WSM's portfolio review end November

At 30 November my portfolio ended up ytd 70%.. That is down substantially from where I ended just a month ago and almost 20% from my ath this year, so I decided to take a bit of stock this month.

I tried to boil down a summary of each of my holdings to a couple of key things only - trying to see the forest, and trying to ignore the trees, if you like.

The things I settled on were 1) why the company is special - what it does and its position in that market, 2) who the CEO is and why he is the right guy for this job (the all-important narrative part of the business). Then in terms of financial numbers 3) what revenue growth, 4) cash flow% and 5) gross margins looked like in the most recent quarter, and then in terms of drivers of all of that, what 5) NRR and 6) customer growth looked like.

So in stead of a summary of what each company did, a lot of detail on its numbers, etc etc, I will focus on those things this month for each of my companies.

2021 YTD RESULTS


End of:

Jan	+7.6%
Feb 	+7.7%
Mar 	-6.0%
Apr 	+4.6%
May	+6.6%
Jun	+24.1%
Jul	+22.1%
Aug	+79.4%
Sep	+83.9%
Oct	+101.1%
**Nov	+70.6%**

MONTH OF NOV REVIEW

My portfolio lost quite a bit of value this month vs where I ended October. I’m now back to where I was in August. I wrote this in last month’s summary:

“Of my top conviction stocks, Upstart and Lightspeed stand our for me going into earnings. Neither of them budged for the month despite a ton of good commercial news - new products, new customers, positive macro trends. They have all of the makings of producing excellent results in a couple of days, yet the stock prices do not seem to have anticipated this imo.”

Eish!! (https://www.urbandictionary.com/define.php?term=Eish)

Accordingly I was overweight and leveraged going into Lightspeed’s results, and after their results I exited quickly and then shifted to being overweight and leveraged going into Upstart results. I guess most of us here know that combo didn’t work out so well in the end (both shares dropped like rocks after earnings, in case you missed it).

I also had some seller’s remorse (if there is such a thing) looking at the Cloudflare share price climbing while all this was going on. I sold my full position between June and August. I could just imagine Saul saying: “I told you - told you - never to sell just because the price went up!”

Oh, well. You can’t win them all I guess. So while lamenting the sad fact that I no longer owned NET, I reminded myself of another of Saul’s pieces of wisdom which is that the stocks you don’t own don’t matter, only the ones you do own. I’m up 70% ytd, which is not too shabby after all.

One win for me this month was that I was also a little leveraged going into Pubmatic’s earnings, and they delivered the goods and the stock promptly popped by 20%, when most of my other stocks were seeing red.

In addition to Lightspeed I also exited Doximity and Docebo, and opened three new positions - Zscaler, Amplitude and Confluent. After results I exited Digital Turbine, but after reading some good detailed analysis and arguments from athinkingfool about the company and it’s prospects, I bought a small position again just before month-end.

MY POSITION SIZES

Given that two out of my four “top conviction” stocks of last month got hammered this month, I’ve upped the criteria for qualifying as a “top conviction” stock, as this was arguably my big mistake for the month: not the stocks I picked (one can never be 100% sure), but my relative conviction in the direction and pace of change in the anticipated results. After some introspection, a lot of staring at numbers and listening to conference calls, I came away concluding that only two qualify at this stage as top conviction for me - Datadog and Monday.

Here is the composition of my portfolio, split per conviction tier, at month end as well as the month before that:


Monday			21.5%, 8.8%
Datadog			20.0%, 19.3%

Crowdstrike		10.1%, 11.9%
Upstart			10.4%, 22.3%
Zscaler			9.3% (new)
Zoominfo		9.1%, 8.7%

Amplitude		7.3% (new)
Pubmatic		6.2%, 2%
Confluent		3.8% (new)

Digital Turbine		1.7%, 3.0%
Cash			 0.6%,  -

**SOLD:**
Lightspeed		-, 16.4%
Doximity		-, 4.9%
Docebo			-, 3.0%

DISCUSSION OF POSITIONS I SOLD

Doximity (DOCS)

Doximity seems to have produced the goods: NRR increased from 163% to 173%, revenue was up 76% yoy and 10% qoq and they raised guidance by 10%.

So, why did I sell?

Well, a couple of things together led me to exit. They are a very richly valued ad-tech play (by my definition) in a medical niche. And while they are well positioned for all of the reasons I outlined last month, there are extremely well-priced ad-tech companies with faster customer growth, great leadership and arguably a longer runway available at the moment, and I don’t want too big of a % of my portfolio in ad tech. Also, I just couldn’t help but feel that this was, at least to an extent, a COVID-driven stock; and that even a slight deceleration/normalisation in the tailwinds could lead to a big deceleration of revenue growth.

The big metric-driven argument was that NRR was 178% but revenue growth only 76%, meaning that essentially all growth came from existing customers…so it was all expand and no land this quarter (that was not the case in Q1. In Q1 NRR was 167% and revenue growth more than that, at 98% - both land and expand). New customers drying up to this extent is not a good thing, even if you do manage to bleed your existing ones dry.

And one additional thing caught my ear when listening to the call this quarter. The CEO sounded smug and a bit arrogant; also to his team. I simply didn’t like the way he felt the need to augmented others’ answers to questions and sometimes contradict them ever so slightly. Call me silly to focus on that, but that was part of my decision. The role of the CEO is so important in an organisation - especially rapidly growing ones - that I focus disproportionally on that and run for the hills if something seems off to my - obviously very subjective - mind.

Docebo (DCBO)

Docebo’s numbers decelerated. Revenue growth went to 68% from 76% in the prior quarter, ARR to 60% from 64%, whereas these metrics were on a seemingly upward path for a number of quarters before that. Gross margin dipped to 79% from 80% as well. Given that I had a question mark about the CEO and his team from last quarter, I didn’t even bother to listen to the call. I looked at the numbers and sold.

Lightspeed (LSPD)

Lightspeed’s numbers disappointed a lot, and for me the investment thesis was broken, so I sold as soon as I could, and haven’t looked back.

More detailed thoughts on why I sold: https://boards.fool.com/i39ve-done-the-same-and-sold-for-me-…

REVIEW OF MY CURRENT POSITIONS

Monday.com (MNDY)

They are the soon to be LEADER in workflow management with their Work OS product - they will surpass Asana very soon in size. The co-CEO’s Roy Mann (41, ex CTO of Wix) and Eran Zinman (37) are two developers from Israel who know each other very well. They speak in ensemble without interrupting each other and have a passion for making their products simple and easy to use. Clearly customers are loving it.

Revenue growth: 95% yoy / 17% qoq
Gross margin: 90%
FCF margin: 3.5%
NRR: 115% / 130% for >10 employees
Customer growth (>$50k ARR): 231% yoy / 30% qoq

→ Truly exceptional financial metrics - even better than Datadog, with off the charts customer growth, top-class NRR (for >10 employees), soon to be the leader in their category and with two exceptional CEOs.

My notes about their latest results: https://boards.fool.com/thanks-for-the-notes-this-was-a-fant…

Datadog (DDOG)

Datadog is the clear next-gen observability category LEADER, with an act two in security coming soon. The CEO Olivier Pomel (43) is a computer scientist - educated at one of the elite universities of Paris who felt the pain of having siloed tooling for observability and dev in a previous company and set out to fix the problem. He builds for developers, with developers and is an exceptional leader, speaking with clarity and calm while relentlessly, almost inevitably building newer and bigger things to “solve the whole problem” for his customers.

Revenue growth: 75% yoy / 16% qoq
Gross margin: 78%
FCF margin: 21%
NRR: >130%
Customer growth: 34% yoy / 7% qoq
Large (>100k ARR) customer growth: 66% / 15% qoq

→ Truly exceptional financial metrics, with exceptional large customer growth and top-class NRR, the leader in what they do and an exceptional CEO.

My notes about their latest results: https://boards.fool.com/thanks-sjo-here-are-my-notes-and-tak…

Crowdstrike (CRWD)

The undisputed next-gen endpoint security LEADER. The CEO George Kurtz (50) is a driven, fast-car loving, security-focused CPA by training who, while CTO at McAfee saw the pain of existing solutions and decided to fix those. He strikes me as someone you don’t want to mess with - and that includes “adversaries”. His mission seems to be to beat any cyber adversary out there. No matter what it takes.

Revenue growth: 70% yoy / 12% qoq
Gross margin: 78%
FCF margin: 22%
NRR: >120%
Customer growth: 81% yoy / 15% qoq

→ Great financial metrics and very strong customer growth - even better than Datadog - and with an exceptionally driven CEO who is driven to win.

My thoughts about their Q2 results (they report Q3 tomorrow): https://boards.fool.com/crowdstrike-thoughts-34922016.aspx

Upstart (UPST)

AI lending disruptor and clear LEADER, and miles ahead of any competition, currently conquering unsecured lending in the US, with auto and mortgage debt in the US next. CEO Dave Girouard (54) is experienced in massively scaling tech businesses, having previously done that for Google’s Gsuite of products. He is calm, focused and passionate about the problem he is solving - fairer credit based on true risk.

Revenue growth: 250% yoy / 18% qoq
Gross margin: 78%
OCF margin: ±20%
NRR: Lumpy…
Customer growth (bank partners): 210% yoy / 24% qoq

→ Astounding growth, margins and cash generation and superb growth in the number of bank partners (24% qoq is better than Crowdstrike and Datadog’s customer growth and only slightly behind Monday). The CEO is the real deal and is in this for the long term, and dead set on building a massive financial services company. Revenue being lumpy is the only downside, but even that has only once really been an issue and stalled: in a quarter when the world got a once-in a generation shock of discovering a new pandemic-causing virus.

Some more thoughts on Upstart: https://boards.fool.com/upstart-q4-expectationsguesstimation…

Zoominfo (ZI)

B2B GTM Sales intelligence LEADER for the online/remote working world. CEO Henry Schuck (37) seems like a dyed in the wool sales professional who built a company that solves the problems that B2B sales professionals encounter daily. But, like his company, there’s more to him than is apparent at first glance. He’s also a doctor of law (cum laude) and Washington State and Nevada registered lawyer. The company has a red-blooded sales culture and the CEO is passionate about the problem his company solves and seems relentless in driving execution.

Revenue growth: 60% yoy / 14% qoq
Gross margin: 88%
FCF margin: 37%
NRR: >115% (my estimate; not disclosed)
Customer growth (>$100k ARR): 74% yoy / 14% qoq

→ Fantastic cash generation - better than any of the companies in my potfolio - combined with hypergrowth on the top line. And NRR that is still relatively low, but accelerating coupled with really strong customer growth.

My thoughts about their latest results: https://boards.fool.com/zoominfo-q3-my-thoughts-and-notes-34…

ZScaler (ZS)

Zero Trust LEADER, with huge macro tailwinds and best positioned to capitalise on those. CEO Jay Chaudhry (62) is an Indian immigrant electronic engineer who completed three different masters degrees in the US after becoming an engineer in India and immigrating in the 80’s. He had a long career at IBM before founding and selling a string of security-focused companies and then fouding ZScaler in 2007.

Revenue growth: 61% yoy / 17% qoq
Gross margin: 81%
FCF margin: 36%
NRR: >125%
Customer growth (>$100k ARR): 53% yoy / 9% qoq

→ Solid, hardworking and seasoned leader with an inspiring story and a career building security companies. Strong growth and excellent cash flow margin - on par with Zoominfo this quarter - fuelled by accelerating NRR and RPO and expected further tailwinds due to their strong positioning in zero trust and government.

Pubmatic (PUBM)

Supply-side advertising platform CHALLENGER, with big macro tailwinds as the industry undergoes a fundamental change in how it is organised and works. The son of Indian immigrants, CEO Rajeev Goel (42) founded the company with his brother and the CTO (all 3 computer scientists). The CTO is based in India where they maintain a big developer presence to build and dev on their own infrastructure, which is part of their competitive advantage.

Revenue growth: 53% yoy / 17% qoq
Gross margin: 72%
OCF margin: 45%
NRR: 157%
Customer growth (publishers): 25% yoy / 5% qoq
Customer growth (CTV): 35% qoq!

→ Young, energetic team who come at the ad-tech problem from the technology, and not the media side (like leader Google, not like large but slower grower challenger Magnite). Small company with strong growth fuelled by increasing numbers of high-quality publishers, strong NRR and super-charged growth from CTV.

My detailed write-up on the company and Q3 results: https://boards.fool.com/pubmatic-positive-analysis-34985342…

Amplitude (AMPL)

Digital product improvement insight LEADER. Co-founders CEO Spenser Skates (33) and CTO Curtis Liu (31) won MIT’s AI competition battlecode twice - meaning they can both code and know AI. Well. (https://news.ycombinator.com/item?id=5022167)

Revenue growth: 72% yoy / 16% qoq
Gross margin: 71%
FCF margin: -35%
NRR: 112%
Customer growth: 54% yoy / 11% qoq

→ Young but already highly accomplished CEO leading an equally young company with his CTO friend from university. Revenue growth and NRR accelerating even before their first two new products which were announced in the last Q (which will bode well for future NRR). Customer growth is also seemingly on an upward trajectory and they are surfing digital transformation as a huge and long-term wave/tailwind.

Confluent (CFLT)

Real-time event streaming message queue/DB LEADERS. The CEO Jay Kreps and his co-founders created Apache Kafka while at LinkedIn and founded Confluent as a company focused on building out a commercial platform with Kafka at its heart. This has led to the release of Confluent Cloud (fully managed and cloud-based Kafka) end 2017. My thesis is that Confluent Cloud will fuel growth and become the heart of the company (unlike what happened with Atlas at MongoDB where the cloud version cannibalized existing revenue and growth fizzled out), although that is by no means a sure thing.

Revenue growth: 66% yoy / 16% qoq (Cloud @26% of rev +245% yoy)
Gross margin: 69%
FCF margin: -20%
NRR: >130%
Customer growth: 75% yoy / 7% qoq

→ Great alignment of product and the team as the founding team built the open-sourced product Kafka upon which their company is now built. Exceptional growth in Confluent Cloud and a convincing argument by the team about why this is relevant for customers - essentially you don’t need to configure all of the infrastructure; they do that for you, incl crucially governance (sounds a lot like Cloudflare’s and the hyperscaler’s philosophy but then focused on Kafka deployments).

On this one I’m going to see what happens - hence only a starter position. There are strong arguments by people on the board who did not invest. This one has proponents (me, CloudL, Muji) and very savvy and smart people who passed (Bear, Saul). I’m betting on Confluent Cloud being an additional engine for growth rather than just a replacement of existing revenue.

My take (invest a small starter position): https://boards.fool.com/i-would-like-to-delve-a-little-deepe…
Bear’s take (don’t invest): https://boards.fool.com/so-what-could-q3-2022-look-like-if-w…
Saul’s take (don’t invest): https://boards.fool.com/confluent-why-i-decided-not-to-buy-n…
Muji’s overview of Kafka: https://hhhypergrowth.com/a-kafka-deep-dive/

Digital Turbine (APPS)

Digital Turbine is my smallest position. I exited after listening to earnings as I wrote here: https://boards.fool.com/after-listening-to-the-call-and-the-…

However, this thread from athinkingfool convinced me to buy a small position again:

His arguments: https://twitter.com/thinking_stocks/status/14643730309105745…
His model: https://pbs.twimg.com/media/FFJ8dM0XMAcNfef?format=png&n…

Essentially his argument is that acceleration in the second half of this financial year will ensure yoy growth this year comes in at >60%. Then, based on management’s targets announced at their recent investor day, Singletap’s hypergrowth will result in that product alone reaching $1bn in run-rate revenue in just under two years, which, combined with more modest growth from the rest of the business will be good for very close to 60% yoy growth for the company as a whole for each of the next two years as well.

CHECKING OUT

What a month! Lightspeed, Upstart, sector rotation, a small taper-tantrum yesterday…and Omnicron…May the investment gods (and the damn virus) smile on us for the remainder of the year.

As always I would love to hear comments, thoughts or different takes.

Happy investing, all!

  • WSM

Previous reviews:

Oct 2021: https://boards.fool.com/wsm8217s-portfolio-review-end-octobe…
Sept 2021: https://boards.fool.com/wsm8217s-portfolio-review-end-septem…
Aug 2021: https://boards.fool.com/wsm8217s-portfolio-review-end-of-aug…
July 2021: https://boards.fool.com/wsm8217s-portfolio-review-end-of-jul…
June 2021: https://boards.fool.com/wsm8217s-portfolio-review-end-of-jun…
May 2021: https://boards.fool.com/wsm8217s-portfolio-end-of-may-2021-3…
April 2021: https://boards.fool.com/wsm8217s-portfolio-review-end-of-apr…
March 2021 Q1 ytd: https://boards.fool.com/Message.asp?mid=34791940
Dec 2020 full year: https://boards.fool.com/Message.asp?mid=34710356

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