Well, whaddya know. Another year in the books.
No matter how your portfolio finished, I sincerely hope your 2021 saw more good than bad. That’s what matters most after all. While December 31 will eventually be a blip for most of us, it’s also a great time to glance up from whatever screen you’re staring at and take a peek at the world around you. For investors it’s seen as a moment to take stock (pun intended!) of your annual performance and the process behind it.
I’ve always strongly favored the process part of that mix, mostly because decisions drive performance. With that in mind, here are my main process lessons from 2021. To help with the flow, I’ve ranked them roughly by the force with which the message punched me in the mouth.
• Widgets suck: Let’s face it, hardware complicates things. Companies producing physical products face manufacturing, material cost, and supply chain variables software firms simply don’t have. A hiccup in any one of those can throw a wrench into even the best laid plans. Just ask Peloton. Or Roku. Or you can ask me, since I took healthy losses on both after seeing first-hand how a widget butterfly flapping its wings can change a firm’s entire outlook (https://fs.blog/the-butterfly-effect/).
• The average consumer is a pain in the ass too: Now now, don’t take offense. I’m just as much an average consumer as anyone else. This is more a comment on consumer-facing business models. Simply put, business-to-business (B2B) firms are much easier to follow than business-to-consumer (B2C). Strong B2B products are generally more essential and harder to dislodge once customers commit to them. B2C products are subject to consumer moods, trends, and sentiments that are mostly nonexistent with corporate customers.
• Know your platform: Any company even remotely connected to software loudly trumpets its platform. 2021 taught me not all platforms are created equal. Peloton has a platform, but entrance to the best of it requires a hefty equipment purchase. Zoom has a platform, but for now it’s too reliant on a single product. Roku has a platform, but usage fluctuates based on hardware sales, viewer tastes, and cyclical advertising. Docebo has a platform, but digital learning appears to be about four steps removed from being mission-critical for most users. The lesson here is the importance of platforms varies wildly, so try to target those most likely to be a daily necessity customers just can’t do without.
• Net retention rate [NRR] is the shizzle (https://www.macmillandictionary.com/us/dictionary/american/s…): The best companies break traditional valuation models in a lot of ways. One of the most powerful (and potentially profitable) is by delaying or even defying “normal” growth slowdowns. While everyone has to land new business, this year I’ve come to appreciate the impact a high NRR has in making software’s land & expand model work. Current customers spending more as they go has a compounding effect, and accelerating NRR is a sneaky-strong path to outperformance. Having 20-30% revenue growth in the bag – or 60-70% in the case of Snowflake – before even a single new sale is an awesome way to start a new quarter or year.
• Make a habit of setting expectations for your holdings: Buying a stock implicitly means the company behind it has done something to earn your investment dollars. Consequently, there’s nothing wrong with setting expectations for what that company must do to keep them. And the simpler you make those guidelines, the easier it is to adjust if needed. Don’t forget YOU are the only one who decides if a company deserves your money or not.
• SaaS conviction levels are not – I repeat NOT!! – applicable to non-SaaS companies: This was the major takeaway from my Upstart experience. There’s simply less certainty in trying to gauge the future for non-SaaS companies, particularly those with limited or no sources of recurring revenue. Sure, there’s a chance for a bigger upside surprise than expected (see UPST’s Q2). The flip side is there’s also a greater chance for downside disappointment (see UPST’s Q3). It’s not that these businesses should be avoided entirely. It’s more about making sure allocations reflect the higher uncertainty.
• Be a quarter early rather than a quarter too late: I used to think the most expensive words in investing were “this time is different.” I now realize “I’ll give it one more quarter” is sometimes just as costly. I can only have so many holdings break my heart (and wallet) waiting an extra three to six months for a bounce that never comes. This year taught me most bounce theses are nothing more than bias and hope. Well, it turns out hope is not a strategy. Unless, of course, the strategy is throwing good money after bad. In that case you could say I had a pretty good year.
• Don’t half-ass your way out of positions: Zoom smoked me on this one. If interested, you can check out my June write up for the gory details (https://boards.fool.com/stocknovice39s-june-portfolio-review…).
Putting it all together, 2021 taught me to celebrate this simple chain of events…
• A quality earnings report –> positive call comments –> a guide suggesting a reasonable beat will produce another quality report.
…and raise my antennae at this one…
• A marginal or slightly disappointing report –> call comments containing hedges, complicated explanations, and/or soft excuses –> a guide where an unusually strong beat is required to get the company back on track.
Why do these patterns matter? Because…
• Trying to own only the best companies at all times is an extremely tough standard to meet: 2021 really brought home that part of running a concentrated portfolio. You might call it a momentum strategy, and many do. However, I view it as a strict adherence to owning only those firms that meet an insanely high set of performance standards. I’ll be the first to admit it sometimes seems like the only thing harder than clearing that bar is staying above it for an extended period. Every once in a while, a Datadog or a CrowdStrike or an Okta or an Alteryx has a lengthy stretch among the best of the best. Unfortunately, others come and go in much shorter time frames. Yet while the names might change, the standards remain remarkably stable. I personally view that as highly disciplined rather than momentum, but that’s just me. Your mileage may vary, of course.
I think of it this way. If you’re any kind of sports fan, picture your portfolio as the all-star game. We all know superstar players tend to be fixtures for years. Others string together a few seasons before eventually being overtaken. Some merit only a game or two before no longer being able to compete at that level. Last is the occasional flash in the pan who in all honesty might not have deserved a spot in the first place. If you replace “player” with “company” and “games” with “quarters,” you’ll get the gist of how I see it. Every (earnings) season is a chance to reassess the roster, and I’m the one responsible for making the picks. Personally, I’d love every company to be a fixture. Unfortunately, that’s not the way it works when an all-star standard needs to be met. Which all circles back to the lesson I relearn every year…
• You own the company and not the stock: Yeah, I already knew this one, but 2021 reinforced it for the umpteenth time. The longer I’m in the market, the clearer it becomes being able to separate the company from its stock when assessing the underlying business is one of the keys to successful investing. The market has repeatedly proven over time business execution leads stock price and not the other way around. It’s just reeaaalllly hard to stay focused on the slower pace of execution updates when price is always just a click away. Yet the best investors I know somehow seem to find a way (https://giphy.com/gifs/GSoAjnPrlSaoJE6ikt/fullscreen).
You might ask, “is it really that easy to focus on the business while ignoring the stock?” I wish, especially during pullbacks like this most recent one. But I figure the lesson will stick eventually if I just keep reminding myself over and over again. In fairness, I’d guess none of us ever fully escapes the pitfalls of market psychology. The best we can hope is to survive long enough to recognize when it occurs and accept it’s never as bad as it seems if we own the right companies. I have no idea if my current companies are the right ones, but I do believe they represent my best effort at beating the market entering 2022. I hope you feel the same way about yours.
Good luck, everyone.
Month YTD vs S&P Jan 5.0% 5.0% 6.1% Feb -3.0% 1.8% 0.4% Mar -15.9% -14.4% -20.1% Apr 9.1% -6.6% -17.9% May 3.1% -3.7% -15.7% Jun 18.4% 14.0% -0.4% Jul 2.8% 17.2% 0.1% Aug 20.3% 40.9% 20.5% Sep 0.3% 41.2% 26.6% Oct 11.5% 57.4% 34.8% Nov -9.8% 41.9% 20.4% Dec -8.4% 30.0% 3.1%
December Portfolio and Results:
%Port %Port 31-Dec 30-Nov 1st Buy DDOG 26.0% 24.6% 12/09/19 MNDY 20.6% 20.1% 09/20/21 ZS 19.5% 12.9% 06/10/21 SNOW 6.8% - 12/02/21 S 6.6% - 12/13/21 BILL 6.5% 6.2% 10/20/21 NET 5.1% 6.5% 08/07/20 AMPL 4.7% 5.9% 10/20/21 CRWD 4.2% 10.0% 06/12/19 UPST - 3.3% 03/18/21 Cash 0.0% 10.5% Return vs S&P Month: -8.4% -12.7% 2021: 30.0% 3.1%
December 2018: https://boards.fool.com/stocknovice39s-end-of-year-portfolio…
December 2019 (contains links to monthly reports): https://boards.fool.com/stocknovice39s-2019-portfolio-review…
December 2020 (contains links to monthly reports): https://boards.fool.com/stocknovice39s-december-portfolio-re…
January 2021: https://boards.fool.com/stocknovice39s-january-portfolio-rev…
February 2021: https://boards.fool.com/stocknovice39s-february-portfolio-re…
March 2021: https://boards.fool.com/stocknovice39s-march-portfolio-revie…
April 2021: https://boards.fool.com/stocknovice39s-april-portfolio-revie…
May 2021: https://boards.fool.com/stocknovice39s-may-portfolio-review-…
June 2021: https://boards.fool.com/stocknovice39s-june-portfolio-review…
July 2021: https://boards.fool.com/stocknovice39s-july-portfolio-review…
August 2021: https://boards.fool.com/stocknovice39s-august-portfolio-revi…
September 2021: https://boards.fool.com/stocknovice39s-september-portfolio-r…
October 2021: https://boards.fool.com/stocknovice39s-october-portfolio-rev…
November 2021: https://boards.fool.com/stocknovice39s-november-portfolio-re…
Ladies and gentlemen, 2022’s starting lineup…
AMPL – Amplitude’s December was highlighted by six #1 category rankings in software review firm G2’s Winter 2022 Report (https://investors.amplitude.com/news-releases/news-release-d…). It was also the fifth consecutive report users ranked AMPL the #1 product analytics solution. Amplitude continues to show a lot of promise for a young company. I’m cautiously optimistic (i.e. 4.7% allocation optimistic) it can turn that promise into further execution during 2022.
CRWD – CrowdStrike was our last holding to report this earnings season. I’d call the quarter solid but very much as expected. I anticipated $380M in revenue with a roughly $410M Q4 guide (https://boards.fool.com/skudrun-good-writeup-i-agree-100-wit…). CRWD posted $380.05M and $406.5-$412.3M. So, the headline numbers were right in line. So far, so good.
Digging deeper though, I thought customer metrics were mixed. CrowdStrike added 1,607 new customers, a slight drop from a record 1,660 in Q2. The resulting 75% YoY and 12% QoQ growth were the lowest ever dropping from 81%/15% last quarter and 85%/16% last year. The good news is those customers keep steadily using more of CRWD’s 21 modules with 68% at 4+, 55% at 5+, and 32% using 6 or more. Each of those figures is up from Q2 and last year. In addition, NRR again met the company’s 120%+ benchmark meaning current customers are continuing to increase spend.
The underlying highlight was an acceleration in net new Annual Recurring Revenue (ARR). This is a measure management has hyped several quarters now. It surged unexpectedly in Q1 and flattened for Q2 before showing renewed signs of life in Q3. The CFO stressed multiple times this quarter’s record $170M was a broad-based expansion and not a one-time bump from outsized deals. Net new ARR is also being boosted by CRWD’s product expansion beyond endpoints into cloud workloads. Management estimates the ARR contribution from workloads as 25% and growing. That’s a positive sign.
The ARR news was in my opinion the quarter’s most interesting development, particularly with the announcement the Cybersecurity and Infrastructure Security Agency (CISA) selected CrowdStrike as one of its major partners (https://ir.crowdstrike.com/news-releases/news-release-detail…). CEO George Kurtz says CrowdStrike will “secure a significant portion of endpoints and workloads for multiple federal agencies as they operationalize the White House executive order to improve the nation’s cyber resiliency.” The deal also makes the “federal government one of our top customers.” Though there are plenty of companies touting the same – and plenty of other partners in this CISA deal – it is always nice to have a top customer with such obviously deep pockets. Now all CRWD has to do is land the business. The CFO noted government ARR was “not notable in Q3, [but] we will see it steadily fold into ARR over the coming quarters.” It better steadily fold in if CrowdStrike is going to maintain growth at this scale.
CRWD’s ability to execute at this size is what I’ll be watching closest entering 2022. As described at the top, this quarter delivered almost exactly the beat and raise I was looking for. That’s good because we all know beat and raise is part of the game. The question is whether the market already built in the same expectation. Since the stock hasn’t really budged since earnings, it would appear so. And that’s the challenge. As CrowdStrike continues to get bigger, it gets harder and harder to post an upside surprise. Its performance might be reliable and efficient, but reliable and efficient is not necessarily the hallmark of a hypergrowth winner. It sounds like more of a GARP (growth at a reasonable price) option instead.
As companies grow and mature, the difference between what is and what could be shrinks to the point almost everything is already built into the price. At some point you’re no longer amazed by Steph Curry dropping 30 a night (https://www.youtube.com/watch?v=7fPcse1phtk&ab_channel=M…). Once that happens, a 40-point outing becomes no big deal and 25 feels like a disappointment even though that’s a great outcome for just about anyone else. Though it’s still Steph Curry, it’s no longer “Oooh, man! I gotta buy that ticket!” Now it’s more like, “Yeah, I know it’s Steph Curry, but do I wanna buy that ticket today?”
And that’s the dilemma. Has CRWD reached its Steph Curry inflection point? And if so, just how many points does CrowdStrike need to score the next couple of quarters to keep everyone buying those tickets? That’s clearly something to think about. If the promised government business doesn’t kick in soon – and really, when has any government program anywhere kicked in sooner rather than later? – CRWD might have transitioned from an exciting investment to a boring good one. While that still fits many styles, boring good usually ends up getting displaced by faster growers in a concentrated portfolio. Unfortunately, CrowdStrike is drifting that way.
In the end, I found CRWD’s quarter right about as expected. Yet CRWD’s right about as expected is coming at the same time other security firms like ZScaler, Palo Alto, and SentinelOne are delivering mild to strong surprises. Why hasn’t CRWD been able to do the same? Regardless of the reasons, each quarter without a surprise only makes it tougher the next time around. The numbers just get too big. After another good-but-not-great report, I’ve more than halved this position. I figure it’s not just CRWD’s quarter in isolation but CRWD’s quarter versus other alternatives. In my opinion those alternatives deserve the bigger allocations right now. So that’s what I did. At this point I’m willing to wait another quarter to see how many of those government seeds crop up in revenue, ARR and/or the forward guide. However, another right about as expected showing in Q4 would likely bring CrowdStrike’s impressive portfolio run to an end. *
(* I wondered if I might be setting myself up for another “one more quarter” letdown but don’t believe so. I wouldn’t say this quarter disappointed and am not sure George Kurtz is genetically capable of uttering a hedge or excuse. It’s not about losing conviction in CrowdStrike the company as much as becoming less enthusiastic about its investment potential compared to other options. I’ve decided the possible government business is worth waiting on another update. However, proof that business is arriving sooner rather than later will be non-negotiable in next quarter’s report.)
BILL – There’s not much to report on Bill.com this month other than hiring Sarah Acton as its new Chief Marketing Officer (https://investor.bill.com/news/news-details/2021/Bill.com-Hi…). Acton brings over 25 years of experience to the firm with previous positions at Athos (an athletic wearables company), LinkedIn, and Yahoo!. Bill.com made considerable strides in building its brand during 2021. Let’s hope Acton helps keep that momentum going in 2022.
DDOG – Though it was a fairly quiet month for my #1 holding, two pieces of news did hit my feed. First, Datadog launched a service to assist users with data protection and regulatory compliance (https://investors.datadoghq.com/news-releases/news-release-d…). This new feature “provides customers with an easy solution to detect, classify and protect sensitive data found in their application logs, helping them comply with regulatory requirements (such as GDPR, HIPAA, CCPA), industry standards and business policies.” Security and compliance have become increasingly important in today’s environment, so it’s no surprise Datadog is making sure to tighten up its credentials in this area.
Next, Datadog formally joined the Nasdaq 100 as of December 20 (https://www.nasdaq.com/press-release/annual-changes-to-the-n…). The primary and most obvious benefit is any mutual fund or ETF containing Nasdaq 100 firms now needs to own Datadog. The secondary and in my opinion more relevant benefit is the public recognition of Datadog’s rapid progress from 2019 IPO to one of the more successful tech businesses in the market (https://giphy.com/gifs/will-ferrell-elf-congratulations-vmtx…).
MNDY – I added a lot during the December pullbacks. You know what they say…in for a penny, in for a pound. Well, make that several pounds in my case. I believe monday.com sits in a very strong spot heading into the new year.
NET – As usual, Cloudflare has a lot going on. The main product news was an expansion of its Zero Trust platform (https://cloudflare.net/news/news-details/2021/Cloudflare-Exp…). The enhancements will make it even easier for customers to move away from legacy firewalls to “secure their entire corporate network across all of their branch offices, data centers, and clouds.” That certainly fits with NET’s mantra of making things safe, fast, and reliable.
Cloudflare also conducted CIO Week, the final 2021 installment of its Innovation Weeks series (https://blog.cloudflare.com/welcome-to-cio-week/). After a year spent detailing an astonishing number of new releases and features, it only makes sense to tailor a week to those individuals tasked with sorting through it all on behalf of their employers. I look forward to seeing what business momentum these Innovation Weeks create in 2022.
Next, Cloudflare made a minor acquisition with the purchase of Zaraz (https://cloudflare.net/news/news-details/2021/Cloudflare-Acq…). Zaraz’s technology revolves around speeding up and securing websites, which is right up Cloudflare’s alley. The potentially bigger milestone is this marks the first acquisition of a company built on NET’s Workers developer platform. It will be interesting to see how and if Cloudflare can further leverage the thousands of applications being created on Workers.
Lastly, Cloudflare announced a couple new partnerships. One was a deal with several leading cybersecurity insurers qualifying NET customers for discounts and other benefits (https://cloudflare.net/news/news-details/2021/Cloudflare-Hel…). I consider it a feather in Cloudflare’s cap underwriters have enough faith in its products to offer discounts to its users.
The other was an agreement to join Microsoft 365’s network partner program (https://cloudflare.net/news/news-details/2021/Cloudflare-Joi…). This deal gives Cloudflare’s Zero Trust users “enhanced connectivity to Microsoft 365 services, enabling them to get faster performance and optimal user experience.” Faster and optimal. Yet another example of NET’s incredible ability to stay on point.
If nothing else, Cloudflare deserves my 2021 Most Recap Keystrokes Award. I can’t say I’ve ever owned a company that stays as active or communicates as thoroughly as this one. That in turn has led to some lengthy but well-deserved write ups. Here’s hoping Cloudflare executes just as thoroughly in 2022.
S – SentinelOne (S1) makes its portfolio debut. Yet another cybersecurity firm, S1 touts its automated response capabilities as its differentiator from competitors. Rather than withstand the traditional time lag of IT and/or response staff when countering attacks, S1’s platform is designed to automatically block threats and begin the initial response. CEO Tomer Weingarten describes it as “empowering human operators with the speed, scale, and precision of technology” to better protect devices, cloud workloads and the data itself.
I have no idea how much of a technical advantage that might be, but SentinelOne’s performance so far suggests there’s some steak behind the sizzle. Over the last four quarters, S1 has posted metrics that look very much like a long-term SaaS winner (oldest to most recent):
• YoY Revenue Growth: 97%, 108%, 121%, 128%
• QoQ Revenue Growth: 22%, 25%, 22%, 22%
• Annual Recurring Revenue Growth: 96%, 116%, 127%, 131%,
• Net Retention Rate: 117%, 124%, 129%, 130%
• Growth in Customers Spending >$100K: 111%, 127%, 138%, 140%
• Gross Margin: 54%, 53%, 62%, 67% (should hold/decrease short term; long-term target 75-80%)
The flip side of all this topline acceleration is SentinelOne continues to show considerable cash burn and large losses. Both moved in a strongly positive direction last quarter, but S1 must prove it can maintain the trend. The Q4 and FY22 figures below are current guides which I’d expect to be beaten. For context, management guided for a -90% Q3 operating margin before posting the -69% result.
Operating Cash Flow % Revenues Q1 Q2 Q3 Q4 YR Q1 Q2 Q3 Q4 YR 2019 2019 2020 -$10.46 -$11.89 -$7.07 -$15.01 -$44.42 2020 -120.6% -112.7% -58.3% -99.2% -95.6% 2021 -$11.80 -$13.71 -$17.77 -$23.29 -$66.57 2021 -65.7% -66.3% -72.4% -78.0% -71.5% 2022 -$30.80 -$41.99 -$17.00 2022 -82.4% -91.8% -30.3% 0.0% 0.0% 2023 2023 non-GAAP Free Cash Flow % Revenues Q1 Q2 Q3 Q4 YR Q1 Q2 Q3 Q4 YR 2019 2019 2020 -$10.81 -$12.64 -$8.31 -$15.32 -$47.08 2020 -124.7% -119.8% -68.5% -101.3% -101.3% 2021 -$12.72 -$14.48 -$19.84 -$25.57 -$72.61 2021 -70.8% -70.0% -80.8% -85.6% -78.0% 2022 -$32.59 -$44.74 -$20.68 2022 -87.2% -97.8% -36.9% 0.0% 0.0% 2023 2023 non-GAAP Operating Income (LT 20%+) % Revenues Q1 Q2 Q3 Q4 YR Q1 Q2 Q3 Q4 YR 2019 2019 2020 -$15.15 -$14.71 -$18.70 -$22.08 -$70.64 2020 -174.7% -139.5% -154.3% -145.9% -152.0% 2021 -$22.58 -$20.97 -$25.09 -$30.97 -$99.61 2021 -125.7% -101.4% -102.2% -103.7% -107.0% 2022 -$47.50 -$45.00 -$38.73 -$53.80 -$180.00 2022 -127.0% -98.4% -69.1% -80.0% -90.0% 2023 2023 non-GAAP Net Income % Revenues Q1 Q2 Q3 Q4 YR Q1 Q2 Q3 Q4 YR 2019 2019 2020 2020 0.0% 0.0% 0.0% 0.0% 0.0% 2021 -$22.99 -$21.35 -$25.56 2021 -128.0% -103.3% -104.1% 0.0% 0.0% 2022 -$48.52 -$46.00 -$39.95 2022 -129.8% -100.6% -71.3% 0.0% 0.0% 2023 2023
As the CFO pointed out, Q3’s performance was balanced between new and existing customers in all geographies and customer sizes. That bodes well for SentinelOne maintaining the improved leverage.
The question, of course, is exactly how S1 fits in a crowded cybersecurity field. While competitors like CrowdStrike have multiple awards and recognition, so does SentinelOne. Its Singularity platform was recognized by Forrester Research as “the best fit for companies that want customizability and to grow into XDR.” S1 was also named Best Innovator in SE Labs’ Annual Report. It most recently won CRN magazine’s 2021 Endpoint Protection Security Product of the Year (https://www.businesswire.com/news/home/20211213005565/en/). After swapping some notes with more tech-savvy peers, it sounds like the better CRWD/S1 mousetrap depends mostly on what you want it to do. S1 does seem to have the edge though if the cheaper mousetrap matters. Fortunately, there’s an awful lot of mice running around right now, so it looks like there’s plenty of room for everyone.
While I don’t believe SentinelOne is executing quite as well as CrowdStrike at the same stage, that’s secondary to whether S1 has the better future heading into 2022. Since I’m not entirely sure yet, I’ve decided to let them duke it out for a bit and see where things go. As my allocations suggest, I give S1 a slight edge so far.
SNOW – Last month I wrote “I considered rebuying SNOW on its recent drop but decided to wait instead being this close to December 1 earnings. A strong report would likely be worth restarting a position.” Well, you can’t say I’m not a man of my word.
I thought Snowflake nailed it. The quarter was headlined by $312M in product revenue and an acceleration to 110% YoY growth. That type of growth at this size is amazing. Even better, QoQ growth increased to 23% versus 19% in both Q2 and last year suggesting short-term business has jumped as well. Likewise, international growth surged 174% YoY in EMEA and 219% in Asia Pacific. That pushed international business to 17% of total revenue versus 16% last quarter and 14% in 3Q21. Data is booming everywhere, and Snowflake is apparently booming right along with it.
This exploding top line is creating excellent leverage as SNOW grows. Gross profit grew even faster than revenue leading to all-time highs in total (70.7%) and product gross margin (74.6%). Remaining Performance Obligation (RPO), which had slowed noticeably in Q1 and Q2, made a solid comeback in Q3 with 18% QoQ growth. The CFO expects “Q4 is going to be a big RPO addition. But at the end of the day, it’s not RPO in isolation, it’s revenue, and it’s more current RPO that is more meaningful.” Current RPO (expected to be recognized within the next 12 months) is 55% of the total or $990M. That’s certainly a nice head start.
The upside surprise knocked Q3 expenses to a record-low 68% of revenue, which in turn produced $8.5M in operating income for Snowflake’s first-ever profitable quarter. That means it has posted the following operating margins since going public (oldest to most recent):
-30.1%, -24.1%, -15.6%, -8.0%, 2.5%.
That’s an incredible run, though I guess that’s what happens when your first five quarters as a public company include revenue growth between 103% and 116%. I’d expect management’s 96% Q4 guide will finish closer to 110% keeping the streak intact. With an initial Q4 operating margin guide of 0.9%, I think it’s reasonable to anticipate another acceleration there as well. In my opinion, Snowflake’s continued outperformance is a great illustration why NRR is indeed the shizzle. Its 173% is not only best-in-class but leaves most others reporting this metric in the dust. There’s always the question of how long SNOW can hold these levels but starting so high leaves plenty of room for continued NRR support even when we see the inevitable fade.
Its business is growing so rapidly Snowflake has now created individual clouds for its financial and media customers. This lets participants create and customize their own collaborative environments. Management anticipates eventually doing the same for other verticals and singles out healthcare as a likely candidate. I’d have to think these individualized clouds will only increase the stickiness of SNOW’s products and platform as we go.
Likewise, Snowflake is seeing rapid growth of its data marketplace where clients can store, list, and share datasets. It ended the quarter with 924 datasets from more than 200 providers. Management noted a 130% increase in what it calls “stable edges”, which are ongoing sharing relationships between providers and users. As CEO Frank Slootman noted previously, the only thing limiting these relationships is the creativity and budgets of marketplace participants. Kudos to Snowflake for positioning itself to earn a cut of every collaboration that occurs in what appears to be another fast-growing space.
Not surprisingly, management’s comments on the quarter were glowing. Slootman said the nature of data means Snowflake is not just talking to CIO’s and IT execs but everyone on the business side needing to analyze and interpret it. That makes Snowflake a company-wide topic for customers rather than just a technical concern. That also makes it mission-critical, which is exactly where any service provider wants to be (like I said, know your platform!).
I previously owned and exited SNOW this year over worries the lowish Q1 customer adds would fail to support higher revenue growth the second half of the year. With new clients taking 9-12 months to ramp up revenues, I was uncomfortable this smaller cohort could carry the load when its turn came around. The Q3 results and strong Q4 guide have at least temporarily calmed those concerns, though I’ll keep watching.
Snowflake’s stellar growth is being led by $1M+ customers and a continued rise in NRR due to “rapid growth among our largest customers and the addition of six customers to the measurement cohort that have gained greater than $1M in revenue in the past year.” Is there a cap to these $1M+ customers? Maybe, but maybe not. After all, during Q3 Snowflake closed a 3 year/$100M deal along with five other eight-figure multi-year deals. Management seems to be nailing its focus on “penetrating the largest enterprises globally as we believe these organizations provide the largest opportunity for account expansion.” It already has 148 customers spending $1M+ including eight at $10M+. Since portfolio mate ZScaler has 224 $1M+ customers at an even smaller scale, I might be underestimating just how many of these big spenders exist. Slootman says, “we sort of haven’t reached that tipping point yet where sort of the floodgates are open and things are just expanding at a meteoric rate. But we’re anticipating that that will happen at some point.” Since I’m a total sucker for meteoric rates, it looks like I might stick around a while.
UPST – Upstart the business had an interesting month. First, it expanded its relationship with what looks like a pretty major partner (https://ir.upstart.com/news-releases/news-release-details/fi…). First National Bank of Omaha (FNBO) is a subsidiary of First National of Nebraska. First National of Nebraska (FNN) and its affiliates hold over $25B in assets across seven states. According to the release, this expansion will “scale [FNBO’s] personal loan program nationwide.” I’m not sure how many other FNN affiliates will immediately participate, but this is obviously another nice partner win for Upstart.
Next, it joined with the National Bankers Association (NBA) to improve credit access to customers of minority-owned depository institutions (https://ir.upstart.com/news-releases/news-release-details/up…). NBA is a nationwide group of minority-owned banks listing 24 main members with affiliates in 22 states and the District of Columbia. These institutions will now have access to UPST’s technology for smaller personal loans to “help borrowers recover from short-term setbacks, without playing exorbitant interest rates from payday lenders that can quickly turn into cycles of debt.” This appears to be Upstart’s first public move into the smaller loan category hinted at during the Q3 conference call.
Despite the generally positive business updates, UPST the stock didn’t make it through the end of the year in our portfolio. I exited during the broader mid-December pullback when realizing I preferred DDOG at $156, ZS at $270, and starting S at $47 to holding UPST at $140. So, that’s what I did. I’m comfortable Upstart will post a solid Q4. However, I consider the future beyond too murky to pass on those other companies at such discounted prices. Upstart had a strong and (fortunately) profitable portfolio run. For now, I’m willing to wait for the Q4 report and management’s comments before reassessing. Let’s see if it can work its way back into the mix at some point in 2022.
ZS – There were a couple brief but positive pieces of news on ZScaler this month. First, it announced the general availability of its Zero Trust Workload Communications solution (https://ir.zscaler.com/news-releases/news-release-details/zs…). In techno-speak, this gives ZS “the industry’s first Zero Trust for cloud workloads solution that secures cloud-to-internet, cloud-to-cloud, cloud-to-data center, and intra-cloud communications.” That sounds like a lotta communications. Here’s hoping it leads to a lotta business.
Next, ZScaler joined fellow holding Datadog in being added to the Nasdaq 100 (https://www.nasdaq.com/press-release/annual-changes-to-the-n…). As with DDOG, this means anyone mirroring or tracking the Nasdaq 100 now needs to own ZS. Likewise, this serves as notable recognition of what ZScaler has accomplished as a public company.
As for the stock, ZS’s fantastic November 30 earnings report was not enough to keep it from getting caught up in December’s broader growth pullback. I personally viewed it as a gift and pushed this allocation heavily. In October I wrote:
”I continue to think ZScaler is as well-positioned for the next few quarters as any company we own. In fact, it’s not hard to imagine an uptick in both numbers and narrative at some point. I really like where ZS sits after this exercise and would even consider it an early sleeper for a big 2022.”
Two months later I feel exactly the same. In fact, I’m pretty hyped up to see what ZS can do during the upcoming year (https://giphy.com/gifs/H70SgZh48rZYNxQY5N/fullscreen).
My current watch list in rough order is ZoomInfo (ZI), Upstart (UPST), and Asana (ASAN). I’ve poked around on some fintech and e-commerce names as well but just can’t get comfortable enough to list any here.
And there you have it. I can’t say it was the smoothest finish, but I have little to complain about exiting 2021. Despite a rough last couple of months for growth stocks, I was still able to squeak out a market beating year. I learned a ton and more importantly believe I improved my process. I owe a great deal to those who continue to post and share information so freely, especially here at Saul’s. Crowdsourcing is a powerful tool – with the right crowd, of course – and the shrinking of the world via the internet and Zoom is one of the rare ways COVID has likely changed us for the better. I’m not sure there’s ever been a better environment for the amateur/retail investor to learn, share, and collaborate. I tip my glass to those who plan to keep collaborating in 2022 (https://giphy.com/gifs/dicaprio-draw-serial-8Iv5lqKwKsZ2g/fu…).
Thanks for reading, and I hope everyone’s New Year gets off to a great start.