These updates almost feel like confessions to me these days. Forgive me for I have sinned; it’s been a month since my last confession…
The only good thing that I can say about my performance since October of last year is that it is basically just as bad as most others on this board. But make no mistake I’m not sugar-coating this: I believe that I’ve made bad decisions and have paid a heavy price for that. I’m attempting to pick stocks that will go up in value, after all. So being down about 70% from my ATH in November and 60% this year cannot, by any stretch of the imagination, be labeled “ok”. It’s not like there weren’t other companies or assets available in the market which I could have picked, which went down less or that even went up in the last 8 months (like an allocation to cash for example). So in terms of stock picking - by my bar at least - the last 8 months have been terrible. Period.
I believe that the most important thing (in hindsight of course) that I should have realised is that rising inflation will by necessity cause rising interest rates, and that will hurt growth names and especially fintech names disproportionally. And I should consequently have picked other stocks at that time. So back then - no growth stocks with heavily negative cash flows - i.e. no Monday, SentinelOne and certainly no fintechs - i.e. no Upstart. To be clear, I’m not suggesting that I failed these past 8 months due to an inability to time the market - i.e. that I should have gotten out and back into the market - I’m suggesting that I failed at stock-picking for the current environment in the last 8 months.
On October 16th 2021 the Economist’s front cover title and main article was “The energy shock”. In the article they said "Since May the price of a basket of oil, coal and gas has soared by 95%.” Who doesn’t know that energy prices feed into the cost of everything else? The second main article of the same edition was entitled “Is the world economy entering a wage-price spiral?” with sub-heading “Both wage growth and inflation are unusually high”. Not saying that I should have changed all stock picks. But I am saying I should have taken this into account in my stock picking. This is a big macro force with a direct impact on the price of high-growth companies, like the macro tailwind of cyber-security, macro-tailwind of cloud migration - both of which are incorporated into my decisioning. So why did I fail to take inflation into account? Dunno. But I didn’t and I’ve paid a heavy price for that omission.
That leaves me with two hypothetical questions: 1) Which stocks should I have picked? And 2) assuming I changed picks, when should I have changed tack again back into some of the board favourites?
Perhaps I should have picked more CF positive hypergrowth companies back in October/November like ZI, CRWD? Perhaps tech stocks such as APPL/MSFT? Or (much) more cash? All of those would have yielded better returns than what I achieved in the last 8 months. I don’t know for sure and it will most certainly be too long and potentially pointless a discussion and OT. But it remains something I’m currently thinking long and hard about, as my aim is to grow my money as the primary objective, bar none.
Even though I don’t have a clear-cut answer to the first question, I believe the answer to the second question is “about now”. But then gradually, without any FOMO. Which brings me to a second bad decision I made only last month which is worth highlighting.
Attempting to time the market bottom by utilising leverage. My argument was that trying to time the top and bottom is almost impossible as you have to be right twice, as Saul repeatedly points out. I thought that I could in some way surmise when we’re close to the bottom, though, (vs both top and bottom) and then start leveraging my portfolio to achieve outsized returns once the market turns. In this way I would only need to be right once.
Turns out being right even once with timing the market is not that easy - the market can, and did go down quite a bit more from the area that I though was “close to the bottom”; every bottom can have another trap-door it seems, and leverage with stocks going down can wipe out your full portfolio.
So unlike last month - which was the first time in my life that I leveraged my portfolio - I’m not leveraged any more this month and have been cured of this habit - hopefully for the rest of my life 
2022 YTD RESULTS PER MONTH
Jan -27.1%
Feb -23.9%
Mar -33.8%
Apr -43.4%
May -59.0%
Oh man, what a bad result for this year so far!
POSITION SIZES
Below is the composition of my portfolio on 30 May, with the percentage end April in brackets.
**Datadog 27.1% (24.6%)**
**SentinelOne 20.2% (16.2%)**
**Crowdstrike 16.0% ( - )**
**Snowflake 9.6% ( 10.2%)**
**Zscaler 10.2% (17.1%)**
**Cloudflare 4.4% (2.4%)**
**[Bill.com](http://Bill.com) - (18.6%)**
**Monday - % (10.3%)**
**Upstart - % (9.6%)**
**Cash 12.6% ( -8.9 )**
I’m currently way overweight in S and CRWD relative to my other holdings. I’m planning to recalibrate once both of them have reported this week. I will also deploy the cash I have currently as that is a result of some very recent sells, not a planned position. I wish to be fully invested at this time.
MAY REVIEW
This month the big guns Google, Amazon and Microsoft reported their results. I thought Amazon’s was terrible overall - in terms of actual performance and tone of the call, reflecting the slow-down in e-commerce - their mainstay, even though the AWS part was actually very good. Google’s results were good and the cloud part was great, and Microsoft was excellent and positive overall. As Microsoft does just about everything the B2B companies in my portfolio do, I really took heart from this up-beat and super-strong quarter from them.
However as the month progressed and my companies reported a mixed bag of results and the market tanked even more, my mood soured.
Upstart’s results were terrible, and I was heavily invested. I was also very bullish on this company for a long time so felt almost betrayed by management this quarter. Their main sin (in addition to relatively poor performance and a fundamental shift in their risk profile which I discuss below) was that they reduced guidance for both next quarter and the full year by a lot, barely a few months after they gave an extremely bullish outlook for the year and poo-poo-ing the (well-known at the time) macro changes coming their way. What irked me even more is that the CEO sold lots of shares in the period in between the rosy outlook and the greatly reduced one now. Whether they knew or did not know that they would be adversely impacted by the macro forces that they said would not impact them - and I’m going to give them the benefit of the doubt here and assume they did not - it’s bad. Either they were dishonest (like I said, not saying that) or they are not very good at understanding the external forces impacting their company performance. In terms of in-quarter performance, they reported fewer loans transacted than Q4, profitability was way down vs last q and operating cash flow took a massive dive due to the large chunk of auto loans on balance sheet. This suddenly massive loan book (necessary to grow their auto business) now sitting on their balance sheet, exposes them to credit risk and funding problems just like any other financial institution, and unlike a software company. And venturing into mortgages will dwarf this. This last part radically changes their risk profile - they suddenly become a massively capital-intensive, funding dependent, credit-risk prone loan experiment machine. I sold and will not be looking back with any kind of fondness on this investment.
I thought Monday’s results were very uninspiring. Their operating margin went from -10% to -40% sequentially, and the previous signs of FCF leverage disappeared as they went from -3% → -2% → 3.5% → 10.6% and then this quarter falling back to -14.9%. All of this while their incremental revenue $’s added continued to essentially flatline, going from $8.8m → $11.7m → $12.4m → $12.5m over the last 4 q’s and now to $13.0m. So as far as I’m concerned no acceleration there, while they are having to spend more and more. Even backing out the infamous superbowl ad, their spending profile was still going the wrong way. Much more spend and poorer margins to achieve flat dollars added is a poor combo. I sold my full position after results.
Bill.com also failed to get me very enthusiastic. They reported numbers which on the face of it look great: revenue up an astounding 180% and they turned free cash flow positive - to a very solid $22.7m or 3% margin, and they added a ton of new customers. But, on reflection, I turned more negative:
- The kicker in their revenue growth comes from Divvy, and this revenue they report gross of the related incentives required to generate said revenue (which for BILL is in the 40% range - high), whereas it would seem most banks report this revenue net of the incentives required to generate them; if they were to report these revenues net, then revenue growth rates would have been (much) lower. A back of the matchbox calc shows that revenue growth for last q would have been 3% in stead of 7% qoq. This also leaves them open to the opposite, should divvy rev stall for whatever reason (outsized revenue deceleration).
- They are very dependent on transaction revenues from SMEs which are closest to consumers in the B2B world - similar to LSPD (and UPST). In a cooling economy there has to be risk of this slowing down, or not accelerating to the extent hoped for (this is what happened to Lightspeed).
- They report NRR only annually (similar to only ZI of the companies I follow), yet they still tout that number in big bold letters in all of their prezzo’s even though it is currently meaningless, esp in light of the Divvy acquisition. Whereas my other holdings (like DDOG) are crystal clear on the meaning of each and every metric they give us, with BILL I feel the story is a bit more complicated. This is exacerbated for me by their recent acquisitions.
- Some key metrics didn’t go the right way last q: GM% went down from 85.3 → 84.6% ; in the prior two years this did not happen from Q2 to Q3. Op margin swung from +2% to -3%, a 5%pt drop. In the prior two years op margin didn’t really move from Q2 to Q3. Number of bill transactions and TPV both dropped marginally, but last year they did not drop (year before it did drop but that was in COVID and a much smaller base; not really comparable).
- If I try to exclude divvy transaction revenue to exclude the revenue recognition/high incentive issue and isolate what’s left, revenue growth was much slower or even marginally negative (they don’t give this number explicitly, so my calcs could be slightly out, but the general direction won’t be).
I sold my full position. However as this one is not black/white and the valuation is quite compelling at current levels, I may buy a small position again. But I’m in no rush.
Cloudflare turned in a good quarter, with NRR ticking up to the highest ever at 127%, while customer growth continued apace, gross and operating margins held steady, all this while delivering another >50% top-line growth - at 53% yoy. I thought the strongly negative FCF margin at -30% due to a once-off tax expense was explained well, and Prince sounded convincing and upbeat, as always. They again performed like a metronome, while continuing to innovate like mad. The market clearly didn’t like the negative FCF - I thought it was overdone. I took a 4.4% position after results and will be looking to add more.
Datadog turned in a stellar performance. There was again nothing I could fault them on, except maybe the seasonal slowdown in sequential $’s added which was more than usual at -34% qoq (2021 Q1 was -9%; 2020 Q1 was -1% and 2019 Q1 -20%). Much like Cloudflare they are an innovation machine and are successfully expanding into adjacent markets. But unlike Cloudflare they give us a lot of insight into how it is going with each of their new products (to be fair Cloudflare did give a bit more colour this quarter too, but still way less than the Dog). Revenue growth clocked in at 82% yoy, they raised guidance for Q2 and for the full-year, and they showed increasing operating leverage. Operating margin went up from 22% to 23% sequentially and FCF% up from 32.7% to an amazing 35.8%. All other metrics are also green, with multi-product adoption increasing and customer size as well, while NRR remained >130. A notable positive was billings, which were up 9% sequentially and 103% yoy - much, much stronger than the +59% and +55% yoy achieved in Q1 of the prior two years. This is a truly amazing company executing almost faultlessly.
Snowflake turned in a quarter which for me was neither exceptionally good nor bad. The team on the call sounded less confident than in prior quarters; the CFO got irritated with repeated questions about macro from some analysts, the team whispered to each other audibly, and amateurishly and there were some fault-lines visible in the numbers. For one, they suddenly dropped reporting on F500 customer growth and did not explain this change, simply moving the goalposts to measuring G2000 in stead. Revenue growth slowed down sequentially to 10% vs double that in Q1 of all three prior years. RPO went down sequentially for the first time to -1% vs +7% and +10% in the prior two years. And current RPO did roughly the same: up 1% sequentially. Given how this team steered us to RPO, this is not a good thing no matter how you cut it. Operating margin went into reverse for the first time after a steadily improving streak for the past 10 quarters - from 5% in Q4 to 0% in Q1. This was offset by a massive 43% FCF margin. However they told us last quarter already to expect an outsized FCF in Q1, due to the massive billings in Q4 (i.e. not to expect it to continue). NRR dropped to 174% but due to the way this is calculated (past years’ product revenue vs two years ago product revenue) - this probably means the more recent months have NRR which is way, way lower. I pointed out that this will likely happen in January (post 82351 https://discussion.fool.com/snowflake8217s-slowing-sales-3502501… ) back when I was a wealthy man The management team continued the ramp-up, and actually increased the pace of hiring vs prior quarters, with S&M employees increasing by an amazing 19% qoq. This must indicate exceptional confidence, which I applaud. Still, the combination of flat RPO and cRPO with revenue growth far outpacing those two metrics, and increasing costs in the business and falling NRR gave me pause. I sold quite a big chunk of the position I took only last month, and will probably be looking to reduce still more. I don’t think I’ll sell out completely though.
ZScaler turned in a seemingly good report last week and rose strongly after results, but, the more I thought about it, the report was disappointing for me. The key thing that disappointed was the one thing that bothered me last quarter as well: Billings. I pointed out some time ago that billings almost perfectly predict revenue (https://discussion.fool.com/zscaler8217s-remarkable-predictabili…), and management has repeatedly pointed us to billings as the key thing to watch. So what did prior billings predict for revenue? $290m. And what did they report? $286.8m. So a bit less. Why? Because billings have been slowing down in quarter (g denotes the Q4 guide):
**Bill Q1 Q2 Q3 Q4**
2019 65 115 85 126
2020 88 135 131 195
2021 145 232 225 332
2022 248 368 **346** 469g
**QoQ Q1 Q2 Q3 Q4**
2018 77% -26% 48%
2019 -30% 53% -3% 49%
2020 -26% 60% -3% 48%
2021 -25% 48% **-6%** 36%g
**YoY Q1 Q2 Q3 Q4**
2019 35% 17% 54% 55%
2020 64% 72% 72% 70%
2021 71% 58% **54% 41%g**
Spot the obvious problem. As per management revenue growth lags billings growth. And while revenue growth this quarter and last quarter was 63% yoy, billings growth was only 54% this quarter and 58% last quarter. And they’re guiding for 41% yoy billings growth next quarter. Let’s say they are sandbagging, though, and they end up growing billings qoq by 48% (like the prior 3 years) and not the 36% qoq guide they gave, then billings growth would still be only 54% yoy next Q. This slowdown in billings growth will inevitably translate into a slowdown in revenue in the next quarters. So it’s already clear from their billings performance that they will slip back from a 60%+ grower the last couple of quarters to a 50%+ grower sometime this year. I sold a big portion of my shares and will likely reduce it further.
Crowdstrike will report day after tomorrow. I took a big position in CRWD again, after re-listening to their most recent call. They are very well positioned to capitalise on an exceptionally strong position, and they are moving successfully into adjacent markets. The two I would call out are Humio - getting onto Datadog’s turf, and Identity. They called out their partnership with Cloudflare and the fact that Cloudflare became a customer in their last earnings call, and the numbers moved in the right direction. ARR growth at 14% outpaced Revenue growth at 13% sequentially, and they reported record net new ARR of $217m, up 28% sequentially - a rate last seen 3 years ago when they were about a quarter of their current size. And NRR ticked up nicely - to 124% from 122% in the prior quarter. And finally even though US growth was a little below last year Q4 qoq (10.3% vs 12.4%) their EMEA growth (13.3% of revenue in Q4 vs 8.3% in Q1 2021) has been accelerating and I believe may accelerate even further this quarter. EMEA sequential growth from Q1 2021 to Q4 2022 was 14.4% → 16.1% → 11.7% → 12.0% → 8.8% → 20.9%.
SentinelOne will report results tomorrow and I’ve kept this as a rather large position. This is probably my highest risk position going into earnings, as they will be a long way from being anywhere near CF positive territory - how long may be crucial. However I’m keeping them at this high an allocation as I expect the tailwind from the war in Ukraine to disproportionally benefit them given their proximity to Europe and their large non-US revenue composition. In Q4 international revenue grew 130% yoy (vs 119% yoy for the company overall) and was 31% of their total revenue. The Attivo acquisition will also likely be a kicker and accelerant to their growth and fills in capabilities around identity among others. Lastly, I believe that they are still tracking CRWD’s growth trajectory - with their Q4 2022 metrics roughly in line (albeit with more, smaller customers, but growing) with CRWD’s Q3 2019, just as their Q3 2022 was roughly in line with CRWD’s Q2 2019.
FINISHING UP
What a month again…And as always, good luck, to you all.
- WSM
P.S. for the value hounds frequenting these parts (some of whom mistakenly believe that most who post on this board don’t know what value or valuation means) and others interested in the topic, I thought to include two interesting readings to get you started (it is OT for discussion on this board so please don’t discuss here). The second link, the book by Philip Fisher, is a favourite of Warren Buffett’s fwiw.
McKinsey: https://www.mckinsey.com/business-functions/strategy-and-cor…
Fisher: https://www.amazon.com/Common-Stocks-Uncommon-Profits-Writin…
Previous reviews:
Apr 2022: https://discussion.fool.com/wsm39s-portfolio-review-april-2022-3…
Mar 2022: https://discussion.fool.com/wsm8217s-portfolio-review-end-march-…
Jan 2022:https://discussion.fool.com/wsm8217s-portfolio-31-jan-2022-35041…
Dec 2021 full-year: https://discussion.fool.com/wsm8217s-year-end-portfolio-dec-2022…
Nov 2021: https://discussion.fool.com/wsm39s-portfolio-review-end-november…
Oct 2021: https://discussion.fool.com/wsm8217s-portfolio-review-end-octobe…
Sept 2021: https://discussion.fool.com/wsm8217s-portfolio-review-end-septem…
Aug 2021: https://discussion.fool.com/wsm8217s-portfolio-review-end-of-aug…
July 2021: https://discussion.fool.com/wsm8217s-portfolio-review-end-of-jul…
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