun	10.5%	69.4%	52.1%
Jul	6.9%	81.1%	62.2%
Aug	1.2%	83.3%	66.6%

August Portfolio and Results:


					
	%Port	%Port				
	31-Aug	31-Jul	1st Buy		Return	vs S&P
AYX	17.2%	14.2%	08/27/18	109.3%	106.1%	
MDB	13.3%	12.7%	08/29/18	62.4%	60.8%	
TTD	13.2%	14.4%	06/08/17	68.3%	64.2%	
ROKU	10.8%	5.8%	05/13/19	66.9%	65.7%	
ZS	9.6%	11.5%	08/27/18	43.9%	41.4%	
OKTA	8.4%	9.6%	06/15/18	90.2%	85.9%	
TWLO	6.9%	11.7%	08/27/18	45.9%	43.6%	
SMAR	6.8%	7.0%	01/07/19	52.3%	43.4%	
PLAN	5.3%	5.6%	05/28/19	23.7%	20.8%	
CRWD	5.1%	4.3%	06/12/19	16.1%	15.2%	
ESTC	3.5%	3.1%	07/15/19	-5.9%	-3.9%	
Cash	0.03%	0.04%				
					Return	vs S&P
				Month:	1.2%	3.0%
				2019:	83.3%	66.6%

Past recaps for anyone who’s interested:

December, 2018: https://discussion.fool.com/stocknovice39s-end-of-year-portfolio…
January: https://discussion.fool.com/stocknovice39s-january-portfolio-rev…
February: https://discussion.fool.com/stocknovice39s-february-portfolio-re…
March: https://discussion.fool.com/stocknovice39s-march-portfolio-revie…
April: https://discussion.fool.com/stocknovice39s-april-portfolio-revie…
May: https://discussion.fool.com/stocknovice39s-may-portfolio-review-…
June: https://discussion.fool.com/stocknovice39s-june-portfolio-review…
July: https://discussion.fool.com/stocknovice39s-july-portfolio-review…

Stock Comments:

I remained at 11 stocks this month. There were no additions or subtractions to the names though I shuffled my allocations quite a bit. The nuts and bolts are below.

AYX – Alteryx continues to be a rock. The stock saw a nice bounce after 7/31 earnings, and I bumped it ~0.25% with my regular contribution for August. It’s continued to climb since. The company also took advantage of its recent momentum to issue $700-$800M in convertible notes this month. Though potential dilution is never ideal, I’m not overly concerned given the terms appear cheap. It’s also an easy way to ensure AYX has enough cash to maintain its growth initiatives if the broad economy should sputter. AYX remains #1 with a bullet in my portfolio, though I admit I’m starting to ponder my top end comfort level for an individual holding. That’s a nice problem to have I guess. For now I’m content to let my current shares ride but won’t add any more.

CRWD – I nibbled at CrowdStrike a couple times this month after trimming some TWLO. I know CRWD is expensive, but I find its numbers overwhelming. How many companies can tout a 103% Q1 growth rate in a year which should end up at $450M+ in revenue? (Besides ZM, of course!) That’s the type of rarified air we’re talking about here. I’m fairly optimistic CRWD can challenge triple-digit growth again next quarter and wouldn’t be entirely shocked if they ended up 90%+ for Q3. Even with the recent pullback, I’m willing to see how long they can keep this up.

ESTC – As we headed into 8/28 earnings, my July 15 swap of SHOP (+28.2% from 7/15-8/28) for ESTC (-15.4%) was definitely not a contender for my Move of the Year Award. Regardless, I felt Elastic deserved the chance to show me its results before making any decisions on whether to keep it. I’m glad I gave it the chance.

As stated when I bought ESTC, I recognized the growth but was keeping a close eye on margins and cash flow. I was also looking for further clarity on a business plan that seemed to be entering a lot of new areas all at once. I won’t rehash the results since it’s already been done (https://discussion.fool.com/quick-elastic-estc-quarterly-results…), but they were good enough to keep me interested. I liked the fact both subscription and SaaS revenues accelerated and was pleased to hear their foray into monitoring and security seems to be gaining real traction. Their recent government win is intriguing as well (https://discussion.fool.com/estc-huge-win-with-the-federal-gover…). More importantly, their call was very positive and their guide suggests revenues could accelerate as soon as next quarter. Elastic’s losses are still large enough to keep me from jumping in with both feet, but I believe this quarter gives the stock plenty of room to run. As a result I bumped my allocation a tick at market open the day after earnings.

EVBG – Everbridge is a prior holding I still follow, so I was tuned in to 8/5 earnings. Unfortunately, the numbers fell short. Revenue growth dropped from 40% to 35% and will more likely than not slip again next quarter given its recent trend. Raw customer growth held sequentially, but a decline in deferred revenue after four straight advances was cause for concern. Gross profit growth ticked down as well, and the company still hasn’t proven its path to consistent profits. To top it all off, I found their call both clumsy and evasive when prodded about the deferred revenue dip and their medium-term future.

While Everbridge continues to work toward expanding their corporate and healthcare segments, it still relies on government contracts for ~33% of its business (up from 30% last quarter). As I’ve mentioned in prior write-ups, next quarter is the US Government’s “spend it or lose it” quarter and most of EVBG’s potential European mass notification business won’t be finalized for another 10-15 months. Given the bureaucratic sales cycle, I’d expect things to drag out and look lumpy going forward. In addition, It didn’t help that the outgoing CEO stated last quarter to “keep your eyes peeled” for a 5-7% revenue bump through potential acquisitions, then followed it up with an $83M acquisition that is not immediately accretive and did nothing to significantly raise their FY guide. All in all, I’d say this report was a relative disappointment. The market seemed to agree, knocking it down 10%+ after hours on its way to slipping ~12% overall by the next day’s close. I find EVBG’s 2020 prospects interesting enough to keep it alive, but it moves to the outer edge of my radar.

MDB – Mongo’s been parsed to death. My main takeaway from everything I’ve encountered is that the need to collect, store and process unstructured data is only going to increase as time goes on. At this point me and my shares are just hangin’ out until September 4 earnings.

OKTA – Okta joined ESTC in reporting 8/28, and I thought their numbers were solid. Revenues came in about where I hoped at $140.5M and 48.5% growth. Subscriptions held steady and expenses got back in line as a percentage of revenues after a jump last quarter. Billings growth dipped from 53.4% to 42.4%, which did cause some concern. However, that was offset a bit by RPO growth jumping from 59% last quarter to 68%. On their call management noted lumpiness in billings and recommended considering both together as a gauge of future business. I’m generally not a fan of companies switching metric focus mid-stream – that was probably the main lesson from my NTNX experience – but when viewed that way things appear to be OK. This is something I’ll be paying close attention to though going forward.

The revenue beat meant both gross profit growth and gross margins ticked up a notch, which was nice to see. The bottom line also benefitted as net (-4%) and operating margins (-7%) continue to march closer to breakeven. Finally, Okta reiterated they expect to finish slightly FCF positive for the year. In the end it was a good quarter from a great company.

I guess the only real glitch was the softness in guide, which sent the shares down a few percent the next day. As mentioned previously (https://discussion.fool.com/just-to-mull-a-bit-more-i-find-that-…), I never take guides at face value. However, I do use them to estimate a range for the next quarter based on the firm’s history of guides vs actuals. In this case OKTA forecasts $144M and 36% growth at the top end next quarter. I’d anticipate something more along the lines of $152-$155M and 44-47% growth. That wouldn’t be bad at all, but it does require a solid Q3 beat to get there. While I think Okta can do it and continue to hold a large allocation, I did trim some for more shares of ESTC since the same process with Elastic kicked out a projection for accelerating growth.

PLAN – Anaplan reported 8/27 before market open. The market apparently wasn’t crazy about the numbers, but I thought they were fine. Revenue growth held at 46% vs 47% last Q. Subscriptions accelerated to 48% and expenses were reasonable. Gross margins ticked up to 84.4% for subscriptions and an all-time high of 75% overall. Customer growth was solid. Billings growth dipped a bit, but Remaining Performance Obligation growth has climbed from 44% to 53% to 56% the last three quarters. Losses are narrowing as a percentage of revenue and PLAN finished FCF positive for the first time as a public company. Given their guide and history, I’m pegging growth in the 47-49% range next quarter. So basically steady as she goes with a chance to accelerate a bit. The stock has dipped slightly the last few days, but it seems more knee-jerk to me than any change in fundamentals. It could also be some simple profit taking in a stock that had already rocketed 50%+ in the three months leading into earnings. I view Anaplan’s thesis as still being intact and will continue to hold my shares.

ROKU – Roku reported on 8/7 and I thought they knocked it out of the park. Revenue growth accelerated to its highest level since their 2017 IPO. The last four quarters are now 38.9%, 46.5%, 51.3% and 59.5%. Even more impressive, growth in their higher margin platform revenues has trended the same way – 73.9%, 77.2%, 78.7% and 85.6%. GAAP margins remain slightly negative as they focus on growth, but Adjusted EBITDA has now been positive for 5 consecutive quarters. Roku now has 30.5 million active accounts (+38.6%) that collectively streamed 9.4 billion hours (+70.9%) last quarter. The company is clearly finding ways to monetize those hours as average revenue per user jumped $2.00 sequentially to $21.06. In addition, the company highlighted the following in their shareholder letter:

  • Roku is the #1 streaming platform in the US by hours.
  • Roku’s operating system powers 41 million devices and smart TV’s in the US. This is 36% greater than their closest competitor and is expected to grow.
  • Roku owns 39% of the US streaming media player installed base as of 1Q19.
  • Roku’s operating system powers more than 1-in-3 smart TV’s sold in the US during the first half of 2019.

In a nutshell, Roku appears to be delivering in spades. The company is out in front of a huge shift in the way viewers consume TV, and its rapid growth doesn’t look like it will slow any time soon. This recent thread contains a pretty good description of what’s going on: https://discussion.fool.com/roku-thoughts-34281655.aspx?sort=who…. As for the stock, I was able to grab some at $105.50 immediately after earnings, then added a couple more lots over the next few days. At the time those buys put Roku just below my target allocation of 9-12%. It has now solidly appreciated into that range. I really like what Roku is doing and can’t see myself exiting any time soon. Given the numbers, I’m mildly surprised more here don’t own it and would be curious to hear why others have chosen to pass. What is it that’s keeping you away?

RUN – A quick sidebar even if it might not be in the true spirit of the board. I’m not a big options player and never have been. The few I’ve written over the years have never been more than a blip in my portfolio and the thought has been practically non-existent since moving to growth investing. In simplest terms I like my companies and would rather hold the shares. Besides, playing it straight is much easier to manage.

That being said, I veered off script and bought a slightly out-of-the-money call on RUN just before earnings. Sunrun is “the nation’s largest residential solar, storage and energy services company” for whatever that’s worth. Like much of the segment, the stock has been on a tear. Sector mates ENPH and SPWR both soared 30%+ after earnings. Likewise, SEDG popped ~25%. Most convincingly, Raybert – who previously identified the first two names and seems to have a good grasp on solar (https://discussion.fool.com/solar-energy-34234911.aspx?sort=whol…) – revealed he had a hearty 13% of his portfolio in RUN (https://discussion.fool.com/as-promised-34265197.aspx). I wasn’t familiar enough with the company to open a position, but liked the odds of a beat and decided a short-term bet was worth the calculated risk given the info at hand and Raybert’s excellent work. I’ve seen others do something similar after write-ups on companies like ARNA and AMRN. I simply chose to nibble at an option rather than shares given my limited cash on hand.

Unfortunately, it didn’t pan out. As options are sometimes inclined to do it whipsawed from down 40% to up 90% in just the 48 hours before earnings. I seriously thought about selling up ~80%, but exiting before earnings was against my whole thesis for buying in the first place. To my chagrin RUN’s results were pretty meh and the stock slid ~10% after hours. Oh well, I guess somebody in the sector had to disappoint. I ended up licking my wounds and selling first thing the next day at a ~50% loss – about a 0.2% portfolio hit – to put the cash back into play.

Even though this move didn’t pan out, a huge thanks to Raybert for supplying the info I used to piece it together. As usual, I never cease to be amazed by some of the crazy-good insights available on these boards. The chances options become a significant part of my future reside squarely between slim and none. However, I felt this opportunity was too intriguing to pass up without giving it a shot.

SUPER IMPORTANT DISCLAIMER: Please don’t try this if you don’t know what you’re doing. While I certainly could have doubled my money (or more), I could just as easily have lost 100%. That’s the way options work. For perspective, my maximum loss exposure from this trade was roughly equivalent to the effect of a $5 MDB price drop on my overall portfolio. So it was very appropriately sized for my risk tolerance. Unlike holding the stock though, the time factor of options can severely limit your ability to recoup losses when things don’t break your way. That’s why so many people here avoid options, myself included the overwhelming majority of the time.

SHOP – I sold Shopify last month after a tremendous run, but was impressed enough by their 8/1 earnings to make notes for future reference. SHOP held 48% revenue growth at a roughly $1.5B run rate, which I find remarkable. Their merchant solutions, which is the faster growing portion of their revenue base, grew 56% and is now ~58% of total revenues. All their other metrics stayed roughly in line with past performance, and gross profit growth even ticked up a notch to 50%.

Even more impressive, their conference call expressed palpable enthusiasm for the company’s prospects. They seem to be killing it internationally. They launched their service in 11 more languages and their apps are now available in 18 languages overall. They have expanded Payments to 13 countries in varying currencies. Their Shipping service is now used by more than 42% of eligible merchants overall, and their Capital branch saw a 36% bump in advances and loans to $93M. They clearly have a lot going on, but it’s also readily apparent SHOP has all kinds of avenues for continued growth.

Most interestingly, Shopify apparently has candidates beating down their doors to serve as initial partners in their recently launched fulfillment network. The money quote:

“Since announcing Shopify Fulfillment Network at our Unite Conference, we have received an incredible amount of interest that has exceeded our expectations. Thousands of merchants have expressed their desire to be a part of our early access program and dozens of partners are eager to join us in being a part of the solution…Given that the uptake and interest for Shopify Fulfillment Network has been much stronger than anticipated, our plan is to accelerate investing so we can move fast and execute on this opportunity for our merchants.”

If those fulfillment plans do indeed gain rapid traction, how many merchants currently locked into Amazon might be tempted to give Shopify a look? This link leads to an excellent article explaining that while Amazon’s middleman system is extremely effective, Shopify might be a better choice for merchants seeking direct interaction with their customers (https://stratechery.com/2019/shopify-and-the-power-of-platfo…). I never fully realized the stark difference in the underlying business models of AMZN and SHOP. All services being equal – including fulfillment, of course – there’s a real argument that merchants who don’t necessarily need Amazon’s built-in traffic might be better off with Shopify. SHOP has always been extremely customer-driven, and right now it seems the company can do little wrong with those customers.

In the big picture Shopify appears to be transforming itself into a one-stop shop for any business of any size quite literally anywhere in the world. I don’t know exactly what their potential TAM might be except to say it is almost certainly magnitudes bigger than most. It also appears SHOP is positioned to temporarily slow or possibly even halt the recent growth declines caused mostly by the law of large numbers (at least as long as the economy holds, which is no guarantee). So in essence you now have a company barreling toward a $2B run rate that should maintain something in the range of mid-40%’s growth for the next few quarters at least. That’s almost mind-boggling to me. SHOP’s market cap and already massive price appreciation this year have kept me from rebuying even as it continues to march upward. However, it stays high on my watch list and would definitely be a purchase candidate if it went on sale or I soured on something else in my portfolio.

SMAR – The main news this month was SmartSheet receiving a FedRAMP designation approving it for use by federal agencies and government contractors. That also means it will now be formally listed in the FedRAMP Marketplace. It’s always nice when one of our companies expands its market, but I’m much more focused on SMAR’s upcoming 9/4 earnings as a gauge of what’s really going on.

SQ – I was looking forward to 8/1 earnings, but decided to remain on the sidelines after seeing the results. Simply put, there was too much deceleration in too many areas for me to feel comfortable buying back in. For those interested though, there were a couple of really great threads breaking it all down. You can find them here: https://discussion.fool.com/square-reports-2019-q2-earnings-3426… and here: https://discussion.fool.com/is-anyone-but-me-purplexed-with-sq-3….

TTD – TTD reported 8/8. Some felt the report wasn’t great, but I found it plenty good enough. Revenues reaccelerated slightly from 41% to 42%. The company remains firmly profitable, with adjusted EBITDA (+57%) and non-GAAP EPS (+58%) accelerating both sequentially and YoY. Net and EBITDA margins continue to hold strong at 28.5% and 36.2%, respectively. Expenses rose a little faster than revenues, but as usual a nice chunk of change hit the bottom line even as TTD invests in its future. Overall, The Trade Desk remains one of those rare firms recording high growth and high profitability at the same time.

Like most call listeners though, I viewed the numbers as almost secondary. This report was always going to be about the specifics of the recent Amazon partnership and any updates on the foray into connected devices. CEO Jeff Green highlighted the usual suspects with CTV growing 2.5X, audio growing 270% and total mobile hitting a record 47% of gross spend. As expected, he was also bullish on the Amazon deal. The pleasant surprise for me was just how excited he sounded about where their Disney partnership might lead. I was really intrigued by his description of the potential benefits of programmatic ads during live events. Given the public tension between cable companies and sports networks (including Disney’s ESPN) over rights fees, this could create a whole new growth lever for TTD.

Outside of the typical sunshine and rainbows, it’s fair to note I thought Green’s distinct lack of China commentary was a bit odd considering his glowing review of their overall Asia progress. China was noticeably absent from the prepared remarks, and Green answered a question about it with a fairly stock “just staying the course”. I know TTD is playing the long game there (as they should), but I didn’t sense Green’s usual enthusiasm for the topic even if I didn’t know what exactly to make of that observation. It turns out TTD ended up formally announcing a General Manager for China on 8/20 (http://investors.thetradedesk.com/news-releases/news-release…). The position will be based in Shanghai and tasked with leading their business there. If the hire was still in the final stages at the time of earnings, that might explain why Green was so quiet about it on the call.

One of the past knocks on TTD has been whether Green’s cheerleader salesmanship of their future is more hype than reality. Along those lines, I’ll readily admit their outlook has a bit more uncertainty than some of my other holdings. TTD’s thesis has always required some leap of faith about the inevitability of content consumption moving to the connected world. I believe that leap is getting shorter and shorter every day. When I think about last quarter, TTD’s main avenues for growth were primarily CTV and secondarily China. As we exit this quarter those avenues appear to have expanded to CTV, Amazon and Disney with China appearing to be at least temporarily bumped down the pecking order. JPutter also noted a recent contract announcement partnering with a company named Bidstack for programmatic ads in the eSports and gaming arenas (https://discussion.fool.com/ttd-and-bidstack-deal-34284089.aspx). I find these new developments very encouraging, and it’s important to remember this is all happening while the company is already churning out profits. In my opinion, TTD has increased its odds of posting dominant future returns. As a result I’ll continue to hold a very healthy position.

TWLO – It’s no secret I’ve been questioning the size of my Twilio allocation the last couple of months. This month I finally took action and pared it down considerably. My final steps to get there consisted of two parts. First, I dug into their 7/31 earnings:

  • I’d say revenues were good but not great beyond the headline number. Organic growth dropped from something north of 60% to 56% while continuing to incorporate an acquisition that grew just 28%. My math puts the growth of the combined company somewhere around 50%, which seems to match up with what some others have calculated.

  • Gross margins did tick up, but that number was inflated slightly by the Verizon A2P fee delay and will still be pressured when those fees eventually hit.

  • Non-GAAP expenses as a percentage of revenues increased for the second quarter in a row, which isn’t much of a surprise given the costs incurred when folding in an acquisition. It still counts though.

  • Their expansion rate drifted slightly down. While it’s still a phenomenal 140%, it’s important to note that rate doesn’t include any SendGrid business at all until 1Q20. I’m unsure exactly how they will handle the combined number at that point, but I’d have to think it’s going to be considerably less once everything is accounted for.

  • Finally, they didn’t do much from the beat-and-raise standpoint that’s become almost a foregone conclusion for highly priced companies in this market. They did bump adjusted revenue $8M but kept base revenue the same. Granted, the raise would have been slightly larger if Twilio hadn’t backed out ~$8-$9M in anticipated revenues from the Verizon fee bump. It’s also fair to acknowledge those revenues should be reinserted and help lift a future guide once there is more clarity on the timing (next quarter, perhaps?). Regardless, that number is relatively small potatoes at a run rate over $1B.

  • If asked to describe myself as being pleased, neutral or disappointed at the end of step 1, I’d have to say disappointed.

My second step was to review their call not once but twice. This probably had a bigger influence on my decision. I like it when companies reference new initiatives with comments implying they are seeing immediate traction, things are moving quickly and/or progress is going even better than expected (see SHOP’s fulfillment comments above). My Spidey senses start tingling when the emphasis is more along these lines:

  • “we’re on the right path”
  • “having those conversations”
  • “lot of discussion”
  • “we’re definitely having conversations”
  • “we’re more having conversations at this point”
  • and finally, the dreaded “longer sales cycle”

Twilio management used each of those phrases regarding their stated focus of “expanding Flex’s presence in the market as well as cross-selling Twilio SendGrid”. The longer sales cycle comment was tied at different points on the call to Flex as well as their overall progress with enterprise clients. In fairness, they did trumpet some lands with “early adopters” and “early disruptive” type companies. While that might support the idea their products are cutting edge, early adopters by nature still reside on the slower part of the adoption curve (http://weblog.tetradian.com/2016/08/09/tech-adoption-tech-ev…).

In addition, most here are fully aware of the crossing the chasm concept (https://ewthoff.home.xs4all.nl/Weppage%20documents/Summary%2…). In both of the above links you’ll notice that chasm resides right after “early adopters” and just before “early majority”, which is the point at which business momentum really takes off. Trying my best to read between the lines, it appears to me Twilio might have some work ahead to maintain rapid growth.

Don’t get me wrong. Nothing detailed above means the SendGrid acquisition and/or Flex won’t be smashing successes. It merely suggests Twilio and Jeff Lawson might be mortal. The law of large numbers applies to almost everyone, and the $1B revenue mark is a pretty good spot to check for signs of this effect. As it stands now I view Twilio’s present as more consolidation than hyper growth. Most of their low-hanging fruit has been plucked and they are transitioning to their next phase. To their credit they have clearly lined themselves up for expansion into email, Flex, 5G, smart cities and whatever else IoT might bring. In addition, their developer driven model almost certainly means a slew of yet-to-be-determined use cases are headed their way. All Twillo has to do now is prove they can turn all of that theoretical positioning and synergy into practical bottom line results. You know, the chasm and all.

After finishing this dive I decided Twilio’s August 6-7 SIGNAL conference was their last best chance to persuade me all is well (https://www.youtube.com/watch?v=zDAmPIq29ro). Even Lawson himself hinted at some exciting announcements. I did find some of those announcements pretty cool – particularly the Conversations API – but in the end it wasn’t enough to overcome my nagging concerns that Twilio’s immediate future might be tougher than originally planned. So while I’m still drinking the Kool-Aid, I’ve opted to sip from a glass for a while rather than keep guzzling from a gallon jug. Cheers!

ZS – ZScaler’s main August action was a quick 10%+ drop caused by a mid-month analyst report about possible sales challenges in their partner channel. I joined some others in viewing this as a buying opportunity and swapped some TWLO for ZS at that time. ZScaler has the chance to prove whether that was a wise choice or not when it reports on 9/10.

My current watch list in rough order is SHOP, ZM, GH (new), COUP, PAYC, PD and TEAM. Square, Zendesk and Everbridge find themselves in the penalty box after their earnings hinted at slowing momentum. PS rounded out my July list, but its prospects have since tragically perished in a horrific post-earnings dumpster fire. I can’t help but notice this list seems to be shrinking, which seems to mesh with my selectivity comments at the beginning of this recap.

And there you have it. August was a little erratic, but in the end I squeaked out another positive month. Or more accurately, my only three gainers – ROKU (+46.5%!!!), AYX (21.2%) and MDB (6.3%) – stepped up big time and literally dragged the rest of my portfolio into the black. I know macro issues continue to swirl, leading to more fear than greed in the current market (https://money.cnn.com/data/fear-and-greed/?iid=EL). However, there’s nothing I can do about that. I’m choosing instead to grind it out by putting my money in the best companies I can find and then paying as much attention as I can. I’m glad I’ve found a group that not only holds a similar view but continues to support each other with top notch ideas and observations along the way.

Thanks for reading and I hope everyone has a great September.

176 Likes

Hi stocknovice!

Wow, great stuff thanks as always for articulating your thoughts so well.

P.S.,

I am pretty sure you are due for a promotion to “StockVeteran”.

Best,
Matt

16 Likes

Hi Stocknovice,

Excellent, excellent write up. I really like how you leave your emotions out of it and give your opinions.

So you asked why everyone isn’t in Roku. Here are my thoughts. I think Roku is a flash in the pan much like Fit Bit. They really do not have a moat but are more of a commodity. Anyone can switch between them and any other provider like, Nvdia shield, Amazon Fire devices, Xbox one, Asus chrome box, Raspberry pi, minix neo, etc. While I realize that Roku is being put on tv’s and also has a great price on their device, many of their competitors have cheap prices also.

Now if you look at the xbox 1 it has support for 4k also and many of the younger people that play games and also cut the cord will look closely at this for their streaming, but if they wanted something smaller I do not think they would pick the Roku. The big strike, in my mind, against Roku is you can’t put kodi on it. Most of the cord cutters want to be able to put the kodi os on their device. Devices like Amazon can be jail broke to put kodi on them and other devices like pi and xbox one can load kodi directly on them. You can’t jail break or put kodi directly on the Roku, the only way to show kodi through the roku is to mirror it. This is unacceptable because of the many steps and awkward control while watching kodi.

So while roku is putting up some great numbers right now, the one number that I do not like is it’s gross margins. They are sitting at 47% which is probably about average for a company that is building and selling devices but is not impressive. I am thinking that their growth is going to come to a slow halt and growing in the single digits, something like fit. I have seen this play out before with companies like Amba and Garmin.

So that is what is keeping me out of Roku. I am glad you are doing well and I hope it continues for you but keep a sharp eye on it.

Andy

21 Likes

As long as Roku is coming pre-installed on televisions, it does not matter what else is out there. Now fully 1/3 of all smart TVs sold have Roku as the operating system. Up from 1/5 from a couple years ago.

Roku’s device sales have actually been very lackluster. That’s not where their growth is comping from. This is not a “device” company like Fitbit. It’s an operating system company that monetizes it with free ad supported content.

I don’t know ambarella but this is not Garmin either. Garmin got disrupted by another device, the cell phone.

There are many articles explaining where Roku is headed, here is one. “Devices” are not part of their long term strategy.

https://www.google.com/amp/s/www.theverge.com/platform/amp/2…

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As long as Roku is coming pre-installed on televisions, it does not matter what else is out there. Now fully 1/3 of all smart TVs sold have Roku as the operating system. Up from 1/5 from a couple years ago.

I am glad you pointed that out 12x, I forgot to mention. Roku is also a walled garden, which is another strike I see for them. They are trying to create their own add supported system. I have 3 smart tv’s and do not use any of the apps or roku that came with them. I went out and bought a firetv and xbox 1 that allow me to load any app I want onto them.

I have never tried Roku so I can’t say anything about their system.

Andy

So what retailers are going to sell FireTV? A product of their competitor? FireTV is trying to do the exact same thing, create a walled garden, that’s not an issue is it? At the end of the day Roku is just getting a channel to have an advertising outlet. One of Rokus advantages is they are 100% neutral.

Years ago when I thought the idea of buying books online was bad because you could not browse through it to see if it was good first and passed on a stock called Amazon, I learned not to disregard results because of my opinion. And Roku is getting results. Just look at the chart showing market share in this report.

https://ir.roku.com/static-files/df3d060c-0975-4903-83d3-0e1…

Of course there are people who would rather buy a FireTV or whatever else. They make the minority according to the chart. That upward sloping line showing Roku is in the lead and growing the lead is what matters. Not personal preference.

I’m obviously not here to change minds or convince people to buy Roku but that’s the way I see it. Much has been said about Roku already. But let’s not look at the wrong thing and consider them another Fitbit or GoPro or whatever when their future lies in operating system/platform. That has several demographic trends working in their favor.

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Let me just say my thesis for holding Roku is it being the default OS preinstalled in various television brands. The other line going up strong on that chart is Tizen which is a Samsung brand operating system. I do not see Roku having a large presence in Samsung. Samsung owns roughly 33% of the smart TV market. LG and Visio are also large. Will have to see if it makes sense to expect Roku to continue to garner TV OS market share. That has been a driver for growth recently. Because if not it then falls back on them selling more devices. Samsung and Roku alone make up a big part of the market already.

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We are just having a good conversation about Roku 12x. I don’t have a dog in this hunt and maybe you will change my mind

I’m obviously not here to change minds or convince people to buy Roku but that’s the way I see it. Much has been said about Roku already. But let’s not look at the wrong thing and consider them another Fitbit or GoPro or whatever when their future lies in operating system/platform. That has several demographic trends working in their favor.

Now that you brought up GoPro, isn’t what they did exactly what Roku is trying to do. The only difference is that Gopro had their own content. They were trying to be a content provider which would have allowed them to monetize it. What does Roku have that is different or a moat? It isn’t their OS because their are many OS’s and people do not care about that. Describe to me their moat.

So what retailers are going to sell FireTV? A product of their competitor? FireTV is trying to do the exact same thing, create a walled garden, that’s not an issue is it? At the end of the day Roku is just getting a channel to have an advertising outlet. One of Rokus advantages is they are 100% neutral.

Actually Amazon is breaking down walled gardens. This was posted on this board awhile ago when TTD was teaming with Amazon. TTD, as you know, works with anybody and everybody except walled gardens.

https://www.fool.com/investing/2019/08/13/heres-why-the-trad…

One of Rokus advantages is they are 100% neutral.

Except for ads, they are just neutral in giving out other people’s content, except for Kodi. But maybe that is why they won’t let Kodi on their box, because that is another free OS. I would say they are trying to be another netflix right?

Andy

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Let me just say my thesis for holding Roku is it being the default OS preinstalled in various television brands.

Ok thanks 12x.

Andy

Wow. Go away for half a day and a great discussion on Roku breaks out. I also received a reply off board with someone’s reasoning for giving it a pass, so greatly appreciated. I’m clearly biased since I own the stock, but I’d like to add some thoughts to those already made. This isn’t meant to convince anyone to buy, hold or sell the stock. It’s only meant to clarify my thesis within the context of the current conversation.

First, I had a couple comments on the business plan as I view it.

Andy: What does Roku have that is different or a moat? It isn’t their OS because their are many OS’s and people do not care about that.

In a weird way the fact people don’t care might actually be somewhat of a moat. Other than the really small subset you reference that prefer Kodi, most consumers are indeed indifferent about their smart-TV OS. That indifference means those consumers who aren’t seeking out a specific OS have a 1-in-3 chance of buying a smart TV with Roku as the potential default for accessing their content. So the moat might not be the consumer, but rather the existing deals with manufacturers who have already committed to putting Roku’s OS in their product. This is where Roku’s neutrality helps them. What smart-TV manufacturer that doesn’t have its own OS would willingly want to install Samsung’s or Amazon’s when those companies are clearly direct competitors? In my opinion that gives Roku a definite edge. Someone is going to get the consumer’s money. Roku is putting itself in position to facilitate a boatload of those transactions.

Andy: I would say they are trying to be another netflix right?

I think that’s an interesting comp and it does makes some sense to me (others may chime in if they disagree). The difference I see is Roku isn’t stubbornly digging its heels in against an ad-supported free offering like Netflix. Roku is instead embracing that concept with the intent of monetizing their users however they can with no real preference whether it’s through subscriptions or ads.

Next, I had some observations on their numbers.

Andy: So while roku is putting up some great numbers right now, the one number that I do not like is it’s gross margins. They are sitting at 47% which is probably about average for a company that is building and selling devices but is not impressive.

12x: Roku’s device sales have actually been very lackluster. That’s not where their growth is comping from. This is not a “device” company like Fitbit. It’s an operating system company that monetizes it with free ad supported content.

I agree with 12x’s statement, and that’s a big part of my thesis for owning the company. As Andy points out, overall gross margins are pretty pedestrian. However, I view Roku more through the individual breakouts they provide. Their own stated strategy is “trading player margin for account growth and platform revenue growth". So how are they doing?

First, let’s take a look at the big picture through overall revenues and gross margin:


Net Revenue						% YoY					
	Q1	Q2	Q3	Q4	YR			Q1	Q2	Q3	Q4	YR
2017	$100.09	$99.63	$124.78	$188.26	$512.76		2017	 	 	 	 	 
2018	$136.58	$156.81	$173.38	$275.74	$742.51		2018	36.4%	57.4%	38.9%	46.5%	44.8%
2019	$206.66	$250.10	 	 	 		2019	51.3%	59.5%	 	 	 

Gross Margin				
	Q1	Q2	Q3	Q4	YR
2017	38.8%	37.8%	40.0%	39.0%	39.0%
2018	46.2%	49.6%	45.6%	40.7%	44.7%
2019	48.8%	45.7%	 	 	 

My Take: Accelerating revenues. Nice! To Andy’s point, overall gross margins make me a little less enthusiastic. So let’s dig deeper.

How about player margin?


Player Revenue						% YoY					
	Q1	Q2	Q3	Q4	YR			Q1	Q2	Q3	Q4	YR
2017	$63.68	$53.65	$67.25	$102.82	$287.41		2017	 	 	 	 	 
2018	$61.50	$66.47	$73.33	$124.34	$325.64		2018	-3.4%	23.9%	9.0%	20.9%	13.3%
2019	$72.51	$82.42	 	 	 		2019	17.9%	24.0%	 	 	 

Player Margin				
	Q1	Q2	Q3	Q4	YR
2017	16.9%	6.4%	7.9%	9.5%	10.2%
2018	15.8%	22.2%	11.5%	2.4%	11.0%
2019	9.8%	5.5%	 	 	 

My Take: Yuck. Player margin stinks! They’d better be trading it for something else or they are probably on the road to bankruptcy.

How about account growth?


Active Accounts (millions)				% YoY						
	Q1	Q2	Q3	Q4	YR			Q1	Q2	Q3	Q4	YR
2017	14.2	15.1	16.7	19.3	 		2017	 	 	 	 	 
2018	20.8	22.0	23.8	27.1	 		2018	46.5%	45.7%	42.5%	40.4%	 
2019	29.1	30.5	 	 	 		2019	39.9%	38.6%	 	 	 
												
Streaming Hours (billions)				% YoY						
	Q1	Q2	Q3	Q4	YR			Q1	Q2	Q3	Q4	YR
2017	3.3	3.5	3.8	4.3	14.9		2017	 	 	 	 	 
2018	5.1	5.5	6.2	7.3	24.1		2018	54.5%	57.1%	63.2%	69.8%	61.7%
2019	8.9	9.4	 	 	 		2019	74.5%	70.9%	 	 	 

My Take: Now we are getting somewhere. Roku has 30.5 million users streaming 9.4 billion hours. Roku is not only gaining millions of eyeballs each quarter but also seeing the time those eyeballs spend glued to their platform skyrocket. That’s a lot of opportunities to monetize their platform.

And finally, platform revenue growth:


Platform Revenue						% YoY					
	Q1	Q2	Q3	Q4	YR			Q1	Q2	Q3	Q4	YR
2017	$36.42	$45.98	$57.53	$85.44	$225.36		2017	 	 	 	 	 
2018	$75.08	$90.34	$100.05	$151.40	$416.86		2018	106.2%	96.5%	73.9%	77.2%	85.0%
2019	$134.15	$167.68	 	 	 		2019	78.7%	85.6%	 	 	 

Gross Margin				
	Q1	Q2	Q3	Q4	YR
2017	77.1%	74.4%	77.3%	74.6%	75.7%
2018	71.1%	69.8%	70.5%	72.2%	71.1%
2019	69.9%	65.4%	 	 	 

My Take: In my opinion this is where the real profit potential lies. Platform revenue growth is accelerating at VERY impressive rates, and gross margins are clearly MUCH higher in this area. What makes this development even more intriguing (to me anyway) is this:


Platform Rev % Total			
	Q1	Q2	Q3	Q4	YR
2017	36.4%	46.1%	46.1%	45.4%	43.9%
2018	55.0%	57.6%	57.7%	54.9%	56.1%
2019	64.9%	67.0%	 	 	 

As you can see, those higher margin platform revenues are rapidly becoming an ever bigger piece of Roku’s total pie. The company does indeed sell some hardware but only as a means to get more viewers on its platform. It’s the ads and extras Roku offers once those viewers are there that lead to the real money. I interpret Roku’s numbers as showing they are not only sticking to their stated strategy but executing it perfectly. I have no reason to think their business momentum won’t continue at least through the second half of the year, especially when you consider the potential accounts and hours they could add via people upgrading TV’s over the holidays. I can’t speak for everyone that holds Roku, but I consider the next two or three quarters must-see TV (very crappy pun totally intended). I guess that’s what makes a market.

12x: I’m obviously not here to change minds or convince people to buy Roku but that’s the way I see it.

Andy: I don’t have a dog in this hunt and maybe you will change my mind

To me this exchange exemplifies why this board is so great. I’m never looking to change anyone’s mind in these discussions. I’m only looking to refine my own thesis through the viewpoint of others. Everyone here is 100% free to make their own decisions on what to do with their money. There’s really nothing to “win” on an internet message board. Unfortunately, not everyone feels that way and it can often pollute the discourse to the point the entire board suffers. In my opinion that’s part of what splintered NPI and I believe the entire Fool community is worse because of it.

In its purest sense Roku is only a dog in my hunt while I choose to own it. That’s the only connection I have to the company. I’m not here to stump for technologies, gardens or brands. I’m only here to find stocks I think can maximize my returns until a better option comes along. I don’t own a Roku device or TV and don’t plan on it. I’m simply choosing to own a part of what I believe is a successful business at this point in time. It’s discussions like these that help guide my decisions and I appreciate the thoughtful yet civil way we continue to break these things down.

Andy: … keep a sharp eye on it.

Very sage advice, my friend. I promise I will.

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I’d love to see a breakdown of where ROKU’s revenue comes from. Users don’t pay…except for their premium content, which has to be minuscule. Not sure why content providers like Netflix or HBO would pay…Roku benefits from having their products available as much or more than they do. Who’s paying Roku all these hundreds of millions of dollars a year? Advertisers? To show a little add on the home screen before the user clicks on Netflix or HBO’s app? How much can they charge for that?

I just don’t understand how they make money. Or what exactly they’re selling. That’s why I haven’t been able to buy ROKU.

Bear

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I’d love to see a breakdown of where ROKU’s revenue comes from. – Bear

When I want company details… I go to the company:

https://ir.roku.com/static-files/df3d060c-0975-4903-83d3-0e1…

Both platform and player segments exceeded our expectations resulting in an exceptional quarter. Total revenue growth accelerated to 59% YoY, primarily driven by growth in advertising as Roku monetized video ad impressions once again more than doubled YoY. Increases in the estimated value of content distribution agreements, based on improved visibility and performance trends, also resulted in a larger than expected recognition of revenue in the quarter. As a reminder, revenue recognition for our content distribution agreements can be lumpy quarter-to-quarter.

The most successful digital ad platforms are built on three ingredients: a coveted audience, reach at scale, and proprietary data to drive results for marketers. Roku possesses all three. This quarter, we’re highlighting how data is scaling and differentiating our platform business.

There is more at the link where they explain this stuff.

Rob
Rule Breaker / Market Pass / Supernova Navigator Home Fool & STMP/MTH Maintenance Coverage Fool
He is no fool who gives what he cannot keep to gain what he cannot lose.

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Who’s paying Roku all these hundreds of millions of dollars a year? Advertisers? To show a little add on the home screen before the user clicks on Netflix or HBO’s app? How much can they charge for that?

Bear, Roku has the “Roku Channel” that you can watch movies for free. This is all older content, but its free. Roku will show advertisements on these channels, and that is how they are generating income from their platform.

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Rob,

Thanks for the post and the link to the information.

I have posted a few times over the past few weeks on the topic of Roku and what will be its role and advantages in the Ad Exchange as CTV programmatic advertising continues to grow exponentially over the next 5 years. Therefore, I will not bore anyone with continued discussion on that topic.

However, I will say that having read the information provided by Rob’s link, a form of the words “ad” or “advertising” appears no fewer than 20 times in the first 4 pages of the report. Keep in mind that this count does not include the numerous uses of the word “marketing”.

That is where Roku will be as the years tick by and cord-cutters and never-corders continue to grow.

On a topic related to words in the referenced report…the most important word only appeared once…INTERNATIONAL.

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Bear, Roku has the “Roku Channel” that you can watch movies for free. This is all older content, but its free. Roku will show advertisements on these channels, and that is how they are generating income from their platform.

That’s a great example of something I’d like to know. How many users watch the “Roku Channel?” And how much of their platform revenue comes from ads on this channel?

Bear

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To give you a precise answer as to where they are getting the ads to sell here’s the source.

https://digiday.com/media/inside-race-scramble-ad-supported-…

In deals with TV networks and other publishers that distribute their apps on Roku and Amazon, both platforms take 30% of the ad inventory available on those apps.

A publisher if they want someone to view their content (so they themselves can sell ads) they must get their app on a platform for it to be viewed. In order for Roku to allow the app/channel onto Roku the price is to give them 30% of the ad inventory for Roku to market and sell via their own machinations.

Same for Amazon and FireTV.

So if Discovery Channel App has a thirty minute show that has 10 ad impressions in total, 3 will be Roku’s.

30% of ads across expanding number of apps and channels x ballooning streaming hours (+72%) = accelerating hyper growth.

Darth

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Expanding on what I was saying since Roku Channel was brought up. The movies on their are owned by a publisher say 20th Century Fox.

Big hasn’t made Fox a lot of money lately. Let’s dust it off and put it on the Roku channel and their 30 million+ sets of eyeballs and set it up to have 3 breaks of 5 ads. Every time Big streams Fox sells 10 ads and Roku sells 5. And so on and so forth for all the ad supported content. There’s apps and channels and movies and shows. And shows and movies in apps.

I believe there’s other complexities and deals and ad selling services (like programmatic data) that a Roku provides to add to the mix as well. But Ads are what make up the bulk of platform revenue.

Darth

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I first bought a stake in ROKU in late 2017 primarily because i believed in the future potential of superb Founder/CEO Anthony Wood and added heavily in the December, 2018 decline as data became more clear and as my understanding increased.

Wood has proven his visionary and executive brilliance and has been telling us all along that the ROKU device is primarily a loss leader to enable the leap into a broad range of more lucrative services associated with the move to CTV.

ROKU provides an OS system for content providers, a superior system for adtech targeting while maintaining consumer privacy (unlike Amazon, Facebook, Google), and sign up support for new customers for all content providers.

Here is a quote from Wood 13 months ago trying to o tell the market it is missing the point in thinking of ROKU as hardware:

“We don’t really make money… we certainly don’t make enough money to support our engineering organization and our operations and the cost of money to run the Roku service…That’s not paid for by the hardware. That’s paid for by our ad and content business…We help content distributors find customers, sign up customers, and promote their content, and we get paid for that.”

This is from the most recent Q call:

“Our ad business is thriving as we offer a superior solution providing precision targeting, access to premium inventory, unique sponsorships, and OTT reach that an individual publisher of third-party ad tech provider cannot match. The Roku OS was built to create value for advertisers and content distributors.”

I do wonder if Amazon’s latest move with TTD is an effort to compete with ROKU’s privacy advantage. I don’t buy the pitch that AMZN’s primary purpose is a magnanimous move to help out the little guys and weaken anti competitive arguments.

Of course it is comforting to see the continuing ROKU skepticism. I continue to be very long but not without growing concern over valuation. Longer term investors own stocks when we think the future is better than the current consensus.

Results of the last 2 quarters has made it fairly clear that the existential case against ROKU is dead. Rather, ROKU now seems destined to have an important and secure place in the future of the huge and rapidly growing CTV service opportunities. How dominant a place and how much is already priced in the stock is still unclear. I remain pretty comfortable risking a sizeable stake on Anthony Wood’s ambition and ability to stay in front.

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Bought Roku at $40 in January and sold at $150. I’ll be back in but it’s ran too much to fast for me. The last quarter was killer and you all that aren’t owning it because you’re looking at it as a hardware play and tracking overall 47% margins.

That’s the old roku. Instead track it as an add platform play. Those margins are at 86% and all you should be tracking.
Hope it drops to the 120’s so I can load up again.

How has owning TTD during that time worked? Not nearly as good. I’ll be in TTD before next earnings but don’t see much of a need to try my luck with them until about that time. But there’s room for both to kill it in this market.

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Bear,

My best guess – tons of ad revenue from YouTube. People get Roku for the all-in-one platform. Anything they watch on YouTube has ads. Those ads add up (see what I did there :)).

Just a guess, but I think it’s much bigger than what Roku channel brings in,

Brian

Long ROKU (very small position)

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