July 2021 Portfolio Analysis

Welcome to my eighth publicly written portfolio update (and 2nd on ExponentialDave.com)! My portfolio is up 299% as of 7/30/2021 from when I started tracking my results in January of 2020. This means that, $100 invested in the ExponentialDave portfolio on January 1, 2020 would now be worth $399, almost a quadruple. Meanwhile my benchmark, WCLD, is “only” up 120% since January of 2020, and the S&P 500 is only up 36%. For the year 2021 through 7/30/2021, my portfolio is up 23%, meanwhile WCLD is up 9%, and the S&P 500 is up 17%.

Monthly YTD performance at the end of each month
Jan 2021: 6.5%
Feb 2021: 4.2%
Mar 2021: -9.8%
Apr 2021: -0.9%
May 2021: 3.0%
June 2021: 20%
July 2021: 23%

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Current Allocation vs Allocation as of Last Portfolio Update on 6/17/2021. * indicates position includes options. For more details, the last portfolio update link is here: https://exponentialdave.com/2021/06/17/june-2021-portfolio-analysis/

SymbolNowLast Update

Honorable mention goes to GAN, which I bought after my June monthly report and sold before my July monthly report. I provide details later in this report on why I sold it as well as why I sold Affirm. I also have a few comments at the end of this report on my watch list company, Zoom Info.

YoY revenue growth rates of my companies:

YTD performance of the stocks through 7/30/2021 (regardless of when I bought them)

There are some interesting observations going on regarding growth rates versus stock performance. After Upstart, my best performing stock this year has been NET, which is up 56% YTD. This is despite its below average revenue growth. Meanwhile, two of the three highest performing revenue growers (SNOW and NARI), are among my worst performing stocks. Regarding Snowflake, this is because 7 months time is still rather short term, which means valuation has been able to play a big part in determining its stock price direction. Over the longer term, my expectation is that strong revenue growth will be the dominant factor on Snowflake’s stock price, either causing price appreciation or multiple compression. Of course we’d rather have price appreciation, but multiple compression would just delay eventual price appreciation, assuming growth rates stay in the same ball park. 

Regarding Inari, perhaps its lacking performance is because the market is expecting a steep drop off in revenues soon. If this proves false, there could be substantial upside in Inari.  It is a small position for me, so I am not overly concerned about it, or I may sell Inari to add more Upstart shares ahead of another possible blockbuster earnings report. 

Reducing Option Exposure

For a few reasons, I have reduced my exposure to options from 14.4% in my June portfolio analysis to a current exposure level of 7.6%. A big part of this drop was the sale of my January 2021 $60 call options on Crowdstrike. The position was 5.6%, and I used the proceeds to buy shares of CRWD stock. This does not reflect a change in my confidence of CRWD, but rather it reflects the fact that the option has been performing quite similarly to the stock for a while now (this is normal for deep in the money calls), and there is not much life left in the option. If I hold until January, then I will basically have to take whatever price it is at that time. While I suspect CRWD will appreciate between now and then (although guessing short term performance is a fraught endeavor), I will achieve quite similar performance through the underlying equity. For more aggressive performance, I could use the proceeds to buy more CRWD $360 call options, but I am not interested in that kind of aggression at current market levels.

Additionally, I sold other options simply because I was playing the growth stock rotation, and the play is over. Growth stocks are back towards all time highs. I told this to someone in my inner circle, and she asked me, “does this mean I should sell or stop buying growth stocks?” My answer was a hard no. They are “growth” stocks for a reason. Just because they are at all time highs does not mean they won’t keep going higher. But, because the rotation is over, it does mean that in the short term some upside has been removed.

Should another rotation happen, which it always can happen at any given time, you would see me buy back a lot of the same options I sold.

Regarding the options I decided to keep, in general I kept ones which I believe have the biggest potential for short and long term upside. This in particular includes options on Upstart, which I think may have yet another quarter where it blows the doors off. I also think Lightspeed is likely to see a large acceleration due to the resurgence in the hospitality industry. Datadog will see a boost in top line numbers, because it provided strong guidance for Q2 and is “lapping” Q2 of 2020 where it stumbled somewhat. FVRR has big promise as well, with its high top line growth, incredible margins, relatively low market cap of $9b, and its coinciding low price to sales multiple.

Shopify posted a good quarter on the whole, but uninformed Shopify commentators were probably upset about the headline growth numbers going from 110% YoY last quarter to 57% YoY this quarter. The company was pretty obviously headed for a return to normal this quarter, since its last 3 reported quarters were considered “normal” or “strong side of normal” rather than “gangbusters”. Q2 of 2020 was its only huge “covid quarter” (which was in every sense of the word a gangbusters quarter), which is now no longer within the past year’s results.

Non-GAAP net income was a bright spot, rising 12% sequentially and 121% YoY to $284.6mm. Although I prefer investing in companies with faster growth and lower profits, Shopify is simply past that part of its business life cycle where it can spend more money to earn higher revenues. I’m ok with this of course, so long as revenue growth stays healthy. Also worth mentioning, with quarterly profits growing like this, it seems highly likely that the next twelve months of non-GAAP net income will be over a billion dollars. This should mean a smaller need in the future to raise capital by diluting shares.

Subscription solutions growth was slow, coming in at 4% QoQ growth. On a YoY basis, it still looks quite healthy though, coming in at 71% YoY. The last 3 quarters, starting at Q3 2020, came in at 25% QoQ, 14% QoQ in Q4 2020, and 15% QoQ in Q1 2021. So 4% is clearly quite low for Shopify, and based on 2018 and 2019 subscription solutions growth numbers, I would expect this number to normalize a bit in coming quarters to maybe 6% or 7%.

Although subscription solutions growth is important for Shopify, the real exponential growth comes from merchant solutions revenue. A few years ago, merchant solutions growth accounted for about half of Shopify’s revenues. Now it accounts for 70%. It most recently grew at 18% QoQ!

GMV growth came in at 41% YoY. There has been some commentary that this might be what growth ‘really’ looks like once covid related growth goes away. I don’t think this tells the whole picture though. Quick reminder that GMV is gross merchandise volume, or basically the sum of all things sold on Shopify. The thing is, with each passing quarter, Shopify is becoming more than just a place where people sell stuff. It is also lending money through Shopify Capital, it has 7000 apps in its developer ecosystem (and developers who make over a million dollars on these apps pay Shopify 15% of their revenues), it does payment processing through Shop Pay (which still only has a 48% penetration rate of GMV), it has a fulfillment network, etc. My point is that there is a lot of optionality here beyond just selling stuff, so leaning too heavily on GMV would be a mistake.

Other important metrics which demonstrate the health of Shopify’s business include operating leverage dipping down to 35% (down from 37% last quarter, 39% last year, and 53% in 2019!) as well as non-GAAP gross margin coming in at 56%. 56% is very much in line with what this number is historically. This is in stark comparison to its smaller competitor, Lightspeed, which has seen margins dropping nearly every quarter.

QoQ Revenue Growth (most recent last): -7%, 52%, 7%, 27%, 1%, 13%
YoY Revenue Growth: 47%, 98%, 97%, 93%, 110%, 57%

Twilio posted revenues on the strong side of normal. QoQ organic growth came in at 55% YoY or 14% QoQ. If you look only at organic quarter over quarter revenue growth numbers, this quarter was Twilio’s best since Q2 of 2019.

DBNER, a very important metric both for TWLO as well as pretty much all stocks I own, came in at a healthy 135%.

The weak point from the report was sequential customer adds, coming in at 2% QoQ. Making matters somewhat worse, that 2% includes customer adds from Twilio’s acquisition of Segment. I think that, given Twilio’s over all success in adding customers, this is something minor worth watching in the future but not worth judging Twilio incredibly harshly for in the present.

Non-GAAP gross margins came in slightly lower than normal at 54%. In the last 5 quarters starting at Q2 2020, margins have been: 56%, 55%, 56%, 55%, 54%. I consider this sort of drop to be non-problematic, so long as it doesn’t happen repeatedly every quarter.

Guidance is weak, which is very normal for Twilio. They are guiding for 1.7% sequential growth, which is pretty much what they’ve guided for the past 6 quarters. Each time they have of course had large revenue beats.

It’s worth mentioning that, on a GAAP basis, the company is increasingly unprofitable, with losses that grew from about $100mm for Q2 2020 to $228mm in Q2 of 2021. The thing is, most of that loss comes from stock based compensation, which should not be viewed as a key element of Twilio’s business. The company does not provide non GAAP net income/loss, but it does provide non GAAP income from operations, which came in at $4mm and non-GAAP gross profit, which came in at $360mm.

QoQ Organic Rev Growth (most recent last): 10%, 10%, 12%, 12%, 9%, 14%
YoY Organic Rev Growth: 57%, 46%, 52%, 52%, 49%, 55%


I will have more to say about Lightspeed in my next update after Lightspeed’s earnings come out later this week, but it’s worth mentioning that Shopify’s earnings report provided some possible insights into what we can expect from Lightspeed.  In particular these quotes:

“Retail point of sale GMV is nearly back to pre-COVID levels as a percentage of overall GMV”

“More locations adopted point of sale Pro in our second quarter for its modern omnichannel features like buy online, pickup in store, which was adopted by 63% of brick and mortar merchants in English speaking geographies at the end of June. This is up from just 2% in February last year.”

^^This is precisely the stuff that Shopify and Lightpseed compete on head to head.  Since Shopify is doing well in this regard, I also expect that Lightspeed is doing well. If Lightspeed is not doing well, we will need to read particularly carefully to figure out why and act accordingly. 

Selling Affirm
Plain and simple, they have an opaque agreement with Shopify that they squirrel away into sales and marketing expenses. You would expect Shopify to pay Affirm for each BNPL transaction Affirm facilitates. But actually, Affirm has agreed to pay Shopify for each transaction. We don’t know how much though. Because of the opaqueness, we can’t really know for sure, but it clearly sounds like Shopify is getting a great deal at Affirm’s expense.

When I heard that Affirm had an exclusive agreement with Shopify, I jumped at the chance to buy the shares. I assumed it would be a huge catalyst, but I didn’t know the details of the deal and just how bad it is for Affirm. Knowing what I know now, I don’t think Affirm is worth holding at this point.

Selling GAN
I bought it for a couple reasons, namely:
–A substantial part of the business is SAAS based (about half), yet the stock is not valued like a SAAS company, with TTM P/S hovering around 9
–Made a solid acquisition of CoolBet, which is now accounting for about half their revenues (this is what I consider the non-SAAS part of the business). They call it their B2C segment. As per Q1 2021, CoolBet’s revenues grew 70% YoY.

–I played a lot of Texas Hold’em in my day and therefore easily take an interest in businesses in the gambling industry (yes, I do believe it’s important to be truly interested in the companies you invest in)

Why I sold GAN:
–Weak annual guidance AND a history of missing annual guidance
–Possible reliance on more “big bang” events like adding new states (such as Michigan earlier this year) for revenues to keep growing at high rates. Furthermore, GAN would then have to win clients in said new states.
–They brag about how they have the “burstable bandwidth” regarding engineering talent to bring new clients online quickly and stay compliant with different states’ laws. Although there is probably truth in that, this is quite apparently implying they are creating customized software implementations for each client. This is time consuming, expensive, and doesn’t scale well. It’s the opposite of what a company like Crowdstrike does, which creates new modules that any client can just “flip on” like a switch.
–In their most recent report, there’s no mention of DBNER or anything of a similar nature. You could look at the growth of gross operator revenues, but that doesn’t make the distinction between cohorts necessary to compute if last year’s clients are on average spending more this year or not.

So at a high level, we can’t be that confident they will even hit their weak yearly guidance, half their business is non-SAAS, they might become dependent on the chance that progressively bigger states will legalize online gambling (and that potential clients within said states will choose GAN), their products may become too customized to scale nicely, and we don’t know if existing clients spend progressively more and more each year.

Watch List: Doximity, Zoom Info

A few quick notes about my watch list company, Zoom Info.  Probably the biggest reason I have stayed out thus far is because the revenue growth rate is rather average for companies in my portfolio, but what is considerably below average is the DBNER, which they report as being 108%.  This makes them extra susceptible to the law of large numbers – they have to work a lot harder than say, Twilio, to acquire new customers.  Otherwise revenue growth will drop off.  Also, some people are getting excited about what they see as revenue growth acceleration from 50% YoY growth in Q1 2021 to the current rate, 57% YoY growth in Q2 2021.  A minor problem with that is that it was inorganic growth.  Organic revenue growth in Q2 2021 was 54%, not 57%.  This is still technically an acceleration, albeit a smaller one, and it’s a little less than what growth rates were in Q4 2020.  Additionally, the presence of acquisitions can also make next quarter’s guidance appear stronger than it really is.  Although I am highlighting what I see as negatives here, the company for sure has a lot going for it, so it is definitely something I am considering adding to my portfolio. 

As always, thanks for reading this far!


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