stocknovice's May portfolio review

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.

2019 Results:


	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…
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…

Stock Comments:

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.

112 Likes

Stocknovice-

I really enjoy reading thru your portfolio and how you think about companies.

Good Stuff.

Thank you for posting.

Jim

5 Likes

Stocknovice,

I too enjoy reading your monthly reviews. I want to thank you for posting about ROKU. I was in the middle of charting their financials when I saw your post, so thanks. One of the main things that finally got me on board with ROKU (3%) is their new advertising tool, Activation Insights. This highlight from the press release impressed me.

According to Magna Global, OTT accounts for 29 percent of TV viewing but so far has only captured 3 percent of TV ad budgets. Roku provides significant scale and reach to help advertisers catch up to where consumers already are. Additionally, Roku offers advertisers some of the most advanced tools in OTT to deliver more effective, targeted and measurable campaigns.

With Roku’s Reach Insights measurement tool brands such as Baskin Robbins and RE/MAX found that a sizable audience was no longer being reached via their linear TV campaigns. Eighty-six percent of people age 18-49 who saw a Baskin Robbins ad on the Roku platform did not see the ad on linear TV, leading to a 10.6 percent incremental reach. Additionally, 81 percent of users age 25-54 who saw a RE/MAX ad on the Roku platform did not see the ad on linear TV, leading to a 9.2 percent incremental reach.

“This year’s TV upfront made one thing very clear, OTT is the new cable and powerful new video channel to reach today’s consumers,” said Michael Piner, SVP, Video and Data Drive Investments, MullenLowe. “Roku’s tool helps show us just how effective OTT is at reaching our advertisers’ valuable consumers. It gives us a detailed look behind the GRP, allowing us to identify key audiences we’re missing or over/under exposed to Linear TV ads but that can be effectively reached on their Roku devices.”

https://www.nasdaq.com/press-release/roku-introduces-new-ana…

Thanks

Steve

8 Likes

Hi Steve,

Thanks for posting your thoughts.
I am a ROKU holder as well and quite impressed with it. I also bought a ROKU device and so far it looks good.

This new tool - Activision Insight looks promising… however, it seems to me a table stake… I am actually surprised they haven’t had something like this before.
So, yes it should materially help ROKU. However, I would not put too much faith in that press release that talks about how ROKU offers more visibility to advertisers. (These PRs are always meant to claim the be far better than they are.)

But I agree, just having a measurement tool with specific insight should help a lot to ROKU ad sales team.

Hi Stocknovice,

thanks for posting detail review.
I found quite useful.

Few points stands out to me.

  1. You sold out SQ but do hold ZEN.
    I hold both of them… and questioning how long should I hold them because both operating very well without getting enough credit from the street… relatively to other high growth stocks. The reason I am re-thinking is Tinker’s sage advice - what do I not know that street knows… it bothers me… and these two are more associated with smaller merchants than any other discussed on this board.

On the other hand, I also believe there is too much fear in the market (and part of it is justified with tariffs and risks/ uncertainties around it)… which means, these are best positioned to jump up if / when some enthusiasm returns to market…

  1. I finally sold out SHOP as well on valuation… it just is too high…

And yes, just like my exit with TTD, SHOP has continued to go up… so may be my exits are proving to be contrarian :slight_smile:

  1. PLAN: Very impressed by their results and conference call. Do not seem to be terribly highly valued… I need to update my spreadsheet but after that, I may start a position in this company.

  2. PS: It was a great quarterly result… I am still hesitant on this company for two reasons

  • a) they are not in critical path in the SW stack, they are training company and therefore would be the first to get cut in a slowdown
  • b) I really hate their corporate structure… Seems like the founders and venture investors took this public while retaining their hold on it through LLC and public investors dont really have any control…

So, yes prioritizing PLAN over PS certainly looks prudent,

Finally, cant wait for SMAR results. I have built up 10% position in this over last couple of months and hoping for great results.

thanks again for sharing your detail thoughts.

1 Like

Thanks nilvest. I appreciate the feedback.

1. You sold out SQ but do hold ZEN.
I hold both of them… and questioning how long should I hold them because both operating very well without getting enough credit from the street… relatively to other high growth stocks. The reason I am re-thinking is Tinker’s sage advice - what do I not know that street knows… it bothers me… and these two are more associated with smaller merchants than any other discussed on this board.

I feel the same way. ZEN currently ranks 12/12 on my conviction list, mostly due to that “what am I missing here” feeling. I had similar thoughts while holding NEWR and PAYC coming into the year. I held NEWR an extra quarter and it remained flat before I eventually sold. I did the same with PAYC and was fortunate enough to see a 48% gain January-March before I decided it had gotten too hot and turned it into more higher conviction AYX, OKTA and SMAR.

I have ZEN in that same bucket at present. The numbers deserve a longer hold, but it could very well get swapped for ESTC in a couple of days depending on ESTC’s report.

2. I finally sold out SHOP as well on valuation… it just is too high…

I agree here as well even though I generally value SHOP a little more than some others here. Going through my recaps, it’s been on a short leash since December. However, the stock just kept on performing to the point I even added a bit more when I reviewed my allocations in March. At this point I’m viewing it as much through the relative strength or momentum lens than fundamentals. I keep waiting for a flat or down month, but SHOP just keeps on climbing. I plan on holding until the market tells me differently. My ears are wide open.

4. PS: It was a great quarterly result… I am still hesitant on this company for two reasons
- a) they are not in critical path in the SW stack,

Great point. This was a major factor in my sell decision, which is why I highlighted it. As I learn more about the SaaS market in general, I’m placing more and more weight on this concept in my decision making. I view being mission-critical as the number one tie breaker when trying to assess how well some of these businesses will hold up during a downturn or even a recession.

5 Likes

At this point I’m viewing it as much through the relative strength or momentum lens than fundamentals. I keep waiting for a flat or down month, but SHOP just keeps on climbing. I plan on holding until the market tells me differently. My ears are wide open.

This.

This is why I like people’s portfolio posts. Not for the specific allocations (tho it’s interesting), but for the juicy tidbits like this in the per-company musings.

You nailed my sentiments on SHOP exactly. I sold an initial bit off 2mo ago, and it’s up 30% more since. Have a 5% stake left in SHOP that I ultimately want to replace with one of the quality companies with accelerating hyper-growth in my Tier 1. But the market really likes SHOP at the moment (lingering cannabis hype?), and who am I to argue? But it is next on the chopping block of my current holdings.

So, great wording that resonated, “novice”.

Just to mull a bit more… I find that sometimes determining the right sell moment is up for a lot of debate. This was one where my (and your) lazier sell attitude paid off, after Saul was quick to sell when the revenue growth rate slowed so much.
As I’ve mentioned before in last Q’s earnings boil-down (#53442), I throw companies into 3 Tiers of interest to me. SHOP has been bottom of Tier 2 for me since Saul sold, and now, due to having so many companies to pick from in Tier 1, and having to move flawless companies to Tier 2 having no yellow flags yet, that if a company has any yellow flags it’s moving to Tier 3 now (sell/watchlist).

So strange to be making such a quality company in SHOP be Tier 3 for me (aka just outside owning now that I want to limit myself to 10-12 holdings). That seems a sign of how many HIGH QUALITY stories we have to choose from right now. VEEV is another company, that in any other time in my investing past I would be holding for 5 more years, easily. SQ too - it has all the right numbers but the market is just sour for what could be a number of legitimate reasons. Now I just want more revenue growth than that, and have a lot of high quality alternatives to choose from. Both SHOP and VEEV show that one can still have a lot of success with Tier 2-3 companies however. SQ has moments of faltering, yet continues to have very impressive growth, but it is starting to hit Tier 3 for me as well - I have too may other good choices, so why bother with this higher risk choice?

WHEN to sell these hypergrowth stories seems like a much fuzzier choice then buying. Writing about this gives me a bit of an epiphany into Saul’s thinking around selling. “Why bother waiting for workarounds” was an easy lesson to absorb, especially after NTNX and NVDA blundered so visibly. But when “revenue growth is slowing” creeps in more drastically, yet the company continues to kick ass and take names over the long term, … it seems a much harder decision point as to when to sell. Saul opts for dropping the company quickly, and moving to the other high quality companies. Yet companies can and do continue to succeed from those first signs… but when the hint of problems does increase from there, the price drop can come swiftly. So perhaps best to give Saul major props on acting quicker.

Saul seems to be driving many or most decisions by when to buy a better alternative (a new company becomes very attractive) in turn determining what to sell (free up cash to get it). And that thought, in turn, makes me start to better understand why Saul’s impatience with a company can ramp up quickly - why bother with questionable moments when you have 4 or 5 other companies that you could bolster?

Saul - Interesting to have you hop into ZM! It seems like the admonishments on an overly high price (baking in a lot of expectations) was a weakly held rule. I love that you write out your thoughts around those kinds of things, so we can watch the evolution around it. Anyway, it has VERY impressive growth numbers, so it has my attention.

Anyway, back to my Stanley Cup game. Go Blues.

-muji
long SHOP, SQ

PS thanks for your shout out earlier this year after my MDB posts, “novice”.

PPS also time to change your board alias “novice”.

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Just to mull a bit more… I find that sometimes determining the right sell moment is up for a lot of debate. This was one where my (and your) lazier sell attitude paid off, after Saul was quick to sell when the revenue growth rate slowed so much…WHEN to sell these hypergrowth stories seems like a much fuzzier choice then buying.

I think this applies to the huge majority of investors, myself included. Buy decisions are always much easier than sells. What seems to help me is being prepared and having rough expectations in mind for each company’s earnings. We all hold a thesis that caused us to make our initial buy decision. What numbers do I need to see to feel that thesis is still supported? This is just me, but I like to figure out what I believe are acceptable ranges prior to viewing the actual results. That calms my mind and puts me in a position to assess some very important information without the emotion of scrambling to figure out the numbers, reacting to afterhours prices, trying to read between the lines on conference call comments, etc. It helps me proactively assess the info rather than emotionally reacting to it.

The stocks I own that are showing success seem to follow a pattern. Many of the concepts below are either outlined in Saul’s knowledgebase or been discussed multiple times, but here are some the general checkpoints I use:

  • Rapid and preferably accelerating revenue growth. Subscription revenues with appropriate margins are preferred.

  • Expenses, secondary margins and cash flow that are all moving in the right direction. That means shrinking as a percentage of losses or growing as a percentage of profits.

  • Appropriate customer and/or cohort growth to continue supporting their business momentum. The higher the expansion or retention rates the better.

  • Conference call words that match the press release numbers. This is totally subjective, but I’d like to leave with the same general sense of enthusiasm for the company I felt coming into the call.

An underrated but required factor – in my personal calculus at least – is a history of beat and raise on guidance. Being honest, for all intents and purposes this has become a requirement for these companies in this market. Like most here I never take these numbers at face value. However, rather than ignore them completely I eyeball the company’s rough trend of recent guides and actuals to form an initial expected revenue range. Everything else I consider when assessing their results flows off of that. As outlined in my last review, here’s the process for SMAR:

”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?

The very first thing I do is hold myself accountable to those headline numbers. Anything too far below that number is an immediate sell signal. I quickly check the secondary numbers to see if they support the thesis. I might listen to the call or read the transcript. After plugging in the actuals and checking the rates, the last thing I do is eyeball their current guidance to see if it’s high enough to give them a chance to keep winning the beat and raise game. Some recent examples:

  • NTNX was an auto sell right off the release. Not only were the numbers terrible, but the CFO was quoted in the release as saying ”…our third quarter guidance reflects the impact of inadequate marketing spending for pipeline generation and slower than expected sales hiring”. Frankly, that might have been the easiest sell decision I’ve ever made. I didn’t even need to plug in the numbers. No regrets and haven’t given it even a sniff since.

  • I sold VCEL earlier this year when the revenue total and MACI contribution to it didn’t pass my smell test. Their call comments were way more guarded and even a little defensive compared to the prior quarter. In addition, their guides for the next quarter and FY were way too low to think they could win the raise game. Taking a quick look right now, it’s down almost 16% since. #WINNING!!

  • Two quarters ago this process kicked out $116-118M revenues for OKTA. They came in just under at $115.5M. That got my Spidey senses tingling and alerted me to dig deeper. After dumping in the figures and listening to the call I decided the thesis still held. I kept my shares but shortened the leash.

  • Using the same process, I came up with $123-125M for OKTA this past quarter. The came in just over at $125.2M. All the supporting figures lined up, their call comments made sense and I was personally impressed with their record 10.5% FCF margin in a quarter we knew would have higher operating expenses. Given this info, I wasn’t surprised to see the little price pop and actually have more conviction in OKTA coming out of this quarter than last.

All this to say I have absolutely no idea what information SMAR or MDB is going to release tomorrow. However, I do have a rough idea of the numbers I will need to see and words I will need to hear for them to keep my money. I can’t say that process is right or wrong and it’s definitely not perfect, but I’m comfortable saying it’s one that seems to be working for me so far.

PPS also time to change your board alias “novice”.

LOL. I picked the handle when I joined the Fool in 1997 and have just rolled with it ever since. I did try to change it to intermediateinvestor one time, but MF says it’s too many characters. If there’s one thing I’ve learned over those years, it’s that the market can humble you in a hurry. In that respect I think the name is a pretty good reflection of my overall perspective. I view those who believe they are stockexperts as much more likely to make major mistakes.

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stocknovice -

Replying because a simple “recommend it” does not do this post justice!

I follow an almost identical process for the companies I own and track but have never had the eloquence or focused effort to type it out in such a coherent and concise fashion.

Great insight into not only the methodology itself but the benefits it provides - which are in addition to the strong returns to date. While returns are the main goal they can also deceive us into thinking they stem solely from our own genius - its also important to track how our methodology provides the actual insights which drive confident and timely decisions that are at least somewhat explainable outside of a “feeling”.

I will say this method requires substantial upfront work. For me, if I want to truly follow a new company I have to gather 2+ years of history across all relevant measures both direct from earnings releases and then also from the calls themselves (metrics like customer, ARR, retention rate, etc). However, once you have set this baseline of data set up for the company it is a relatively quick update when the next quarters earnings are released and allows for a tangible measure of how a company performed vs your expectations.

Thanks again for your insightful post.

FlyFisher22

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Stocknovice,

Great posts and I love the clarity of thinking, very impressive.

PS is not critical in the software stack. Agree with that, but consider the broader market for technical talent.

There have been examples of companies being bought just to get the people.

Lambda school is one of the first examples of alternative credentialing and it is growing fast.

I believe companies will view getting people in the door as step one, then training to company needs and standards as step two, then beginning the ramp up to expected productivity.

When Google announced they are using PS to train, that is when my conviction for the company solidified.

True, in a real economic blood letting, training budgets will evaporate. However, the situation would have to be rather dire before tech education budgets get axed.

What is the alternative to PS?
YouTube
Higher education
Private consultant training
One-One mentoring
Company specific training materials and sessions

If PS makes it into consideration, it seems like a very good value.

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