stocknovice's September portfolio review

Before kicking things off I must absolutely, positively thank Saul and the board managers for all their hard work this month. Herding cats is a crappy, thankless job and your tireless efforts toward trying to keep things civil are greatly appreciated.

Well, well, well. September put quite the wrap on this earnings season. Unfortunately, the early-month market reaction to my last few companies’ reports wasn’t particularly kind, and it only got worse from there. While I didn’t see any major collapse in fundamentals, the market took it as an opportunity to SERIOUSLY reset some prices it viewed as previously inflated. The decline affected not only stocks I own, but also some other seemingly solid SaaS names (PAYC, VEEV, ZM, WDAY). Taking a broader look, it appears a few solar stocks got sunburned as well (ENPH, RUN). Likewise, many of biotech’s big gainers now seem a bit, shall we say, sickly (AMRN, ARNA, GH). Even cannabis has recently lost its contact high (IIPR). Frankly, it’s hard to find much comfort food anywhere on the menu these days (BYND). []

Corny puns aside, most of the last couple months has looked like one big sell-the-news party for many of 2019’s highfliers. Earnings – along with some clunky IPO’s – were just the excuse to get things started and then keep them going. Unless you were fortunate enough to time it right, a drop that indiscriminate is almost impossible to avoid for anyone holding any of those names. And if you’re holding a lot of those names like many on these boards, well look out below. For those posters who might not have experienced this kind of plunge before – and recent traffic suggests there are a few – I’d like to reprint the intro from my very first recap last December. Regulars can feel free to skip it if they’d like. I know it’s long, but I do think it’s relevant. Being honest, I even found myself gaining some much-needed perspective after rereading it:

“My first try at one of these. The original intent was for my eyes only. However, I’ve learned a ton from others’ recaps and decided to post it just in case I can give some small amount back. I apologize for the long intro I added but thought it might lend some perspective to others who are relatively new to this board and/or high-growth investing.

For background I started investing in the mid-90s. I joined MF in ’97 and started tracking returns in ‘02. According to MF my XIRR has beaten the S&P by ~2% yearly. Most of this was buy and hold luck – SBUX in ’06, BRK-B in ’07, AAPL in ’08. This past June – after a rollover and a buyout – I found myself with 25 positions and ~28% cash. I wanted to reallocate but was short on ideas. I realized I needed to better educate myself if I wanted to keep managing my own portfolio. Otherwise, I should just buy an index fund and call it a day.

After poking around I found myself wading through a ton of old posts on Saul’s and NPI. The commenters were clearly more advanced than I was. They discussed stocks in a way that was smart and rational. There was the occasional digression on both boards <grin and wink> but in general they stuck to trying to help each other find quality stocks. They discussed ideas, checked each other’s work and most importantly periodically broke down what went right or wrong. In all honesty it reminded me of what MF was like before so many marketing emails found my inbox. I knew these people were on to something because their discussions were based mostly on rational thinking, due diligence and common sense. After lurking for six weeks or so, I’d decided where I was going to put my idle cash.

Some users have recently commented they feel they found high growth investing at just the wrong time given the market downturn. HERE’S LOOKING AT YOU KID!! I made my first growth purchases August 27 [2018] and built out positions throughout September. I knew I was buying on the way up at market highs but also know trying to time the market is a fool’s (small f) errand. I allocated all my cash and started selling some of my historical “winners” to continue streamlining. Then October hit…

And like everyone else I watched the red appear on my screen. Not just little bits of red either. Big, sloppy waves of it. My portfolio dropped over 10% and I ended the month trailing the S&P for the first time all year. “No big deal,” I thought. I knew this bull market couldn’t last forever and I’d seen dips before. I survived 2000 and 2008. In fact this was probably the least concerned I’d ever been. At first I found it odd. Why weren’t these wild swings bothering me more? While I knew my bigger percentage losses weren’t that different than the past, the pure dollar amounts were undoubtedly the largest I’d ever experienced.

As I thought about it, I began to understand why I remained so calm. I already knew historically the market always bounces back. However, this time I not only had history on my side but I also had more conviction in the companies I owned than ever before. Simply put, my portfolio made more sense. It was tailored to my style at my risk and my allocation levels. I knew exactly what I owned and more importantly exactly why I owned it. I told myself I was comfortable riding this out and imagine my swagger as I was totally vindicated by my market-beating November! Then along came December…

And a historically bad month forced me to double check everything. And you know what? After rerunning the numbers, rechecking my math and rereading the boards I find I still have confidence in what I’m doing. The easiest way to beat the market is to invest in market-beating companies. While I’m keenly aware some of these picks won’t pan out, I strongly believe I’ve taken more ownership of my portfolio and greatly increased my chances of success.

Unlike many here and at NPI, I did NOT have a big first-half cushion to offset a roller coaster last three months. I also put a large chunk of cash back into the market at an unfortunate time (not a wrong time mind you, just unfortunate since you can’t time the market). You’ll see some serious laggards below. That being said, I ended up pulling out a comeback win over the S&P despite huge ebbs and flows along the way. [Note: My 2018 portfolio finished at -2.3% vs -6.3% for the S&P.] As I write this my main takeaway from 2018 is not that I beat the market. It’s that I became a better investor due mainly to the regulars on these boards who are so willing to share their knowledge. I owe a big thanks to all of them and look forward to continuing to learn in 2019.”

Hmmm…crappy timing, waves of red, bad months and double-digit portfolio drops. Sound familiar? As I reread that intro I can honestly say I believe those words even more today than I did back then. That’s why it’s worth it to write things down every once in a while. Corrections happen, and there’s not much we can do about them. Unfortunately, corrections also tend to bring a surge of empty, emotional, ambiguous and even antagonistic posts to the board which don’t lend much to the usual conversation. Without any kind of actionable info, most of these observations are nothing more than barking at the moon no matter how many links, charts or intentionally vague bullet points are included. If anyone does have the Holy Grail, please let us know. (Don’t hold out on us, hlygrail! []. :grin:) I can’t speak for anyone else, but I’d switch to a risk-free style that led to market beating returns in a heartbeat. Otherwise, as Saul suggests it is probably time to move past the emotional outbursts and get back to discussing companies again. Or as Fontella Bass and Bobby McClure once put it, DON’T MESS UP A GOOD THING. (

In this particular pullback I’m very fortunate that I do have a sizable YTD cushion to help soften a very big blow. That’s due in very large part to the time, effort and energy spent by the people who contribute to these boards. It’s also because I didn’t let myself get scared out of the market when things temporarily cratered last October and again last December. At times like these it’s important to remind myself the goal is not to chase the latest vagaries in stock price but rather to invest in the absolute best businesses I can find. That’s not to say the psychology of investing doesn’t suck. It absolutely does. This has been a terrible month. However, the only thing I can do is continue to watch, continue to read, continue to learn and continue to think independently. I am 100% responsible for my investing decisions. Me and me alone. I am well aware that I have tilted my portfolio toward a software business model that I believe is going to be a long term success. I fully understand and accept that risk. I haven’t overextended myself, I’m not using leverage and I haven’t invested funds that I can’t afford to leave in the market as I ride this out. Trying to execute what I believe is a thoughtful plan will always serve me better than knee-jerk reactions to short-term market swings in either direction. As long as I choose the right companies more often than not, I like my odds that the stock prices will take care of themselves. And if that doesn’t happen over a reasonable amount of time, index funds here I come!

As I once again double check my holdings – isn’t it amazing how selloffs make you do that? – I’m reminded that Marc Andreessen once famously stated “software is eating the world” ( While it’s been almost 20 years since he first said it, I’m pretty sure he was onto something. These are amazing tech times and many of these companies are doing amazing tech things. That hasn’t changed one iota over the last few weeks. In fact, those investors who have spent the last few months lamenting valuations and trumpeting to wait for better entry points have gotten a golden chance to buy many of these same names at much lower prices across the board. Hopefully, they’ve followed their own advice – I know I have in the small areas I could. The key of course is finding those companies with the biggest room to grow. In the end one admittedly VERY painful month doesn’t make me any less glad to be along for this ride, because I believe there is still plenty of runway ahead of us. Hang in there everybody…

2019 Results:

	Month	YTD	vs S&P
Jan	21.0%	21.0%	13.1%
Feb	11.5%	34.9%	23.8%
Mar	7.9%	45.5%	32.4%
Apr	5.8%	54.0%	36.5%
May	-0.4%	53.4%	43.6%
Jun	10.5%	69.4%	52.1%
Jul	6.9%	81.1%	62.2%
Aug	1.2%	83.3%	66.6%
Sep	-23.7%	39.9%	21.2%

September Portfolio and Results:

	%Port	%Port				
	30-Sep	31-Aug	1st Buy		Return	vs S&P
AYX	17.0%	17.2%	08/27/18	57.9%	52.9%	
TTD	14.2%	13.2%	06/08/17	22.9%	17.8%	
MDB	11.4%	13.3%	08/29/18	36.6%	33.2%	
ROKU	10.6%	10.8%	05/13/19	6.9%	4.3%	
OKTA	8.5%	8.4%	06/15/18	48.1%	42.0%	
TWLO	7.6%	6.9%	08/27/18	23.0%	18.9%	
ZS	7.1%	9.6%	08/27/18	0.7%	-3.3%	
PLAN	5.9%	5.3%	05/28/19	7.0%	2.3%	
ESTC	5.3%	3.5%	07/15/19	-11.2%	-10.9%	
CRWD	5.2%	5.1%	06/12/19	-16.3%	-18.8%	
COUP	3.8%	-	09/12/19	-6.8%	-6.0%	
SHOP	3.6%	-	09/12/19	-13.1%	-12.3%	
SMAR	-	6.8%	01/07/19	22.9%	11.9%	
Cash	0.05%	0.03%				
					Return	vs S&P
				Month:	-23.7%	-25.4%
				2019:	39.9%	21.2%

Past recaps for anyone who’s interested:

December, 2018:…

Stock Comments:

I began September with 11 stocks, then dropped to 10 partway through the month after deciding to exit SMAR. That sale combined with post-earnings trims of MDB and ZS kept me bouncing between 6-9% cash for several days even while I kept trying to redeploy the money. That turned out to be an interesting exercise. Based on what I’ve learned here I’m trying to stay fully invested and keep my portfolio as concentrated as possible. At the same time, I’m trying to manage my holdings by setting rough allocation percentages for each company based on my conviction level. So even though I liked the raw prices for a lot of my stocks during this drop, adding would have put me at an allocation that didn’t fit my guidelines. I now realize this strategy is likely to cause some fluctuation in my number of holdings as individual conviction levels change. After bumping each of those 10 to my max comfort level, I still had ~7.5% cash left. That led me to my watch list, where I initiated a position in COUP and bought back into SHOP. So I end the month at an even dozen names. We’ll see how long it stays that way. The whys and wherefores of how it all played out are below.

AYX – Oh well, even the best companies aren’t exempt from getting whacked every once in a while. I’m pretty confident Alteryx will get its chance to whack back before it’s all said and done. I would have bought more if it wasn’t already my largest position. Apparently, I’m OK letting a position grow to >15% but am uncomfortable adding any new shares much beyond that level. That’s good to know. I still haven’t determined at what level I’d trim a position because it’s simply too large. I’m guessing I’ll start squirming somewhere in the 18-20% range. Hopefully, Alteryx is successful enough to give me that opportunity at some point.

COUP – A new purchase. Coupa’s main product is a procurement software which links users with their supply chain to provide complete visibility and control over their business spend. They also offer a broad set of solutions surrounding that core module including invoicing and payments. Those non-core offerings have now grown to >50% of their new subscription revenues, which shows they’ve created some optionality in their product line. They have a large customer list including clients like Peloton and Shopify. Last quarter Coupa had $1.3 trillion worth of cumulative spend pass through its platform. One of its main differentiators is a Community Intelligence function that lets users share ideas and compare aggregate results by industry or calendar across that entire $1.3T. Helping large companies track and manage how they spend their money sounds pretty mission critical to me. COUP was just named a Gartner Leader in the Procure-to-Pay space for the fourth consecutive year while finishing first on both axes, which is pretty nifty if you stop to think about it.

COUP had bounced around my watch list the last few months, and I finally pulled the trigger after what I thought were very strong earnings. They stated last quarter they were reaching a “tipping point in winning a very, very large TAM”. This report appeared to put their money where their mouth is. Revenue growth has accelerated from 39.4% to 44.3% to 54.3% the last three quarters, and I’d anticipate something mid-50’s again next quarter. While ~$1.8M of that revenue was due to a recent acquisition, 51% organic growth accounted for most of the acceleration. Subscriptions have followed a similar path (+45%, +46%, +51%) and now account for 88% of total revenues. Gross margins of 73% aren’t quite as high as some of my other holdings, but COUP has proven itself very efficient by posting positive net and operating margins for five consecutive quarters.

Stepping back a bit, Coupa now shows similar growth to SmartSheet but at a bigger run rate and much further along the path to profitability (which I believe matters in this current market). So even though Coupa’s more expensive from a valuation standpoint, I swapped a portion of my SMAR dollars for COUP when the overall sector slaughter knocked Coupa off its all-time high and drove it back below its pre-earnings price. It’s a small position, but I’m happy to welcome it on board.

CRWD – CrowdStrike released its second report as a public company on 9/5. I was looking for revenues of $109-$113M which also gave CRWD an outside chance to maintain 100%+ growth. The company issued a beat, but came up just short of my hoped for range at $108.1M and 94.1%. Several metrics did stay in triple-digits though with ARR (+104%), GAAP gross profits (+106%) and non-GAAP subscription gross profits (+113%) all beating that mark. Most interestingly, customer growth accelerated for the second straight quarter to 111% with a record 730 new clients. That bodes well for their future. Subscription revenues grew 99% with non-GAAP subscription gross margins increasing to 76% vs 71% YoY. CRWD is also seeing bottom line leverage as net (-21% vs -55%), operating (-19% vs -50%) and FCF (-27% vs -64%) margins all improved drastically YoY. Overall, I viewed the numbers as pretty darn impressive considering all this is happening at a scale that calls for over $450M in revenues this year.

Unfortunately, the strong numbers weren’t the main conference call topic for a company that has carried a very high price tag from the day it IPO’d. Just about every analyst question seemed to focus on CRWD’s competition rather than its results, particularly in the wake of VMWare’s acquisition of Carbon Black and the recent report by Palo Alto. In essence, CrowdStrike’s early success has caused quite a bit of havoc in the sector, and the sector is trying to fight back. Management views the recent consolidation “as a strong net positive for our business and validates that cloud-native is hard and costly unless done from inception”. They believe legacy firms and on-prem solutions are struggling to adjust. Ironically, they also believe this upheaval is making many companies review their present security, which in turn is increasing the number of firms peeking under the hood at CRWD’s solutions. They emphatically state today’s customers “are looking for the single agent architecture born in the cloud not an amalgamation of three or four different acquisitions put together”. CRWD touts not only their cloud-native architecture but also the fact they have the industry’s first endpoint detection product for mobile devices. CrowdStrike basically pounded its chest, pointed to the Gartner Magic Quadrant scoreboard and said they welcome letting “the customers decide which technology is best”. I obviously didn’t enjoy the post-earnings drop (duh!), but there are simply too many good things going on with CRWD to consider selling. In fact, I added a teeny tiny bit mid-carnage to goose it back into the low end of my 5-8% target range.

I’d be remiss if I didn’t mention the White House’s insertion of CrowdStrike into the latest Ukrainian kerfuffle this past week even if I have no real idea how to process or weigh it. It’s not like we didn’t already know CRWD was the company who helped identify Russia as the entity who hacked the Democratic National Committee in 2016. For now, I’m working off the assumption it has nothing to do with CRWD’s current business or immediate prospects. However, I’ll be paying close attention to make sure the company isn’t further dragged into the political fray.

DDOG – New IPO Datadog interests me quite a bit, but ultimately came out of the gate too far above what I was willing to pay. It hasn’t yet retraced quite enough to get me on board. Datadog specializes in cloud-based, real time infrastructure monitoring, APM and log management for a client’s entire stack. The company enters the market with great numbers and Bert posted an excellent free write up on it here:….

Here are the basics:

Revenue							% YoY					
	Q1	Q2	Q3	Q4	YR			Q1	Q2	Q3	Q4	YR
2017	$18.40	$21.91	$26.74	$33.71	$100.76		2017	 	 	 	 	 
2018	$39.72	$45.68	$51.07	$61.61	$198.08		2018	115.8%	108.5%	91.0%	82.8%	96.6%
2019	$70.05	$83.22	 	 	 		2019	76.4%	82.2%	 	 	 

Op Expenses						% YoY					
	Q1	Q2	Q3	Q4	YR			Q1	Q2	Q3	Q4	YR
2017	$15.06	$17.90	$20.69	$26.65	$80.30		2017	 	 	 	 	 
2018	$30.42	$36.11	$43.61	$52.45	$162.58		2018	102.0%	101.7%	110.8%	96.8%	102.5%
2019	$60.76	$66.24	 	 	 		2019	99.7%	83.5%	 	 	 

GAAP Gross Profit						% YoY					
	Q1	Q2	Q3	Q4	YR			Q1	Q2	Q3	Q4	YR
2017	$14.55	$16.33	$20.58	$25.89	$77.35		2017	 	 	 	 	 
2018	$30.57	$36.23	$38.98	$45.77	$151.55		2018	110.2%	121.8%	89.4%	76.8%	95.9%
2019	$51.10	$62.24	 	 	 		2019	67.1%	71.8%	 	 	 

GAAP Gross Margin						Op Ex % Revenues				
	Q1	Q2	Q3	Q4	YR			Q1	Q2	Q3	Q4	YR
2017	79.1%	74.6%	76.9%	76.8%	76.8%		2017	81.9%	81.7%	77.4%	79.1%	79.7%
2018	77.0%	79.3%	76.3%	74.3%	76.5%		2018	76.6%	79.0%	85.4%	85.1%	82.1%
2019	72.9%	74.8%	 	 	 		2019	86.7%	79.6%	 	 	 

GAAP Operating Income					% Revenues				
	Q1	Q2	Q3	Q4	YR			Q1	Q2	Q3	Q4	YR
2017	-$0.52	-$1.57	-$0.12	-$0.76	-$2.96		2017	-2.8%	-7.2%	-0.4%	-2.2%	-2.9%
2018	$0.15	$0.12	-$4.64	-$6.67	-$11.03		2018	0.4%	0.3%	-9.1%	-10.8%	-5.6%
2019	-$9.66	-$3.99	 	 	-$13.66		2019	-13.8%	-4.8%	 	 	 

non-GAAP Net Income (GAAP '17/'18)				% Revenues				
	Q1	Q2	Q3	Q4	YR			Q1	Q2	Q3	Q4	YR
2017	-$0.78	-$1.33	$0.08	-$0.53	-$2.11		2017	 	 	 	 	-2.1%
2018	$0.35	$0.15	-$4.67	-$6.59	-$10.24		2018	0.9%	0.3%	-9.1%	-10.7%	-5.2%
2019	-$9.43	-$3.99	 	 	 		2019	-13.5%	-4.8%	 	 	 

Operating Cash Flow					% Revenues				
	Q1	Q2	Q3	Q4	YR			Q1	Q2	Q3	Q4	YR
2017	 	 	 	 	$13.80		2017	 	 	 	 	13.7%
2018	 	 	 	 	$10.80		2018	 	 	 	 	5.5%

non-GAAP Free Cash Flow					% Revenues				
	Q1	Q2	Q3	Q4	YR			Q1	Q2	Q3	Q4	YR
2017	 	 	 	 	$6.03		2017	 	 	 	 	6.0%
2018	 	 	 	 	-$5.01		2018	 	 	 	 	-2.5%

They have 8,846 customers as of 6/30 with the large majority coming through the self-serve channel, so professional services revenues have been inconsequential to date. While DDOG operates in arenas with lots of competition, their differentiator is they are the first company to offer logging and monitoring across infrastructure through a single solution. As shown in the figures above, they’ve shown very impressive growth at a better profitability level than most companies at a similar stage. It’s definitely one to watch in my opinion.

ESTC – I added a smidge after trimming elsewhere. I’m basically banking on the same two things as everyone else around here: 1) Elastic’s price has plenty of room to run and 2) this quarter’s results could potentially lead to reaccelerating revenues in Q2. I hoping they don’t run too far into DDOG’s space as they continue to build out their offerings, but it does appear there’s going to be some overlap. Something to pay attention to…

MDB – Mongo reported on 9/4 with the surface numbers landing about where I expected. Revenue growth came in at 67% with the company raising FY guidance from $381M to $395M. Their Atlas product continues to grow like gangbusters (+240% YoY) and now accounts for 37% of total revenues. Customer growth remains solid, although losses and margins generally stayed flat sequentially. My first impression of the quarter was not bad but not great either.

Upon digging deeper, however, I found the way MDB got to those results a little odd. My main concern was the revenue beat being inflated by some pull forward from contracts originally expected to close in Q3. That in turn led to a guide for significantly less growth in the back half of the year. Even though Mongo warned tough comps were coming, the size of the decline was still disappointing. I’d estimate something slightly less than 50% growth next quarter, which is a long way down from 67% even when accounting for the timing issues. Management’s call comments continue to voice confidence in their business plan. However, I thought they expressed more caution than usual in regard to how comps, timing and Atlas revenue recognition affects their immediate future. While I strongly believe the world will continue its long-term march toward NoSQL, the headwinds Mongo outlined for the second half make me think a short-term slog could be imminent for the stock. MDB remains a core holding, but I trimmed a couple percent immediately after earnings to bring Mongo to an allocation level I’m more comfortable with while I wait for things to become clearer.

OKTA – I’ve apparently found my personal sweet spot with Okta. It never really crossed my mind this month to do anything with it one way or the other.

PLAN – Please see Okta above. However, if forced to choose I’d be more likely to nibble at Anaplan than Okta right now given their relative price and allocations.

ROKU – September (-32.8%) was a brutal month for ROKU after a ridiculously stellar August (+46.5%) that pretty much carried my portfolio. Being honest, the run from ~$100 on 8/7 to ~$170 on 9/6 was almost certain to elicit a pullback. As with any stock experiencing a similar burst, the question is always where the price finally settles. Unfortunately, in this case it settled just about where it started. Congratulations to anyone who was able to successfully trade in this window. I simply chose to ride it out since 1) I believe in the company longer term and 2) my ability to time the market has repeatedly proven to be terrible over the years.

Price action aside, there was quite a bit of news to digest during September. The first was an announcement that Roku has expanded its TV licensing program to Europe with Hisense as its initial European TV partner (… and…). Hisense was one of Roku’s early North American partners, so this seems like a natural expansion of an already successful relationship. The first Hisense/Roku TV’s will hit showroom floors in the UK during Q4.

The next pronouncements were the release of new and updated hardware. Early in the month Roku released a smart soundbar and wireless subwoofer that are both embedded with Roku’s platform (…). Mid-month the company released its refreshed lineup of Roku players and OS for smart TV’s. The pessimist in me sees this as a further expansion into hardware, which I’m lukewarm about. The optimist in me sees yet more avenues for viewers to easily access Roku’s platform, and as luck would have it just in time for the holiday shopping season! The pragmatist in me – who I always try to heed most often – is perfectly content to stick around to see how things shake out as Roku aggressively pursues what it clearly sees as opportunities for continued growth.

The third bit of news was AAPL’s unveiling of pricing for its Apple TV+ product. This led an already skittish market to dump pretty much every stock associated with streaming in any way. Frankly, Apple’s forays into these types of services never quite seem to pan out the way they’d like, so I’d say there was considerable FUD in the market’s reaction. It’s not like Apple created a new device to compete against Roku, and its own release said “The Apple TV app…will come to Amazon Fire TV, LG, Roku, Sony and VIZIO platforms in the future.” So Apple basically stated it was releasing a new service for a pre-existing app and one of the main ways to access that service is through Roku. Isn’t that what we want? I see nothing wrong with letting everybody else split up the content pie while Roku serves as the aggregating platform that pulls it all back together for easy access by consumers. The market reaction reminded me of the dip a couple months ago on AMZN’s smart TV flash sale, which turned out to be a great buying opportunity. I thought ROKU’s 10% haircut on the Apple news was a bit excessive, so I added about ~1% more at that level.

The final volley was Comcast and Facebook both releasing streaming options to existing customers on 9/18. This is the one that started the real hit to Roku’s stock. Comcast is offering its internet-only customers – a quick search turned up ~27.6M of them – a free first OTT box with a monthly charge for any additional boxes. Given those customers must rent Comcast’s modem to qualify and can only outfit one TV without seeing their bill increase even more, I can’t see this being a game changer. Facebook’s offering will be $149 and have streaming capabilities as well. As with the Apple announcement I’m not surprised others want a piece of the rapidly growing streaming market, but I don’t view either of these moves as disrupting Roku’s short-term prospects or overall business given Roku’s continued advantage of being a neutral platform in the streaming arms race. Sadly, my lack of time travel skills prevented me from cancelling my purchase on the AAPL dip so I could take advantage of this one instead. I believe those who added here will eventually be rewarded (although you’re on your own if it turns out I don’t know my ass from my elbow).

My sincere thanks to everyone who chimed in on ROKU after last month’s write up. This recent thread is useful as well:…. And a special shout out to Darth for an excellent post on the state of the overall streaming market (…) along with a list of the current best-selling TV’s on Amazon (…). [Spoiler alert: Roku dominates in both links.] Darth’s been on an extremely informative Roku tear the last few weeks.

After some pretty lively discussion, I remain convicted in my Roku thesis. I also better understand the bear case, which is always helpful and should not be underestimated. For now I will continue to hold Roku as a healthy part of my portfolio, though I’m guessing that’s easier for me than some others since a large number of my shares still sit in the green despite the recent pounding. At the same time I’ll be watching the next couple of quarters closely to make sure the expanding competition isn’t hurting Roku’s margins or prospects for future growth. This is a case where I’m not trying to overthink things. I’m intent on owning the company until the growth and platform revenue numbers tell me it’s not worth following any longer.

SHOP – Just when I thought I was out…SHOP pulled me back in ( I had already mentioned last month I was impressed with their earnings report. The big news this month was the acquisition of 6 River Systems to help build out its new fulfillment network (…). The purchase adds an established cloud-based fulfillment software with a mobile robot system for warehouse operations. The cost is $450M (~60% cash/~40% shares) with an expected Q4 close. The transaction isn’t expected to have a material impact on 2019 revenues but should increase expenses by ~$25M. According to the release, “6 River Systems solution is operating in more than 20 facilities in the U.S., Canada and Europe, fulfilling millions of units each week for companies including Lockheed Martin, CSAT Solutions, ACT Fulfillment, DHL, XPO Logistics, and Office Depot”. So this tuck in not only adds cutting edge tech but also a strong pre-existing customer base. I guess SHOP wasn’t screwing around last earnings call when they said they were looking to accelerate their fulfillment plans. I bought back a small position when Shopify plunged right along with everything else mid-month. Unfortunately, that purchase was just prior to SHOP issuing a secondary offering exchanging ~2% dilution for just under $700M in additional capital (before underwriting costs). The offering priced at $317.50, which I view as some sort of support. Given Shopify’s underlying fundamentals are still very much intact, I felt the drop below $300 was a temporarily oversold situation and am glad to see the stock has bounced back a bit. I’m willing to hold my small rebuy at least a little longer to see if it recovers further. However, this is likely the first place I’ll go for cash if I see something more appealing.

SMAR – SMAR joined Mongo in reporting 9/4. The headline numbers were very similar to past quarters with 53% revenue growth, 56% subscription growth, 82% gross margins, 134% NRR and subscriptions accounting for 90% of total revenues. Customer growth continues to impress with clients spending $5K+ growing 55%, $50K+ growing 113% and $100K+ up 128%. Average Contract Value growth has hovered between 47-50% for eight consecutive quarters is now ~$3K overall. In a lot of respects SmartSheet has been a model of consistency and appears to be chugging right along with plenty of room to grow.

Despite the steady-as-she-goes top line results, the stock slid sharply post-earnings most likely due to an outlook that called for increased losses. SMAR’s small $3M bump in FY revenue was offset by a guide for $6M more in operating losses, $5M less in FCF and flat EPS for the year. In addition, the size of the company’s beats has been shrinking steadily, which was specifically pointed out by an analyst on their call. Given that trend SmartSheet will need to execute…well…smartly to top 50%+ growth next quarter. I thought the tone of their call was neutral, and the widening losses were explained as a strategic choice to increase spending to accelerate branding, headcount and international efforts. However, that decision also means increased short-term cash burn to chase growth, so they’ll have to prove fairly quickly they are making the right call.

History shows the market will often stomach losses for selected high-growth companies. However, those companies often return the favor by showing increasing bottom line leverage and at least some steady progress toward profitability while the market gives them the pass. I believe SmartSheet failed to meet that requirement this quarter and took a big hit as a result. (As an aside, I also believe this concept is partially responsible for ESTC’s sideways drift through most of 2019.) It now appears the market has branded SMAR as having something to prove, and I unfortunately don’t see much of a short-term catalyst in the current environment. I held for a few days after earnings, then decided to bank my SMAR profits on 9/9 when some higher conviction stocks tanked while SMAR only dipped. SmartSheet still holds a strong spot on my watch list, but I’ll be looking for improved leverage and stronger bottom line results next time around.

TTD – Not much to report from a business standpoint. The Trade Desk remains a strong, profitable company with plenty of room to grow. I took advantage of the decline back into the $210 range to grab a few more shares. Then TTD decided to decline some more. Nonetheless, I remain comfortable with it as my #2 position.

TWLO – I considered adding when TWLO dropped with everything else, but just couldn’t pull the trigger. I guess that means my Twilio conviction level is now firmly entrenched at “prove it to me before you get any more of my money”.

ZM – I don’t own it yet, but that was one helluva quarter. Eric Yuan’s genuine happiness about the company he’s building is enjoyably contagious. Not to mention the fact I’m mildly envious of the credit limit his wife will likely have on her new HSBC charge cards (sorry, you’ll have to listen to the call to get the joke). The odds are good I’ll end up with a Zoom position at some point, though for now I’m sticking with CRWD as my ultra-nosebleed valuation poster child.

ZS – ZScaler released full year earnings on 9/10 and followed with an analyst day on 9/17. Like most here my initial earnings reaction was “Ugh!”. Revenues not only fell a couple million short of where I hoped, but their outlook sounded more conservative than the past few quarters. Unless Q1 is a strong beat, revenue growth will almost surely drop from 61% to something below 50% in just two quarters. That’s a fairly significant plunge considering the company is still at a current run rate just under $350M. The headline billings number clearly hurt as well, even if there’s an underlying argument it wasn’t quite that bad. On the bright side gross margins, deferred revenues and operating expenses held steady while the company continues to turn out small, steady profits.

The call unfortunately didn’t do much to ease my initial reaction, at least for the short-to-medium term. CEO Jay Chaudry implied sales headwinds, saying “We are not sure if the macroeconomic environment is having an impact, but we started to see some large deals taking longer to close.” He also introduced a new Chief Revenue Officer in response to what he feels is a “need to build a sales machine to drive consistent sales execution”. From a qualifications standpoint it looks like a good hire, but we’re starting from scratch on seeing what he can do. Their FY20 guidance calls for billings (+28%) to grow slower than revenues (+34%). That suggests a slowdown to me and is something they definitely have to address. Management also alerted everyone to a tough revenue comp two quarters from now along with some additional cash flow pressure this year due to their headquarters move. That’s quite a bit of pre-explaining before the year even gets started. Chaudry says he is “not worried about any competitive pressures”, but clearly sees execution areas he’d like tightened up. I’d agree and am glad to see they appear to be taking steps to address the issues.

Putting it all together, it appears ZS is no longer firing on all cylinders but instead finding its way as it continues to scale. That’s not at all uncommon for a company at this stage, but it does raise my shareholder antennae since it’s cropping up at a lower run rate than some others who have faced similar pressures. As other posters have very astutely pointed out ZScaler isn’t a bottom up, grass roots, viral adoption product. It’s a major C-level decision to completely revamp the way a company handles security. It sounds like most early adopters are already on board and future sales will require a little more elbow grease (which is very similar to what I think about TWLO and Flex). That’s not a knock against ZS or its technology. It’s simply my assessment of where they are on the product adoption curve (…).

In the end I felt ZScaler posted good results with a blah forecast. That won’t fly for a stock that had been priced for great results and a clear runway. I have no doubt they are playing the beat-and-raise game with their “prudent guidance” and am fully aware their initial FY guide is similar to last year. However, the way I interpret their comments suggests this year’s beats won’t be quite as impressive. The market was very quick to express its dissatisfaction, and I must admit I was disappointed as well. I sold about 20% of my shares immediately after hours, deciding to sit on the rest until I had a chance to review analyst day. I liked the announcements made at the event, including a new partnership with CRWD and some very pointed presentations reinforcing the technical merits of their solutions. My take afterwards is ZScaler’s current dilemma is more likely growing pains than broken thesis. Let’s see if they can regain their mojo. I’ll hold what remains, but ZS has a much shorter leash at least through next earnings.

My current watch list in rough order is ZM, SMAR, DDOG, PAYC, DOCU and TEAM. DocuSign is back on the list after a strong quarter which showed improving traction for their Agreement Cloud product. I’m ambivalent on Cloudflare (NET) so far since I don’t find its numbers or competitive position as strong as some other recent IPO’s. SQ, ZEN and EVBG remain in my penalty box. PagerDuty joins them after disappointing earnings that saw growth drop from 49% to 45% with what I view as a real chance to be below 40% next quarter. At a run rate that’s still under $200M, that level of performance just isn’t good enough to fight for a spot in my portfolio right now. I’ve dropped GH from the list due to my general skittishness with biotech. After following it for most of this year, I now realize there are simply too many binary events and drastic price moves for me to feel comfortable putting money into this sector.

And there you have it. My second negative month of 2019 – and quite the loss it turned out to be. In fact, it’s my biggest losing month since switching to this style in August 2018 and it’s not even close. At its bottom I dipped to a level originally cleared in March and now sit 26.8% below my July 26 high. I can’t say for certain where the ~8.5% portfolio drop on 9/9 ranks among my biggest one-day percentage losses, but I can 100% guarantee it was my biggest pure dollar loss ever. It’s important I remember the raw size of my dollar swings will always rise if I’m fortunate enough to have a portfolio increasing in total value. I guess that’s not necessarily the worst problem in the world to have.

In calmer times we all know pullbacks are healthy and some of them can be rather large. That doesn’t make things any easier when one happens, especially when it’s so abrupt. Does anyone really relish seeing roughly six months of gains evaporate in what seems like an instant? The fact significant drops are a fairly common occurrence for any seasoned investor is very small consolation. After all, the percentage size of this month’s plunge isn’t that different from the one I experienced last August-December except that even after this brutal beatdown my overall portfolio has increased 39.9% since that time vs 18.7% for the S&P. Does that make me feel any better? Maybe not as much as it should, but I know that’s emotion speaking rather than logic. I’m guessing I would have been pretty excited if you’d told me January 1 that on September 30 I’d be sitting at a little better than double the market. The conundrum is my path to get there has been rather unpleasant recently and there’s now an underlying anxiety in the air that wasn’t there before. Being honest though, the only reason it wasn’t there before is because the prior underlying anxiety was knowing a hard pullback was inevitable one of these days. And I guess that’s the point. There’s ALWAYS the potential for underlying anxiety if you don’t keep things in context. The form that anxiety takes simply depends on where we are in the investing cycle. Unfortunately, those are the non-negotiable table stakes you must pay to play this game. I’m totally OK with that. For others that aren’t, I can assure you the sooner you accept it the better off you’ll be (or you’ll likely need to play a different game).

The saving grace in all this is that history tells me in almost certain terms I’ll live to see another day. Again, market psychology sucks and I’m sure many others are undergoing the same rough treatment right now. Will my portfolio continue to outperform going forward? I have no earthly idea, but in these moments it’s important to take a breath and self-reflect:

  • Do I still believe in the business prospects of the companies I own? Yes. I’m well aware they might not all succeed, but I seriously doubt any of them are going to zero any time soon.

  • Do I still believe in my process for picking them? Yup.

  • Am I comfortable with the adjustments I made based on this new round of info? Sure, as much as the word “comfortable” can apply during a blindingly red month.

  • And most importantly, do I still believe I am on a course that gives me a chance to positively impact my family’s future while earning better returns than the broad market? Absolutely, and I mostly have my fellow Fools to thank for that.

Well then, for better or worse it looks like I’ll be sticking around at least one more month. Thanks for grinding through my latest entry of keyboard therapy and I hope everyone has a great October…or at the very least a kinder, gentler one.


Thanks for a great post. Saul asserted that the panic was over, time to get back to discussing companies. But, I wanted to just emphasize one thing you mentioned almost in passing with respect to the recent decline. You said, “I can 100% guarantee it was my biggest pure dollar loss ever.

Maybe I hadn’t thought about it in those terms so clearly before. I started following the board and putting Saul’s methodology into practice in 2016. When I reviewed my performance over the last three years I was struck by the fact that my recent dollar loss exceeded the entire value of my portfolio at the beginning of 2016! Obviously (or maybe not so obvious) my current portfolio value remains way above where I started three years ago. But you’re absolutely correct in the assessment of the dollar loss. I’m not going to deny that from a percentage perspective, the decline has been very significant, but the sheer number of dollars I think is what really rattled me. It’s just math, the bigger the number you begin with, the bigger the number represented by a given percentage decline (or increase for that matter).

Anyway, I don’t want to belabor the point. But I found this off-hand comment to be very enlightening.

Oh yeah, one other thing I’d like to add. Even with all the sturm und drang I admit I reacted emotionally, but I did not take any drastic action. I didn’t rush to sell my holdings. I just sat on my portfolio. So, despite the drama, I can also say my confidence remained sufficiently strong to keep my actions in check.

Separately, when looking at individual companies, I want to thank you and Darth for your analysis of Roku. I like the company for both their financial performance and their technology, but it’s the only B2C company I hold. That does make a little nervous. I appreciate the positive re-enforcement of my own analysis. The intelligent, reasoned analysis of several participants on this board is invaluable.


Hi Brittlerock,
Yes, as my portfolio grows with success, a 10% or 20% gain or loss represents an amount of money that would have been huge to me a few years ago. I have found that thinking of it in percents instead of dollars helps me keep things in perspective, and helps to keep me from making irrational emotional decisions. In fact, I think it’s the only way to do it.