August 2021 Portfolio Analysis

Welcome to my ninth publicly written portfolio update (and 3rd on ExponentialDave.com). My portfolio is up 335% as of writing on 8/22/2021 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 $435, which is more than a quadruple. Meanwhile my benchmark, WCLD, an amalgamation of cloud stocks, is “only” up 118% since January of 2020, and the S&P 500 is only up 39%. For the year 2021 through 8/22/2021, my portfolio is up 34%, meanwhile WCLD is up 9%, and the S&P 500 is up 18%.

Said differently, cloud stocks are under performing the S&P 500 by 9%. I found this surprising, but hey, on the bright side, I am beating The S&P 500 by 16% just this year. Intelligent stock picking for the win! But it’s also worth saying, it’s not really fair to say cloud stocks are under performing the S&P 500 this year, even if it is technically true. This is because, just one year prior, WCLD absolutely demolished the S&P 500, when WCLD grew 105% in 2020, meanwhile the S&P 500 grew 16% in 2020. And the ExponentialDave portfolio rose 225% in 2020.

Anyway, the portfolio hit a new all time high last week after Upstart reported earnings, bringing 2021 YTD returns to 39% and cumulative returns to 351%. The portfolio then drifted downward somewhat towards the end of the week, with particular volatility in Upstart derivatives.

If you have any questions or comments, feel free to leave a comment at the bottom of this post. And if you haven’t subscribed yet but would like to, please go to my home page and enter in your email into the “Subscribe” box.

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%
Aug 2021 (as of writing on 8/22/2021): 34%

Cumulative returns since 1/1/2020: 335%

Approximately 10% of the 34.1% gains this year have been derived from options trading. That is to say, if, instead of buying options I had instead held cash, my 2021 returns would be approximately 24% YTD.

Current Allocation vs Allocation as of Previous Portfolio Update. * indicates position includes options.

Confidence levels:
Solid, firing on all cylinders: CRWD, DDOG, SNOW, NET, DOCU, ZS, LSPD
Amazing results, higher business risk (negligible subscription revenues): UPST
Showing Potential Weakness: ROKU, SHOP

Sells:

I made a post about selling FVRR. Basically the narrative changed. I still think FVRR is a good company probably poised for long term success (over 5 years), but in the medium term (one-ish year), their outlook has changed. There is some probability that management continues to screw up, or that growth doesn’t re-accelerate, or that there is something wrong with their business that is just now starting to show up in quarterly results. Again, most likely I would bet the company is fine. But my starting line up doesn’t have any of the problems Fiverr has, so I sold. I can always buy back in if things start to look solid again.

I mentioned in my last report that I may sell what little Inari I had left to speculate on a big quarter from Upstart. Well, luckily that’s exactly what I did! But I didn’t stop there. I also sold Twilio and added some of that into Upstart as well (before their quarterly report). Why did I sell Twilio, even though the narrative didn’t change? I simply thought Upstart offered significant short term opportunity, and I had to get the cash from somewhere.

YoY revenue growth rates of my companies:

OPTIONS ANALYSIS

The diversity of my options exposure has narrowed substantially since my last update. I still own (and have added to) both Upstart and Snowflake call options. I sold all DDOG, LSPD, and FVRR call options. This is largely due to the growth stock rotation being long over, and the explosively good earnings reports of DDOG and LSPD gave me great exit points. I still remain very bullish on DDOG and LSPD. FVRR, on the other hand, I discussed earlier in this report.

I wrote in my July portfolio analysis that I planned on keeping options which I believe had the biggest opportunity for upside, including Upstart. Luckily, I put my money where my mouth is! Not only did I buy more Upstart shares ahead of its Q2 earnings call, I also upped my options stake from 1% as of my last portfolio update to a little under 3% right before earnings came out. These options would more than double in value after Upstart released its blockbuster earnings report.

Before the Upstart earnings report, I had a group of Upstart options at the $280 strike price for January 2023 expiry and another group of call options at a $220 strike price January 2023 expiry. After earnings came and Upstart began getting close to the $220 strike price, I sold the $220 strike options and immediately rolled them into the UPST $310 January 2023 expiry. This is because I genuinely believe Upstart has a lot more room to run, both in the near term and in the long term, and the more out of the money strike price should give me a higher return as its stock price rises. The $220 strike price options I sold netted me a cool gain of 134% in 9 days (8/9/2021 – 8/18/2021).

The near term is tricky and of course fraught with lots of possible outcomes. Upstart historically is prone to big time down swings (after its incredible Q1 report, the stock nearly tripled to $164/share, only to see its stock price more than cut in half to $84/share by mid May of 2021). I wouldn’t be surprised if this happened again, but if it does, I will be more than happy to pick up even more shares or options. Rather than being concerned about the downside risk, I am more concerned about the risk that it continues rocketing higher and I don’t own enough of it. For that reason, I have decided I will most likely hold these options for longer.

Regarding my Snowflake options, I added to the position after seeing the Cleveland Report try to tell us that sales cycles are elongating. This knocked the stock price down 10%, which seems like nonsense to me. Snowflake’s business has been humming along – the one possible weakness we’ve seen thus far was that last report, they only signed up one fortune 500 customer. This is definitely something worth thinking about, but it seems silly to fixate on that when they also increased their number of million dollar customers by 35% from the prior quarter.

COMPANY SPECIFIC ANALYSIS

UPSTART
It feels like I’ve been tweeting fanatically about Upstart for at least a few months now (@xponentialdave on Twitter), and based on their latest quarterly report, that’s probably not going to stop any time soon! Revenues exploded 60% higher from last quarter. This is about as much as Docusign, Shopify, and Cloudflare (all great stocks) will grow all year.

A few other metrics that jumped out at me: loans transacted in Q2 was 286,864. This is nearly as many loans in one single quarter as they transacted in ALL of 2020, which came in at 300,379. And the company is increasingly profitable, with adjusted net income coming in at $58.5m, up from $20m in Q1.

Guidance came in at 11%, which you may note is clearly much lower than the 60% QoQ they just delivered. Worth mentioning though, for Q2 2021, they had guided revenues for 32%, but then they came in at 60%! They effectively came in with twice as much growth as they said they would. So I am expecting roughly 20% sequential growth at a minimum. Achieving 20% growth next quarter in a fiscal year where they’ve just grown 60%, 39%, and 34% sequentially in their past 3 quarters would be a massive accomplishment.

Upstart continues to be the most volatile stock I own. It’s a bucking bronco. But the volatility is certainly worth the while, as I think this stock is the most likely I own that could provide life changing returns. I had written in my July report that I thought Upstart may be due for a blockbuster Q2, and you can put me on record as saying I think Upstart is also setting themselves up for a blockbuster Q3! Of course, I have no crystal ball, but it is obvious Upstart is firing on all cylinders.

A risk worth repeating, is that although Upstart is a SAAS company, it does not have substantial revenues on a subscription basis, like most of my other stocks. I had previously said that I would be wary of holding this stock if its P/S multiple starts creeping higher than SAAS companies with significant subscription revenues. I have changed my mind on this somewhat – with revenue growing significantly faster than any other growth stock I own, I am happily willing to look past whatever its P/S ratio becomes and let UPST become a marquee position in my portfolio, even if P/S creeps up a lot higher.

Key quotes from their latest earnings report:

“…our models for digital and off-line acquisition caught up to the most recent funnel wins that drove our earlier growth and began to target applicants they would have previously ignored or misprioritized.
ExponentialDave: This partially explains some of their insane growth.

one of our bank partners decided to eliminate any minimum FICO requirement for their borrowers.
ExponentialDave: This is big news. If more banks start doing this, the full power of Upstart’s platform can be unleashed, further boosting future loan origination.

On the progress of auto loans: “Upstart powered banks have now originated more than 2,000 auto refinance loans in 40 different states. We’ve also made fast progress on our automotive retail solution today known as Prodigy Software. Since the beginning of the year, we have doubled the number of dealerships, AKA rooftops using Prodigy. And in Q2, more than $1 billion in vehicles were sold through Prodigy.

“The balance of our growth in transaction volume came from an increase in the number of rate requests we received this quarter as our marketing programs scaled in response to the conversion funnel improvements of prior quarters.
ExponentialDave: Upstart could not have scaled this much so quickly without stellar marketing capabilities. I think a lot of people have fixated on Upstart’s loan analysis capabilities, but their ability to market to good customers is possibly an overlooked big time strength Upstart has.

“loan sizes and demand for loans in terms of what’s being requested has moderated downwards in the last 18 months
ExponentialDave: This is obviously a headwind for a company that specializes in evaluating credit worthiness, which makes Upstart’s enormous success that much bigger of a feat. It’s performing like Zoom did at the height of the pandemic, except Upstart doesn’t have some once in a life time freak of nature event. It just has a better mousetrap.

ROKU
Revenue growth came in at 81% YoY – this includes platform revenue growth of 117% YoY. Despite solid top line growth, Roku is the only stock of mine whose quarterly report reduced my confidence somewhat. The concerning metric was sequential accounts growth, which came in at 2.8%. This is below the average of their last 9 quarters, which is 7.5%. Their Q1 accounts growth was only 4.7%, so not only is this quarter their second bad quarter of accounts growth in a row, it’s also a continued deceleration (Q4 saw accounts growth of 11.3% QoQ). That said, Roku’s business is highly seasonal, and covid has thrown a wrench into various comparisons. So I am leaning towards looking past this for now, especially since Roku has cemented itself as the dominant “operating system for your TV” in the United States (and hopefully other geographies soon).

ARPU growth came in at 13.4% QoQ or 46.3% YoY. This is actually a very close proxy for what many companies report as DBNER, which in Roku’s case would be 146.3%, which is exceptionally high. Among companies I own, only Snowflake’s is better. With ARPU improving like this, it’s ok I think for there to be occasional lulls in accounts growth.

Roku is guiding for 6% sequential growth for Q3 2021. With the usual guidance beat, I think it would be reasonable to see sequential growth come in around 12%, which translates to year over year growth of 59%.

Key quotes:
“Also of note, at the recent upfronts, we closed commitments with all seven major advertising agency holding companies.”

First, we will take tough year-over-year comps across our business in the second half of 2021 due to pandemic-related outperformance in the second half of 2020. Second, we will also face tough comps within the year-over-year growth rates of our active accounts and streaming hours given last year’s demand spikes.”

The mix shifts in TV ad budgets to streaming, combined with the launch of multiple new premium DTC services in the second half of 2020, resulted in an exceptional growth in our platform revenue during that period. While this will create tough year-over-year comps in the second half of 2021, we still expect robust growth.”

regarding tough year-over-year comps in active accounts and streaming hours. In 2020, pandemic-related lockdowns drove a surge in active accounts and engagement. For example, active accounts and streaming hours grew nearly 80% and 100%, respectively, from Q2 2019 to Q2 2021. The surge in streaming player in smart TV sales in 2020 contributed to this growth. In 2021, we expect the overall U.S. smart TV market to shrink on a year-over-year basis, as OEMs manage supply chain challenges.

ExponentialDave: The above 3 quotes all demonstrate tough times ahead for Roku. But with Roku’s history of conservative management and beating expectations, it’s hard to know how seriously to interpret the statements. However, when there are other companies I want to add more to, such as Datadog, who basically talk about their business like they have found eternal spring, and then I hear Roku talking to investors like a long winter is coming, it does make me want to sell Roku.

“…the industry saw television overall saw 19% decline year-over-year in viewership. Our viewing was up 19%. So well ahead of you know, the overall industry”

“…selling marketing products to our content providers, more than tripled year-over-year. So there’s a very strong segment but also we had a very, very strong traditional advertising quarter as well with strength from large to what we call our large customer segment, Fortune 500 type advertisers And there was a question earlier in the call, we’re also seeing really great strength from performance or growth, advertising as well, that category for us, which is still smaller part of our overall ad business more than tripled, or nearly tripled year-over-year”

“We’ve hit 55 million active accounts, which is a proxy for a household. But if you look at the potential market is just huge. I mean, there’s a billion households around the world that have broadband, and watch TV, all of those households are going to transition over time to streaming for all their TV.”
ExponentialDave: There are 123mm households in the U.S. So even if, hypothetically they had 55mm active accounts in the U.S. (they don’t – it’s a global number), they would not even be at the 50% mark.

“TVs are super price competitive, and how much it cost to build a TV is very important in terms of market share, because it affects the price you can sell the TV for. And, we’ve put a lot of effort into making our software platform run with less memory and smaller chips than our competitors. And so right now, for example although the entire industry is suffering from the supply chain issues and the shortage of chips and the related increases in pricing, it’s impacting us less than others, because we use less memory than all our competitors’ products, for example So, I think our vision is that most TVs are not a licensed operating system that we are the leader net, and we’ll maintain that leadership by being very focused on building the only purpose built operating system for TV. That’s what we do.”

ExponentialDave: As I contemplate selling Roku, it’s statements like the above one which make me want to hold on to the stock. It is a very purpose driven company that is the best at what it does. Their hyper focus on being the best operating system for TV has led to numerous advantages over the years such as the one described above.

DATADOG
Datadog landed an outstanding quarter, growing revenues 18% sequentially or 67% YoY. The sequential growth was the highest we’d seen for Datadog since Q4 2019! Guidance for next quarter is 6% sequential growth, or 60% YoY. 6% sequential, for guidance, is slightly above average for Datadog. Enterprise customer growth was 12% sequential, which is solid, especially considering they have seen 3 quarters in a row now of high enterprise customer growth. Non GAAP gross margins continue to be high, coming in at 76%, and non GAAP net income continues to move in the right direction to $32mm. DBNER continues to be above 130% (they never break out the exact number – just whether or not it’s over 130%), which is very crucial news for DDOG, considering its revenues are usage based.

Key quotes from the latest conference call:
“We announced the general availability of 2 new security products, Cloud Security Posture Management and Cloud Workload Security….With these offerings, the first building blocks of our Cloud Security Platform are coming together, and we can start delivering on our vision to break down silos between DevOps and security teams.”

“…beginning of our opportunity to bring observability to the CI/CD space, and we announced the beta of our CI Visibility product in late July. The problem is that developers also don’t have visibility into their CI/CD pipelines. They have a hard time figuring out if tests are failing and why and where in their CI/CD pipeline they are experiencing bottlenecks and issues.”
ExponentialDave: This is one of those fun moments where I get to chime in and say ‘I’m a software engineer, and I approve of this message’. In other words, I full on agree that there is a lack of observability in CI/CD pipelines. Somewhat frequently in my day job, I found myself annoyed when things go wrong with the pipeline and it takes 3 hours to figure out why. Some issues take even more time than that, involving entire teams of people to figure out what’s going on. Naturally, this is very expensive and not a good use of anyone’s time.

Usage trends were strong and showed broad-based growth. New logo generation was also strong and customers continued to adopt more products across the platform.

Analyst:”…infrastructure monitoring still being in its early days. From your perspective, what drives that sort of sentiment around infrastructure monitoring? It’s been your core product that was sort of the foundation of the company and you’re saying that there’s still a long runway ahead. Can you just expound upon that line of thinking a little bit?

Olivier Pomel (CEO/Founder): “I think the intersection of what we have and what’s in the cloud in the next year is still a small fraction of what there is in the market total. So there’s a lot more we can get from that. The second aspect is that the world is transforming digitally so the market, like the overall — the size of the infrastructure that will have to be monitored probably is a lot bigger than what had to be monitored 5 years ago.

Olivier’s thoughts on the key product groups: “the 3 main legs of that stool are going to be APM, logs and infrastructure monitoring.”

“…it’s almost a given that there will need to be a different way of charging for some of the — for capturing some of the value provided to customers that can’t just be attached to the straight volumes of data that are being exchanged because those volume of data are exploding exponentially while our customers’ revenues are not going to explode exponentially.
ExponentialDave: This is pretty fascinating and I suspect someday will also be a problem for Snowflake. To be a bit obvious, Datadog is a cost for Datadog customers. If the cost of Datadog rises exponentially, but Datadog customer revenues don’t grow exponentially, some companies will require a cost reduction from Datadog in order for it to make sense to keep using Datadog. Clearly we haven’t reached that point yet, but it is also apparently something on Olivier’s mind. Olivier later mentions that they intend to give customers access to various levers and pricing flexibility to help ensure customers’ bills don’t grow linearly with data volume.

Analyst: There isn’t a security vendor at this point that doesn’t have those solutions available as well. So even though the market is early, it seems like everybody is chasing this. Maybe you can help me think about what differentiation you can bring into the security space from your perspective?

Olivier: …On the differentiation, what we’d bring to those categories, we already are instrumenting all those workloads. So we are present on those machines. Our agents are running there. The logs are being collected by us already. We already connect to all those cloud configuration. So there’s nothing else to be done really by our customers to turn on security, and that’s a major, major differentiator. And we also have all the developers and all the ops people that are watching what we do all day. And they can get – they can teach the security team as well.
ExponentialDave: The analyst asks a great question here, and Olivier hits back with a solid answer. Essentially, Datadog is already parked on the right servers. Datadog could just “flip on a switch” for its customers who it’s already doing APM for, and bam now they have security.

CLOUDFLARE
Cloudflare, clearly the most consistent company I own, continues to grow at 52% YoY. This is the same as last quarter. And it is within a few percent of pretty much every quarter going back to q3 2019 (I don’t have YoY data from before then). DBNER creeped up another point to 124%, this is up from 115% in the comparable quarter last year. Cloudflare’s business model is generally not usage based, so this speaks to Cloudflare’s ability to, per the conference call, expand large customers, especially with bundled deals.

Gross margins remain a healthy 78%, paying customers ticked up 6% sequentially (about average for Cloudflare), and enterprise customer growth grew 71% YoY and 15% sequentially. This is pretty normal for Cloudflare, but without a doubt those are awesome numbers on enterprise customer growth.

Key quotes:
“19% of the Fortune 1000 are now paying customers”

“The United States federal government chose Cloudflare’s Zero Trust solutions in order to help secure federal agencies against the rising threat of cyber attacks. We partnered with Accenture Federal Services and won a contract with the Department of Homeland Security to offer our protection to all civilian executive branch agencies.”
ExponentialDave: They go on to tell us that the United States government is the biggest I.T. buyer in the world.

Second quarter operating expenses as a percentage of revenue decreased 2% sequentially and decreased 5% year-over-year to 81%

If you look at companies we admire like Salesforce and Microsoft…
ExponentialDave: Sharp contrast with Crowdstrike CEO/Founder George Kurtz who loves bashing Microsoft.

more than 50,000 developers wrote their first Workers script or code this time. And that’s not signed up for an account. That’s actually wrote code and deployed an application. We can — that continues to grow over time and the retention of those developers. They don’t tend to just write something and then go away, but we see them continuing to deliver more and more application and more and more sophisticated applications, as we watch what developers are building.

ExponentialDave: A smart company like Cloudflare knows that if you win the developers, you will win the war. Getting 50k developers to deploy apps for the first time using Workers is a solid feat for Cloudflare.

“It’s 88% of our contracted customers used four or more cloud product and 79% are five or more… And that (4 products) tends to be the magic number for us in terms of really having stickiness and really differentiating ourselves in the marketplace.

LIGHTSPEED
I wrote in my last update:

“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.

Not much to read into here – Lightspeed fired on all cylinders! Although the stock popped 15ish percent after earnings, I think it could have gone higher, if not for uncertainty regarding the spread of the delta variant. Speaking of that, I have finally come to terms with Lightspeed’s covid risk. If LSPD catches covid (metaphorically speaking – I am referring to hypothetical lockdowns the delta variant may cause in the future), we sort of know what that looks like. It sort of looks like growth slowing down to around 40ish percent and cheap acquisition targets for LSPD to swallow up, only to put Lightspeed into a full on sprint once lockdowns are lifted.

Regarding the numbers, revenues grew organically to $65.5mm, representing 82% YoY growth and 28% sequential growth. It’s very important to keep in mind when looking at any YoY comparisons that Q2 of 2020 was substantially weak for LSPD, since its revenues are largely derived from the restaurant and hospitality industries. Total revenues were $116mm. Non GAAP GM came in at 50%, down from 53%, which they finally explained as being due to transaction volumes growing substantially. Transaction revenues were $10mm in Q2 2020 and grew to $56.4mm this quarter, a 464% increase off of covid lows.

ARPU rose 43.8% higher YoY and 7% QoQ. Organic gross transaction volume (GTV) rose 90%. Locations (not organic) rose 95% YoY and 26% QoQ. Organic locations growth was 60% higher. Guidance is coming in at 7% sequential growth for Q3 2021. Due to the acquisitive nature of Lightspeed, it’s hard to say how meaningful that 7% is. But the big picture remains in tact: Lightspeed is making huge strides each quarter.

Lightspeed’s latest acquisitions:
Ecwid, expected to close by 9/30/2021
–$20m revenues in LTM and 50% YoY revenue growth
–enhances omni channel offering with easy to use tools to quickly sell online, facilitating unification of digital and physical operations

Nuorder closed july 1 – $20m revs in LTM at 30% YoY rev growth.
–accelerate the Lightspeed Supplier Network, significant concentration of apparel brands
–3k brands and 100k + active retailers such as Canada Goose, Converse, and Arc’teryx

On Lightspeed’s business strategy:
a) More customer locations
b) Expand Monetization of GTV with payment and financial solutions
c) Accelerate ARPU with introduction of new modules (Only 50% of LSPD customers use more than one lightpseed module)
d) Expand presence within verticals
e) Mergers & Acquisition

Customer location count:
–62% retail vs 38% restaurant/hospitality
–46% Europe and Rest of World vs 54% North America

–ARPU this year: 43% subscription, 49% transaction based, 8% hardware/other
–ARPU last year: 64% subscription, 28% transaction, 8% hardware and other
ARPU on software stand-alone was up 14% year-over-year
ARPU was up 44% year-over-year inclusive of the Payments revenue

–Payments penetration is ~10% of GTV as of Q1 22.
ExponentialDave: Shopify’s payments penetration is about 50%. Getting to 50% just so happens to be Lightspeed’s long term goal.

Key quotes:
“We saw more business shift back to physical in the quarter with a portion of our retail GTV, driven through physical locations growing three times faster than online.”

…the takeaway from this quarter is we – hopefully, everyone hearing us loud and clear that we think the long-term signs and signals we’re seeing right now are really strong. Near term, it remains an unpredictable environment. We’ve seen certain geographies go back into lockdowns.We’re seeing constant headlines about Delta variants and what that might be – what that might mean. And so we’ll continue to be cautious and prudent in the near term.

Watch List: SNAP

As always, thanks for reading this far! May all of our returns be exponential!

2 thoughts on “August 2021 Portfolio Analysis

  1. […] Sells: I sold Roku because I needed money to buy Monday.com. I think the narrative is intact with Roku. Monday.com is a pricier, more aggressive stock to own, which I think fits in better with my risk profile than Roku, which I suspect is a safer stock to own over the next couple of years. However, in the short term, the tone on the last Roku earnings call was as though they are gearing up for a long winter ahead, which makes me think the next couple of quarters may limit some of Roku’s short term upside. I wrote about this “long winter” commentary in my August 2021 investment report. […]

Leave a Reply to September 2021 Portfolio Analysis – EXPONENTIAL DAVE Cancel reply