Wow. Quite the month.
Like many here I saw my portfolio surge multiple times during June before sliding back this week. For the first time in a long time I had to seriously consider my top-end comfort level for an individual holding when MDB spiked early on and temporarily challenged the 15% allocation mark. Luckily those concerns were alleviated in the best possible way when AYX, TTD and some others jumped immediately afterwards to return things to a more comfortable balance while my overall portfolio continued to climb. Even with the retrenchment of the last few days, I can’t complain about another positive month.
I know there’s been a lot of discussion lately about the valuation for many of these stocks. Like others, I wish there were more obvious bargains. Unfortunately, there’s not. As Saul and others have pointed out repeatedly there’s a strong argument these stocks deserve higher valuations due to the low capital business structure and the relative certainty of recurring revenues. Trying to predict the future is a lot easier once you realize many of these companies scatter enough crumbs to get at least a good portion of the way there. Because of that it was only a matter of time until the broader market started paying more attention to this little corner of the investing world.
Is there massive exuberance around some of these stocks right now? No doubt. Will we see some sort of correction at some point? Almost certainly, although we have no idea when. Do we have any control over it? Absolutely not!! In the meantime, the silver lining is many of us have seen better returns than we ever could have imagined as a result.
In the bigger picture I keep reminding myself I can only choose from the options available. I find it telling that despite continued efforts to look elsewhere by some VERY smart people on these boards, we keep coming back to the same bundle of names. Through most lenses these are great companies with impressive results and exciting futures. In my opinion the fact the table stakes have risen so drastically only confirms we’re still playing one of the best games in town. A bigger ante undoubtedly lessens our margin of safety. However, I’d have to think those that stay disciplined and smart will still win their fair share of hands in the long run. Happy investing everyone…
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%
June Portfolio and Results:
%Port %Port 30-Jun 31-May 1st Buy Return vs S&P AYX 13.7% 12.1% 08/27/18 69.4% 64.8% MDB 13.0% 13.3% 08/29/18 74.2% 71.0% TWLO 12.3% 13.2% 08/27/18 56.4% 52.3% TTD 12.1% 11.7% 06/08/17 70.2% 64.1% ZS 10.7% 10.2% 08/27/18 68.6% 65.3% OKTA 9.5% 9.7% 06/15/18 89.5% 84.7% SMAR 7.3% 7.2% 01/07/19 51.7% 42.2% PLAN 5.3% 3.7% 05/28/19 14.9% 11.5% ROKU 5.0% 5.6% 05/13/19 11.3% 8.9% SHOP 4.5% 5.9% 08/06/18 83.5% 76.9% CRWD 3.6% - 06/12/19 8.2% 6.3% PD 3.0% 3.7% 04/11/19 23.5% 21.6% ZEN - 3.8% 02/08/19 6.4% 4.5% Cash 0.02% 0.03% Return vs S&P Month: 10.5% 3.6% 2019: 69.4% 52.1%
Past recaps for anyone who’s interested:
December, 2018: https://discussion.fool.com/stocknovice39s-end-of-year-portfolio…
I remained at 12 stocks this month, but did do some minor shuffling in the back half of my portfolio. I also lowered the total number I consider core holdings from 9 to 8 as I’ve finally started to transition away from SHOP. Individual musings below:
AYX – Alteryx led the charge for my portfolio this month with a 25.6% gain. The main news was an Investor Presentation and Analyst Day on June 11. Ethan provided a first-rate recap of the company’s slide presentation (Ethan’s take: https://discussion.fool.com/ayx-analyst-day-etc-34227919.aspx; AYX slides: https://investor.alteryx.com/news-and-events/presentations/d…). In a nutshell, management strongly reaffirmed the excellent business prospects most of us are already familiar with. The most impressive statement to me was AYX stamping 90-92% as their long term gross margin target and 35-40% as their long term operating margin. Those numbers are about as lofty as you’ll find and suggest the company sees little to no competition or pricing pressure on the immediate horizon. We talk a lot about the possibility of these companies being able to turn on the profit spigot whenever they want. AYX appears to be a prime example. They’ve done nothing to dissuade me from keeping them as one of my largest allocations and are the likely destination for any cash I add in July.
CRWD – A new position purchased as soon as it became available at IPO. I got in at just over $63. Yeah, I know it’s expensive but still thought it was worth a starter spot. CrowdStrike has been touched on previously, and its performance thus far has been outstanding. Some highlights (any 1Q20 numbers are top-end guidance from their most recent S1):
Revenue % YoY Q1 Q2 Q3 Q4 YR Q1 Q2 Q3 Q4 YR 2017 $52.75 2017 2018 $38.72 $118.75 2018 125.1% 2019 $47.29 $55.70 $66.38 $80.46 $249.82 2019 107.8% 110.4% 2020 $95.70 2020 102.4% ARR % YoY Q1 Q2 Q3 Q4 YR Q1 Q2 Q3 Q4 YR 2017 $58.76 2017 2018 $71.00 $90.00 $113.00 $141.31 2018 140.5% 2019 $170.39 $208.00 $254.00 $312.66 2019 140.0% 131.1% 124.8% 121.2% 2020 $360.00 2020 111.3% Subscriptions % YoY Q1 Q2 Q3 Q4 YR Q1 Q2 Q3 Q4 YR 2017 $37.90 2017 2018 $32.49 $92.57 2018 144.3% 2019 $39.76 $49.16 $57.65 $72.83 $219.40 2019 124.1% 137.0% 2020 $85.60 2020 115.3% Subscriptions % Revenues Op Ex % Revenues Q1 Q2 Q3 Q4 YR Q1 Q2 Q3 Q4 YR 2017 71.8% 2017 207.2% 2018 83.9% 78.0% 2018 145.5% 164.8% 2019 84.1% 88.3% 86.9% 90.5% 87.8% 2019 129.0% 121.3% 129.9% 105.3% 119.9% 2020 89.4% 2020 0.0% Op Expenses % YoY Q1 Q2 Q3 Q4 YR Q1 Q2 Q3 Q4 YR 2017 $109.30 2017 2018 $56.31 $195.71 2018 79.1% 2019 $61.01 $67.55 $86.20 $84.69 $299.45 2019 50.4% 53.0% 2020 2020 GAAP Gross Profit % YoY Q1 Q2 Q3 Q4 YR Q1 Q2 Q3 Q4 YR 2017 $18.74 2017 2018 $19.55 $64.27 2018 243.0% 2019 $27.90 $37.13 $44.11 $53.46 $162.59 2019 173.5% 153.0% 2020 $66.60 2020 138.8% non-GAAP Subscription Gross Profit % YoY Q1 Q2 Q3 Q4 YR Q1 Q2 Q3 Q4 YR 2017 $13.66 2017 2018 $53.09 2018 288.5% 2019 $24.75 $151.21 2019 184.8% 2020 $62.37 2020 152.1% -100.0% non-GAAP Subscription Gross Margin GAAP Gross Margin Q1 Q2 Q3 Q4 YR Q1 Q2 Q3 Q4 YR 2017 36.1% 2017 35.5% 2018 0.0% 57.3% 2018 50.5% 54.1% 2019 62.2% 0.0% 0.0% 0.0% 68.9% 2019 59.0% 66.7% 66.4% 66.4% 65.1% 2020 72.9% 2020 69.6% Dollar-Based Gross Retention GAAP Subscription Gross Margin (S1 writeup) Q1 Q2 Q3 Q4 YR Q1 Q2 Q3 Q4 YR 2017 93% 2017 2018 94% 94% 96% 96% 2018 56% 2019 97% 97% 97% 98% 2019 62% 70% 70% 70% 2020 2020 Expansion Rate Q1 Q2 Q3 Q4 YR 2017 104% 2018 114% 116% 122% 119% 2019 123% 127% 127% 147% 2020 141% Subscription Customers % YoY Q1 Q2 Q3 Q4 YR Q1 Q2 Q3 Q4 YR 2017 450 2017 2018 1,242 2018 176.0% #DIV/0! 2019 1,491 2,516 2019 102.6% #DIV/0! 2020 3,054 2020 104.8% -100.0% #DIV/0! non-GAAP Operating Income % Revenues Q1 Q2 Q3 Q4 YR Q1 Q2 Q3 Q4 YR 2017 -$88.47 2017 -167.7% 2018 -$118.30 2018 -92.0% -99.6% 2019 -$31.23 -$115.78 2019 -66.0% -51.0% -43.0% -35.0% -46.3% 2020 -$21.80 2020 -22.8% non-GAAP Free Cash Flow % Revenues Q1 Q2 Q3 Q4 YR Q1 Q2 Q3 Q4 YR 2017 -$64.65 2017 -122.6% 2018 -$94.99 2018 -80.0% 2019 -$65.61 2019 -26.3% 2020 2020
*(I’m sorry MF’s formatting is so terrible. Hopefully the operating margins aren’t too hard to decipher.)
As you can see, CrowdStrike sports triple-digit growth in just about all the right places at a run rate quickly approaching $400M. On paper it looks a lot like Zoom without the pre-IPO breakeven profits. That’s pretty impressive, especially when you consider CRWD operates in the very busy cybersecurity space (just as Zoom competes in a crowded videoconferencing market).
CrowdStrike’s differentiator appears to be a cloud-native technology that continually analyzes data across their entire customer base and shares the results in real time. Their main products are “10 cloud modules [sold] via a SaaS subscription-based model that spans multiple large security markets, including endpoint security, security and IT operations (including vulnerability management) and threat intelligence”. I’m no techie, but I know security matters more than ever and CRWD appears to be doing something very, very right. For those of you that might want to read something a little more techie, check out muji’s excellent deep dive here: https://discussion.fool.com/crowdstrike-deep-dive-34213712.aspx. One thing I noted during my research was Symantec listed as a competitor. After Symantec’s recent poor quarter there was a lot of speculation here that ZScaler was eating its lunch. The numbers above suggest CrowdStrike might be fattening up a little at Symantec’s expense as well.
Putting it all together, CrowdStrike hits a lot of checkpoints. It has innovative products in a mission-critical area, it’s growing like a weed, it has gobs of recurring revenue and its secondary metrics impress almost across the board. I know it’s a crowded space, but CrowdStrike appears to be devouring that space so far. Their first report is July 18, and anything above the Q1 estimates in their S1 would only make CRWD even more interesting. I’m not saying CRWD can pull a ZM (mostly because of the difference in profitability), but there are clear avenues for upside here. And if I’m going to KNOWINGLY take my chances on a high P/S or EV/S stock, I might as well put my money on a horse coming out of the gate with a 100%+ growth rate in a lot of the measurements I care about. I’m really curious to see where this one goes.
ESTC – I don’t own it but want to comment on it anyway for future reference. Elastic ended May at the top of my watch list and I looked forward to June 5 earnings. Unfortunately, I still can’t get comfortable with it. Revenue growth continues to dip: 79%, 72%, 70%, 63% over the last four quarters with a FY decline from 81% to 70%. I know the numbers are slightly better when adjusted for currency, but they are still drifting firmly in the wrong direction. While I’d fully expect a decrease as Elastic grows and comps get tougher, I’m personally not seeing enough bottom line progress to offset the revenue decline. Operating margins were basically flat for the year (-20.0% FY18 vs -20.5% FY19), net margins were similar (-24.6% FY18 vs -22.5% FY19) and cash flow remains spotty. Gross margins are fine at 74% but fall short of companies such as SMAR (81%), PD (86%) or AYX (91%!!). Simply put, I feel other firms I’ve dug into at a similar stage have shown either more progress or a more understandable path towards profitability.
Compounding matters further is the fact I still don’t fully comprehend ESTC’s business model despite the many excellent write-ups on this board. They clearly have a LOT of balls in the air right now and are expanding into some already competitive markets. And I don’t mean to sound harsh, but this is literally the first earnings release I can recall reading where a company touted giving away free features as part of their business highlights. While additional product differentiation is nice, it means little if it doesn’t translate to actual dollars. To what extent that happens is still TBD in my opinion. Most of the companies we discuss – and likewise most of the companies I own – tend to show steadily increasing leverage as they grow and scale. At present Elastic seems to be treading water in this area, at least as I see it. Their raw growth rates are still quite strong and I respectfully see the thesis of those who own it. However, I likely won’t be able to get over the hump myself until I see better progress on the bottom line.
MDB – MDB reported June 5. Revenue and subscription growth accelerated to 78% and 82%, respectively. Subscriptions have increased to 94% of revenues from 92% last year. Atlas revenues grew 340% and now make up 35% of their total. Customer growth remains very strong and Mongo finished the quarter FCF positive for the first time as a public company. In addition I found this call exchange really interesting:
”Dev, maybe sticking with Atlas first, can you give us a sense of what the net expansion rate looks like in that business versus the overall business maybe on a cohort perspective?”
”Yeah. The net expansion rate is definitely higher than our overall blended business. We don’t publish that number, but it’s just a function of the fact that customers can consume infrastructure more quickly. They don’t have to go provision more internal capacity or deal with any of the operational issues of provisioning more capacity. And so, we find that the net expansion rates are higher than our blended rate that we’ve disclosed, which is, for the 17 quarters in a row, has been over 120%.”
If I’m reading that correctly, even though Atlas has slightly lower margins it could potentially lead to an increase in their expansion rate as it continues to grow as a percentage of revenues. It appears Mongo’s business is growing like mad no matter how you slice it.
The market’s immediate reaction to earnings was mixed, possibly on some of the noise in their secondary figures. Gross margins fell to 70.3% from 71.4% last quarter and 73.7% last year. That decline was anticipated though as they integrate the mLab acquisition and grow their lower margin Atlas business. The other development was a guide toward a slightly larger loss for the year despite raising revenue projections. They lowered the midpoint guide for FY20 operating losses from -$57M to -$61M and EPS from -$1.03 to -$1.08. They did note the impact of the $39M Realm acquisition in this decreased guide, but I’m guessing down is down as far as the algorithms are concerned. In addition, for the second call in a row they made comments specifically warning of tougher comps in Q3/Q4.
Those warnings mean it’s probably prudent to pay attention the next couple quarters to ensure Mongo stays on the right path (then again, when isn’t that prudent for any company?). However, from my perspective that’s mostly nitpicking for a business growing their top line this rapidly. I considered adding more, but as mentioned last month I was already slightly overweight heading into earnings. I simply held instead and like many here saw MDB leap upward before sliding back and settling in. Despite the short-term roller coaster, it’s worth pointing out MDB still posted a solid 8.4% gain this month.
In the end, Mongo continues to do Mongo things. Below is a March quote from nilvest in my notes which I think is a perfect description of what’s going on:
“How often can you find a combination where
– you can be very confident of a market that’s still emerging but WILL BECOME huge
– you can be very confident that there is ONE WINNER TAKES MOST
– and you can be confident on WHO that winner is
– and you can INVEST IN THAT WINNER in pure and direct way (not as a group in some other company)”
That pretty much nails my present sentiments on the company. I’m very happy to hold it, and it continues to bounce around at or near my top spot.
OKTA – Okta posted yet another strong month, becoming my fifth stock to touch a double YTD. I raised my OKTA comfort level from 8-10% of my portfolio to 9-12% after their latest earnings. I’m content to let my current allocation ride.
PD – PagerDuty’s first report as a public company occurred June 6. I had anticipated somewhere around $36.8M in revenues as outlined in this thread: https://discussion.fool.com/pagerdutypd-a-deep-dive-34191497.asp…. They came in at $37.3M, accelerating growth to 49.1% from 46.9% last quarter and 46.3% last year. Customer growth remained steady, gross margins were great (85.7%) and they are seeing strong growth internationally (+63% YoY and now 21% of total revenues). Their call was positive even though the presentation was a little stiff and straightforward. They stated the “vast majority of lands are uncontested. They are greenfield [opportunities] replacing a legacy environment…”. The initial numbers seem to support their case. Overall, PagerDuty appears to be in a perfectly good spot as it continues its post-IPO journey.
PLAN – Anaplan continues to intrigue. They’ve made great inroads with their Connected Planning offerings and now find themselves as one of the few companies versatile enough to be listed in six different Gartner categories off a single product platform. PLAN has potential solutions in finance, sales, marketing, supply chain, workforce and IT. Their current mix is 60% finance with the other areas gaining traction as they go. The company made several announcements at their June 10-12 customer event, including expanding their Deloitte partnership to 650 consultants (+67% YoY) in order to keep up with demand. They also released product enhancements that make it easier for clients to access information and make decisions via mobile devices. News like that along with last quarter’s acceleration in both subscriptions and billings growth make it look like Anaplan is well-positioned for the remainder of the year. I added a few more shares as a result.
ROKU – Roku briefly passed the $100 mark to set new all-time highs. It took a late dive when AMZN announced a two-day sale on its smart TV offering, but I personally view this more as FUD than any change in fundamentals or foreseeable business prospects. I might have considered adding if my allocation wasn’t already in my targeted range and everything else hadn’t dipped right alongside it. I don’t need to be a techie to understand that some people still dig watching TV and will likely access more and more of it through streaming platforms as we go. ROKU has put itself firmly at the forefront of that transition. I’m willing to let this story continue to play out.
SHOP – I finally decided it was time to start paring SHOP, though not before it posted yet another double-digit rise to start the month. It climbed even more afterwards before dropping with everything else to end the month. I’ve mentioned several times that I’ve been waiting for a lull in the stock price to begin selling, but to Shopify’s credit it’s been on an absolutely phenomenal 2019 run. In this case my decision wasn’t driven by any angst over SHOP as much as simply wanting a bit more exposure to Anaplan. I decided a trim here was the best place to find the cash.
I think SHOP is a fantastic company that continues to innovate. Whether it be point of sales hardware, additional languages or the recent announcement of a new fulfillment network, they have several irons in the fire with the potential to create additional revenues. Their fulfillment plans in particular could be a huge win, and they “expect incremental revenue to largely offset costs” as they build it out. The downside is establishing that network will be a very lengthy process with the “bulk of net return expected beyond 2023”. While I can’t argue against any of their plans, their business is 1) becoming more complicated to follow and 2) expanding into areas which will likely pressure margins in the short to medium term. That’s convinced me it’s finally time to start looking elsewhere. I’m not exactly sure of the timing, but I anticipate phasing out of Shopify prior to its next earnings. I’ll have no complaints if and when I close this position though because SHOP been berry, berry good to me (https://twitter.com/super70ssports/status/108095358110301798…).
SMAR – Smartsheet reported June 5. I wrote last month I was looking for something around $57M in revenues with signs they are taking advantage of their room for growth (thought process for that figure here: https://discussion.fool.com/just-to-mull-a-bit-more-i-find-that-…). They came in at $56.2M (+55%) and held their 134% retention rate. Subscription growth accelerated slightly to 57% and subscriptions now account for 89.5% of total revenues. Gross margins are strong at 81%. High-end customer growth (>$5K, >$50K, >$100K) remains healthy and their average annual contract value grew 48%. Operating, net and FCF margins remain negative but continue to grind in the right direction. They also announced several developments this month, including designation as the only work execution platform listed in the FedRAMP marketplace for federal agencies and government contractors.
The flip side is SMAR also announced a secondary offering of 6.5M shares on June 10. That announcement led to a small dip, but the offering was priced strongly and the action since suggests the market doesn’t seem to have a big issue with SMAR padding its coffers as it continues to grow. Putting it all together Smartsheet appears to be on the right track. They continue to execute and commented on their call that “every [sales] team outperformed their goals”. Despite coming in a tick below the revenue number I was looking for, their Q2 (51.0%) and FY (49.1%) guides make it fairly easy to see them continuing to challenge mid-50’s growth for the remainder of the year. All in all I viewed this as a solid but not spectacular quarter based on my expectations. I’m keeping my allocation as is for now.
TTD – The Trade Desk had a pretty nice month (+14.6%). Thanks for asking.
TWLO – Twilio plods right along even though the stock has lagged a little recently compared to most of my holdings. Its allocation decrease the last couple months has nothing to do with any change in the number of shares. It is entirely the result of larger gains by the stocks around it. My hope is TWLO gets to return the favor at some point.
It’s probably fair to point out I’m having a minor mid-life crisis with TWLO at present. There’s really no arguing what they’ve done to this point. However, I see a little muddiness when trying to guesstimate their future. Their raw numbers the rest of this year will undoubtedly impress, but how much of that is due to the SEND acquisition? Comps will be much tougher starting in 1Q20, especially after adding a company that comes in with slower growth right off the bat. In addition, gross margins which already rank near the very bottom for my companies will be pressured even more by the recent Verizon price increase. Diabilito and Bear’s recent thread on expenses provides some food for thought as well (https://discussion.fool.com/twilio-sm-spending-analysis-34237109…). Finally, Twilio ranks dead last in YTD price appreciation in the non-IPO division of my current portfolio at +52.7%. I realize in a vacuum that’s a borderline ridiculous statement, but it’s a valid observation in terms of relative performance against my other holdings. Is the market trying to tell me something that I’m simply not hearing? I can’t see myself abandoning TWLO, but I am at least starting to mull over whether it deserves a lower allocation until things become clearer.
WORK – I don’t have much to add that hasn’t already been covered elsewhere. Slack brought solid numbers and a very famous name into its IPO (DPO actually, but you catch my drift). I do have some concern that their slowing growth isn’t being sufficiently offset by decreasing losses and/or better cash flow yet given the high price. However, it’s hard to get the full picture off of an S-1 with incomplete non-GAAP info. In the end I decided I only had enough stomach for one IPO dice roll this month and liked CrowdStrike’s numbers better.
ZEN – Zendesk started June as my lowest conviction holding. Their past few quarters have been steady but flat. My original thesis was based on signs in their numbers and comments they were poised to accelerate revenues and margins as 2019 progressed. While some of those signs are still visible, I interpreted this past quarter’s results as showing their current story is still more future than present.
Those observations and some ZEN feedback from last month’s review (thanks again, nilvest) made me think more about this position. I ended up turning it into cash on June 5 knowing that MDB, SMAR and ESTC were all reporting at market close. PD reported June 6. Three were higher conviction positions and the other (ESTC) was at the top of my watch list. I liked the odds of one of them releasing news that made me consider adding shares, and I wanted to give myself maximum flexibility to pivot on whatever information came my way. I could add to something, look at a new position or simply buy right back into ZEN. Luckily, tax implications weren’t a factor since this was all in a retirement account (with some free trades to boot!).
I initially used about 1/3 of the funds for a few more shares of PD, but changed my mind a couple of days later and turned it back into cash so I could put the whole amount toward an initial position in CRWD. I know we’re in a high-priced environment right now, but it’s still nice to have so many interesting options to consider.
ZS – I bought a small amount at the start of June with my usual monthly contribution. Set it, and forget it! https://imgur.com/gallery/ZK9vQtt
My current watch list in rough order is ZM, EVBG, COUP, TEAM, PS, SQ, ZEN, PAYC and ESTC. DOCU falls off. Best I can tell DocuSign either might or might not be experiencing headwinds and billings issues due to the sales cycle of its new Agreement Cloud product. Given I’m not nearly adept enough to figure it out, I’ve marked DOCU as too complicated and put it in the pass pile for now.
And there you have it. Once again, a pretty hectic month. My portfolio hit an all-time high on June 19 when it closed up 82.0% YTD. As I read that again, I find it an almost unimaginable number. I own six different stocks that have at least touched a double for me at some point in 2019 – ZS, SHOP, MDB, TTD, OKTA and SMAR. I also know of at least six more discussed here that have done the same during that span (ROKU, MELI, STNE, COUP, GH and ENPH). And that doesn’t even include the 225% rocket ship followed by the -55% free fall some of you might have experienced with TEUM. That many doubles over just six months seems insane, but THAT’S THE FACT JACK! (https://www.youtube.com/watch?v=ZB52NEPJxUs).
As we continue to sift through this market, we can talk all we want about what role stretched valuations or hot sectors might have played in this development. However, we have no control over those variables. The simple truth is all of these stocks have been sitting in plain sight the entire time for anyone willing to buy them. There are plenty of businesses currently available that are absolutely crushing the market so far this year. Even better, many of them almost certainly still have room to run.
As we hit 2019’s halfway mark, I personally couldn’t be more pleased. This board has helped me identify some winners, walk away from some laggards and even get lucky in switching a couple horses along the way. Regardless of my returns going forward, I can only hope the quality of conversations the next six months is as productive as the last six. Thanks again to all who contribute – and even those who don’t. Some of you might already be familiar with the famous quote “None of us is as smart as all of us”. I can’t think of many better examples of that notion than this board.
I hope everyone has a great July.