Each year-end since 2020 I’ve written a more reflective summary of my portfolio and took the time to look back over the year.
This time I decided to look back a bit further - at the historical results, and the old year-end portfolio reviews of Saul. The years before the craziness of the pandemic. Finding them requires a bit of sleuthing and the search function. Here they are (forgive me and please correct me if I get stuff wrong in my analysis, @SaulR80683).
Saul:
2015 (+16%)
2016 (+2.5%)
2017 (+84.2%)
2018 (+71.4%)
2019 (+28.4%)
(for the full history of Saul’s returns, go here and scroll down).
A couple of things struck me while reading these older end of year portfolio reviews. Saul’s approach has evolved as has the metrics used to assess his portfolio. In 2015 the focus was on P/E and the growth rate of earnings, and the rule of thumb from that seems to have been that Saul was looking companies with a PE lower than the growth rates in Earnings.
What also jumped out at me is that there were periods like end 2016 when people were questioning the wisdom of a focused, growth-oriented approach - after Saul had 3-year results that weren’t that stellar. I guess it is normal for people to doubt a certain approach or someone’s ability after a year or so of less than stellar results. However, just as interestingly those voices disappeared in the good years like in 2017 and 2018. Kinda like spectators yelling at or applauding the players on the field if they miss or score, but not being willing or able to get onto the field themselves. Saul’s approach (and any active investment approach for that matter) is not easy, one needs to be willing to play (vs just index-investing) and one needs perseverance to make it pay off.
From around 2016 and into 2017 and 2018 Saul invested more and more in SaaS and software stocks - this wasn’t the case before then. And in the years before software as a service Saul also managed to generate outsized returns. By 2018 it was mostly SaaS, but that does not mean that other stocks did not do well. From his 2018 portfolio review:
Another thing that stood out to me is the impact of big corrections on returns. Below is the calculated CAGRs for Saul’s portfolio for all preceding years, per year, based on his published results:
Look at the impact that the big loss of 2008 had on returns. It took many years for Saul’s portfolio to make good those losses - 5 years, to be precise. But also note the impact of the big loss averted in 2001 - missing that drawdown contributed very strongly to Saul’s 30+% CAGR in the years from that point until 2008 - note the elevated CAGR in the years following 2000. There were 3 big drawdowns in this investing timeframe: the .com crash in 2000/2001 - which, crucially, Saul managed to sidestep, 2008 and 2022. Missing the first of those was a very important achievement of Saul’s imo. And something that I will consider more going forward. In my own investments, I believe that I will need to pay more attention in future to avoiding very big drawdowns, given the outsized impact those have on returns.
Then, about the SaaS wave I found both the shift and the discussion fascinating (Saul was up quite a bit in 2018 while the market wasn’t). This is again from his 2018 year-end review:
I also reflected on the investment success of Charlie Munger in the years before he joined Berkshire.
Munger managed a ±20% pa return over the 14 years up to 1975. But looking at the results it is clear that it’s another story of big ups and downs - down -32% and -31% in 1973 and 1974 and up 73% in 1975.
The same is true of Berkshire Hathaway - for example down -48.7% in 1974 and up 129% in 1976.
There are more examples, of course, but I’m going to stop here.
So what does this mean for me?
It means that my results of 2022 (which was worse than Saul’s 2008 loss of 62%) will most probably take me years to make good. Perhaps half a decade. But - and that’s the big takeaway - those losses can eventually be made up, and then some - if I keep at it.
One of the prices I believe I have to pay - in addition to the hard work and mental gymnastics and sometimes anguish - for superior returns, is volatility. The big thing is learning to deal with that. But volatility and huge drawdowns are different imo, and I believe I need to pay more attention to learning to distinguish between the two, as the reward for missing the big once in a decade drawdowns is huge.
Also, as times change I need to evolve my approach. SaaS was (and perhaps is still for some years) a big wave to ride. The metrics that were adopted were great for evaluating those companies - NRR, RPO, ARR etc. But that should not be the full arsenal. I need to stay flexible and be able to adapt to new industries, business models, waves.
My results vs the S&P and BRK.B
| Year | My Return | S&P | BRK.B |
|---|---|---|---|
| 2020 | 220.5% | 18.4% | 2.4% |
| 2021 | 52.5% | 28.7% | 29.6% |
| 2022 | -67.9% | -19.4% | 4.0% |
| 2023 | 44.7% | 24.2% | 15.8% |
| ------ | ------ | ------ | ------ |
| Cumulative | 127.3% | 52.5% | 59.8% |
| CAGR | 22.8% | 11.1% | 12.4% |
Results per month for 2023
| 1 Jan 2023 to | YTD Return | % of starting capital change |
|---|---|---|
| Jan | +7.2% | +7.2% |
| Feb | +17.3% | +10.1% |
| Mar | +15.1% | -2.2% |
| Apr | +2.1% | -13.0% |
| May | +23.4% | +21.3% |
| Jun | +31.2% | +7.8% |
| Jul | +37.3% | +6.1% |
| Aug | +43.7% | +6.4% |
| Sept | +30.2% | -13.5% |
| Oct | +14.2% | -16.0% |
| Nov | +33.4% | +19.2% |
| Dec | +44.7% | +11.3% |
My portfolio as of 31/12/2023
| Company | 31/12 |
|---|---|
| Axon | 15.8% |
| ELF | 15.1% |
| Celcius Holdings | 13.3% |
| Monday | 13.1% |
| Samsara | 9.9% |
| Transmedics | 6.9% |
| Shift4 | 3.7% |
| AEHR Test | 3.4% |
| Remitly | 2.1% |
| Dlocal | 1.9% |
| Cash | 14.8% |
YTD + 44.7%
Discussion of positions and changes
This month I didn’t start any new positions. I exited one, and changed weightings of the rest.
Samsara: I increased my position again after Q3 earnings to a significant 9.9% position, after being way too cautious before earnings and stupidly cutting my position to a very small one because I didn’t pay close enough attention to prior ER’s.
I couldn’t understand the big jump in their Q3 and Q4 guide for before the just reported third quarter and got cold feet because the jump seemed implausible (hence I cut the position pre earnings to 1.9%). But if I had been paying attention I should not have done so as they told us in very clear English why that was going to be the case in Q2 already. They said:
“As a reminder, our fiscal year always ends on the Saturday closest to February 1, which means every six years, our fiscal year calendar includes 53 weeks instead of 52. As such, FY ’24 includes an extra week in Q4, resulting in 14 weeks instead of our typical 13-week quarter. We expect the extra week will add less than 3 percentage points of year-over-year growth in FY ’24 and which was already factored into our prior guidance as well as the current guidance we provided today.”
Water under the bridge. This is a great company executing extremely well. So I made a mental note to listen more to management in future. And this is what they had to say about the upcoming Q4 and their next fiscal year:
“I’d say that based on our current outlook, I think the initial FY2025 revenue dollar range that we provide will be higher than the current consensus number, given that we just beat Q3 and we raised Q4. And I would also frame that as de-risked.”
I also increased my smaller positions Transmedics, Dlocal, AEHR test and Shift4.
Lastly, I exited Nvidia. The concerns and complexity of their China exposure continued to bug me. Also it is a huge and extremely visible company. Lastly the strategic intent of the big buyers of their chips to move away from the current scenario of essentially having only them as a single supplier convinced me that there are simpler stocks for me to try to understand and profit from.
That leaves me with big positions in Axon, Celcius, ELF, Monday and Samsara.
What I have done in my portfolio weightings is to prioritize growth. The article below makes quite a compelling case that growth is currently under-appreciated by the market, and hence I’m positioning for when that will eventually not be the case anymore. This is the most important quote from the article below imo:
“Assigning equal weight to growth and profitability for late-stage businesses is flawed and has caused misguided business decisions.
Why?
While a margin increase has a linear impact on value, a growth rate increase can have a compounding impact on value. We show the detailed math below, and it’s confirmed by public market valuation correlations when you backtest the relative importance of growth versus FCF margin. The actual ratio fluctuates massively in the short-term — ranging from ~2x to ~9x in the past handful of years — but over the long-term, the ratio typically settles at 2x to 3x more value for growth over profitability.”
Individual portfolio companies - growth
Given the context of the quote above, for the remainder of my review I’m going to focus only on the growth of the companies in my portfolio:
Axon
| Revenue $m | Q1 | Q2 | Q3 | Q4 | QoQ Q1 | Q2 | Q3 | Q4 |
|---|---|---|---|---|---|---|---|---|
| 2020 | 147.2 | 141.3 | 166.4 | 226.1 | -4.0% | 17.8% | 35.9% | |
| 2021 | 195.0 | 218.8 | 232.0 | 217.6 | -13.8% | 12.2% | 6.0% | -6.2% |
| 2022 | 256.4 | 285.6 | 311.8 | 336.1 | 17.8% | 11.4% | 9.2% | 7.8% |
| 2023 | 343.0 | 374.6 | 413.6 | 2.1% | 9.2% | 10.4% |
Cloud revenue:
| Cloud $m | Q1 | Q2 | Q3 | Q4 | QoQ Q1 | Q2 | Q3 | Q4 |
|---|---|---|---|---|---|---|---|---|
| 2020 | 39.2 | 41.9 | 45.5 | 50.3 | 6.9% | 8.6% | 10.5% | |
| 2021 | 52.4 | 60.5 | 63.3 | 68.7 | 4.2% | 15.5% | 4.6% | 8.5% |
| 2022 | 77.0 | 81.7 | 95.7 | 113.5 | 12.1% | 6.1% | 17.1% | 18.6% |
| 2023 | 116.5 | 132.6 | 148.0 | 2.6% | 13.8% | 11.6% |
Axon’s revenue just grew at 10.4% qoq which annualises to 48.5% yoy. Their NRR is stable at a multi-year high of 122% and their cloud business, which makes up a bigger part of the total each quarter, is growing even faster than the overall business at 11.6% qoq. Stunning profitable growth at a reasonable price - a run-rate PS of 11 which is not bad for this business imo. My top position.
ELF
| Revenue $m | Q1 | Q2 | Q3 | Q4 | YoY Q1 | Q2 | Q3 | Q4 |
|---|---|---|---|---|---|---|---|---|
| 2021 | 64.5 | 72.4 | 88.6 | 92.7 | ||||
| 2022 | 97.0 | 91.1 | 98.1 | 105.1 | 50% | 26% | 11% | 13% |
| 2023 | 122.6 | 122.3 | 146.5 | 187.4 | 26% | 34% | 49% | 78% |
| 2024 | 216.3 | 215.5 | 76% | 76% |
Here I’m switching gears as this is a cyclical business. So I’m going to look primarily at yoy growth. And based on that, the business is on fire, coming in at 76% growth for the most recent quarter (qoq it was flat - but that is consistent with prior years’ seasonality). Will this momentum suddenly stop? I don’t think so. Based on run-rate PE and last quarter’s yoy growth, this one also comes in with a PEG below 1, even cheaper than Celcius (see below).
Celcius
| Revenue $m | Q1 | Q2 | Q3 | Q4 | Q1 QoQ | Q2 | Q3 | Q4 |
|---|---|---|---|---|---|---|---|---|
| 2020 | 28.2 | 30 | 36.8 | 35.7 | 6.4% | 22.7% | -3.0% | |
| 2021 | 50.0 | 65.1 | 94.9 | 104.3 | 40.1% | 30.2% | 45.8% | 9.9% |
| 2022 | 133.4 | 154.0 | 188.2 | 178.0 | 27.9% | 15.4% | 22.2% | -5.4% |
| 2023 | 259.9 | 325.9 | 384.8 | 46.0% | 25.4% | 18.1% |
Insane growth including this last quarter’s 18.1% qoq which annualises to 94.5% yoy. The business is seasonal though, and the upcoming Q4 will be the first one to lap the start of the change to the Pepsi distribution system of a year ago.
Will that cause growth to drop off a cliff? Will the comps be very difficult? Will seasonality result in a huge qoq drop? I believe that this is causing some uncertainly and may be scaring people off. For me, though, I just don’t see the growth suddenly coming to a halt. They have much more room to grow in the US, and international will be slowly ramping starting this year. Based on run-rate PE and current quarter’s annualised growth, I believe it’s cheap at a PEG of below 1.
Monday
| Revenue $m | Q1 | Q2 | Q3 | Q4 | QoQ Q1 | Q2 | Q3 | Q4 |
|---|---|---|---|---|---|---|---|---|
| 2019 | 13 | 17 | 21.1 | 26.6 | 30.8% | 24.1% | 26.1% | |
| 2020 | 31.9 | 36.5 | 42.6 | 50.1 | 19.9% | 14.4% | 16.7% | 17.6% |
| 2021 | 58.9 | 70.6 | 83.0 | 95.5 | 17.6% | 19.9% | 17.6% | 15.1% |
| 2022 | 108.5 | 123.7 | 136.9 | 149.9 | 13.6% | 14.0% | 10.7% | 9.5% |
| 2023 | 162.3 | 175.7 | 189.2 | 8.3% | 8.3% | 7.7% |
Customers
| >50k cust | Q1 | Q2 | Q3 | Q4 | QoQ Q1 | Q2 | Q3 | Q4 |
|---|---|---|---|---|---|---|---|---|
| 2019 | 9 | 23 | 46 | 76 | 156% | 100% | 65% | |
| 2020 | 105 | 144 | 185 | 264 | 38% | 37% | 28% | 43% |
| 2021 | 335 | 470 | 613 | 793 | 27% | 40% | 30% | 29% |
| 2022 | 960 | 1160 | 1323 | 1474 | 21% | 21% | 14% | 11% |
| 2023 | 1683 | 1892 | 2077 | 14% | 12% | 10% |
NRR
| NRR % >50k | Q1 | Q2 | Q3 | Q4 |
|---|---|---|---|---|
| 2021 | 135% | 135% | 145% | 150% |
| 2022 | 150% | 150% | 145% | 135% |
| 2023 | 125% | 120% | 115% |
The Monday growth story is 3-fold for me. First off, their last qoq revenue growth of 7.7% annualises to 34.5% - not too shabby in and of itself. Second is that their NRR is at a historical low (driven by macro forces as is most everyone else’s), and third is that their customer growth has continued at a strong pace, with $50k+ customers growing at 57% yoy this last quarter, much faster than revenue growth. And remember that they look at ARR for that $50k threshold, which is a forward-looking metric. Once NRR starts ramping up again - and there are compelling reasons to believe that it will, including their successful product expansion - all of those customers (they have a lot of them - 2077) of theirs could fuel a revenue acceleration. It’s not expensive imo at a run-rate P/S of just over 11.
Samsara
| Rev $m | Q1 | Q2 | Q3 | Q4 | QoQ Q1 | Q2 | Q3 | Q4 |
|---|---|---|---|---|---|---|---|---|
| 2020 | 19.0 | 25.0 | 33.0 | 41.0 | 31.6% | 32.0% | 24.2% | |
| 2021 | 50.0 | 56.0 | 66.0 | 75.0 | 22.0% | 12.0% | 17.9% | 13.6% |
| 2022 | 87.7 | 101.0 | 113.8 | 125.8 | 16.9% | 15.2% | 12.7% | 10.5% |
| 2023 | 142.6 | 153.5 | 169.8 | 186.6 | 13.4% | 7.6% | 10.6% | 9.9% |
| 2024 | 204.3 | 219.3 | 237.5 | 9.5% | 7.3% | 8.3% |
Samsara’s most recent 8.3% qoq growth equates to 38% yoy. With 49% yoy growth in their >$100k customers (also based on ARR - so forward-looking), I see a lot of very strong growth ahead. Like Monday, NRR is probably at an ebb. So when the NRR tide stabilises or accelerates, revenue could accelerate too, similar to the dynamics I spoke about above for Monday. Samsara isn’t cheap at a run-rate revenue multiple of just over 17. But she’s worth it.
Transmedics
| Revenue $m | Q1 | Q2 | Q3 | Q4 | QoQ Q1 | Q2 | Q3 | Q4 |
|---|---|---|---|---|---|---|---|---|
| 2020 | 7.5 | 3.4 | 7.1 | 7.6 | -54.7% | 108.8% | 7.0% | |
| 2021 | 7.1 | 8.2 | 5.4 | 9.7 | -6.6% | 15.5% | -34.1% | 79.6% |
| 2022 | 15.9 | 20.5 | 25.7 | 31.4 | 63.9% | 28.9% | 25.4% | 22.2% |
| 2023 | 41.6 | 52.5 | 66.4 | 32.5% | 26.2% | 26.5% |
This company has been discussed a lot, and there was a lot of angst (including, I must admit from me) about the change of their business model to a more capital-intensive one, which was going to sap its growth momentum. I think it’s fair to say that hasn’t happened and the feared “change” was more of an evolution (at least up to now).
Just look at the quarterly growth rates above. In Q3 they grew 26.5% qoq which annualises to 156% yoy. Yes. I also had to do the math twice. If that’s slowdown, then please give me some more of it. The company is not profitable so PE ratios don’t work (yet - they’re prioritising growth). But based on P/S it’s at 11 times run-rate revenue. And remember that a 26.5% qoq growth rate doubles revenue in 3 quarters, so if growth doesn’t fall off a cliff, that multiple looks (very) low to me.
Shift4
I’m not going to look at revenue for this company, but rather at gross revenue less network fees. Why? Because that’s how management looks at the business. And it makes sense as they pay a portion of their revenue to the payment networks, so a big part of their revenue isn’t really “theirs” - they just collect it obo the network. Under not so very different legal circumstances, revenue recognition rules would actually have required them to net off their revenue in this manner (if they were an agent obo the network). So they are saying that they think the essence of their business is actually more like that, so they prefer to look at their revenue after deducting the network fees.
| Revenue Less NF $m | Q1 | Q2 | Q3 | Q4 | QoQ Q1 | Q2 | Q3 | Q4 |
|---|---|---|---|---|---|---|---|---|
| 2020 | 79.1 | 67.4 | 87.7 | 88.8 | -14.8% | 30.1% | 1.3% | |
| 2021 | 97.5 | 136.3 | 148.3 | 147 | 9.8% | 39.8% | 8.8% | -0.9% |
| 2022 | 148.8 | 182.6 | 196.7 | 199 | 1.3% | 22.7% | 7.7% | 1.4% |
| 2023 | 200.0 | 228.1 | 243.0 | 0.3% | 14.1% | 6.5% |
So their last quarterly revenue growth was 6.5% which annualises to 28.6% yoy. But they’ve just closed the acquisition of a company - Finaro - on 26 October which will accelerate their growth of itself (and which is why they guided for a big acceleration in upcoming Q4), will allow them to sell all of their products into Europe, and they have a SaaS business - Skytab - which has been growing well in the US and which they will now also sell into Europe. All of these will likely accelerate their growth from an already respectable rate of just under 30%. They guided for Q4 revenue less network fees growth of 28% organic and 41% including the acquisition.
The company is valued at a price to run-rate revenue (less network fees) of 6 and a run-rate PE (yes) of 31. The CEO thinks this is dirt cheap which is why he is is open to being taken private. If that happens it will happen at a premium to the current price.
The remaining three companies have decent recent growth, but there are some question marks about whether it will continue: AEHR test, Remitly and Dlocal will need to show respectable numbers in the coming quarter to stay in the portfolio. We’ll know next week whether AEHR clears the bar.
Closing
Happy belated new year everyone, and here’s to another year of investing together, sharing thoughts and constructive debate.
All the best!
-wsm
Previous reviews
November 2023
October 2023
September 2023
Aug & Jul 2023
June 2023
May 2023
April & Mar 2023
Feb 2023
Jan 2023
