Another earnings season is almost over. I wish they were more often. I just love going through the reports, listening to the calls, and having something tangible to go through.
Instead of constantly trying to achieve the lowest portfolio average cost while making assumptions as to where a company is headed by focusing on all the wrong things.
I remember when I bought my first share (back in 2020) based solely on the icons my app was showing (although I’m glad I really liked Tesla’s logo back then 
). I’m very grateful I met skilful investors that pushed me to learn more and become better.
Since half my companies have already reported, I wanted to share:
- Some of my thoughts
- My take on the recent reports
- And my current portfolio weight
What you'll learn:
⓵ My thoughts:
❖ Pessimists vs optimists
Our job as investors is to exploit the price difference. And take advantage of the prices the market is offering. Sometimes the market is optimistic other times it is pessimistic.
Benjamin Graham once said that the intelligent investor is the one who buys from pessimists and sells to optimists. Since human nature is based on emotions.
You see, emotions rule the world, hence we see all these fluctuations in the market. Do you really believe that companies go from good to bad in a single trading session? Or 2? Or 10? Or even (dare I say) 100?
At the end of the day, you can identify a solid business or even a bad company (bottom fishing) and still manage to make money.
How? Well, it all comes down to the price you bought something. I’d say that the price you pay is irrelevant only when the company you are buying keeps executing years on and eventually will grow into their valuation no matter how crazy it might appear at first.
However, in this crazy market (and to keep our sanity) we tend to balance the risk/reward by justifying the price we pay for something.
❖ Price matters (but it’s not everything)
You see, when buying anything, the first thing we tend to ask is this: “how much?”. And it’s only natural. However, Warren Buffett said that you should try to see what you are buying before you see the price. Try to understand it, the potential, the performance, and leave the price at the end. Of course, sometimes a price can make or break an investment. Remember, Upstart at $400. Zoom at $500. And many other examples.
Even for the sake of this exercise let’s assume that a price to forward sales of 10 is fair for a SaaS company growing 30% YoY. And 20 for a company growing 50%. And 30 (or more) for a company growing 70+% YoY. Even if that is fair. The problem is we don’t know for how long that company is gonna maintain their specific YoY growth (and hence their justified premium) because once it goes from 70% to 50% of course the company is doing fine but the market will rerate it accordingly. And that’s why buying bad/cheap companies is not always a good idea. They can still get cheaper.
❖ Every investors dreads uncertainty
You see, investors and people in general, don’t like what they don’t know (uncertainty). And that’s why anticipation of an event is always worse than the actual event. Heck, even the anticipation of war was worse than the start of the physical invasion itself. Stocks went up after the start of the war (God have mercy on us). OK, enough with the rambling.
Onwards.
⓶ My take on the latest earnings reports
DDOG: 8.5/10
Expected: $365m
Results: Very Strong
Concerns:
- Rapid QoQ deceleration. Went from their best QoQ (21%) to the worst (11%) since the covid Q. (albeit seasonality and hard comp from a monster Q4).
- What will the headline be next year when hard comp is up? Today we have easy comp YoY due to covid. But what happens next year? (We need $650m for 80% YoY)
Thoughts: It’s becoming a FCF monster. Still grows at hypergrowth levels.
What I know:
- 100k customers keep growing. Best in absolute numbers ever. QoQ in line with previous Qs. (even though lower in YoY)
- DBNRR above 130 (19th consecutive Q).
- Strong ARR growth across geographies.
- Strong million-dollar-customer addition.
- Sales expenditure was less this Q (also sales were involved in other projects in early Q1)
- Churn is low.
- Billings up 103% YoY (annual billing upfront hence higher than revenue).
- RPO up 85% YoY. (focus on revenue and implied ARR not billings or RPO as per management).
- Gross margin 80% (up from 77% last year).
- Not worried about the 200 Russian customers (immaterial)
- Free Cash flow keeps growing (36% Free Cash Flow Margin).
- Expecting 380m in Q2. 1.6-1.62 billion FY (up 56% YoY)
- Conservative assumptions for estimates and guidance.
- Best hiring in Q1. Continue in Q2 too.
- Security about application production. Cloud native.
- Trades at 20x forward sales. Reasonable. For now.
What I don’t know:
- How fast they decelerate.
- If they keep their 50+% growth next year.
- How far up are they in their S-curve?
- Will it become a 30% grower next year and then rerated down again? For now, I don’t see this happening. And this is my reasoning: Let’s say 363m for Q1 then 420m for Q2(16% QoQ) then 480m in Q3 (14% QoQ) then 565m for Q4 (18% QoQ) = 1,828b (77% YoY FY22). Then 23Q1 620 (10% QoQ) for a 70% YoY.
Decision: Kept my full position (more on the allocation later)
BILL: 8/10
Expected: $170m
Results: Strong enough
Concerns:
- Total revenue could be a bit higher. For a higher QoQ (albeit seasonality).
- Organic core revenue growth is a bit lower.
Thoughts: very strong customer additions. just want to see the acquisitions keep providing leverage to the entire organization.
What I know:
- Expected seasonality
- Expanded CPA exclusive partnership
- Bank of America white-label platform
- Broaden products and services
- Aim to become a multibillion-dollar company
- Large global opportunity
- New Chief People Officer (ex-Pinterest/Google/Microsoft)
- Better net loss than expectations
- Inflation impact is immaterial
- Higher float from higher interest rates
- Net new customer additions above expectations (great indicator for revenue down the line as there is lag as to when they start to generate revenue)
- Part of the digital transformation (people switch from paper to digital)
- Short payback period (15 months)
- Trades at 20x forward sales. Can it get lower? Sure
What I don’t know:
- Will macro factors affect the company?
- Does fintech deserve a high multiple?
- Will investors bring fintech back to favor?
Decision: Kept my full position.
NET: 7.5-8/10
Expected: $215m
Results: Solid
Concerns:
- Wanted to see some acceleration. Everyone is waiting for that. Same questions remain.
Thoughts: I start to appreciate NET even more as time goes by. It might be cruising at around 10% QoQ but it keeps improving other metrics in the meantime too.
What I know:
- Record DBNRR (127%)
- Record paying customers (10% QoQ)
- Record 100k customers
- Strong 500k customer addition (68% YoY)
- Strong 1-million customer addition (72% YoY)
- 12x 5-million customers
- Largest acquisition (email security)
- Expanded fortune 500 company partnership ($15m/year)
- New global social network contract ($3m/year)
- Intend to become an iconic trusted tech company that defines the future of the internet
- Strong employee addition
- Russia/Ukraine less than 1% of headwind
- Trades at 22x forward sales. Reasonable?
What I don’t know:
- Can they show faster acceleration?
- Will investors lose interest if it keeps growing at 50% only?
- FedRAMP? Sooner or later?
Decision: kept my full position.
UPST: 6/10
Expected: $310m
Results: Disappointing guidance
Concerns:
- Constant fear of missing guidance
- Never know what to expect
- Can’t predict the level of growth
Thoughts: Unpredictable.
What I know:
- Macro headwinds
- Soft next Q and FY guidance
- Auto will contribute meaningfully in 2023
- Trades at 3x forward sales. Cheap? Who knows?
What I don’t know:
- How fast other flavors of credit kick in (small dollar, mortgage)
- How much they’ll actually grow this year (or the next)
- The effect of the Fed on the transaction volume
- How difficult 2022 (and beyond) will be for FinTech companies
Decision: After having sold the majority of my shares 2 Qs ago, there is a tiny position left as of now that I decided to keep just to follow the company.
⓷ My current allocation:
At the end of the day, all our holdings must represent the best option going forward relative to what’s out there. And this is what I think represents that best today:
- SNOW 19.5%
- DDOG 18.5%
- ZS 17.5%
- S 15%
- NET 14.5%
- BILL 13.5%
- UPST <1%
Concentrating on 6-7 stocks is risky. Diversifying to 500 companies is even riskier.
Buying companies in an edgy market is risky. Not buying is still risky.
Walking is risky. Driving is risky… You get the point.
❖ Possible vs probable
There is no free meal. We are just trying to take calculated risks and differentiate between possible and probable.
I don’t expect the sales multiple to expand. And this is not the way I invest in these companies. But, even if the valuation of these companies remains flat and only expands according to the actual growth of the companies, I’d be super happy about it.
As for cash, I still don’t hold any. But it all comes down to you. And your risk appetite and how well you sleep at night after your entire portfolio shrinks by 50+%. The problem I see with holding cash is that you need to be good at timing the market as to when to deploy the funds.
Personally, I thought the bad days were behind us too many times now. And yet, we are making lower lows.
❖ Fear and greed index
As I write this, the fear-and-greed index is at “extreme fear” levels. Also, we are in an environment with war, inflation, etc. going on. This can give some perspective as to what’s happening with the stock prices.
Just remember that we are not bots, and we are not supposed to stay glued to our screens (even if we do). And the greatest asset we have is time. So, spend it wisely.
And remember: Stocks become less risky when prices are down. Not the other way around.
Thank you for reading.
[ps: Also, there’s another benefit to focusing on the best businesses that no one talks about. And that is that we stay ahead of the tech, trends, what problems are being solved around the world, and what pushes us (human beings) forward.
So, we can also learn about what drives the economy, market, etc. In reality, this can’t be learned by investing in subpar companies (even if you make a profit). That’s another side effect of investing in certain companies vs indexing or other forms of investing (real estate, gold, etc.).
As a result, concentrated investing, in the best businesses, is a solid choice not only for the money potential but for the man (or woman) you become in your journey.]
