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July 2021 Portfolio Review
Total Return: +17.2% YTD (+0.1% vs S&P)
July was one of those welcome breathers between earnings seasons. These pauses are usually great opportunities to pull back from company specifics and mull over where our broader industries might be heading. In my opinion, we’ve seen two recent developments which bode well for my holdings. First were the stellar earnings reported by most of the tech stalwarts, particularly in the areas of cloud usage and computing. Apparently, this digital revolution thingy might be more than just a passing fad. That’s exactly what I was hoping to hear.
Next were continuing signs the US public sector is going to spend big on cybersecurity the next few quarters. As a result, software and security firms have been furiously scrambling to update certifications to make sure they can fight for their piece of the pie. FedRAMP approval is a must-have to compete for federal business. ZScaler has always been ahead of the curve in this area. CrowdStrike, Datadog and Cloudflare all recently solidified theirs. While it’s impossible to tell who the major winners will be, it is encouraging to see these companies positioning themselves to land as much new business as they can. We should get our first peeks at how the landscape is shaping up when Datadog and Cloudflare report this upcoming week. Here’s hoping for positive early returns. 🤞
July 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)
This month saw some portfolio consolidation. After Twilio’s report, I asked myself if I’d rather have ~5.5% of our portfolio in TWLO or ~0.7% more in each of our other holdings besides NET (which at its current valuation is staying right where it is through earnings). I found I preferred the gang of eight. And so…
CRWD – This month CrowdStrike announced the availability of Falcon for GovCloud, its FedRAMP-authorized endpoint protection platform. Management understandably expressed enthusiasm about the release:
The recent Biden Administration Executive Order on cybersecurity emphasizes multiple cybersecurity-focused priorities for government agencies, including fundamental proactive security measures, such as endpoint detection and response, incident management, threat hunting and the prioritization of cloud. Falcon Complete provides all of those capabilities in a single turnkey solution, while offering a superior endpoint protection platform that addresses additional EO mandates such as Zero Trust and log management.
As mentioned earlier, all signs point to increased government cybersecurity spend the rest of 2021. CrowdStrike’s recent efforts and increased attention put it in prime position to win a significant portion of this business. The stock’s late month fade dropped its allocation behind DDOG and into #2 in our portfolio. I’d expect these two to duke it out for our top spot the remainder of the year.
DDOG – This was pretty much “Partnership Month” for our new top holding. Datadog began July with the announcement of a deeper integration with ServiceNow. This arrangement provides greater visibility into user, platform, and API activity. Joint customers can now receive real-time feedback on “who is accessing…data and what actions are being performed in order to proactively identify unusual user activity and potential data breaches.” With most organizations more aware than ever of protecting sensitive and business-critical data, deals like this make a ton of sense for all parties involved.
Next Datadog expanded its Google relationship with a direct listing on Google Cloud Marketplace. This lets customers access and purchase Datadog’s solutions directly through Google’s platform with just a few clicks. For convenience, customers also have the option of paying for any Datadog add-ons using their committed Google Cloud spend. So, Google provides more options for its customers while Datadog gains additional exposure through one of the world’s largest cloud vendors. Sounds like a win-win to me.
Lastly, Datadog strengthened its Amazon presence by achieving Government Competency Status with Amazon Web Services (AWS). This designation confirms that Datadog’s security, compliance, performance, and operational measures all meet or exceed the standards required for government customers utilizing AWS for cloud-based services. In case you hadn’t yet noticed the theme, government customers look like they are going to be very active very soon. Datadog will provide some of our earliest real-time comments on that activity when it reports pre-market August 5.
DOCU – July was a quiet sequel to DocuSign’s stellar June earnings report and subsequent 35%+ stock gain. Despite the low-key month, I have no reason to think DOCU’s 1M+ customers weren’t sending a flurry of documents back and forth for e-signatures. Steady as she goes with this position.
LSPD – July’s main Lightspeed news is an upcoming vote to change the company name from Lightspeed POS to Lightspeed Commerce, Inc. The article states:
Lightspeed POS Inc. says shareholders will decide this summer whether the company is renamed Lightspeed Commerce Inc., to more accurately represent the full scope of services it provides.
I’d be all for this change for two reasons. One, I too think “Commerce” more accurately reflects the company’s vision than “POS” (Point of Sales). Two, I try to make a habit of not owning POS's.
Oh yeah, one other thing. Earnings pre-market August 5.
NET – Not surprisingly, Cloudflare gave us yet another month with multiple updates. First it announced availability of a lower pricing plan for customers using Microsoft Azure as their cloud platform. This partnership allows clients to choose cost-optimized routing directly through their Azure settings. Don’t ask me to explain the tech behind it. I only know it’s generally customer-friendly for companies to pass on cost savings whenever possible as long as it doesn’t inhibit the bottom line. The quid pro quo, of course, is hoping the customer dollars saved are repurposed into additional Cloudflare usage. While the returns for this program are still TBD, it’s hard to fault NET for making what is clearly a good move for its customers.
The second piece of significant news was Cloudflare’s Zero Trust offerings being added to the FedRAMP marketplace for US government agencies (hey, there’s that FedRAMP thing again!). NET already lists the FBI, State Department, Interior Department, Library of Congress, and several individual US states among its government customers. This marketplace listing is the final step before full authorization allowing an even larger group of agencies to access Cloudflare’s products. As with the other companies jockeying for this business, this expanded availability is excellent news.
Next, Cloudflare announced a 25+ city partnership with one of the largest internet service providers in Brazil. The deal took two years to put together and is one of NET’s largest single-country expansions so far. Brazil gets a faster, more reliable internet. Cloudflare gets a stronger foothold in South America’s largest economy. Sounds like a fair trade to me.
Finally, CEO Matthew Prince informed us Cloudflare will continue its Innovation Week series with one a month from July through September.
Hat tip to the most-excellent muji@hhhypergrowth for kicking off the Twitter conversation to which Prince responded. July’s installment was Impact Week, which occurred over the last few days. The original concept was showcasing Cloudflare’s environmental, social and governance efforts as part of its overall mission to create a better internet. The highlights definitely lend some insight into NET’s corporate DNA. Prince identified the impetus for the week as his initial attempts to get co-founder Michelle Zatlyn to start a company with him:
When I first was trying to convince Michelle that we should start a business together, I pitched her a bunch of ideas. Most of them involved finding a clever way to extract rents from some group or another, often for not much benefit to society at large. Sitting in an Ethiopian restaurant in Central Square, I remember so clearly her saying to me, ‘Matthew, those are all great business ideas. But they're not for me. I want to do something where I can be proud of the work we're doing and the positive impact we've made.’
That sentence made me go back to the drawing board. The next business idea I pitched to her turned out to be Cloudflare. Today, Cloudflare's mission remains helping build a better Internet. And, as we kick off Impact Week, we are proud to continue to live that mission in everything we do.
There are multiple posts detailing the environment Cloudflare envisions for both employees and customers, but I’ve tried to limit this recap to those I believe most affect the business. The general blog is worth a peek for anyone interested in seeing the entire layout. If nothing else, I’d recommend the introductory post linked above the quote simply for the background and perspective it provides.
Monday’s announcement was the launch of Project Pangea, a free service to help underserved communities increase internet access. Through this program eligible non-profits and local groups can connect to the internet for free using NET’s services rather than traditional internet service providers. This could help bring additional high-speed access to developing and rural areas across the globe, including some of the 21 million people currently lacking high-speed access in the United States. Cloudflare believes “safe, reliable, and sustainable internet access is a basic human right” in this day and age. Project Pangea is the company’s effort to help make that happen.
On Tuesday, Cloudflare announced plans to eventually power and operate its network with 100 percent renewable energy, which will in turn reduce their customers’ carbon footprint as well. NET’s most recent upgrades will enable its servers to process 57% more internet requests per watt of energy. Pulling back further, Cloudflare is now capable of processing over ten times as many requests per watt than 2013. This is not only an impressive amount of power savings but an interesting look at just how deeply innovation is embedded in Cloudflare’s core.
(On a side note, the first link above notes Cloudflare’s network handles roughly 17% of today's internet traffic. That’s a pretty big number, and a great indication of just how far NET is trying to spread its reach.)
Wednesday saw Cloudflare introduce Smart Edge Revalidation. As best I can figure it, this feature stores web pages more efficiently which in turn saves bandwidth, lessens the number of unnecessary page reloads, and ultimately creates a faster experience for users. I’d say that aligns pretty firmly with NET’s “build a better internet” mantra.
Thursday gave us updates on Project Fair Shot and the Athenian Project. Project Fair Shot is a program in which Cloudflare offered its Waiting Room product free of charge to any organization responsible for scheduling and/or dispensing COVID vaccines. Since February, this program has helped 100+ customers in 10+ countries schedule roughly 100 million vaccinations.
The Athenian Project was designed to provide enterprise level security to state and local election websites in the US. This latest update includes a new partnership expanding this service to international elections as well. Through a collaboration with The International Foundation for Electoral Systems, National Democratic Institute, and the International Republican Institute, Cloudflare will provide free enterprise services to groups working on election management and reporting around the world.
While neither project is likely to be a money maker, I consider both excellent examples of the type of significant challenges this management team is willing to embrace. I’d also venture to guess the operational and technical feedback from programs like this is an invaluable tool for strengthening Cloudflare’s overall innovation process. Well done.
Friday wrapped up with a post co-written by Prince and Zatlyn detailing what Cloudflare has learned from these programs and where the company intends to go from here. As with the business itself, the plans are big and bold. Like most young companies, the proof will ultimately be in the pudding. However, as a shareholder I can’t help but appreciate the commitment. I hope they pull it off.
Cloudflare’s Weeks series is always an interesting look into what this company is doing. But as we enter August I’m much more interested in its “earnings week” release on August 5. That’s where we’ll get to see just how much all these other Weeks are paying off.
ROKU – July gave us a couple of programming notes and one very interesting business update. First, Roku teamed with Maker's Mark bourbon to announce “The Show Next Door”. Under this sponsorship, host Randall Park will conduct a weekly talk show in which he begins each episode by mixing a favorite cocktail during the opening monologue. The show’s format is meant to create a “quick drink with friends” feel while Park interviews guests. The significance here is this is the first major content from Roku’s recently created Brand Studio to help marketers go beyond traditional 30-second ads. Episodes will be available for free on both The Roku Channel and Maker’s Mark social channels. I think it’s worth reading the boilerplate quotes from the release, not because they are enlightening on their own but because they reflect the type of sponsor relationship Roku is trying to create with this new service. KK Hall from Maker’s Mark stated:
“The Show Next Door” is the embodiment what we call Maker’s Hour – the much-deserved time you decide to make for yourself. We turned to the Roku Brand Studio because we want to go beyond the traditional ad experience on the largest screen in the home. Together we developed an entertaining and clever show with a splash of spirit as audiences transition from “working at home” to “being at home.”
Said Brian Toombs of Roku Brand Studio:
Our partnership with Maker’s Mark is innovating how brands meet consumers today as they shift away from traditional television to streaming. “The Show Next Door” is an incredible example of moving beyond the traditional 30-second ad and creating a fun and uplifting comedy so Maker’s Mark reaches streamers whether they are watching ad-supported or subscription-only content.
Marketers are constantly looking for new ways to engage customers. It’s still TBD just how creative Roku can get with trying to weave sponsorships directly into programming. However, when you consider much of this effort can be trialed in-house on The Roku Channel, there appears to be much more upside than down in seeing where this project leads.
Next was a partnership with NBCUniversal creating an exclusive Olympic experience for Roku users. Starting July 20, Roku placed a dedicated interface on a portion of its home screen to help viewers access what NBCUniversal estimates at 7,000 hours of event coverage and Olympic-related programming. The interface will remain through the end of the Olympics on August 8. Depending on how well this partnership goes, I wouldn’t be at all surprised if Roku somehow finds a way to repeat this service for a host of major sporting and/or cultural events. With 53.6M accounts and counting, I’d have to think Roku’s home screen is a valuable gateway to potential viewers.
Finally, and probably most notably, July saw even more evidence of ad spending leaving linear TV for streaming options like Roku. According to Adweek, Roku wrapped up its recent upfront advertising sales with strong results. The company completed this year’s contracts a full quarter earlier than usual while doubling the total commitment from 2020. The retention rate on existing advertisers was 95%+, which shows those already on Roku’s platform aren’t going anywhere. More importantly, 42% of the total haul was net-new contracts which supports the idea more ad money is finding Roku’s platform as it scales. Said Alison Levin, VP of Ad Revenue and Marketing Solutions:
We’ve been participating in the upfronts for many years, and we really felt strongly that this year was the year that upfront is going to transform.
Based on recent earnings releases from ad-heavy companies like Twitter, Snap, Google and Facebook, that transformation does indeed seem to be occurring. If I was a betting man, I’d guess we’ll learn Roku is riding the same wave when it reports August 4.
SNOW – This was a relatively quiet month as far as company news. The lone company release was Snowflake announcing technical support for the Unified ID 2.0 paradigm. Unified ID 2.0 is a customer tracking system allowing advertising and publishing partners to anonymously share first-party data. The significance here is Snowflake has identified the media vertical as one of its heaviest users of data sharing services. Supporting this ID is yet another way to make it as easy as possible for customers to share data on its platform. That can only benefit the overall business.
Outside of company news, I’d strongly recommend anyone either considering or owning SNOW take the time to read this article (with another shout out to muji@hhhypergrowth). It not only breaks down the services Snowflake offers but provides a ton of insight into just how many different areas its business can expand. CEO Frank Slootman has stated the possibilities for data are limited only by the imagination of users (and budgets, of course). Credit where credit is due, Snowflake continues to position itself to meet as many of those possibilities as it can.
TWLO – It was a fairly busy month for Twilio. It started with the formal completion of May’s Zipwhip buy. The technology acquired will let Twilio “deliver more secure, high-quality toll-free [text] traffic at scale.” At a cost of $850M split equally between cash and stock, Zipwhip is expected to quickly be accretive to revenue and gross margin.
In mid-July TWLO released the beta version of Twilio Live, “a cloud-based platform that allows businesses to quickly and seamlessly embed live, interactive audio and video streaming solutions into their applications.” CEO Jeff Lawson has continually touted the company’s mission of delivering any message via any medium at any time. Twilio Live should be yet another step in that direction.
Later Twilio achieved full compliance with the STIR/SHAKEN protocols to combat illegal robocalls. STIR/SHAKEN is an industry effort to ensure phone calls are wanted and have a legitimate business purpose rather than being automated spam. In many respects this effort is more about ethics or integrity than revenue or profits, but Twilio deserves credit for its unwavering support for these protocols. As someone who happens to both own a phone and dislike robocalls, I’ve always appreciated this effort.
Twilio ended the month with its July 29 earnings report. The headline numbers were a pleasant surprise with $669M in revenue (+67% YoY) and $4.2M in operating income after guiding for a $22M loss. Both figures were better than I expected. 55% organic growth excluding the Segment acquisition was impressive as well. However, some other metrics disappointed. First, 53.9% gross margin was the lowest in 14 quarters. Next, 5,000 new customers was the smallest number in 10 quarters and lowest sequential growth ever at just 2.1%. Finally, management once again calls for upcoming operating losses, this time to the tune of $25M. Frankly, I don’t find any of those trends appealing.
After reviewing the release and call, I’m feeling some TWLO déjà vu. There was a stretch a couple years ago where Twilio took a pause on its upward march while the market waited for it to fully digest the SendGrid acquisition and gain traction with its new Flex product. I’m starting to get an eerily similar vibe from the Segment acquisition and its new Journeys customer-engagement platform. I have little doubt Twilio will be a successful long-term investment. The question, of course, is whether Twilio is one of my best ideas right now.
I’ve written before on thinking about companies in terms of their S-curve:
Given the enormous market for communications, Twilio arguably has the largest S-curve of any of our holdings. At the same time, its present gross margin and profitability profile likely give its curve our most gradual and meandering slope. The choice becomes whether I want to pursue Twilio’s perceived higher top-end market size or others’ perceived faster slopes. After thinking it through, I found I preferred the faster slopes. Therefore, I’ve exited TWLO and spread the proceeds pretty much equally among our remaining names other than NET.
UPST – In the first follow up to last month's alliance with the National Association of Federal Credit Unions (NAFCU), Upstart announced Telhio Credit Union as an official lending partner. According to the release, “Telhio offers 10 branching offices throughout central and southwestern Ohio and nearly 4,000 shared branching locations nationwide.” Taking a quick look at Telhio's profile, it had 70,000+ members and ~$950M in assets on its balance sheet at the end of 2020. This seems like a pretty attractive first partner as UPST looks to gain traction with this program.
Upstart also added another traditional banking partner in Associated Bank. Through this deal Associated Bank now offers personal loans using UPST’s model directly through its own website. With $34B in total assets, 220+ branches and 1.3M customer accounts in eight states, this immediately becomes one of Upstart’s most significant partners. Associated Banc-Corp is listed on the NYSE under the symbol ASB and is currently “one of the top 50 publicly traded U.S. bank holding companies.” I’d view this as a big win and even further validation of Upstart’s lending model.
Management has been very open about expanding its lending network in 2021 and deserves a ton of credit for the steady flow of partners added these last few months. We’ll find out just how much all these new partners are contributing to Upstart’s business when it reports August 10. I’m personally expecting another very good to excellent quarter.
ZS – A very unassuming month for ZScaler. I guess that’s what happens when the cybersecurity world is scrambling to finalize government sales certifications while all yours are already buttoned up. Hopefully, ZS used all that extra time to close a few more deals. We don’t have an earnings release date yet, but I’d estimate sometime during the last week of August.
My current watch list…
…is led by TWLO, FVRR (Fiverr), and ZoomInfo (ZI). Twilio currently sits at the top, but that could change when FVRR and ZI report this week. With TWLO having just exited our portfolio, it would likely take a substantial falter by one of our current holdings for any of these three to get more than passing consideration for an actual spot.
And there you have it.
Another positive month. While I know many regained their February peaks during June or early July, we took until July 24 to reclaim our all-time high. We squeaked out two more this week with a current high of +21.4% YTD on July 28. Our portfolio also ends the month ahead of the S&P on the year for the first time since February. I have to admit it was a bit of a slog from the doldrums of March through May. However, it’s always reaffirming to see that owning good companies and letting them do their thing still tends to work itself out.
A recent conversation really solidified the “good company” concept for me. I don’t follow a ton of people on Twitter but do hang around a bit. On July 19 when the market saw one of its largest daily declines in several months, my feed turned into a flood of handwringing over whether this was a good spot to start or add to a position in random company XYZ. That prompted me to make the following observation:
That led to the following exchange with Harley Carroll (who is a smart, experienced follow by the way):
I’d honestly never put it that succinctly before but would like to thank Harley for framing my outlook exactly right. I find myself very comfortable with my current “concentrated collection of companies” (which is now even more concentrated with the subtraction of Twilio!). But alas, August will bring yet another round of earnings reports to reassess whether our current holdings remain the best place for our money. So, buckle up, Buttercup. Here we go again...
Thanks for reading, and I hope everyone has a great August.