Welcome to my eleventh publicly written portfolio update (and 5th on ExponentialDave.com). My portfolio is up 474% as of writing on 10/29/2021 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 $574, which is more than a quintuple (5x). Meanwhile my benchmark, WCLD, is “only” up 139% since January of 2020, and the S&P 500 is only up 42%. For the year 2021 through 10/29/2021, my portfolio is up 77%, meanwhile WCLD is up 18%, and the S&P 500 is up 24%.
Quick reminder that, 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. Furthermore, I have been tweeting (https://twitter.com/xponentialdave) some of my portfolio updates (just the positions – not much real analysis) as well as quick thoughts on stocks, investing, and portfolio management.
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: 53%
Sep 2021: 59%
Oct 2021: 77% as of writing on (10/29/2021)
2020 Performance: 225%
Cumulative Performance Since Jan 2020: 474%
Options trading results from 2021 have added 16% to my YTD results. So, without options trading, my results would be 61% as of 10/29/2021.
On feedback I’ve been getting:
Some of you have reached out to me either through commenting on my posts or private messaging to thank me for helping you have more confidence in your investments and generate larger returns. And, I know this sounds cheesy, but to be honest it warms my heart! It definitely feels great to be able to help people the way others have been able to help me over the years. This is why I blog!
On the other hand, I have also started getting some of my first hate mail lol, lately from people who bought into Upstart when it was around $400/share and are now disappointed that it has fallen somewhat. I need to remind everyone, but especially these people, at the end of the day I am just a pretty ordinary guy, with a day job as a software engineer, a family, personal obligations, etc. And I am not qualified to be giving anyone financial advice. If you read something I write and act on it, you need to do your own due diligence and completely own the decision. Stocks are volatile and go down sometimes – sometimes a lot. I’m always doing my best, but I’m wrong about things I say plenty of the time. Don’t purchase anything you’re not prepared to lose entirely. And definitely don’t get into the habit of blaming other people for your own life choices.
Current Allocation vs Allocation as of Last Portfolio Update on 9/20/2021.
Highest Conviction: UPST
Second Tier: DDOG, LSPD, CRWD, MNDY, ZS
Third Tier: NET, SHOP, SNOW, ZI, GLBE, IS
Experimental: AFRM, BILL
Highest Reward/ Highest Risk: UPST
Higher Reward, Higher Risk: LSPD, SNOW, GLBE, BILL
Higher Reward, Lower Risk: DDOG, CRWD, MNDY
Lower Reward/Lower Risk: ZS, SHOP, ZI, NET
I didn’t sell out of anything completely in the past month, with the exception of Shopify, which I discuss further down in the report. That said, CRWD , NET, and UPST got a bit of a trimming because I needed some funds to buy a bit of AFRM, BILL, and GLBE. CRWD, I had mentioned previously was a good candidate to trim due to its slowing growth. I’m really not looking to trim it further though. Upstart was trimmed simply because it ran up so much, and I don’t want the allocation to grow too much over 30% (although I am certainly considering it). NET was another good candidate for me to trim because of its sky high valuation (its PS is higher than SNOW’s as I’m writing this, even though revenue growth is half as much).
YoY revenue growth rates of my companies:
YTD Performance of Current Holdings (as of 10/27/2021) and market cap:
Of all the stocks above, only six of them were stocks that I held all year: CRWD, SHOP, SNOW, ZS, NET, and DDOG. Everything else was newly acquired at some point this year.
We have now seen cloud stocks nearly return to all time highs ahead of earning season. My best attempt to read the tea leaves would be that this means our companies are going to have to really impress in order to move the needle after earnings. And, for most of our companies, probabaly the market will yawn at even very good results, resulting in mild post earnings slumps. But this is just my guess at short term price action. Keep in mind that I mostly don’t act on this sort of forecast. The best move here tends to be to stay calm and hold through most things that may get thrown at us.
The fact that cloud software stocks are largely trading near all time highs has been enough to keep me out of my typical option play, which is just to buy LEAPS options. This is not to say I haven’t been tempted by Upstart’s latest price drop, from $400 a share to as low as $315. Upstart options have been very good for me historically, and definitely something I’m heavily considering, but again, market highs are making me extra cautious about starting to use leverage.
COMPANY SPECIFIC ANALYSIS
I don’t have a lot to say about Upstart ahead of earnings on 11/9/2021. Seasonality may play a factor. The personal loan industry tends to see stronger 1H than 2H, which may be a slight drag on revenues. Regardless, Upstart presents what I believe is the best opportunity to double over the next 12 months. That said, it also comes with a big risk of a sharp drawdown. Actions speak louder than words, so I hope my oversized concentration in Upstart speaks for itself that I think the reward is more than worth whatever risk we might be dealing with.
And I thought this video here also illustrates how far we’ve come with Upstart:
^^We have talking heads on CNBC pretending to understand it.
The key determinant of what happens after earnings will of course likely be revenues and guidance. For Q3, I’m looking for QoQ revenue growth > 18%. That said, I think if revenue growth comes in below 25% QoQ, the market may see that as a big disappointment. This is really just a guess I’m making – consensus numbers tend to be meaningless and there is really no way to know how the market will react until it’s history.
History doesn’t always repeat itself, but it often rhymes. We can’t go back in time to 2016 to buy Shopify when it was a baby, but we can buy Global-E while Global-E is still young. Global-E is an ecommerce play with a huge TAM of $736b– they specialize in the facilitation of cross border e-commerce.
This is what Global-E does at a high level:
“Here at Global-e, we have purpose built a global end-to-end ecommerce platform and service that enables merchants to transact with shoppers from anywhere in the world, by localizing both merchants and shoppers experiences, and seamlessly overcoming the many barriers of cross-border trade, making global e-commerce border agnostic”.
And at a low level, what that actually means is this:
“A merchant needs to support the local language, present attractive prices in local currency, support the local payment methods that are prevalent in that market, offer a compelling shipping and delivery experience, guarantee a full landed costs including all relevant import duties and taxes and more.”
That doesn’t sound that hard for a company to just handle for themselves, so why does anyone need Global-E? This is why:
“Now multiply these challenges by 50 or 100 markets, it becomes nearly impossible to overcome. There is no one size fits all solution, as shoppers from each market have their own different expectations with regard to the localized shopping experience.”
On revenue growth, the company is doing a superb job. In its most recent quarter, revenues grew 24% QoQ or 92% YoY. I suspect that, since the company is still rather young and small, and because of the major international ecommerce tail winds it will ride, the revenue growth endurance will be very strong. It could sustain hypergrowth for much longer than many other companies in its growth cohort. Guidance is for -2% QoQ revenue growth, which translates to 69% YoY growth.
Regarding ownership, the company is still founder led. The CEO, President, and COO each own approximately 4% of the company. This should be plenty enough to ensure their interests are aligned with shareholders.
A few quick words on the Shopify partnership. Yes, Shopify owns 5.5% of Global-E shares, and yes, Shopify does have an in house solution which competes with Global-E to some degree (although both parties say the services “complement” each other). We will see how much truth there is to that in time. So long as revenues continue to grow at hypergrowth levels, I am not too bothered by some competition here. The Shopify solution is not as comprehensive as Global-E’s, and Shopify’s solution is meant more for SMB’s.
Another weak point is the revenue mix. Currently 65% of revenues are from fulfillment. My understanding of this, is that Global-E is basically just contracting out shipping here. This is in stark contrast to where I prefer to invest. I prefer to invest in software companies. This makes this 65% of revenues not very interesting to me as an investment – the other 35% of revenues is far more appealing. It also means that the P/S ratio is actually much bigger than it appears, since we only actually care about 35% of the comapnies revenues.
Gross margin is another con, which, coming in at 36%, is far lower than most companies I own. Not to be a broken record, but again, so long as revenue growth stays in the upper two digits, this won’t matter that much in the long run. Plenty of extremely successful stocks have had long term gross margins in the 30’s. Furthermore, gross margin has been expanding.
And the last risk I will highlight, is the global supply chain issues going on now. I certainly lack subject matter expertise on the global supply chain, and I don’t pretend to really know what will happen here. We did get some strong hints from Shopify’s conference call that this has not noticeably affected revenues though.
So in short I have highlighted four risks/problems above: competition from Shopify, overpricing of shares due to a shipping revenues constituting 65% of revenues, weak gross margins, and global supply chain issues. I think that, given the massive opportunity, these risks are worth taking. But for the time being, I would be reluctant to let this position become a large part of my portfolio.
Some of the sharpest investing minds I know have taken a bearish stance on Affirm, and they have good reasons. I have flip-flopped on Affirm several times this year already. I bought in January, and then I sold. I bought back in in June, and then I sold in July. And now I have bought back in at $135 a share. For the record, I totally missed the run up from $60 a share to $135 a share due to their recent partnerships (such as Amazon) and blow out quarter.
Anyway, why did I buy back in to this business, after selling out of it twice? Affirm now has partnerships with Amazon, Shopify, Walmart, and Target. These 4 giants account for 56% of all U.S. retail ecommerce sales. Amazon alone accounts for 39%. Although it is possible that Affirm is getting a terrible deal from Amazon, I have come around to this as a short term cost which will create long term brand awareness and revenue growth.
Furthermore, I tend to buy stocks that I think will perform “business as usual”, businesses that will consistently keep doing just about what they have always done, such as Datadog, Monday.com, Cloudflare. I don’t really expect that they will accelerate revenue growth. Affirm, however, I think has a great chance now to accelerate its revenues further. Some will point out that the market is pricing this in already. And there is for sure a lot of truth to that. Historically though, the market is terrible at pricing in future revenue growth, as we see companies maintain high P/S multiples for many years.
Affirm most recently grew its revenues 13% QoQ or 71% YoY. It guides for -5% QoQ growth, which is mostly in line with what it’s guided for the past two quarters that it’s been a public company, as it guided for -3% QoQ growth for its fiscal Q4 2021 and -4% for its fiscal Q3 2021. No one ever likes to see negative guidance, but clearly this is just the way they operate, and it’s not to be taken seriously. In their limited time as a public company, they have beaten guidance by an average of 17% QoQ.
And more on revenues – another thing to note is that there is naturally big seasonality in a business built on BNPL. The biggest revenue growth occurs in Affirm’s fiscal Q2 (the period from Oct-Dec).
Affirm was founded by Max Levchin of Paypal mafia fame, who still leads the company as CEO. He has a 13% stake in Affirm, which gives him many billions of reasons to align his interest with shareholders.
Key quotes from the last earnings call (fiscal Q4 2021):
“Another is the merchant marketplace built directly into the Affirm app and website. Purchases originating on these Affirm owned and operated services amounted to nearly one-third of transactions we facilitated in the fiscal year 2021. And these transactions are particularly valuable to our merchant partners. Merchants love our marketplace because the reach can be highly targeted, and effective in driving conversion.“
“We facilitated purchases for more than 7 million consumers, nearly twice the number of consumers we served in the prior fiscal year.”
“When we reported earnings back in May, we shared with you that we had on boarded 12,500 Shopify merchants at the time. And today, that number stands at hundreds of thousands.”
“The consumer can use the Affirm Debit+ card in place of the regular debit card, it connects seamlessly to their existing bank account, and no new checking account is required. Once you swipe or tap your card, you can use the intuitive debit plus companion app to turn any eligible transaction into an Affirm pay-over-time product. All it takes is a couple of taps within day after the transaction occurs.”
ExponentialDave: They tell us later that this potential game changing new product is not included in next year’s guidance at all.
“In the fourth quarter, we accelerated year-over-year growth rate both GMV and revenue for the second consecutive quarter to 106% and 71%, respectively.”
“The equity capital used to fund our loans decreased by another 19% to $178 million, despite more than doubling GMV and nearly doubling total platform portfolio.”
“For the first time, fashion and beauty was our largest category, thanks to our focus in expanding into lower AOV(average order value) segments, while travel and ticketing continue to grow rapidly, contributing 14% of GMV, up from 9% in our fiscal third quarter of 2021.”
“active merchants, those merchants who have transacted on the platform over the prior 12-months, increased to almost 29,000 compared to just 5,700 in the prior year. Thanks in large part to our partnership with Shopify.”
“Turning to the mix of our offering, we derive 38% of GMV from our 0% APR product, down from 54% in the fourth quarter of 2020. While the GMV contribution from interest bearing products increased to 62% from 46% last year”.
“Interest income grew 111% to $104 million.”
“Revenue from gain on sales loans of $43 million, increased from $12 million in the year ago quarter, as a result of more favorable loan sale pricing and the increase in the volume of loans we sold to third parties and our 2021 non-consolidated 0% securitization transaction.”
“total transaction cost of $114 million came in better than our outlook of $135 million to $140 million in the fourth quarter. While transaction costs grew 149% year-over-year, nearly all of the increase was related to a $58 million year to year swing in the provision for credit losses”
“Delta marketing expenses, which include both personnel and our marketing activity, increased from $5 million to $54 million, or from 3% to 24% total revenue. Majority of the dollar growth was driven by consumer branding to drive awareness and adoption, while SBC contributed $6 million of year-over-year increase, and the warrants we issued to Shopify in conjunction with our commercial agreement, contributed $17 million.”
ExponentialDave: One of the reasons I sold out of Affirm was because of the perception that the Shopify deal was possibly too expensive. We see here that Shopify accounted for $17m out of $54m of marketing expenses. The $54m was 24% of total revenue, so Shopify accounted for 31% of the 24%, or roughly 7.4% of revenues. This is not cheap, clearly, but I think it is manageable. This will be a useful expense metric to track and keep an eye on in future quarters.
“General, administrative expenses increased from $31 million last year to $138 million, or from 21% to 53% of total revenue. However, excluding stock based compensation G&A was 21% of net revenue, compared to 19% in the year ago quarter.”
Before getting into this one, I want to give a big thanks to Muji, who does really superb work over on https://hhhypergrowth.com/! I highly recommend subscribing if you haven’t already done so. I had been chatting with him, and he gave me some great reasons to give Bill.com a closer look. And so I did, and I was impressed enough to build up a small starter position.
Bill.com is a SaaS company that “brings smart AP (accounts payable) and AR (accounts receivable) automation and new bill payment capabilities” to SMB’s. From their 10-K, “Customers use our platform to generate and process invoices, streamline approvals, make and receive payments, sync with their accounting system, and manage their cash”.
Some of you who started following my writing last year on Saul’s Investing Discussions may recall I used to own Bill.com and ultimately sold last summer because it had slower growth than my other holdings. At the time, after Q2 2020, it was growing at 31% annually, which was and still is too slow for my portfolio.
In hindsight, we know that SMB’s got hit particularly hard during covid, which are Bill.com’s bread and butter. So covid naturally suppressed Bill.com’s performance. Since and including Q2 2020, here is how Bill.com’s YoY revenues growth rates have stacked up:
31%, 31%, 38%, 46%, 73% (organic)
And on a quarter over quarter basis:
2%, 10%, 17%, 11%, 21% (organic!)
So it just grew at 21% organically QoQ, which is its greatest quarterly growth of all time. If we look for seasonality in the numbers, its best quarter tends to be its fiscal Q2 (which is Oct-Dec). To put it simply, the quarter it just had is typically not even its best season.
It looks clear that YoY comparisons are buoyed by deflated 2020 revenue numbers. However, it’s now had several strong quarters consecutively. Its QoQ performance puts it easily in the top half of my portfolio by revenue growth.
What’s the reason for several strong quarters in a row? I think we can identify a few things in its favor. Starting with the most obvious, the U.S. economic climate for SMB’s is much better now than it was during 2020. Secondly, a significant portion of Bill.com’s revenues comes from transaction fees , and these transaction fee revenues are absolutely exploding. On an organic basis, this is what has happened with transaction fee revenues the past 4 quarters (all numbers in millions):
19.2, 26, 29.4, 36
So this means its quarter over quarter transaction revenue growth comes out to:
35%, 13%, 23%
Unfortunately I was not able to find further break outs of transaction revenues for more than the past four quarters, so we can’t get an idea of YoY transaction revenue growth on an organic basis. But the quarter over quarter growth there is astounding! There was some related commentary on the latest earnings call regarding transactions growth:
Analyst: “on the transaction volumes in the quarter, they jumped significantly, about 1 billion transactions there. Can you help us understand why the significant increase on a quarter-over-quarter basis? Because it’s by far the largest on both a percentage basis and an absolute basis that we’ve seen in the model in several years.”
John Rettig: “We think that’s a really good sign for the health of the small business customer base where we’re serving. And we saw similar results with our TPV. So both transactions and TPV, we’re up significantly, both on a year-over-year basis and on a sequential basis. And we think that just has to do with a higher level of economic activity amongst our customer base and the fact that we’re gaining a larger share of their spend, share of wallet, if you will, and that’s showing up as strong growth in transactions and TPV.”
Like many of my other portfolio staples, Bill.com checks a lot of the traditional boxes for a great stock. It is founder led with high insider ownership, with CEO/founder Rene Lacerte owning 4.2% of shares outstanding, bringing the value of Rene’s stake to roughly $1b as of writing. Its non-gaap gross margins are high, coming in at 80%. Net losses are present but manageable, coming in at $-6mm, and DBNER is 124%, up from 121% last quarter.
A couple of possible weaknesses I notice – firstly, I see that customer growth was mildly lower than last quarter, dropping from 6% QoQ growth in fiscal Q3 2021 down to 4%(organic) in fiscal Q4 2021. Secondly, I also wonder if this higher revenue growth that we’ve seen the past few quarters is happening entirely because of the pandemic recovery. As in, companies like Shopify and Zoom experienced a massive “pull forward” of revenues, whereby revenues that would have normally taken years to acquire were “pulled forward” into 2020. The opposite of that would be a “push backward”, whereby revenues Bill.com should have gotten in 2020 got pushed back to 2021. But I am just speculating here on possible risks to its revenue growth- we will have a better idea of where things stand after Bill.com reports earnings on 11/4/2021.
Lastly, regarding guidance, here is what management had to say:
“For fiscal Q1, we expect our total revenue to be in the range of $103.2 million to $104.2 million, which assumes organic core revenue growth of approximately 60% for Bill.com on a stand-alone basis.”
ExponentialDave: So on a non-organic basis, we are looking at 32% sequential growth and 124% YoY growth.
A lot of you aren’t going to like this part because I know Shopify is a fan favorite. But I don’t write for the sake of winning a popularity contest. My first lot of shares was purchased almost exactly three years ago for $129 a share, which means that, as of writing, those initial shares have appreciated 1022%. Admittedly it’s not easy to sell stocks sometimes because we get attached to them. Unfortunately I have decided to take old yeller out back and sell Shopify. Here’s why:
Revenue growth came in at 0% QoQ (not a typo) and 46% YoY. The company has been indicating for a while that the second half of the year will not be as strong as usual. This is exactly what we got for Q3. The company reinforced in their latest earnings call that stimulus earlier in the year combined with a shift in revenues from online to physical had a lot to do with this. It was a weak Q3, perfectly in line with what they’d been warning us about (they weren’t sandbagging here), so I don’t think we can count on sandbagging to save the day for Q4. It will probably be weak as well. And just to drive home the weakness we saw in Q3 – the weakest Q3 Shopify has ever had before this was 7% QoQ growth. Furthermore, the weakness was seen in both subscription solutions and merchant solutions, rising 1% and 0% QoQ respectively.
So effectively, we got some deceleration, and we are likely to see even more deceleration. I can live with the current deceleration. It’s the propsect of more deceleration that bothers me. Additionally, they stopped providing any sort of guidance a while back, so we are basically flying blind without any idea of what numbers we should expect for Q4. Guidance is the best way to figure out the “floor” for how bad the business may do, and it is something almost every other company I own provides. Guidance gives us a baseline for what sort of revenue deceleration may be in store, and it tells us what revenue number they feel very, very confident they can beat.
In the past, I’ve said that Shopify should be given a pass at some deceleration, because its TAM is so much larger than most other companies. This still might be true, and I may regret this sell at some point. But now Shopify is literally 10x bigger than it was when I bought it by market cap. So surely it has eaten into quite a bit of its TAM. Yes, I’m sure it still has plenty to go though.
None of the reasons I’ve listed above for selling makes Shopify a bad company. In fact, I would go as far to say it’s thriving right now and has many bright years ahead of it. Some day, it very well may overtake Amazon as ruler of the e-commerce world. But it will do so without me as as a shareholder. Because it no longer fits in to my best 10 investment ideas for the next year and beyond. In a portfolio intended to have 15-20 stocks, I think there’s a place for it, but again, the goal is to be closer to 10 of my very best investment ideas.
Watch list: Nuvei, DOCS.
As always, thanks for reading this far!