December 2020 Portfolio Review

Total Return: +196.5% YTD (+180.3% vs S&P)

Jan 02, 2021

Wow. 😳

Is 2020 over already? It is hard to believe a year that often felt like it would never end has finally drawn to a close. And what a year it was. While society wrestled a historic pandemic, the market whipsawed between historic panic and historic euphoria. In many ways the disconnects were jarring, but in others they strangely made sense. The market is always forward looking, and February/March’s initial pandemic crash was just as quickly followed by a realization the world was likely to somehow make it through. At least we always had before. So, the market not only changed its bet to the upside outcome but repeatedly doubled down as the year progressed. The vaccine took quite a while – fully admitting we aren’t quite out of the woods yet – but recent news does suggest an end might be in sight. Thank goodness.

But a vaccine was not the only solution discovered in 2020. We also learned first-hand just how much interaction can be conducted seamlessly online. Countless traditional norms became impossible this year, and for better or worse many will never return. The question now is just what becomes the new normal in 2021 and beyond? While COVID forced us to adapt in often uncomfortable ways, in some areas it only accelerated a future that was already coming. The COO of Okta recently described it as “one of those technology leapfrog moments,” and I would have to agree. The digital revolution was underway long before coronavirus, and it becomes clearer by the day we are not going back. The companies facilitating this move aren’t stealing from their future as much as having their future thrust upon them. Those best meeting this opportunity could grow exponentially during the coming months and years. In fact, non-execution might be the only thing stopping a few from simply rolling over everything in their path. This dynamic is best illustrated in this well-sourced and painstakingly researched adoption curve:

Is that an exaggeration? Well, duuhhhh. At the same time, I don’t believe it is that far off what some of these companies might be able to accomplish. I look forward to seeing whether any of my holdings are the ones meeting this challenge in 2021. I sure do hope so.

2020 Results:

December Portfolio and Results:

2020 Monthly Allocations:

Key:

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

Past recaps:

December 2018

December 2019 (contains external links to all 2019 monthly reports)

Stock Comments:

December ends with the same cast of November characters plus the return of an old friend. It is always enjoyable to have a month where all my holdings generally solidify their spot. That isn’t always the case with a highly concentrated portfolio, so I won’t take it for granted. I enter 2021 thinking more about allocation sizes than whether I own the right companies. I’ll gladly ride that wave as long as it lasts.

CRWD –

Yeah, what he said. CrowdStrike absolutely crushed its December 3 earning report. It is not often you see a company this size accelerate growth, but that is exactly what CRWD pulled off. Total revenue of $232.5M meant 86% YoY growth versus 84% in Q2 and 85% in Q1. The $117M in new Annual Recurring Revenue set a quarterly record and brings total ARR to $907M. Gross margins hit a record 76% from 75% last quarter and 72% in 3Q20. Demand “was well balanced between new customers and expansion business and between large enterprises and mid-market and commercial accounts.” That’s exactly what I like to hear.

Just how balanced was it? Well, 61% of customers are employing 4 or more of CrowdStrike’s product modules compared to 57% last quarter. 44% use 5+ (vs 39%), and enough customers are now at 6+ for management to start breaking that cohort out at 22%. With three new modules this quarter for 17 total and a net expansion rate of 120%+, there is plenty of room to grow with existing customers. New client adds weren’t shabby either with a record 1,186 for 8,416 overall (+85% YoY). Management states they ended the quarter with a record pipeline, and CrowdStrike’s virtual user conference drew 6 times more attendees than last year’s live event. So, there are several signals the growth party won’t be ending anytime soon.

Digging deeper, operational leverage is really kicking in as well. As I have written before, CrowdStrike’s secret sauce is its ability to capture customer data once and monetize it many times over across its entire client base. Detections, enhancements and improvements from one user can immediately be redistributed across its entire network. Ease of installation is also a huge advantage, with the example of switching Target Corporation from Symantec’s legacy platform to CrowdStrike’s cloud solution in less than 10 days. This is a virtuous cycle in which everyone wins. The increased execution has expenses as a percentage of revenue dropping from 78% to 75% to 71% to 68% the last four quarters, which in turn has allowed this:

Operating Margin: -4%, 1%, 4%, 8%
Net Margin: -3%, 3%, 4%, 8%
Free Cash Flow Margin: 33%, 49%, 16%, 33%
EPS: -$.02, $.02, $.03, $.08

These trends suggest strong profitability should be the norm going forward. The CFO noted “Q3 represents our eighth consecutive quarter of improving non-GAAP operating performance on both a dollar and margin basis.” Simply put, CrowdStrike has become a monster with little sign of slowing down. There is zero chance the world moves to fewer endpoint devices and securing them all only becomes more vital as we go. Kurtz says this phenomenon is not just companies buying laptops for remote workers but a “much more sustainable trend that we see for the foreseeable future as people move to the cloud and transform digitally.” Companies everywhere are redesigning their security, and CrowdStrike is waiting right there to meet them. In fact, management measures its TAM at $32.4B for 2021 vs a $24.6B estimate when coming public in 2019. That presents an enormous opportunity, and CRWD appears well-positioned to take advantage.

That positioning drew almost immediate attention shortly after earnings when two firms announced major breaches. First, FireEye disclosed foreign hackers stole some of its security testing tools. Just days later SolarWinds admitted to another attack in which malware was inserted into an update sent to thousands of customers. CrowdStrike quickly and decisively reaffirmed the safety of its Falcon platform in this company blog. The post notes its Falcon platform already resists this type of attack three different ways and lists multiple existing capabilities for defending against the SolarWinds incident. SolarWinds also responded quickly and decisively…by deploying CrowdStrike to secure the endpoints on all its systems. I cannot think of a much bigger endorsement for CRWD as a best-in-breed security solution.

As for the stock, December could not have gone much better. A 13%+ post-earnings pop initially pushed CRWD ahead of ZM to 24.6% of my portfolio. A 10%+ jump on the SolarWinds installation news stretched that lead even further without adding a share. Despite trimming a bit when it ran to $220+ and a ~31% allocation just before Christmas, CRWD ends the year right back in the 30% range. Needless to say, CrowdStrike enters 2021 as my highest conviction holding.

DDOG – Datadog kicked off December by releasing its first service designed for GitHub. Over 56 million developers and 3 million organizations use GitHub to build, ship and maintain software. This new offering lets developers continuously monitor code and assess vulnerabilities during the production stage rather than waiting for issues to arise after release. Given the importance of reliability and security in today’s world, this sounds like yet another valuable addition to Datadog’s product line.

That was followed later in the month by a deeper integration of Datadog’s compliance monitoring module with Amazon Web Services’ (AWS) Well-Architected Tool. This will let AWS customers better monitor workloads to ensure security meets AWS’s current best practices. It is always a feather in Datadog’s cap when one of the major cloud providers makes it easier to deploy a DDOG product. That cap sure has gained a lot of feathers lately.

DOCU – If it wasn’t for CRWD, DocuSign would have been my favorite earnings report this quarter. DOCU’s entire 2020 has been about accelerating growth in just about all the right places. December 3 earnings was another chance to see if the trend was still intact. So, how did DOCU do? Well, take a look for yourself:

Total Revenue: 39%, 45%, 54% ($382.9M)
Subscription Revenue: 39%, 47%, 54% ($366.6M)
Billings: 59% 61%, 64% ($440.4M)
International Revenue: 46%, 59%, 77% ($76M and 20% of total revenue for the first time)
Contract Liabilities – Current: 43%, 55%, 62% ($686.2M)
Total Customers: 31%, 40%, 46% (822,000 !!!)
Enterprise Customers: 48%, 55%, 64% (113,000 !!!)
Subscription Revenue/Total: 95%, 95%, 96%
Operating Expenses as a % of Revenue: 71%, 68%, 66%
Net Retention Rate: 119%, 120%, 122% (new record)
Gross Profit: 37%, 45%, 54% ($301.93M)
Subscription Gross Profit: 36%, 44%, 53% ($306.6M)
Operating Margin: 8%, 10%, 13% ($49.1M)
Net Margin: 8%, 10%, 12% ($46.1M)
EPS: $.12, $.17, $.22

So, whaddya think? Is that good? I’d say so. eSignature is booming at the same time DocuSign develops its next-generation Contract Lifecycle Management (CLM) and eNotary offerings. COVID initially slowed the CLM effort due to it being a more complex product with a longer sales cycle. In my opinion this delay has been more than offset by the eSignature surge and rapid gain in customers. Over 113,000 enterprise clients is a pretty attractive base in which to cross-sell new products as the world finds its new equilibrium. It also creates the possibility any post-COVID eSignature or net retention slowdown could at least partially be offset by new CLM adoption. How quickly that might occur is still TBD, but CEO Dan Springer hints that is what he is starting to see:

If you recall when we finished Q4 last year, the message we had was there was a fairly significant acceleration in particularly CLM, which was a major additional agreement of our product we had at that time and we were quite excited to see that coming into the New Year. And at the beginning of Q1, we saw that trend continuing. After COVID sort of hit…we saw a fairly significant change. We saw customers coming back to us saying, yes, long-term, we want to be Agreement Cloud companies. But right now, we got some critical use cases that we need to get up to signature. And so we saw this dramatic acceleration on the signature side of the business and some slowing of deals and some slowing of those transactions of people who are working with some CLM sides. I think we’ve seen the same thing throughout the year. And in the last quarter or so, we are starting to see that coming back. So, things like the Seal Software, things like CLM, those are now businesses that are returning to the levels we would have expected if they hadn’t been for COVID. And we think CIOs and other business leaders are fundamentally had a reaction upfront which was I can only work on my critical projects. Remember, they were just like DocuSign having to go to a work from home setting and they weren’t in their offices. And so, larger and more complex projects that required a systems integrator or at least some sort of statement of work. Those got pushed out a little bit. Now people are coming back and saying those are critical to our future and so the Agreement Cloud is right back where we want it to be in terms of top of mind with our customers. And I’ll just give you quick example. I had a call this morning with a very large customer of ours and they said, hey, we are super excited to be now reaccelerating our plans to roll out CLM while they have been dramatically increasing their signature usage over the course of the year. They said now is the time. We are ready to reaccelerate with CLM. And I think that’s what we are going to see throughout the next quarters.”

He also stated:

…something that history has taught us at DocuSign. When customers go from paper-based processes to digital agreement processes, they do not go back. We believe that trend will hold when the pandemic subsides and DocuSign’s value will persist no matter how the future of work unfolds…And so we’ve accelerated that growth not because we are sort of robbing from the future, but we are just getting closer toward that $25 billion TAM opportunity and with our revenue being under a couple billion and us having such a dramatic market share lead has been such a big portion of the total market. It gives you a sense that I think we can continue to grow at very attractive rates well into the future.

While these types of statements are never guarantees, the underlying confidence does support the idea DocuSign has a legitimate path for maintaining its current success. What seems to be giving the market pause, of course, is exactly how much of DOCU’s recent growth will stick in its immediate post-COVID future. During the call the CFO hinted at tough comps next year, and Springer had the following to say when asked about post-pandemic growth:

But my assumption not really having any detailed ability to guess the future is that that growth will be at a higher rate than we were at pre-COVID happening, but probably not at the same growth rate that we’ve seen in the last few quarters where it’s been amazingly heightened. So, I think it will be very strong growth and probably higher than you’ve seen previously. And so when we look at our revenue growth I think you’ll see next quarter when Cynthia pulls together. I think what you will see is an exciting growth future for us and probably from a billing standpoint, slightly below the incredible numbers we’ve put up the last few quarters.

The implied risk in that comment pressured the stock after an initial post-earnings bump. Fortunately, it has somewhat recovered as December has progressed. With a typical beat of management’s Q4 guide, I would anticipate another slight growth acceleration next quarter to something in the 55%+ range. The question becomes what the initial FY22 guide will be given the above statement. Remember, the beat-and-raise game requires management to leave room for four beats during the year, so initial FY guides must almost always be taken with a large grain of salt. However, a “higher rate than pre-COVID” should put DocuSign’s actual FY22 growth solidly in the 40’s with a strongly profitable bottom line. That’s an attractive combination. In addition, Springer’s comments on delayed CLM adoption means management is likely being very cautious about how much CLM revenue it bakes into projections. That implies any CLM or eNotary traction in 2021 could quickly be accretive. At least that is what I am betting on.

As I wrote last month, DocuSign tends to get lumped in with the work from home stocks. While the company obviously benefitted from remote work, I agree with Springer’s suggestion the recent surge didn’t steal from the future as much as speed DOCU further along a path it was already on. First, it is hard to fathom the world wanting to return to clumsy and antiquated paper trails. Second, 96% subscription revenue with a 17-month average contract length suggests most users plan on sticking around a while. Finally, the sheer number of customers added in 2020 should do wonders for the brand going forward. That suggests DocuSign might keep doing what it’s doing for quite some time, especially if its new offerings take hold in that enormous customer base. I like the odds of that happening enough that I added some shares heading into 2021.

NET –As promised, Cloudflare hosted its Privacy & Compliance Week in early December. It is hard to believe NET had anything left in the tank after the seemingly endless list of releases during its recent Birthday and Zero Trust Weeks, but CEO Matthew Prince and gang didn’t let us down. The thing that really stood out to me was Cloudflare referring to itself as a “security, performance and reliability” company. I find this expanded branding a great summation of everything NET has said and done in recent months.

The first Privacy & Compliance news was the release of Cloudflare’s Data Localization Suite. This includes an array of tools for customers on Cloudflare’s network to customize where data goes and who accesses it across the globe. Many countries have different regulations regarding access, protection and privacy. This suite makes it easy for clients to set regional controls specific to the location handling the data. I don’t want to get too far over my technical skis on this one (mostly because those skis are very short), so I’d recommend reading the linked release. It explains both the mechanics and benefits of this new service in very easy terms. This seems like a pretty neat trick.

During the week Cloudflare also teamed with Apple and Fastly on customer privacy. Engineers from the three companies co-authored a proposed standard that would separate IP addresses from electronic queries so no single entity sees both at the same time. This feature would safeguard internet users from onlookers and third parties, creating a layer of user privacy not currently available on today’s internet. It is easy to see how this could be a valuable service as more traffic and information inevitably finds its way online.

Next, Cloudflare made its Web Analytics tool free to anyone who wants to use it. Most “free” analytics tools trade their service in exchange for user information that can be converted into ads. Cloudflare is making its tool truly free with no strings attached. In this way web developers can gain insights into site traffic without trading visitors’ privacy to do it. As Cloudflare explains:

The most popular analytics services available were built to help ad-supported sites sell more ads. But, a lot of websites don’t have ads. So if you use those services, you're giving up the privacy of your users in order to understand how what you've put online is performing…Cloudflare's business has never been built around tracking users or selling advertising. We don’t want to know what you do on the Internet — it’s not our business.

A noble statement, but it is important to remember the ultimate success of any freemium product is its ability to eventually drive paid business. While that is still very much TBD, this move will almost certainly introduce a host of new users to Cloudflare’s platform. I have no reason to doubt management’s belief this is a smart decision.

NET capped the week with a beta release of Workplace Records. This module lets clients automatically log the state and country for remote employees. That in turn helps finance, legal and HR streamline income and tax reporting for its distributed workforce. Individual worker privacy is protected by logging only the tax jurisdiction and not a physical address within it. This feature can also track intellectual property (IP) projects to confirm they are being done in locations with appropriate ownership and transfer laws. This helps clients ensure they are not inadvertently putting their IP at legal risk.

It is easy to see how Workplace Records could address major pain points for large customers. As Cloudflare put it, no one wants to “impose somewhat draconian rules requiring employees to check-in” to deal with these issues. As more and more companies use remote workers, less intrusive tracking with easier adaptation to local laws is a clear win-win for all parties. This is yet another prime example of how quickly NET is innovating to meet its customers’ needs.

Outside of Privacy & Compliance Week, NET also unveiled Cloudflare Pages. Pages is a fast, secure way to build and host JAMstack sites. What is JAMstack, you ask? Good question because I had no idea either. Fortunately, a link in the blog post informs us it is “a method for building fast, lightweight web applications using mostly JavaScript, APIs, and markup (HTML/CSS).” In essence, it is Cloudflare yet again leveraging its network so developers can interact with end users more quickly and efficiently. Soooooo…pretty much par for the course with the multitude of other recent enhancements.

To help tie this all together, Cloudflare acquired Linc on December 22. This purchase adds Linc’s automation platform for allowing front-end developers to collaborate more closely when building applications. This “will accelerate Pages to enable richer and more powerful full-stack applications.” The tech behind the service is fully outlined in the link, but the key takeaway for me is this acquisition again lines up well with Cloudflare’s vision of providing end-to-end solutions for developers looking to engage with customers in more efficient ways.

Taking a step back, Cloudflare has made a staggering number of moves and releases the last few months. As outlined above, many are specifically designed to meet local access and regulatory requirements no matter where they are deployed. That type of customization could be a huge benefit to customers. In some respects, however, it is fair to wonder whether Cloudflare might be doing too much too fast. I have previously owned companies that expanded product lines so quickly you couldn’t help but wonder if they were becoming unfocused or spreading themselves too thin. Nutanix springs to mind, and I thought Elastic had a similar stretch. In this case, I am encouraged NET’s recent innovations appear to be relatively natural extensions of its core platforms. In essence, Cloudflare mostly seems to be adding customer-driven branches to already existing trees (at least that is how I’m viewing it and am open to hearing differently). Given its recent success, this strategy seems to be working. Personally, I am excited enough about the future that I twice swapped some ZM into NET as Privacy Week unfolded. That seems to have been a good choice so far. NET’s recent run has pushed its portfolio allocation, and I would not at all be surprised to see it compete for an even larger spot as 2021 unfolds.

OKTA – Good ‘ol Okta. I said last month I was hoping for another sneaky-excellent earnings report. CEO Todd McKinnon and crew didn’t leave me hangin’. Revenue growth of 42.0% held steady from 42.7% last quarter. Subscription revenues did the same at 43.1% versus 43.9%. Remaining Performance Obligation (RPO) continues to stand out at $1.58B (+53% YoY) with $753.2M (+46%) scheduled to be recognized within the next 12 months. When you consider total RPO is more than 7 times the current quarterly run rate, you realize just how committed customers are to Okta’s products.

Speaking of those customers, Okta now has 9,400 (+27% YoY). That includes 1,780 (+34%) with an annual contract value (ACV) of $100K+ and 320 (+ >50%) now spending $500K+ annually. This quarter’s top 25 contracts were all $1M+ with six at $5M+. Large enterprise customers make up 80% of total ACV, meaning Okta has built a very stable revenue base. While workforce identity remains Okta’s flagship offering, its fledgling customer identity (CIAM) segment now represents 25% of revenues growing 70%+ YoY. Operating expenses fell to a record-low 76% of revenue, and net retention rate ticked up sequentially from 121% to 123%. That marked Okta’s highest net retention in 12 quarters. Gross retention also remains strong with the CFO noting:

We’ve not experienced any degradation in gross retention rates during the pandemic and continue to experience strength with customer upsells, particularly with our enterprise customers.

Collections have been stronger than expected during most of the pandemic as well. As usual, the overall business continues to trend in the right direction.

As you’d expect, the strong execution is steadily improving the bottom line. Gross profit hit a record $170.3M with 78% gross margins. Subscription gross margin was 82%. I wrote in August Okta appeared to be on the verge of sustained profitability. I’m glad to say that observation still holds. This was Okta’s second consecutive profitable quarter with $5.1M in operating and $5.7M in net income. Free cash flow (FCF) hit a record in both dollars ($41.6M) and margin (19.1%). Okta has now been FCF positive eight of the last nine quarters and holds a very healthy $2.5B in cash on its books. To top it all off, Okta posted a new Rule of 40 high with trailing 12 months revenue growth plus FCF margin at 56%. Good stuff.

That kind of cash is letting Okta invest aggressively in its future. Headcount increased 23% during Q2 in order to support the expanding business. Management is also bulking up internationally, where revenue grew 51% YoY and now accounts for 16% of total revenue. First, Okta opened a new Tokyo office to expand its Asian reach. Japan Country Manager Takashi Watanabe brings more than 25 years of experience driving Japanese interest in brands like Adobe and SAP. Second, Susan St. Ledger will begin as President of Worldwide Field Operations on February 1, 2021. St. Ledger joins Okta after 4.5 years in a similar role at Splunk where she helped grow revenues from $700M to almost $2.5B. Anything comparable would obviously be a smashing success. Bring it on, Susan.

Looking ahead, management raised its full year revenue outlook to $823M and initiated Q4’s top end growth guide at 33%. A typical beat would once again put growth at 40%+ for both the quarter and year. They also released an initial FY22 guide of $1.07B in revenue and 30% growth. I would anticipate that number being beaten handily, especially considering management has consistently stated it expects 30-35% CAGR through at least FY24. Gotta play that beat-and-raise game though. As for next quarter, the CFO emphatically stated during the call:

We’re obviously already a month into the quarter and things are going very well…So not only is Q4 looking very good, but I'm very optimistic about the first half of next year, as well, I think the pipeline's looking very, very good.

That was four verys in case you were counting. McKinnon expressed similar optimism:

…we talk about COVID, and what it's done for the business and headwinds and tailwinds and all that stuff. But the big - a big truth is that, it's really, really made every company serious about their online strategy. I mean, it's something they've all known they've had to do. And they've been thinking about, you know, hey, we got to get online, we got to change, we got to adapt, it's digital world. But COVID has made it very clear that they need to act now. And we're starting - we're seeing that in what's going on in our business as well.”

So, tack a couple reallys and three got to’s onto the excitement. Not to be left out, Co-founder and COO Frederic Kerrest had this to say at a recent investor conference:

So, the workforce business is going to go very well in the next three, five, 10 years. I mean all the Oracle stuff, IBM stuff, CA stuff, Ping stuff, all the legacy on-prem infrastructure we're just going to take it out over time. I think the CIAM market is going to be very interesting and we're definitely investing heavily there to make sure that we can take a leadership position because we're – basically that market is just getting defined right now.

Man, that’s a lot of stuff Okta plans on disrupting. Statements like this are a big part of what I’ve grown to appreciate about this company during the 2.5 years I have owned it. There has always been a quiet, determined confidence to what they say and do. More importantly, the numbers have consistently backed it up. The need for strong identity tools will only increase as more and more interactions occur online. Like management, I got to say I really believe Okta’s stuff is in a very good spot to keep meeting those needs in 2021.

(As an aside, this month saw Okta added to the Nasdaq 100. Apparently, the Nasdaq has some quiet confidence in Okta as well.)

PTON – Peloton the company saw a fair bit of news this month. Most of it revolved around PTON once again expanding its class catalogue. First was pairing with TV producer and Peloton member Shonda Rhimes on an 8-week “Year of Yes” class collection. This series spans multiple disciplines at all fitness levels and will be led by a cast of Peloton’s popular instructors. We all know improving fitness is at or near the top of the list for most New Year’s resolutions. This collaboration strikes me as a smart, effective way for Peloton to:

onboard everyone receiving new equipment for the holidays and
further connect with its already enthusiastic existing users.

Next were initial forays into Pilates and pre-natal classes. The pre-natal classes were at least partly inspired by the current pregnancy of Robin Arzon, one of Peloton’s most widely followed instructors. These new offerings are yet another way PTON lets its users create a customized experience beyond their bike or treadmill. A fitness instructor I know says there is some additional licensing coursework involved to lead pre-natal exercises. She says the licensing is not difficult but specialized pre-natal classes are rarely provided by local health clubs since there is not enough demand for regular class time. This probably isn't a huge market for Peloton, but it sure does reinforce the stickiness of the platform. Nicely done, guys and gals. And congratulations, Robin.

Finally, on Christmas Day Peloton announced a series of holiday workouts featuring the Beatles. Peloton already has a popular Artist Series covering all types of musical genres including its recent collaboration with avid member Beyonce. This Beatles collection links Peloton directly with one of most popular bands and powerful music brands of all time. And believe it or not, these classes have already been Ringo Approved.

On the operations side, Peloton dropped $420M to acquire commercial fitness giant Precor in an all-cash transaction. Scheduled to close in early 2021, this acquisition immediately gives PTON access to 625,000 square feet of US manufacturing space along with a lengthy list of Precor’s hotel, corporate, multi-family residence, and college campus customers. The release states, “Peloton plans to produce connected fitness products in the US before the end of calendar year 2021.” That should be a huge help as management works feverishly to meet demand. If nothing else, it should ensure we won’t see similar delivery delays during next year’s holiday rush.

But the potential for this acquisition goes well beyond just manufacturing space. Peloton is already dominating the home equipment market. Purchasing Precor’s customer list and sales channels is an almost turnkey solution for entering the commercial space with a bang. It also hands Peloton a ready-made market for its new treadmill line. I won’t say equipment upgrades are recurring revenue because they most definitely are not. However, I do think it safe to say this acquisition should create very healthy growth at least through the first cycle of Pelotons replacing Precors in need of upgrade. And don’t forget this will all occur during a year in which PTON already guides for $3.9B in revenue and 114% growth. I like this move.

Along those same lines, Peloton recently posted an interesting job opening for an Account Executive, Corporate Wellness. The first responsibility in the job description is to “partner with enterprise-level employers and benefits administrators to have Peloton included in their corporate wellness/benefit plans”. Many employers are currently exploring health and prevention incentives up front in hopes of controlling treatment and maintenance costs in back. While I doubt this avenue moves PTON’s short-term business needle, it aligns very well with a broader push into the commercial market. It also shows management is thinking much bigger than just equipment and subscriptions for exercise junkies.

Not to be left out, Peloton’s stock made news as well by joining OKTA as a new member of the Nasdaq 100 on December 21. This is always welcome publicity, and the stock drifted steadily upward after the release before popping on the Precor news. The main effect is PTON now becomes a required holding for any mutual fund owning or tracking the Nasdaq 100. While joining an index is no guarantee of success – just ask the six companies who were dropped to make room – it clearly demonstrates Peloton is on the right track. All they have to do now is get those backorders filled as quickly as possible.

ROKU – It’s baaaa-ack. Roku was a portfolio fixture for me from May 2019 to August 2020. It was one of my best performers in 2019 and entered this year as my #3 holding. Unfortunately, the stock lagged for much of 2020. Like most businesses with an advertising component, Roku took a major hit when the world simply stopped spending on ads while trying to figure out what this COVID thing was all about. With management’s comments at the time suggesting spending wouldn’t return to prior levels until well into 2021, I decided to step aside until the smoke cleared.

Well, it turns out this past quarter cleared up a lot of things. Most of my reasoning for reentering Roku is eloquently explained in the following two write ups. First, this post nailed the Q3 recap. Next, this Substack article detailed the accelerating strength of the business. Long story short, Roku had the quarter shareholders had been waiting for a little sooner than expected. While the market occasionally seems to get distracted by Roku’s hardware, management has been crystal clear those efforts are nothing more than vehicles for luring more eyeballs onto their platform. Therefore, my personal ROKU thesis has mostly revolved around platform revenue growth and gross margins. Let’s see how they have tracked over the last four quarters (oldest to most recent):

Platform Revenue Growth: 72%, 73%, 46%, 78%
Platform Gross Margins: 63%, 56%, 57%, 61%

As you can see, that Q2 slowdown was quite a doozy. Meanwhile, management has consistently referenced gross profit growth to gauge the overall health of the business. Here is how that stacks up:

Platform Gross Profit Growth: 49%, 39%, 26%, 73%
Total Gross Profit Growth: 44%, 40%, 29%, 81%

So, Q3 represented a huge acceleration in metrics that has been sliding firmly the wrong way. The question, of course, is how much of this change is sustainable and how much is a one-time fluke? Again, management previously predicted the return to pre-COVID ad spending some time in the back half of 2021. However, I don’t think even they anticipated the acceleration of the switch from linear to connected TV (CTV) which occurred last quarter. It is not that total ad spending rebounded. It is that ad purchasers drastically shifted the spending they do have away from linear and more toward CTV. Roku clearly benefitted. In fact, management stated it has already closed 2021 upfront deals with all six major ad agencies “at significantly increased levels of commitments”. Yes, these initial contracts and Q3’s political ads likely produced some one-time surge. However, the underlying shift in ad agencies’ baseline commitment to CTV should indeed be sustainable. And it is only getting started. As long as Roku proves its value add, those dollars likely won’t be leaving its platform anytime soon.

Much of the love for companies in my portfolio is based on identifying those with the best chance to maintain or even accelerate recent strong performance. I believe Roku fits that mold, although the fickle nature of advertising and consumer-based business models puts my conviction at a lower level than say CRWD or NET. Regardless, I’m glad to welcome ROKU back into the fold.

TWLO – There’s not much to report on the Twilio front. The only real news I saw was the company expanding its partnership with WhatsApp. Frankly, that’s kinda what TWLO does after embedding itself with a customer. With October’s Segment acquisition now closed, Twilio has lined itself up for a very interesting 2021. In theory it just needs to execute (don’t they all!). Stay tuned.

ZM – I wrote extensively last month about Zoom’s November 30 Q3 earnings report. Much of this month was spent thinking about those results and how I wanted to manage this allocation going forward. Already an excellent business, Zoom’s stock price and market cap both exploded in 2020 after the company found itself in the perfect spot to help the world manage COVID-induced lockdowns. Like many who own it, I have been extremely fortunate to be along for much of this ride. I made my first purchase at $110 in March and pushed ZM to 15%+ of my portfolio during a mid-August pullback. An absolute blowout Q2 report rocketed it to as much as 30% my holdings at ZM’s mid-October peak even after a trim. I have never had an allocation that large before and have spent much of the time since testing just how much stomach I have for letting a winner run. It turns out I’m perfectly fine having a company organically grow to 25%+ of my portfolio as long as it remains one of my highest conviction holdings. ZM set the standard, and CRWD just reinforced the rule.

The difference now is Zoom’s story has become more complicated as we move closer to a post-COVID reality. The obvious benefits and efficiencies of Zoom’s platform aren’t going anywhere. However, the pure necessity of doing everything on Zoom will almost certainly lessen significantly as the planet reopens. Initial questions about future growth are very valid now that Zoom’s market cap has basically quintupled over the last 12 months. Zoom has arguably absorbed the law of large numbers better than any firm in history, and those numbers continue to be some of the best around. I also wouldn’t dare bet against CEO Eric Yuan making Zoom an iconic global brand (if it’s not already).

However, being able to brag about owning an iconic global brand is not my goal. My sole goal is managing my family’s portfolio the best I can. While ZM still fits in that mix, this new uncertainty lowers the conviction that previously gave it my top spot. I made multiple trims this month to add to DOCU and NET. I also sold some shares to help restart ROKU. There is a good chance I shave more in January. I do not have a firm target in mind but am guessing ZM lands somewhere in the 10% range when everything shakes out. I fully anticipate at least one and likely two more quarters of dominant numbers. Management’s comments on the future beyond that will determine exactly where this position goes in 2021.

My current watch list…

…in rough order is ZS, SHOP, FVRR and TTD. I’m also poking around on LSPD a bit since I’d like an ecommerce play and this intrigues me a bit. ZScaler forced itself back on this list with an amazing quarter. Its recent sales glitch seems to be fixed, and ZS now has accelerating growth numbers heading into some reasonable comps. The question becomes how much of my portfolio I want in security companies given my already considerable positions in CRWD and NET. That might keep ZS at arm’s length…or might not. I honestly don’t know. I guess I’ll just have to wait and see.

And there you have it.

It is only fitting I end the year with much of the same volatility that started it. ZM’s post-earnings crater immediately produced a painful -7.9% portfolio drop on December 1. As they say, “A concentrated portfolio giveth, and a concentrated portfolio taketh away.” (Okay, they don’t really say that. I made it up.) Luckily, strong reports from CRWD, OKTA and DOCU that same week yanked me right back to positive. That in turn was followed by a -6.9% December 9 plunge and +6.5% bounce on 12/10. So, basically three more entries in 2020’s already crazy-long list of +/- 5% days in only a week and a half. All that whipsawing left my portfolio just about flat into the middle of the month.

The back half saw some chop as well but fortunately more ups than downs. In fact, I hit a new all-time high (ATH) on December 18 when CRWD’s second 10%+ day this month led to a +215.8% YTD close. My previous October 13 ATH was mostly driven by Zoom’s spike to $580 while it being ~30% of my portfolio. ZM’s subsequent pullback and a -30%+ portfolio drawdown by mid-November had me thinking a new ATH might take a while. Once again, however, 2020 told me to take my traditional thinking and shove it. The fact I rebounded so quickly really highlights the benefits of portfolio diversification…as long as that diversification includes a willingness to let CRWD run to 30%+. 😏 As the music stops, I end with an even newer ATH of +236.3% YTD on December 22, a 196.5% overall finish and one heck of an amazing year.

As 2020 finally and fittingly comes to a conclusion, it is hard to know exactly what to make of it all. Are some of the returns we have seen this year a fluke? Absolutely, starting with mine!!! No one should expect to double, triple or even quadruple an entire portfolio in just 12 months as some I know have indeed done. In fact, it is almost embarrassing to contemplate such shockingly good returns in a year so shockingly bad in so many ways. However, please remember we never control our returns. We only control our process for choosing what we own. In that respect, everyone deserves full credit or blame for whatever decisions they made and returns they produced in 2020. Frankly, that’s the way this thing works. The market does not buy your stocks. Neither does that paid service...or that free newsletter...or that message board...or that TV personality...or that favorite Twitter follow. You do. That why it is so important to choose your information wisely and take the time to do the work.

As for me, 2020 produced literally lifechanging returns. I have never had a year like this before and quite honestly never expect to have one like it again (and that thought applies well beyond investing). What I do expect is to keep engaging with others to discuss companies and stocks in a way that hopefully increases my odds of beating the market. To that end, I remain grateful to those so willing to share along the way.

In closing, I hope your families enjoyed whatever holiday it is you celebrate and wish everyone a happy and healthy 2021. As usual, thank you very much for reading. See you next year.

Share TheStockNovice

TheStockNovice