MY RESULTS YEAR TO DATE
June was a very good month for my portfolio and it reached a new ATH.
I ended the month up ytd 24.1%.
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%
MONTH OF JUNE REVIEW
The big change for me this month was sellling Inari after earnings, which was a 8% position for me prior to exiting, and buying Docusign with the proceeds before earnings, as well as adding a lot to Upstart.
Also, two small positions: after Asana’s great earnings I decided to open a position, and did the same with Digital Turbine, after reading Ant’s summary of their exceptional results and delving a bit deeper.
I trimmed Cloudflare, Zoominfo and Snowflake to fund the increases and new positions.
WHY DID I SELL INARI?
I sold Inari after their Q1 results, same as many others. Saul explained the key things for him were the uncertainty, negativity and caution in their tone, the fact that they did not want to give Q2 guidance and that the reopening seems to be headwinds for them.
I went about getting to my decision a little differently, by pencilling in a handy beat on their full-year guidance and then filling in the quarters and having a look at the resulting yoy revenue growth rates.
Here is what I did. I pulled forward their number of territories and cases per territory generously and used that to forecast the number of cases for the remainder of the year while keeping the average revenue per case stable. I then calculated their quarterly revenue based on that. So to generalise, I worked on an assumption that recent good performance plus a little bit will continue.
That resulted in a full-year 2021 revenue of $284m vs their guidance of $240m-$250m. So far so good, right? The problem became apparent to me if I then pencilled in the numbers. The resultant revenue and yoy growth rates would then look like this for the 4 quarters of 2021:
Q1a Q2f Q3f Q4f
57.4 66.3 75.3 85.3 -> $284.3m full year.
113% 161% **95% 75%**
In addition to the points Saul made, that’s what made me sell: Even with a handy beat to guidance, which was already sounding shaky, and a continuation of strong execution, revenue growth would fall precipitously in Q3 and Q4, with no credible path (visible to me at least) of how that could turn out otherwise. Similar to what is likely coming with ETSY…
AND WHY DID I BUY DOCUSIGN?
Well I was very bullish on the stock in my March write-up. I noted that the company seemed to be doing great, with revenue growth accelerating in 2021 from 39% in Q1 to 57% in Q4, gross margins were improving, NRR accelerating, operating margins improving and positive, customer growth accelerating and ARPU increasing. At the time I had a 2.4% position and wrote after my overview of the numbers:
“Actually after reading this I don’t know why my position is so small…”
But I never built a full position and actually exited when I tried to focus my portfolio in May. So when I sold Inari and was looking for a place for the cash, Docusign was the obvious choice for me and I bought before they released their rather exceptional Q1 results, for which Bear wrote an excellent overview here: https://discussion.fool.com/docusign-remembered-34853893.aspx Bear:
“This wasn’t just a good quarter. This was a revelation (billings especially). The market was lumping Docusign in with companies that benefited in 2020 from the environment but wouldn’t see that benefit carry through in 2021. The market was wrong. This quarter proved that things aren’t slowing back down for them at all. Companies are spending more and more with Docusign, and they aren’t looking back.”
Here are the last 4 year’s Q1 qoq and yoy revenue growth rates:
QoQ: 2022: 9% 2021: 8% 2020: 7% 2019: 5%
YoY: 2022: 58% 2021: 39% 2020: 37% 2019: 32%
Just look at that acceleration!
I could go on and on; every single metric is going in the right direction. FCF is up 180% qoq and 275% yoy to 26% of revenue. Billings is up 54% yoy, GP% is up 1%pt to 81%. Operating margin is 20%, the highest ever achieved, customer growth came in at 49% yoy and enterprise customers 53% yoy while customers spending $300k or more was up 42%
This is a great company which is under-appreciated by the market (and our board perhaps?). It is trading at a run-rate P/S of about 30 (vs Cloudflare’s 60 - which I discuss in a Cloudflare vs Docusign shoot-out below 
POSITION SIZES
I have nine positions as at the end of June and I feel pretty comfortable with all of them.
**Datadog 23.3%**
**Crowdstrike 21.2%**
**Upstart 17.0%**
**Docusign 10.1%**
**Snowflake 9.0%**
**Cloudflare 6.8%**
**Zoominfo 6.6%**
**Digital Turbine 3.1%**
**Asana 2.9%**
REVIEW OF MY POSITIONS
Datadog (DDOG)
Datadog is my top holding currently, in line with last month’s allocation.
Datadog’s revenue growth in the last quarters is not reflective of what I believe could be in store for the remainder of the year, as they lap their heavily COVID-impacted Q2 of last year.
Operating margins have been steady at around 10% and NRR consistently above 130% for at least 13 quarters. FCF has been strongly accelerating, clocking in at 22% in Q1 of 2021!
In terms of their engines of growth, the key one is of course observability where they continue to add customers, modules and multi-module adoption, but they’ve also recently planted a flag in security, and that will likely be a strong future driver of growth for them. At a recent Berenberg conference in June, the CFO had the following as answer about their security offering and what makes it different:
”Yes. Well, in security, what we’re trying to do is ride what we see as an emerging trend and something that’s known as DevSecOps. So what this is premise time is, security used to be very centralized, firewall-oriented and controlled by a siloed group. And like DevOps and what we’ve experienced, silos we see beginning to be broken and responsibility in developers in handling some of their security.
Now the reason for this is that the pace of development has increased. And when you get to containerization of micro-services, it’s too complex to be handled in a static way. So we’re following what we see as the increased role of DevOps and these things pushed out. We’re also now focusing on inside the company, inside the firewall on endpoints, we’re focused on the production environment. So that’s how we’re differentiating ourselves. It’s early in that trend. There’s - it’s not established. We’re building our product. This movement towards DevSecOps is still very early, so it’s very much greenfield and nascent and we want to be there for this trend as it happens.”
So they are building on their strong position in DevOps to expand into the security of the production environment, which is a smart move imo. They are not going into protecting endpoints, which is what Crowdstrike does, or networks, which is what Cloudflare does.
I 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.
Crowdstrike (CRWD)
Crowdstrike is now my #2 position but remains the most consistent of my top conviction stocks. Q1 results posted on 3 June were great, and I think the strength of the quarter was under-appreciated.
There were concerns about Q1 being a slowdown after they posted 70% yoy growth in Q1 and guided for 61% for Q2 in this thread: https://discussion.fool.com/crwd-1st-quarter-results-34846292.as…
I disagree. I think they will handily beat the guidance and the underlying business is accelerating.
For me this was a key question and insight from the Q&A session:
Q: Andrew Nowinski
Great. Thank you. And congrats on another fantastic quarter. I wanted to just get a question in on the net new ARR this quarter. So you, again – you saw no seasonality from Q4 to Q1, which I think is the first time at least the last three years where net new ARR has not declined sequentially, clearly indicating a significant change in the spending environment. In the past, I think you’ve talked about AWS driving a significant percentage of that net new ARR. So, I was curious, was that again the key driver this quarter that enabled CrowdStrike to defy normal seasonality?
A: Burt Podbere, CFO
Hey Andy, this is Burt. So, I think it’s just more broad-based demand. I don’t think it’s necessarily focused in just AWS. I think, the great news is we essentially delivered a second Q4 in Q1, to your point. You’ve been following us closely. I think it’s the continuation of trends we have been seeing for quite some time. George talked about them, the digital and security transformation, cloud adoption, this robust threat landscape. And I think we’re in a buying environment. And so, we’re really excited to be able to post such a strong Q1. But I think, again, it goes back to the broad-based demand. But thanks for tracking that information.
Here are the numbers:
Net new ARR:
Q1 Q2 Q3 Q4
2019 38 46 59
2020 52 59 78 98
2021 86 105 116 **143**
**2022 144**
And the % change in net new ARR qoq:
QoQ Q1 Q2 Q3 Q4
2019 21% 28%
2020 -12% 13% 32% 26%
2021 -12% 22% 10% 23%
2022 **+1%**
Basically the analyst and the CFO were making the point that, in the past, net new ARR, in absolute $ have always dipped from Q4 to Q1 until now.
This spells great things for Crowdstrike in the short/medium term for me, and after that I expect years of fantastic growth given the huge tailwinds of the present and Crowdsrtrike’s excellent position.
Upstart (UPST)
I increased my upstart position this month to a large holding from medium one last month. I funded most of this by trimming Snowflake.
Last month I concluded my monthly review (and a fairly detailed overview of Upstart) with the following:
Upstart feels like a company with multiple tailwinds coming together at the same time: lots of consumer demand for personal lending at a time of massive stimulus, a re-opening of the global economy after a pandemic and AI coming of age, with a head-start in an area where the market is ripe for disruption. And it’s well led with a top-class CEO and founder, profitable and growing exceptionally fast. So even after the incredible recent run-up in the stock I remain bullish.
Since then I’ve grown even more bullish.
For anyone not yet convinced, have a listen to this June 13th, 37 minutes interview of the CEO originally posted by Secretfriend: https://www.buzzsprout.com/1697077/8693359-investing-in-ai-e……
Snowflake (SNOW)
I trimmed Snowflake this month from a large position to a medium position in order to increase my Upstart position.
They are an exceptional company growing incredibly fast with rock-star leadership and a valuation to match. However, or perhaps accordingly, I see the potential for Upstart to really surprise on the upside more than I do for Snowflake.
I feel a bit like the market expects Snowflake to do exactly as well as they are predicting. The market expects >160% NRR and revenue growth >100% and probably won’t bat an eyelid if that gets delivered, no matter how incredible that achievement is. Whereas I think with Upstart the market does not yet believe that they will grow revenue in excess of 100% to the same extent.
This seems to me to be reflected a bit in the discussions on this board too. No-one seriously wonders whether Snowflake can pull off the exceptional goals they are setting for themselves, or whether their market and opportunity is really that wide open, or whether the leadership is really that great, whereas there are a couple of posters on this board with questions - rightly or wrongly (and I believe the latter) - about Upstart.
Cloudflare (NET)
Similarly to Snowflake, I trimmed Cloudflare quite a bit this month - going from a 12% position to a 6% position. Cloudflare is arguably the most expensive stock in my portfolio, and although the extremely impressive pace of innovation is fantastic, I struggle to find compelling reasons - if I were forced to choose - to own Cloudflare in stead of Docusign or Datadog.
That is because I tend to look for the best opportunities to invest in, like everyone on this board - which means comparing companies and valuations. And Cloudflare’s numbers are not that compelling relative to some other names imo. To make the point, let’s do a bit of a (tongue-in-cheek) shoot-out between two names in my portfolio:
Cloudflare vs Docusign shoot-out, using the last reported quarter’s numbers.
Cloudflare had a 51% revenue growth rate vs Docusign’s 58% → winner Docusign!
78% gross margin vs Docusign’s 81% → winner Docusign!
-5% operating margin vs Docusign’s 20% → winner Docusign!
NRR of 123% vs Ducusign’s 125% → winner Docusign!
Docusign’s yoy revenue growth accelerated from 57% yoy to 58% in the last two quarters, while Cloudflare’s went from 50% to 51% → winner Docusign!
Docusign’s latest quarter customer growth rate was 48% while Cloudflare’s was 34% → winner Docusign!
And Docusign’s customer growth rate was higher than Cloudflare’s in the prior 8 quarters too. → winner Docusign!
And all of this while Docusign had a larger revenue of $111.9m vs Cloudflare’s $74.3m. → winner Docusign!
So Cloudflare does not have a single metric above that is better than Docusign’s, yet is trading at a run-rate P/S of around 60 vs Docusign’s of around 30.
That, to me would seem to be rewarding Cloudflare a lot for expectations of future success and revenue growth acceleration, which is of course rightly expected from their long and impressive list of innovations.
But in looking at the current numbers, I struggle to see a reason to put money into Cloudflare rather than Docusign at these levels.
Which is why I trimmed Cloudflare a lot after the recent run-up in the share price and did not trim Docusign.
On this point, I would welcome further debate, of course!
Zoominfo (ZI)
I trimmed Zoominfo to a midsized position and used the proceeds to buy the two small positions in Asana and Digital Turbine which I discuss below.
Zoominfo held an analyst day mid June, and gave an impressive ambition to become a GTM engagement layer for their customers, which the market seems to have largely shrugged off. The prezzo and webcast are here: https://ir.zoominfo.com/events/event-details/inaugural-analy…
And the slick kick-off video: https://video.zoominfo.com/watch/hr79fUqU2airdSiiZcxPE2
No new numbers were released and my thoughts remain largely the same as in May.
In Q1, new customer growth doubled yoy, and they are executing very well on upselling to their existing base - ARPU grew to the highest yet, and they added 100 customers to the cohort spending more than $100k - from 850 to 950. Their International growth is really starting to hum. International revenue grew 14% qoq (69% annualised), and within the Q they said the month of March (the last month of the quarter) was the best ever which means that Q2, if that momentum holds, will be even better than Q1. New product adoption is going well. And they have great gross margins (89%), fantastic operating margins (43%), and free cash flow margins (64%). They guided for 48% yoy growth for next Q, and I think they may breach 50% yoy for the first time next Q.
One item that has recently started to bother me about Zoominfo is their seemingly relatively static customer numbers QoQ (both Q1 and Q4 were “above 20k”), and that they did not disclose NRR every quarter.
I asked the Zoominfo IR deportment about that, and they said that, yes, the last disclosed customer number was “greater than 20k” in Q1 2021, and that their last disclosed annual NRR was 108% in Q4 2020. They also said that they believed the aggregate customer number is less informative due to the significant differences in contract value and duration, and suggested I look at revenue growth and margins in stead.
It is all good and fine for the IR department to suggest that I look at revenue rather than customers, but the fact remains that customers drive revenue. I would think that a marketing and sales company would and should know this, accordingly I find the answer unconvincing.
So the question mark around customer growth remains and will be a big focus of mine in their next earnings call.
Digital Turbine (APPS)
Ant brought this one to my attention https://discussion.fool.com/digital-turbine-q4-2021-results-3484…
Revenue of $95m grew 142% yoy (incl acquisitions) and 101% proforma and the company is EBITDA positive with $22.5m in the last Q (23.7% margin).
Investor presentations: https://ir.digitalturbine.com/presentations
They are building a digital advertising/monetisation platform, so they are in the company of the likes of the Trade Desk, Magnite and Roku. However they are building a platform specifically for mobile phones and focused more generally on Android.
The CEO had the following to say re the last Q’s results (the growth rates are not organic, but still):
”Fiscal 2021 was a breakout year for Digital Turbine," said Bill Stone, CEO. "We accelerated our revenue growth amid unprecedented global demand for our Applications Media and Content Media offerings. At the same time, we clearly demonstrated the compelling operating leverage inherent in our platform business model, as evidenced by a more than four-fold year-over-year increase in our non-GAAP Adjusted EBITDA to $22.5 million, and a more than five-fold year-over-year increase in our non-GAAP EPS to $0.25 in the fiscal fourth quarter. Profitable growth, via continued operational execution and strategic platform expansion, remains the primary focus for the Company.”
Digital Turbine is essentially a bunch of companies: Digital Turbine (which itself is a recent combination), Appreciate, AdColony and Fyber. The last three are very recent acquisitions: Appreciate (March 2021), AdColony (April 2021) and Fyber still to close.
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**
It trades at ±19 run-rate P/S and ±7 based on the proforma combined revenue.
For a profitable company growing at >100% this looks like a very good buy.
Asana (ASAN)
I wrote up why I took a position in Asana, here: https://discussion.fool.com/revisiting-asana-q1-2022-and-qa-3486…
In summary, a couple of things going really well, and one question mark. Accelerating customer growth - they added 7k customers / 8% qoq growth in Q1 which is a bit of a seasonal low point usually.
NRR is expected to be going higher, with the CFO stating:
“I would say, Q2, Q3, we expect our NRR to pick back up to pre-pandemic levels. [WSM: Pre-pandemic was 120%; during the pandemic it dropped to 115%]
Lots of room to grow within the existing customer base, CFO quoted again:
“we are 3%, 4% penetrated in our paying customer base. So there is so much expansion opportunity in front of us.”
And funnel KPI’s all pointing in the right, and accelerating direction. Again quoting the CFO:
”across the funnel, we’re seeing record volumes of interest, top of funnel. And our free to pay conversion rate is at an all-time high. Conversion rates, pipeline, ACV, customer adoption metrics are going up. Churn rate, customer sat and NPS scores are at or better than pre-pandemic level. It really is sort of growing across the board.”
Only one gripe: the huge opex spend, bringing in op margins of -43%.
Still, looks good to me for a smallish position.
CLOSING
A value/cyclical investor friend of mine yesterday posted on our shared Whatsapp group: “It’s tech time again”.
I responded with “It’s been tech time for the last couple of decades”.
Long may it last!
- WSM
Previous reviews:
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