Is there a best time to buy stocks? The answer is not that clear.
Another earnings season is almost through. I was a bit skeptical about how this Q would play out because of the tough environment we keep hearing about.
But, interestingly enough, our companies are still executing well enough (some better than others though). And thus, I want to share:
- Some of my thoughts
- My take on the recent reports
- And my current portfolio allocation
Here’s the one-liner (if you’re out of time): Solid execution in a tough environment but with prudent guidance.
What you'll learn:
⓵ My thoughts on the market
❖ Growth vs value investing
Lately, there’s been (there’s always been) a lot of talk about how overvalued our companies are. Yes, even after the recent carnage. Investors switching to value (whatever that means). Going to cash. Or, changing their game plan altogether.
I have trouble understanding the growth/value debate. Even Buffett, who is supposedly the biggest value investor, doesn’t differentiate between the two. It’s just about identifying the better opportunity (not just for today and tomorrow but for years to come).
And that’s all there is to investing (to my simple mind at least). Heck, he was even one of the very first to buy SNOW (yes, yes at a discounted price which was higher than it actually is today — adjusted for growth).
❖ Demand is still strong
Our companies operate in a booming industry. The industry is still one (if not the only one) of the fastest-growing ones. Yes, there are reported headwinds for some areas (EU specifically).
And customers tightening budgets and trying to stretch their dollars’ worth (by opting for cost-saving software).
But there hasn’t been a major report on cutting the spend on any of these companies. And unlike other companies that operate in different industries, our companies are mission-critical and get prioritized pretty high within the enterprise.
❖ Profitability over growth?
Investors were giving a high premium to growth last year, this year they tend to focus on profitability, and next year something else might come up (who knows?).
I personally don’t cut companies based on just a single metric (even though the sole purpose of a company is to turn a profit — let’s be clear about it).
But there are plenty of profitable companies. The question is: Are they worth investing in? For this, I’m willing to give enough time for companies to follow their planned trajectory. And reach their potential. And this is why I still own companies (like SentinelOne) that still burn a lot of cash.
Because of the macro environment, companies are being prudent in their guidance. For this reason, I don’t try to make many changes in the allocation by trying to figure out top dogs, but I let the portfolio sort that out on its own organically. I just trim positions that go above a certain weight (max 20%).
Inflation means stuff got more expensive.
However, our companies showed margin expansion (nonetheless). This shows resilience and good leverage. Our industry showed resilience to spend and budget constraints. There was very little cutting of spend on the cloud.
❖ Is there a recession-proof company?
Of course, no company is ever recession-proof but recession-resilient. Companies will not abandon the internet or give up the cloud to go back to on-premises software. Cybersecurity will remain a must-have and not a nice-to-have. And so forth.
Nothing is ever expensive or cheap on its own. You need to compare with other alternatives at the same time. It doesn’t matter what the price was 6 months ago. It doesn’t mean it will go back to that (at least not anytime soon — if ever).
❖ Is there a best time to buy stocks?
If we were simply choosing companies based on how far down they came from their ATH, then we wouldn’t need to analyze companies. We would just select randomly based on the “discount”.
The problem I have with this approach is that you need to assume that the previous price was justified and well-deserved and that it will come right back in line with the rest of ATH prices.
Some might say a company already lost 80% so how low can it go? Another one might say oh it lost so much so it probably isn’t good. The point is you simply can’t choose based on price alone.
The moral of the story is that stocks and groceries have nothing in common. And you need to have a certain intrinsic value in place. How can this be?
❖ Can you stick to your investment strategy?
Even if you can draw DCF perfectly (next to impossible — if possible at all), we live in an environment where almost without exception sentiment follows price movement. And not the other way around.
And if that’s the case, we can then become meme speculators and just buy the stocks with the higher short interest.
I find it important to stick to a strategy and not jump from one to the other. As long as our companies grow meaningfully, I don’t see why I should change them for something else.
If something else comes along with better potential, I’ll do that. But for now, I don’t see that happening.
Onwards.
⓶ My take on the latest earnings reports
DDOG: 8/10
Expected: $410m
Results: Solid execution
Concerns:
- Very soft QoQ guidance
- Free Cash Flow margin takes a hit
- What will the topline growth be next year?
Thoughts: Still grows at hypergrowth levels. Still healthily profitable on a non-GAAP basis.
What I know:
- Record 1,400 new customers
- DBNRR remains over 130% (20th consecutive quarter)
- Free Cash Flow margin drops to 2020 levels (15%)
- $100K+ ARR customers grow 54% YoY (now represent 85% of total ARR)
- Large customers grow at a slower pace
- SMB customers grow as usual
- Strong pipeline of large new logos and product cross-sales for the second half
- Low and steady churn (1-5% — across all customer sizes)
- Newer products grow ARR at 100% YoY (excluding infrastructure monitoring, APM suite, and log management)
- Customers using 6+ products up to 14% (vs 6% for the prior year)
- Customers using 4+ products up to 37% (vs 28% for the prior year)
- APM product went from general availability (GA) to best-of-breed in 5 years
- Acquired Seekret to bring customers visibility into the API and unlock new capabilities for the APM suite and security platform
- Several 7-figure and 6-figure wins
- Deflationary force
- Highly diversified in industries and segments
- Slower billings and RPO growth due to clients being conservative in their commitments (but not revenue growth)
- Gross Profit Margin up to 81% (vs 80% for the prior Q and 76% for the prior year)
- Cloud migration is proceeding as before
- ARR growth is the best metric
In a nutshell:
Trades at 20x forward sales while growing at 74% YoY and 12% QoQ (annualizes to 57%) with a run rate of $1.6 billion and a 2% QoQ guidance (FY guidance of 59% YoY). Reasonable? I believe so.
What I don’t know:
- How uncertain is the macro environment for the second half of 2022 (and beyond)
- Will it become a 30% grower next year and then rerated down again?
Decision: Kept my full position (more on the allocation later)
BILL: 9/10
Expected: $200m
Results: Excellent execution
Concerns: Profitability
Thoughts: Just want to see the acquisitions keep providing leverage to the entire organization.
What I know:
- Global customer base (150 countries)
- 3x client number (albeit most from acquisitions, 30% YoY organic growth)
- Strong organic and non-organic growth
- Gross profit margin up 7% (84% vs 79%)
- Net loss 70% lower than anticipated
- Expected to be profitable in ’23
- Record organic customer base growth
- Deflationary product
- NDBRR up meaningfully (131% vs 124%)
- Successful integration of acquisitions
- New CPO and COO (FinTech experience: PayPal, American Express, etc.)
- Significant TAM
- Payback time 4 quarters (vs 5 quarters at IPO)
- Faster-than-anticipated take rate expansion
- Value proposition aligns with SMBs (regardless of macro situation)
- Large global greenfield opportunity
- Tailwinds:
- Revenue and margin contribution from rising interest environment
- Payment monetization expansion opportunity
- Growing awareness of SMBs for adopting cloud solutions
In a nutshell:
Trades at 21x forward sales while growing at 156% YoY (71% organically) and 20.4% QoQ (annualizes to 101%) with a run rate of $800 million and a 5% QoQ guidance (FY guidance of 51% YoY). Reasonable? I believe so.
What I don’t know:
- Will softening/moderation impact other industries other than advertising?
- Does FinTech deserve a high multiple?
Decision: Kept my full position
NET: 8.5/10
Expected: $235m
Results: Very strong execution
Concerns: Still waiting for a bit of an acceleration
Thoughts: Steady grower. Increased FY guidance. A nimble company that improved their operating loss dramatically (at break-even now).
What I know:
- Record large customer addition
- 3x Fortune 1000 customers (since IPO)
- Aim to exceed DBNRR of 130% (now at 126%)
- Gross profit margin up 90 basis points YoY (78.9% vs 78%)
- Break even Operating Margin
- Positive Free Cash Flow during 2nd half of the year (now at negative 2%)
- Helping companies save money and consolidate expenses
- Longer sales cycles start to stabilize (continues at the high-end business level — half million to a million deals — by weeks, not by days)
- More difficult now to land than expand (vs prior year)
- Recession resilient (not recession-proof)
- All-time-high Gross Renewal Rate (since IPO)
- High win ratio for Zero Trust vs Zscaler & Palo Alto (because of strong and easy-to-use platform)
- Several new multi-million deals
- Workers keeps growing
- New cybersecurity deals (even from peers)
- Pay-as-you-go business now 11% of the revenue (keep investing in it)
- Strong hiring quarter (total employee increase of 49% YoY)
- RPO up 10% QoQ and 57% YoY (current RPO 60% of total RPO)
- Prudent/cautious when it comes to guidance (albeit increased FY guidance)
- EU region 2nd performer (deterioration to continue)
- Crypto business less than 5% of revenue
In a nutshell:
Trades at 21x forward sales while growing 54% YoY and 10.5% QoQ (annualizes to 49%) with a run rate of around $1 billion (GM 78.9%, NRR 126%) and a 7% QoQ guidance (FY guidance of 48% YoY). Very reasonable (albeit profitability concerns).
What I don’t know:
- Can they show any acceleration?
- Will investors lose interest if it keeps growing at 50% only while barely being profitable?
- FedRAMP? How soon is soon?
- Will EU deterioration affect growth?
- Are they indeed in the early stage of another s-curve with their Zero Trust products?
- Will they reach their 130% DBNRR goal?
- Will they displace Zscaler and take more market share on that end?
Decision: Kept my full position
SNOW: 9.5/10
Expected: $455m (product revenue)
Results: Outstanding execution
Concerns: No major concerns here (other than valuation)
Thoughts: Consumption has not softened amid a tough environment. Growing (fast) at scale while profitable on a non-GAAP operating income and FCF basis.
What I know:
- $1-million customers up to 246 (up 20% QoQ and 112% YoY)
- RPO up 78% YoY to $2.7 billion (57% to be realized in the next 12 months — cRPO)
- Net Promoter Score of 72
- NRR above 170 (4th consecutive Q)
- Aim to reinvent cloud application development (far-reaching as per management)
- Launched Powered by Snowflake program (registrants up 35% QoQ)
- Summit users’ conference up 5x (since 2019)
- Significant product innovations
- Intent to acquire Applica (to help customers and partners get more value from all data types)
- Durable growth among the largest customers
- Core verticals:
- Financial services (biggest — 20% of revenue)
- Advertising
- Media and entertainment
- Retail and CPG
- Technology
- Healthcare and life sciences
- FX immaterial (>95% in USD)
- Companies globally prioritize Snowflake (including SMBs)
- No macro headwind (as of now)
- $5 billion in cash
- Long-term opportunity stronger than ever
- Hiring plans haven’t changed (onboarded almost 1,000 new employees YTD)
- Most customers are still ramping (continue to do so — moving workloads to Snowflake)
- Prudent guidance
- Unusually high 22Q3 (so not a good YoY comparison — for next Q)
- 80% of clients run in AWS, 18% in Azure, and 2% in GCP
- Billings meaningless to business (focus on cash flow and revenue consumption instead)
- Consumption > Subscription (in tough times like now)
- Both market and channel for system integrators
- Still the leader (rest are just following)
- Resellers are not a significant part of business
- Expecting a big increase in RPO
- Not negative on Europe (no EU headwind)
- Snowflake vs Databricks:
- Data lake vs just a tool in the lake
- Far more strategic/tactical choice
- Focus on simplicity and ease of use
- Different user types
- Both coexist for many years
In a nutshell:
Trades at 33x* forward sales while growing 83% YoY and 18% QoQ (annualizes to 93%) with a run rate of around $2 billion (GM 75%, NRR 171%) and an 8% QoQ guidance (FY guidance of 68% YoY). I’ve always struggled with SNOW’s valuation. And this is why I’ll trim it whenever it gets above 20% of the port.
*I’m using 358 million outstanding shares for a market cap of $66 billion (at the time of writing)
What I don’t know: Can they reach their $10-billion product revenue target (sooner)?
Decision: Kept my full position.
UPST: 2/10
Expected: No idea
Results: Need I say more?
Thoughts: If management finds a way to come out of this, the risk might be worth it at current levels.
Decision: The tiny amount I have left is worth next to zero, so I won’t count it.
CRWD
Expecting: $540m
Results: August 30
S
Expecting: $100m (including Attivo)
Results: August 31
ZS
Expecting: $320m
Results: September 8
⓷ My current portfolio allocation
I expect these companies to do well in the future — not necessarily in the next Q or so — in comparison to other businesses (for the price they are trading at right now):
- SNOW 19.5%
- BILL 17%
- DDOG 15.5%
- S 14%
- NET 12.5%
- ZS 11%
- CRWD 10.5%
People don’t like uncertainty. And we try to explain things in trends. Even when there isn’t one. And this is why we put a premium on sustainability based on past events. Because we want things to make sense (even if they don’t).
And this is why technical analysis exists. It doesn’t matter if it’s true or not. Because it’s true for some. But what might once appear great, might end up being not so great (plenty of examples).
And this is why we follow our companies each and every quarter. If something goes extremely out of favor, then we jump ship.
But we need to keep our eyes on the bigger picture instead of trying to figure out the exact best time to buy stocks. Because investing is about managing the risk. Not trying to avoid it altogether.
And don’t forget: Sentiment shouldn’t follow price movement (unless we are bots).
Thank you for reading 🙂
[PS: All in all, it’s understandable that inflation makes people worry about the future. So they end up taking money out of the market, trying to save a bit more, and don’t invest as heavily as before. But inflation is the No.1 reason for investing in the first place (if you want to outrun inflation that is)]
