I didn’t write an update last month, because life sometimes just happens and my carefully laid plans encountered Tyson’s famous words…So this month I’m covering both July and August. It’s been a good two months despite some big ups and downs in between.
Below I will give a brief view of why I did what I did and why I own the companies in my portfolio. As I’m doing these write-ups as a form of discipline and part of my own investing process, I’m trying to avoid writing epistles, rather distilling and focusing my thoughts (it has the added benefit that readers don’t die of boredom).
| 1 Jan 2023 to | YTD Return |
|---|---|
| Jan | +7.2% |
| Feb | +17.3% |
| Mar | +15.1% |
| Apr | +2.1% |
| May | +23.4% |
| Jun | +31.2% |
| Jul | +37.3% |
| Aug | +43.7% |
Portfolio as of end August
Just under half of my portfolio are in the top 3 positions; more than 80% in the top 7. And then there is a rather long-ish tail of smaller positions.
What I did and why
At the end of July I had 11.5% in Bill, which I sold out of completely after earnings in August. I wrote up why here. tldr: it was a disappointing, bland, uninspiring affair with no innovation to speak of.
I took Crowdstrike down from a 12.6% position in June to 8.7% in July and 4%-ish going into earnings yesterday. I felt that the competitive space was getting crowded and their numbers didn’t look like they had any acceleration left in them.
I increased Axon to my number two position in July because it really is just such a beautiful business, at a good price, and with great prospects ahead. I also wrote that one up.
I decided to re-enter Transmedics just before earnings and bought a sizeable position, and then upped the ante by buying more after earnings, only to decide it was probably a rash decision and sell almost the whole position after taking the rather big loss (the stock was down 30% in August and I caught a lot of that…). I’m still undecided on this one, which is why it is a leveraged, and small, position for me.
I increased my Monday position after their pretty awesome earnings.
I took a position in Okta before earnings. I saw @PaulWBryant had a position end July so I investigated and liked what I saw, namely acceleration and margin improvement under the hood.
Lastly I took a number of smaller positions in companies where I see the potential for acceleration, rerating, or both.
Celcius
This is a great company, posting tremendous results and that is growing exceptionally fast. It’s profitable, is a repeat purchase and is not slowing down, in fact it seems to still be accelerating. This company has a good change to follow in Monster’s footsteps - and that has been one of the best investments of the past couple of decades. The last quarter’s numbers:
- Revenue up 112%
- Gross profit up 168%
- EBITDA up 357%
- Net profit up 345%
This is what revenue growth looks like compared to Snowflake’s, when Snowflake was at a similar revenue level. In Q4 of last year, Celcius moved to Pepsi’s distribution system and revenue took a dip. Since then they’ve come back with a vengeance. I think it is truly remarkable that it’s growing faster than Snowflake did at similar scale. It’s bottom-line profitable, cash generative and trades at a run-rate revenue multiple of 11.5x and a PEG of lower than 1. Nuf said.
Axon
On this one I have no additions to my write-up and @PaulWBryant and @junomean2 additions to that thread. This is a great business with an effective monopoly in their target-market, with acceleration on the cards at an attractive price imo.
Zscaler
Zscaler is the leader in Zero trust, and I feel the field is less crowded and the solution more difficult to get right - i.e. there is a bigger moat - than some other parts of the cybersecurity landscape. The company and CEO clearly have their collective tails up. In recent conferences the CEO sounded very confident, and he articulated how they are winning against the point solutions of newer competitors and against the older tech of incumbents. They also have none of the sales force issues that some competitors have; in fact Gartner thought the sales force was arrogant (great imo). They have a rule of 40 of 61%, just grew by 46% and guided for 35% next Q. I added to my position yesterday.
Samsara
Samsara just reported earnings yesterday. I thought it was excellent.
Revenue was a beat against expectations, gross margin improved, operating margin improved and moved very close to breakeven and they reached FCF and non-gaap net income positive territory for first time. ARR added was the highest ever:
| ARR add $m | Q1 | Q2 | Q3 | Q4 |
|---|---|---|---|---|
| 2020 | 30 | 31 | 41 | |
| 2021 | 28 | 31 | 40 | 48 |
| 2022 | 41 | 55 | 56 | 65 |
| 2023 | 49 | 56 | 61 | 71 |
| 2024 | 61 | 74 |
Here’s FCF% progress over time - just look at the Q2 margins over the last 5 years:
| FCF % | Q1 | Q2 | Q3 | Q4 |
|---|---|---|---|---|
| 2020 | -205% | -177% | -178% | -181% |
| 2021 | -126% | -92% | -59% | -48% |
| 2022 | -46% | -46% | -38% | -40% |
| 2023 | -36% | -25% | -9% | -3% |
| 2024 | -1% | 2% |
They also raised next Q and full year guidance. And i really liked how clearly they showed the components of the raise:
Large customer adds (>$100k ARR) of 140 was the highest ever, up from 92 a year ago and 138 a q ago, and they’re landing big new customers: 7 of the top 10 net new ACV deals were new customer lands. NRR was >115% for all customers and >120% for large customers.
I thought this was an exceptionally good set of results: they maintained revenue growth at a very high 43% yoy while simultaneously improving all margins - gross, operating, cash, and net. One of the analysts captured it quite well and asked whether he was missing anything, because:
Dom, it’s rare to see the combination of net new ARR acceleration whilst like sales and marketing expense growth decelerates. So maybe was there anything special, unique, one-time in nature? […] just making sure we’re kind of not missing anything there.
The CFO’s answer was no - they really are just executing that well.
I’ll probably be adding to this one despite the hefty price-tag (run-rate revenue multiple of 16.5x currently - the highest of my stocks).
AEHR Test
AEHR is the only company that can efficiently test SiC chips which are a necessary component for EV’s. And testing is a necessary step in the production of SiC chips. That’s about the gist of it. If EV continues to grow as it is expected to globally, there will be a tsunami of SiC chips to test, and only one company with the tools to test them efficiently - AEHR.
Monday
Monday has a knack for executing strongly, and customer growth and operational leverage was really terrific. They managed to improve profitability and cash flow while at the same time keeping revenue growth stable. No small feat. This is simply an innovative, highly efficient outfit executing exceptionally well and with a strong business model.
Okta
Okta is a discarded, somewhat disgraced gem. They are the leader in identity with a strong product portfolio and good leadership. And it looks like the CEO managed to get his house in order after the acquisition of Auth0 (which was the start of a big mess for them). Their results out two days ago have not been written up in detail on the board, so here goes with some details:
- Revenue was $556m, up 23% yoy. But importantly up 7.3% qoq vs just 1.6% a quarter ago.
- Raw $ revenue added was $38m, the highest in 8 quarters
- Gross margin was 79.8% up from 76.8% a year ago
- Operating margin was 10.6% up from -3.3% a year ago
- FCF margin was 8.8% vs -5.3% a year ago
The CEO opened with this snippet in the first couple of sentences of the ER:
we believe the macroeconomic environment, while still challenging, has stabilized relative to the last few quarters.
They also mentioned exceptional strength in really large customers, which is not apparent from just a cursory look at customer additions, which were admittedly not that great.
All in all great: a leading business showing margin improvements coupled with an improving revenue outlook and more internal and external stability, at a fair price: run-rate revenue multiple is 6x.
Crowdstrike
Crowdstrike delivered underwhelming Q2 results imo. Raw $ Revenue added was down in all geo’s vs the prior quarter. But that was balanced by steady performance otherwise: the strongest operating margin in their history and a rule of 40 of 55.
I think what the market liked though was that they painted a compelling story of competitive advantage and change underway currently which will benefit them (SentinelOne’s troubles, among others) and a greatly improved outlook for H2 of this year.
Given their strength and dominance in their niche and their positive H2 outlook, I’m willing to keep a small position in Crowdstrike.
Pure Storage
I took Pure down to a smaller position than I had previously. Ant’s great summary of the results paints an optimistic view, but I felt that they were promising jam tomorrow - acceleration coming, but none yet…Because I can also see that acceleration coming quite clearly, I decided to keep a small leveraged position.
Why? They have an NPS above 80, they have the best flash storage solution out there, and they are valued modestly. If they do accelerate, and there is a big chance that they will, there is a big likelihood that the shares will rerate markedly.
Other smaller positions
I have 2%-ish positions in 5 other companies.
Transmedics could end up with a monopoly position in the transport side of the lucrative market for organ transplants in the US and potentially further afield, if they navigate the addition of a fleet of planes to their operations well. The CEO believes that they will; the market is sceptical.
Confluent is a leader in real-time data and real-time data is becoming more and more important for a variety of use-cases, the least of which is not AI. The numbers are compelling and the longer-term opportunity as well, and AI could add acceleration.
Pagaya is Upstart done right. It is very cheap and could explode if interest rates fall.
Global-e is the leader in cross-border payments and has the potential of big acceleration when their Shopify whitelabel solution finally gets widely implemented, which is expected in the next couple of quarters.
D-local is a hyper-growth payments provider for emerging markets with the bulk of their revenue from South America. There’s a lot to improve for the very large populations in emerging markets, and many emerging markets out there, so revenue could grow very fast for very long. They also just added a rock-star co-CEO from MELI to their team, who could help ensure that they capitalise on the opportunity.
Finishing up
I’ve had a pretty good year up to now. Given where we are in the interest rate cycle, I intend to stay pretty much fully invested going forward.
Good luck, all! And please do engage in debate about any of my positions - that’s what the board is about.
-WSM