April 2021 Portfolio Review
Total Return: -6.6% YTD (-17.9% vs S&P)
While there’s almost always less to write about in the lulls between earnings, I found April unusually calm. With the world rightly focused on getting vaccines into arms, my newsfeed has been paying noticeably less attention to the daily gyrations of the market. One, that makes total sense considering the circumstances. Two, that’s fine by me.
Given the choice, I prefer fewer market distractions during earnings (or at any time really). It makes it much easier to separate the signal from the noise. And we’ve seen plenty of positive signal so far with the bellwether tech names all posting knockout quarters. More importantly, each emphasized the shift to digital is not only continuing but even accelerating as we go. That’s music to my ears since software, cloud services, and digital advertising make up such a large part of our portfolio. Knock on wood, I’m looking forward to a round of updates with less external racket than we’ve become accustomed to the last year or so. Here’s hoping that dynamic holds through the rest of the earnings calendar.
April Portfolio and Results:
2021 Monthly Allocations:
darker green: started during month
lighter green: added during month
yellow: trimmed during month
blue: bought and sold during month
red: position exits
positions >10% in bold
December 2019 (contains links to all 2019 monthly reports)
December 2020 (contains links to all 2020 monthly reports)
I’ve been thinking a lot about portfolio management this month. I currently have a mishmash of companies I like but don't love in the back of our portfolio. Though I believe each is sized appropriately, I must also admit to feeling some drift/noise creeping into my process with these smaller names. The more tryout type positions I keep in our portfolio rather than on the watch list, the greater the risk I lower the standards for our investment dollars. I’d like to nip that in the bud.
Last August I jotted down these thoughts for myself about portfolio management:
I still 100% believe that’s the best way to run a concentrated portfolio (or any portfolio for that matter). This is my family’s future after all, so shouldn’t the standards be high? Consequently, I’ll be extra focused on my companies meeting expectations during upcoming earnings. Every name below should consider itself forewarned…
CRWD – The majority of CrowdStrike’s April highlights came from an early-month Investor Briefing (slides here). Though much of it was simply a rehash of Q4’s stellar numbers, we did gain a few new insights. First, CrowdStrike is now up to 19 product modules. Of its current 9,896 customers, 1,569 spent between $100K and $1M in Annual Recurring Revenue (ARR) last year. Another 176 topped the $1M ARR mark. With new customers onboarding at an average of 4.3 modules, CRWD has plenty of room to keep meeting its 120%+ target retention rate. That’s positive news.
Management also gave us further detail on its overall ARR trend. As noted last quarter, CRWD’s $1.05B in ARR during FY21 made it the third-fastest SaaS company to $1B behind Salesforce and Zoom. That number is expected to hit $3B by FY25 even if CRWD doesn’t significantly expand its current business. That suggests a higher number should be easily attainable if CrowdStrike continues to execute. Fortunately for shareholders, there is optimism that execution will occur. Management raised its long-term target 2% for both Subscription Gross Margin (new range 77%-82%) and Operating Margin (now 20%-22%). It also set an initial Free Cash Flow Margin target of 30%+, indicating this year’s massive cash flow increase will hold post-COVID. So, better margins and higher profits? Sure, I’ll take that.
In my opinion this info reaffirms CrowdStrike’s position as a potential powerhouse in a mission-critical sector. The current environment of digital transformation, increasing cloud workloads, and elevated security threats plays right into CRWD’s hands. What the company offers is no longer optional. It’s vital. That’s a great place to be. It’s also why CRWD remains my biggest holding by a long shot.
DDOG – Datadog formally completed the Sqreen acquisition in April. As detailed in the original February announcement, this purchase improves DDOG’s ability to detect, block, and respond to threats. With the deal now final, Datadog moves “closer to providing customers with a robust, full-stack security monitoring solution for the cloud age.” A number of companies are jockeying hard to position themselves as one-stop shops for security, observability, and monitoring. Sqreen’s technology will add greatly to DDOG’s effort in this area.
Datadog also got some third-party love this month when Gartner Research named it a 2021 Leader in Application Performance Monitoring. Some highlighted customer quotes included:
Datadog - high quality monitoring and logging "Integrating Datadog in our environment was painless. For the past year we have been relying on Datadog to monitor our production and development environment and we have been highly satisfied with it." -CTO in the Miscellaneous Industry
Datadog APM Is The Right Tool For The Job "We get great information about the service out of the box without custom instrumentation...Datadog is really the right product for our business right now." -Devops Engineer in the Finance Industry
Datadog APM Easy To Integrate And Automate "Easy to setup and install, can be integrated with so many technologies like AWS, MongoDB, PostGres, MySQL etc. Application monitoring made [sic] so easy." -SRE Manager in the Miscellaneous Industry
That type of customer enthusiasm was very much the norm before Datadog hit its COVID-impacted 2Q20 speedbump. Fortunately for shareholders, the enthusiasm kicked back in with accelerating sequential growth the last two quarters. I’m cautiously optimistic we’ll see that trend continue in DDOG’s May 6 report.
DOCU – April’s high point was a note from UBS investment bank after Docusign’s recent Analyst Day. UBS noted (bolding mine):
DocuSign spent the bulk of its virtual Analyst Day describing the market opportunity, arguing that they are still very early days in the core e-signature space and that the CLM [Contract Lifecycle Management] upsell is small today but gaining momentum. However, the most incremental comments were about the medium-term growth and margin outlook, more positive than we were expecting. The CEO said that the Agreement Cloud/CLM suite ‘will become noticeable as a growth driver this year’, a statement that struck us as an uptick in tone.
I have previously referenced this management’s conservative tone, so it’s encouraging to see them potentially moving up the CLM timeline. Not to mention the fact it’s always nice to receive third-party confirmation bias. 😏 CLM is clearly a major part of DOCU’s continued growth, so the sooner it gains traction the better.
ETSY – Not much to report on the ETSY front besides hoping its recent buyer, seller, and traffic momentum positively influences May 5 earnings. We’ll find out soon enough.
LSPD – Lightspeed makes its initial appearance in my portfolio. In addition to my comments below, I’d strongly recommend this introductory write up and this Q4 recap since both influenced my decision.
Lightspeed is a merchant services software company with customers in over 100 countries. Its products target small and medium businesses operating mostly in retail, restaurants, and hospitality. Software support in these sectors is very fragmented, and most merchants use multiple services. LSPD is looking to exploit this fragmentation with a true one-stop shop for office management, inventory, procurement (including a fledgling supplier network with over 100 vendors), point of sales, customer engagement, and payments. It has also launched a capital division to help merchants facilitate loans up to $100K.
Lightspeed is a slightly different holding for me in that its recent strategy is very much acquisition driven. Management has specifically stated it will not shy away from any chance to add technology, locations, or new verticals. True to form it has made three recent acquisitions along those lines. First was Shop Keep, a hospitality platform adding $7B in Gross Transaction Volume (GTV) and 20,000 customer locations. Next was Upserve, a restaurant management software with $6B in GTV and 7,000 locations. The most recent was Vend, a New Zealand-based retail management software firm, which just closed April 16. Vend not only brings another $7B of GTV and 20,000 locations but also doubles Lightspeed’s presence in the Asia Pacific.
I normally prefer organic growth, but it’s not hard to see how LSPD’s efforts could pay off handsomely. The company was able to raise money at an opportune time then buy considerable scale on the cheap as economies slumped. The acquisitions give Lightspeed 135,000 locations and over $48B in annual GTV just as the world starts to reopen. That’s an enviable position. Its Payments platform – which grew organically 4X this year – was recently launched in the UK and Europe. More importantly, management expects Payments to be available in all its geographies this calendar year. Needless to say, that could be a huge boon as business resumes for Lightspeed’s customers.
LSPD’s considerable risk is management must prove it can synchronize all these rapidly moving parts. Of course, the considerable reward is a potentially super easy, super sticky, super profitable platform. The company’s recent Q3 showed organic growth of 53% with 47% growth in payments despite the general hospitality business shrinking 19%. So, in a brutally tough environment Lightspeed has not only held steady but created intriguing upside as the world (hopefully) continues to reopen. As a result, I’ve decided to start a small position. In last quarter’s call, management stated it expected Shop Keep and Upserve’s operations to be integrated by April with the joint product line available by end of summer. This will be a big part of what I’ll be looking to hear when Lightspeed reports on May 20.
NET – At some point I’m just going to post a monthly list of links to Cloudflare’s company blog and call it a day. NET has been that active recently. The first move this month was the hiring of a VP and GM, Asia Pacific. Jonathan Dixon joins Cloudflare after heading the Asia Pacific and Japan for Amazon Web Services. Dixon will be based at Cloudflare’s regional headquarters in Singapore. This hire makes a lot of sense given NET’s room to grow internationally.
Next Cloudflare partnered with NVIDIA to bring the latter’s accelerated computing tools to NET’s edge network. This deal “will create a massive platform on which developers can deploy applications that use pre-trained or custom machine learning models in seconds.” Considering NVIDIA’s size and position in the burgeoning AI market, this is strong validation of NET as a best-in-class platform. The market seemed to agree, spiking the shares ~12% on the initial news.
The NVIDIA partnership came smack dab in the middle of Developer Week, NET’s April follow up to March’s Security Week. As with Cloudflare’s prior “Weeks”, the announcements came both fast and furious.
Monday saw the beta release of Stream Connect. This new feature lets developers use Cloudflare’s edge network to restream video on platforms like Facebook, YouTube, and Twitch. Rather than limiting themselves to just one platform at a time, content producers can use Stream Connect to send video to fans through multiple platforms at once. In layman’s terms, it let producers optimize bandwidth by sending one stream to Cloudflare’s network rather than separate streams to each viewing platform. It looks like this:
Pretty slick. Meeting fans - aka customers!!! - via their preferred service can only benefit anyone looking to build and maintain an online brand. It’s easy to see how this could be a powerful tool.
Cloudflare also switched its Pages offering from beta to general release. Pages is “a fast, secure and free way for front end developers to build, host, and collaborate on Jamstack sites.” What’s Jamstack, you say? Well, a quick search says it’s a popular architecture for building websites and apps. I’m assuming enough developers use it that I should share NET’s general excitement, so I will.
Tuesday was an upgrade to NET’s Workers platform making it easier for developers to personalize user experiences by location. Cloudflare also announced partnerships with six observability companies including Datadog. These collaborations will give developers greater flexibility in using their observability tools of choice on Cloudflare’s platform.
Wednesday saw several posts. First, Cloudflare moved its Unbound product to general release. Unbound is designed for complex use cases and larger applications requiring longer execution times. Next was the release of an optimizer feature within Workers improving performance for websites built on the Accelerated Mobile Pages framework. Finally, NET released a WebSockets feature creating faster server connections for apps based on interaction or live updates. Though I don’t fully understand all the tech here, my oh-so-hot take is Wednesday was “The Faster, The Better” day.
Thursday’s announcements had a Zero Trust flavor. First, NET renamed its Argo Tunnel product Cloudflare Tunnel and released a free version for anyone who’d like to use it. Tunnel lets developers create a private, secure link to Cloudflare’s network for any project they’d like. This link forms a security layer between the developers’ work and the public internet while still allowing partners or collaborators to gain access (that’s my interpretation, anyway). It sounds like this addresses a major headache for developers building and testing applications or websites.
Next, Cloudflare released its enterprise-grade SaaS protection in beta to the general public. This expands its target customer from established enterprises to anyone at any stage of building a SaaS business. It also positions NET as the potential base infrastructure solution for literally any SaaS company big, small or startup. In essence, Cloudflare is offering to handle every aspect of security so developers can focus on core products rather than creating in-house security for each customer. As the blog post put it:
By marrying Cloudflare for SaaS with Workers, SaaS companies can unleash their developers — we’ll take care of not just certificate management, security, and performance, but also the burden of infrastructure. You write the code, and we’ll take care of the rest.
That sounds like a pretty persuasive pitch to me.
Notwithstanding the above, what seemed to generate the most Thursday buzz was a feature letting developers create a Zero Trust connection using a common browser rather than a custom application. Once verified, the user can “run commands…as if they were using their native command line with any client side configuration or agent. Cloudflare’s network will accelerate their connection, apply rules about what data transfers can take place, and record the session for administrators to audit as needed.” According to the post, this feature is a direct result of conversations with customers struggling to create this type of secure environment. Cloudflare’s often said it want to simplify the internet. Given the remote nature of today’s workforce, this seems like a pretty major simplification to me. Nicely done.
Staying true to form, Friday capped the week with multiple announcements. The main one detailed three improvements to Workers. First was an embedded coding template and editor letting developers dump in ideas as they occur. Second was a feature allowing easier customization of work in progress. Last was an easier way to access and view logs.
Joining the Workers upgrades was an expanded list of database partners to provide more options for developers. The company also released a streaming video module supporting Non-Fungible Tokens (NFTs). I have no idea how long the current NFT craze will last, but kudos to Cloudflare for ensuring its network is capable of following NFT’s wherever they lead.
Taking a step back, I continue to be amazed at the sheer volume of innovation being churned out as these “Weeks” unfold. As CEO Matthew Prince put it:
To his credit the company is clearly taking that to heart. The risk is NET overextends its R&D and/or sales departments by trying to bring so many products to market at once. Many are also free offerings which will only move the needle if converted to paid upgrades. That could mean a noticeable lag in monetizing these innovations, assuming of course they can be monetized at all. What’s comforting as an investor is even a non-techie like me can see how all these pieces generally fit together. May 6 is our next glimpse at how they are affecting the bottom line. That occurs during what I like to call “Earnings Week”, which from my perspective is often the most important Week of all.
PTON – I have both company and portfolio news for Peloton this month. The company news was certainly a mixed bag. The positive was the official close of December’s Precor acquisition. This could potentially be a huge shortcut for PTON as it looks to expand from home exercise to the commercial sector.
The bigger and unfortunately more negative news was a public spat over treadmill safety with the Consumer Product Safety Commission (CPSC) after a child died in a Tread+ accident during March. On one hand, all treadmills present safety risks for children and pets. On the other, publicly feuding with a regulatory agency is almost always a no-win situation, particularly when that agency is focused on consumer protection. I found the linked response above uncharacteristically tone deaf. There is always a way to acknowledge risk, comfort customers and promise to keep working toward a better product. As an example, see CEO Eric Yuan’s excellent response during Zoom’s security difficulties last year. In this case, Peloton chose to use “refute” right in the headline of a safety discussion after a death associated with one of its products. In retrospect, I’m guessing they’d like a do-over. The stock unsurprisingly took a hit, and the company has given itself some image repair work to do going forward.
In a somewhat lucky portfolio occurrence – and I in no way mean to downplay the very tragic circumstances surrounding the recent slide – I exited Peloton the week prior to the CSPC dustup to raise the cash for Lightspeed. Even before the safety bulletin, PTON had become something of a battleground stock. While there are plenty of bullish arguments surrounding Peloton, the market seems to want proof it can navigate the delivery delays, Tread rollout, and early commercial efforts before rewarding the shares. Lightspeed certainly has plenty to prove as well, but I see its current challenges and timeline as less complicated to follow than PTON. I would also say LSPD has perceived post-COVID tailwinds in contrast to Peloton’s headwinds. Hence, Peloton slides back to my watch list until things clear up.
ROKU – Roku gave us a fair amount of news this month. First, it formed a partnership between the This Old House program and YouthBuild USA. YouthBuild USA is a non-profit organization providing disadvantaged youth access to resources and training in order to grow their skills. Through this partnership two YouthBuild USA members will join This Old House’s upcoming season for a six-week apprenticeship. I’d call this a nice gesture for a noble cause.
Next was this article outlining a new Roku Recommends promotional product. This offering will let advertisers purchase videos promoting programming on Roku’s platform. The article states, “the format is set to roll out in the second or third quarter, and advertisers are being asked to pay in the low- to mid-six figures to sponsor the video, two of the agency executives said.” Roku has spent a considerable amount of time collecting eyeballs. The obvious next step is monetizing them as effectively as possible. Roku Recommends appears to be a strong step in that direction.
Finally, Roku announced it was rebranding the short-form content recently purchased from Quibi as “Roku Originals”. Management describes this content as:
…relevant, fun and thought-provoking TV that has something for everyone from the best talent in Hollywood, including Anna Kendrick, Chrissy Teigen, Lena Waithe, Idris Elba, Kevin Hart, and Liam Hemsworth. The Roku Channel is the place for incredible, free programming and we are excited to bring this premium content to the biggest screen in the home.
The more in-house content Roku broadcasts, the more ad sales it can keep entirely for itself. Roku Originals could goose revenue fairly quickly if even a portion of the current ad pipeline finds its way into these programs. If nothing else, this appears to be a smart use of Quibi’s content.
Roku deserves a ton of credit for continuously looking to leverage the increasing number of viewers and advertisers moving to streaming TV. Our next peek at how well that leverage is paying off is May 6. In TV lingo, “Stay Tuned!”
SNOW – I’m finally taking the Snowflake plunge. A much-hyped 2020 IPO, SNOW is a data management company providing an all-inclusive platform for storage, compute, and cloud services. For a deep dive on the tech, I’d strongly recommend this longform write up by the one and only muji. Grab a coffee because it might take a while, but I guarantee you’ll feel a lot smarter when you’re done.
Snowflake’s main hook is eliminating data silos by hosting everything in one place for easy consolidation, sharing and analysis. It charges for storage and computing power while allowing customers to use any tools they wish for prep and analysis. SNOW’s platform is completely cloud-neutral, meaning it works with whichever cloud vendor clients prefer. As might be expected in our data-driven age, business has been booming. All Snowflake’s metrics point strongly in the right direction, but in my opinion these three highlight the true potential here (oldest quarter to most recent):
Product Revenue Growth: 117%, 115%, 116%
Remaining Performance Obligation (RPO): 211%, 240%, 205%
Net Revenue Retention Rate (NRR): 158%, 162%, 168%
Taking a look, we have core revenue more than doubling, future commitments more than tripling, and existing customers spending significantly more as they go. Such massive RPO suggests revenue isn’t likely to slow significantly any time soon. Simultaneously, management has confidence it can maintain its 160% NRR through at least the rest of this year. Each of these rates would be top of the scale for any company. Combining them all in one firm means Snowflake has a chance to grow overwhelmingly fast. Unsurprisingly, it will need to do just that to justify the stock’s overwhelming premium.
The world’s need to collect, store and analyze data is growing exponentially. By positioning itself at the literal intersection of these trends, Snowflake could grow exponentially as well. The company has posted two excellent quarters post-IPO while the stock has roundtripped from $245 to $390 to $210. While SNOW still has as much dominance priced in as any stock around, the recent pullback made it the most attractive I’ve found it since its debut. As a result, I grabbed some under $225 and plan on following along for a while. We’ll see where things lead.
TWLO – Another ho-hum month for a ho-hum good company. Since it’s my third biggest gainer YTD, I’ll somehow find a way to live with Twilio’s tedium. Earnings May 5.
UPST – There were a couple interesting developments on the April Upstart front. The first was a secondary offering of two million shares. UPST eventually issued 2.3M new shares at $120 each. I’m not sure what management plans to do with the cash, but this seems like a smart raise given the stock’s recent appreciation.
Next was the addition of two new lending partners. First Financial Bank, a Nasdaq-listed bank with ~$16B in assets, joined in February. First Financial will expand its Personal Lending Program by offering loans through Upstart’s website. The second partner is Florida’s Drummond Community Bank. While Drummond’s ~$800M in assets makes it a smaller partner, the significance here is it will offer both personal and auto loans through Upstart’s platform. The more the merrier as UPST takes its initial steps into the auto lending market.
In detailing the partnership, a First Financial executive remarked:
Updating our approach to maintain relevance in today’s retail environment is essential. This platform and approach increase the number of clients we can serve in a prudent manner. This includes new clients who are currently underserved by traditional banking channels.
I highlight this quote because I believe it’s the perfect summary of UPST’s thesis. All businesses must adapt to stay relevant, and banking is no different. Upstart is quickly carving out an interesting niche in facilitating that change. Adding more partners improves its platform while improving the platform should add more partners. If that flywheel kicks in even a little, this could become one heck of a stock. At least that’s my bet. UPST crushed March earnings in its first report as a public company. May 11 is its second bite at the earnings apple. Color me incredibly curious to hear what they have to say.
ZM – Zoom’s big April announcement was the creation of a $100M fund to encourage third-party innovation in the Zoom Apps ecosystem. Successful applicants “will receive initial investments between $250,000 and $2.5 million to build solutions that will become core to how Zoom customers meet, communicate, and collaborate.” It’s no secret Zoom is looking to use the strength of its current platform as a springboard for future growth. Using a small percentage of its $4B+ cash on hand to seed creative ideas seems like a no-brainer in trying to reach that goal. I like this move.
ZS – In company news, ZScaler announced the State of Oklahoma purchased both of its flagship products as part of the state’s cybersecurity program. Oklahoma chose ZScaler to help improve its security posture for all government data and employee access. Governments around the world will almost certainly spend a lot of money shoring up security in 2021. It’s nice to see ZScaler positioned to get its piece of the action.
Later in April ZScaler acquired Trustdome for its Cloud Infrastructure Entitlement Management [CIEM] technology. The new tech will be integrated into ZS’s existing platform to improve identity management, access, and permissions. Trustdome’s Israeli development center is also included in the buy which helps expand ZS’s international footprint. Expected to close sometime this quarter, this looks like a nifty little add.
In portfolio news, ZS unfortunately lost its spot to make room for SNOW. This was as much a portfolio management decision as a reflection on either company. CRWD, NET, and (indirectly) DDOG give me plenty of security exposure. I’d also rank all three firmly ahead of ZScaler in conviction. In contrast, Snowflake is my only real exposure to the burgeoning data management market. With no cash on hand, the SNOW money had to come from somewhere. That somewhere turned out to be ZScaler, so back to the watch list it goes.
My current watch list…
…in rough order is ZScaler (ZS), ZoomInfo (ZI), NARI (Inari), FVRR (Fiverr), OKTA (Okta) and PTON (Peloton). There’s a decent chance a name or two from above joins it in May.
And there you have it.
April turned out to be a welcome rebound in what has certainly been a choppy year. First, a quick recap of 2021 to date:
A clean start got us up to +20.0% YTD and a February 12 all-time high…
…before a late-February crash turned into a continued March stumble…
…which was followed by a borderline heroic April climb.
Believe it or not, we briefly revisited positive YTD this week before fading the last few days. I’ll gladly take that considering March’s exit. So, what will May bring? Darned if I know. I only know that despite the stock volatility, most of my companies keep chugging right along. Business updates have been consistently upbeat, and I’m optimistic we’ll hear more positives during upcoming earnings. Goodness knows I’ll get plenty of chances to listen with seven holdings reporting in May. As I said in the intro, I’m looking forward to some reports in what appears to be a more settled macro environment. That puts more attention on business execution, which is where I believe it belongs anyway. For those who also own the names above, fingers crossed we get the execution we’re looking for.
Thanks for reading, and I hope everyone’s spring is off to a great start.