February 2022 Portfolio Review

Welcome to my February 2022 portfolio update! My portfolio is up 214% as of writing on 2/21/2022 from when I started tracking my results on January 1st, 2020. This means that, $100 invested in the ExponentialDave portfolio on January 1, 2020 would now be worth $314, which is more than a triple (3x). Meanwhile my benchmark, WCLD, is “only” up 55% since January of 2020, and the S&P 500 is only up 34% since January 2020. For the period from 1/1/2022 through 2/21/2022, my portfolio is down 25%, meanwhile WCLD is down 22%, and the S&P 500 is down 9%.

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Monthly YTD performance at the end of each month
Jan 2022: -24%
Feb 2022: -25% (as of writing on 2/21/22)

2020 Performance: 225%
2021 Performance: 30%
Cumulative Performance Since Jan 2020: 214%

Current Allocation vs Allocation as of Last Portfolio Update on 1/17/2022:

Conviction Levels:
First Tier: DDOG, BILL, NET
Second Tier: ZS, ZI, SNOW
Third Tier: MNDY, S

Risk/Reward Categorization
Higher Reward, Higher Risk: SNOW, MNDY, S
Higher Reward, Lower Risk: DDOG, BILL
Lower Reward/Lower Risk: ZS, ZI, NET

On the portfolio’s performance lately:

The portfolio’s 2022 performance and last 4 month’s performance have been yo-yo’ing between very bad and just sort of bad. To say that volatility has been severe would be an understatement. My YTD performance was up to -12% as recently as 2/16/2022, which is actually a significant improvement from January, when at one point I was down 39% YTD.

Times like these occasionally make me wish I had chosen any other hobby (Or did this hobby choose me). It is tempting to think that I should take my 200ish percent gains off the table and take a break from investing until some normalcy returns to the markets. But fortunately or unfortunately, I know too much to do this!

Times like these, when prices are cheap and the market is acting completely irrational are when we have our best opportunities. I should be dollar cost averaging as much money as I can comfortably afford while prices are cheap like this. I think we are looking at generational opportunities in the SaaS sector right now.

I went from being up 505% cumulatively from 1/1/2020 to 10/18/2021, to the point where I’m at now, only being up 214% since 1/1/2020. To put these losses further into context, the amount of money I’ve lost in the last several months has been bigger than all the money in my portfolio in August of 2020. And yet, my portfolio is still three times larger than it was at the start of 2020.

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

COMPANY SPECIFIC ANALYSIS

Datadog
The only weak point was the Q1 2022 revenue guidance, which came in at 4%. On average, they have guided QoQ revenue growth historically for 6%. With an average revenue beat of 8%, we can estimate revenue growth of 12% sequentially, which would still lead to an increase in the YoY revenue growth from 83% this most recent quarter to 84% in Q1 2022. Although 12% sequential growth would be significantly worse than the 21% QoQ revenue growth we just saw in Q4 2021.

Revenue growth accelerated on a YoY and QoQ basis, 83% and 21% respectively. 21% QoQ growth makes this Datadog’s best quarter ever as a public company.

Million dollar customers grew 114% to 216. Enterprise customers spending > 100k grew 60% YoY, and these enterprise customers account for 83% of all of DataDog’s revenues. Additionally, customers using six or more products surged to 10% of all customers, up from 3% in the year prior.

Gross margin came in higher than ever at 80%, and free cash flow was $107 million, or a FCF margin of 33%. This gives Datadog a rule of 40 of 117. (YoY growth rate + FCF margin)

Full year guidance for 2022 is calling for 49% growth. Although this is a far cry from the current YoY rate of 83%, it is slightly ahead of what they guided full year 2021 for, which was 47%. They of course progressively raised this after each and every quarter, going from 47% to 56% to 65% before finally reaching 70% growth for the full year.

Quotes from latest earnings report:
“And we’re very pleased to report that our newer products added about $100 million in ARR in 2021. These are the newer products we launched in 2019, which excludes core infrastructure, core APM and log management.”
ExponentialDave: Companies are often cagey about labeling new product revenues with a specific dollar amount, so I am very pleased to see this from Datadog. I wish Cloudflare would give us any kind of break out regarding which products are driving how much revenue.

“Now let’s take a moment to review our accomplishments in 2021. We ended the year with thirteen generally available products, up from nine at the end of 2020. We significantly extended our visibility capabilities in 2021.

Cloudflare
Mechanical and machine like in nature, Cloudflare maintains 50%-ish growth basically every quarter. For as far back as my YoY revenue growth data goes (Sep 2019), Cloudflare has never been more than 4% plus or minus from 50% YoY revenue growth. In this iteration, revenue growth was 54% YoY. This translates to 12% sequential growth, which is sort of right about average for them.

To be honest, “so good it’s boring” really applies to Cloudflare. All their usual metrics were up and to the right, same as usual. DBNER improved to 125%, up from 119% in the comparable quarter last year, enterprise customers spending > $100k improved 71% YoY, and non-GAAP gross margins improved to 79%, up from 78% last year.

Importantly, Cloudflare finally gave us a break out of how many million dollar customers they have, which is apparently 56, a 75% improvement from the year prior.

Guidance is for 6% sequential revenue growth, so factoring in a typical 5.5% revenue beat, we should be looking at another business as usual quarter of 11.5% growth.

Key quotes from the latest earnings call:

“2021 becomes our fifth straight year with 50% or greater compounded growth. First, over those 5 years, our growth has actually accelerated; but second, and probably more important, our growth has been relentlessly consistent. We have dialed in our business. We understand and we are in control of its levers.
ExponentialDave: Lots of CEO’s can try to make claims like this one, but pretty much only Matthew Prince has this sort of data to back it up.

“We think of managing our operating margin a bit like that game Flappy Bird, not too high, not too low, for as long as we can, we want our operating margin to hold just above breakeven and right where it’s been for the last two quarters. In other words, we have done something wrong if we beat significantly on EPS.”

“R2, our zero egress office store, has had more than 9,000 sign-ups for its closed beta, including some incredible logos
ExponentialDave: Recall, R2 is Cloudflare’s answer to Amazon’s S3 (object storage), and it is Cloudflare’s gateway to becoming the 4th cloud. This strategy was outlined in greater detail during their last earnings report.

“The U.S. represented 52% of revenue and increased 52% year-over-year. EMEA represented 27% of revenue and increased 60% year-over-year. APAC represented 14% of revenue and increased 29% year-over-year.

“For fiscal 2021, large customers represented 54% of total revenue compared to 46% of total revenue in 2020.

“Free cash flow was $8.6 million or 4% of revenue compared to negative $23.5 million or 19% of revenue in the same period last year.
ExponentialDave: This gives Cloudflare a rule of 40 of 58.

ZoomInfo

We got pretty standard organic revenue growth of 13% QoQ and 52% YoY from ZoomInfo. However, their q1 2022 revenue guide is much weaker than usual. It is the weakest guide they have ever issued as a public company, coming in at 2.6% QoQ revenue growth. They have historically beaten their guide by 4-7%, with an average beat of 6%. It would be reasonable to be expecting them to actually produce a sequential revenue rise of 9%.

On the bright side, the fiscal year 2022 guide they released is for 37% growth, just one notch lower than the 38% growth they forecast for 2021, which they ultimately beat handily, growing revenues at 53% for the totality of 2021 on an organic basis.

Part of why I own ZoomInfo despite its weaker revenue growth is its strong free cash flows. It is highly unusual for a company to be able to grow at 50%+ and have free cash flow margins of 38%. This gives ZoomInfo a rule of 40 of 90, if we use their organic YoY rate of 52%.

Adjusted gross margin was 89%, up from 88% in the prior year. Meanwhile net revenue retention rose to 116% in 2021, a big improvement from 108% in 2020.

Key quotes from latest earnings call:

“As we exited 2021, international revenue eclipsed a run rate of $100 million and for the year international revenue was up 91%

“when we acquired Chorus, it was growing just over 100% year-over-year. With further investment in sales enablement, product functionality and deeper integration into the ZoomInfo platform, we’ve accelerated Chorus growth to 200% relative to year-end 2020.
ExponentialDave: This is eye popping growth, but I don’t think Chorus is a big enough percent of ZoomInfo’s revenues to really move the needle. According to my estimates, Chorus accounted for 9 million dollars of ZoomInfo’s total revenue for Q4 2021, which was 222 million. Or roughly 4% of revenues. I don’t think 4% of revenues growing substantially faster than current organic revenues will really be enough to move the needle on its own. Especially when you compare this to Bill.com’s acquisition of Divvy, which is also growing significantly faster than Bill’s organic business, but Divvy accounts for a whopping 25% of Bill.com’s total revenues, a much bigger portion of Bill.com’s business than Chorus is of ZoomInfo’s business.

“As of year-end, we carried $1.25 billion of gross debt”

Bill.com
Bill.com’s headline numbers were eyepopping: 190% non-organic revenue growth and 85% organic YoY growth. QoQ organic revenue growth was exceptionally strong as well, coming in at 22%. This means they had an even bigger quarter than last year, even though Bill.com had cautioned us in the last earnings report not to expect another unusually strong quarter like last year.

Non-GAAP gross margins came in at 85%, and transaction fees, which I had highlighted as a key metric, came in particularly strong with 30% QoQ organic growth and 119% YoY organic growth. Transaction fees had steadily been becoming the dominant portion of Bill.com’s overall revenues (as opposed to subscription revenues). The portion of revenues that are transaction based will continue to grow as a portion of Bill.com’s overall revenues, since those are growing significantly faster than subscription revenues.

Bill.com’s acquisition, Divvy, is basically on fire, growing revenues at 188%. Past estimates show that Divvy accounts for approximately 25% of Bill.com’s total revenues, so this will deliver a substantial boost to Bill.com’s revenue growth in the long run, assuming Divvy continues growing faster than the Bill.com organic business.

Key quotes from latest conference call:

“In prior earnings calls, we discussed being selected to design a new payables and receivable solution for one of the top three small business banks in the U.S. Today, I’m excited to share that the bank is Bank of America. This new partnership came together as a result of our success serving Bank of America’s commercial customers and extends our reach to support all of the small businesses, including sole proprietors that Bank of America serves. The new solution was launched in several markets in Q2, and the nationwide rollout will continue throughout calendar year 2022.

“In Q2, we also began recognizing revenue from our new small business solution with Bank of America. Together, these items represented a step-up in subscription revenue of approximately $10 million in Q2 compared to the prior quarter. Bill.com organic subscription revenue growth was 51% year-over-year, which accelerated from 39% in Q1, driven mainly by the impact of a slightly larger average customer size and the new Bank of America revenue.

“With respect to the Bank of America opportunity, we just started rolling that out in the quarter, and it will be rolled out through the coming quarters. By the end of FY – or calendar 2022, we will expect that to be in market and launched and starting to drive more meaningful results at that point.

There is uncertainty regarding the impact of Omicron, inflation and supply chain constraints being experienced by businesses. While we don’t see an impact on our overall SMB base at the moment, we continue to monitor the situation closely. Our fiscal 2022 outlook update assumes there won’t be a material negative impact to our business from pandemic macroeconomic or supply chain issues faced by our customers.

“For fiscal Q3, we expect our total revenue to be in the range of $157 million to $158 million. Note that sequential revenue growth in Q3 will be influenced by seasonality as well as the step-up in revenue recognized in Q2 that I referenced earlier for Invoice2go and Bank of America subscription fees.

“our revenue per transaction, which was $5.79, just a little below $6, up 63% year-over-year.

“when they first subscribed to the Bill.com platform, they tend to have many more check payments versus electronic payments. They tend to have some of their suppliers on the network but not all. And over the course of several quarters, as they get further engaged with the platform, we see the electronic payments go up. And as a result of that, we see higher adoption of some of the newer ad valorem products that we have that has the effect of increasing our overall transaction monetization.

ExponentialDave: I liked this description of the process of onboarding Bill.com customers, and how usage tends to drive upward over time. Like Datadog, bill.com takes time to ramp up new customer’s usage.

Amplitude
What a painful lesson here. After posting mildly disappointing earnings, Amplitude’s stock fell as though it’s some sort of pharmaceutical company whose only drug in the pipeline just failed phase two clinical trials. Of course, we know Amplitude is not a pharma company. It is a tech company with three products, and its revenues just grew 65% YoY! It is a healthy company, and yet the market brutalized its shares 59% in a single day after its earnings report.

The problem is that although YoY revenue growth was pretty good, QoQ growth in Q4 was only 9%, a huge slow down from last quarter’s 17%. This 9% QoQ growth annualizes to 41%, which conveniently was also very close to the 40% growth they guided full year 2022 for.

But I will say this, a 40% annual guide is really not bad! ZoomInfo guided to 36% and was treated to a roughly 10% sell off the day after earnings. A 10% sell off is unpleasant, but no where near the brutality of a 59% sell off! Additionally, although Amplitude is new to the market and we only have seen them report two public quarters, both times they have beaten their guidance. Most recently this beat was by 6%. So if they consistently raise their guidance over the next 3 quarters, we could easily see them grow their revenues in the ball park of 50%-60%.

I don’t want to make it sound like I think this quarter was good – it wasn’t good. But it was not the death knell of Amplitude that a 59% sell off would portend. The company is healthy, but it is no longer a top 10 hypergrowth stock.

Although I tried to sell Amplitude literally within one minute of reading the results (at 4:08pm Eastern) when it was down about 20%, my limit order did not go through. And within 2-3 minutes, it was already down more than 35%, which I thought was ridiculous off of a report which was only mildly disappointing. So I ultimately decided to hold it and think of it metaphorically as cash which I will probably use at some point.

Monday.com
A lot of you, like me, have concentrations in Monday.com. And a lot of you, like me, got a bit rattled when we watched Amplitude drop 59% in a single day off of a slightly bad report.

Like Amplitude, Monday.com is somewhat newly public. But unlike Amplitude, I think Monday.com has had much more consistent revenue growth than Amplitude. Further, I think Amplitude’s underlying business (not the stock price) experienced a bit of “reversion to the mean”. As in, Amplitude had a couple of quarters where revenue growth accelerated (notably Q2 and Q3 of 2021), and is now possibly “coming back down to normal”, whereas Monday.com has consistently grown between 16.7% and 19.7% in each of the last 5 quarters. (Six quarters ago, Monday did have a weak quarter where it grew 14.4%, but keep in mind this was Q2 of 2020, the most covid intense quarter of all time across most companies.)

Importantly, we also have one more earnings guide from Monday.com to go off of than we had for Amplitude (I’m not counting the very first guide we got from Amplitude, since it was only a few weeks away from the actual earnings report). Although it doesn’t sound like much, this writer’s opinion is that having one more real guide for Monday.com than we had for Amplitude gives us actually much greater insight into what to expect from Monday.com. For example, Monday.com guided Q3 of 2021 to be a 6% QoQ revenue increase from Q2, and then they came in at 17.6% QoQ. For Q4 of 2021, Monday.com gave us the same 6% QoQ increase that they said they were expecting for Q3. I think this is a hint that we can expect a similar result for Q4, with approximately an 11% revenue beat.

But we must also recall, nothing is guaranteed, past performance may not always be indicative of future results, I’m just a regular guy on the internet, and if you find yourself losing sleep over Monday.com’s upcoming earnings report, perhaps you should consider diversifying a bit more and concentrating less.

UPSTART
Some of you will probably be disappointed that I no longer own Upstart. I sold it a couple weeks before earnings after reading about rising default rates from a poster on Saul’s board named JonWayne. People had pointed out that rising default rates are not inherently bad, so long as “risk-adjusted” default rates are in line or better than non-Upstart loans of a similar risk profile. While this is true, the market (not just Upstart stock) was reflecting sincere panic, which caused me to want to only be in my highest conviction positions, so I sold.

Right before earnings, I took a small 4% position in Upstart, since I believed there to be substantial upside. As in, Upstart had the potential to completely blow us away, as they’ve done previously. And the earnings came in incredibly strong, for sure, and with pretty good guidance for 2022. Ultimately, with the market still being very bearish on growth stocks, I decided I still want to be in my higher conviction SaaS stocks. And I have a decent sized tax bill coming up, so I actually ended up selling out of Upstart and may plan to use this money to pay taxes.

I think Upstart’s report was good enough to merit holding, and should things turn around for the growth stock sector I might re-initiate an Upstart position.

Wrapping Up
As always, thanks for reading this far! Please feel free to drop a comment and let me know what you think.

Watch List: Confluent, MongoDB, Upstart

5 thoughts on “February 2022 Portfolio Review

  1. Hi Dave. Really appreciate you sharing your knowledge and experience through your portfolio updates and your commentary on Saul’s board.

    With respect to your comment about wanting to take a break from the market during the current volatility, I definitely hear you. The depth of the downturn, and potentially with more losses to come, has motivated me to dig deeper on risk management of my portfolio.

    One of the best resource I found on the topic (so far) are the last two chapters in Mark Minervini’s book “Trade Like a Stock Market Wizard” (both chapters focus on risk management). Yes, he is the guy who was interviewed in the fall who had no idea what Upstart’s business was all about. :). I bought the book anyway, given my obvious reservations. Money well spent and well worth the read. In many ways, his investment style is very similar to the Saul Discussion Board approach.

    Anyway, I thought I would pass along this tidbit of info that might be helpful in the current market environment.

  2. Hey Dave, thanks for sharing your PF-analysis.

    I´ve got 2 questions.

    Do you have any plans to hedge your portfolio?
    Selling puts? Reverse ETFs on QQQ S&P500, IWO?
    About Saul’s forum: Do you follow – apart from Saul – any particular guys there, if yes, who?

    Thks a lot! Keep on doing your great work.

    • Hey Mick, thanks, no plans to hedge here. As for Saul’s board, a great way to figure out where the best advice is, is to look for people who continually tend to get large numbers of recs.

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