Well, at least I’m back in the game 
What I did in February
I significantly trimmed Datadog, Bill, Trade Desk and Cloudflare after earnings and increased Transmedics and SentinelOne.
Now careful readers will notice me to-ing and fro-ing on SentinelOne. Yes. Last month I significantly reduced S. This month I significantly increased. And this is not the first time; I’ve had a lot of discussion - both internal and with Saul and Bear et al - on this one. And whereas Saul (yea) and Bear (nay) have remained relatively steadfast in their convictions, I have gone from one camp to the other. For me there are a number of things that pull me in opposite directions with this stock. But for now I’m in the yea camp at least until after earnings. I’ll talk a bit about my thinking below.
YTD Return :
January: +7.2%
February: +17.3%
(I had to look for the “+” sign on my keyboard after not having used it for more than a year in this section. It made a very satisfactory “click” when pushed)
Portfolio end Feb
| Ticker | % of port |
|---|---|
| SNOW | 24.3% |
| BILL | 16.4% |
| S | 11.3% |
| TMDX | 12.1% |
| NET | 8.3% |
| TTD | 3.6% |
| DDOG | 5.8% |
| CRWD | 0.6% |
| Cash | 17.7% |
Snowflake
I thought Snowflake’s just reported quarter left quite a bit to be desired, and I reduced my position significantly (it’s about 11% currently). I found the tone of the call aggressive from management’s side, and I found the CEO largely absent from most of the discussion. He did not instil his usual “x-factor” into the call. Perhaps it was because he had to lower his revenue growth estimate for the coming year from 47% to 40%, or in $-terms that’s a reduction of $145m for their estimate/guide for the coming year in just 3 months. That must have hurt someone’s ego.
They put the unexpected reduction down to newer cohorts ramping less quickly than they would have expected…ok…but remember how many times they explained to us that it takes at least 6 months and often a year or even more for customers to ramp? And customers that are newer than 2 years are not even included in their NRR calc. So this cannot only be recent customers suddenly not ramping as quickly as they would have thought imho. I think someone messed up last Q with that 47%. Probably the CFO given how he was left to explain himself over and over again in the Q&A.
Revenue growth was only 5.7% qoq. and NRR slowed to 158% - and remember that this number includes no customer signed in the last 2 years and also includes the growth of this quarter and the previous 3 so will always lag what’s happening in quarter. And that revenue growth slowdown is what happened in quarter. If I look at the revenue growth decay (this Q’s yoy revenue growth as a % of a year ago’s yoy revenue growth) - a measure of how fast revenue growth is slowing, SNOW slowed a lot this last Q (that 53%):
| Q1 | Q2 | Q3 | Q4 | |
|---|---|---|---|---|
| 2021 | 77% | 84% | ||
| 2022 | 74% | 87% | 92% | 87% |
| 2023 | 77% | 79% | 61% | 53% |
I left the call disappointed for the first time after listening to a call by this management team.
A last point here. This Q’s and next Q’s guide implies a yoy growth rate of approx 25%-ish if the same sequential growth is continued for a couple Q’s more. So the guide implies a strong turnaround of current and next Q’s fortunes from Q2 towards the end of next year, to hit the 40% growth guide. If there is no change, they’ll miss the 40% guide. Now I’m not saying they’ll miss. But in the past there wasn’t really a prerequisite of things to get significantly better for them to hit their target. The prerequisite in the past has been for things not to deteriorate. This time it’s different.
Bill
I said that I would be watching like a hawk to see how their big customer increase of last Q translated into revenue. Well, I didn’t really need to watch like said raptor. They told us: not by much. I was very disappointed by this. They split their customer numbers and revenue contribution for us between the FI channel and the rest of the company for the first time, and we could see that most of the customer adds came from the FI channel, and that those FI channel customers actually didn’t contribute much.
Still, they grew revenue by 13.1% qoq, which, for comparison is more than twice what Snowflake did qoq (5.7%). Now this is obviously not fair as I’m comparing a relatively seasonally strong Q of Bill’s with a relatively seasonally weak one for SNOW. But it just goes to show by how much Snowflake’s revenue growth has dropped…
I’m considering cutting BILL some more but at the moment feel it is relatively safe after the haircut the stock has taken.
SentinelOne
On the one hand, they use a ton of SBC (more than others in our portfolio perhaps), and there are worries about the endpoint market in general and competetion from Crowdstrike specifically.
And they fumbled a little with an ARR guide last Q (they said they would increase ARR by at least $50m and then only hit $49m…a $1m or 2% miss on ARR). How could we ever trust these guys again??? I find that a tad overdone given the absolute $ amount and % of total. Still, they did miss.
On the other hand we have a company growing extremely quickly, gaining customers hand over fist and improving their margins each quarter. And then they have been improving their competitive positioning a lot.
This is their trajectory on the Gartner Magic Quadrant for EPP:
Source: Gartner
I think that’s a pretty big deal. Winning is all about relative competitive advantage, right? And failing a complete meltdown in endpoint protection market worldwide I would think that moving to such a strong leadership position over the last 3 years sets them up for many more years of strong growth.
And then we have this:
Source: Jamin Ball
Look to the far right of the graph. SentinelOne is valued the lowest of all listed US SaaS companies based on this measure. Doesn’t make sense to me - I don’t think there is something broken in the company, quite the contrary if you look at that Gartner graph.
So I flopped after flipping last month and built it back up to a key position.
Transmedics
I thought they had a great quarter. The results have been discussed at length with quite a big discussion about their TAM and specifically kidney being the next big thing for them or not. Without wading into the discussion any more than necessary, I would suggest that a big discussion about the size of kidney (although important 3+ years out imo) misses the bigger point. They currently only have a 7% market share in the US of a market that is set to grow and which they are themselves expanding. So lots of room left to grow in the US. And they have not even started with expansion into the rest of the world (yes, to all you Yankees, there is a world outside the US: 
There are more than twice as many people living in the EU than the US). Plenty of TAM to go around for a company as small as this one imo.
Now this isn’t software, so supply chain, stock, logistics are all part and parcel of this company’s business model. But I can’t fault them on their plans on this front. They brought in a new expert to help with their supply chain and they are efficient with their stock. I look to inventory turn as a measure of efficiency here (higher is better):
| Inventory turn (times pa) | Q1 | Q2 | Q3 | Q4 |
|---|---|---|---|---|
| 2020 | 0.9 | 0.5 | 0.6 | 0.9 |
| 2021 | 0.8 | 0.8 | 0.4 | 0.7 |
| 2022 | 0.9 | 1.4 | 1.6 | 2.1 |
Happy to keep this one.
Cloudflare
Even though this was their smallest beat in a long time, this company keeps on chugging along, and the tone on the call was great. It’s been discussed a lot on the board. Perhaps just one thing to add which could be interesting - those same growth decay numbers for NET look like this:
| Q1 | Q2 | Q3 | Q4 | |
|---|---|---|---|---|
| 2020 | 100% | 98% | 115% | 97% |
| 2021 | 107% | 110% | 93% | 108% |
| 2022 | 105% | 102% | 94% | 78% |
So yes, their growth rate has slowed. But not by nearly as much as some of the others.
I also said that I would watch their cash-flow like a hawk. And in this they did not disappoint. In fact they over-achieved somewhat! FCF was a record $33.4m, or 12.3% of revenue, and operating cash flow was a record 28.4%!
Their guide was very strong as well. Even though I trimmed after the stock ran up so much so quickly, I will be looking to increase again to a full position.
Trade Desk
Similar to Cloudflare, the Trade Desk had a very good quarter: positive, emphasising relative share gains and delivering smashing profitability and cash flows. As with Cloudflare I trimmed after the stock ran up a lot and quickly. I will be looking to build it back up a bit but probably not to a full position again.
Datadog
Ah, Datadog. I wrote about my main concern with them namely that they don’t seem to be landing enough new customers here.
I guess that remains my key issue. That, and the fact that they guided for mid 20% growth for next year…remember hypergrowth anyone? 40%+?
Revenue growth was ok-ish: it came in as expected a bit lower than the previous quarter, at 7.1% qoq growth (faster than SNOW…). And as with SNOW, remaining in the stock means hoping for a turnaround of fortunes from the current reality.
Here are the growth decay numbers for DDOG:
| Q1 | Q2 | Q3 | Q4 | |
|---|---|---|---|---|
| 2020 | 115% | 83% | 70% | 67% |
| 2021 | 59% | 98% | 121% | 147% |
| 2022 | 159% | 111% | 82% | 53% |
Sure, it’s off a very high compare, but still. Whereas 2021’s story was one of acceleration, 2022’s was almost exactly the opposite: one of extremely rapid deceleration. Where does it go to from here? Back to hypergrowth? Don’t know. Which is why it is now a much smaller position than pre earnings.
Finishing up
That’s it folks. My hit rate has been 50/50-ish of late: I would say a fail on BILL, DDOG and SNOW. But the hits on TMDX, TTD and NET made up for that, it would seem.
After the cybersec companies have finished reporting, I will reassess. I will be looking to be in companies where there seems to be a tailwind and an expectation of relative revenue growth stability or even acceleration, as well as looking for companies which have seen relative market share gains. Hopefully there are still some of those around!
-WSM