November 2021 Portfolio Review

Welcome to my twelfth publicly written portfolio update (and 6th on ExponentialDave.com). My portfolio is up 374% as of writing on 11/23/2021 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 $474, which is more than a quadruple (4x). Meanwhile my benchmark, WCLD, is “only” up 121% since January of 2020, and the S&P 500 is only up 45%. For the year 2021 through 11/23/2021, my portfolio is up 46%, meanwhile WCLD is up 10%, and the S&P 500 is up 27%.

As of market open on 11/22/2021, the portfolio was up about 58%. Thanks to a very large market sell off in high growth names (being blamed on the reappointment of Jerome Powell), the portfolio sits at up 46%.

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.

I also made my first Youtube “short” video about Upstart, available here. If I get enough interest there (likes/subscribers), I’d be happy to do more of these – seems like a nice middle ground for people who find monthly reports to be a bit too verbose. But for those of you who prefer written updates, you have nothing to fear! Video updates will not be a replacement to written updates.

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%
Nov 2021: 46% (as of writing on 11/23/2021)

2020 Performance: 225%
Cumulative Performance Since Jan 2020: 374%

Options trading results from 2021 have added 11% to my YTD results. So, without options trading, my results would be 35% YTD as of 11/23/2021.

Current Allocation vs Allocation as of Last Portfolio Update on 10/29/2021:

Conviction Levels:
First Tier: DDOG, MNDY
Second Tier: SNOW, BILL, CRWD, ZS, ZI
Third Tier: NET, UPST, AMPL, AFRM

Risk/Reward Categorization
Higher Reward, Higher Risk: SNOW, BILL, AMPL, UPST, AFRM
Higher Reward, Lower Risk: DDOG, MNDY
Lower Reward/Lower Risk: CRWD, ZS, ZI, NET

SELLS:
I sold out of Lightspeed, ironSource, and Global-E completely, and I also trimmed my Upstart position heavily. Upstart will be discussed in its own section later.

Lightspeed effectively slowed down from a hypergrowth company to just a “growth” company. Organic QoQ growth of 28% in Q2 of 2021 slowed down to 8.4% QoQ in Q3. It could be that this is just lumpiness happening for whatever reason, but I don’t need to be patient and wait to find out, since the other companies in my portfolio are (mostly) still executing quarter after quarter. This emphasizes a key tenet of the investing strategy I follow. Everything is on a short leash. I don’t “wait around” for the long term investment thesis to play out. So long as Datadog, Crowdstrike, Zscaler, etc keep the sales engine consistently performing both in the short term and long term, why own anything worse than that? Based on the hope that maybe some day Lightspeed will return to its former growth stock glory? That feels like a gamble to me. I prefer more sure bets.

Furthermore, the acquisition heavy nature of Lightspeed’s business always added undue complexity (I wrote about this consistently), so Lightspeed gets a shorter leash than say, Upstart.

I also sold out of Global-E completely. In my last report, I wrote about several weaknesses Global-E is dealing with. My thinking was, so long as it’s providing growth that is hard to find elsewhere, it’s probably worth holding. The problem is, its growth decelerated to 77% from 92%, and it seems likely growth is going to continue to decelerate, making it even more unworthy of being in my portfolio. Even if it miraculously keeps growing at 77% after its next quarterly earnings report (I’d say it’s more likely it ends up around 55%-60%), I still have several companies growing faster than it without all the problems it has. In short, too many problems, not enough growth -> better places for my money.

Lastly, I sold out of ironSource as well. Growth for the quarter came in at 4% QoQ or 59% YoY. Revenues have decelerated consistently since Q4 of 2020. For the record, here they are, starting with Q4 2020 and ending with Q3 2021:
108%, 97%, 82%, 59%

Unless ironSource shows signs of acceleration any time soon, this is a pretty uninteresting company to me that seems highly likely to continue its sharp deceleration.

On the portfolio’s performance lately:
November has been a series of kicks to the groin, and frankly it may not be over yet. Both cloud stocks and the S&P 500 still sit close enough to all time highs. Some people will read that last statement and think that, like gravity, since the market is up, now it means that now the market must come down. I don’t subscribe to that belief – if I did I would sell everything and wait. Growth stocks will grow to reach new higher highs, and when they hit lows again, the lows will be higher than previous lows. However, in the short term, I do believe that there may be a heightened chance of a slow down – which is why I haven’t done much options holding lately.

Expectations Setting
To my new readers, welcome! I’m glad you’re here, and I hope I can help show you how wealth can grow exponentially. Expectation setting is important. I expect to make mistakes – big ones sometimes. There are some of you who have grown accustomed to Twitter whiz kids and market timing geniuses. These alleged geniuses claim to always sell before the big drop and buy before the meteoric rise. And they pretty much never tell people about their moves until after the fact. If you can’t tell yet, I am not one of these people.

I ate large losses this month from Upstart and Lightspeed. A number of people asked me about this, seemingly expecting me to say I sold everything before the big drop (of course I didn’t). That’s not my investment style. I’m a regular guy with no way of getting news faster than other people. My investment style involves reading newly available information, analyzing it, and then acting based on the numbers I see.

Seeing Upstart go down from $400 a share to $206 a share (as of writing) is without a doubt painful for all shareholders. The good news is that a lot of us were buying at $90 a share, $130 a share, etc, so it is still up a lot for some of us. And to those of you who joined the Upstart party on the later side and are now underwater, I would advise looking at the forest instead of the trees. For example, my portfolio is still up 46% this year. Yes, it is way less than its all time high hit earlier this month, but when my portfolio was originally up 46%, I was pretty thrilled about it. And there’s no reason I shouldn’t be happy with this now.

I put that bit about Upstart into the Expectations Setting section for a reason. I expect this to repeatedly happen again, maybe not with Upstart, but with other stocks I own. If you can’t handle these kinds of drops, I don’t think my content is going to be very helpful for you. And I mean this in the nicest way possible, I would advise you to look elsewhere for analysis. I don’t want you to be disappointed the next time I buy or hold a stock that goes down.

YoY revenue growth rates of my companies (organic numbers used for BILL and ZI):

YTD Performance of Current Holdings (as of 11/22/2021) and market cap:

Of all the stocks above, only five of them were stocks that I held all year: CRWD, SNOW, ZS, NET, and DDOG. Everything else was newly acquired at some point this year.

COMPANY SPECIFIC ANALYSIS

UPSTART
The big surprise this time was Upstart, which demonstrated for the first time in many quarters that it is actually not the perfect stock. I have said repeatedly that I expect high volatility in Upstart, and that if the quarterly report isn’t perfect, there would be hell to pay. Unfortunately this is what happened.

Just to be clear, upon reflection I view this as though I had a great poker hand with a high probability of winning, but even the best poker hands get out drawn sometimes. Just because pocket aces lost to 7-2 offsuit one time, doesn’t mean that betting the pocket aces was a mistake. If an Upstart like situation came around again, I don’t think I would do very many things all that differently.

Getting into the quarterly results, I will start with revenue growth, since that is the most important metric. Quarterly revenue growth since Q3 2020 has looked like this:

282%, 34%, 39%, 60%, 17.5%

Growth went from off the charts to “on the charts.” I have SaaS companies in my portfolio growing faster or nearly as fast as 17.5% QoQ.

Is there more deceleration in store? Based on the strong guidance they are giving us, it seems that is not the case. They guided to 16% QoQ growth for Q4 2021. In the few quarters they have been public, we have seen them beat guidance by 28% in Q2 and 7% in Q3. Assuming they beat by a few points, we would be looking at QoQ growth around 20% or so. This annualizes to 107% annual growth, which would be fantastic.

The problem is, I’m not sure how valid it is to just assume they will be able to keep growing at 20% each quarter. Clearly, there is big volatility in revenue growth with Upstart, largely because of the fact that Upstart is not SaaS. Unlike SaaS companies, every quarter Upstart effectively starts with 0 guaranteed revenue.

Why did revenue growth drop so much? We can look at the sharp slow down in loans transacted and the sharp slow down in the growth of loan transaction total. QoQ loan transaction growth has looked like this, starting with Q1 2020:

Absolute QoQ growth in loans transacted (in thousands) each quarter has been:

Based on the numbers above, I would conclude growth is all over the place. Now on to loan transaction total QoQ growth, again starting with Q3 2019:

I think the loan transaction total QoQ growth best illustrates why Q3 was so bad. We had the lowest growth ever since Q2 2020, the onset of Covid-19.

Although the numbers above show deceleration, I don’t think it’s quite time yet to sell out of Upstart completely. I am on the fence but leaning towards giving it another quarter to assess based on their annual guide, which I will assume should be extremely conservative, since they would intend to beat and raise their annual guide 3 times.

Key quotes from the latest earnings call:

As you could read on Upstart ‘s S1 filing, our AI platform had experienced 9 million repayment events, and was trained on 15 billion cells of training data as of a year ago. Today, our platform has processed 17 million repayment events and is trained on 28 billion cells of training data.

A year-ago, we had 10 bank and credit union partners on our platform. Today we have 31 partners and we’re adding them faster than ever.

A year ago, a handful of auto loans had been refinanced in a single state. Today, more than 4,000 Upstart powered auto loans, have been originated in 47 different states

And even better, I’m also pleased to tell you that 4 Upstart bank partners have now dropped their FICO requirement

In fact, we’ve now tripled the number of dealers on our platform compared to a year ago, and in Q3, we added an average of more than 1 rooftop a day.

First, we’re working toward a small dollar loan product designed to help consumers with unexpected and immediate cash needs: think a few $100 repaid in just a few months…It can significantly accelerate the pace with which we can bring the underbanked into the financial system. And it can likewise accelerate the pace of learning by Upstart’s AI models

Second, we believe there is an unmet need to provide fast, easy access to affordable installment loans to business owners across the country. This is another product in high demand from our bank and credit union partners and we hope to bring it to market during 2022 as well

The home mortgage market. It’s by far the largest consumer lending category….This is what we call the missing million, and from where we stand it’s crystal clear that a huge fraction of these million would-be homeowners are more than credit-worthy and deserve access to an affordable mortgage. This is an opportunity that we’re excited about and we’ll begin to invest in significantly throughout 2022. While this initiative has a longer time horizon on it, we felt it’s important to share our intention right now.

we believe Auto will be a meaningful contributor to our financials next year, but we don’t have specifics on what exactly that means.

What’s really driving our performance is improving over time in the underlying models, and that doesn’t happen in a smooth way. It happens in shifts and starts, and so if you look at where we focused our timing in Q3, we’ve had some good wins, but frankly, there’s a lot of effort operating focus we put into areas like fraud mitigation just because that became an interesting topic for us in Q3

AFFIRM
Affirm’s revenue growth in its most recent quarter was a disappointment. It came in at 3% QoQ, but they saved themselves with robust guidance, estimating growth of 22% QoQ for the holiday season, which does not include any growth from their somewhat nascent Amazon partnership.

First let’s look at why this most recent quarter came in on the low side. Merchant growth was superb, rising 252% QoQ to 102k. Active consumers rose 23% QoQ to 8.7 million. But the problem was GMV (gross merchandise volume), which only rose 1% QoQ. This is what weighed down revenues. In other words, the company was able to significantly expand its presence both with merchants and consumers, but because the total value of things purchased only rose a little bit, we ended up with a weak quarter.

In fact, this quarter is weaker than the comparable quarter both in 2020 and in 2019, coming in at 13% QoQ revenue growth in 2020 and 26% in 2019. The business has of course changed a lot (mostly due to the decreasing Peloton concentration), but I don’t think this makes the quarter any better.

What’s always more important is what will happen. Markets are forward looking. Guidance is strong, and I am pretty convinced that the Shopify partnership hasn’t come anywhere close to maturing (Shopify has over a million merchants on the platform, yet Affirm has only 100k merchants), and of course Amazon is still in the very earliest of innings.

While I have heard that the partnership is live now, as of writing this on 11/22/2021, I have yet to personally see it despite looking. A friend of mine has told me it is live, but it is sort of “buried” and hard to find.

I’m imagining that Amazon and especially Affirm are doing everything in their power to get this optimized and useful before Black Friday. But we are almost there, and it’s not going to be effective if it’s live but hard to find. It’s possible then, that some Affirm holders are expecting a big beat in the upcoming quarter, and this beat may not be so big without much contribution from Amazon. The company does tell us they are aiming to have it generally available before the end of the calendar year:
“Although we just announced our original relationship with Amazon at the end of August, the results we’ve seen have enabled us to expand beyond our task that began earlier this year. We are now ramping towards general availability, which we expect to achieve by the end of the calendar year.

This is why I view Affirm as a bit of a crap shoot in the short term. But eventually, perhaps more in the medium term, this Amazon partnership should be an enormous contributor to revenue growth, since Amazon alone accounts for 39% of all e-commerce in the United States.

And regarding the long term, before I go into the conference call quotes, here is one statistic from a terrific poster on Saul’s Investing Discussions whose username is “Jon Wayne” which illustrates the kind of long term tail winds Affirm is riding:
“A Bank of America report from December 2020 predicted that the BNPL market could grow 10–15x by 2025 and process between $650 billion and $1 trillion in transactions annually.”

Key quotes from the latest conference call:

We achieved our first ever billion-dollar GMV month in September

We also shipped the first version of our super app

adaptive checkout, the reinvention of our core business, is fully live in the market, has delivered an over 25% conversion lift, and has already been adopted by 44% of eligible merchants.
ExponentialDave: The 25% conversion lift is a key reason to choose Affirm over its competition.

And now, we have integrated relationships with partners representing approximately 60% of U.S. e-commerce.

“One of the key drivers of the strong Q1 performance was the ramp of our partnership with Shopify, which has enabled merchants to provide consumers with a fast, seamless pay-over-time product.”
xd: My problem with this statement is that this quarter wasn’t actually that strong, and I already outlined why I think so above.

growth in lower AOV categories has accelerated, resulting in an expected AOV decline from $661 one year ago to $402 in Q1.

In Q1, total operating expenses outside of transaction costs, grew $190 million, driven by an $87 million increase in stock-based compensation, primarily due to the IPO in January. Excluding SBC, these expenses grew 125%.

in my opinion at least, there’s going to be very different number of transactions per user for those that take on our Debit+ product, and the ones that haven’t yet. The Debit+ consumers are — we expect them, we ask them, we welcome them to use the product daily. And the idea there is to really start tracking into as often as easy or debit card

Analyst: “And just one follow-up on the Shop relationship. How much further do we have to go before we get to a full run rate by quarter or maybe some of the things that might happen to get us there? Obviously, it’s off to a great start, but trying to figure out how much more room there is to grow, just to get to a run rate. Is that a quarter or two or is that going to be a several year process?”
Max Levchin: “I’ll give a qualitative answer as is my custom and Michael may or may not is going to add a little bit more. But probably the most important thing to understand about us as a Company, we don’t build a thing and start selling it and roll it out, and that’s it. The reason Shopify partnered with us, the reason all these great enterprises look at us and say, “This is the right partner for us, ” is because we come into a relationship with a plan to build more stuff. “

It’s important half of Americans we surveyed and we do survey all time have now expressed interest in using products like ours and the other half doesn’t know what it is, which means that it’s on us to educate the market and explain what this is and how it’s fundamentally different from your credit card.”

YoY Revenue Growth: 98%, 57%, 67%, 71%, 55%
QoQ Revenue Growth: 13%, 17%, 13%, 13%, 3%

BILL.COM

“Core revenue, which represents subscription and transaction fees, was $115.6 million, growth of 164% year-over-year. Organic Bill.com core revenue growth accelerated to 78% year-over-year compared to 73% growth last quarter. In addition, we experienced very strong card revenue growth from Divvy of 187% versus last year.”

Its recent acquisition of Divvy (closed on 6/1/2021) grew its revenues at over 100% YoY in Bill.com’s fiscal Q1. Its other recent acqusition, Invoice2go (closed on 9/1/2021), has over 200k customers. Organically, Bill.com has only 127k customers, so Invoice2go should be able to provide Bill.com a terrific cross selling opportunity.

In my last monthly update, I highlighted the exponential growth Bill.com is experiencing specifically within its transaction fee revenues, which most recently accounted for 70% of Bill.com’s total revenues. This trend continues, with transaction fee revenues climbing another 21% QoQ organically, and 127% YoY organically. Here is QoQ organic transaction fee revenue growth starting with fiscal Q2 2020:

35%, 13%, 23%, 21%

Before their latest earnings call, I had seen that seasonal 35% bump during the holiday season last year and thought that perhaps there would be another strong fiscal Q2 (holiday season) ahead. But during the earnings call, they shot down that hope with this statement:

“Looking ahead, we expect lower TPV growth rates as we’re assuming the seasonal spike in TPV we experienced in Q2 last year doesn’t occur this year.”

It could be sandbagging, but I wouldn’t count on an explosive Q4 again. Uncertainty regarding the pandemic came up as well in this quote:

“There is significant uncertainty regarding the next phase of the pandemic, and many businesses are experiencing supply chain challenges. And while we haven’t seen any material impact to our business to date, we are monitoring the situation closely. For purposes of our fiscal 2022 outlook, we have assumed that there won’t be a material negative impact to our business from macroeconomic or supply chain issues faced by our customers.

I would imagine that plenty of SMB’s are going to be hit with supply chain issues. But I have no idea what sort of magnitude. Will it be enough to hurt revenue growth? I am willing to wait it out and see.

Guidance is for 60% organic growth YoY for fiscal Q2 2022 and 55% for FY 2022. With 3 quarters left to go, these numbers are for sure conservative, which should bring Bill.com organic growth in the mid 60’s most likely for the full year, which puts Bill.com in the middle of the pack of my portfolio.

Key Quotes:
“Bill.com organic subscription revenue growth was 39% year-over-year, which accelerated from the prior quarter, driven mainly by a slightly larger average customer size due to our success with attracting and growing mid-market customer relationships.

“we started focusing realizing that we had a lot of mid-market companies that were coming to us. And so we have fine-tuned the sales process, if you will, and the go-to-market process, if you will through the organic business. I think Divvy naturally was kind of already in a larger customer segment.”

“And the measure that we look at more often around our progress is just how are we growing overall transaction revenue per transaction, which was approximately $5 in the quarter, $4.97, up about 69% year-over-year, and you’ve seen pretty steady growth in that.”

YoY Revenue Growth: 31%, 38%, 46%, 73%, 78%
QoQ Revenue Growth: 10%, 17%, 11%, 21%, 13%

MONDAY.COM

I wrote about Monday.com for the first time in my September report.

Its financials largely due the talking: revenue growth was 95% YoY and 17.6% QoQ. It’s been putting up performance like this very consistently now since approximately Q1 of 2020. Enterprise customer growth came in at 30% QoQ, which is very similar to what it did last year. And the company continues to scale nicely. Non-GAAP operating margin has improved from -72% in the comparable quarter last year to -11% in Q3 2021. Plus the non-GAAP GM is stellar, coming in at 90%, an improvement from 88% in the comparable quarter last year.

Guidance for next quarter comes in at 6% QoQ growth or 76% YoY growth. This is exactly the same QoQ growth they forecasted for Q3 of this year, which they ultimately beat by 11.3% QoQ. I’m expecting something similar to happen again.

Key quotes from the latest earnings call:
“you asked, like, if we see this as a greenfield market, so the answer is like, definitely, yes.”

Analyst:“And then, secondly, separately on the enterprise wins this quarter. Can you maybe disclose to us how many seats, so to speak, have the biggest deals landed with? And then if any of the deals you sign an enterprise where wall to wall so to speak were exclusive?”

Roy Mann: “Yes, so we’re seeing thousands of seats that we are lending in and spending within our existing customer base. We are approaching seven figures transactions”
ExponentialDave: I’m gonna nitpick what was otherwise a great quarter. This quote implies that they don’t have any seven figure customers yet. By comparison, the newest company in my portfolio, Amplitude, has about half as much revenue as Monday.com but has 22 such customers spending > $1 million. They have of course two very different business models. Amplitude’s business model is usage based, whereas Monday.com’s is seat based. Seat based businesses are more prone to “law of large number” problems which can lead to stalling revenue growth.

But to be perfectly clear, as long as Monday.com’s revenue growth stays high, I am more than willing to overlook a lack of million dollar clients, especially since they are scaling up their enterprise customer cohort faster than any company I’ve ever seen.

YoY Revenue Growth: 102%, 88%, 85%, 93%, 94%
QoQ Revenue Growth: 17%, 18%, 18%, 20%, 18%

AMPLITUDE

Amplitude is a new position for me that I first read about in StockNovice’s portfolio update (which I highly recommend making a habit of reading each month). I will break down what Amplitude is in a couple ways. Firstly, they call their product a “digital optimization system”, which I admit is a bit vague. Secondly, here is how they describe their 3 products:

1) Amplitude analytics provides teams with fast, self-service insights in the customer behavior.
2) Amplitude Experiment “is an integrated end to end experimentation solution that enables teams to deliver impactful product experiences for the customers through [AB test] and control future releases.”
3) Amplitude Recommend “is a no code personalization solution that helps teams increase customer behavior, increase customer engagement by intelligently adapting digital products and campaigns to every user based on their behavior.”

In my own words, their products help clients understand what customers are doing with a product, test out different approaches to products, and recommend changes to increase customer engagement.

Amplitude is demonstrating eye catching growth early on, with revenue growth coming in at 72% YoY and 18% QoQ. Revenues have been accelerating since Q2 of 2021, ticking up from 50% YoY in Q1 2021 to 63% YoY in Q2 2021. This lines up nicely with the release of 2 new products in Q2 2021, both Experiment and Recommend were introduced then. This begs the question do they may need more new products next year to sustain their growth, but as per usual I will be evaluating this based on how their growth comes in each quarter.

Amplitude’s revenue model is usage based and dependent on the growth of data, which is in my humble opinion, effectively the best business model we as investors can invest in. From the S-1: “Our pricing model is based on both the platform functionality required by our customers as well as committed event volume. An event could be any action that a user takes in a digital product, such as ‘Create account’, ‘Add to cart’, or ‘Share photo’.”

A bit more on KPI’s, DBNER ticked up to 121% in Q3 2021 from 119% in Q2 2021. Non-GAAP GM came in at 71%, which is the same as it was last year in the comparable period. As of the end of H1, the company has 22 million dollar customers, which is quite a lot for such a small company.

Key quotes from the latest earnings call:
“First, the Amplitude behavioral graph is a proprietary user oriented database that we built from the ground up to support the real time interactive queries that power our suite of applications…Existing databases are unable or struggle to answer questions about our user journey, due to the sophistication of modern digital products and the complexity of user behaviors across devices and channels.”

“Customers can construct complex queries through a simple point and click interface to rapidly answer complex behavioral questions about their customers journey and their product experience. Users also don’t need to be technical or know SQL to answer these questions, which enables a more cross functional usage and data democratization across the teams.”

Starting today, anyone who uses snowflake can become an Amplitude customer in just a few clicks. Our bi-directional integration joins together Snowflake and Amplitude with their shared customers and breakdown data silos, rich customer data sets, and unlock real time self-service insights. This means every member of an organization can use Amplitude to run lightning fast queries of Snowflake data on the Amplitude platform.”

“As we mentioned our last call, we had some large expansion in Q2 twenty one, while with easier year over year comp, due to the impact of COVID that are contributing to our growth rate.”

“From a geographic standpoint, Q3 revenue from the U.S. increased 75% year over year to 29.6m and international revenue increased 68% to 15.9m. The U.S. was 65% and international 35% of reported revenue versus 64% and 36% in the prior year.

Regarding new products “Experiment” and “Recommend”: “This is the first, Q3 is the first full quarter that they’ve been launched products. And so, yes, still very, very early.”

Regarding the Recomend product: “One of the really interesting things about that one is that you can do smart recommendations on a per customer basis. So, hey depending on what they’ve previously done, being able to say, okay, hey, I think they’re going to be really interested in this feature or this promotion or if I send them a notification that looks like this, they’re going to get a lot of value out of that

YoY Revenue Growth: 50%, 63%, 72%
QoQ Revenue Growth: 10%, 18%, 17%

DATADOG
Datadog produced yet another strong quarter. We have seen an acceleration since Q1 of this year when revenue growth hit 51% YoY. Since then it has climbed to 67% as of last quarter and now 75% YoY. As far as revenues go, Datadog had a rather fleeting moment of covid induced weakness in Q2 of 2020, but since then it has come roaring back to its old form, but at a much larger scale. QoQ revenue growth starting in Q2 of 2020:

7%, 10%, 15%, 11%, 18%, 15%

And YoY Revenue Growth: 56%, 51%, 67%, 75%

Enterprise customer (> $100k) growth came in at 12% QoQ, which is consistent with the recent past. Similarly, overall customer growth came in at 7% QoQ, which is also comparable with business as usual. Non-GAAP GM ticked down a negligible amount to 76%, and DBNER continued to be > 130%.

Additionally, Datadog is guiding for 8% revenue growth, and they tend to beat by 8% on average. All signs point to another strong quarter from Datadog.

Key quotes from the latest earnings call:
77% of customers are using two or more products, up from 71% a year ago. Additionally, 31% of customers are now using four or more products, which is up from 20% last year.

I also wanted to mention database monitoring, which we announced for general availability in August, and which gives our customers deep visibility into the performance and execution of queries across all of their databases.

Next, we had a seven-figure upsell with a global fashion retailer based in Asia. These customers saw e-commerce sales increased dramatically during the pandemic, and they began to use Datadog after several outages resulted in missed sales. After a disappointing implementation of a competing solution, they chose Datadog APM across their global e-commerce sites and saw immediate improvement in stability.

The two main trends that we see that are underpinning the success you’ve seen in the past few quarters – as you identified earlier, the fact that the pace of cloud migration and digital transformation has resumed to where it was. That’s the first ingredient. The second ingredient is that our newer products are reaching scale and are being successful and are basically propping up our growth as we solve a larger and larger problem for our customers. So the combination of those two things really is what drives the success you’ve seen.

ExponentialDave: The above quote illustrates that Datadog is the dream come true for hypergrowth investors. Its newer products are enabling acceleration of growth to maintain – this is what we wanted to happen with Upstart and its auto loans, but it’s seemingly not happening fast enough.

…the success of our new products and decide that we’re – we mentioned on the call, our APM and log products together reached more than $500 million in ARR. So not only are they growing very fast, like they say in hypergrowth but also they contribute quite a bit to the revenue of the company.

The third factor is that on the back of that, like with all the demand environment being there and with us solving a larger and larger problem, we successfully scaled the go-to-market teams, so we can actually go after this opportunity.

about two-thirds of our growth… has come from expansion of their use of products that they had already bought. And about one-third has come from their adoption of the new products, and that’s been pretty consistent over time

ExponentialDave: This is the power of usage based products and why I see so much potential in Amplitude. Two-thirds of Datadog’s growth came from usage growth!

Overall, the – there’s one thing that you’ve correctly identified, which is data volumes are just going to explode much faster than customers’ revenues are going to go up. And so we need to be able to differentiate from a technical perspective to solve these problems in a different way of our customers or to give them more control so they can target what they are – they need to keep...A number of these things we’ve announced at Dash last week actually, were meant to help with that. So we didn’t make any pricing changes, but we are innovating from a product perspective to have new ways of solving these problems and to give more control to our customers.

CLOUDFLARE
The elephant in the room is that, despite business as usual, Cloudflare’s stock price has gone parabolic (what a great problem to have!). On 9/28/21, the stock was trading at $112/share, and as of writing this it’s currently trading at $211/share. The best idea I’ve heard for why this meteoric rise has occurred is that the so called “smart money” has decided that it believes Cloudflare will become the 4th cloud (AWS, GCP, AZURE being the other three). If true, this doesn’t sit so well with me, because it means Cloudflare is a story stock that people are buying based on the hope/dream that it becomes the 4th cloud. Naturally, why haven’t I sold then? Because we are getting incredibly consistent execution, and perhaps there is a decent chance we see revenue acceleration soon.

Cloudflare reported 13% sequential revenue growth for Q3 2021, their highest sequential growth ever since… Q3 of 2020. This was an improvement of last quarter’s 10% sequential growth. Overall customer growth came in at 5% QoQ, meanwhile enterprise customer growth clocked in at 15% QoQ. Non-GAAP GM came in at 79%, and DBNER was 124%.

Revenue guidance is for $185m, representing 7% sequential growth. They will probably beat this by a few points and maintain YoY growth around 50%.

Key quotes from the latest earnings call:
Our average contracted customer now spends over $100,000 annually with us, up from an average of $72,000 when we went public just over two years ago, evidencing our success selling to larger and larger enterprises.

We are building the network that any business can plug into and not have to worry about anything else
ExponentialDave: What a great sales line. People always talk about how complicated Cloudflare is – Matt Prince is nailing the communications here.

They appreciated our global network with locations across the Middle East and our ability to deliver services that kept their sensitive customer data local in the regions they serve. Handling data locality requirements is one of the superpowers of edge computing over traditional cloud.
ExponentialDave: Again notice the messaging here. Prince is positioning Cloudflare as a competitor to the traditional cloud providers.

we saw continued strength in both the U.S. and internationally. As a percent of revenue and increased 62% year-over-year. APAC represented 14% of revenue and increased 25% year-over-year

ExponentialDave: Below I am about to paste in a rather large quote, which I always try to avoid doing. But I think it’s really that important to understanding why Cloudflare stock has skyrocketed recently:

“But what I think that we hope is that R2 can be very disruptive in the market and not only allow us to capture more of the object store spend, but also put downward pressure on all of the different cloud providers to eliminate their egress fees. It is completely absurd that these companies are charging nothing to send data to them, but then charging what can be massive markups, 80x what the wholesale price is to take data back out. And we don’t think that’s sustainable, and we want to push that down. The reason why that’s attractive to us is we think that our long-term opportunity is really to be the fabric that connects together the various cloud providers.And in an ideal world, what we hear from customers is that they want to use some Cloudflare services, but they want to use Google services and Microsoft services and Amazon services and pick the best of what they need across all of those different providers in order to deliver a more robust application. And I think that is the inevitable way that the market will play out over time and that being that fabric that can connect those different networks together is a very powerful position for us to be in. And so R2 is both, I think, an opportunity for us to grow TAM, but it’s also an opportunity for us to accelerate what I think is the inevitable next generation of the cloud, which is allowing customers to pick the best of breed across multiple clouds.”

Analyst:“maybe one more on R2. I know it’s absolutely early days, but how would you characterize the level of sign-ups so far?”

Matthew Prince: “Off the charts.”

ZOOMINFO
ZoomInfo organically grew at 53.5% YoY and 11% sequentially. Enterprise customer growth was superb, growing at over 70% YoY. Unlevered Free Cash Flow came in at $73.3m, which is much higher than normal for a company growing revenues over 50%. Additionally, they stated in the earnings call that: “the leading indicators are pointing to meaningfully higher annual net dollar retention rates with expected improvements across customers of all sizes.”

Guidance is for $208m, representing 5% QoQ growth. With an average beat of 5%-6%, we will be looking at 56% YoY growth.

More key quotes from the latest earnings call:
“We now have information on more than 150 million business professionals and 100 million companies. Internationally, we grew our company and contact data coverage in Europe by approximately 80% this past year, and we now cover nearly all businesses with more than 100 employees in Europe. We have expanded our healthcare data asset, adding nearly half a million new contacts and enriching 750,000 others with supplemental contact information.”

“We have also innovated with new data privacy features. Customers can now exclude contact data from certain geographies and create a public presence flag to highlight data that is available in the public domain

International revenue growth accelerated to greater than 80% year over year.

YoY Revenue Growth: 50%, 57%, 61%
QoQ Revenue Growth: 9%, 14%, 14%

As always, thanks for reading this far!

Disclosure: Nothing on this page or website should be taken as advice. I am not a financial advisor.

33 thoughts on “November 2021 Portfolio Review

    • Hi @Graymatterblog, good question. So I listed those as YTD gains of the stocks that I hold. But I also mention that only five companies have been held all year long, and Amplitude is not one of them. I have not made anywhere near 22% on Amplitude. Amplitude is also a newly public company, so it is technically not possible to have held it all year long. The 22% number comes from googling “AMPL stock” and setting the graph to be “YTD”, as of writing on 11/22/2021. Is this more clear now?

    • Yep, they all start to feel similarly sooner or later hah. I do recall getting hit hard in 2018 especially towards the end of the year because of the trade war fears and interest rate fears. The portfolio recovered and did ok in 2019 – I think it was up 24% or so. The recovery for me was most of the way there by April 2019.

    • Great question Freddy. I do what I call a shallow dive followed by a deep dive. In the shallow dive, I mostly follow KPI’s to determine if it’s worth doing a deep dive. This saves a ton of time. On the deep dive, that’s when I start to look at what the product really does. That said, I do want to know at a very general level what the product is during my shallow dive. For example, if a company is selling widgets (instead of software), I want to know that before I do a deep dive. Selling widgets is generally a red flag for me (or at the very least, it’s a yellow flag).

  1. Dave,

    Came across your blog only today. I have a finite pot of funds by which I mean I can’t add new cash.

    Would it be better to allocate say about 50% of it to WCLD and the rest to certain growth stocks

    I am very new to this.

    • Coolshades, thanks for the question. I unfortunately will have to give you a pretty unsatisfying answer though. I can’t give anyone financial advice – I’m simply not qualified. Everyone has a unique financial situation, so the best I can do is show you what I do for myself.

      However, I can tell you what I did to get the knowledge I have now. I was a “Motley Fool Stock Adviser” member for years. Just one good stock, and the subscription will pay for itself.

      Once you are a Stock Advisor member, go over to Saul’s Investing Discussions (available for free if you are a Stock Advisor member) and read “Saul’s knowledge base”. Read the best posts on Saul’s board every day for a year, and you will be ready to invest on your own.

      • Hi Dave,

        with the drop this week, i have done a shakeup of my portfolio and invested in a few key stocks DDOG, MNDY, CFLT, CRWD, ZS, AAPL … perhaps i have missed the party but i guess you and everyone on Saul’s board might say, the party never stops!

  2. Fantastic write-up, I learned a lot – not just about the companies but also about your approach, thanks a lot!

    One question I’d like to ask, perhaps related to your deep dives mentioned above but not covered here. How much you investigate what sort of competition the companies are facing and how much weight you give for those findings? For instance, Datadog is thriving while competitors are replacing CEOs so the situation looks good for them. For Monday I think Asana can’t be ignoted but is it only by the numbers you monitor the situation? And Amplitude seems to be directly competing with Twilio Engage and Twilio is not a company to be ignored and then there are also other players like Heap.

    For me it looks like the competitive landscape in the above examples is different for each and in very simplified way I could perhaps summarize: DDOG – little concerns, MNDY – looks good but monitor, AMPL – more challenging and perhaps a bit unclear. Would you agree with this blunt characterization or do you see things differently?

    • What a great question! So long as the company is maintaining hyper growth revenues (and strong KPI’s), I tend to not worry much about competition. There was a time when people would say that Datadog is risky because of competition from Dynatrace, Newrelic, the hyper scalers, etc. None of that ultimately mattered though – the competitors are all still there and underperforming relative to DDOG.

      I think your competitive assessment is pretty good. But for me, I don’t let the threat of competition prevent me from investing in a hypergrowth company.

  3. Thanks Data – super valuable read to me. Could you briefly explain the zero guranteed recenue: “Unlike SaaS companies, every quarter Upstart effectively starts with 0 guaranteed revenue” Thansk, Christian.

    • Hey Christian, if a new SaaS company ends Q1 with 1000 customers, they start Q2 with 1000 customers. Those original 1000 customers from Q1 are in a contract that they’ve agreed to be in, typically for at least a year and sometimes for as long as 3-5 years. So for this hypothetical SaaS company to double its customer count in Q2, it only has to find 1000 new customers to get to 2000.

      However, when a company that sells widgets (like refrigerators, or even loans in this case) makes 1000 loans in Q1, in Q2 they start with 0 loans. So to grow revenues 100%, they would have to sell 2000 loans in Q2 alone.

      Do you see the difference there? The widget company had to do way more work in Q2 (effectively double the amount of work), meanwhile the SaaS company had to do the same amount of work as it did in Q1.

  4. I really enjoy your blog and appreciate your perspective. I have a question regarding options. Are most of your option trades short term or do you buy LEAPS and hold for high conviction stocks? I am very grateful for you and everyone on Saul’s Discussion Board who share their updates. BTW, I’m in favor that you continue your video analysis. It’s great.

    • Hey Khai, thanks for the question. Typically I think of LEAPS as short term holdings with the intention to sell in less than a year. I have occasionally broken this rule though (Crowdstrike).

      At some point, I might consider a converting a substantial portion of my portfolio to LEAPS and holding longer term (more than a year). This would of course be risky but I’d be ok with it I think. But so far, I have yet to convert more than 15% of my portfolio to LEAPS options – this is what I did during the spring 2021 growth stock rotation.

      • Hi Dave, Thank you for your great blog – I have been a member of Saul’s board since 2018 and was a big fan of your posts there. I am wondering if you could explain in a little bit more detail your strategy to convert part of your portfolio to LEAPs (I have no experience in options, and I’m wondering how you chose the time expiration dates and strike prices etc – is there some methodology that you could explain in a blog post?). Thank you again .
        For the time being I intend to stick with the basics – if its good enough for Saul then its good enough for me – but if I could learn how to impliment a basic strategy of buying LEAPs then I certainly would be more open to it. Thank you so much.

  5. Hey Dave – Found you on Saul’s board. Been following your updates for a while. I’m one of those who loves this investing style and jealous of people like you who are able to pull it off. You thought about offering a subscription service for those of us who’d like to follow along with you?

  6. Dave, thank you so much for taking the time and putting in the hard work to help fellow investors, very grateful

  7. Thanks Dave. First visit to your site although I do read your posts on Saul’s site and find them quite informative. In your monthly updates you have not featured ZS recently although you do hold it at 8%. Any particular reason for not including it? And why it’s “lower risk/lower reward”?

    • Hi RollerCoaster, good questions. Zscaler has an earnings report coming up very soon and this update was getting lengthy, so I will most likely be writing about Zscaler in my next monthly update. Regarding why the lower risk/lower reward designation, everything is relative. Relative to my other stocks, Zscaler isn’t growing very fast, nor does it seem obvious that some big revenue acceleration is coming (like Affirm). So I marked it as lower reward. And it is lower risk because it is a SaaS company with a strong track record, with no obvious and material risk ahead of it as far as I can tell.

  8. Hi Dave, beautiful report.

    I was curious on your position sizing as that is the area I am focusing on currently.
    From https://twitter.com/investianalyst/status/1462249669648470016?s=21 it appears that there is high chance that enterprise spend on productivity software, especially asana and monday, will be affected.

    Given its a market where there is very high competition and little moat, are you comfortable with that high of a percentage ?

    • Hey Srinath, regarding competition, my response is always to follow the numbers. Is Monday.com revenue growth decelerating? Enterprise customer growth slowing? Margins dropping? The answer is no across the board. The company, for the time being, is thriving. Should that change in the future, I will react by selling shares.

      Any company in a good industry is going to attract competitors. If I got skittish any time some competitors show up, I would have missed out on some of my best stocks, such as Crowdstrike, Datadog, Zoom Video, etc.

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