May was pretty busy with several of my companies reporting earnings. Fortunately, most of them continue to execute even as the market aggressively ratchets up expectations. As I get more and more familiar with my holdings, I find myself gaining more confidence in my ability to piece together information and connect the dots. However, I never cease to be amazed at the speed and volume of the dots these boards can collect for everyone to review and comment on. I remain very grateful to have found this community.
Month YTD +/-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%
May Portfolio and Results:
(I’m assuming MF’s tracker is finally functioning properly again for the last column. It seems right. All other numbers are tracked on my own and correct.)
%Port %Port 31-May 30-Apr 1st Buy Return +/- S&P MDB 13.3% 12.0% 08/29/18 59.3% 60.5% TWLO 13.2% 13.7% 08/27/18 51.7% 51.8% AYX 12.1% 12.3% 08/27/18 33.8% 34.3% TTD 11.7% 12.1% 06/08/17 48.1% 46.5% ZS 10.2% 9.8% 08/27/18 51.8% 53.0% OKTA 9.7% 8.9% 06/15/18 74.1% 73.4% SMAR 7.2% 7.1% 01/07/19 33.9% 29.4% SHOP 5.9% 5.2% 08/06/18 71.3% 69.8% ROKU 5.6% - 05/13/19 11.0% 13.9% ZEN 3.8% 3.3% 02/08/19 8.5% 6.6% PLAN 3.7% - 05/28/19 1.9% 3.1% PD 3.7% 3.4% 04/11/19 34.9% 38.0% EVBG - 2.4% 02/21/19 16.2% 14.8% PS - 3.5% 03/04/19 3.6% 3.0% SQ - 6.3% 08/27/18 -18.8% -19.1% Cash 0.03% 0.04% Return +/- S&P Month: -0.4% 6.2% 2019: 53.4% 43.6%
Past recaps for anyone who’s interested:
December, 2018: https://discussion.fool.com/stocknovice39s-end-of-year-portfolio…
I wrote last month about dropping down from 13 positions and settling in at 12. I did indeed do that in May, although I’m somewhat surprised Square ended up as one of the stocks I decided to eliminate. My initial thought going forward is to limit myself to those dozen slots. As we enter June I consider my top nine as stable holdings and the remainder as tryout or learning positions based on conviction level. I’m happy owning all of them, and I view my bottom three as a pretty tough bar to clear for a new stock to be considered.
AYX – Alteryx churned out another strong earnings report on 5/1. Revenues grew 51% with 90.5% gross margins and an expansion rate that accelerated to 134%. They stated they expect “orderly revenue seasonality” in FY19 similar to 2018, in which growth was 50%, 54%, 59% and 57%. Given that statement and this quarter’s 51%, I’m anticipating a firm beat of Q2’s 49.5% guide with a strong chance of acceleration again as the year progresses. Based on AYX’s start, I’d have to think FY19 growth finishes much closer to last year’s 55% than their just raised FY guide of 42%. I did make a note of elevated operating expenses this quarter, which they attributed to headcount and scaling of their international business on their call. I’m not overly worried about it given their other numbers (particularly gross margins) and am all for them continuing to invest in growth. However, I’ll at least pay attention to expenses as the year progresses. In the meantime AYX seems to be plugging right along and remains a top holding for me.
EVBG – EVBG was both my smallest and lowest conviction position at April’s end. They posted a decent quarter and small beat on 5/6. Revenue growth stayed at 40% with their roadmap into new markets still intact. They were cash flow positive for the second quarter in a row with net and operating margins ticking the right way. They guided FY for mid-30s growth with a call comment to “keep your eyes peeled” for potentially 5%-7% more through acquisitions.
In my opinion there are two main drivers here: 1) the potential for increased government business in the US and 2) international requirements – mostly in Europe – for the installation of citizen notification systems over the next few years. Revenues have a chance to accelerate if one of those drivers picks up and could really take off if both hit. That being said, I have some concern over the timing of that potential acceleration after hearing them address both avenues on their call. On the US side they suggested a Q3 rush (two quarters from now) where most government agencies hit the “spend it or lose it” portion of their fiscal year. On the international front they anticipate most of the required buying decisions happening over the next 18 months, but in their words likely “back loaded” during that period. I’d have to think they would be considerably back loaded given the way most bureaucracies function. EVBG considers itself in position to win significant business in both arenas. However, it appears there will be some waiting involved.
The market liked the results enough to immediately push the stock toward new highs during a down week. While I have no complaints about that upward move, I did decide the timing concerns outlined above were enough to put me on the sidelines for a quarter or two until EVBG proves those revenue streams are indeed gaining traction. For now I view Everbridge as a better bet in 2020 than 2019, so I sold my small allocation to help build out an initial ROKU purchase. The odds are good though I’ll be back in this one at some point if they continue to execute.
MDB – I used some spare cash to add a bit early in the month and then grabbed a few more shares when I reallocated SQ. I’m admittedly slightly overweight on Mongo, but if I’m going to be overweight on something I might as well take my chances on a company with 94.3% subscription revenues guiding for 67.5% growth. MDB reports June 5.
OKTA – It was nice to see Okta hold April’s big price gains as we waited for 5/30 earnings. It was even nicer to see the stock take another jump when those earnings finally arrived. I was personally expecting $123-$125M in revenues for the quarter, so I was pleased to see them come in just above that range. OKTA matched last quarter’s performance with 50% revenue and 53% subscription growth. Their growth in $100K+ customers accelerated from 50% to 53%. Despite operating expenses we had been forewarned would be seasonally high, they posted a record 10.5% FCF margin and a small beat on the bottom line. The company seems to be rolling along.
PD – PagerDuty has been on an impressive run for me since grabbing some shares on their April 11 IPO. A good breakdown of PD along with my general reasons for buying can be found in this thread: https://discussion.fool.com/pagerdutypd-a-deep-dive-34191497.asp…. I started out with a 2.9% allocation which has now grown organically to 3.7%. I’m happy to let that initial purchase ride, but the high price and quick run has kept me from adding any more so early on in their existence. I’ll get a better idea of just how much meat is on this bone when they report earnings for the first time as a public company on June 6.
PLAN – I bought back into Anaplan after a strong earnings report before market open on 5/28. Overall revenue growth came in at 47%. Subscription growth has accelerated slightly from 42% to 45% over the last three quarters while calculated billings have grown 44%, 54% and 57% during the same span. Their remaining performance obligations came in at $473M and 53% growth, accelerating from 44% last quarter. Margins are heading the right way, their expansion rate held steady at 123% and they are creeping ever closer to cash flow positive (-7% FCF margin vs -31% in 1Q19). Their call comments were very positive and backed up the momentum in their numbers. In my opinion they are executing well and kicked off FY20 in fine fashion.
PS – Pluralsight spent the majority of May at the back end of my portfolio until I swapped it out for PLAN earlier this week. PS kicked off the month by reporting on 5/1. I stated last month ” I’m looking for them to maintain 40%+ growth while continuing their recent improvement in margins and retention rate.” So how did they do?
- Revenue growth of 40.2%. Check.
- Gross margins of 76.9% vs 76.8% last quarter and 76.0% last year. They just made an acquisition they believe will let them get to their 80% target earlier than they previously anticipated. Check.
- Operating margin of -14.8% vs -18.9% last quarter and -25.4% last year. Check.
- Net margin of -13.4% vs -18.5% last quarter and -33.0% last year. Check.
- A retention rate of 128% vs 128% last quarter and 120% last year. They stated last quarter they anticipated getting to 130%+ during 2019. They didn’t reiterate that number this call, but I have no reason to think they won’t meet that projection. Push for now.
- Growth in accounts with >$100K in annual billings accelerated to 82.8% from 76.2% last quarter. Pleasant surprise.
- Cash flow positive for the second quarter in a row. Thank you, sir. May I have another? https://www.youtube.com/watch?v=bIZoVO8ZyyQ
Overall, they posted solid numbers followed by a positive and enthusiastic conference call. The quarter wasn’t a blowout and the market basically yawned, but I did view it as good enough for PS to hold its spot. That ended up changing after PLAN reported and I decided I liked Anaplan’s prospects a bit better. PLAN is showing better growth with a product line I believe is more critical and more deeply embedded in the companies using it. I highlighted that last thought because it’s a very important point that several posters on these boards have emphasized when considering these companies.
ROKU – A new purchase. Roku has put itself smack dab in the middle of the seemingly unstoppable transition from linear TV to digital streaming. The platform and customer base they have spent the last decade building is ready-made for content providers looking to reach an ever growing digital audience. A brief discussion of some of their numbers was posted in this thread started by SoonerAJ: https://discussion.fool.com/roku-from-hardware-to-platform-34206…. My key takeaway after breaking them down is that Roku has evolved from a fancy cable box maker into a legitimate advertising platform with the potential to be the operating system for the majority of smart TV’s. The company’s higher margin Platform business – ads, smart TV OS licenses, and fees from its aggregator Roku Channel – is accelerating and becoming an ever larger percentage of total revenues:
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 2019 78.7% Platform Rev % Total Platform Gross Margin Q1 Q2 Q3 Q4 YR Q1 Q2 Q3 Q4 YR 2017 36.4% 46.1% 46.1% 45.4% 43.9% 2017 77.1% 74.4% 77.3% 74.6% 75.7% 2018 55.0% 57.6% 57.7% 54.9% 56.1% 2018 71.1% 69.8% 70.5% 72.2% 71.1% 2019 64.9% 2019 69.9%
At the same time, their customer base grows steadily and the time spent on their platform is exploding:
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 2019 39.9% 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 8.9 2019 74.5%
Roku’s self-described “strategy of trading player margin for account growth and platform revenue growth” appears to be paying off in spades. With 1-in-3 new smart TV’s running Roku’s operating system, they’ve passed Samsung as the #1 OS in the US. In addition, they’ve established a presence in 20 different countries. While they don’t expect any international contributions until 2020, their belief is the entire world will eventually move in the direction of digital consumption. That’s a whole lotta TAM goin’ on.
SHOP – Yet another positive month despite at least one valuation-based analyst downgrade. In fact, SHOP became my second stock (after ZS) to touch a double for the year and ends May as the leader in my personal 2019 clubhouse with 98.6% returns YTD. As I think about my portfolio’s performance the past several months, it’s become apparent the market currently values Shopify’s e-commerce lead, substantial international efforts and initial foray into point-of-sales (POS) hardware much more than Square’s POS lead, arguably lesser international footprint and initial foray into e-commerce. I’d have to think that dynamic changes at some point given their comparative numbers, but for now who am I to argue? Ride the wave, baby.
SMAR – Smartsheet has had a relatively quiet couple of months since its huge run from January through mid-March. June 5 earnings should show whether the next leg of their journey is up or down. They guide for $55M in revenues and 51.4% growth. They’ve beaten guidance the last three quarters by $2.9M (7.3%), $2.4M (5.4%) and $2.2M (4.4%). Given that trend, I think it’s reasonable to expect an upcoming beat of at least $2M (3.6%). That would put revenues at $57M and growth at 56.9%. Those are the headline numbers I’m hoping they can meet or clear.
Beyond the headlines, I’m looking for them to continue their momentum in large client growth and take advantage of a retention rate that has accelerated to 134%. I’m also interested in their annual contract value (ACV). As their CEO stated last quarter, “…one of the real blessings of the company is, even though we did see a 50% step up in ACV, the number is still tiny. I mean, we’re taking $2,500 on average. So the opportunity for us to really reach the full potential with an account, we were talking orders of magnitude, not order of magnitude.” Will any of those orders of magnitude find the top or bottom lines next week? Inquiring minds want to know…
SQ – As mentioned a couple times above, I finally had to step away from SQ. Their raw earnings numbers on 5/1 once again impressed in a vacuum: 59% adjusted revenue growth and 126% subscription growth with subscriptions now accounting for ~45% of total revenues. They churned out $61.7M in adjusted EBITDA (+72%) and remain firmly profitable. From a big picture standpoint Square continues to innovate and expand its footprint with existing customers. Much like SHOP, their slowing growth is coming off some very high baselines. Ultimately, I admire the company and the business it’s creating.
However, I also had to recognize that Square’s been my third-worst performer since committing to high-growth investing last August behind NVDA and NTNX. It’s quite the conundrum, and one excellently articulated by most of the board heavyweights in this outstanding thread: https://discussion.fool.com/thoughts-on-sq-34197357.aspx?sort=wh…. I held SQ the entire time waiting for the market’s weighing machine to give credit to the numbers. After the reaction to this quarter, I’ve decided at least temporarily to listen to the market’s voters instead. Those voters are very clearly putting more weight on SQ’s declining numbers than the relative size of the numbers themselves. To make matters worse, I’m having a hard time seeing the short-term catalyst that changes their minds.
Is three quarters too short a holding period to pass judgement on a company that’s actually doing some interesting things? Maybe. However, having such a condensed number of stocks really highlights the effects of opportunity cost in the “wait it out” portion of your portfolio, especially in an upward market. My SQ shares had steadily slid from 8.2% of my portfolio on February 28 to 5.9% post-earnings while most everything else appreciated around it. I ultimately decided I had other options available that don’t have Square’s continued waiting game attached. So back to the watch list it goes with the money being spread between a new position in ROKU and adds to TTD, ZS, MDB and ZEN. So far that decision to switch horses has worked out in my favor. If SQ starts an upward swing that looks sustainable, I’ll gladly jump back in with not one but both feet.
TTD – An interesting quarter. They beat and raised…but apparently didn’t beat and raise enough. In fairness though, a drop to 41% growth from 56% last quarter and 61% last year is worth looking at closely (as nilvest so graciously did here: https://discussion.fool.com/why-i-sold-out-of-ttd-34205054.aspx?..). I can’t say I expected 50%+ this quarter like nilvest, but I was a little disappointed not to see something at least mid-40’s off of what was admittedly a tough 1Q18 comp.
In some respects I simply think the stock had gotten ahead of itself and needed to take a breather. While Jeff Green has repeatedly stated their China opportunity will take quite some time to play out, I believe the official launch of their Chinese platform may have built in some undue expectations for the quarter. Green continues to stress incremental gains in China to ensure TTD’s early foothold becomes permanent. He also clearly states there should be no real expectation of material contributions until that happens. Anyone hoping the platform announcement might lead to some surprise revenues was likely let down, and a few investors might have headed for the exit as a result.
Even though TTD is growing much faster than the ad market as a whole, advertising itself doesn’t have nearly the momentum of the markets in which most of our other companies reside. In addition and as others have pointed out, TTD’s main programmatic growth levers aren’t quite big enough yet to overcome what appears to be a possible slowdown in the legacy ad market. Regardless, there are a LOT of dollars in play here over the long haul and TTD is in a very strong position to benefit. Their thesis is not just growth of the overall ad market but a shift within that market from legacy platforms to digital (much like ROKU). While the timing of that shift is still TBD, it is almost certainly a matter of when and not if. One thing to watch closely is making sure all the “3X” and “270%” and “300% for consecutive quarters” comments are eventually backed up by real dollar amounts to prove TTD’s future is not just verbal hype off of smaller bases. I do believe that “hype” portion of TTD’s story is a legitimate bear argument, much like we saw with Talend. Along those same lines, there’s a delicate balance between Green’s constant China trumpeting in the spotlight and his continually emphasizing the methodical patience it will require in more formal moments. The fact TTD already has a strong core business churning out very real profits makes it much easier to wait and see how things turn out.
In the end there’s little doubt The Trade Desk is a top dog and first mover in a business they are helping create – and quite literally with their Unified ID offering. A beat next quarter similar to this one would sustain their current growth rate and anything above that would be at least a small acceleration sequentially. I believe there’s a realistic chance that does indeed happen. I must admit this quarter dropped TTD a half-notch on my conviction meter, but I still see enough advantages to continue holding and even added a touch on the dip at around $184.
TWLO – There was a little bit of a whipsaw to Twilio’s price this month even though I didn’t see much in the way of general news. I don’t view the recent secondary offering as much of a factor as far as the company’s story or upside. For those who might have missed it, there were two absolute must-read posts from Saul for anyone who holds TWLO: https://discussion.fool.com/twilio-deep-dive-ipo-to-launch-of-fl… and https://discussion.fool.com/twilio-deep-dive-flex-launch-to-the-….
ZEN – Last quarter’s earnings were enough to convince me my thesis holds. I added a tick when I reallocated SQ.
ZS – Another position I bumped with a few of my Square dollars. I made the buy a couple percent into ZScaler’s 7%+ rise the day Symantec threw up all over itself by announcing the double-whammy of a quarterly miss and the abrupt departure of their CEO. The speculation here at the time was ZS was the reason for Symantec’s lost business. That put a spotlight on ZS’s May 30 earnings.
I have to admit to some nervousness coming into those earnings. ZS’s recent valuation range suggested the market was pricing in an absolute monster quarter, and the Symantec tea leaves did nothing but add to the hype. Fortunately, ZScaler posted numbers which show their business remains very strong. Revenues (+61%) and gross profits (+62%) both continue to show impressive growth while FCF, operating and net margins were all positive for the third quarter in a row. ZS is growing like a weed and posting a steady trickle of bottom line profits even as they continue to stress that their “plans are not to maximize profitability or generate additional operating leverage in the near term, but to invest aggressively in our business to pursue our significant market opportunity”. I wish we all had the problem of making more money than we can seemingly spend.
The small post-earnings dip suggests the market didn’t quite get what it wanted, but I personally find it hard to get too gloomy over profitable 61% growth. I’m guessing my regular monthly contribution for June finds its way into ZS early next week.
My current watch list has ESTC at the top, especially after poring through muji’s absolutely epic breakdown (https://discussion.fool.com/an-elastic-technical-review-34208190…). However, I’m waiting for earnings and the expiration of their lockup period to make sure I’m comfortable with their path forward. If I am satisfied with what I see, I’ll likely try to find a spot for them. Elastic is followed in rough order by ZM, TEAM, EVBG, PS, SQ, COUP, PAYC and DOCU. I dropped ABMD and VCEL after what I viewed as disappointing earnings. NEWR fell off my list for the same reason: https://discussion.fool.com/mekong22-i-sold-out-of-newr-after-la…. I quickly checked WIX’s 5/16 earnings after their recent run, but ¯_(?)_/¯.
And there you have it. Another solid market-beating month. My portfolio made a last-minute lurch into positive territory for the month on 5/31 before falling just short at the closing bell. I’d be remiss if I didn’t give a large shout out to SHOP (+12.9%), ROKU (+11.0%) and PD (+9.6%) for a firm push from the rear this month. I’ll obviously have new info to consider when MDB, PD and SMAR report next week, but in general I’m very content with my present holdings. As usual, I’m always open to thoughts or comments either good or bad. It’s how we get better.
And finally, a special thanks to everyone who participated in the recent threads on valuation expansion (https://discussion.fool.com/my-explanation-of-our-valuation-expa…) and learnings from NTNX (https://discussion.fool.com/learnings-from-nutanix-ntnx-34219820…). It is utterly amazing that such quality information is available on a free message board. We shouldn’t take that lightly and most definitely shouldn’t take it for granted. Both conversations have been bookmarked and are on my current short list for Threads of the Year.
Thanks for reading and I hope everyone has a pleasant June.