Strictly Business: Mid-May Update

News and notes from the last two weeks.

Phew. That’s a much better stretch of earnings reports…

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AEHR 0.00%↑ – Aehr Test Systems joins our portfolio with a small starter position. AEHR is a small company producing burn and test systems for semiconductors. Its main markets are automotive, mobile, silicon photonics (optical sensors), memory/logic chips, and silicon carbide semiconductors. Aehr runs a razor-and-blades business model selling initial testing units with follow up purchases of supply kits to run the tests. The technical appeal of its system is twofold:

1. its units burn multiple wafers at once rather than the traditional one at a time and

2. its test is sensitive enough to meet the failure requirements of electric vehicle manufacturers and other chip-heavy users.

While revenues are relatively tiny at present (just $17M last quarter), AEHR is already solidly profitable on both a GAAP ($3.8M, 22% margin) and non-GAAP ($4.1M, 24%) basis. Its main risk is customer concentration from its largest client (believed to be Onsemi). Part of AEHR’s upside lies in two new clients currently testing its system to ensure failure rates are acceptable. If these tests are successful, management believes each of these customers could scale to a similar size as Onsemi. That would produce a significant growth spike for what is already an efficient, profitable company.

With the rise in electronic vehicle chip production, I have seen speculation as to whether Aehr might eventually sell systems to Tesla. I don’t personally consider that part of the thesis since Tesla does everything in-house. However, there’s nothing in theory stopping Aehr from selling systems to suppliers for every automaker not named Tesla. That idea combined with Aehr’s other markets looks like plenty enough TAM for me to start a small position and see where it goes.

(Full disclosure, I tried to start an AEHR position in April by selling $30 puts but didn’t get the shares. In addition to the 2.2% purchased since at ~$26.50, I have additional $25 and $30 puts expiring Friday. Depending on Friday’s close, this position could jump to 4%-5% with the new shares coming at a cost basis somewhere between $21.75-$22.50. We’ll see, but I’d gladly take that outcome.)

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BILL 0.00%↑ – Bill delivered in a big way in its May 4 report. As stated at the link, I liked the quarter a lot. We know Bill’s small-and-medium-sized customers have been severely tested in this environment. Against that backdrop, I can’t help but feel encouraged by the resilience shown in this report. I like the groundwork Bill is laying as we continue to move through this cycle.

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CRWD 0.00%↑ – After an April filled by an investor briefing and multiple product announcements, CrowdStrike’s May is off to a quiet start. Our next formal update is most likely when CRWD reports after market close May 31.

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DDOG 0.00%↑ – Mr. Market breathed a huge sigh of relief after Datadog's May 4 report. Being honest, so did I. While the market clearly priced in a worse quarter, I found the report about what I expected. If I’m going to risk a portion of our portfolio on a firm fighting macro and optimization headwinds, I want to at least see signs of relative strength within that bucket. I know that’s not an exciting bar, but that’s the one DDOG needed to clear. I’m relieved it did.

Datadog followed earnings with the release of a ChatGPT integration to help organizations track AI usage, costs and performance. While this integration isn’t about using AI as much as monitoring it, this feature seems right up DDOG’s alley as customers inevitably increase the number of applications which will need to be observed and optimized using this new technology.

Lastly, Datadog announced it will be presenting at three upcoming investor conferences on May 17, May 22, and June 7. All of them will be webcast live and can be accessed through DDOG’s investor relations site (details in the release).

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ENPH 0.00%↑ – Enphase continues its steady cadence of product and deployment news. First it launched home energy systems using its microinverters and batteries in Australia. Next, ENPH began microinverter sales in Poland, the firm’s latest European market. Lastly, it announced expanded deployments in Mexico.

I know the stock price has languished recently due to concerns about softness in the US, but Enphase’s international business seems to be on a tear. Since international is likely to do most of ENPH’s heavy lifting this year, let’s hope that trend continues.

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NET 0.00%↑ – As I wrote last month, I wasn’t a fan of Cloudflare's most recent report. However, I still have the tiny position I didn’t sell immediately after seeing the report. I’ll figure out exactly what I want to do with it as this week’s Developer Week unfolds. NET kicked things off by extending its Zero Trust security service to cover generative AI. Good on Cloudflare for hitting two buzzwords in one release. Let’s see what the rest of the week brings.

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TMDX 0.00%↑ – TransMedics posted about as good a quarter as could be expected May 1. The best thing a smaller, faster-growing company can do is maintain hypergrowth while steadily improving operating leverage and the bottom line. In that respect, TMDX nailed it. The more I listen to CEO Waleed Hassanein, the more I appreciate his attention to detail and drive to execute. Yes, TransMedics must juggle multiple supply and logistics variables to pull this off. The good news is management has shown it is clearly up to the task so far.

Shortly after earnings TMDX announced a $300M convertible note offering which eventually provided north of $400M. These funds will most likely be used to shore up TransMedics transportation network including the possibility of acquiring an existing charter flight company. The market initially disliked the announcement but came around once the final terms were announced. A 1.5% interest rate is pretty darned good right now with the shares behind it given an initial conversion price of $94 and cap of $141.88 (vs that day’s $70.94 close). If nothing else, institutions are willing to put their money where their mouths as far as TMDX’s upside. That’s fine by me.

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TTD 0.00%↑ – I’d say The Trade Desk made it 4-for-4 on our May earnings reports so far. Even as 2023 consistently forces us to reassess what a “good” quarter looks like, The Trade Desk keeps delivering good quarters. My main takeaway is TTD appears to be coiling every spring it has at its disposal. That only bodes well when (not if) the broader advertising tide turns, especially given what I’m sure is going to be enormous political spend in late 2024. I’m comfortable continuing to hold our medium-sized position.

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ZS 0.00%↑ – Zscaler hasn’t officially reported yet, but nonetheless gave itself a good quarter bump on May 8. ZS pre-announced that day raising its Q3 guide from $398M to $419M. Management felt comfortable enough with the outlook to raise its full year revenue and billings guides as well. Since I was carrying $418M for this quarter, you’ll hear no complaints from me. Here’s hoping management left a million or two in the till to get us to $420M+ when the final number is released.

Zscaler followed with the release of enhancements to its Digital Experience monitoring and troubleshooting solution. The details read more like expanded features than anything new, but kudos to management for at least putting the obligatory “AI-Powered” in the headline to show it is keeping up with the times.

We’ll get a clearer picture in Zscaler’s formal report June 1. As usual, I’ll update these new numbers and send some pre-earnings thoughts a few days before.

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May 15 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

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As usual, thanks for reading and I hope everyone’s May is off to a great start.