MY RESULTS YEAR TO DATE
July was a very weird month with lots of ups and downs in all of my portfolio companies.
I ended the month up ytd 22.1%. which is down slightly from where I was last month. I expect the real catalysts to happen in August and early September when most companies report their first lapping of a full quarter of last-year’s COVID-impacted results.
2021 ytd results were as follows:
End of Jan +7.6% End of Feb +7.7% End of Mar -6.0% End of Apr +4.6% End of May +6.6% End of June +24.1% End of July +22.1%
MONTH OF JULY REVIEW
This month I sold Asana again, trimmed Cloudflare a lot, and bought Lightspeed and added to Upstart with the proceeds.
I added two new starter positions in Pubmatic and GAN to the starter position I took in Digital Turbine last month, bringing my small try-out positions to three. I’m looking for smaller, less well known hypergrowth companies with less stretched valuations at the moment and hope that some of these will pass muster as I keep learning about them.
WHY DID I SELL ASANA?
My one major gripe with Asana has been and remains that they have extremely high costs in the business. It came down a bit last quarter as a % of revenue, but it doesn’t seem like they have a strong will to get to profitability or cash burn neutrality any time soon. So after the stock spiked after Moskovitz, the CEO, bought a lot of shares and the market rewarded the good quarterly results, I decided that there are better places to put my money.
I know that I’ve been blowing hot and cold on Asana, which is, if I’m being honest with myself, a good reason not to hold the shares.
I have ten positions as at the end of July - 3 top conviction, 4 mid conviction, and 4 small positions. I’ll be looking to whittle this list down and concentrate my bets more post August/September quarterly results:
**Crowdstrike 21.7%** **Upstart 19.4%** **Datadog 20.1%** **Docusign 10.7%** **Snowflake 6.9%** **Zoominfo 6.7%** **Lightspeed 6.1%** **Digital Turbine 2.8%** **Cloudflare 2.5%** **Pubmatic 1.5%** **GAN 1.6%**
REVIEW OF MY POSITIONS
I’ll review the less well covered positions in more detail than the more popular ones and will spend more time discussing why I trimmed Cloudflare so much this month.
I would really welcome engagement/challenges/views from the board about the three small positions GAN, Digital Turbine and Pubmatic which I describe below.
I didn’t change my Crowdstrike position and still believe that the strength of Q1 was under-appreciated and the underlying business is accelerating.
When they report early September I’ll be looking for revenue growth to tick up fuelled by the strong net new ARR performance of Q1.
I further increased my Upstart position this month and it is now a large position on par with Crowdstrike and Datadog.
This position is somewhat leveraged, which is why my portfolio under-performed relative to some others on the board this month. If, as I expect, Upstart surprises with their next set of results, I should outperform. If not, this will be a drag on the portfolio.
Some useful new pieces of the puzzle gleaned in the last month was that Upstart’s loans outperform competitors by a wide margin ito of defaults, as demonstrated by others on this board. This is in addition to their USP that they approve more loans at lower APR’s. So the value proposition to banks certainly seems to increasingly be validated.
A good recent video to review:
June 28: John Lewis, research scientist at Upstart (PhD in Stats) https://www.linkedin.com/in/john-lewis-661a8953/
In this video John articulates what the ML team does at Upstart.
His answer to what the biggest challenge for upstart will be in the next 5 years towards the end of the video was also interesting to me, as I assume he is a little less guarded about questions about Upstart’s future plans than the C-suite would be.
His answer was [at 53:56] that he thinks the biggest challenges for Upstart are staying ahead of competitors and continuing to grow their product space. With their move into auto loans defined by him as a new product space. He predicted that in the next 3-5 years they will have entered between 3 and 5 new product spaces.
They report on August 10.
I didn’t change my position size here either. I still expect them to accelerate revenue growth to above 60% again in Q2, reversing the decelerating trend of 57% and then 52% of the last two quarters, with many quarters of hyper growth to come.
They report before markets open on August 5, so we’ll see soon. But that’s the key thing I’ll be looking for - accelerating revenue growth.
They will report again early September; same as Crowdstrike. Docusign is a great company and still under-appreciated in my view, even with the recent run-up in share price.
I made no changes to my Zoominfo position this month.
They have done a pretty big deal, though - the acquisition of chorus.ai for $575m, which they will be paying for with cash on hand and an additional $300m debt (not convertible) at a cost of 3.875% pa. That’s a pretty low cost imo and smart financing.
One of the things I like about Zoominfo is that they run the business for growth, but without losing sight of the basics of ultimately generating cash flows, profits and value for their shareholders. So doing a financing round at good terms to fund an accretive acquisition is the type of thing that I like. They are taking advantage of the current low interest environment and raising cash without diluting shareholders (another company that is run like this is Crowdstrike.)
Chorus uses machine learning and artificial intelligence to capture and analyze prospect and customer calls, meetings, and emails.
“The acquisition of Chorus will accelerate our vision to deliver a modern go-to-market platform that brings together best-in-class intelligence with comprehensive data management, workflow, and engagement software, empowering companies to effectively execute their revenue-generating strategies”
What will this practically enable?
“For example the combined company will expand visibility into companies’ buying committees by identifying and recommending other key contacts involved in the buying decision or referenced by participants in conversations. As Chorus recognizes meeting invitees and participants and listens for their sentiments, motivations, and concerns, ZoomInfo will further enrich the profile of each member with detailed contact and company intelligence.”
So chorus is a strong addition to the capabilities of the company and its vision to become a GTM platform.
They will be reporting on August 2nd.
I was a bit late to buying into Lightspeed but finally decided to open a position after reading Ethan and other’s excellent write-ups on the stock and looking for a place for the proceeds of selling most of my Cloudflare position.
It looks like there could be a lot of acceleration in store for this one as the economy reopens and the multiple acquisitions start to bear fruit.
Lightspeed will report before markets open on 5 August.
I made no changes to my Snowflake position this month.
At the beginning of the month I trimmed Cloudflare from a medium position to a small position after my comparison of Cloudflare to Docusign in my monthly write-up.
Basically what started out as a tongue in cheek exercise ended up consuming my thoughts for days afterward. In last month’s write-up I compared Cloudflare and Docusign’s key numbers, and Docusign came out on top on every single one. Bar none. And the stock was half as expensive as Cloudflare on just about any price metric you cared to calculate even after the recent run-up in Docusign. Crowdstrike also trumps Cloudflare on all key metrics I track. And if you compare Cloudflare to Datadog, Datadog also comes out on top - some measures are the same (revenue growth, GM%) and others are better (Op margin, NRR) - and Cloudflare is more expensive than Datadog and Crowdstrike too. Here is the Docusign comparison again:
Cloudflare vs Docusign shoot-out, using the last reported quarter’s numbers.
Revenue growth: Cloudflare 51% / Docusign 58%
Gross margins: Cloudflare 78% / Docusign 81%
Operating margin: Cloudflare -5% / Docusign 20%
NRR: Cloudflare 123% / Ducusign 125%
Revenue growth momentum last 2 q’s: Cloudflare went from 50% to 51% yoy / Docusign from 57% to 58%
Customer growth: Cloudflare: 34% / Docusign 48%
Customer growth momentum: Ducusign’s customer growth rate was higher than Cloudflare’s in the prior 8 quarters
Size: Cloudflare’s $74.3m / Docusign $111.9m
And if you add revenue growth and operating margin together, Cloudflare is the lowest of any of my portfolio companies, at 46%.
And yet Cloudflare trades at a P/S of around 67 and Docusign around 31.
So then, the more I thought about it, the more I found it exceptionally hard to justify the price tag of Cloudflare. Not on an absolute basis, but relative to my other holdings. And all of my other holdings were excellent businesses in large markets with unbelievable growth, tech and leadership too.
Is Matthew Prince and his team really that much better than Dan Springer and his team? Better than George Kurz? Sure the story of Cloudflare is more epic, with founders still at the helm, adversity - the whole thing. Read Broadway Dan’s excellent epic tale about the people and the company’s story:
Seriously, read it if you haven’t yet. The cast and story really is that good.
But not the numbers…compared to other companies on the board…and this board preaches following the numbers. So I followed the numbers and decided that the company did not deserve such a big part of my portfolio at this price. Like Snowflake last year: it is and was an excellent company, but not worth the $380/share that the market was demanding last year October. It was more palatable to me at the low $220’s which was my cost price this year when I decided to buy.
And then Saul published this piece: https://discussion.fool.com/an-addition-to-my-end-of-month-summa…
In it, he makes the excellent point that you should never sell just because the price has gone up, as you make most of your gains from stocks that just keep on going up. And that’s true from my own experience too. Last year I agitated about Zoom’s valuation and missed a part of the boat because of that. But then again before and up to October last year not many people on this board were buying Snowflake, which probably implies that, had one of us owned Snowflake, we would have been selling even though the price went up a lot last year.
So. Was I being stupid here? Should I have hung onto a very large Cloudflare position? Or will I have the opportunity in a couple of months to buy again at a more reasonable price, or buy in a year if the price simply stays at current levels for a year, or does not go up as much as some other stocks? Clearly valuation matters and cannot be ignored; otherwise no-one on the board would have thought Snowflake was overvalued (many did) and Upstart would not have been a screaming buy at $80 recently.
I also believe something in the story did change - at least for me. They have been churning out new products like crazy and continued to do so this quarter. They’ve been innovating at a terrific clip. So given that, I was expecting revenue to accelerate last Q, which it didn’t.
But that does not really say whether I made the right call here, and frankly I’m not 100% sure. But I’ve followed my conviction and put my money where my mouth is, i.e. mostly elsewhere. It seems there are people on both sides of this argument on the board too. Some people have close to a 20% holding or even higher, others have also sold out to a much lower holding or even sold out completely based on the current valuation.
Time will tell. I will be watching next Q’s results with extra care and act accordingly.
Cloudflare reports on August 5th.
Digital Turbine (APPS)
Digital Turbine is building a digital advertising/monetisation platform. However they are building a platform specifically for mobile phones and focused more generally on Android, and partners with large Telco’s in stead of bypassing them like many providers in the mobile ad space do.
This last part is part of their success, I believe, as Telco’s have historically been pretty bad at successfully executing on anything outside their twin core competences of infrastructure/network provision and sales.
I’ve seen, first-hand, a number of failed attempts at a large mobile operator to move up the value chain - Vodafone Live!, Vodafone 360, mobile advertising, and others. So operators are hungry and Digital Turbine offers them a way to get a bit of the value that was built on top of the connectivity they’ve built, and which has largely passed them by in the last two decades.
Digital Turbine is essentially a bunch of companies: Digital Turbine (which itself is a recent combination) added Appreciate, AdColony and Fyber this year. The last three are very recent acquisitions: Appreciate (March 2021), AdColony (April 2021) and most recently Fyber, which closed May 25th.
Bill Stone, CEO
Bill joined in 2012 and became CEO in 2014 and has an MBA from Rice University. He has a strong background with large telco’s including Verizon, Vodafone and Airtouch which is important as the Telco’s are important customers/partners for Digital Turbine.
Their latest quarter’s results was revenue of $95m which grew 142% yoy (incl acquisitions) and 101% proforma and EBITDA of $22.5m for a 23.7% margin.
They break down last Q revenue and yoy growth as follows, for a pro-forma view of the business:
Digital Turbine and Appreciate: **$95.1 / 142% yoy** AdColony: **$58.3 / 38% yoy** Fyber: **$102.9 / 179% yoy** Combined: **$256.3m / 116% yoy**
The stock is down from $76 end of last month to $63 now.
After last month’s portfolio review, some people asked me offline why I didn’t have a larger allocation to this company than I do.
I guess for me, the thing that gives me pause is the fact that Digital Turbine really is a combination of a number of companies, each one with its own unique assets which allowed it to grow very fast. This is very different from a Crowdstrike, Datadog, Upstart which have a strong core of self-developed software which is powering their growth, and the acquisitions they make are done to fill a niche/augment capability. Like a great chef just adding a little bit of salt.
Digital Turbine is more like throwing a couple of very nice dishes together and expecting that the three dishes together make a nice new one and not pasta with sweet chilli apple pie bolognese…
I think that the combination of the companies makes sense and the cultures can gel and the synergies are there to be had and the customers will like the new offerings, but the proof of that pudding will be in the tasting.
Their words have less kitchen metaphors in there but says roughly the same - they are combining companies and planning for the result to be more than the sum of the parts:
“The acquisition of Fyber is a critical component of Digital Turbine’s broader strategy to provide comprehensive media and advertising solutions for our partners and advertisers while enriching the mobile experience for end users through native on-device discovery. By combining Fyber’s rapidly growing mediation, exchange and advertising solutions with Digital Turbine’s core native application and content discovery experiences, the combined company should be ideally positioned to be a leading end-to-end solution for mobile brand acquisition and monetization.”
Until the combined entity has merged/coalesced into something new, while continuing to expand at hyper-growth levels to raving customer-reviews, I will be more cautious. I’m sure some on this board won’t touch companies like this for exactly these reasons, but I’m willing to take a bit of risk on this one. I like the mobile and operator-centric advertising/monetisation model that they’re trying to build and am willing to see if it works out.
Some notable pieces of news since Q4 results:
26 July Adcolony was named best mobile ad network: https://ir.digitalturbine.com/press-releases/detail/613/adco…
29 July they announced an expansion of their partnership with TikTok to North America. “Digital Turbine is to be the preferred distributor for TikTok on mobile device preload inventory in North America.” Sounds like a big deal to me.
The company is still small with a market cap of $6bn. They will report their Q1 2022 results on August 9th.
I looked at GAN after Texmex brought it to the board and took a position after they provided outstanding preliminary Q2 results mid July.
What does GAN do?
GAN provides software to real-world casinos to enable them to do online betting. They white-label their software so that these casino’s don’t need to develop their own software and can compete against the online-only competitors. At the beginning of the year they also decided to go direct. They acquired Coolbet which is a direct to consumer online sports betting business and is now called their B2C segment. In their own words:
“GAN is a leading business-to-business supplier of internet gambling software-as-a-service solutions predominantly to the U.S. land-based casino industry. Coolbet, a division of GAN, is a market-leading operator of proprietary online sports betting technology with market leadership positions in selected European and Latin American markets.”
Dermot Smurfit, CEO
Recent interview: https://sbcamericas.com/2020/12/21/dermot-smurfit-law-family…
“The largest shareholder is Sir Michael Smurfit. He’s got a very significant shareholding in GAN and has been a supporter for more than a decade.”
Interview from 2014: https://www.irishtimes.com/business/technology/playing-a-cle…
“…at a family meeting Game Account Network (GAN) was born.
“It sounds very formal but it wasn’t. It was over dinner. The question was posed by one of the hierarchy: ‘Lads, you are the next generation: what are we going to invest in now?’ ” says Dermot Smurfit jnr.
“I said internet gaming. As long as we keep our noses clean, don’t prejudice our family reputation or our business interests worldwide – let’s get involved,” he recalls of the family discussion 12 years ago.
So this is a bit of a family business, with Dermot running the firm since 2002 that his uncle is the largest shareholder in. And generally that type of thing does not spell hyper-growth to me and generally gives me pause. Still the CEO has been at the helm since inception and is still running the company 19 years later, and now they’re exploding together with the deregulation of the online gambling industry in the US.
A short overview of more recent activity below:
Texmex’s reasons for buying and Q4 results April 1:
Texmex’s reasons for selling May 16 (before Q1):
At the time Texmex was worried about a lack of new customers coming on board and estimated a full-year revenue of around $100m.
“If GAN had amazing software they should be signing up casinos every few weeks. They lost PARC this year and Fanduel’s sports betting last year.”
The share price was around $16 and a P/S of around 6 then.
Q1 numbers were as follows:
Revenue: $27.8m of which $14.3m was contributed by their acquisition of Coolbet, so up 263% (non-organic) and up 76% yoy organically.
Gross margin: $19.1m or 69%
Adj EBITDA : $1.7m so positive margins at 6%
Cash on hand: $52m after the acquisition of Coolbet.
Since then the following happened:
May 17: GAN reached an agreement with Ainsworth Game Technology Limited to obtain the exclusive online rights to all current and future Ainsworth online games, today comprising over seventy unique games. This deal delivers on the long-stated content acquisition strategy to increase the Company’s overall ‘take rate’ on B2B Gross Operator Revenue from iGaming as well as securing a fast-growing share of existing iGaming revenues from B2C Operators who are not already clients of GAN
May 24: GAN Announces Addition of Soaring Eagle Casino & Resort as Its Fourth Client in the State of Michigan. Soaring Eagle Casino & Resort is the largest casino in the State of Michigan. This also marks GAN’s ninth client for U.S. real money iGaming and online sports betting in the U.S.
Jun 17: GAN Announces Multi-Year Agreement with Incredible Technologies to obtain the exclusive online rights to all current and future Incredible Technologies’ online games, which will grow to over 110 games during the term of the contract. For GAN, this deal adds to the content acquisition strategy devised to increase the Company’s overall ‘take rate’ on B2B Gross Operator Revenue derived from iGaming as well as securing a fast-growing share of existing iGaming revenues from B2C Operators who are not already clients of GAN. GAN will immediately begin deriving online content licensing fees from Incredible Technologies’ existing online operations in New Jersey. As a result of this long-term deal, GAN’s combined exclusive online slot partners content represented approximately 7% of all slots sold in the U.S during 2020.
Jul 7: prelim Q2 revenue of $34-$35m and full-year guidance increased to $125m-$135m for the year.
“Looking back, we identified and acquired a business at the outset of this year that is now performing significantly ahead of plan.”
Jul 28: GAN Adds Las Vegas Property Treasure Island Hotel & Casino to Its Growing List of Simulated Gaming Clients. Treasure Island features over 2,800 newly renovated hotel rooms and over 85,000 square feet of live casino gaming conveniently located on the iconic Las Vegas Strip.
In Q1 their revenue was $27.8m and included Coolbet from early January, so for most of Q1. Given that there were no acquisition in Q2, the two quarters are comparable, so working on the mid-point of their prelim results of $34.5m gives sequential organic revenue growth of 24% which annualises to 136% yoy and is high for a profitable company currently trading at approx 6x sales.
The stock is currently still valued at $15.75 - roughly the same price as when Texmex posted in May, before they increased full-year guidance by almost 35% and gave a very upbeat view of the quarter and the rest of the year.
The market has not yet rewarded the company for the very high growth rates achieved, good customer additions, successful strategies for increasing take-rates and their B2C success.
This is a tiny company with a market cap of only $640m, so I don’t want to allocate a huge part of my portfolio to them, but if they continue to deliver on the growth and build a strong position this could be a winner.
They’ll be reporting the full details of Q2 on August 16th.
Pubmatic is a cloud-based sell-side digital advertising platform with more than 50% of revenues derived from mobile.
They are in the digital ad space, similar to Magnite and the Trade Desk, but much smaller, without complex acquisitions like Magnite and focused on mobile, which is the key thing I like.
What do they do?
From their Dec 2020 annual report:
Our company provides a specialized cloud infrastructure platform that enables real-time programmatic advertising transactions. We believe that our purpose-built technology and infrastructure provides superior outcomes for both Internet content creators (publishers) and advertisers (buyers). For the fiscal year ended December 31, 2020, our platform efficiently processed approximately 46.9 trillion ad impressions, up 69% from approximately 27.8 trillion ad impressions in the fiscal year ended December 31, 2019, each in a fraction of a second.
PubMatic was founded in 2006 with the vision that data-driven decisions would be the future of advertising and since then we have invested significantly in developing our platform. By harnessing our massive data asset and leveraging our sophisticated machine learning algorithms, we increase publisher revenue, advertiser return on investment (“ROI”), and marketplace liquidity, while improving the cost efficiency of our technology platform and our publishers’ and buyers’ businesses.
Our cloud infrastructure platform provides superior monetization for publishers by increasing the value of an impression and providing incremental demand through our deep and growing relationships with buyers. Our global platform is omnichannel, supporting a wide array of ad formats and digital device types. We are aligned with our publisher and app developer partners by being independent. We do not own media and therefore do not have a vested interest in driving ad revenue to specific media properties.
We own and operate our own software and hardware infrastructure around the world, which saves significant costs as compared to companies that rely on public cloud alternatives, partly due to the data-intensive nature of digital advertising.
We generate revenue from publishers primarily through revenue share agreements, generally one-year contracts that renew automatically for successive one-year periods, unless terminated prior to renewal.
We primarily work with publishers and app developers who allow us direct access to their ad inventory, as well as select channel partners that meet our quality and scale thresholds. We have direct relationships with publishers such as Verizon Media Group and News Corp and app developers such as Zynga and Electronic Arts.
Rajeev Goel, CEO and co-founder
He has a masters in computer science from University of Pennsylvania and bachelor in economics and political science from Johns Hopkins. He’s a board member of the Interactive Advertising Bureau and is ex-SAP where he was a senior product marketeer.
So this is a company that has its own infrastructure, large dataset, AI-driven software and growing at hyper-scale in a market that is expanding and changing rapidly - digital advertising. Also there are no complicating acquisitions muddying the waters like there is with Magnite and it is founder-led.
Revenue: $43.6m up 54%yoy
Gross margins: $31.2m / 72%
Adjusted EBITDA: $14.5m / 33%
Net income: $4.9m / 11.2%
Operating cash flow: $12.7m / 29%
Customers: they ended 2020 with 1200 customers and added 360 in the year, so 42% customer growth in 2020.
NRR: 122% vs 109% in 2019.
The company is still very small, with a market cap of $1.5bn.
I like this company and look forward to their Q2 results on August 10th.
When most of our companies report in the next weeks/month, the market will reassess and start weighing which of them were indeed just “Covid stocks” and which ones will continue to benefit and grow exponentially for many years to come. I’m trying my best to have a portfolio comprising the best of the latter group.
June 2021: https://discussion.fool.com/wsm8217s-portfolio-review-end-of-jun…
May 2021: https://discussion.fool.com/wsm8217s-portfolio-end-of-may-2021-3…
April 2021: https://discussion.fool.com/wsm8217s-portfolio-review-end-of-apr…
March 2021 Q1 ytd: https://discussion.fool.com/Message.asp?mid=34791940
Dec 2020 full year: https://discussion.fool.com/Message.asp?mid=34710356