Every quarter, I provide updates on my stock portfolio to stay disciplined and get different perspectives. Please contact me if you disagree.

For more frequent updates follow me on Twitter @MoritzMDrews and SavvyTrader for portfolio changes.

This review is longer than usual because I wanted to spend some time reflecting on the entire year, all my companies, and my thoughts on what to expect in 2024 and the future. So, grab a coffee, and let's dive in!

A recap of my portfolio in 2023

January: After a tough 2022, my portfolio kicked off with a solid 10% gain, which is encouraging. It reminds us that this challenging period will eventually come to an end.

February: Stayed cautious about certain investments, expecting market uncertainties. Had a volatile month with a peak of 25% year-to-date (YTD) return, but ended at 14%.

March: Began investing in toilet paper and dealt with challenges from low guidance (NET), outages (DDOG), and banking concerns (Silicon Valley Bank). Categorized challenges into noise and controllable factors. Wondered why other investors shifted away from SaaS. Back to 6% YTD.

April: Portfolio experienced a strong decline, resulting in a -4% return for the year. Emphasized the long-term resilience of tech and software. Encouraged others to maintain perspective during tough times.

May: Market overcame pessimism, leading to a significant 32% increase in YTD returns. It was my best month ever, with a 36.4% gain in just one month, which is amazing! Shared personal struggles and stressed the importance of taking a step back to assess the bigger picture.

June: Recognized the positive impact of monthly portfolio reviews, promoting regular performance tracking and in-depth analysis. Encouraged investors to start writing their own portfolio reviews. YTD: 30%.

July: Discussed the importance of holding investments for a longer period, emphasizing a thoughtful, data-driven approach. Mentioned my goal of achieving a 20% annual return over the long term, dealing with challenges, and focusing on high-quality growth companies. Portfolio quietly increased to 35% YTD.

August: Finetuned investing philosophy to prioritize people and leadership in investment decisions. Announced a gradual shift to a different approach over the coming months. 32% YTD.

September: Emphasized the importance of adapting to the changing investing landscape. Switched to a quarterly portfolio review schedule with fewer adjustments, focusing on sustainable, long-term growth. Portfolio remained around the 30s with a 34% YTD gain.

October to December (Q4): After a challenging year in 2022, my portfolio in 2023 ended with 55% YTD and a 17% annualized True Time Weighted Rate of Return (TWR) since 2019. The events of 2023 have once again shown how hard it is to predict the market, which reinforces my choice to always remain fully invested.

Portfolio performance

Timestamp: 12/31/2023

Portfolio allocations

Changes to the portfolio

Positions I trimmed

Bill -

While I find Bill's large total addressable market (TAM) (over 70 million SMBs worldwide generating $125 trillion of B2B payment volume) and the potential for international expansion intriguing, it is also one of the most challenging for me to understand.

After BILL’s last earnings report, the stock was punished by the market with a 35% drop. Management reduced the fiscal year (FY) guidance due to the challenging macroeconomic environment. Luckily, I had already reduced my position to about 3% before the earnings report, as I was already questioning whether I still saw myself as a long-term shareholder.

I’ve always felt uneasy about fintech stocks, and after the experience with BILL, I might establish a rule to avoid any fintech businesses in the future. There’s just so much disruption and volatility happening in that sector.

However, I didn’t sell any shares after the drop because I believed it went into undervalued territory and still is as of writing this in November. With over 4,000 quarterly expected new customer additions for BILL standalone, the growth of our customer base is still on track. Additionally, the traction of Divvy, now called "Spend & Expend," looks promising.

Potential catalysts that could send the stock price back up again include:

• In an improving environment helping TPV-, customer and revenue growth

• Cross-selling opportunity from standalone customers to Spend & Expend

• Increase in subscription pricing in FY2025 with BofA

• Success in international expansion

• Smart acquisitions

I might hold onto it for a while, but it sits on the bench.

Positions I sold

Nvidia -

As discussed in an older portfolio review, I considered selling my shares in NVDA, and I ultimately did sell my small position at $462 in early October and used the cash to add to and .

I have great admiration for the company—its leadership, high insider ownership, profitability, and rapid growth. It's truly a dream investment. However, I have two concerns:

1. The company's current market cap is $1.2 trillion, and I question whether it can grow to over $8 trillion in the next 10 years to achieve a 20% compound annual growth rate (CAGR) in stock price appreciation. Even for a 15% CAGR, it would still require a $5 trillion market cap. To put this in perspective, Microsoft and Apple currently have market caps of around $3 trillion. While it's not entirely unrealistic, there are other alternatives where a 20% CAGR over the next decade seems much more attainable.

2. Valuation: Looking at the forward price-to-earnings (P/E) ratio of just 24 as of December 15th, NVDA doesn't appear to be expensive. However, the question is: How sustainable is this growth? Once demand slows down, either the forward P/E ratio will likely increase or the stock price will decrease a lot.

Unlike a typical Software as a Service (SaaS) business with recurring revenues, Nvidia is a cyclical business and still working on developing and ramping up subscription offerings.

Data center revenue exploded to 80% of total revenues during the recent quarters. I have doubts that the recurring revenue segment will fully compensate for the significant drop in growth once most companies have already stocked up on Nvidia's chips. While it may happen in the future, I anticipate a larger decrease in the stock price once chip demand eases.

Additionally, Nvidia has gained significant attention and is a popular choice among all—retail and institutional—investors at a level that I don’t even see for a SaaS darling like Crowdstrike. This popularity reduces the likelihood of long-term outperformance. (It’s also one of the reasons why I’m not invested in Tesla).

While I recognize the true innovation and disruption that AI brings and believe it will have a significant impact on our lives in the future, I also try to remain grounded. The usage of AI, such as ChatGPT, and the immediate demand for chips has skyrocketed, but I expect this growth to level out. Similar to the early 2000s with the internet, people believed everything had changed. And while it did, it took another decade to truly materialize.

I view AI through a similar lens. It's promising, in its early stages, and here to stay. However, progress will likely occur at a slower pace than expected. The longer it takes, the more competition will emerge, and it becomes harder to argue that Nvidia is the sole vendor in the market.

Lastly, I keep thinking about Nvidia's Infiniband technology versus Ethernet. I'm still trying to grasp this topic fully, but I feel that Ethernet might have the advantage when it comes to the best network infrastructure for low inference, which is crucial for AI. Other players in the industry might have an edge in this area, as customers may prefer Ethernet in the future.

For additional context here are the sequential (QoQ) trends:

Total revenue: Q2 88% -> Q3 34% -> Q4e 25%(?)

Datacenter revenue: Q2 140% -> Q3 41% -> Q4e 28%(?)

I may underestimate the durable growth driven by data center demand, and Nvidia might surprise us in the next decade. Actually, I’m reading so many positive pieces about Nvidia's outlook, perhaps I should just get on board again, instead of writing such a long text about a 1% position I sold.

However, since it was only a "tryout", I’ve decided not to be on board for now. Investing involves creating assumptions and hypotheses, and then making decisions based on that information. Given my personal investment strategy, I believe there are many more and "easier" opportunities available elsewhere:

Considering the many other opportunities ahead of us that will greatly benefit from AI in the upcoming lifecycle stages of innovation, including the data infrastructure- and application layer that follows the hardware layer contributed by companies like Nvidia, AMD, and Arista Networks, you could think of ANET as my “NVDA play,” but with a market cap that is 17 times smaller. And the upcoming opportunities in the data infrastructure and application layers include DDOG, S, CRWD, ZS, NET, SNOW, MDB, (CFLT), and perhaps even MNDY and TTD.

Confluent -

Confluent experienced a stock price crash similar to SentinelOne and BILL after lowering their FY guide by 4% from $772M to $769M. I decided to sell a week after earnings. However, I held on to Bill and S for different reasons:

In the case of SentinelOne, I concluded that there was a more immediate upside and disagreed with the exaggerated stock price drop. I believe the business was still on track. As for BILL, I see the investment thesis still unfolding, although I’m considering selling it due to its complexity.

Now, regarding Confluent, there are several reasons why I have decided to move to the sidelines for now:

1. Confluent still needs to prove if they are truly as mission-critical as they claim. One customer decided to transition to an on-premises solution, which, although not specific to Confluent as management stated, still doesn't help my confidence.

2. Management has frequently changed its go-to-market (GTM) strategy. The most recent change is their move to a model where customers pay based on how much they use the product (which I think is a good move). On one hand, I like how quickly they adapt, but on the other hand, I wonder if they should have had a clear strategy from the start.

3. RPO, cRPO, and customer growth (also large ones) are slowing down. If these metrics had been strong, I would have maintained my position.

4. Revenue growth is in the low 30s, and next quarter it will likely be in the high 20s. This is significantly lower compared to most other businesses, considering their smaller quarterly revenue base:

   1. CFLT - $200M (32% YoY)

   2. BILL - $305M (33% YoY)

   3. S - $164M (42% YoY)

5. Lastly, there’s still a high amount of dilution.

While some of these issues overlap with S or BILL, it's the combination of factors mentioned above that influences my actions differently here.

On a positive note, the trend towards profitability continues to be very good. The non-GAAP net income ($6.3M) was positive for the second quarter in a row, making up 3.2% of revenues. The operating cash flow margin improved to -4.6% compared to -27.5% last year, and the free cash flow shows a similar upward trend. The dollar-based net retention rate (DBNRR) remained high at 130% (although it would be lower if their old method was used).

However, my investment in CFLT was only a small 2% starter position, so I chose to sell it quickly instead of turning it into a full position and diving deeper into the business. Even though I sold CFLT at around $17 and the stock has continued to rise (45% since I sold) as of December 15th, I'm okay with it because I invested most of the cash into TTD and some other positions that have increased by about 25% since then. So not everything is "lost," and I still stand by my decision.

I will remain open to changing my mind, which might make me consider investing in CFLT again. Some catalysts that could cause this are:

• Full ramp-up of the consumption-based model

• Introduction of more products (i.e. Flink)

• Achieving more certifications like FedRAMP

• Use cases driven by "AI" which increases the amount of data processed

Positions I increased

Evolution Gaming -

Looking at Evolution Gaming from a short-term perspective, its performance in Q3 2023 was unexciting, despite achieving a record-high 70% EBITDA margin, 60% operating profit margin, and 44% year-over-year growth for operating cash flow per share.

Revenue increased by 20% compared to the previous year, reaching €453M, driven by Evolution's live segment and expansion in Asia. However, there was a 7% negative impact due to foreign exchange rates. Management highlighted the challenges caused by the slow opening of studios and the need to hire more staff quickly. These issues are expected to be resolved in the coming quarters.

Revenue growth of RNG (Random Number Generator = Slots) slowed down to a negative -1.9% year-over-year (YoY). It is uncertain whether RNG can achieve the originally planned double-digit growth as anticipated by management.

On a positive note, management announced a share buyback program of €400M shortly after earnings and has already executed it three times, purchasing shares worth over €50M. Furthermore, they successfully launched their popular game show called "Crazy Time" in the US, which could potentially boost revenue growth in the US for this quarter.

I maintain a strong conviction in Evolution due to its experienced management, strong competitive position, large Total Addressable Market (estimated at $153 billion by 2030), high insider ownership (12%), high profitability, and zero debt. Several potential catalysts for growth are ahead, including:

• Resolving studio capacity issues and increasing hiring

• Achieving success in the RNG segment

• Launching new successful game IPs in new markets (such as Crazy Time in the US) and driving international expansion

• The EU market could provide potential upside by 2026 if iGaming regulations are relaxed

• Making smart decisions regarding capital allocation, such as buybacks and reasonable acquisitions

• Improvement of the macroeconomic environment

During the quarter, I took advantage of the declining stock price towards €80 multiple times to increase my position.

Arista Networks -

Arista Networks specializes in providing cloud networking solutions, with a focus on high-performance, scalable, and programmable switches for data centers and cloud computing environments, and benefits from the hardware layer in AI. This is because AI workloads are becoming increasingly important among cloud users, there should be faster production upgrade cycles of data center switching products, and they are gaining market share with enterprise customers.

It’s a common misconception that they are "just a hardware company". In reality, they are a software company with a gross margin of over 60%. Their software solutions improve their customers' networks' speed, security, efficiency, and manageability. They have a customer base of over 9000, with a Net Promoter Score (NPS) above 80. Some of their happy customers include Microsoft, Meta, Alphabet, Amazon, Apple, Alibaba, Baidu, and Tencent.

Another aspect that intrigues me is the significant insider ownership of 19% held by highly experienced and trustworthy leadership. They demonstrate strong fundamentals and share goals aligned with shareholders, such as avoiding dilution and executing smart capital allocation decisions like share buybacks. Additionally, Arista has a proven track record of achieving a high Return on Invested Capital (ROIC) of 29%, practices prudent mergers and acquisitions, adopts a long-term mindset, and maintains exceptional profitability with high margins.

And that trend continued in Q3'2023, which was an outstanding quarter:

• $1.509 billion of revenue, an increase of 28% YoY

• 62% GAAP gross margin

• 46% GAAP-operating income margin

• 40% operating cash flow margin

• $1.72 GAAP net income per share, an increase of 52% YoY

Management expects to grow revenues at a low double-digit rate for years to come and anticipates taking half the time it took Arista to achieve the first $5B to reach $10B in revenues.

When I purchased my initial ANET shares, I did not even consider AI. However, I now believe that this trend will contribute to further growth in the upcoming years. It will also provide support that surpasses the cyclical nature of the business, especially regarding the switch upgrade cycles by the cloud titans. Due to this cyclical nature, CEO Jayshree Ullal usually advises investors to take a three-year perspective on earnings rather than solely focusing on a single quarter or year.

When I purchased my initial ANET shares, I did not even consider AI. However, I now believe that this trend will contribute to further growth in the upcoming years. It will also provide support that surpasses the cyclical nature of the business, especially regarding the switch upgrade cycles by the cloud titans. Due to this cyclical nature, CEO Jayshree Ullal usually advises investors to take a three-year perspective on earnings rather than solely focusing on a single quarter or year.

Arista's strong customer base, which includes Microsoft and Meta , is both its biggest risk and its biggest advantage. These companies accounted for 42% of Arista's total revenue in 2022. On one hand, this highlights the strength of Arista Networks' offerings. On the other hand, it would be good to see Arista diversify its revenue sources further, and they are actively working towards that goal.

Potential catalysts include:

• Upgrade cycles might come in faster than expected since AI requires high-speed networks

  • 800Gbps switches

  • 1.6Tbps switches

• New solutions

  • Core: AI Spine, Enriched EOS stack, Network as a service

  • Adjacent markets: Routing & Campus, Transit WAN Routing, Edge as a Service

  • Software as a service: Deliver Zero Trust Networks (in collaboration with Zscaler), Improve Deployment Designs, Increase Visibility and Observability

• International expansion (2023: 78.5% Americas)

• Success in customer diversification (enterprise/campus)

• Improving macro environment

• Acquisitions that might be value-adding

• AI driving needs to upgrade to Arista’s solutions or increase the existing footprint

Every time I check out all those facts about this boring networking company, I can't resist throwing in a little more cash. (And when it comes to investing, I love the boring stuff. Thanks, Peter Lynch.)

The Trade Desk -

Unlike BILL, The Trade Desk is a company that I find easy to follow. They recently reported a strong performance in the third quarter, with the following highlights:

• Revenue of $493M, representing a 25% year-over-year increase.

• Operating cash flow margin of 39% and a free cash flow margin of 37%.

• GAAP net income of $39M.

• The repurchase of $90M worth of shares in Q3'2023 to offset dilution.

However, the stock crashed by 30% after hours due to a weaker-than-expected Q4 outlook. In the second week of October, management observed temporary caution from some advertisers, particularly those in industries affected by recent strikes/auto industry. It is worth noting that BILL also reduced its outlook, likely due to similar external factors rather than poor execution, which influenced my decision to hold onto BILL for now.

Here’s why I am not concerned by the weaker-than-expected outlook:

1. The Trade Desk continues to outperform its competition and the digital advertising industry: While the Trade Desk is growing 25% YoY, the industry is only growing at a 5 to 10% YoY rate, which means that the business is taking market share. Jeff Green anticipates that this outperformance will persist throughout 2024.

2. The Trade Desk benefits from more deliberate ad spend: With tightening budgets, marketing agencies and brands are more deliberate about their ad spend and prefer to shift it towards advertising that is more flexible, and data-driven and offers superior ROI: The Trade Desk.

3. Innovation coming from AI: The Trade Desk has been investing in meaningful AI use cases for years and expects many new opportunities where they can inject AI. The business owns significant value in data and insights.

4. CTV continues to be the fastest-growing channel of their business and a key driver of overall omnichannel growth. Executives at every major streaming giant with both an ad-supported and an ad-free tier, (including Disney, Netflix, Paramount, Warner Bros Discovery and NBC Universal) say that total revenue per user is higher on the ad-supported plan than it is on the ad-free plan. That can be a significant catalyst going forward.

5. Retail media has become one of their business's fastest-growing areas, and they expect this to continue in 2024.

6. Global expansion: The Trade Desk made significant and successful investments in its business outside the US over the last several years (e.g. in go-to-market strategy, CTV, retail media).

7. Rapid adoption of The Trade Desk’s UID2 and EUID technology: UID2 and EUID is increasingly becoming the currency for relevant ads and personalized content that has been adopted by the infrastructure of the internet and nearly all of the biggest content companies in the world. Agencies want to have more control over their campaigns and data.

8. Upcoming US political election. Since 2016, The Trade Desk has been a vital platform for leading political advertisers. In 2024, they expect to gain more share in this segment and they believe that spending will increase as the year progresses

9. Profitable growth: TTD is one of the few high-growth technology companies that consistently generates strong adjusted EBITDA, positive GAAP earnings, and free cash flow that has steadily increased over the years.

10. Decent insider ownership with a 10% stake held primarily by Jeff Green.

11. A large TAM with an estimated size of $1 trillion.

I couldn't resist and added to my position after the earnings report, buying more shares at around $60.

“We align our interest with our clients, we maintain our objectivity, and we innovate like hell.” Jeff Green during the Q3’2023 earnings call.

Commentary on my other companies

Crowdstrike -

CrowdStrike's Q3 2023 earnings exceeded estimates with 35% revenue growth YoY, raising its FY revenue guide by 0.2% and indicating a further sequential acceleration next quarter (7.9% QoQ). Despite a challenging macro environment, net new ARR accelerated to $233.11M (13.7% QoQ), earning praise from analysts. Management expects net new ARR for the full year to be in line with modest growth, and double-digit YoY growth in the second half, translating to at least $243M net new ARR in Q4 (9.3% QoQ).

The forecast for operating income and net income was raised by 4% for the entire year. Subscription gross margin reached a record high of 80.3%, Free cash flow margin was 30%, and there was a first-time positive GAAP operating income of $3.2M. These factors led to a strong Rule of 66.

Module adoption rates remain strong, with 26% of customers now using 7+ modules (up from 24% last quarter). The gross retention rate remains high (>97%). Lastly, they achieved a significant milestone by surpassing $3B in ARR.

However, the Revenue Performance Obligations (RPO) were a bit weak, resulting in a sequential growth rate of only 2.8%. This can be attributed to the macro environment and budget scrutiny, even in the field of cybersecurity. DBNRR was slightly below the benchmark (<120%) in Q3, as the mix of net new ARR from new customers has exceeded expectations and continued to land bigger deals.

With $3.17b in cash, there is ample opportunity for strategic acquisitions. Crowdstrike estimates its TAM to be $100b by CY24 and $225b by CY28, which leaves plenty of room for future growth.

Overall, strong performance! I'm looking forward to the upcoming earnings report, especially the trend on RPO and the yearly update on customer numbers.

Share

SentinelOne -

SentinelOne’s Q3’2024 earnings report exceeded expectations, beating revenue estimates by 5.3% and showing a 10% increase QoQ. Management raised its FY revenue guide by 2%, projecting $625 million for FY24, a 48% YoY growth. Financial indicators, including gross margins and operating margins, have all been raised, showcasing a commitment to profitability.

Despite a challenging macro environment, they added 350 customers (3.1% QoQ), with a strategic focus on larger enterprises (+66) leading to a 6.6% QoQ increase.

Management anticipates positive Free Cash Flow (FCF) in H2 FY25, signaling a strong outlook for the next fiscal year. They continue to gain market share against both next-gen and legacy providers.

Additionally, the net new ARR guide for the year has been raised to $200M, up from $195M. If they achieve this target, the net new ARR will be approximately $58M, which is the same as the net new ARR in Q4’23 (last year). I believe they are being cautious and anticipate that the net new ARR will be slightly higher than Q4’23, which was $58.21M.

Acknowledging the challenging threat landscape, SentinelOne plans to transition Singularity Cloud to CNAPP next year.

They announced a new Chief Revenue Officer (CRO) from Elastic.

Despite a high dilution at 5.7% YoY, the pace has slowed to 1.2% QoQ. Management maintained a confident tone, and analysts congratulated its performance. With a strong financial position of $1.1 billion in cash and no debt, SentinelOne is in a solid financial state.

It's important to note that SentinelOne is not just focused on endpoint security. It's a platform company that offers a growing range of additional cybersecurity products, such as data lake and cloud security.

In summary, SentinelOne's Q3'2024 earnings report shows that they are doing well in the cybersecurity market. Their shares have gone up by 20% after-hours and almost 100% in the past 6 months. I'm happy that I kept my investment in S, as explained in my SentinelOne's Q1’2023 earnings review. SentinelOne is still on track to gain market share, along with Crowdstrike and other cybersec companies. For now, I’ve decided to continue being a shareholder.

Zscaler -

What I love about Zscaler is that it is founder-led, with high insider ownership. Zscaler's CEO, Jay Chaudhry, holds a 39% stake, which aligns management interests with shareholder value. This serves as a powerful incentive for Zscaler's profitability and success. I believe this factor has contributed to the company's successful development, as well as its strong Q1'2024 earnings:

Zscaler exceeded expectations with a revenue growth of 40% YoY and raised its FY revenue guide by 1.6%. Due to the challenging macro environment and a sales leadership change, Zscaler remains prudent with its outlook.

Free cash flow margin was an impressive 45.2%, thanks to strong collections from Q4 billings, including a $20M upfront deal in fiscal Q4’23. The combination of growth and cash flow led to an impressive rule of 80 in the quarter.

Customers generating more than $100k ARR came in a bit weak with only 3.8% sequential growth (99 net new adds), which is the lowest Q1 number of customer additions since 2022. Also, customers generating more than $1M ARR were weak with only 4% sequential growth (19 net new adds). Still, they added 14 new logos with more than $1M ARR, which was a Q1 record.

Additionally, 5 customers increased their spending to more than $1M ARR. 50% of new logo customers purchased multiple platform offerings: ZIA, ZPA, and ZXD. Management also announced a record new ACV in the Fed business with over 90% New ACV year-over-year in the Fed vertical.

My take on weaker customer growth: Management emphasized the importance of focusing on generating revenue from their existing customer base. I believe this is a smart move because the existing base provides the easiest and most frictionless way to increase revenue. Why struggle against macro headwinds and waste resources on pursuing large enterprise customers who are still tightening their belts, when there is so much (6x) untapped potential right in front of them?

After stumbling over an analysis of where cybersecurity sales occur for all cybersecurity companies (see image below), it is interesting to note that direct sales growth plummeted from Q4 2022 onwards, while channel growth (resellers, system integrators, and MSSPs) remained steady. This decrease aligns with the timing of weaker customer growth reported by Zscaler, SentinelOne, and other companies. It is attributed to changes in the overall economic environment.

Another interesting fact is that more than 90% of cybersecurity sales happen through partners. It's not surprising that Zscaler invested in its channel strategy, including training its global sales team to better engage partners, building relationships with distributors, and expanding its channel team to support the growth of the business to $5 billion in ARR.

Similarly, Crowdstrike introduced the Accelerate Partner Program to cover its entire ecosystem, Falcon Complete for Service Providers to offer co-branded or white-labeled managed security services, CrowdStrike MarketPlace for integration partners, and the CrowdCredit reward program.

Dollar based net retention (DBNRR) rate declined from 121% to 120%. However, I'm not concerned because this lagging metric reflects the challenges faced in the past year. I anticipate an increase in this metric over the next 12 months.

The calculated billings guide for the full year remained unchanged, which was below consensus and likely the cause for the after-hours drop of -6%. While management considers it a key business metric, I focus only a little on it. It is more useful for evaluating short-term performance and can be a confusing metric when used to rate long-term performance or the general investment thesis for Zscaler. I’ve shared my thoughts about this topic in the past.

It’s clear why I have a strong conviction in Zscaler: there is substantial potential for durable long-term growth. Zscaler consistently highlights the opportunity to increase revenue by 6 times for each customer. The fact that 40% of the Fortune 500 are already customers demonstrates significant progress, while also suggesting the possibility of further growth through acquiring new customers, especially considering the potential for upselling.

Additionally, I like that Zscaler is expanding into other categories like IT tools with Business Analytics, which expands their Total Addressable Market (TAM). For more info, please refer to Muji's comments here.

Cloudflare -

After a tough year for Cloudflare because of macro and sales execution issues, the company quickly turned things around. Q3’2023 was a great quarter!

Revenue growth increased to 32% compared to the previous year, and even sequential revenue growth accelerated to 8.8%. Cloudflare is on track to generate over $1B for the first time in a full year, which makes it one of the rare companies that can achieve this scale while still growing fast.

Management raised the low end of the full-year revenue guide to $1,287M from $1,286M, which is not much, but a positive sign. After the Q1’2023 guidance massacre, they are unlikely to guide overly optimistic again. They also raised the outlook for operating income for Q4 and the full year, as well as EPS for the full year.

Dollar-based net retention rate (DBNRR) increased to 116% from 115%, and I expect it to improve further as the macro environment improves.

During the quarter, Cloudflare added 206 large customers (> $100k,) which is an 8.8% increase compared to the previous quarter. These customers now contribute 65% of total revenue, compared to 61% last year.

Also, Cloudflare's profitability is on track, with a 20% operating cash flow margin, 10% free cash flow margin, and 17% net income margin.

The quarter would have been even better if dilution had been slightly lower, as it is still growing at 4% compared to the previous year. Additionally, RPO (remaining performance obligation) growth was a bit light at only 4.5% sequentially.

I'm happy with these results and I expect them to continue because Cloudflare is in a good position for the decade, especially if more companies use the edge to reduce interference for AI applications. And it’s reassuring to see Matthew Prince wearing a helmet for skiing since he’s a big part of my investment hypothesis. ⛷️

Snowflake -

Snowflake had a strong Q3’2024, beating and raising expectations:

• Revenue of $698.5M, an increase of 34% YoY, and 9.1% QoQ

• Raised full-year (FY) product revenue guide to $2,650M by 1.9%

• Raised FY non-GAAP product gross margin guide to 77% from 76%

• Raised FY non-GAAP operating margin guide to 7% from 5%

• Raised FY Free Cash margin guide to 27% from 25%

• 70% YoY growth of Free cash flow at $111M

• Record high GAAP gross margin 69%

• Record high Non-GAAP gross margin 75%

• Record high Non-GAAP product gross margin 78%

• 51% Non-GAAP net income margin

• 127% Non-GAAP EPS growth

With 370 new customers added during the quarter, the total customer growth remained stable at 4.3% quarter over quarter. However, when adjusting historical numbers, only 2 customers from Forbes 2000 have been acquired, and I am unsure why. On a positive note, they posted 35 customers who generated more than $1M in revenue, showing a strong sequential acceleration of 8.7%.

Furthermore, they posted 4 customers who generated over $5M in trailing twelve months (TTM) product revenue and 2 customers who generated over $10M in TTM product revenue. Management also mentioned that their biggest customers have become stable in terms of optimizations:

• Consumption growth in September exceeded expectations

• Snowpark consumption grew 47% QoQ

• Consumption in October was up 500% since last year

• 30% of customers used Snowflake to process unstructured data in October

• Consumption of unstructured data was up 17x YoY

• Price per credit increased 4% YoY → Increased consumption of higher-priced additions of Snowflake

Remaining Performance Obligations (RPO) slightly accelerated sequentially to 4.5% QoQ, which might be boosted by seasonality and still muted by budget scrutiny.

DBNRR decreased to 135% from 142% (as expected), which mirrors the past 2 years' challenges (24 months trailing metric). In reality, customer consumption might already be increasing, contrary to what the metric shows.

It’s great to see the main hypothesis about data sharing is materializing: 28% of customers now use data sharing, which is a strong 12.4% increase compared to the previous quarter.

There was also a comment about the mix of hyperscalers and where the consumption comes from. 76% of the consumption comes from AWS, 21% from MS Azure, and 3% from GCP. The reason why GCP has a low share of consumption is because it has higher pricing for customers.

On the product side, they highlighted the "Dynamic Tables" product, which entered public preview earlier this year. It is already being used by 1,500 customers. Also, Snowflake events had 23,000 people attending, which is twice as many as last year, showing a lot of interest in its innovations.

Management mentioned that there will be a lot of migration from on-premises to cloud over the next few years. Also, new solutions will be available in the fourth quarter, which will create significantly more opportunities for expanding workloads:

• Native apps framework

• Unistore for transaction processing

• Snowpark Container Services

• Apache Iceberg Tables

Based on dilution trends, the total number of weighted-average shares outstanding for the full year decreased from 362 million to 361 million. This decrease is a result of their share buyback program. In Q3, they spent $400 million to buy back 2.6 million shares, and year-to-date, they spent $592 million to buy back 4 million shares at an average price of $147.5 million.

It's also good to see a data point like Snowflake ranking #1 on the Future 50 list, along with Datadog, Crowdstrike, Cloudflare, and Bill. The Future 50 list was created by the Boston Consulting Group and Fortune in 2017 to evaluate the long-term revenue growth potential of over 1,700 of the world's largest publicly traded companies.

Overall, excellent. Let It Snow! Let It Snow! Let It Snow! ❄️

Datadog -

After missing their guidance and leaving investors with uncertainties in Q2 2023, many investors sold their shares at the -20% price. Initially, I was also confused. However, after a thorough analysis, I concluded that there is nothing fundamentally wrong with the business.

Fast-forward to Q3’2023, the strong earnings report rewarded my patience:

Revenue was $548 million, with year-over-year growth of 25% and accelerating sequential growth rates of 2.6%→5.8%→7.6%. Management raised the full-year guide by 2% to $2,107 million, and I anticipate that the growth will accelerate compared to the same period last year, starting at around 27% year-over-year in Q1 2024.

Management mentioned that the consumption levels are back to those seen in Q1, and October showed stronger trends than the previous year. Despite this positive performance, they stated that the guide is still conservative and does not reflect the positive trends in October. This is good as it reduces the likelihood of missing the target and allows for further potential gains.

Another highlight was the increase in remaining performance obligations (RPO), which continues to accelerate year-over-year (54% YoY!) and sequentially (16% QoQ!). Customer growth is on track, with 140 net new customers spending more than $1M ARR and a sequential growth rate of 4.7%. This is a significant improvement compared to the negative trend in the previous two quarters (130→80→140). Additionally, management emphasized that they added a record number of new customers exceeding $100k ARR in the quarter.

The dollar-based net retention rate (DBNRR) decreased to 115% from 120%. This is similar to Snowflake's and other DBNRR metrics, which look at the past. I'm not concerned about it because of the overall economic situation. I’m a little worried about the adoption of modules. The growth rate for customers using 6 or more products slowed down to 2.7% (only 147 customers started using 6+ products) sequentially in comparison to 13.1% (636 customers started using 6+ products) in Q2. I don't have a clear answer for this, but I will closely watch this metric.

Profitability is on track with $158 million in net income (29% of revenues), $138 million in free cash flow (25% of revenues), and earnings per share of $0.45 (a 96% increase compared to the previous year).

In the future, AI applications could help improve long-term growth. Currently, AI customers, mostly model providers, contribute 2.5% to ARR compared to 2% in Q2. With the increase in AI use cases, there will be many new opportunities for growth.The stock has increased by 40% since Q2.

MongoDB -

After a surprisingly strong Q2’24 with revenue increasing by 40% compared to the previous year, MongoDB had a more typical Q3. However, they still exceeded revenue expectations by 7% ($433M, a 30% increase compared to the previous year) and raised their revenue outlook for the full year by 3% to $1,658M. The revenue from Atlas now accounts for 66% of the total revenue, up from 63% a year ago, and it has grown by 7% compared to the previous quarter.

Profitability is on track:

• Full-year operating income guide increased by 21%

• Full-year EPS guide increased by 24%

• Operating cash flow margin: 9%

• Free cash flow margin: 8%

• Non-GAAP operating income: 18%

• Non-GAAP net income: 18%

I remember that MongoDB, like Cloudflare, initially seemed to have trouble becoming profitable. However, both companies quickly adjusted and started making money when the overall economic situation changed. This shows that their business models are strong and able to grow.

On the other hand, getting new customers, except for large ones, was relatively weak:

• Added 1,400 new customers in total (3.1% increase from last quarter)

• Added 1,400 new Atlas customers (3.1% increase from last quarter)

• Only added 100 new customers through direct sales (1.5% increase from last quarter)

• Added 117 new customers spending over $100k (6.3% increase from last quarter) - Good

• The ARR NET retention rate stayed stable at 120% for a long time now

I think the business is not doing anything wrong. It's just that getting new customers directly is challenging in this situation. This is similar to what I wrote about Zscaler earlier, considering the current situation.

Overall, it was a good quarter. The stock price dropped by -6% after hours because it is already valued high, with a forward EV/S of 15. I don't expect the stock price to go up significantly until revenue from consumption and getting new customers improve significantly. I believe this will happen when the overall economic situation becomes more favorable.

Monday -

Monday, the Work OS platform, had a rock-solid Q3'23. They did even better than expected, making $189.2M in revenue (38% more than last year), which was 3% more than their revenue guide. They also raised their revenue guide for the whole year by 1% to $725M.

Profitability remains strong, with a positive GAAP net income of $7M (last year it was -$23M). They had $67M in operating cash flow (35% of revenues) and $20M in free cash flow (11% of revenues). Their non-GAAP EPS increased to $0.64 from $0.05 last year, and their GAAP EPS increased to $0.15 from -$0.51 last year. Their gross margin decreased a little to 89.3% from 89.9% last quarter. It's something to keep an eye on, but not something to worry about.

Customer growth is strong with 185 net new customers spending more than $50k, up 57% compared to the previous year, and 9.8% compared to the previous period. 59% of Forbes 500 companies are customers, which means there is still potential for more of these large customers as well as significant opportunities for upselling:

One of Monday's key strengths is their ability to quickly create and distribute new products. For instance, the rollout of mondayDB is progressing faster than expected, and they have introduced a new category called "monday Service" for ticket management, CSAT, Portal, SLA management, and Asset management. Although not available to all customers yet, Monday CRM has gained good traction with 11,025 accounts, a 32% increase from last quarter. Furthermore, monday dev accounts have grown to 1,042, a 33% increase from last quarter. Management aims to make monday CRM and monday dev accessible to all customers by the end of Q1 FY24.

Net retention rates decreased to 110% for all customers, 115% for customers with 10+ seats, and 115% for customers spending more than $50k. However, management mentioned being "encouraged by the signs of stabilization that we witnessed during the most recent quarter".

Overall, I'm happy to be part of Monday because:

• TAM: The company has a large and growing market opportunity ($56B).

• Diversified revenue: They generate revenue from different parts of the world (only 54% from the US).

• Execution: They excel in various areas, such as culture, go-to-market strategy, research and development, and financials.

• Insider ownership: The company is led by owner-operators who own 20% of the company.

• AI: They also have the potential to develop AI solutions that can double revenues by adding value to existing customers.

To learn more about Monday, you can check out their Investor Day 2023 presentation here.

(My thoughts are with all the people affected by the current war in Israel and around the world, which I hope will come to an end soon. It’s impacting 7% of Monday's global workforce who have been called up for reserve duty.)

New positions

I’ve started four new positions, but I’m not ready to discuss them yet. Each position represents only about 2% of the portfolio. I’ll provide more insights once these positions reach full size, as I may decide not to continue with one of them.

Closing Thoughts

The recent earnings season started with a bang as both CFLT and BILL experienced nearly a 50% drop after earnings, causing me to question my entire portfolio.

Fortunately, since I needed more confidence in those companies, my positions in them were relatively small.

However, the rest of the earnings season turned out to be quite favorable, as many of my largest holdings such as NET, SNOW, DDOG, and CRWD saw double-digit rallies after their earnings reports and cybersecurity has proven to be remarkably resilient.

‘Cybersecurity titans’ have raised their forecasts after beating the best-case scenario last quarter. And the stocks have performed exceptionally well this year: CRWD has seen a 150% year-to-date (YTD) increase, ZS has gained 103%, NET has gained 99%, S has gained 90% YTD, and I would almost include DDOG, touching cybersec, in that group with a 70% YTD increase.

Talking about cybersecurity: I always make a list of potential reasons—thesis breakers— to sell my companies, and "serious security breach" is always one of them. For every company. This shows how important cybersecurity is and continues to be. In addition, there is a growing trend towards using cloud services, and it is crucial to secure these services, especially in the era of artificial intelligence.

The major players in cybersecurity have been incorporating AI for a long time and have already developed their AI solutions. For example, Zscaler has 360, SentinelOne has Purple AI, and Crowdstrike has Charlotte AI. I believe, these AI solutions will contribute to significant growth for all of these companies, as they participate in the AI infrastructure layer throughout their lifecycle.

No single leader holds a double-digit market share. For example, Microsoft, the largest player, had approximately $15B in revenue in 2022, which is still less than 10% of the total market. Palo Alto represents roughly 3%, while CrowdStrike holds about 1.5% etc.

Gartner predicts the information security and risk management market will reach $267.3 billion in 2026 with a CAGR of 11% until 2026.

Moreover, statements like the one below by Palo Alto CEO Nikesh Arora, further reinforce my conviction that there is enough space and runway in the cybersecurity landscape for multiple players.

It’s not a coincidence that almost all of them are reporting strong numbers. That’s why I’m invested in cyber security.

What to expect in 2024?

Some people expect a recession to hit and affect the entire market, while others anticipate a continuation of last month's rally. As for me, I’ve no idea! (Although surprisingly my crystal ball from last year's December 2022 portfolio review seemed to have worked!).

I read a fantastic book called Stocks for the Long Run by Jeremy Siegel, which presents a wealth of statistical evidence:

Waiting for a recession to be officially declared before deploying cash can be risky. The National Bureau of Economic Research takes its time to confirm, and by then, the market may have already bottomed out, making the recession old news.

For instance, the 2001 recession lasted eight months, starting in March and ending in November, yet its official announcement came later. Similarly, the Great Recession, from December 2007 to June 2009, had its official start declared a year later, and the end date was announced even later. Relying on timely announcements can—I would even say 'will'—result in missed opportunities and losses.

Instead of worrying about things I can’t influence, here’s my thinking:

Thesis off? Good! Reflect and refine. Market volatility? Great! It's a buying opportunity. Life throws curveballs? Fantastic! Embrace personal growth. Perspective is key—setbacks are lessons, and challenges are growth opportunities. So, as always:

I focus on what I can control and ride the market coaster if necessary

After experiencing a two-year investing nightmare with a -61% decline in 2022, I’m very happy with 55% YTD return (versus 22% for my benchmark, the accumulating S&P500 ETF) and 17% annualized Time-Weighted Return (TWR) since 2019. Going forward, I’ll continue working towards my goal of achieving a 20% annual return over the next few decades. But can I realistically achieve that goal with the companies I own?

Considering their current market caps and valuations, I'm not sure. However, these are excellent companies with strong leaders, large addressable markets, and favorable trends. I expect most of them to continue growing steadily or even faster. And they must keep delivering, or else it might get tough. One promising sign is that cloud growth has been increasing again since Q3'24 and has shown resilience with 16.4% growth:

My plan is simple: I’ll stay invested in these excellent companies for as long as possible until I see significantly better opportunities or if a specific investment thesis begins to show weaknesses. In that case, I’ll use the funds to invest in one of my newer, smaller, and lower-valued companies. One thing is certain: It’ll be exciting to look back on these thoughts in 2034—10 years from now.

Thanks for joining me on this journey and Happy New Year, everyone!

Follow on X/Twitter for frequent updates: @MoritzMDrews

PS – I have started sharing my portfolio on SavvyTrader. Here, you'll find:

• Current Portfolio Holdings

• Performance Over Time

• Distribution Heatmap

• Detailed Trade Alerts

• Trade History

Check it out at this link.

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Disclaimer: This portfolio summary is for informational purposes only and does not constitute investment advice. Everything expressed here is solely my personal opinion. As I am not a professional, please do not blindly follow my perspectives as they could lead to incorrect conclusions.

Everyone likes to call themselves a long-term investor.

Yet very few act accordingly.

This is something I have thought about a lot recently. After we were spoiled by a 10-year bull market leading into COVID-19, it’s hard to tolerate volatility and think beyond the short-term struggles with inflation, severe interest hikes, and recession-ish sentiment.

Buying stocks at better prices for longer

As a long-term investor, now is actually a great time to continue adding to my positions at a discount. And the longer the bearish sentiment continues, the longer I can build my portfolio at a discount. Hello, 2024! A great opportunity, if you think about it from that perspective.

Had I sold my tech growth stocks last year, I’d have lost as much as 60% on a cost basis (!!) for some of them.

After sitting through this time and regularly adding at better prices over the past year, I’m down only slightly on some positions and significantly up on others.

Valuation

This shows me that, even if you invested in or shifted to highly valued stocks at the market peak, patience allows you to come out with a gain.

That is if you are invested in companies whose thesis remains intact.

Fire & forget doesn’t work with fast-growing, richly valued stocks. What helps are the following:

• Patience

• Strong nerves

• Regular due diligence about your investments

As of lately, I’m also more aware of valuation than before. Valuation plays an important role in that it can enhance or shrink your gains significantly. In retrospect, I’d much rather have added fresh cash to my portfolio only in 2022, and not in 2021.

However, the longer you invest, the smaller the effect and importance of valuation become. As a long-term investor, I can relax: I’ll pay more attention to valuation, but I don’t intend to become too dogmatic about it. After all, who cares today if you bought Amazon 5 USD cheaper or pricier 10 years ago…

The beauty of long-term investing

Ride out volatility and draw-downs

Some stocks, especially growth stocks, are significantly more volatile than others. Despite that, even the greatest stocks suffered severe draw-downs over extended time periods. Chris Mayer recently published a great piece about drawdowns that I recommend checking out. If you invest long-term, volatility doesn’t matter. Rather, it gives you favorable prices to add to your stocks and thus, drives returns long-term.

PS: Something I really need to get off my chest: Just because a stock has fallen farther from peak to trough, it can still be a better investment, if the overall performance is better than that of a less volatile stock:

Compounding, or: to the moon

You all know it, but it can be very helpful to think about what compounding does for you if you can sit tight for 15+ years. And we need to give our portfolios the time to do that compounding magic.

Historical outperformance of stocks

Stocks have been the best asset class to own long-term. Surprisingly, that is even true if you invested during the market peak of 1929, and held tight onto your positions through the following great depression (as outlined in the great book Stocks for the long-run* by Jeremy Siegel).

Stocks (or ETFs, for that matter) will win the performance comparison, but only if you own them for a long enough time frame.

Tax Benefits

In many countries, long-term investments qualify for preferential tax treatment. For example, capital gains on investments held for the long term are often taxed at a lower rate than short-term gains. Additionally, you save a lot of tax by not being too active in trading in and out of positions. Long-term investing with mostly inaction results in significant tax savings over time and protects your compounding magic.

I hope this provides some encouragement during this weird market. I have no idea, how long it’ll last, but I know, it won’t last forever and patience will be rewarded. In the meantime, I’m planning on adding to my existing positions and building out some new ones, as well.

Stay tuned, currently, Moritz and I are looking closer at compounding business with strong growth metrics!

If you feel anxious, I highly recommend reading One Up On Wall Street*: The great Peter Lynch suffered many draw-downs, periods of inflation and terrible markets. Yet he returned an insane amount of 29+% (!!) annualized returns to his shareholders. In his book, he has one chapter dedicated solely to reading during bad times.

PS: Reading books is a much better investment of time than reading market news and pessimist reports. 😉

TL;DR

Don’t let the market swings get to you.

Investing for the long-term will help you:

• Weather volatility so that it makes you wealthier, not poorer

• Maximize the compounding effect for your portfolio

• Statistically outperform all other asset classes

• Pay fewer taxes

Happy Investing & enjoy the rest of your weekend!

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Disclaimer: This text is for entertainment purposes only and does not represent any investment advice, stock buying or selling recommendation, or any other financial advice. So please always do your own due diligence and make your own decisions. See our disclaimer for more details.

*This post may contain affiliate links that at no additional cost to you, I may earn a small commission.

For more frequent updates and my expectations for the next earnings season, follow me on Twitter: @MoritzMDrews

Let's dive in!

In my previous portfolio review, I discussed the evolution of my investing philosophy, which now places a stronger emphasis on the long-term prospects of a business rather than focusing solely on quarterly metrics that can be volatile.

In theory, I have always had a mindset of "holding forever" when it comes to investing. However, in practice, this approach can be risky, especially when investing solely in fast-growing, unprofitable (GAAP), and highly-priced businesses operating in competitive and disruptive industries, with the hope of also weathering difficult times.

While some companies, like Crowdstrike , have become profitable on a GAAP basis, it remains to be seen if they can sustain profitability over the long term and if they have a sustainable competitive advantage. On the other hand, companies like Snowflake have yet to achieve profitability while maintaining one of the highest valuations in the market.

When I use the term "risky," I am not referring to the possibility of losing all of the capital. Instead, I am referring to the expectation of generating returns that outperform the market.

Let's be realistic: We invest in individual stocks because we believe we can outperform the market. However, I don't believe it’s possible to consistently outperform the market over the long term by investing in a small number of these expensive businesses with lots of uncertainty mentioned above.

Historical data has shown that most businesses do not succeed. Therefore, when investing in companies like Monday , Bill , or Crowdstrike (just randomly selected names from my portfolio), it’s important to be cautious about expecting market-beating performance over the next decade.

Grasping the true difference between growth and value took me some time. It's not an either-or situation. A business needs to provide value to its shareholders, and the growth of key metrics such as revenue and earnings contributes to that value. Successful investors aim for both.

However, there is a third aspect, often mistaken as "value," which refers to the price (not stock price, but the multiple) of the company. Considering this price becomes crucial when considering long-term investments in such companies.

The main difference between growth and value investors lies in the timing of their entry and exit from a stock. Growth investors typically enter when growth is accelerating, often regardless of valuation, and exit when growth begins to decelerate, as valuation becomes a significant factor. On the other hand, value investors buy stocks at low valuations and sell when the investment becomes overvalued (price).

Personally, I’m not a fan of either style anymore. Both styles require constant action, including:

• They’re forced to continuously seek new opportunities, as current holdings may fall out of favor over time due to either decelerating growth or high valuation (which can be stressful).

• Selling stocks and paying taxes (can hinder compounding).

• Buying new stocks with the hope of achieving better performance than the previous investment (moreover, the paid taxes must be compensated by a significant stock price appreciation in the new investment).

Now, I'm not saying these styles are wrong. There are many investors who have achieved impressive results using them. It's just my personal preference:

I wouldn't say I like the feeling of constantly being compelled to take action either because growth is slowing down (which is bound to happen at some point due to the law of large numbers) or because valuation has become unreasonable.

So, what does all of this mean?

As I mentioned in my last portfolio review, my main focus is on the long-term, sustainable growth of the business. I'm willing to hold onto investments through both ups and downs. Here’s an example of my most recent addition, Evolution Gaming ($EVO.ST / $EVVTY ):

The quarterly revenue growth of this company has been decelerating for quite some time, making it less appealing to investors who solely prioritize growth:

Year-over-year (YoY) revenue growth appears lumpy:

However, when taking a step back and looking at it from a long-term perspective, the overall trend of absolute revenues appears to be very healthy:

Profitability is skyrocketing:

Lots of free cash flow:

No debt:

Unprecedented margins continue to trend upward:

Earnings per share continue to trend upward:

And dilution remains very stable (In 2021, it was primarily driven through acquisitions):

While most mentioned looks impressive, the market does not seem to agree. The stock price of Evolution Gaming has been moving sideways for nearly 2 years, and its P/E ratio is at a historically low level of just 23.

After extensive research on Evolution Gaming, I’ve concluded that it is a misunderstood business, rather than being simply seen as a gambling stock with no competitive advantage and unethical practices.

I firmly believe that Evolution Gaming, as the B2B market leader in live casinos, will continue to demonstrate sustainable growth of 20% or more in the coming years due to a) the expanding live casino market, b) their international expansion efforts, and c) diversifying revenue streams through options like RNG.

If they continue to execute their plans, as they have in the past, the market will eventually catch up and deliver consistent returns to shareholders. Additionally, the company's valuation appears reasonable and not excessively priced.

Here’s a recent article that provides an in-depth analysis of Evolution's competitive advantage and the factors driving its success (but also highlights risks that are important to understand). I found it informative and enjoyable to read.

So here we have a highly profitable business that is experiencing sustainable growth across multiple aspects in a growing market, driven by capable management who have skin in the game.

This is the type of business I am willing to hold onto, even during challenging quarters, as long as the investment thesis continues to prove successful.

Portfolio performance

Timestamp: 9/30/2023

Portfolio allocations

Closing Thoughts

As mentioned in my recent write-ups, I intend to make fewer adjustments to my portfolio. Consequently, there will be fewer portfolio changes to report, like in September when I didn’t change anything.

Going forward, I’ll publish a quarterly portfolio review every 3 months that will include the usual updates on performance, changes, and thoughts. As a result, this will be my final monthly portfolio review.

The next portfolio review will be published in the first week of January 2024. I expect it to feature a few new exciting and sustainable businesses, similar to Evolution Gaming. Stay tuned!

Thank you for reading and Happy Investing!

Follow on X/Twitter for frequent updates: @MoritzMDrews

Read my previous portfolio reviews here.

Disclaimer: This portfolio summary is for informational purposes only and does not constitute investment advice. Everything expressed here is solely my personal opinion. As I am not a professional, please do not blindly follow my perspectives as they could lead to incorrect conclusions.

An investment thesis is a written analysis describing why an investment should generate a compelling return. Professional investors, VC firms, and analysts regularly create research-backed investment theses to introduce investment ideas.

Here’s how an investment thesis helps you as an individual investor:

• Properly understand the company

• Feel confident amidst market swings and volatility

• Distinguish noise from impactful catalysts and developments

• Check company performance against the thesis to see if it remains intact

Define your investing goal & time horizon

Before we can move on to writing an investment thesis, we need to determine the goal. Do you want to beat the index? Which one?

Is the goal to hold a business for 10+ years and compound it? Or are you short-term focused?

Example 1: If you want to hold on to a business for 10+ years and don’t touch your portfolio unless necessary, it makes sense to research the stock thoroughly, think about long-term developments, industry, and overall trends and tailwinds, and learn about management and culture.

Example 2: If you want to max out short-term appreciation of a stock; valuation, and near-term events might be more impactful to your thesis and you’ll likely invest in a different set of companies compared to example 1.

When you know what you want to achieve, you can find the right investments to get you there.

How to write an investment thesis

Initially, it is helpful to write a brief summary explaining what the company does.

💡 Sanity check: If you can simplify and explain what the business does and how that creates value, you likely know it well yourself.

Example: Snowflake helps businesses extract the value of their data by providing the infrastructure (Data Cloud) to store, use, analyze, govern, and share the data while ensuring high data quality.

1. Define the underlying catalyst

Write out the primary reason you believe this investment has attractive upside potential beyond its own execution. This can include anything from favorable industry dynamics and tailwinds to disruptive potential and the opportunity for market outperformance.

Example: I want to participate in Cloud Transformation (and AI), and invest in a well-positioned business in the Cloud Computing Market which is expected to grow by a 20% CAGR from 2023 - 2030. (Source: Fortune Business Insight)

2. Evaluate the positioning of the company

In the next step, think about how well this particular company or investment is positioned to benefit from the catalyst.

To help you answer this question, you can find an overview of aspects I like to use when evaluating an investment:

• Fundamentals

  • Durable revenue growth

  • Profitability

  • Margins

  • Debt

• Competitive positioning

  • Is the company outperforming its peers or the overall market?

  • Is it positioned as a premium or pricing leader?

• Valuation

  • Compared to peers

  • Compared to its historical valuation

  • In the context of its future performance

• Management

  • Is management credible, competent, and applies the right values to the business?

  • How is management incentivized and what is the degree of insider ownership?

• Capital allocation

  • How well is the business allocating its available capital towards future growth and to increase shareholder value?

3. Identify risks and impactful events

Every investment comes with risks, as well as important events or developments investors should keep track of.

Risks can come from competitive pressure, politics or regulation, supply-chain shortages, disruption, and other areas. Ultimately, it’s the individual risk/reward evaluation and appetite that decides whether something is a good investment for you or not.

Share

Which events or developments do you think will impact this business and how? This could include the launch of a new flagship product, a change in legislation or industry regulation, or management presenting its capital allocation plan for the mid-term.

Write these significant developments down so you can refer back to your notes when they are coming up.

Example: Snowflake Investment Thesis

Book recommendation: If you’re interested in high-performance and growth culture in Tech, I recommend Frank Slootmans’ book “Amp it up!”*.

4. Define your investment criteria

Aggregating your thoughts from the previous steps, you can distill the must-haves for your investment thesis to remain intact.

For instance, you can think about which outcomes you expect from the important events and developments (see step 3), as well as what expect the company to deliver in terms of its fundamentals (e.g. a maximum level of debt, dilution, etc.).

Compare quarterly results and important events or developments against your investment criteria to check, if your investment thesis remains intact. This helps you make objective decisions and have a framework to rely on when deciding whether or not your investment thesis is broken or remains intact.

💡 Important: Your investment thesis and criteria should serve you as a framework for decision-making. Nonetheless, it's crucial not to be overly rigid. Unexpected events, such as the Covid crash or other external factors, can cause investments to fall short of expectations despite the investment thesis remaining intact.

5. Define your conviction level

Lastly, think about how confident you are in this company’s ability to help you achieve your investment goals (=conviction). This will help you make informed investing decisions, e.g. how much capital to allocate to this stock, when to sell, etc.

Book recommendation: I highly recommend Why Stocks Go Up and Down* if you’re introigued by the ins and outs of fundamentals and what dictates stock prices, including a deep case study on how to create an investment thesis.

TL;DR

An investment thesis is an important framework to think about your investments and make informed investment decisions backed by your own due diligence.

Here’s how to write your own investment thesis:

• Define your investment goal and your investing time horizon

• Define the underlying catalyst you want to benefit from

• Evaluate the positioning of the company

• Identify risks and impactful events

• Define your investment criteria

• Define your conviction level

• Use your thesis to regularly evaluate your investments

Cheers & Happy Investing!

Disclaimer: This text is for entertainment purposes only and does not represent any investment advice, stock buying or selling recommendation, or any other financial advice. So please always do your own due diligence and make your own decisions. See our disclaimer for more details.

**For the sake of readability, I keep this example brief. You can read more about Snowflake in our other articles, for ex. Snowflake Q1 2023 earnings recap. Disc: As of writing this, I own Snowflake shares.

*This post may contain affiliate links that at no additional cost to you, I may earn a small commission.

For more frequent updates and my expectations for the next earnings season, follow me on Twitter: @MoritzMDrews

Let's dive in!

Here's a thought I've carried with me since I started investing over five years ago:

My biggest fear in investing is not huge drawdowns - I survived a -61% drawdown on my portfolio in 2022. It's not the fear of recessions or economic downturns - they happen every seven years on average. And it's not black swan events - I focus on what I can control.

My biggest fear is being unable to adapt to the constantly changing world of investing. The ability to course-correct is necessary because what worked in the past might not work anymore tomorrow.

I highly regard Saul for his ability to adapt to change, which helped him achieve an astonishing 30+% CAGR over the past decades. Now, I feel that the time has come for me to become like a tiny water drop that has to find its own path, a path that feels right to me.

This review marks an inflection point in my investing journey, leading me to be more active than usual since I’ll gradually shift to a different approach as I’ll explain in a second. I expect this to continue for the next few quarters until my portfolio aligns with the course correction I'm currently undertaking:

After much reading and contemplation, I’ve come to question what type of investor I truly want to be. I’ve decided that I want to be someone who optimally holds companies for decades and sees themselves as an owner of a growing business.

This led me to the question of how I can maintain my conviction if things go down in a quarter or two. And I’ve found my answer: it is all about people.

This means that my primary focus is investing in the people, the leadership, and the culture behind great companies. I search for individuals with a profound understanding of how to build strong cultures, reinvest efficiently into their company, and create successful businesses that are driven by long-term secular trends.

Additionally, they have a significant personal investment in their own company. I deeply believe that, in the long term, people are the most important factor in determining a company's success.

So instead of obsessing over P/E ratios, changes in sequential growth metrics, or how frequently the CEO mentions "AI" in earnings calls, it’s ultimately the leadership and the people they hire who are crucial.

It is the talent that ultimately drives durable growth for decades.

I’ll always prioritize growth, but it doesn't have to be hyper-growth. When I say growth, I'm referring not only to revenue growth, but also earnings growth, cash flow growth, and margin expansions.

I'm satisfied with any type of healthy growth that has the potential to last for at least a decade. I'm looking for a combination of significant growth metrics, and I’ll be okay with lumpy revenue growth. This doesn't mean I won't consider or invest in "unprofitable" hyper-growth companies anymore. I'll still invest in the best of them.

Nevertheless, what has changed is that I stopped putting labels on things. I try to look beyond categories like Small-, Mid-, and Large Caps, growth vs. value, or trendy SaaS businesses with recurring revenue models versus boring, unsexy offline companies.

Moving forward, I'll consider them all and choose the ones that I believe will help me achieve my goal of an ambitious 20% CAGR over the next few decades. I want to be an actual business owner, investing in companies, that I can easily understand and monitor. All that raises the bar pretty high. And once I’ve found a company that checks all the boxes I plan to hold on to it.

However, I won't blindly invest with a "buy and hold" mentality forever. Due to constant change, innovation, and technological disruption, the average lifespan of companies is decreasing. This approach is a thing of the past and only works with ETFs anymore.

This means that I’ll still sell if the time has come. But instead of basing my decisions on a sequential change in some metrics, I’ll rely on a clear investment thesis that I have written down for every company I own. This time may come tomorrow or 10+ years from now. Nevertheless, as long as the investment hypothesis remains intact and I have faith in the people driving the venture, I will stay on board.

Here's a quote that resonated with me last month:

Portfolio performance

Portfolio allocations

Recent changes to the portfolio

Positions I trimmed

Datadog –

Initially, I was confused by the low customer growth, with only 600 new customers added and just 80 customers spending more than $100K ARR during the quarter. This negative trend has persisted for a few quarters now. However, after conducting more research, I gained clarity. Despite this trend, my conviction remains strong. Why:

1. Customers are using more modules, indicating that they still love Datadog.

2. Management, whom I trust, sounded highly convinced of the company with future growth picking up again.

3. The quarter was impacted by several events that made it look odd: a) macro still dragging consumption b) seasonality impacting larger customers in Q2 c) low churn on the meaningless low end, d) a one-time cleanup of 200 low-end, tiny customers to free tier (also meaningless).

4. Management highlighted record-high bookings, which indicates that more meaningful customers on the high end were acquired or extended their contracts. The reason why these customers didn't show up in the $100K cohort is because they aren't spending the "booked" value to get over that $100K ARR threshold, yet. This is due to budget scrutiny and ongoing optimizations.

5. Remaining Performance Obligations, the "backlog" of what customers commit to future spending, accelerated to 41.9% YoY and 9.6% QoQ. Also, cRPO growth, revenue that is recognized in the next 12 months, accelerated to 30% YoY. Essentially, Datadog’s customers signed up to spend significantly in the future. It's just a matter of when they pull the trigger.

In short:

• Existing customers still love DDOG.

• New customer growth is healthier than it appears.

• Macro, scrutiny, and optimizations won't last forever.

I still trimmed my position slightly to align it with my other larger holdings. You can see this move as part of my "inflection point," which I noted at the beginning of this summary.

Despite the significant drawdown of the stock over the past two years, my position is still up over 180% since I bought it. Selling would mean paying taxes, and I plan to invest for the long term. The thesis for Datadog remains intact, and going forward, I will try not to touch it anymore if possible. (Please remind me if I forget, since I am fallible).

Crowdstrike –

A few weeks before Crowdstrike's earnings, I trimmed my position slightly to allocate funds to my new investments. Although earnings were solid, I was expecting more revenue growth for the quarter.

Nonetheless, it’s great to see a net new ARR of $196M, which is higher than expected. There was also a nice acceleration in RPO growth, indicating customers plan to spend more in the future.

In addition, customers are purchasing more modules, and Kurtz announced that Crowdstrike is now GAAP profitable with $8M in quarterly revenue. As a result, I remain a calm shareholder.

Zscaler –

Similar to CRWD, I trimmed ZS slightly because I needed funds. I wanted to bring the position to a level where I feel comfortable, but I will be much less active in the future due to my course-adjusted investing style. Zscaler reports on 9/5, and I expect them to deliver solid results.

SentinelOne –

Sentinel One reported solid numbers and the stock is up about 40% since its recent drawdown:

• Beat revenue guide by 6%, reaching $149.4M, a 46% YoY increase, and a 12% QoQ acceleration.

• Gave a solid Q3 guide of $156M (I had expected $151M).

• Raised the FY guide to $605M, up from $600M.

• Added 77 customers spending >$100k, 8.4% sequentially, accelerating.

• All margins continue to improve and are working out as planned.

• Organic DBNRR is over 120% instead of the reported 115%, which is influenced by last year's Attivo acquisition.

Management also mentioned they are collaborating with four large accounting firms to ensure that the whole ARR issue influenced by consumption revenue, which happened in the last quarter, will not happen again.

Additionally, they stated that rumors about a potential acquisition or the cancellation of the partnership with Wiz are unfounded.

While all of this sounds great and worked out as I had laid out in my last quarter’s writeup (which I recommend reading to understand the whole situation), I trimmed my position ahead of earnings at the $17 region.

My plan was to opportunistically trim if the stock kept going up because I didn't know for sure what would happen, so that’s what I did for risk management. They made some significant mistakes which I shouldn't ignore. I used most of the funds to allocate to existing and new positions I have conviction for the long-term.

While I liked the quarter, I’ll continue to think this through and let you know about my decision next month.

One observation I made was how negative everyone suddenly became. There was immense pressure coming from all sides, especially on FinTwit (FinX?).

But it's important to tune out the noise and focus on what really matters: the people behind the company one is invested in. I don't want to invest in just some random metrics; I'm investing in real people driving a venture. And when they speak up, I listen.

bill com –

When it comes to writing about companies, some energize me while others feel like work. Unfortunately, Bill falls into the latter category and continues to be my most complicated company to follow. Here are my thoughts on the quarter:

Subscription revenue remained flat at 0.3% QoQ. However, it's worth noting that my previous writeup stated that "the subscription price increase is now in their run rate numbers, and as a result, we can expect a smaller sequential subscription revenue increase compared to recent history." Also, subscription revenue only makes up 25% of total revenue.

TPV growth from BILL standalone customers remained flat, but management expected this last quarter due to lower TPV performance in Q3. Dollar-based-net-retention rate was 111%, down from last year's 131%. While this isn't the right direction, I can't think of a single (non-consumption-based) company that has a better DBNRR these days due to macro trends.

Customers coming from financial institutions declined by -10% QoQ, but this was expected due to Bank of America sunsetting the BILL-powered legacy ACH and Check bill pay solution used by their commercial customer segment. It's also worth noting that BILL core customer growth accelerated to 4% QoQ (versus last quarter's 2.8%) after excluding customers coming from financial institutions.

There was some nice revenue growth from Divvy (12.8% QoQ), and Divvy Total Card payment volume was up 11.8% QoQ. Operating income reached a record high of $42.3M, and net income was $69.4M. Operating cash flow increased significantly to $80.4M (up from -$10M a year ago), and free cash flow was $73M (up from -$15M a year ago).

However, customer growth coming from Divvy was a bit light at 7.7% QoQ, which could be due to seasonality.

In summary, the quarter was "okay" with no red flags. I was happy to see strong profitability. However, going forward, I hope to see stronger customer growth, especially for Divvy, and an FY revenue guide raise. Due to the combination of okayish results, although still strong considering the overall environment, I don't feel confident with BILL in the long run. I'm not convinced that their "acquisition engine" will work out well, and it's possible they could hit a wall in the next 12 months.

I kept trimming throughout the month and allocated the cash to other positions. For now, I plan to keep 5% in BILL, but I'll likely sell out next quarter to make room for a better alternative.

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Positions I increased

The Trade Desk –

I thought the quarter was rock solid as usual and even better - revenue growth accelerated to 23% year-over-year and sequentially. Based on the guidance I expect that trend to continue. All relevant metrics keep improving, and they even improved GAAP net income to $33M, up from $9M a quarter ago. When the stock tanked after earnings, I couldn’t hold back and added a bit.

Just this week TTD announced that its CTO David Pickles steps down. He worked at the company for over a decade. Only time will tell what that means for the company. Still, my conviction remains high. Remember, when Crowdstrike’s CTO stepped down 2 years ago? Didn’t hurt them obviously.

The Trade Desk is one of the easiest companies to follow and one of my best performers since I first bought it almost 5 years ago.

If you are not familiar with The Trade Desk, here is a quick primer on what makes it so intriguing based on some of my older notes:

Facebook, Twitter, Google, and other social media platforms work very well for performance marketing, but they cannot convey emotions effectively. The big brands and conglomerates, such as McDonald's, Nike, Lindt, Dr. Ötker, BMW, etc., rely on emotions in their advertising, and they urgently need a platform where they can let their creativity run wild, without being limited by performance figures like CPCs (cost-per-click) and CPAs (cost-per-acquisition).

Linear TV is dying, and more and more people are consuming media online, mainly via mobile devices and platforms like YouTube, Disney, or Netflix.

However, the small screens of mobile devices, often used without sound, do not allow for emotional impact. Moreover, users have full control over their online experience, so video ads before or after a YouTube video do not have the same emotional impact as a commercial tailored to the target audience, consumed via a connected TV on a large screen with sound.

By using The Trade Desk and its data-driven targeting, companies can reach their audiences more effectively and reduce waste significantly, making ad dollars spent on connected TV more valuable than those spent on linear TV.

This creates opportunities for companies to create emotionally charged advertising that resonates with their target audience, leading to higher engagement and increased brand loyalty. Roughly every dollar spent on linear TV is worth at least twice as much on Connected TV and its TAM is huuuuuge. As you can imagine, I like TTD!

Confluent –

Confluent remains a small starter position for me, sitting at 2%. Overall, the quarter was decent with the following highlights:

• Beat their Q2 cloud revenue guide by 2%, achieving $189.3M, a sequential acceleration to 8.8% (seasonality driven though).

• Cloud revenue is decelerating, which I assume is muted by macro factors. However, as a percentage of revenue, it is increasing to 44%, and the raw dollars added ($10M) for the quarter is higher than last year.

• Raised fully rear revenue guide by 1% to $772M from $765M.

• Hired a new CFO, Rohan Sivaram, who was senior vice president of finance at Palo Alto Networks.

• The company sits on $1.85b cash and is moving towards non-GAAP profitability with improving margins, so there is no cause for concern (non-GAAP net income was positive for the first time).

• Solid RPO, which keeps stabilizing.

• All customer cohorts grew very healthily, especially the $100k and $1M cohorts, which make up 85% of total ARR.

If you want to learn more about the company, I recommend reading my last writeup and Peter Offringa’s take on the quarter.

I added and may continue to add opportunistically, but I am not in a hurry to do so. This company has the potential for a very long runway for years to come.

MongoDB –

Impressive: MongoDB generated a revenue of $424 million, which represents an acceleration of 40% YoY and 15% sequentially. Although the Q3 guide was rather weak (below my expectations), I assume there was some one-time impact which I have yet to confirm during the earnings call. However, the weak guide was offset by the strong full-year raise to $1.608 million, up from $1.542 million (a 4% raise!).

While Atlas's revenue is still strong, it declined slightly as a percentage of revenue (to 63% from 65%) due to the exceptionally strong performance of the non-Atlas business. Atlas revenue is primarily based on customer consumption of the platform, which is closely related to end-user activity of the application and can be affected by macroeconomic factors. I can only imagine what happens once consumption picks up again!

Overall, customer growth was solid, and margins improved across the board.

Since MongoDB is one of the most expensive in my portfolio, I might not add further from here since I'm already happy with the position size. However, I still have to read through the earnings transcript, and that might make me change my mind.

Snowflake –

Snowflake had a strong quarter, with product revenue reaching $640M, a 37% YoY increase. Sequential growth accelerated to 8.1%, and remaining performance obligations saw a healthy sequential increase of 3.8%, up from -6.9% last quarter. Although the dollar-based net retention rate (a lagging metric) decreased to 142%, it is still best-in-class and expected to improve with consumption in 2024.

Customer growth slightly improved, with 4.5% sequential growth, and 22 Global 2000 customers added during the quarter. However, the number of customers spending more than $1M in the last 12 months did not perform as well, but this is likely to be due to customer optimizations during the last year that caused them to move out of this cohort(similar to dynamics observed about Datadog). This metric is expected to improve again in 2024.

Profitability improved across the board, and Data Marketplace Listings accelerated to 255 added listings, up from 56 last quarter. The number of customers using stable edge (2.220) was solid, up by 55% YoY. This metric is important to monitor Snowflake's core investment thesis, as laid out in my previous writeup here.

In mid-August, during its duration of sadness, I added a small amount to my position. And by "duration of sadness," I mean the stock price was down. But hey, that's just a nice way of saying "buying the dip."

Cloudflare –

As a reminder, here are my thoughts on Cloudflare's lumpy earnings two quarters ago. However, last quarter's earnings looked like they were back on track. I’m not sure if they were ever off-track. Or perhaps they still are, but I’m confident in its ability to fix things.

The company delivered 6.3% sequential revenue growth at $308.5M (although this was influenced by seasonality) and raised full-year guidance slightly to $1.287M. Customer growth was fine, especially in the larger cohort. They added 196 large customers spending more than $100k, which is a significant acceleration compared to previous quarters:

• 121

• 212

• 159

• 134

• 114 (5.6% QoQ)

• 196 (9.1% QoQ)

Although influenced by seasonality, this performance is encouraging. In addition, RPO increased to $1.036M, which is a nice sequential acceleration to 8.1%. On the bottom line, Cloudflare produced great profitability across the board with a 21% operating cash flow margin, a 7% free cash flow margin (strong for Q2), and an 11% net income margin.

In August, I added a few times when the market entered an "unhappy mode" once again.

New positions

Pure Storage –

In mid-August, I took a tiny position of around 1% in Pure Storage, the leader in data storage. I had owned it back in 2019 as well, but didn't feel comfortable with it. I like the emerging subscription revenue underlying the company.

Also, the whole Flashblade/E technology is astonishing, as it decreases costs by 90%. It requires 10% of the footprint, power, heat dissipation, and manual labor compared to spinning a disc. This is incredible.

Their other products, namely Block Store and Evergreen//One, which is their subscription offering, also sound very appealing. Block Store allows users to mitigate some of the elevated storage bills that have developed with the movement of many workloads to the cloud.

However, I still feel uncomfortable holding the company. I believe that holding a storage company feels like holding a commodity in the long run. Although I believe Pure Storage will do well, especially in the short and mid-term, as they are positioned to profit from the AI tailwinds, I'm not convinced about the long-term prospects.

Additionally, since I don't want to hold more than 12 positions, I had to say goodbye to Pure Storage once again.

Nvidia –

Motivated by a bit of FOMO and the company's impressive performance, I initiated a position in Nvidia in early August. As an avid gamer, I’ve been familiar with Nvidia's graphics cards since the early 2000s, and I have been following Beth Kindig's analysis of Nvidia's future, particularly its data center segment, since 2019. Nvidia is a no-brainer.

Nevertheless, I’m considering selling my small position. As stated in my introduction, my goal is to achieve a long-term CAGR of 20% for my portfolio, and I am not convinced that Nvidia will deliver that for me for the decade to come. Yes, AI is here to stay, and the numbers look great.

However, this time is - again - not different. Although the stock price may double or even triple again, I anticipate the demand to level out in the mid-term, muting the stock price appreciation for a significant amount of time. In every company I invest in, I aim to hold for decades, rather than selling after a double or so. Furthermore, I believe there are better alternatives for the long term.

In addition, I do not fully understand Nvidia's business, even as a gamer, and I do not want to spend time trying to comprehend it. I prefer something simple, like TTD, whose business I can understand and follow. I don’t want to add a "cool-sounding" name to my portfolio and hope for the best.

I’m not sure what I am going to do yet and I’ll provide an update in my next month's portfolio review.

Arista Networks –

Arista Networks is a fascinating company that I stumbled upon. I owned it in 2019 and, being much more novice then, unfortunately, sold it.

Arista Networks creates networking equipment that acts as the plumbing for the internet. They produce switches and routers that facilitate fast and efficient data transfer between computers and devices on high-speed networks, such as the Internet or within large organizations. In simple terms, they provide the technology that enables the internet and large computer systems (data centers) to run smoothly and connect everything together. Although this may seem like a commodity, it’s not just the hardware that drives their business.

Their advanced software is what sets them apart and makes everything work seamlessly, and one reason for their 60%+ gross margin. There is a reason why they are the leading supplier to the "Cloud Titans" - as Arista Network likes to call companies such as Amazon, Google, Microsoft or Meta.

In the short term, there may be a demand normalization by cloud titans, so growth may not be smooth from year to year.

So why now?

I believe that Arista Networks benefits greatly from AI tailwinds, such as increased use of AI workloads among cloud users, faster production upgrades of data center switching products, and expanded market share with enterprise customers. Furthermore, the company has a strong leadership team, who hold 19% of the business, and a proven track record of success.

Its CEO, Jayshree Ullal, who has been with the company since its inception over a decade ago, leads the company with an intrinsic interest in its success. Prior to joining Arista Networks, she served as Senior Vice President at Cisco, where she was responsible for a $10B business in data center, switching, and services.

With over 30 years of networking experience, she has received numerous awards, including E&Y’s “Entrepreneur of the Year” in 2015, Barron’s “World’s Best CEOs” in 2018, and recognition as one of Fortune’s “Top 20 Business Persons” in 2019.

Andy Bechtolsheim, a co-founder of the company, serves as Chief Development Officer and Chairman. Before joining Arista Networks, he co-founded Sun Microsystems and served as its Chief System Architect, where he was responsible for next-generation server, storage, and network architectures.

A few metrics:

• $1.3B in cash, with no debt.

• Growing revenue at over 20% year after year (39% year-over-year at $1.46B last quarter).

• Gross margin over 60%, and operating margin over 35%.

• Producing significant free cash flow ($423M last quarter).

• GAAP profitable ($492M net income last quarter).

• Consistently achieving a return on invested capital over 20%.

• Consistently growing GAAP EPS with no dilution.

If I commit to this position, my plan is to continue learning about the company and gradually increase my involvement over time.

I look at Arista Networks as “under-the-radar-mini-Nvidia”. And while there are the usual risks associated with any company, the real risk lies in patience, as the company's performance may be inconsistent at times. To me, this is a decade-investment.

Evolution Gaming Group – EVO.ST

I’ve found a company that I believe will do well for decades to come: Evolution Gaming AB.

This Sweden-based company is the leading provider of live casino games for online gambling websites. They use actual casino equipment and real dealers to broadcast games such as roulette, blackjack, and poker over the internet, allowing people to have a genuine casino experience from their homes. It's important to note that they do not offer their services directly to consumers, which mitigates potential obstacles and risks.

The company's underlying business fundamentals are impressive: they have a YoY revenue growth rate of 28%, €441M in revenue, an EBITDA margin of ~70% (no typo!), an FCF margin of over 50%, an operating margin of 64%, a consistent Return on Invested Capital above 20%, about $500M in cash and no debt. Almost all meaningful metrics are moving in the right direction, and there has been no dilution for a while now. I cannot recall seeing such a strong performance across the board.

Last week, Evolution Gaming AB reached another all-time high with its average active player count at 60k players versus 19k last year, and it is likely to grow to 100k soon. I appreciate their leadership team and their business strategy.

The company's total addressable market is vast since most casino games are still being played in retail casinos, but the shift to online gambling is rapidly accelerating.

Of course, there are regulatory and other typical business risks, and lately, they have struggled because of the tough macro environment. However, as of now, I believe that there is a bright future ahead for the company.

No activities:

Monday –

Money reported one of the strongest earnings:

• Record free cash flow

• Strong new logo growth

• Raised Full Year Guidance

Why does Monday keep delivering? I believe it's due to a) its great leadership and culture, which you can check out on Glassdoor, b) its customer-centric product strategy, and c) its rock-solid marketing engine, as I wrote about last year in this post.

There are no planned changes here, and I'm happy with the current allocation.

Closing Thoughts

I believe that we are at a turning point for accelerated cloud and software spending, as earnings indicate. If this is true, it aligns with the thoughts I wrote down in December of last year. It's almost like I had a crystal ball! (laughs)

Now that earnings season is almost over, there will finally be a break for the next three months. I have some great companies on my watchlist that I will be reviewing soon and may add to my portfolio. Stay tuned!

You can find all my previous portfolio reviews here.

Thank you for reading and Happy Investing!

Follow me on Twitter for frequent updates: @MoritzMDrews

Disclaimer: This portfolio summary is for informational purposes only and does not constitute investment advice. Everything expressed here is solely my personal opinion. As I am not a professional, please do not blindly follow my perspectives as they could lead to incorrect conclusions.

Quarterly earnings reports can be overwhelming: 🤯

• Don’t know, where to start?

• Looking at stock prices, rather than fundamentals?

• Doing too much and still, you’re constantly feeling behind?

Here’s my simple 3-Step Framework to navigate earnings season with ease.

Step 1: Fundamentals – Get a grip on the data

The easiest (and most reliable) data source is the investor relations (IR) page of a business. Why? Publicly traded companies need to quarterly report their results. Simply look for “Cloudflare IR”, for instance.

In the IR section, you’ll find the data in one or several of these resources:

• Press/Earnings Release

• Investor Presentation

• Shareholder Letter/Supplemental

• SEC-Filing/10-Q

There are a gazillion metrics to track.

Unless you’re a professional or like to spend hours or days on each earnings report, a few selected metrics suffice to evaluate the health of a business.

5 Metrics to get you started

• Revenue & Revenue Guidance

• Earnings per Share (EPS)

• Customer Growth

• Free Cashflow

• Margins

How to track metrics

No need for fancy tools. A simple spreadsheet will do.

However, there is some upfront work: One season’s data is only a snapshot, so we need more data points to see a trend in the fundamentals.

Initially, I recommend you add the data for the past 4 - 8 quarters.

Tips

• Add the absolute numbers (e.g. in $, %, or count)

• Include comparisons like Year-over-Year and Quarter-over-Quarter for absolute or $ numbers (e.g. revenue in $, customer count)

• Display profitability numbers also as margins (e.g. Free Cashflow as % of revenue = Free Cashflow Margin)

What to Look For

• Are the metrics growing/improving?

  • Ex: earnings, revenue,e cashflow, or margins

• Is there seasonality at play?

  • Ex: Q1 usually exhibits weaker revenue growth than the rest of the year

• Any outliers or negative findings?

  • Ex: Customers going down, revenue falling off a cliff, continuously deteriorating margins

Step 2: The Conference Call – Getting into the weeds

Conference calls are awesome because they offer a platform for management to share insights and analysts to ask questions. Access the webcast (and sometimes the transcript) via the Investor Relations website.

Alternatively, you can find the transcript and recording of the call on sites like fool.com (free), Seeking Alpha* (limited free articles), or QuartrApp (partially free).

What to Focus On

Analyzing a conference call is subtle, but you will get used to it. 😊

Ideas to get you started

• Does Management sound confident?

• Are the analysts mostly congratulating management?

• What’s the focus of the prepared remarks?

  • Ex: Lately, a lot of AI talk

• What are the analysts probing around?

  • Ex: Everyone asks about weak customer growth —> check your spreadsheet

• Any explanations for outliers that you found in the fundamentals?

How to track

Simply jot down your thoughts in your preferred physical or virtual notebook. Personally, I like to use Notion, but you can use OneNote, Word, a notebook, etc.

When the next earnings season comes around, you’ll be thankful for your notes and can reference back on anything you would like to follow up on.

Step 3: Investing Diary – Taking control

Writing down insights and your thoughts is helpful to hold yourself accountable. It’s easy to put off hard decisions or be lazy about your portfolio (consider an ETF).

However, if you write down your thoughts, you’ll be more committed.

Ideas to get you started

• Investment thesis

  • Why are you holding this business in the first place?

• Fundamentals

  • Note your findings from your spreadsheet

• Conference call

  • Add here the notes from the call

• Conviction:

  • How confident are you in this company and how much of it do yo want to own?

Bonus:

Share your thoughts with like-minded individuals to exchange thoughts and for maximum accountability.

For instance, I share my portfolio allocations and transactions monthly on Twitter/X: https://twitter.com/LisaOnCloouud9

Next Steps - Walking the talk

What, not done yet? Don’t worry, we are almost there.

Now, that you have your notes, use them to evaluate your investments:

• Do you feel comfortable with your holdings?

• Are any changes needed or a new company to add?

• Do you feel comfortable with your portfolio allocations?

Remember: There is no right or wrong.

Your Investing Style.

Your Portfolio.

Your Money.

Make sure your portfolio aligns with your financial goals, your tolerance for risk and volatility, and your time horizon.

And that’s a wrap! I hope you found this helpful to feel more prepared for the upcoming earnings.

If you have any questions, please drop them in the comments.

In Summary

1. Track the fundamentals in a spreadsheet

2. Listen to conference calls + take notes

3. Take notes, e.g. in investing diary

4. Take actions (if needed)

Cheers, and Happy Earnings Season! 🎉

Disclaimer: This text is for entertainment purposes only and does not represent any investment advice, stock buying or selling recommendation, or any other financial advice. So please always do your own due diligence and make your own decisions. See our disclaimer for more details.

*This post may contain affiliate links that at no additional cost to you, I may earn a small commission.

For more frequent updates and my expectations for the next earnings season, follow me on Twitter: @MoritzMDrews

Let's dive in!

As you can read below, I made no changes to my portfolio this month. Instead, I took the opportunity to reflect on my investing approach.

I believe that investing in growth doesn't require constant trading. I prefer a deliberate approach when evaluating new or existing holdings and avoid hasty, frequent transactions.

Being data-driven, I looked at my holding periods:

• The Trade Desk: 4.2 years

• Crowdstrike: 4.1 years

• Datadog: 3.9 years

• Cloudflare: 3.0 years

• Snowflake: 2.5 years

Wow! Time flies …

During my 5 years in the stock market, I've managed to hold onto some investments for over 4 years, which feels like a reasonably long time to me.

The reason for my extended holding period is simple – I didn't feel the need to constantly trade or make changes while the market was doing its thing. I've learned that sometimes the best move is no move at all.

But shouldn’t I invest in growth companies, riding the momentum and switching around frequently to achieve the best results?

Perhaps - others are having great success with that strategy.

It just doesn’t resonate with me and that’s why I’m still trying to find the investing style that resonates best with me.

My goal is to outperform the S&P 500 because if I can't achieve more than its 10% annual return, I might as well choose an ETF for automatic wealth creation. However, I'm aiming higher, targeting a 20% annual return.

It’s an ambitious goal and to reach it without constant trading, I focus on some factors, including:

• Maintain reasonable position sizings below X%.

• Invest in quality growth companies with healthy and durable growth.

• Ensure my holdings are well-positioned for the future, considering long-term tailwinds, great management, and increasing demand from customers.

It's challenging but possible: I've seen other investors achieve even better results with different approaches.

Back to data-driven facts: How’s it going?

Currently, my portfolio has yielded a 14% annual return (CAGR) since I began investing in 2019, because of the over-hyped 2020 but also despite the brutal 2022.

While that’s below my 20% p.a. target, I attribute this setback to global events beyond my control:

• inflation

• the pandemic

• interest rate hikes

• the war in Ukraine

• the looming recession

However, I remain focused on what I can control:

Staying committed to my goal by investing in quality growth companies, staying well-informed, and making necessary adjustments without trying to squeeze every last bit of performance.

I believe that after the challenging 2022, the market will eventually stabilize, and making the right decisions at least 50% of the time should help me reach my goal.

With that in mind, adaptability and humility is vital, given that the market could be on the verge of the next major megatrend: AI.

Portfolio performance compared to market

Portfolio allocations

Recent changes to the portfolio

Here’s what I did in July: Nothing. 🦥

Company updates

Note: To keep it concise, only companies with noteworthy updates might be included. Absolute numbers relate to last quarter's earnings release. Metrics are adjusted values (Non-GAAP).

Check out my most recent reviews here:

• Snowflake

• Cloudflare

• Datadog

• Crowdstrike

• Zscaler

• Sentinel One

• Bill

• The Trade Desk

• Monday

• Confluent

My Watchlist

, , , ,

Closing Thoughts

Earnings season ahead: I'll be back next month with updates on some of our companies. Specifically, I'm keeping a close eye on Cloudflare and Sentinel One. They better deliver!

Earnings Calendar

Thank you for reading and Happy Investing!

Twitter: @MoritzMDrews

Disclaimer: This portfolio summary is for informational purposes only and does not constitute investment advice. Everything expressed here is solely my personal opinion. As I am not a professional, please do not blindly follow my perspectives as they could lead to incorrect conclusions.

Stocks discussed:

RPO and ARR were weak in contrast to their strong bottom line – the biggest disappointment for investors in this report.

Let’s Start With the Top Line

Q1 revenue growth was $692.6M, a robust 42% YoY increase. While sequential growth was 8.7%, down from the previous quarter, the company surpassed Q1 guidance and raised its full-year outlook. Q2's projected revenue is $727.4M, hinting at another sequential decline, typical for weaker Q2 and Q3 seasons. International markets outpaced overall growth, up 53% YoY.

Annual Recurring Revenue (ARR) rose 42% YoY, reaching $2.73B, but net new ARR was $174.2M, lower than the past 5 (!) quarters and decelerating sequentially. ARR outlook for the full year remains around 30% growth due to longer sales cycles, smaller deal sizes, and increased deal scrutiny.

On top of weak ARR, Revenue Per Order (RPO) declined YoY for the first time ever, now standing at $3,315B. Also impacted by businesses switching from multi-year to 1-year contracts. Makes sense, but meh.

Happier Results on the Bottom Line

While growth is hampering (but still, strong - don’t want to make it sound worse than it is), CrowdStrike really proves how it can increase its efficiencies. Showing investors record outcomes and beating expectations for Operating Income, Net Income, and Free Cash Flow.

Margins improved across the board. Each margin gained around 30 bps – that’s really strong! For ex., the non-GAAP Subscription Margin surpassed 80+% for the first time - ever. Reason: data center and workload optimization.

Non-GAAP Operating Expenses are roughly in line with previous quarters (S&M as a share of revenue are higher than in previous Quarters, driven by the timing of marketing and in-person events, R&D and G&A are stable)

Operating & Free Cashflow was strong at 43% and 33% of revenues, respectively.

CrowdStrike also achieved record non-GAAP Net Income and GAAP profitability for the first time. However, this is not expected to be sustainable just yet, as it was mostly driven by adding less headcount in Q1.

EPS reached a record of $0.57 per share and CrowdStrike is on a mission (yes, to stop breaches), but also to control stock-based compensation, while retaining top talent.

It strives to keep dilution under 3% in the coming years. Good for shareholders, but also, controlling SBC is important on the way to sustainable GAAP profitability.

Turning to customer activity

So, how are customers doing? We don’t know, unfortunately, since CrwodStrike switched from a quarterly reporting of customer count to annual. This leaves us with retention and product adoption.

CrowdStrike’s Net Retention Rate continues to decrease and now sits at 120+%, down from 125% last Q and 126% a year ago. I don’t like it, but it’s a common theme in this uncertain macro environment and not specific to CrowdStrike.

Product module adoption (vendor consolidation): This metric is critical for me because it helps me gauge product adoption rate and underscores CrowdStrike’s claim of consolidating several other vendors on its Falcon platform (or not). Fortunately, this looks good: Adoption of 5+ modules remains stable, and adoptions of 6+ and 7+ modules increased by 1 bps each.

My Thoughts

The cyber security market is fragmented and dynamic. So far, CrowdStrike is well positioned and a popular choice for CISOs, maintaining strong win rates, and driving vendor consolidation.

It owns years’ worth of high-quality data which it can use to train LLM models (data moat), helping its users interact with Charlotte AI, a newly launched assistant. This makes it easier for novice analysts to become power users - an important advantage in a job area that is lacking enough security staff.

Other notable highlights include CrowdStrike and AWS working together to develop new Generative AI applications, as well as CrowdStrike achieving Impact Level 5 Provisional Authorization from the Department of Defense, which should help with public deals.

My Investing Decision

I hold a 9 - 10% position in CrowdStrike and view it as a core holding in a growth-oriented portfolio. It’s maturing in terms of profitability but still has high growth and a long runway. Why? Room to grow in endpoints by replacing legacy solutions, emerging products like identity and incident response have strong traction, and international markets are growing faster but are not very penetrated yet.

⟶ I plan to maintain my position size for now.

Thank you for reading and enjoy your Sunday! 😊

Disclaimer: This text is for entertainment purposes only and does not represent any investment advice, stock buying or selling recommendation, or any other financial advice. So please always do your own due diligence and make your own decisions. See our disclaimer for more details.

Why: A potential candidate for durable, long-term growth due to its mission-critical aspect, which allows it to integrate itself into the core of a business.

What: Confluent simplifies real-time data management, enabling you to build modern applications and gain insights without worrying about the technical details.

How: For example, a retail company can use it to seamlessly integrate data from physical stores and online platforms, improving inventory management, sales forecasting, and customer experience.

Confluent's cloud offering has a Total Cost of Ownership (TCO) advantage over self-managed data systems (open source) due to lower infrastructure costs and reduced need for software engineers and operations staff. This advantage allows customers to reallocate engineering time to innovation and reduce deployment times while still benefiting from comprehensive features and functionality.

As a result, Confluent is positioned as the leader in a $60 billion market opportunity in 2022 and $100 billion by 2025. This indicates a large and growing market.

If you want to dive deeper, I suggest reading Peter Offringa's excellent write-up on Confluent.

Let’s dig into the numbers:

Revenue & Guidance

Revenue in Q1 was $174M, representing a YoY increase of 37.9% and a QoQ increase of 3%. Overall, I am satisfied with the revenue figures, especially considering that Q1 is usually a slower quarter. Furthermore, the provided guidance further below looks promising.

Bolding is mine:

From a consumption basis, we did see a little bit of an impact relative to some of the consumption trends in our cloud business in the second half of March and we saw that manifest itself in the financial vertical. What we did see though in April is a nice bounce back and so we saw return to normal patterns for the consumption business and the financial vertical. […] I think in some customers, both in tech and in financial services, there was a fair amount going on in the organizations.

Like other businesses that are more exposed to the tech and financial industries, this business felt a negative impact due to macroeconomic effects and the SVB incident. It is encouraging to see a return to normal patterns.

Confluent's revenue is divided into three main categories:

• Service Revenue: Accounts for 8% of total revenue and is declining. Good.

• Cloud Revenue accounts for 42% of total revenue and is increasing. Last quarter, it was $74M, up 89.7% YoY and 8.8% QoQ. This part of the revenue is consumption-based, which can result in a sharper slowdown in adverse environments, but with greater potential for upside later on. Management explained that the modest increase in cloud revenue mix (41% the prior quarter, 42% this quarter) was due to the outperformance of Confluent Platform in the quarter:

• Platform Revenue: This is 50% of total revenue and declined to $86.9M, down 16% YoY. Confluent Platform performed well in the public sector vertical, exceeding expectations.

Subscription-based revenue, which includes Cloud and Platform, accounts for 92.3% of Clonfluent's total revenue and is steadily increasing. This portion amounted to $160.57M, representing a YoY growth of 40.9% and a QoQ growth of 3.4%.

In my opinion, Confluent's main investment thesis is based on cloud revenue. Ideally, the majority of the company's revenue would come from this category. As shown in the graphic above, Confluent is on track to achieve this goal and management has also noted an increase in sequential revenue every quarter for the remainder of the year.

Remaining Performance Obligations (RPO) amounted to $743M, which is only a 0.3% sequential increase. Although RPO growth is "healthy" it was impacted by a decline in average contract duration and additional budget scrutiny, which elongated the deal cycle in comparison to the eight-figure TCV deal closed a year ago. RPO will be a key metric to watch.

However, the growth in Current RPO accelerated this quarter, which management explained was due to the great work of the sales and go-to-market organizations.

Looking at the geography of revenue, the U.S. accounts for 60% of the total revenue (32% YoY growth), while the remaining 40% comes from international sources (49% YoY growth) and is steadily increasing:

Cashflow & Profitability

Gross margin was 72.3%, up from 69.7% in the same quarter a year ago. The gross margin is going to improve over time due to the shift to more cloud-based revenue.

Operating income improved to -$40.3M (-23.2% of revenues) from -$51.67M last year. Net income also improved to -$25.49M (-14.6% of revenues) from -$52.49M last year. Both Operating and Net Income as a percentage of revenues are improving rapidly.

Management was pleased during the earnings call that Confluent is able to deliver high top-line revenue growth and improve operating margins, with the goal of reaching breakeven in Q4 this year. Earnings per share increased to -$0.09, up from -$0.19 a year ago.

Operating cash flow for this period was -$77.77M (-44.7% of revenues), down from -$55.03M last year. Free cash flow was -$82.9M (47.6% of revenues), down from -$58.43M a year ago.

Although these numbers may seem alarming, they were impacted by charges related to restructuring, the Immerok acquisition, ESPP, and a corporate bonus payout, all of which were discussed on the last earnings call.

Therefore, we can view these charges as a one-time impact, and expect significant improvement in cash flow going forward. This is a key metric to keep an eye on.

Lastly, they have $1.85B in cash, providing ample runway, so there are no concerns in this regard.

Guidance

Management expects Q2 revenue to reach $183M. Achieving a typical beat would result in a 9.1% QoQ increase and indicate stabilization or slight improvement compared to the previous three quarters.

The full-year 2023 revenue guide remains the same as last quarter at $765M. Assuming a typical beat, revenue growth will end up at $788M or 34.4% YoY. Management assumes additional budget scrutiny and no improvement in the business environment for the remainder of this year.

To keep me interested, I would like to see a raise going forward. Key metric to watch.

In Q2, cloud revenue is expected to bring in $83.2M, a 77% YoY increase and a 13% QoQ increase.

For the full year, management has mentioned that sequential cloud revenue will be $8 million. They also expect cloud sequential revenue to increase every quarter for the rest of 2023, with an exit target of 50% cloud revenue share, up from 40% now. A favorable development.

Customers

Confluent added 160 total customers in the quarter, bringing the total to 4,690.

The number of customers spending $100k or more increased by 60 to 1,075, up 33.9% YoY and 5.9% sequentially. This cohort contributed over 85% of total revenue, making it a key metric to watch.

In addition, Confluent added 8 customers spending $1M or more, bringing the cohort to 135 customers. This is up 53.4% YoY and 6.3% sequentially.

All customer cohorts are experiencing a sequential slowdown. Although this trend is common among software companies, I find customer growth to be the least exciting aspect of Confluent's puzzle. To maintain my interest, I would like to see this trend change in the future.

Customer Happiness Metrics

Gross retention rate has exceeded 90% and the dollar-based net retention rate (DBNRR) was over 130%. However, in Q2, the DBNRR is expected to be less than 130% due to customers being more budget-conscious. The old methodology resulted in a DBNRR of 125%, but the company switched to a consumption-based net revenue retention for Confluent Cloud, which raised the NRR to above 130%.

Management believes that this is a better reflection of the actual underlying growth drivers and is consistent with our peer group companies that have a consumption-based model. Consumption-based DBNRRs are naturally higher, and this should increase significantly once customers consume more after the macro fades. This is another key metric to keep track of.

Since everyone is talking about AI nowadays, I liked their reply to an analyst’s question, if AI is a headwind or accelerator for them. Jay Kreps, Confluent’s CEO, replied “Absolutely an accelerator”.

Valuation and Market Cap

When I initiated my tiny position for around $20 on May 3rd, the stock price surged by 40% to $28, increasing the market cap to $8.6B from $5.9B in less than a month.

The forward EV/S ratio of 10 looks reasonable compared to similar companies in the software space.

Now, you might ask, "Is that cheap?"

Although I consider valuation to be the least important criterion for my own investment decisions, it is still a puzzle piece that should be considered. As usual, its significance depends on the circumstances:

If Confluent proves to be a mission-critical software provider that integrates deeply into a business's stack and demonstrates accelerating growth in revenue, customers, and usage, then I would consider the valuation cheap and the market cap very low.

Investors usually look at valuation as a "magic formula," but it isn't that simple. I've thought about this topic many times over the past years and may write about it if there is enough interest. Let me know on Twitter!

I would like to end this write-up with a quote from the last earnings call, emphasizing the mission-critical aspect of Confluent:

Question: "[…] can you give some more specific examples from a vertical-specific use case about expansion -- both expansion and new use cases that give you confidence in achieving your targets this year?":

Yes, absolutely. I mean you would see this across virtually every industry. The one that we called out in the earnings was this large expansion in financial services. Yes, that's an industry that obviously, a lot is happening in. And so the willingness to make big bets on this in the cloud, right? These are organizations that are very sensitive about security, about compliance, et cetera, really do a thorough job of betting. The willingness to make a big bet in this area is really one of a small number of third-party cloud infrastructure of vendors. I think that speaks to how critical this area is. And you could probably come up with a similar example in any other industry of interest, whether that's retail, insurance, automotive, public sector, really exciting things happening in each of those.

My Investment Decision

I started my position at CFLT on May 3rd, and it has increased by 60% since then. However, the increase hasn't significantly impacted my portfolio due to its small size. That's okay, as I plan to keep it on my radar for now and increase it opportunistically.

I am intrigued by Confluent's "picks and shovels" business model and mission criticality, similar to companies such as MongoDB (MDB), Snowflake (SNOW), and Cloudflare (NET). These companies integrate themselves deeply into a business's software infrastructure, which should lead to durable growth for years to come.

While the current macro environment has muted the development of metrics like revenue and customer growth, I can imagine Confluent's growth picking up again once it fades.

To increase my conviction in Confluent, I need to see an acceleration in revenue growth and RPO, a continuation of strong customer additions, and a healthy DBNRR.

Additionally, margins should continue to improve, driven by the increase in cloud revenue share of total revenue. The goal is to break even by the end of this year.

I’m happy with my trial position and, as usual, will follow the numbers (+ narrative).

Let’s dive right in.

My Portfolio

The purpose of my monthly portfolio review is to help you understand my investment philosophy, view my current investments, and facilitate mutual learning. I hope this review is helpful to you!

Portfolio performance compared to market

Portfolio allocations

Recent changes to the portfolio

This month was more active than usual for me, mainly because I opened a new position in MongoDB and needed funds for that. Additionally, you may notice a small cash position (1%), which I plan to reduce to 0% soon since I typically don’t hold any cash.

Trimmed

• Cloudflare -
  Once the stock reached $70, I decided to reduce my already large position so that I could invest more in MDB.

• Sentinel One -
  After the stock went up to $16, I reduced my position in S by about 30% to allocate more funds to MDB.

• Snowflake -
  Like NET, SNOW's stock price continued to rise ($170), and they wanted to add more to MDB.

• Datadog -
  Like NET, DDOG’s stock price continued to rise ($100), and they wanted to add more to MDB.

Added

• Confluent -
  My plan is to increase CFLT to around 5% in the near term, which is why I am adding to it on a monthly basis.

New position

• MongoDB -
  I finally reopened a position after monitoring MDB for the past few years due to better-than-expected earnings and a positive outlook.

Company updates

Note: To keep it concise, only companies with noteworthy updates might be included. Absolute numbers relate to last quarter's earnings release. Metrics are adjusted values (Non-GAAP).

Crowdstrike -

What they do: Leading cybersecurity firm with a "mission to protect customers from breaches”
Type of revenue: Seat-based (Endpoints)
Cash: $2.9B
TTM revenue: $2,446M
Market cap: $35B vs last month's $38B

Key Highlights

Revenue

Crowdstrike's Q2 2023 revenue was $692.6M, 42% year-over-year, and 8.7% quarter-over-quarter beating expectations, but decelerating sequentially.

Net new ARR was $174.24M, negatively surprising the market, but management is confident about acceleration for the back half of the year due to momentum with large customers, record Q2 pipeline, and partnerships.

The remaining performance obligations were $3,315M, negative sequentially for the first time. International revenue is slowly gaining share and growing faster than total revenue at 53% year-over-year.

Outlook

The Q2 revenue guide is $727.4M, suggesting 7.3% quarter-over-quarter and 38.8% year-over-year growth if they keep beating their guide.

The FY2024 revenue guide was raised by 2% to $3,036.7M, with a potential 40% year-over-year growth if they keep raising their guide and deliver a beat in Q4.

The Q2 operating income guide is $123.8M, and the FY2024 operating income guide was raised by 1% to $526.2M. Also, the FY2024 EPS guide has been raised to $2.43 from $2.39.

Cash Flow & Profitability

Subscription gross margin increased to 80% due to investments in data center and workload optimization.

Operating income was $110M (16% of revenue), up from last year's $83M. Net income was $136M (19.7% of revenue), up from $75M. Earnings per share increased to $0.57 from $0.31.

Operating cash flow increased to $301M (43.4% of revenue) and nearly half of the revenue generated cash flow. Free cash flow increased to $227M (32.8% of revenue).

Next quarter, we should expect lower cash flow due to the usual seasonality in Q2 and this year management expects to see more pronounced seasonality but maintains the target of achieving 30% free cash flow margin for the fiscal year.

Crowdstrike reached GAAP profitability for the first time in its history with $0.5M net income, compared to a loss of $31.5M the previous year. The biggest factor for this achievement was the modest growth in stock-based compensation.

Customers

Unfortunately, we cannot see the quarterly development of customer growth since Crowdstrike is moving to annual reporting for new logo metrics.

The dollar-based net retention rate was 120%, down from 125%.

Customers using 5+ modules was 62% (stable), 6+ modules were 40% (up from 39%), and 7+ modules was 23% (up from 22%), indicating vendor consolidation and customer’s wanting more of Crowdstrike.

The gross retention rate remained high and best-in-class.

Notable Developments

Multiple future growth drivers have been mentioned:

First, a compelling partnership with AWS to develop powerful new Generative AI applications that help customers accelerate their cloud, security and AI journeys.

Second, the Impact Level 5 Provisional Authorization from the Department of Defense to sell more products into the public sector.

Third, the sustainable advantage as three mega-trends continue to unfold, AI, consolidation, and cloud:

AI

CrowdStrike believes that large language models (LLMs) are only as good as the data on which they are trained, and their unique dataset spanning petabytes and capturing trillions of new events daily from their global fleet of sensors, combined with over 10 years of attack data and threat graph, creates a sustainable data advantage yielding better models, automation, and outcomes in the rapidly growing adoption of generative AI within cyber security.

Moreover, Crowdstrike anticipates that the utilization of LLMs will decrease the difficulty for malicious actors to generate advanced cyber-attacks. This, in turn, will be a catalyst for demand for contemporary cybersecurity technologies such as Falcon.

Lastly, Crowdstrike has introduced Charlotte AI, a generative AI security analyst that uses high-fidelity security data and is continuously improved through human feedback. Charlotte AI aims to provide faster results, better security outcomes, and lower costs, and will benefit from a continuous human feedback loop with CrowdStrike's OverWatch, Falcon Complete, and Intel teams.

Consolidation

The current macro environment has increased the need for customers to reduce vendor sprawl, agents, and costs, while protecting their businesses with a best-in-SaaS platform. Falcon offers over 200% ROI for enterprise customers, making CrowdStrike a popular choice for businesses looking to protect and drive efficiencies.

Cloud

The exploitation of cloud services has increased by 95% YoY, and the number of threat actors operating in cloud environments has increased by 288%. Securing cloud assets is crucial and will continue to grow in importance. Crowdstrike is well-positioned to meet this need.

Competition

CrowdStrike's competitive environment has remained unchanged since April, with enterprise customers choosing CrowdStrike over Microsoft 8 out of 10 times during testing and strong win rates across all competitors in the quarter.

Dilution & Valuation

Dilution increased by 4% year-over-year to 241M diluted shares outstanding. Management expects 242M in Q2, which continues the upward trend. However, for a healthier development for shareholders, it would be ideal to see this increase go back to around 2% year-over-year. Management has mentioned that they aim to keep it under 3% this year.

Crowdstrike is richly valued at an EV/S of 11, but still below the average (13) of the top 10 SaaS company multiples in Jamin Balls' valuation list for high-growth stocks.

Investment Decision

It’s good to see that my hypothesis from last quarter seems to be holding up so far, with sequential revenue growing at 8.7%.

From my March 2023 summary:

Here is my thesis: Crowdstrike has a seat-based subscription model. I interpret the stabilization of sequential metrics as a slowdown in layoffs, which is good for seat-based subscription model businesses like Crowdstrike, indicating the endpoint market is not saturated and the market has stabilized.

However, this does not mean we should expect further quarter over quarter acceleration, as businesses are not currently hiring more. So, I assume we'll see minimal beats for another 1 to 2 quarters and possibly acceleration again in Q3.

I believe assuming Q1 revenue of $690M, 8.3% quarter over quarter growth with a 1.7% beat is realistic and "prudent." I try to make conservative assumptions (and if these sound too conservative, it's time to trim) - the last thing I want is a negative surprise every quarter.

I also assume Crowdstrike will achieve around 40% revenue year over year at the end of FY2024 (with some luck), more would be very optimistic.

While the actual top-line results were mixed due to weakness in RPO and net new ARR, the outlook appears positive. Management's confident tone and multiple raises from revenue to profitability guides support this view. If the macro environment starts to improve, we might even see 40% year-over-year revenue growth.

The profitability across the board is great, especially considering the impressive operating cash flow margin of 43%! Achieving GAAP profitability for the first time is a significant accomplishment.

The decline in DBNRR was expected due to macroeconomic factors negatively impacting sales. Despite this, it's great to see customers still buying more modules.

The partnership with AWS, the Impact Level 5 Provisional Authorization, and positioning for megatrends (AI, Consolidation, and Cloud) with no change in competition indicates sustainable growth ahead.

Dilution (4% YoY) is higher than I prefer, but management is keeping an eye on it. The valuation at an EV/S of 11 makes sense. Given its strong performance, tailwinds, and runway ahead, I believe the stock is reasonably valued.

As mentioned in my previous summary, I took advantage of the 10% drop in after-hours trading to increase my allocation from 9% to 10%. I have no plans to make any further changes for now.

Note: If you haven't read my coverage on Crowdstrike's competitor, Sentinel One, yet, check it out here:

Share

Zscaler -

What they do: Cybersecurity firm that provides services secure user-to-app, app-to-app, and machine-to-machine communications over any network and any location
Type of revenue: Subscription-based
Cash: $1.97B
TTM revenue: $1,480M
Market cap: $21B vs last month’s $20B

Key Highlights

Revenue

Zscaler's revenue was $418.8M, a 46% YoY increase and an 8% QoQ increase. This met the positive preliminary guidance announced a month ahead of earnings.

Calculated billings were $482.3M, a 39.5% YoY increase and a -2.3% QoQ decrease. This was better than expected and an acceleration from last quarter.

Remaining performance obligations were $3,023M, up 7.6% sequentially, indicating that customers are committing to more future spend.

Management's ability to execute was aided by their well-performing sales organization and good product. Customers recognized the ROI by simplifying their network.

10 out of 13 analysts congratulated management on the impressive results.

My take: Zscaler continues to deliver. Their strategy of partnering with CXOs early on to create CFO-ready business cases appears to be effective.

Outlook

Zscaler's Q4 guide suggests 7% QoQ and 41% YoY growth if they exceed historical guidance.

For the full year, the revenue guide was raised by 2% to $1,593M, up 46% YoY, calculated billings guide was raised by 1.7% to $1,978M, and the operating income guide was slightly raised to $225M.

My take: Zscaler raised its full-year guidance for all metrics, indicating promising times ahead.

Cash Flow & Profitability

Zscaler achieved a gross margin exceeding 80% for the 11th consecutive quarter, with operating income at $63.9M (15.3% of revenue), net income at $74.6M (17.8% of revenue). Operating cash flow was $108.5M (25.9% of revenue), and free cash flow was $73.9M (17.6% of revenue).

Compared to patterns in previous years, S&M expenses have been cut down the most: $185M, which is 44.1% of revenue. However, there are no concerns here.

My take: The overall profitability remains excellent, with healthy cash flow margins ranging around 20%.

Customers

Zscaler added 95 customers spending more than $100k ARR, 22 customers spending more than $1M ARR, and 5 customers spending more than $5M ARR. Customer growth for the $100k ARR and $1M ARR cohort is decelerating sequentially due to larger deals take longer to close as customers introduce more checks and reviews.

The company serves eight of the world's largest financial services and diversified insurance companies, outside of China. They also have 40% of the Fortune 500 and 30% of the Global 2000 as customers.

Approximately 60% of new business comes from existing customers, who are spending more: The Dollar-based Net Retention Rate has remained at 125%+, but the company's success in selling bigger bundles, multiple pillars, and faster upsells within a year may reduce the rate in the future.

The Net Promoter Score of over 70 is a testament to Zscaler’s strong relationship with customers and in Gartner's peer insight rating, which is a customer survey done by Gartner, Zscaler is the only MQ leader who is in number one in all eight Gartner's category.

As stated in their earnings call, the focus is on ARR over having a large number of customers. Management still sees a vast upside in their customer base. After understanding this, I’m a bit less worried about the lower customer growth, which I expect to pick up again at some point.

Why it makes sense to focus on existing customers:

Zscaler has a 6x upsell opportunity with its existing customer base for protecting their users.

Management states, when it comes to cyber companies they’re probably the only company that delivers significant ROI, because they eliminate a bunch of point products.

They see customers buy ZIA, ZPS and ZDX - solutions they offer - for every employee happening more-and-more, because customers are seeing the value by being able to remove a bunch of point products and show ROI and that actually gives them more incentive to buy more.

Here's a recent example:

A fast-growing global bank in the APJ region upgraded to Zscaler for Users bundle, which supports 150,000 users, after deploying ZIA last year. This upgrade significantly reduces the time it takes to open new branches by 50% and eliminates the need for firewalls and MPLS network services.

Zscaler is now a strategic partner for this customer, as they continue to expand their footprint and transform into a cloud-centric organization. The customer stated that it was the first time they had seen a security vendor that understood their business needs and aligned its solution to address them.

With this latest purchase, the customer's ARR has surpassed $10 million. This is also an example of the geographic diversity of Zscaler's business outside the U.S.

My take: Zscaler primarily focuses on large enterprises, but currently, it takes more time to close deals, which slows down customer growth. While this is acceptable, an acceleration in sequential growth is expected next year.

On the other hand, Zscaler's focus on its existing customers makes sense due to the 6x upsell opportunity.

Notable Developments

Using AI, Zscaler has the opportunity to predict most of today's ransomware and other sophisticated attacks on their customers before they happen. And management plans to launch a number of innovations around AI.

That being said, Zscaler has already started integrating ChatGPT with policy-based access controls to ensure safe use of AI applications for their customers. If employees submit sensitive data to ChatGPT or similar applications, our DLP technology will detect and block it.

Zscaler's CEO, Jay Chaudhry, commented on his expectation that AI/ML will expand Zscaler's TAM (total addressable market).

My take: Exciting insights into how Zscaler incorporates AI and how it might become a significant advantage in the future can mean only additional fuel for sustainable growth ahead.

My Investment Decision

Zscaler continues to perform well, thanks to its strategy of partnering with CXOs early on to create CFO-ready business cases. This approach appears to be effective, as indicated by Zscaler's raised full-year guidance for all metrics.

The company's overall profitability remains excellent, with healthy cash flow margins averaging around 20%. Although Zscaler primarily focuses on large enterprises, it takes more time to close deals, which slows down customer growth. However, an acceleration in sequential growth is expected next year.

On the other hand, Zscaler's focus on its existing customers makes sense due to the 6x upsell opportunity. AI may become a significant advantage in the future, which bodes well for the company's continued success.

Zscaler's forward EV/S (enterprise value to sales) ratio is 13, which is slightly below the average of the top 10 SaaS company multiples in Jamin Balls' valuation list for high-growth stocks. Although Zscaler's valuation is stretched, it appears cheaper than NET, which has an EV/S ratio of 16.

It's important to note that while I do consider valuation as one factor for investment decisions, it's not my main consideration.

As I outlined in my previous portfolio summary, I added funds in small increments both before and after the positive preliminary guide with a target allocation of 10%.

Last month, I based my reasoning on the ongoing decline in the stock price. At that time, the valuation had reached a forward EV/S of 8.2, which I considered to be undervalued.

I did not change my already large position in June and plan to hold it for now.

MongoDB -

What they do: Provides a scalable and flexible NoSQL database for storing structured and unstructured data.
Type of revenue:
Consumption-based
Cash: $1.9B
TTM revenue: $1367M
Market cap: $29B

Coming soon: I’m planning to publish my review on MongoDB earnings in my next portfolio summary.

Confluent -

What they do: Provides a platform for managing and processing streaming data.
Type of revenue: Consumption-based
Cash: $1.85B
TTM revenue: $634M
Market cap: $10.5B vs last month’s $9B

Coming soon: I’m planning to publish my review on Confluent next week. If you cannot wait, check out my TL;DR version in this Twitter thread.

Already covered

Check out the most recent reviews for my other positions here:

• Snowflake

• Cloudflare

• Datadog

• Sentinel One

• Bill

• The Trade Desk

• Monday

My Watchlist

, , , ,

Closing Thoughts

Keeping it short this month. Just one thing:

Starting to write a monthly portfolio review was a game-changer for me.

Why:

• It allows me to track performance regularly.

• I can dive deep into each company.

• It boosts my confidence, even in tough times.

I encourage you to start your own review.

And don't be afraid to share it publicly. More puzzle pieces mean better decisions for all of us!

Thank you for reading and Happy Investing, everyone!

PS - For more frequent updates, I'd be happy to connect with you on Twitter: @MoritzMDrews

Disclaimer: This portfolio summary is for informational purposes only and does not constitute investment advice. Everything expressed here is solely my personal opinion. As I am not a professional, please do not blindly follow my perspectives as they could lead to incorrect conclusions.

Is it the “AI-powered” platform?

Or the promising stock ticker ?

Probably. But mainly: Delivering a strong quarter.

What Does Samsara Do?

Samsara provides AI-powered software and gadgets that help companies with physical operations (mostly trucks) improve their operations efficiency, safety, and environmental and social impact.

Its key benefits include targeting a distinct operations budget, delivering significant ROI, and offering customers a quick payback period.

ROI & Payback period are driven by:

• Reduction of fuel costs

• Extensions of asset lifetime

• Measurable reductions in accidents

• Reduction of expensive insurance claims

• Overall improvements in social and environmental goals

• Providing a competitive advantage in a tight labor market

→ I’ve written about Samsara and its potential in-depth here.

Top Line Growth: Revenue, ARR & Guidance

Samsara delivered strong growth amidst challenging macro conditions. Revenue was $204M, growing 43% YoY and beating guidance by 6%.

ARR shows a similar picture: It came in at $856M, growing 41% YoY. $61M of that is net new ARR, growing 24% YoY and accelerating by 4 pps compared to a year ago.

Samsara’s strong growth was driven by several factors.

First of all, the core business performing well:

• Impressive large customer momentum

• Strong expansion rates of existing customer

• Excellent productivity by Samsara’s (Sales) team

• Strong demand (!) meeting Samsara’s ROI and quick payback periods

Additionally, Samsara is expanding its core business beyond vehicles and transportation into “New Frontiers”.

This strong Q1 performance resulted in a 3% raise of full-year guidance, from $248M to $274M at the high end.

While Samsara saw strong demand in Q1, it also noticed a macro-impact on its pipeline:

• Elongated sales cycles since mid-last year.

• Customers shifting purchase decisions higher up in the ranks.

• Some impact on pipeline coverage and conversion (a subtle remark).

Strong Top-Line Growth Driven by Large Customer Momentum & Expansion

Large customer momentum was THE highlight of this earnings report. Samsara added 138 new large customers, up 53% YoY and outpacing revenue growth.

ARR from large customers outperforms total ARR growth at 52% YoY, up from 51% in the previous quarter. The share of total ARR attributed to large customers has also been increasing:

• Q1 '24: Large customers accounted for 49% of ARR

• Q1 '23: Large customers accounted for 45% of ARR

• Q1 '22: Large customers accounted for 40% of ARR

Large customers, including well-known Fortune 1000 companies such as United Rentals, Iron Mountain, and Werner Enterprises, have become the fastest-growing customer cohort.

Great news: large customer momentum not only shows in new additions but also in the strong expansion of existing customers.

In Q1, more than 70% of large customer additions were from existing customer relationships. This contributed to record expansion, accounting for 60% of Annual Contract Value (ACV) this quarter.

Not because of weak, but despite strong customer additions.

Net retention rates this quarter were above expectations and expected to be for the rest of the year:

• 115+% for core customers ($5k+ ARR)

• 120+% for large customers ($100K+ ARR)

Samsara mentioned a healthy mix of expansion upsells and cross-sells. They don't prioritize new logos over expansions (or vice versa).

Instead, they focus on growing ARR as quickly as possible.

New Frontiers

Another contributor to Q1's strength beyond core business was Samsara's growth in “New Frontiers”:

• Non-vehicle product growth: 15% of Q1 net new ACV came from non-vehicle applications, primarily driven by strength in equipment monitoring. This segment ended the quarter at approximately $100M of ARR.

• International expansion: A record 17% of Q1 net new ACV came from non-U.S. customers, with strong traction in Canada, Mexico, and Western Europe. Interesting: Western Europe is a larger market opportunity than the U.S., looking at the number of operations assets.

• Strength in the non-transportation segment: 83% of Q1 net new ACV came from non-transportation customers. As the company expands, the contribution of transportation to the ARR mix is expected to decrease. This shift is not a result of transportation weakness, but rather due to new use cases made possible by Samsara's versatile platform.

Promising:

Samsara just started officially reporting “New Frontier” metrics this quarter. I take that as a sign that they are serious about moving beyond their bread-and-butter business into smart factories and other exciting areas.

Bottom Line: Improving Leverage

While revenue and large customer momentum were my highlight, cash flow, and margins also show improving leverage.

Samsara's gross margins remained steady at around 73% (non-GAAP) and 72% (GAAP). Compared to last year, the non-GAAP operating margin improved from -18% to -9%.

Samsara expects its op margin to remain flat for Q2, but improved the full-year outlook to -5%, up from -7%. This improvement is primarily driven by better leverage from G&A expenses, along with minor enhancements in S&M and R&D spending.

Adjusted free cash flow (FCF) margin showed strong progress, improving from -36%- to -1% year over year. Mainly due to better operating leverage and ongoing enhancements in working capital management.

In the past, operating and FCF margin developments were not as closely aligned. Going forward, Samsara expects them to deviate by max. 5%.

Strategy & Artificial Intelligence (AI)

”A key differentiator for Samsara is how we use AI to transform customer data into business impact.”

Samsara has a unique data set spanning operations data across industries, geographies, and customer sizes.

Why are data moats exciting?

George Kurtz, CEO of CrowdStrike, explained it best:

"While we expect that LLMs will become commoditized over time, the data on which they are trained will not."

Because of that broad spectrum of customers, Samsara aligns its R&D with 80 - 90% of common use cases rather than focusing on specific verticals or new products.

For verticals, they fall back on their large integration and partner network.

Samsara’s AI Use Cases Going Forward:

1. Using insights from video, text, and sensor data to make operations more efficient;

2. Copilots to improve the quality and efficiency of workflows;

3. Expert assistants in areas like safety and compliance.

I like that Samsara closely aligns its R&D priorities with customer feedback. This quarter, Sanjit Biswas, CEO of Samsara, even went “on the road to meet some of the key customers in the US and Europe.”

While it’s not easy to increase your footprint in the IOT industry, I believe Samsara’s strong execution and customer centricity provide a competitive edge.

My Investing Decision

Samsara shows strong growth, execution, and a large runway, propelling its YTD and multiple. Compared to or which grow at a similar rate but are more profitable, Samsara can be considered pricey.

While valuation is not my main investing criterion, I like to consider it when deciding whether to add new cash in smaller or bigger tranches.

If you’re interested in the risks of investing in Samsara, pls see my previous article.

⟶ I currently have a 3% position in Samsara and plan to increase it opportunistically to 5%.

Thanks for reading, and Happy Investing! 🎉

Disclaimer: This text is for entertainment purposes only and does not represent any investment advice, stock buying or selling recommendation, or any other financial advice. So please always do your own due diligence and make your own decisions. See our disclaimer for more details.

Here's why:

Key Highlights

Revenue missed Sentinel One's own Q1 guidance by 2.6%, coming in at $133.4M, up 70.5% year over year, and 5.8% quarter over quarter.

During the earnings call, management explained the miss due to customers generating less consumption-based revenue. Unfortunately, that's just one of multiple issues.

Revenue guidance for FY ‘24 was reduced to $600M from the previously guided $679M. This was shocking, as a slight raise was expected instead. Last quarter, I expected them to achieve 60% at the end of the year, but now I'm thinking they might achieve 50% at best.

Revenue guidance for Q2 of $141M was lower than expected, but still implies a slight sequential acceleration from 5.8% in Q1 to 6.8% in Q1 considering a 1% beat. Note: Q2 revenue will likely slow down to 39% year over year due to tough comps versus previous years’ Q2, when they acquired Attivo.

But how can I expect a beat next quarter, while they've just missed the revenue guide for Q1?

Let me explain:

Net new ARR was lower than expected at $41.6M, up 40.1% year over year, but down 29.5% quarter over quarter. The sequential decline in net new ARR is likely due to seasonality. However, the real issue lies in their historical methodology for tracking ARR.

ARR guidance for FY ‘24 has been reduced to $522M, representing a 35% YoY growth, down from the previously guided 41%. This reduction in revenue is a real bummer.

In the last quarter, I noted:

"CFO Dave Bernhardt couldn't help highlighting multiple times how conservative that forecast is. I try not to read too much into it, though he seemed really eager to convey how low that guidance is. I'd like that, but his last mistake guiding to 50% ARR growth 90 days ago makes me wary."

Unfortunately, the guidance is even lower now.

Four Reasons:

1. In recent years, management has observed a steady increase in usage and consumption patterns by their large customers, which accounted for real-time and quarterly ARR. However, during the first quarter, they experienced a noticeable decline in usage, which continued in May:
   
   As a result, management saw a shortfall in revenue during Q1 and conducted a deep dive into their customer base. During the investigation, they discovered that excess consumption-based revenue was included in the ARR calculation. "Excess" refers to the additional amount that customers have to pay if they consume more than what was contractually agreed upon.
   
   This consumption-based revenue makes up to 5% of total revenue and is generated from data ingestion, the security data lake, and the data set consumption products.
   
   The issue: They should have never included the excess consumption-based revenue into ARR, since ARR means "annual recurring revenue," which consumption is not. Due to the volatility in consumption (similar to Snowflake’s or Datadog’s), the revenue guides were honest but fell short.
   
   To reduce ARR volatility from changes in usage-based consumption and better align ARR with revenue, management decided to change the methodology for calculating ARR for consumption and usage-based agreements to reflect committed contract values.
   
   The bright side: Once customers consume more than what was agreed upon in the contract, there may be an additional upside in revenue beats surprising investors.
   

2. While conducting the deep dive, management also discovered and corrected some historical recording inaccuracies relating to ARR classifications of certain contracts that they identified during the ARR review. An error in their CRM added renewals on top of upsells, which should now be fixed and not happen again.
   

3. Macroeconomic conditions have impacted deal sizes and sales cycles. Budgetary scrutiny has resulted in deal size adjustments for new customers and renewal contracts, as is happening in other businesses facing similar challenges.
   

4. Management was disappointed by some execution challenges in the late stages of contract negotiations for large deals, which caused a few deals to slip to the next quarter. They highlighted a multimillion-dollar deal with a customer who had already fully deployed Sentinel One's solution but could not close the deal in Q1 due to contract delays.

Overall, the change in methodology and correction resulted in an ARR reduction of $27 million or approximately 5% of total ARR as of Q4 FY23, as well as a comparable estimated adjustment to the remaining quarters in the fiscal year 2023.

Unfortunately, the reduced revenue guide has pushed the target to break even from Q4 FY2024 to FY2025. However, progress toward profitability remains on track:

The Q2 operating margin guide has improved to -36%, up from -57% in Q1 2023, and remains on track. The FY ‘24 gross margin guide has been slightly raised from 74.5% to 75%, and the FY ‘24 operating margin guide of -25% remains unchanged.

To achieve these targets, Management announced a plan to optimize their workforce that is expected to impact around 5% of current employees and affect future headcount growth plans.

Margins and cash flows have improved across the board:

• Gross margin has increased to 75% from 68% last year.

• Operating loss was -$50.76M (-38.1% of revenue), which matched my expectation and is a strong improvement from -$57.44M (-66.1% of revenue) a year ago. The smaller loss resulted from revenue growth exceeding the increase in expenses. It's also worth noting that Q1 is usually their weakest quarter for profitability due to front-loaded expenses.

• Net loss was -$42.25M (-31.7% of revenue), up from -$56.98M (-72.8% of revenues).

• Operating cash flow was -$28.06M (-21% of revenue), up from -$49.35M (-63.1% of revenues).

• Free cash flow was -$31.43M (-23.6% of revenue), up from $54.73M (-69.9% of revenues).

Sentinel One continues to invest aggressively in Sales & Marketing, accounting for 63% of its revenues, to capture market share. This indicates that they are not scaling back their go-to-market efforts as they pursue profitability.

Looking at customers, Sentinel One added 680 customers, bringing their total to 10,680, which is a 43.4% increase year over year and 6.8% increase from last quarter. However, this quarter's growth rate slightly decelerated compared to the previous quarter.

More important is the progress in customers spending more than $100k:

In Q1, Sentinel One added 45 net new customers of the $100k cohort, bringing the total to 917. This represents a 61.2% increase year over year and a 5.2% increase sequentially.

Unfortunately, I can’t compare Sentinel One to Crowdstrike, as Crowdstrike no longer reports customers and never reported a $100k cohort.

Comparing the performance to other software businesses with a $100k+ customer cohort:

• ZScaler added 95 net new adds (4.3% QoQ) vs 140 net new adds (8% QoQ) a year ago. That makes the development look solid for Sentinel One since Zscaler shows a similar weakness and the lowest amount of $100k customers in almost 3 years.

• Datadog added 130 net new adds (4.7% QoQ), vs 240 net new adds (11.9% QoQ) a year ago. The lowest amount of customers spending more than $100k in the past 3 years.

Furthermore, it’s worth noting, Sentinel One added 1 net new Fortune 10 customer, now protecting half of them:

Walmart, Amazon, Apple, CVS Health, UnitedHealth Group, Exxon Mobil, Berkshire Hathaway, Alphabet, McKesson, Chevron.

My takeaway: When considering other companies’ performance in the current environment, customers for Sentinel One aren’t falling off the cliff, but going forward I’d like to see a stabilization or acceleration in growth, soon.

The Dollar-based Net Retention Rate was a solid 128%, but down from 130%+ last quarter. Customers continue to consume less and we can see a decline in that metric for all companies in that environment - like Snowflake or Datadog ( ).

I’m seeing no issues here since a) Management highlighted to be confident in staying above 120%+ and b) the gross retention rate “has essentially been flat for the past eight quarters or so. I don't think it's deviated more than 1 point. So one of the things that Tomer had talked about is when customers use us, they don't tend to leave us”.

Lastly, ARR per customer increased by more than 20 percentage points year-over-year demonstrating success with large enterprises as well as increasing adoption of broader platform offerings.

Notable Developments

Sentinel One has launched Purple AI, which enables users to control all aspects of enterprise security, from visibility to response, with speed and efficiency. Customers and prospects had hands-on access to a live demo of Purple AI at RSA, the world's largest cybersecurity event, and the feedback was very positive.

Dilution increased by 6.9% year over year, which is much too high. Ideally, I would like to see a maximum annual increase of 2-3%. However, in Q4, they announced that they expect dilution to slow to 5% YoY in FY2024, which is a significant improvement from the previous year.

My Investment Decision

I trimmed slightly on the way up to $17, but I don't plan to sell further for now.

Here's why:

Obviously, the CFO made significant rookie mistakes and should be held accountable. Executives left Sentinel One a few quarters’ ago to join Crowdstrike () and lowering revenue guidance is also never a good sign. Furthermore, management highlighted deals slipping due to execution challenges. Dilution needs to slow down. That’s a lot of flags!

On the other hand, management has been sincere and upfront about their mistakes. Most importantly, the adjustment to Annual Recurring Revenue (ARR) did not impact historical revenue, total bookings, cash flows, or income statement. Moreover, the ARR for the quarter was in line with management's expectations, except for the consumption downsizing.

By taking out the excess consumption revenue from ARR, they were forced to take the guide down, which is the right move to reduce volatility. Management highlighted that key factors like competition environment, win rates, and the healthy pipeline didn't change.

Customer growth isn’t falling off the cliff. In fact, they have even added one of the top 10 largest companies in the US by revenue, and now protect half of them.

Furthermore, the progress to profitability remains on track, although it has been slightly delayed until FY2025. With $1.1 billion in cash and no debt, Sentinel One has plenty of financial runway.

I'm taking a calculated bet when considering all the puzzle pieces, including listening to what management said, the low valuation, and the market cap.

I believe the risk/reward looks decent: With a market capitalization of only $4B, and a forward EV/S of just 6, the company is still growing at a healthy pace and has visible progress toward profitability.

I'm controlling the risk part of that equation with the size of my allocation, which sits at 6%.

• If I'm right about my bull thesis, there is significant upside potential.

• If I'm wrong, I expect to lose another 50%, which means a 3% loss for the total portfolio, plus lots of learning. I can live with that.

Some people say that Sentinel One is losing to Crowdstrike, but I wonder if that's the right question to ask. The cybersecurity market is large enough for everyone, with a total addressable market (TAM) of $100 billion.

Even Microsoft, a leading security provider, has only captured 1/5 of the market, leaving the remaining 80% for other providers. In my opinion, it's not a matter of Sentinel One versus Crowdstrike. Rather, it's about how well Sentinel One performs on its own in the future.

Please note: This is not a bullish take on a romantic cybersec-story that might or might not unfold in the next few years. I have no idea about the future, as I don’t have a crystal ball.

I don't think I will hold Sentinel One forever since I lack the long-term conviction I have in businesses like Snowflake (). I may even trim opportunistically ahead of earnings.

These results would make me to finally sell out:

• Another downgrade of the FY revenue guide

• Not meeting their net new ARR guide

• A sequential slowdown of $100k customer growth, while peers don’t show the same

• No progress on their path to profitability

However, I believe there could be more near-term upside than expected. As usual, please don’t follow me blindly and make your own judgment.

Thank you for reading, and Happy Investing!

Disclaimer: This text is for entertainment purposes only and does not represent any investment advice, stock buying or selling recommendation, or any other financial advice. So please always do your own due diligence and make your own decisions. See our disclaimer for more details.

Let's dive in and unpack Snowflake's financial performance.

Revenue & Guidance

Snowflake's product revenue for Q1 was a better-than-expected $590.1M, up 50% YoY and 6.3% sequentially. Beating guidance by 3%. The sequential deceleration in product revenue seems to settle:

• 9.7%

• 18.2%

• 12.1%

• 6.2%

• 6.3% this Q

Looking ahead to Q2, guidance projects $625M in product revenue, indicating a 5.9% QoQ increase. A realistic beat of 0.5% or more would lead to sequential acceleration. I expect around $640M.

While Q1 and Q2 numbers look fine for a consumption-based business amidst the current environment, it was the reduced full-year guidance, that disappointed investors. For the second time!

• Snowflake preliminarily guided for 47% YoY growth in fiscal 2024.

• In Q4’23, they down-revised it to 40% YoY,

• only to reduce it again to 34% YoY this Q.

Needless to say, the market was disappointed and reacted with an 11% aftermarket sell-off. At least, Snowflake reiterated its goal to quadruple its annual revenue to $1B by fiscal 2029 (aka actual 2028).

Customer Activity

Net Retention Rate declined further from 158% to 151%, as large customers optimize their usage and purchase credits only based on short-term needs.

Customer Growth:

• Snowflake added 43 large customers (> $1M in trailing 12-month revenue), matching the Q4 2023 record. Impressive!

• Total new customer count of 317 is the lowest in three years. While Snowflake prioritizes large customers, it's important to note that most start small and increase spending over time. Thus, the weak performance in total new customers is not great.

• New Forbes 2000 Global customers are comparatively low, but it's a lumpy metric due to multi-year sales cycles, so I don’t read too much into it. Moritz recently covered Snowflake’s Forbes 2000 customers.

Remaining performance obligations (RPO), an indicator for future customer commitments, was $3.4B, up 31% YoY, but a significant -7.1% sequential drop. Moreover, current RPO growth turned negative QoQ for the first time, signaling limited short-term outperformance.

It's worth noting that Q1 RPO is typically low, but this quarter's level is even lower than usual.

Cash & Profitability

Snowflake generated a record non-GAAP adjusted free cash flow of $287M, up 58% YoY. Representing a record FCF margin of 46%.

Non-GAAP Product Gross Margin increased by 2pps to 77%, powered by “favorable pricing with our cloud service providers, product improvements, scale in our public cloud data centers, and continued growth in large customer accounts”.

Op Expenses and Operating Margins are worth watching. Operating Expenses (GAAP & non-GAAP), R&D, and S&M expenses went up in total amounts, but look healthy as a percentage of revenue.

Non-GAAP Operating Margin was 5%, lower than the 6% that Snowflake guided for. Still, relatively strong for a seasonally weak Q1, “benefiting from revenue outperformance and savings on sales and marketing spend.”

So much for the “raw numbers”. Let’s dive into more qualitative commentary to get more pieces to this puzzling report.

Snowflake on Artificial Intelligence

In the current AI gold rush, we don’t get through the first analyst question without extensive AI commentary. And that's good. Amidst the hype, it's crucial to recognize that AI advancements are real and will reshape the world we live in.

I’ve written about AI in the past:

In Q1, 1,500+ customers used Snowflake for Data Science, Machine Learning, and AI use cases. Up 91% YoY.

This strong increase, 3X (!) Snowflake’s YoY revenue growth, shows traction.

One core success factor of AI is data. Oversimplified, we can say that AI is a model:

• ingesting input (data),

• doing something to it (AI),

• then providing output (data).

If you enter garbage, you’ll get garbage (“Garbage In Garbage Out”). This is why data quality matters. Unlike public data, Snowflake data is controllable, governed, and secure.

And this is a great reason to use Snowflake (data) to feed AI models. Slootman, CEO of Snowflake, called out a large US financial institution using Snowflake data to train its AI model.

Moreover, data is more useful in the correct format. Recently, Snowflake acquired Applica. Its language model enables users to turn unstructured data like documents, contracts, etc. into structured properties and reference them for analytics, data science, and AI.

Finally, Snwflake acquired Neeva, an AI-based search engine. It chose Neeva for its team of senior, AI-savvy engineers and the AI-based search technology. The acquihire will “enable Snowflake users and application developers to build rich, search-enabled and conversational experiences.”

The north star is that Neeva’s tech can be integrated and extended to enable “asking really hard analytical questions that take people weeks and weeks or even months to figure out” and answering them in seconds.

→ Snowflake will discuss Generative AI in detail at its Snowflake summit.

Products & Usage

Data Sharing Stable Edges

This Cloud Metric tracks customers with stable edges, one stable edge representing an active data sharing relationship between two businesses.

Active data sharing drives Snowflake consumption and network effects, as well as value creation for its customers.

The share of customers with stable edges grew 61% YoY, from 23% to 25% this quarter. Sequentially, new stable edges were slightly lighter but still healthy:

• Q1 2024: 13.4% QoQ

• Q1 2023: 18.4% QoQ

• Q1 2022: 26.4% QoQ

Powered by Program

It enables customers to build apps on Snowflake, reducing infrastructure overhead and time to market while increasing Snowflake consumption.

The numbers are strong: customer adoption is up 128% YoY and accelerating sequentially, up 18.1%. Despite limited historical data, the program shows a stable trajectory and a record total customer adoption.

Data Marketplace Listings

This was my lowlight of Data Cloud Metrics, growing only 3% QoQ. A sharp deceleration! It was not addressed on the conference call. I’m puzzled: How does this fit the AI “powered by data” narrative?!

Subscribing to Snowflake's data marketplace grants customers access to 3rd-party data, enhancing their own data, insights, and decision-making.

On top of that, it boosts Snowflake’s "data gravity" and ecosystem while maximizing data value for customers.

This is the definition of Marketplace Listings:

“Each live dataset, package of datasets, or data service published by a data provider as a single product offering on Snowflake Marketplace is counted as a unique listing.”

It’s not actually data usage that is decelerating, but rather the number of new datasets listed in the marketplace by customers. I can only speculate about the reason behind the deceleration, [post edit, fellow investor Muji from hhhypergrowth hinted to me]: but it might be connected to all sorts of new marketplaces popping up, e.g. by the hyper scalers.

However, understanding the definition of this metric better makes me less freaked out by the sharp deceleration in terms of “product adoption”.

Cloud Cost Optimization

Snowflake is dealing with multiple optimization angles at once. On a positive note: some of these help its customers do more with less, which is a customer-centric approach and should pay off in the long run.

Currently, Snowflake calls out three optimization patterns:

1. Optimizations by cloud vendors: better hardware results in more efficient performance for customers.

2. Snowflake’s regular optimizations: improve performance and make things cheaper for customers. Optimization 1 and 2 create a 5% annual headwind to revenue.

3. Change in storage retention policies: Snowflake’s largest customers reduce data storage, pressuring revenue from storage. Additionally, queries run quicker: another headwind for revenue. Similar optimizations in retention policy were seen by one of the hyper scalers, presumably AWS.

   However, this lower data retention comes with a cost for customers: It makes queries on datasets that are now distributed across multiple sources more challenging. Going forward, I expect one or both of these scenarios:

   1. Retention policies revert to previous levels, and consumption and storage tick back up, or

   2. Data retention remains at a reduced level. In this case, optimization would likely be a one-time thing, since customers cannot indefinitely cut storage time.

Besides these optimizations by existing customers, Snowflake also mentioned that the “[..] CFO being in the business […] artificially constraining the demand because of the general anxiety that exists in the economy. So that really needs to start lifting. And that will happen.”

We see: Snowflake is at the epicenter of cost optimizations from all sides, but this quarter, especially from older customer cohorts with a high Snowflake bill.

Couple that with uncertainty and lack of visibility by Snowflake’s management, et voilà: We’ve got a revised full-year outlook.

Here are some exemplary quotes about uncertainty, optimization, and lack of visibility:

“This may well continue near term, but cycles like this eventually run their course. Our conviction in the long-term opportunity remains unchanged.”

“It is challenging to identify a single cause of the consumption slowdown between Easter and today.”

“This, in the past, is we literally saw four weeks in April where there was no week-over-week growth per se or not material.”

“[..] customers remain hesitant to sign large multi-year deals.”

“[..] and that we don't have real strong visibility in terms of, "Okay, when is it all going to be different?”

Sounds dark.

Fortunately, we can also report positives:

The number of queries is up 57% YoY, outpacing revenue. However, queries are running more efficiently, so upside might be muted by the efficiency gain.

Another positive:

Snowpark went from 20% in “one quarter to 30% of our customers using it on at least a weekly basis. We think that's going to go to 100%.” Awesome! Snowflake also highlighted the competitive advantage of Snowpark, not just from a technical perspective, but also from a price perspective.

Finally, Snowflake launched another industry vertical of its Data Cloud: The Manufacturing Cloud: “supply chain management will be the most network segment of all industries that we're operating in.” Exciting!

Long-term thesis intact. Short-term: cloudy

I got reminded that AWS is the closest proxy for Snowflake’s performance. AWS also issued an uninspiring full-year outlook. Guiding down two quarters in a row shows that Snowflake has little to no visibility.

I also disliked low total customer growth and decelerating RPO.

Healthy data sharing metrics, record Free Cash Flow and strong large customer growth are bright spots amidst cloud cost optimization.

Short-term, the upside for Snowflake seems limited. Its proud valuation is not supported by its fundamentals, even if that could change quickly with consumption-based businesses like Snowflake. I just wouldn’t count on it for the remainder of this year.

What if we look beyond 2023?

Long-term, Snowflake is a promising company in the early innings of its potential, powered by an in-demand product, strong network effects, and multifold tailwinds:

• AI & Data Gravity

• Cloud transformation

• Platforming undigitized industry verticals, like supply chain

My Investing Decision

The lack of short-term upside, uncertainty, and lack of visibility reduce my current conviction in Snowflake. For now, I’ll opportunistically reduce my allocation to a low-teens position.

Long-term, I’m optimistic, and I think the market is as well: Despite the after-hour sell-off, Snowflake is up 19% since its report. Partially, this is also due to the general NASDAQ rally.

The main question investors need to ask themselves are:

• Investing short-term or long-term?

• There’s not just buy or sell: How to size an allocation?

Ultimately, that’s a very personal decision to make.

Thanks much for reading & Happy Investing!

Disclaimer: This text is for entertainment purposes only and does not represent any investment advice, stock buying or selling recommendation, or any other financial advice. So please always do your own due diligence and make your own decisions. See our disclaimer for more details.

Now, my year-to-date returns have gone up by 32% versus last month’s -4%. In less than 30 days.

Can you believe how quickly things can change?

For almost two years of continuous market pessimism, every passing month delivered a new blow. And just when it seems we are finally overcoming the challenges, new ones arise — such as the recent storms of , , and .

I want to be open with you: I too am fighting with my own struggles. At times, concerns about my portfolio, the future, and the state of the world weigh heavily on my mind.

However, I've learned the importance of taking a step back and looking at the big picture. I give my thoughts the necessary space to connect the dots before rushing into any decisions.

I'm still figuring out my investing style and what principles resonate with me the most: I'm neither a trader nor a momentum investor. Instead, I prefer to invest long-term in businesses that have strong, sustainable growth potential, like Snowflake or Cloudflare.

I acknowledge the challenges these businesses currently face—a deceleration in revenue growth and metrics like DBNRR.

But I refuse to lose sight of the bigger picture and the underlying thesis driving these businesses. When I recognize a significant opportunity lying ahead, I'm reluctant to make impulsive moves.

By reading and reflecting on management insights and considering the vast opportunities surrounding data and AI, I maintain my confidence in holding onto them, as I believe they will eventually regain momentum.

I may not act as ruthless as some other investors, and I'm uncertain whether that's advantageous or not. I deeply respect those who make quick decisions to cut ties or sell their investments, but that's just not my style.

Am I always right? Certainly not.

But here's the truth about investing: nobody has all the answers. If they did, there would be a guaranteed formula for instant wealth.

The world of investing offers countless strategies and paths toward achieving our goals. It's like assembling a puzzle, with various elements such as approach, valuation, investment theses, summaries, opinions, metrics, and more.

The longer we invest, the more we figure out what works best for us. During this process, mistakes are bound to happen—but that's okay because they serve as valuable learnings. And when we embrace our mistakes, we accelerate our learning progress toward our goals. It's a win-win.

Time will always be the ultimate judge, teaching me the most valuable lessons along the way. And when I've learned them, you can be sure I'll share my insights with you.

My Portfolio

The purpose of this monthly portfolio review is to help you understand my investment philosophy, view my current investments, and facilitate mutual learning. I hope this review is helpful to you!

For more frequent updates, I'd be happy to connect with you on Twitter: @MoritzMDrews

Review structure:

1. Portfolio performance compared to market

2. Portfolio allocation and confidence levels

3. Recent changes to the portfolio

4. Company updates

Disclaimer: This portfolio summary is for informational purposes only and does not constitute investment advice. Everything expressed here is solely my personal opinion. As I am not a professional, please do not blindly follow my perspectives as they could lead to incorrect conclusions.

1. Portfolio performance compared to market

2. Portfolio allocations

3. Recent changes to the portfolio

Trimmed: Snowflake -

A few weeks before earnings, I reduced my position as it had grown to over 20% and I was getting uncomfortable with its size. This was due to its run-up to over $180. I also needed cash to increase my high-conviction positions.

After earnings, I reduced my position further, from 17% to 14%, due to uncertainties around the FY guide. More details below.

Trimmed: Cloudflare -

After the earnings report, I took some time to reflect on NET and decided to trim the position slightly from 16% to 15%. Lucked out here, since I did this after the stock price closed its gap. Like Snowflake, I wanted to match my reduced conviction in Cloudflare with its reduced FY guide.

Trimmed: DataDog -

Similar to SNOW and NET, I aimed to align my conviction with the development of fundamentals. Although they were better than expected, they were still not great. That "Great" label is necessary to earn an allocation of 15%+. Additionally, I wanted to increase other positions with higher conviction.

Added: Zscaler -

I added funds in small increments both before and after the positive preliminary guide on May 8th, with a target allocation of 10%. Last month, I based my reasoning on the ongoing decline in the stock price.

At that time, the valuation had reached a forward EV/S of 8.2, which I considered to be undervalued when looking at the strong fundamentals. Since then, Zscaler has revised its Q2 revenue guide by +5% and its FY guide by +2%, which propelled the stock up by 55% in May.

Added: The Trade Desk -

The Trade Desk reported excellent Q1 earnings results. As a result, I have increased my position with a target of 10%. More below.

Added: monday.com -

Similar to The Trade Desk, Monday demonstrated strong performance. As a result, I have already increased my allocation and plan to eventually bring it to over 10%. More details are below.

Added: Crowdstrike -

Although ARR came in slightly lower than expected (-8.5% YoY), management has reaffirmed its full-year ARR guidance. All other metrics were strong. I took advantage of the drop in after-hours trading (-10%) to increase my allocation from 9% to 10%.

New position: Confluent -

Confluent is a new and small position that I find intriguing due to its mission-critical aspect of integrating itself into the core of a business. More below.

4. Company updates

Note: Absolute numbers relate to last quarter's earnings release. Metrics are adjusted values (non-GAAP).

Snowflake

What they do: Provides data storage, management, and sharing for the cloud
Type of revenue: Consumption-based
Cash: $5B
TTM revenue: $2,134M (product)
Market cap: $54B vs last month’s $45B

On May 24th, Snowflake reported its Q1 earnings, in which my allocation was 18%. At first, I was amped up, but that quickly changed to amped down.

Why: Management lowered its FY guide and the high valuation led to a deserved 12% after-hours drop, following a 31% run in May. Lower consumption due to older customers. Additionally, there has been a change in consumption patterns.

Let’s dive into the numbers:

In terms of product revenue, the company generated $590.1M, a 49.6% increase YoY and a 6.3% increase QoQ. This met my expectation of exactly $590.1M.

However, remaining performance obligations (RPO) were $3,400M, down 7.1% sequentially, which missed my expected value of $3.750M. This decline in RPO is concerning, even though Q1 is typically the weakest quarter for RPO. As I mentioned in my previous earnings recap, customers now only commit to future spending for the coming quarters, rather than years in advance.

Q2 product revenue guide was issued at $625M, which is below my expected $630M. However, this still suggests 9.1% quarter-over-quarter growth and 38.1% year-over-year growth if they meet or beat guidance like in the past.

In my previous review, I assumed a slight acceleration in growth, and this assumption is now materializing. Although I'm happy with the Q2 guide, the FY guide in Snowflake's Q1 earnings report is the lowlight:

Full-year 2024 product revenue guide was revised down to $2,600M (34% year-over-year growth) from $2,705M (40% year-over-year growth) previously. This reduction raises concerns, especially after the strong Q1 report and the decent Q2 guide.

Snowflake's CFO previously had a preliminary FY24 guide of 47% YoY growth ($2,815M) in their Q3 earnings call, which they had to revise down to 40% YoY growth ($2,705M). Now, they had to do it a second time, down to $2,600M (34% YoY growth). It's disappointing to see such a steep decline in growth projections in just two quarters.

Let's take a closer look:

While it's important to understand that Q1 is always a challenging bookings quarter and the current macro environment magnifies that, management saw headwinds globally, starting in April. Consumption slowed after the Easter holidays through to the earnings day, and the majority of this underperformance is driven by older customers.

They weren't able to identify a single cause of the consumption slowdown, but mentioned a few reasons:

• Organizations have re-evaluated their data retention policies, opting for 3 years instead of 5, to delete or archive stale and less valuable data. This lowers their storage bill and reduces compute cost, which means less storage revenue for Snowflake.

However, Hyperscalers like Microsoft Azure, Amazon AWS, and Google Cloud Platform also mentioned seeing retention policies change within their customers. It suggests that the issue is not isolated to Snowflake.

• Additionally, management noted that the development is not due to competitive pressures, but because customers remain hesitant to sign large multi-year deals. This is another good indicator that we are not dealing with execution issues.

• Productivity is not meeting management's expectations. When an analyst probed about this issue, Frank Slootman responded that while there are typical day-to-day challenges that every business faces, productivity is primarily impacted by macro factors.

I also noticed three recent statements about consumption trends that made Snowflake seem unusual compared to other companies:

Snowflake:

In Q1, consumption varied from month to month. We benefited from strong consumption in February and March. Starting in April, consumption slowed after the Easter holidays through today. The strength in the quarter was driven by our healthcare and manufacturing customers. Financial services customers outperformed our expectations.

Confluent:

From a consumption basis, we did see a little bit of an impact relative to some of the consumption trends in our cloud business in the second half of March and we saw that manifest itself in the financial vertical. What we did see though in April is a nice bounce back and so we saw return to normal patterns for the consumption business and the financial vertical. […] I think in some customers, both in tech and in financial services, there was a fair amount going on in the organizations.

Datadog:

I would say April is broadly consistent with what we've seen in Q4 and Q1. I think there's no major difference to call out there. And it's too early also for us to call the quarter obviously. So there's nothing we're really shocked to point out about April.

I keep wondering how other consumption-based businesses didn't experience headwinds in April. My three hypotheses:

H1: Different businesses in different industries with different customer segments experience adverse consumption trends.

H2: Snowflake's consumption patterns are tied to AWS cost optimization activity. In Amazon's last quarter's earnings, AWS experienced weakness, slowing to 11% year-over-year growth. Slootman confirmed that hypothesis by saying, "There's definitely a ripple effect because we're in the stack. So, the answer, generally speaking, is yes."

H3: Snowflake has execution issues. If the trend towards a sharp customer growth slowdown persists over the next quarter, that hypothesis might materialize.

Takeaway on FY guidance:

Based on the information above, I do not believe that there are any execution issues. The change in April consumption trends is likely due to Hypotheses H1 and H2, as the macro environment continues to impact the fragile nature of a consumption-based revenue model. The FY guidance and customer growth are key metrics to keep an eye on.

Cash Flow & Profitability

• The product gross margin improved from 75% to 77% in Q4.

• Operating income was $32.61 million, representing 5.2% of revenue, an increase from $1.68 million in the previous year. Sales and marketing expenses were slightly reduced, contributing to the positive operating margin.

• Net income was $54.15 million, 26.9% of revenue, up from $1.52 million a year ago.

• Earnings per share increased to $0.15 from $0 a year ago.

• Operating cash flow was $299.44 million, 48% of revenue, up from $184.61 million a year ago.

• Free cash flow was $286.92 million, 46% of revenue, up from $181.4 million a year ago.

• R&D expenses were $128.96M, 20.7% of revenue. As a percentage of revenue, it increased compared to previous quarters, indicating that management is investing aggressively in R&D.

• S&M expenses were $244.63M, 39.2% of revenue. As a percentage of revenue, it remained stable compared to previous quarters.

• Cash is $5B, while debt is $0.

Takeaway on Cash Flow & Profitability:

Positive developments across the board, with an outstanding 46% free cash flow margin, indicate that execution issues are not a problem.

Dilution is still under control, as Snowflake used $192 million of cash to repurchase approximately 1.4 million shares to date at an average price of $136. This also reduced the shares outstanding FY Guide to 362M, down from 363M previously, which is a positive for us.

Management noted that favorable pricing with cloud service providers, product improvements, scale in public cloud data centers, and continued growth in large customer accounts will contribute to year-over-year gross margin improvements.

Customer Growth:

• Added 317 total customers, reaching 8,167, up 28.9% YoY and 4.0% sequentially. Their lowest since Q1 2020. Management has stated that they don't give this number much attention since it's the large customers that are more important. However, the total customer count can still influence the $1M+ cohorts, and weak total customer growth could lead to an undesired trend in the $1M+ customer cohort.

• Added 10 Forbes 2000 customers, reaching 590, up 15% YoY and 1.7% sequentially. It's worth noting that every quarter the historical numbers for this cohort keep changing, and is very volatile.

• Added 43 $1M+ customers, reaching 373, up 81.1% YoY and 13% sequentially. This is a positive surprise since 365 total $1M+ customers were expected. Moreover, the key large customer cohort keeps growing steadily and reached a record high in net new customers.

Data Sharing:

• Customers using Stable Edge (data sharing) increased to 2,042, up 61.1% YoY and 13.1% sequentially. Stable edges are defined as continuous data-sharing connections between two or more Snowflake accounts. More customers using stable edges boost Snowflake’s network effect and moat. This development looks healthy.

• Marketplace listings increased to 1,894, up 39.5% YoY and 3% sequentially. However, there has been a sharp deceleration in listings (22% → 13% → 11% → 8% → 3%). Only 56 net new listings have been added, which is an all-time low. This is a metric to watch closely, but "using stable edge" is a better indicator for the health of Snowflake’s data sharing (moat).

• Powered by Snowflake registrants increased to 971, up 128.5% YoY and 18.1% sequentially. This indicates a strong interest in working more closely with Snowflake.

Dollar-Based Net Retention Rate (DBNRR):

• DBNRR declined to 151% vs the expected 147%, down from previously 158%. While still excellent, optimizations from customers are emerging and likely to further reduce this metric in coming quarters (as it reflects the last 24 months). DBNRR is expected to continue decreasing in the upcoming quarters due to the lagging metric.

• However, the decline in DBNRR alone isn't concerning since it's directly connected to optimizations by customers due to the macro environment and management expects it to stay well above 130% long-term.

Takeaway on customers:

I was positively surprised by the growth of customers spending $1M or more (one of the most important metrics for Snowflake), but the total customer cohorts continue to slow down sequentially.

While Snowflake's North Star is the $1M+ customer segment, the smaller cohorts still need to emerge from the total customer cohorts (usually taking 6 to 9 months to ramp customers up).

If these smaller cohorts slow down, fewer $1M+ customers will be added in the future. Additionally, only 10 G2000 customers were added, which is the lowest number since 2021, although this metric tends to be volatile.

I am concerned about customer growth, and these numbers are important metrics to monitor. However, the growth for customers using stable edge keeps steadily increasing.

Additionally, the fact that the number of queries outpaced revenue (57% YoY) is encouraging, as it indicates that customers are heavily using Snowflake and remain satisfied.

This can be attributed to optimizations such as storage reduction and the impact of Graviton 2, a customer-centric initiative that Snowflake implemented over the past year.

AI - Potential Tailwinds Ahead

Management has highlighted that Generative AI's chat-style of interaction will bring disruption, productivity, and obsolescence to tasks and industries. Enterprises can benefit from customizing this technology with their own data.

Snowflake's platform is well-suited for rapidly adopting new language models, and AI's focus on textual data will lead to the rapid proliferation of model types and specializations.

Snowflake's mission is to demolish limits to data, users, workloads, applications, and new forms of intelligence. Interest in machine learning, data science, and AI on Snowflake is escalating. Over 1,500 customers, up 91% year-over-year, are leveraging Snowflake for these workloads in Q1 of 2023.

Additionally, Snowflake's acquisition of Neeva will enable rich, search-enabled, and conversational experiences for non-technical users to extract value from their data.

What Now?

I'm giving management the benefit of the doubt. During uncertain times like these, I need to trust them. If I'm investing in the first place but then jumping off because of a few bumps and not trusting management, then I should question my investment in the first place.

This situation is different from Zoom's, for example. Remember, Zoom skyrocketed during covid, but the market was saturated soon and growth banked. It was unlikely to maintain strong growth for years to come. Zoom had just captured its market.

In contrast, Snowflake has a lumpy, cyclical, and volatile consumption-based model compared to a pure subscription-based one. While it has more downside in bad environments, it also has more upside once it turns. Now, this model is getting hit one after another due to CFOs protecting their money.

Snowflake has an incredibly large runway ahead with data — which is AI, which is everything.

According to Frank Slootman, enterprises are being cautious with their budgets due to an unsettled demand environment. However, they remain confident in the long-term opportunity.

Management expects this trend to reverse but is factoring in these patterns for the full year due to a lack of predictability and visibility of customer behavior. This seems to be the most conservative approach they could take at this time, and I don't expect them to revise their FY guidance again in the future.

Frank Slootman stated:

Scarpelli also noted that although they have a large customer base, they have only migrated a fraction of the data with multi-year plans to Snowflake. Moreover, they have big customers in the pipeline that are likely to close next year, and many new products coming out in the next couple of years.

Speaking of products, Snowpark's daily credit consumption is rapidly increasing. In fact, 30% of all customers are now using Snowpark, which is a significant increase from the 20% seen in the previous quarter.

Additionally, Snowpark consumption has risen by 70% quarter-over-quarter. Snowpark is a new developer experience for Snowflake, which enables developers to write code in their preferred language and run it directly on Snowflake.

Management continues to iterate that they are executing on their strategy and are confident that this will ultimately lead to the "data cloud network effects" they have laid out over the past few years and on track to achieve $10 billion of product revenue in fiscal 2029 with a better margin profile than what was laid out last year.

This comment, from the Q1 earnings call, is underappreciated: It suggests that Snowflake is still in its early stages. That's why its valuation remains high, even after revising guidance down twice in a row!

Any other company on this planet would have been dumped to hell, but not Snowflake. Once the network effects due to data gravity become visible, there will be an unprecedented demand with a huge growth runway ahead.

Why:

Snowflake's customer acquisition and go-to-market (GTM) strategy focuses on large customers and the Global 2000, which includes the largest and most valuable enterprise companies in the world. This creates a strong data gravity and network effect that attracts more customers and partners to Snowflake's data cloud.

For example, Snowflake has announced that Blue Yonder, one of the biggest software companies in supply chain management, will fully re-platform onto Snowflake. Blue Yonder is a key participant in both the manufacturing and retail data clouds. They are the first major supply chain provider to commit to creating an end-to-end supply chain platform on Snowflake. Supply chain management is a highly networked discipline, as changes typically involve numerous different entities.

Why that is so critical:

Up until today, supply chain management is operated by email spreadsheets which is incredibly inefficient because each supply chain is different. Supply chain management will be the most network segment of all industries that Snowflake is operating in and overtake financial services.

Frank Slootman noted:

“Because there's absolutely no penetration right there. These are unsolved problems very much in almost in the history of computing. That's how serious that is. So, fantastic historical opportunity for the technology to address.”

Snowflake is on its way to solving this, which means all the entities in the supply chain will become Snowflake customers. Blue Yonder will be the start of that new era which should lead to significant network effects from this strategic alliance. And Snowflake's data gravity offers opportunities to explore and capitalize on many industries beyond supply chain management.

In a nutshell

The Bad:

• Revised FY guide for 2nd time

• Negative sequential RPO growth (-7.1%)

• DBNRR down to 151% (still excellent)

• Total customer additions continue to slow down (317 new customers added, up 4.0%)

• Forbes 2000 customer additions also slowed to 10 (volatile)

• Marketplace listings up 39.5% but only 3% sequentially (1,894 total)

• New "Optimization headwind": customers deleting/moving less valuable data to cheaper storage

The Good:

• Strong product revenue of $590M in Q1, representing a 50% increase YoY.

• $1M+ customer cohort (north star) grew to 373, representing an 81% increase YoY.

• Q2 guidance indicates a quarter-over-quarter acceleration.

• Strong free cash flow of $287M, with a 46% margin.

• Gross margin is improving to 77%.

• Snowflake is improving profitability while slowing growth signals no execution issues

• No change in competitive pressures.

• Management reaffirmed its goal of achieving $10B in revenue by 2029.

• There are huge network effects ahead due to data gravity and AI tailwinds.

• Strong growth in Snowpark usage, with 30% of all customers using Snowpark and consumption up nearly 70% quarter-over-quarter.

• Reduction in dilution - FY guide is 362M, down from 363M previously due to the stock repurchase program.

• Healthy development in customers using Stable Edge (data sharing), with a 61.1% YoY increase and 13.1% sequential increase.

• Potential revenue accelerators are expected due to upcoming product announcements, including Streamlit.

• The number of queries is outpacing revenue, with a 57% YoY increase in the quarter.

• Management maintains a confident tone, with conviction in the long-term opportunity remaining unchanged and expects to revert back to the mean.

• Many customers have multi-year plans and have only moved a fraction of their data.

• There are deals for next year with big customers that have long sales cycles.

• Cash: $5B. Debt: $0.

My Investment Decision:

I decreased my position from 17% to 14% due to reduced guidance (twice) and slower customer growth to match my confidence level. I don’t plan to reduce it any further and feel comfortable with this allocation.

I believe the thesis remains intact. To uphold the thesis of the network effect, I need to see both stabilization and reacceleration in customer growth.

I am also excited about Snowflake's Investor Day on June 27 in Las Vegas, which will be held in conjunction with the Snowflake Summit. The event will feature significant product announcements, including Streamlit, which is expected to have a meaningful impact on revenue going forward.

Key metrics to watch:

Full-year Guide, total customer growth, customer growth for those spending $1M or more per year, and Forbes Global 2000 customers, stable edge usage, and RPO.

PS - Wishing Mike Scarpelli a speedy recovery from his coughing!

Cloudflare

What they do: Provides cloud-based security for infrastructure exposed to the internet
Type of revenue: Subscription-based
Cash: $1.7B
TTM revenue: $1,053M
Market cap: $23B vs $18B last month

My stance on Cloudflare hasn't changed much since last month's review, and I still lean toward my bullish case:

During the earnings call, management noted that they continued to witness a challenging business environment, which deteriorated significantly in March when negative headlines emerged related to SVB, the broadening banking crisis, which was in the first two weeks of March. They then stated: “[…] almost half of the new business closed in the last 2 weeks of the quarter, which is very nonlinear for us.”

I understand this as things improving at the end of March. Remember: other companies have reported similar issues early in this earnings season.

I have been following Cloudflare’s CEO, Matthew Prince, for a long time now. He is a trustworthy and respectable CEO who cares deeply about his company. If I were in Matthew Prince’s position, I would issue a very conservative, sandbagged guidance to avoid missing it ever again. Doing so would make it possible for the company to beat and raise expectations.

In addition, management emphasized the 100 quota sales reps who underperformed and only generated 4% of annualized new business last year, compared to the top 15% of reps who hit 129% of their quotas. I understand that Matthew Prince wanted to emphasize the discovery of areas for improvement, which provides an upside and is not responsible for the slowdown, which indicates that there are no bigger execution issues.

My confidence is supported by their track record, macroeconomic influence, the pace of innovation, products, and the announcements made during their last investor day on May 4th.

Other investors have already outlined and explained additional information about why Cloudflare might still be on track.

Despite lowering their guidance, I cannot find much wrong with Cloudflare. The next quarter will provide answers, and I may change my stance based on that.

Datadog

What they do: Provides cloud-based infrastructure monitoring
Type of revenue: Consumption-based
Cash: $2.0B
TTM revenue: $1,794M
Market cap: $30B vs last month's $22B

Datadog rallied by 16% after reporting Q1 2023 earnings that were “better-than-feared”.

Revenue for the quarter was $481.7M, indicating YoY growth of 32.7% and QoQ growth of 2.6%. However, revenue was lower than expected due to a $5M service outage in March. Management learned from this incident and will take measures to prevent similar outages in the future.

Excluding this, revenue would have missed my expectations by only 1.4%. RPO increased by 7.5% sequentially, stronger than any previous Q1’s in history, indicating customer commitment.

DataDog achieved $2B in Annual Recurring Revenue for the first time, and management guided to $502M, which was only 0.7% below my expectations. As expected, the full year 2023 revenue guide has been raised by 0.5% to $2,100M. The projected operating income for the full year 2023 is $360M.

Strong profitability: gross margin consistent at 80.5%, operating income $86.4M, 17.9% margin, net income $98.1M, 20.4% margin, EPS increased to $0.28, op cash flow was $133.79M, 27.8% margin, and free cash flow was $116.34M with a 24.2% margin. Operating expenses were consistent with previous trends, indicating that DataDog is continuing to invest appropriately.

They added a record-breaking 2,200 customers, including 1,400 from the acquisition of Cloudcraft. However, when excluding those, only 900 organic customers were added, which is below the 1000 mark for the first time since 2020. Additionally, they only acquired 130 customers spending $100k or more. Management explained that this was due to a combination of weak seasonality in Q1 and macro factors during the call.

Large customers contribute to a solid 85% of total ARR. In addition, existing customer usage growth improved compared to Q4. It is worth noting that larger-spending customers continue to grow slower than smaller-spending customers, which explains the next point.

DBNRR was over 130%, but the trailing 12-month NRR is expected to be below 130% in Q2 due to customers being more prudent with their budgets.

DataDog signed an 8-figure ARR deal with a leading AI company (OpenAI), and a 7-figure expansion with a Fortune 500 healthcare business. An interesting case study about a healthcare expansion has been published: Before using DataDog, major incidents would mobilize up to 150 employees for around 3-4 hours. With DataDog, they only need 20 employees for around 30 minutes, with an opportunity to further reduce these numbers. At an hourly rate of $90, an incident without support from Datadog would cost up to $47,000. With Datadog, it only costs $900. That’s an incredible decrease in expenses.

Tailwinds are ahead: AI will expand observability opportunities (good for DDOG) and increase demand for computing and storage, while also driving digital transformation and cloud migration.

Management reiterated that the trend towards digital transformation and cloud adoption is continuing, with customers gradually optimizing usage and consumption patterns. One interesting commentary on hyperscalers: DataDog has decoupled from AWS deceleration and maintained higher growth than other hyperscalers in terms of sequential and ARR growth.

My Investment Decision

Overall, it was a decent quarter considering macroeconomic effects. My thesis remains intact: DataDog will accelerate growth and maintain durable growth beyond 2023 due to its new products, large market opportunity, steady addition of new customers, and existing customers spending more. I do not plan to make any changes to my allocation.

Key metrics to closely watch are total customer growth and growth of customers spending $100k or more, which I would like to see pick up again.

Sentinel One, Crowdstrike, Zscaler

The Cybersecurity Trio reported already last week.

Due to the vast amount of content in this summary, I plan to publish my reviews on Sentinel One together with Crowdstrike and Zscaler in my next portfolio summary.

Here are my quick takes in one word:

• Sentinel One: Terrible. [Previous review on Sentinel One]

• Crowdstrike: Great. [Previous review on Crowdstrike]

• Zscaler: Solid. [Previous review on Zscaler]

Bill

What they do: Simplifies, digitizes, and automates complex back-office financial operations
Type of revenue: Transaction- and Subscription-based
Cash: $2.7B
TTM revenue: $963M
Market cap: $11B vs last month’s $8.1B

In Q2 2023, BILL reported total revenue of $272.60M, up 63.3% YoY and 4.8% QoQ, beating my expectations of $263M and providing a positive surprise in the current environment.

While subscription-based revenue is accelerating due to a price increase ($66.7M, a 27.8% YoY increase and 8.5% sequential increase), Total Payment Volume (TPV) and therefore transaction revenue ($172.8M, a 52.5% YoY increase and only 1.9% sequential increase) is suffering from seasonality and macro.

That said TPV was stronger than expected (11% YoY, compared to Bill’s initial estimate of being flat), because Q3 quarter looked a lot closer to normal seasonal trends.

Additionally, the subscription price increase is now in their run rate numbers and as a result, we can expect a smaller sequential subscription revenue increase compared to recent history.

Unfortunately, transaction revenue makes up 65% of total revenue, while subscription is only 25%. This drags on revenue growth but should provide tailwinds once macro subsides. Management confirmed that the macro environment remains challenging, with small and medium-sized businesses cutting back on spending and looking to improve efficiency.

Float revenue was $33.1M, a 14.5% QoQ increase. Sequential growth is slowing down as expected, since this type of revenue cannot continue to rise indefinitely. It is hypothesized that float revenue serves as a hedge as long as interest rates remain high, but once rates decrease, it is hoped that transaction revenue will resume its upward trajectory, balancing out any future slowing in float revenue. We will see.

Management guided next quarter's revenue to $280M, beating my expectations and implying 11% QoQ growth.

The full-year 2023 revenue guide has been raised by 3.5% to $1,042M and net income has been raised to $173.4M.

For the BILL standalone platform, Q4 TPV is expected to remain roughly flat compared to Q3. This is because Q3's TPV performance was slightly lower than usual, and management expects that trend to continue.

Reminder: The hypothesis for Bill’s future revenue growth driver is Divvy. That’s why it’s important to pay attention to key metrics like customer growth to the divvy segment:

Divvy's revenue was $88.60M, a 65.3% YoY increase and only 2.3% QoQ increase. However, it's important to note that a mix of seasonality and macro factors had a negative impact on revenue. Additionally, it's worth noting that Divvy's revenue consists solely of transactions and does not include subscription revenue, which does not help stabilize it.

Bill added 2,400 customers to Divvy, up 49.7% YoY, 9.7% QoQ, now representing 27,100 Divvy customers. In my last earnings review, I noted: “This is most likely influenced by macro, but the key metric I am going to watch since BILL is a Divvy-story, see more below.”

Now it’s great to see customer growth accelerating for Divvy, after declining in the past quarters (16.8% → 14.4% → 10.1% → 8.3% → 9.7%)! Pleased to see that.

Revenue per transaction from Divvy customers was $8.69, down -5.7% QoQ. I assume the mix of seasonality and macro was the driver for the decrease, but I expect it to pick up again next quarter. Divvy customers still deliver the highest revenue per transaction.

Total Payment Volume for Divvy was $3.4M, up 4.1% YoY and only 3% QoQ (from 10% the quarter before) influenced by the mix of seasonality and macro. Expecting it to pick up again next quarter.

Looking at customers outside of Divvy, Bill added 3,700 standalone customers, an increase of 2.8% QoQ. I would like to see this growth pick up again.

Bill also added 11,400 financial institution customers. Unfortunately, total transactions for the financial institution segment have not grown meaningfully. Therefore, those customers remain less meaningful for now.

non-GAAP profitability remained strong across the board with an 87% gross margin, $34.8 million operating income, $58.7 million net income, $34.03 million operating cash flow, $23.97 million free cash flow, and $2.7 billion in cash on hand. The elevated gross margin was due to increasing float revenue and a favorable "payment mix".

Overall, Bill exceeded my expectations in all areas of quarterly revenue and next quarter's guide. It is encouraging to see that Divvy's customer growth is accelerating and that Bill is becoming more profitable very fast. However, the duration of macro-related headwinds that affect transaction revenue is uncertain.

In the short term, Bill may face challenges due to small and medium-sized businesses being in standby mode, which will affect customer growth. Nevertheless, management sounded confident during the call and mentioned that the situation has stabilized.

They also indicated that they might see light at the end of the tunnel. Various comments were made, such as "we continue to see very high engagement with the platform." This is encouraging, but it is still an open question of when things will start to turn around.

I also noticed that the total share count decreased from 117,258 to 117,213 due to the $300 million buyback program. This program helps to counter dilution.

Bill is integrating Divvy into its platform, which is expected to be done by the end of 2023. Management sees this as a potentially large revenue driver due to cross-selling opportunities. Rene Lacerte has over three decades of experience building payment solutions for SMBs, so I have confidence in his ability to succeed.

My Investment Decision

Bill is known for beating expectations and I anticipate upside surprises as long as the macro environment remains stable. Once headwinds subside, transaction revenue should increase significantly, similar to other consumption-based businesses. If not, there may be worse outcomes for everyone.

I'm happy with Bill’s Q2 earnings results. However, the business is complex, with multiple revenue streams and business units. Moreover, macroeconomic uncertainty is particularly significant for payment businesses. Therefore, I do not intend to make any changes.

The Trade Desk

What they do: Provides a platform for Ad Buyers (Agencies, Brands, and other technology companies)
Type of revenue: Long-term master service level agreements (similar to recurring)
Cash: $1.3B
TTM revenue: $1,646M
Market cap: $34B vs last month’s $27B

I published my TTD earnings recap separately:

monday.com

What they do: Provides collaboration software based on low-code and no-code building blocks
Type of revenue: Subscription-based (seats)
Cash: $935.6M
TTM revenue: $573M
Market cap: $8B vs last month’s $6.2B

That quarter was almost perfect, except for the lower-than-expected Q1 revenue. Revenue was $162.3M, which is a 49.6% increase YoY, 51% FX-adjusted, and 8.3% increase QoQ. Although I was hoping for $165M, this was a very ambitious expectation.

Q2 Guidance is $170M, which is slightly below my expected $174M. However, if we assume a typical beat, this would translate to $176.8M, a 43% YoY increase, and a 9% QoQ acceleration.

The full-year 2023 revenue guide has been raised by 2% to $706M from $693M. This was in line with my expectation of a typical FY raise in Q1.

Additionally, the full-year 2023 operating income guide has been raised to $12M from -$32M. Last quarter, I had assumed that we would see positive operating income for the full year, and now they even guided for positive operating income! Additionally, 80% of contracts are now annual, compared to 70% a year ago. This provides greater visibility and confidence in future revenue.

Cashflow & Profitability was excellent across the board:

• Gross margin was 90.4%, a record high.

• Operating Income was -$0.3M, which is -0.2% of revenues. This is an improvement from -$43.83M a year ago, which is a significant difference. Historically, Q1 has been the quarter with the biggest losses in previous years.

• Net Income was $7.23M, 4.5% of revenues, up from -$43.42M a year ago.

• Earnings per share was $0.14, up from -$0.96 a year ago.

• Operating cash flow was $42.7M, 26.3% of revenues, up from -$12.91M a year ago.

• Free cash flow was $38.7M, 23.8% % of revenues, up from -$16.2M a year ago.

Sales and marketing expenses currently account for 63.2% of revenues. Management attributes the decrease in these expenses to competitors pulling back on ad spend on platforms such as Google and Facebook.

As a result, Monday can acquire more customers for less money, as they can track the ROI for every dollar spent on sales and marketing using their "BigBrain" technology.

It is worth noting that in the first quarter of last year, S&M expenses were 100% of revenues. This was partly due to their Super Bowl ad, which cost $11M and reduced the percentage of revenues to 90%. So, we can see continued improvements on that front.

Looking at the customers, Monday added 209 net new large customers spending more than $50K+, up 75.3% YoY, 14.2% sequentially. That beat my expectations of 160 by 31%!

Last quarter I mentioned that I wanted to see the growth of that cohort stabilize in the upcoming quarters. And we got even an acceleration, which indicates further revenue acceleration in the upcoming quarters.

Even management was surprised by that strong demand:

“If you think about where we see the strength, is that the largest number of net new enterprise customers in the quarter came this quarter.”

Another highlight is that 77% of total ARR is coming from customers with more than 10 users, which is an increase from 73% a year ago. Additionally, ARR from customers spending more than $50k increased to 28% of total ARR, up from 22% a year ago. I love seeing that consistency!

Also, it's worth noting that 59% of the Fortune 500 are already customers of monday.com, which is an increase from 52% a year ago.

Note: 70% of our customers are non-tech, and 30% are tech. The decrease in demand was mostly seen in the tech sector, which helps Monday navigate this environment compared to other businesses that have more customers from the tech sector.

Moving on to the Dollar-based Net Retention Rate (DBNRR), which decreased for all cohorts:

• For all customers to 115% from 120%

• For customers with more than 10 users it decreased to 125% from 130%

• For customers spending more than $50k it decreased to 125% from 135%

However, the decrease in DBNRR was anticipated due to slower enterprise customer seat expansions amid the challenging macroeconomic environment, and this trend is expected to continue throughout FY’23.

Specifically, they expect an overall NDR of 110% for all customers and around 115% to 120% for customers with more than 10 users and customers spending more than $50k. This means we should expect a further drop of about 500 to 1000 bps per DBNRR cohort.

Note that DBNRR is a lagging metric due to its trailing four-quarter weighted average calculation, and a more recent DBNRR could already look better again.

On the positive side, the weakness in DBNRR has been offset by strong customer acquisition, as mentioned above. Monday has seen very healthy top-of-funnel activity with the expansion into CRM and other use cases, which is expected to bring some recovery on that front next year.

Also, looking at small and medium-sized businesses (SMBs), the DBNRR for that cohort was stable, given the current economy.

Moving on to products

First, the first phase of mondayDB 1.0 was launched, which upgraded the underlying infrastructure. It is currently available to 30% of accounts and will be rolled out to all customers by the end of Q2.

Second, the number of Monday Sales CRM accounts increased by an astonishing 121% QoQ, from 2,458 to 5,441. Currently, CRM is only available to a selection of our existing customer base. During the earnings call, CRM was mentioned more than ten times and is expected to be the next big revenue driver once it becomes available to all new and existing customers.

The number of Monday Sales CRM accounts increased by 121% quarter over quarter, despite only being available to a selection of Monday's existing customer base.

Once CRM becomes available to all new and existing customers, it is expected to be another big revenue driver.

Third, on AI, several initiatives were mentioned. I found leveraging Monday's proprietary data to be the most interesting. With access to a vast amount of data, Monday can help customers in 200 verticals set up and maintain optimal workflows and automations, while also connecting the right people to the right processes. This will improve Monday's speed of adoption within companies and further enhance data-driven product development initiatives.

I would like to emphasize that I'm still impressed with their GTM (go-to-market) strategy.

monday continues to see very strong demand and doubled down on marketing. Comments like these sound very encouraging:

They seem to be checking all the boxes in that challenging environment, and it's clear that what they're doing is working.

For those interested in their successful marketing, I wrote in detail about their GTM strategy here. Not only do almost all the metrics support their success, but also quantitative insights like G2 have included monday.com and several of our products on 18 of its 2023 Best Software Awards lists.

Overall, Monday delivered the most impressive results of all my companies this quarter. Analysts seem to agree:

“Congrats on a great quarter” “Congrats on the strong quarter” “Congrats on the strong results” “Congratulations on these fantastic results” “I'm very impressed by your billings growth”

“The strength of demand here is impressive here in the quarter and outlook despite the moderating NDR.”

“Clearly surprised us here this quarter on positive cash flow”

And one analyst wanted to understand their confidence in their FY guide. The answer:

“We continue to see stronger new customers growth, as we've seen, together with efficiencies, overall efficiency and cash generation, we believe this is something that provides us with some positive view on the rest of the year. So something that allows us to make this guidance."

My Investment Decision

Excellent earnings: As a result, I have already increased my allocation and plan to bring it to over 10% over time.

Key Metrics to watch are DBNRR for customers with more than 10 users, $50k customer additions, ARR% from customers spending more than $50k.

Confluent

What they do: Provides a platform for managing and processing streaming data.
Type of revenue: Consumption-based
Cash: $1.85B
TTM revenue: $634M
Market cap: $9B

I started my position at CFLT on May 3rd and it has increased by over 45% since then. However, the increase hasn't significantly impacted my portfolio due to its small size.

That's okay, as I plan to keep it on my radar for now and increase it opportunistically.

My Watchlist

• Duolingo -

• Samsara -

• MongoDB -

• Nvidia -

And that’s a wrap.

Thank you for reading and Happy Investing!

PS — If you have any questions or feedback, please leave a comment below or shoot me a PM on Twitter: @MoritzMDrews.

Disclaimer: This text is for entertainment purposes only and does not represent any investment advice, stock buying or selling recommendation, or any other financial advice. So please always do your own due diligence and make your own decisions. See our disclaimer for more details.

$177M Record-free cash flow
46% FCF margin (!)
$1.3B cash
$0 debt

What more could you ask for in this environment?

Ah yes, GAAP-profitability, of course:

They hit that mark with a positive $9M GAAP net income!

Circling back to the non-GAAP front, they significantly beat their adjusted EBITDA guide of $78M and delivered $109M (29% of revenues).

The EBITDA margin of 29% is their lowest since Q2 2020, but this is primarily due to higher interest income and tax benefits. These are subtracted from EBITDA (earnings before interest, tax, depreciation, and amortization) and do not necessarily represent a negative trend. On the contrary.

Ignoring that, the EBITDA would be around $137M with an EBITDA margin of 37% and is "on track”.

Net income was $114M (30% of revenues), up from $104.66M a year ago. Earnings per share also increased from $0.21 to $0.23. Operating cash flow was $179M (47% of revenues). These margins are incredibly strong and are one of the reasons why I'm holding this stock.

Non-GAAP operating expenses for R&D (19% of revenues) and S&M (21.7% of revenues) rose by 300 and 450 bps respectively year-over-year. This is likely due to in-person events and travel that did not take place in Q1 of the prior year as they had not yet fully resumed back-to-office work or in-person events, but nothing to worry about.

Revenue and guidance - another highlight

Revenue for the quarter was $383M, which exceeded my expected $366M. This represents a 21.5% increase year-over-year and a -22% decrease quarter-over-quarter. Note: The negative QoQ decline is not worrisome, as Q1 is seasonally the weakest quarter for the company and the advertising industry in general.

The company beat its revenue guidance by 5%, which is a positive surprise since it breaks the negative trend of the previous 4 quarters:
4.1%, 3.6%, 2.6%, 0.2% -> now at 5%!

The Q2 revenue guide was $452M, which exceeded my expected $437M, and was another positive surprise. Excluding U.S. political election spend, which represented a low single-digit percentage of spend in Q2 2022, the estimated revenue growth rate in Q2 of this year would be about 21% on a year-over-year basis, instead of an estimated 18%. This is without a beat. Assuming they beat their guide by just 2% (I expect a 4% beat), revenue is likely to accelerate again.

International spending, with a particularly strong performance in EMEA, accounted for 12% and outpaced North American spending, which accounted for 88%. Additionally, CTV business in Europe grew well into the triple digits YoY in Q1.

In terms of verticals, the travel sector nearly tripled its spending in Q1 compared to a year ago as it continues to recover from the pandemic, while spending on shopping and business was below average.

Customers

On the customer front, there is the usual 95% customer retention for the 9th consecutive year.

I also appreciated the comment about customers being able to work in month-to-month increments rather than committing to a yearlong or 6-month plan, which helps customers in uncertain environments like this.

Tailwinds: Connected TV (CTV)

Looking at the comments regarding the main investment thesis, Connected-TV (CTV), provides further confidence:

• Jeff Green said that CTV currently accounts for 45% of spending and is the fastest-growing channel. The shift from linear to connected TV is accelerating, and this trend is the biggest secular tailwind the company may ever see in its history.

• Netflix highlighted on their earnings call a few weeks ago that the ad-funded subscriber is more valuable to them than the ad-free subscriber. This bold statement supports The Trade Desk.

• And streaming wars intensify each year, which makes integration with The Trade Desk somewhat inevitable for all major streaming platforms as they scale, because they need as much demand as possible on their platforms.

Touching AI

Jeff Green (CEO, The Trade Desk) reiterated a recent statement of Coca-Cola’s CEO:

Which I agree with, being a marketing guy for 20+ years. This will be a significant development for marketing, and the same can be said for The Trade Desk.

He also highlighted their advantage in AI, as they analyze over 10 million ad requests per second. These requests represent a unique dataset that can be used to train generative AI with confidence for years to come. On June 6th, The Trade Desk will hold its "Net Platform Launch" event, which is "the largest in our history". During this event, additional insights about AI will be announced.

On UID2

I was happy to see that The Trade Desk has achieved its target of having 75% of the third-party data ecosystem activate on UID2. This means that most major third-party data providers are now using UID2.

Unilever has reported that ad impressions, including UID2, on Disney were 12X more effective in reaching their target audience than those with traditional identifiers. This is a significant value add and a compelling reason to work with The Trade Desk.

In Summary

I was impressed by the quarter, as were several analysts during the call. The Trade Desk continues to outperform its industry by 4X and is on track to achieve re-accelerated revenue growth.

Someone on Twitter asked me why the stock was down 6% in the following days. While I wouldn't describe it that way, my explanation would be the relatively high valuation. Stocks like these can be extremely volatile, but as of writing, it's still up 48% year-to-date. As long as the company continues to deliver, I expect the stock to keep rising. Long-term.

Despite growing slower compared to all my other holdings, I have a lot of confidence in The Trade Desk. Not only am I expecting revenue growth to accelerate next year due to at least two significant tailwinds: 1. Political spending from elections and 2. accelerating CTV tailwinds, but I also believe that is a rare, enduring grower for years to come.

That's why I plan to opportunistically add to my position over time, and it might even deserve to be among the larger holdings (>10%) in my portfolio.

Thanks for reading, and happy investing!

Disclaimer: This text is for entertainment purposes only and does not represent any investment advice, stock buying or selling recommendation, or any other financial advice. So please always do your own due diligence and make your own decisions. See our disclaimer for more details.

About half of the companies in my portfolio have reported earnings so far: , , , , and .

Portfolio update: As of today, my portfolio is up 23% YTD.

While macro conditions still impact revenue growth and net retention rates, particularly on the expansion side, I have observed encouraging data points in the reports.

Key Highlights:

• Stabilizing Macroeconomy: Companies like bill, Datadog, and monday.com noted that the macro environment is stabilizing (“not getting worse”)

• Revenue Performance: Quite some beats and raises, even if coming off conservative guidance. E.g. from Datadog, monday, and The Tradedesk

• Strong Product Adoption: For instance, product module expansion (DDOG), consistent transaction volume (BILL), strong new product traction (MNDY)

• Stabilizing Costs for Paid Marketing: monday noted stabilizing costs per ad, meaning that competition starts spending $ on Marketing again

• Retention Rates: Net retention declined or is expected to decline for most, but gross retention remains high, indicating low churn

• Customer Growth: Customer growth is also pressured, but many companies report record new logo or enterprise customer growth

And with that, let’s dive into the recap of two of my companies’ reports.

Datadog -

Datadog delivered a solid quarter. Revenue was $481M, up 33% YoY and 2.6% QoQ, beating its conservative guidance by 2.5% and raising full-year outlook by 0.5%. It’s a small raise, but it is one. This excludes the $5M in revenue that Datadog lost due to an outage.

Looking at customers, I expected Datadog to add 180 large (> $100k) and 1,000 regular customers. We got 130 large, and 900 total customers, to which we can add 1,400 from an acquisition. While it’s hard to win customers in this environment, I am a bit disappointed. Net retention rate remained at 130+ % but is expected to drop. This is a trailing 12 months metric, so effects can be laggy.

Profitability looks great with a FCF margin of 24% and a stable gross margin of 80%. No cash issues here.

Datadog commented that they don’t see macro getting worse, but also not better any time soon. Cost optimization is most pronounced for larger customers who are further along in their cloud journey.

My highlight was DataDog's product adoption, which shows that companies are seeing value in its product and expand into new modules. Even in the current environment. I also like that DataDog is strengthening its relationship with Google GCP and Azure in terms of sales and product offerings.

My Investing Decision

⟶ I had an outsized 18% position that I will trim to 13 %. Datadog’s quarter was solid, but not strong enough to maintain such an outsized allocation.

monday.com -

This relatively small company with a $7B market cap managed to accomplish big time. It offers a real open platform, and a strong partner ecosystem, develops leading products, expands its enterprise customer base, and outperforms on both top and bottom lines. Additionally, it gives back to the community through countless ESG projects. Let’s start with its top line:

monday's revenue was $262.3M, 50% YoY, slightly below my expectations of $363M+, but beating Q1 guidance by 4%. Sequentially, Monday grew 8.3%, decelerating from previous levels, yet still outpacing most other companies in this quarter. monday's full-year outlook was raised by 2% to $706M, reflecting strong performance in the current environment.

More outperformance in the bottom line: monday achieved break-even for the first time with an operating margin of (0%), driven by better-than-expected revenue, internal cost optimizations, and slightly below-plan headcount. monday expects its operating margin to improve further to 1 - 2% throughout this year.

Further, it pushed out another quarter of an incredible 90% (!!!) gross margins and added a record cash flow of $38.7M, with an FCF margin of 24%.

Turning to customer activity: monday’s net retention is pressured by macro — especially larger customers hesitating to expand seats (seems to be a pattern for growth companies lately). It might drop a little further to 115% for all customer cohorts, but this drop is expected to be offset by strong top-of-funnel traction. Positive: Gross retention remains stable, so no elevated churn.

My highlight of this report was the record enterprise customer growth: monday added 209 net new large customers with >50k ARR, representing 75% YoY and 14.2% sequential growth, up from 11.4% last Q.

Large customers sequentially outgrowing revenue shows me there is significant future growth embedded.

Why monday.com Is Not Just Another Task Management Tool

I feel like monday is often put into one bucket with Asana and Co.

I strongly disagree.

Here’s why:

• monday is not simply a task tool, but a flexible, open platform that can be used for a variety of purposes

• It offers specific solutions to specific use cases with incredible traction, like developer and marketing tools, and CRM, growing 121% (!!!) sequentially

• monday follows a “land & expand” model. It can land new customers, e.g. with its CRM, and then expand these customers into additional use cases powered by its scalable platform

• A powerful partner ecosystem and app marketplace provides network effects that help Monday resell customer-/partner-developed solutions for countless use cases

• The company is highly data-driven, with an intelligent marketing strategy and a constant feedback loop from customers using the platform.

• monday seems to always stay ahead of the curve - e.g. with its latest AI innovation.

My Investing Decision

⟶ I bought more monday.com in April and got into earnings with a 7% position. After this great report, I want more and will increase my position to 13% - 15%.

Closing Thoughts

So far, the theme of this earnings season seems to be “not getting worse” and “better than expected”. While this doesn’t sound that exciting, it is: Wall Street typically only looks 6-9 months ahead and priced our growth stocks for the worst-case scenario, which did not materialize. The latest market run shows glimpses of optimism and a more risk-on sentiment coming through.

Will it last in the short term? I don’t know.

But mid- to long-term I feel good about my companies and continue to hold them according to my conviction level.

Snowflake is set to report earnings next week on 5/24. I plan to share my thoughts on Twitter. Stay tuned!

Thanks for reading & following us on this exciting journey.🛣️

Happy Investing!

Disclaimer: This text is for entertainment purposes only and does not represent any investment advice, stock buying or selling recommendation, or any other financial advice. So please always do your own due diligence and make your own decisions. See our disclaimer for more details.

And finally some green numbers, with my portfolio up 14.5% YTD. I also plan to provide more regular updates on Twitter. I’d love to connect with you over there!

Fear > Conviction?

Believing in a company is easy in good times. It’s in tough times that our conviction is put to the test. I noticed many growth investors change their investment strategy lately.

They are now:

• Starting to trade

• Selling their SaaS stocks

• Shifting to GAAP-profitable stocks only

• Concentrating their portfolio further to only 3-ish stocks

18 months of draw-downs take their toll on conviction. I’m also not immune - after feeling chilled for 17 months, I got really anxious just before reported. Another -25% draw-down after earnings? Ugh. I considered reducing my position pre-earnings.

Moritz questioned why I hadn't already trimmed my position much earlier if my conviction was that low. This made me reconsider:

• Did I still believe in the long-term prospects of bill? Yes.

• Am I a trader or a long-term investor? Long-term investor.

• Are the fundamentals on track? After analyzing my spreadsheet: Yes.

I got my answer and decided to maintain my position based on conviction. Even got some positive post-earnings price movement, up +30%+, that I would have missed otherwise.

Takeaways:

1. Focus on what you can control

2. Have an investing buddy

3. Follow the numbers

4. Conviction > fear

GAAP vs. Non-GAAP

Conviction is crucial, but it’s also important to be open-minded and challenge ourselves. After all:

In the spirit of challenging myself and witnessing so many investors shifting to GAAP-profitable stocks only, I wanted to circle back to GAAP vs. Non-GAAP profitably.

Refresher: What is GAAP & Non-GAAP?

GAAP,

or Generally Accepted Accounting Principles, is a standardized set of accounting rules that every public company in the US must follow. I think of it as the “financial/accounting theory”.

Non-GAAP,

on the other hand, allows companies to present supplementary metrics that deviate from GAAP principles, providing flexibility to highlight unique aspects of their business. Non-GAAP is better to gauge the actual performance of a business’s operations. In non-GAAP, companies can, for instance, adjust for:

• Stock-based compensation (SBC)

• Acquired intangibles write-off

• Restructuring costs

Non-GAAP reporting is very common among fast-growing tech companies that often use significant amounts of SBC to compensate their employees, making them a "Co-Owner", and aligning their interests with what's best for the business.

These stock options don’t present actual cash outflow. Yet in GAAP reporting, they are deducted as expenses, distorting the picture of a company’s performance. For disclosure: Main disadvantage of SBC for investors is dilution.

GAAP vs. Non-GAAP profitability

Now, let’s look at GAAP vs.non-GAAP profitability on the living subject - the latest earnings report of

GAAP net income is modified by adding back the amount of SBC and SBC-tax, as well as cash-irrelevant amortization effects. Without these non-cash-related expenses, it’s easier to actually see how Datadog’s business is doing from an operations perspective. And this is what I personally care about.

However, I do track GAAP metrics in my spreadsheets as well, and like to refer to them from time to time to sanity-check the non-GAAP reports. Either way, if I want to see how the business performance is doing from an operational point of view, I prefer to follow the non-GAAP numbers.

Note: This article does not aim to fully explain every aspect of GAAP and Non-GAAP. However, if you want to learn more about it, check out this overview on GAAP vs. non-GAAP.

What’s The Takeaway?

GAAP profitability often indicates that a company has more cash because GAAP cash should exceed expenses such as SBC and write-offs. So far, so good.

However, companies often follow certain maturity stages. From being a highly unprofitable, but very fast-growing business in the early stages, all the way to potentially becoming a behemoth.

Here’s a great illustration of the business lifecycle. I invest in companies that are in the growth section (high growth, not as much cash yet)

Since I want to catch that part of the S-curve, I pay attention to the company’s (trend to) profitability but don’t exclude great GAAP-unprofitable businesses from my portfolio.

While Mr. Market likely prefers GAAP-profitable stocks in the short term, I have conviction in my portfolio as is and try to look beyond short-term market reaction.

GAAP vs. Non-GAAP Net Income of My Holdings

Closing Thoughts

TL;DR

• Find and stick to an investing style that suits you

• Stay open-minded and challenge yourself

• Focus on what you can control

• Making money > being right

• Have an investing buddy

• Follow the numbers

• Conviction > fear

Thanks for reading and I hope you enjoyed today’s update. I’d love to hear your feedback so that I can write more relevant content for you. Thanks! 💛

Next up: Earning Recaps. Stay tuned!

*This text is for entertainment purposes only and does not represent any investment advice, stock buying or selling recommendation, or any other financial advice. So please always do your own due diligence and make your own decisions. See our disclaimer for more details.

However, two things happened after that:

1. Amazon made it clear that customers are still evaluating ways to optimize their cloud spending amidst the tough economic conditions, and that April revenue growth rates were about 500 basis points lower than those seen in Q1. Rally ended.

2. Cloudflare reported its earnings, which I thought was a terrible start to the earnings season. You can read more about my thoughts in the company review section below.

I encourage everyone who is struggling to read at least my closing thoughts at the bottom of this summary.

My Portfolio in April 2023

The goal of this portfolio review is to help you understand how I think about investing, see what I’m doing, and help me learn. I hope this review is useful for you!

This review has 4 parts:

1. How my investments did compared to the overall market

2. How my money is invested and how strongly I believe in each investment

3. The changes I made last month to invest in new opportunities or reduce risk

4. Updates on the companies I invested in

Disclaimer: This portfolio summary is for informational purposes only and does not constitute investment advice. Everything expressed here is just my personal opinion. I am not a professional, so please don’t follow me blindly as my perspectives could lead to incorrect conclusions.

1. How my investments did compared to the overall market

Timestamp: 4/30/2023

2. My Portfolio

3. The changes I made last month

Added: monday -

Due to strong earnings and the ongoing decline in the stock price, which has now reached a forward EV/S of below 7.5, I increased my allocation to approximately 8%.

Added: Crowdstrike -

Crowdstrike’s earnings call had a positive tone, with revenue up 47.9% YoY and 9.7% QoQ, remaining performance obligations up 20.4% QoQ, and surprised us with a 12% QoQ increase in ARR, instead of the expected decline of -10%. I increased my position to approximately 9%.

Added: Zscaler -

On April 25th, before Alphabet and Microsoft reported their earnings, the market became pessimistic again. Due to the ongoing decline in stock price, the valuation reached a forward EV/S of 8.2 which I now consider to be undervalued. I increased my position by about 1 percentage point to keep it above 5%.

Abonnieren jetzt

4. Company Reviews

Note: To keep it concise, only companies with noteworthy updates might be included.
Absolute numbers relate to last quarter’s earnings release.
Metrics are adjusted values (Non-GAAP).

Snowflake -

What they do: Provides data storage, management, and sharing for the cloud
Confidence tier: Champion
Type of revenue: Consumption-based
Cash: $5.1B
TTM revenue: $1,938.8M (product)
Market cap: $48B vs last month’s $45B

Noteworthy Updates in April

• Snowflake has launched a new service called Manufacturing Data Cloud for companies that make things like cars, phones, or machines. This service helps these companies use their data to improve how they make and deliver their products. For example, they can use data to see how well their machines are working, how fast their products are moving, and how satisfied their customers are. Snowflake also works with other partners who provide solutions and data sets for different manufacturing problems. Sounds like lots of added value for manufacturing companies and should provide more use cases to Snowflake customers.

Recap and Conviction

Snowflake reported strong Q4 revenue growth with product revenue up 54.4% YoY to $555.3M. Full-year 2024 product revenue is expected to grow 40% to $2,705M. Operating income margin is projected to reach 6% in 2024, with free cash flow margin forecast at 25%.
Customer growth slowed but large customers expanded spending. Snowflake repurchased $2B of stock and expanded its AWS partnership.

Despite lowering its revenue forecast for 2024, Snowflake’s growth thesis remains intact due to its large scale, strong free cash flow, and continued high growth.

→ Read my most recent review here
→ Snowflake reports on 5/25/2023

Cloudflare -

What they do: Provides cloud-based security for infrastructure exposed to the internet
Confidence tier: Champion
Type of revenue: Subscription-based
Cash: $1.7B
TTM revenue: $1,053.12M
Market cap: $15.6B vs $18B last month

My Take

No sugar-coating, this report was awful, and the 25% stock price drop was deserved.

The question now is: how awful will other businesses report? This will determine whether Cloudflare is awful or not:

Low light #1: Revenue was $290.2M (I expected $294M), 36.8% YoY, 5.6% QoQ, missing their guide for the first time in history by 0.3%. Management attributed this to slower expansion from existing customers and a significant increase in elongated sales cycles (27% for new customers and 49% longer for existing customers) during the quarter. One factor for the increase was the broadening banking crisis ( reported similar lines in their earnings call), which made companies increasingly cautious). Almost half of the new business closed in the last 2 weeks of the quarter, which is very nonlinear for them.

Low light #2: Management guided to $306M (I expected $319M) in Q2, which is a big reduction. My expectation for next quarter incorporates no beat but also no miss, meaning $306M.

Low light #3: Full Year 2023 revenue guide was reduced by 4% to $1,284M from $1342M. This is very disappointing. Last quarter, management mentioned guiding very conservatively. “We have not factored in any improvement in the macroeconomic environment or from our go-to-market initiatives.” Either the macro has worsened significantly, as explained by management, or Cloudflare has an execution issue, since they also mentioned rotating (firing) 100 sales reps, since they underperformed.

At least they shouldn’t have any issues on the hiring side, since they received more than 0.25 million applicants in Q1. We’ll have to wait for other companies to report to evaluate this matter.

Hoping for them, this is the most conservative guide they ever gave. If we consider no further improvement, revenue growth will land at 32% for FY2023. That’s a significant slowdown from 49% last year.

Low light #4: Dollar-based Net Retention Rate decreased to 117% from 122%. Last quarter, I noted that I wasn’t too concerned. Well, now I’m slowly becoming concerned. Still, Cloudflare mentioned “not experienced elevated churn” and they anticipate it not to decrease further based on the current data. The sales cycle for existing customers increased by 49% year over year, which was the main reason for the decreased DBNRR.

The customer additions (Added 5914 total, and 114 $100K+ customers) were so-so, but considering the awful topline metrics and management’s explanation of significantly elongated sales cycles, I’m fine with the development. Unfortunately, $500k+ and $1M+ customer additions, which were the highlight of last quarter, are only mentioned in Q4.

Not everything was a low light though, since they managed to continue improving on profitability with several record-highs. I expected them to come in much weaker due to the usual seasonality in Q1:

• Gross margin held up at 77.8%

• Operating Income was $19.4M, 9.4% operating income margin, up from $4.92M a year ago.

• Net Income was $27.2M, 9.4% net income margin, up from $3.45M a year ago.

• Earnings per share was $0.08, up from $0.01 a year ago.

• Operating Cash Flow was $36.4M, 12.5% operating cash flow margin, up from $-35.47M a year ago.

• Free Cash Flow was $13.9M (I expected $0M), 4.8% free cash flow margin, up from $-64.4M a year ago.

Good: The positive development in profitability was not due to reduced expenses in Sales & Marketing or Research & Development, which is still in line with previous trends.

So, what do I read out of this mess?

I can see some red flags such as missed revenue guide (first time ever) and lowered FY guide. However, according to management, the macro environment has significantly deteriorated during the quarter, amplified by the “banking crisis”, which Alteryx and other companies reported as well in their recent earnings call. Customers have increasingly protected their budgets - which raises confidence, that it’s not an isolated issue for Cloudflare. Management also noted they had 100 sales reps getting fired since they underperformed vastly.

Now, since hyper scalers like Google, Microsoft and Amazon reported positive (cloud) earnings, it might be an execution issue on Cloudflare’s side, right? Not so sure: hyper scalers have a consumption-based revenue model that responds more quickly to customer behavior. Cloudflare’s subscription-based revenue model may lag, meaning it remains stable for longer, then declines with a delay, then improves again - after DDOG, SNOW, MDB, etc., have already recovered.

It is also worth noting that several CFOs of trusted companies have now missed their own “premature” guidance (e.g. Snowflake, Sentinel One, now Cloudflare), which increasingly suggests how opaque the current situation is, and I would be cautious about “misleading” accusations. Should they have given a more conservative guide? Maybe. But perhaps at that time, it was their best conservative guess.

On the other hand, profitability is soaring with several record highs and unexpectedly good free cash flow for a seasonally poor Q1 - which suggests that Cloudflare does not have an execution issue. If that were the case, profitability might go down (e.g. price pressure from competition, etc.).

Furthermore, management has emphasized that they did not encounter increased churn, and that renewal rates were consistent with the high levels seen in the previous four quarters. The improvement in pipeline that they observed over consecutive quarters has continued and shows no signs of slowing down. Additionally, win rates against competition remained strong.

Hypothesizing About the Lowered FY Guidance

Bull Case:

During the earnings call, management noted that they continued to witness a challenging business environment, which deteriorated significantly in March when negative headlines emerged related to SVB, the broadening banking crisis, which was in the first two weeks of March. They then stated : “[…] almost half of the new business closed in the last 2 weeks of the quarter, which is very nonlinear for us.” I understand this as things improving at the end of March. Remember: Other companies have reported similar issues early in this earnings season.

I have been following Cloudflare’s CEO, Matthew Prince, for a long time now. He is a trustworthy and respectable CEO who cares deeply about his company. If I were in Matthew Prince’s position, I would issue a very conservative, sandbagged guidance to avoid missing it ever again. Doing so would make it possible for the company to beat and raise expectations.

In addition, management emphasized the 100 quota sales reps who underperformed and only generated 4% of annualized new business last year, compared to the top 15% of reps who hit 129% of their quotas. I understand that Matthew Prince wanted to emphasize the discovery of areas for improvement, which provides upside, and is not responsible for the slowdown, which indicates that there are no bigger execution issues.

Bear Case:

As of the end of March, there have been no improvements. Execution issues, fueled by underperforming sales representatives, are real and things are continuing to get worse. It is possible that Cloudflare may have to lower guidance again next quarter while other businesses thrive. RIP.

Next Steps

Personally, I am leaning toward the bull case. However, please note that this is not advice. Remember that I am just a regular person and I could be a naive goat, hoping for the best.

I need more puzzle pieces (= earnings of other companies, e.g. ZS) before jumping to conclusions. If they paint a similar picture, then I will not part ways with Cloudflare. I am not trying to wear rose-colored glasses, but I don’t have a bad feeling at the moment as I had with other companies in the past (i.e. Zoom).

Being completely ruthless in times like these could result in the cat catching its tail. I might reduce my position to risk management but don’t see a reason to sell until other companies have drawn a bigger picture.

Datadog -

What they do: Provides cloud-based infrastructure monitoring
Confidence tier: Contender
Type of revenue: Consumption-based
Cash: $1.9B
TTM revenue: $1,675.57M
Market cap: $22B vs last month’s $22B

Noteworthy Updates in April

• Announcend the acquisition of Codiga, a provider of code analysis tools. It allows them to expand their observability features into code analysis, providing a more comprehensive platform for the software development lifecycle. This move helps developers write better code, reduces stress and time spent on fixing tech debt, and underscores DataDog’s leverage by moving beyond observability and into developer experience.

• Bottomline, a financial technology provider, announced a new integration with Datadog 1, a monitoring and security platform for cloud applications. The integration will allow joint customers to reconstruct user sessions and capture performance metrics and security logs to protect against fraud and data breaches in critical IBM environments.

• Announced the general availability of Application Vulnerability Management, which automatically uncovers and prioritizes vulnerabilities in open-source libraries. With open-source code making up at least 70% of all software and vulnerabilities projected to rise to almost 2,000 a month in 2023, the new offering allows organizations to continuously identify and manage vulnerabilities in open-source libraries in use within their applications. Using real-time data from Datadog’s observability platform, Application Vulnerability Management prioritizes these identified vulnerabilities with context from all impacted services, workloads and infrastructure resources, enabling DevOps, security and engineering teams to work together and resolve issues quickly based on their risk.

• Announced the general availability of Data Streams Monitoring, which enables organizations to track and manage the performance of applications that rely on messaging systems like RabbitMQ. Data Streams Monitoring automatically visualizes all interdependencies and key health metrics across all streaming data pipelines to help organizations prevent and troubleshoot latency and downtime. The solution is now generally available for Kafka and RabbitMQ, with support for more technologies coming soon.

Recap and Conviction

Overall, the company continues adding new customers and expanding existing customer relationships. While growth slowed temporarily, it has since picked up again. The increase in multi-product customers is especially encouraging, demonstrating the strength of the company’s value proposition.

I remain optimistic about DataDog’s growth prospects despite its conservative guidance of 25% growth next year. While growth may slow down from its current 50% rate, I believe DataDog will continue durable growth beyond 2023 due to its new products, large market opportunity, steady addition of new customers, and existing customers spending more.

The CEO also cited focusing on new customer segments and geographies, as well as developing new products, as key drivers of future growth.

→ DataDog reports on 5/4/2023.

Sentinel One -

What they do: Cybersecurity firm catching up with CrowdStrike
Confidence tier: Contender
Type of revenue: Seat-based (Endpoints)
Cash: $1.2B
TTM revenue: $422.16M
Market cap: $4.6B vs last month’s $4.4B

Noteworthy Updates in April

• Appointed Sally Jenkins as Chief Marketing Officer. Jenkins brings over 30 years of experience in B2B and B2C marketing, having worked at Elastic, Informatica, VMware, and Symantec. She will be responsible for developing and executing SentinelOne’s marketing strategy to elevate the brand and support growth. Jenkins is expected to leverage her experience in SaaS, data, and cybersecurity to position SentinelOne as a leader in the industry.

• Announced integrations with key industry players including Aruba, Checkpoint, Cisco, Darktrace, Extrahop, Fortinet, Palo Alto Networks, and enhanced collaboration with Vectra AI. The integrations expand the company’s firewall and network detection and response (NDR) capabilities, allowing organizations to gain insights to rapidly identify and respond to attacks across all vectors. The partnership with Vectra AI provides enriched signal analysis, while integrations with other companies allow SentinelOne’s XDR platform to detect network-borne threats and attack techniques.

• Unveiled a new threat-hunting platform that uses generative AI and reinforcement learning to detect and autonomously remediate attacks across the enterprise. The platform aggregates and correlates information from device and log telemetry across endpoint, cloud, network, and user data, delivers insights and recommends response actions that can be immediately executed. The platform also allows users to ask complex threat and adversary-hunting questions and run operational commands to manage their entire enterprise environment using natural language.

• Launched Singularity Security DataLake, a cloud-native security data platform that provides a comprehensive view of data across security ecosystems, enabling organizations to quickly detect and respond to threats in real-time. The solution seamlessly ingests any data type from any product or source and fuses it with endpoint, workload, and user data. It also leverages new AI-powered anomaly detection capabilities to proactively identify anomalies and stop attacks faster than any human could. The solution delivers results up to 10 times faster than traditional SIEM offerings and reduces the cost of channeling data by up to 30 percent.

• Announced early access to its integration with Wiz, which will allow companies to identify, prioritize, and fix cloud security threats more efficiently. The integration enables SentinelOne to automatically ingest relevant context from Wiz about cloud resources, including vulnerabilities, misconfigurations, and exposed secrets, improving outcomes for security teams. The integration also allows security teams to visualize their cloud security posture in real-time, identify attack paths to critical cloud resources, prioritize risks, and protect cloud workloads from build time to runtime.

Recap and Conviction

Sentinel One reported strong Q4 2022 results, with revenue of $126.1M, up 92.1% YoY and 9.4% QoQ, and added 750 customers. They expect to focus on product innovation in endpoint and cloud security and expanding platform capabilities.

While Sentinel One is still cash flow negative, the Q1 operating margin guide and FY2024 gross margin and operating margin guide show positive trends. Key metrics to watch include $100,000+ customers, dollar-based net revenue retention, and cash flow.

→ Read my most recent review here
→ Sentinel One reports on 6/5/2023

CrowdStrike -

What they do: Leading cybersecurity firm with a "mission to protect customers from breaches”
Confidence tier: Contender
Type of revenue: Seat-based (Endpoints)
Cash: $2.71B
TTM revenue: $2,241.27M
Market cap: $28.3B vs last month’s $30.5B

Noteworthy updates in April

• Introduced the industry’s first EDR/XDR offering for ChromeOS devices in partnership with Google, called CrowdStrike Falcon Insight XDR. This offering provides visibility and threat detection for ChromeOS devices without the need for an MDM solution. The new capabilities include native ChromeOS XDR, simplified management in the CrowdStrike Falcon console, and accelerated incident triaging and response. The integration will be generally available for customers by June 2023.

Recap and Conviction

CrowdStrike’s Q1 2023 earnings call showed strong revenue growth, profitability, and customer retention metrics. However, guidance was impacted by budget scrutiny and longer sales cycles.

I expect minimal beats for the next 1-2 quarters before a possible acceleration in Q3, assuming conservative growth assumptions. I also believe, that CrowdStrike’s seat-based subscription model indicates a stabilized market, but do not expect further quarter-over-quarter acceleration. I added more.

→ Read my most recent review here
→ CrowdStrike reports on 6/2/2023

Zscaler -

What they do: Cybersecurity firm that provides services secure user-to-app, app-to-app, and machine-to-machine communications over any network and any location
Confidence tier: Contender
Type of revenue: Subscription-based
Cash: $1.91B
TTM revenue: $1,348.1M
Market cap: $13.1B vs last month’s $15.6B

Noteworthy Updates in April

• Zscaler is also a leader in the Gartner Magic Quadrant for Security Service Edge, experiencing strong revenue growth, growing faster than the overall market, and has a strong marketing message, extensive network, and ecosystem of partners. However, clients report pricing and sales arrogance as complaints, and the platform’s UX is not a leading example. Zscaler has been slow to release common features and lacks some advanced features expected in this market.

Recap and Conviction

Zscaler’s Q3 earnings report showed strong revenue growth, profitability, and cash flow, but slower calculated billings growth might lead to weaker revenue growth guidance for the future. Customer growth was so-so, with 30 new $1M customers and the lowest number of new $100k customers in 2 years.

Zscaler faces competition at the lower end of the market but performs well at the high end. The company is on track for $5B annual recurring revenue, but future growth may be lower than the current 30% rate.

I’m considering giving less weight to calculated billings and focusing on other key metrics.

→ Read my most recent review here
→ Zscaler reports on 5/26/2023

Bill -

What they do: Simplifies, digitizes, and automates complex back-office financial operations
Confidence tier: Bench
Type of revenue: Transaction- and Subscription-based
Cash: $2.7B
TTM revenue: $857.03M
Market cap: $8.2B vs last month’s $8.1B

Noteworthy Updates in April

• Ken Moss has been hired as the Chief Technology Officer (CTO) of BILL, a leader in financial automation software for small and midsize businesses. Moss brings over 30 years of experience in online commerce, search, and interactive entertainment, and has a track record of using data-driven development as well as innovative machine learning and artificial intelligence (AI) to deliver strong business results. Moss succeeds Vinay Pai, who is retiring as CTO after five years with the company.

Recap and Conviction

Bill’s Q2 2023 revenue was $260M, a 66.2% YoY increase and a 13.1% QoQ increase, with strong non-GAAP profitability due to float revenue and operational excellence. Divvy, one of Bill’s businesses, is experiencing strong growth in terms of both the number of transactions and revenue, with the highest revenue per transaction at $9.21.

Bill announced several updates, including the acquisition of Finmark, a $300M buyback program, and the launch of an SMB-focused solution with new bank partner BMO.

Management’s reaction and initiatives following the Silicon Valley Bank event increased investor confidence in Bill’s projected >50% YoY revenue growth. My conviction remains unchanged.

→ Read my most recent review here
→ Bill reports on 5/4/2023

The Trade Desk -

What they do: Provides a platform for Ad Buyers (Agencies, Brands, and other technology companies)
Confidence tier: Bench
Type of revenue: Long-term master service level agreements (similar to recurring)
Cash: $1.32B
TTM revenue: $1,578.29M
Market cap: $31.4B vs last month’s $27B

Recap and Conviction

The Trade Desk reported 24.1% revenue growth and guided to 15% growth in Q1. Adjusted EBITDA was a record 49.9% of revenue. Net income decreased due to tax rates but increased 15% for the full year. EPS was $0.38. Operating and free cash flow also reached records at 35.3% and 25.3% of revenue.

The Trade Desk outpaced 8% sector growth at 32% and high margins which is supporting my confidence. The large market ($1T TAM), CTV, Netflix opening, and shopper market support growth. No content created by TradeDesk means it can partner with anyone. CPM is double linear TV’s, very profitable. A $700M buyback offsets dilution from stock-based compensation.

Next year, growth is expected to be fueled by the U.S. presidential election. This will be supported by Netflix, which has recently added an ad-supported option to its platform.

Despite lower growth, which I believe is temporary, my conviction increased which is why I added.

→ The Trade Desk reports on 5/10/2023

monday -

What they do: Provides collaboration software based on low-code and no-code building blocks
Confidence tier: Bench
Type of revenue: Subscription-based (seats)
Cash: $886M
TTM revenue: $519.02M
Market cap: $6.2B

Noteworthy Updates in April

• monday was ranked among the top 5 companies for the UK’s Best Workplaces for Wellbeing 2023 in its class, and it

• plans to incorporate AI capabilities into its platform in 2023 1, opening it up for third-party developers to build AI apps on the monday WorkOS, which will be available to customers through the monday AI Assistant. The company will launch a beta version of the monday AI Assistant in May, expanding how customers interact and build on the WorkOS platform. As an initial offering, monday will release a collection of innovative apps built internally on the same monday AI Assistant infrastructure where external developers will soon be able to build. These apps will support various use cases, from sharing helpful suggestions to improving workflows.

Recap and Conviction

In Q1 2023, revenue was $149.9M, up 56.9% YoY and beating expectations. Gross margin was 90% and operating income was $14.3M, up from a loss. Large customers grew 85.9% to 1,474. The $50K+ cohort grew ARR to 76% of total revenue. monday was the fastest-growing new product on G2. Despite headwinds, full-year guidance is decent. Close monitoring of customer growth is desired, though further decline is expected.

I liked the results and increased my allocation.
→ monday reports on 5/15/2023

Closing Thoughts

In the short term, the market can be brutal. Bears, especially on days like these sound smart because they seem to see clearly and understand more than the blind public. Being pessimistic is the easy thing to do.

But it’s a question of perspective. It’s important to zoom out and remember why stock prices continue to disappoint: multiple macroeconomic effects, like the war in Europe, rising inflation and interest rates, followed by fears about a bigger banking crisis.

However, at the risk of sounding like a broken record, tech and software are here to stay, and businesses worldwide are going to invest in this sector for a very long time.

Will the stocks in the portfolio reach their previous all-time highs? Maybe, because some of them will accelerate and show strong growth durability for years to come. Maybe not, because some of them will hit a wall or just decelerate due to the law of large numbers.

But does it matter?

Yes, for the short-sighted Wall Street looking only six months into the future, and yes, for traders with a focus on getting rich quickly which rarely works out.

No, for an investor buying great companies and understanding that there is more behind growth slowing temporarily due to mentioned macroeconomic conditions.

Discounted free cash flow calculations can help come up with the right valuation in the present, but - from what I’ve learned - often do not play out as expected in the long term. For high-quality, high-growth companies with new growth vectors and optionality emerging, these calculations are mostly meaningless.

Furthermore, new companies to invest in will emerge, making it possible for us to ride the continuous cycle of waves for decades to come.

Again, it can be tough to weather the storm. But you’ll never learn more about the market and yourself than now. I encourage you to embrace and appreciate it. This is a golden opportunity to grow and learn.

It’s a matter of time before the market turns risk-on again.

Remember: tough times don’t last, tough people do.

I hope this statement provides some comfort to you, as it does for me. 🤗

Appendix

Earnings Calendar

My Watchlist

My Previous Portfolio Summaries

• March 2023

• February 2023

• January 2023

• December 2022

Thank you for reading.

Happy Investing, everyone!

PS - Lisa and I started posting on Twitter. We would love to connect with you there as well. Follow us here:

Lisa - https://twitter.com/LisaOnCloouud9
Moritz - https://twitter.com/MoritzMDrews

Disclaimer: This text is for entertainment purposes only and does not represent any investment advice, stock buying or selling recommendation, or any other financial advice. So please always do your own due diligence and make your own decisions. See our disclaimer for more details.

In many cases, it is.

SaaS stocks are a popular choice for high-growth investors, including myself.

Here’s why: SaaS and consumption-based software infrastructure companies have the ability to quickly scale and generate recurring revenue, leading to high-growth revenue and cash flow.

I believe this business model is one of the best out there, and I expect these companies to re-accelerate.

And when that happens, I definitely want to be part of it and ride that S-curve.

However, I don’t want to become complacent with my current portfolio and limit myself to only familiar opportunities.

In this blog post, I will explore the company with the promising stock ticker and share my thoughts about the company.

While Samsara is mostly a tech company with (kind of) subscription revenue, it is still different from my portfolio companies. So let’s dive in.

What does Samsara do?

Samsara’s mission is to “increase the safety, efficiency, and sustainability of the operations that power the global economy.” In simpler terms, the software vendor helps businesses with physical assets (primarily trucks) use data insights (Internet of Things) to improve operations efficiency, e.g. by saving fuel, increasing drivers’ safety, and optimizing asset utilization and maintenance. To enable proper usage of its platform services, Samsara equips its customers with the necessary hardware equipment.

Smart Business Model & Strong Value Add

Well, Samsara is not really a non-tech company, so it is still quite in my wheelhouse. Nonetheless, I find the company intriguing and a bit outside of my regulars for several reasons:

• Samsara generates hard and quick ROI:

  • Hard ROI means that they offer significant cost savings that are easily quantifiable. They provide numerous examples of this on their website.

  • Quick payback period: Samsara's customers generally enjoy a payback period of only a few months. For reference, in SaaS, we usually aim for a maximum payback period of one year, so Samsara is performing exceptionally well. This makes it relatively easy to sell.

• Samsara sells to companies' operations budget, which is "large and generally non-discretionary," meaning that they are less affected by IT budget scrutiny these days.

Samsara may not be literally mission-critical, but it provides significant value to its customers by saving costs, digitizing operations, and improving compliance and efficiency. Companies that do not utilize these benefits and operate manually will eventually fall behind. Therefore, the more businesses that use services like Samsara, the more companies will need to follow suit. Thus, Samsara meets my criteria for a strong business model and value add.

High Revenue & Top-Line Growth

Samsara is reporting revenue and ARR growth as indicators of their top-line growth. Last quarter, its revenue came in at $187M, representing 48% YoY growth. Full fiscal year revenue growth was 52% YoY, so we currently are definitely in a high-growth territory here.

The company has a recurring revenue stream through its “subscription business model that produces highly predictable revenue and [is priced] based on the number of assets versus seat-based pricing, resulting in a lower risk of churn if our customers' hiring slows or contracts.”

I like that their pricing is based on assets versus seats, as this aligns value creation for their customers more closely with costs and makes the business model more resilient during slowed-down hiring or workforce reduction times (such as these days..).

In March last year, Samsara claimed that 98% of revenue is subscription-based (per assets), typically ranging from 3 - 5 years in commitment.

While Samsara is quite heavily focused on transportation and fleet management, this chart from June 2022, as well as recent customer highlights, show that it operates in multiple industries:

Although Samsara remains relatively resilient in the market, its YoY growth is slowing down. The growth rate has decreased from 65.7% to 62.6%, and then to 52%, 49.2%, and 48.3%. As a result, the Q1 2024 midpoint guide is 34%. For the full year, Samsara forecasted revenue of $838M - $848M, which represents 28% - 30% YoY growth.

Since the company has an (arguably short) history of strong beats and raises, the guidance is considered conservative, or as they called it, "de-risked". However, similar beats as in fiscal 2023 are not expected as Samsara stated that they do not anticipate repeating their 8-ish % guidance beats.

The Q1 sequential guide is very low at 2% - 3%, dropping from sequential growth north of 10% in most quarters. Seasonally, Q1 should be rather strong, as far as the short history of IOT as a public company suggests.

The ARR came in at $795M, growing 42% YoY last quarter, and pretty much mirrors Samsara's revenue curve.

Comparing their growth durability with my other companies, they are on the higher end of growth durability, together with Cloudflare, CrowdStrike, and Monday.

Almost Positive Cashflow & Margins

Cash flow and profits are highly valued by many investors nowadays. When looking at high-growth companies, I generally prefer to focus on non-GAAP numbers, as they provide more insight. I look for either strong free cash flow (FCF) generation or a clear path toward it.

So, how is Samsara doing in this regard?

Although Samsara is not yet FCF positive, the company is showing a clear and consistent trend toward achieving this goal, with each quarter producing better results.

In Q4, adjusted FCF was negative $6M, an improvement from negative $50M a year ago. FCF margin was negative 3% in Q4, up from negative 40% a year ago.

Looking at the broader fiscal 2024 outlook, Samsara expects to reach adjusted FCF breakeven by the end of this year. The company also plans to cut negative FCF in half, meaning it would produce negative $55M in adjusted FCF for the full year.

Equity dilution is expected to be around 3% - 5% in fiscal 2024 (yes, they use a notable share of stock-based compensation).

Non-GAAP gross margin has improved and appears to have settled around 73%, where it is expected to remain for the remainder of this year. In the long term, the IoT company expects this indicator to be in the high 70s% (specifically 74-76%).

All in all, it is not there yet in terms of positive Non-GAAP profitability, but Samsara is marching towards it with strong and reliable steps, supported by their fiscal 2024 outlook.

Deep Moat & Strong Moat Trajectory

When searching for new investments, I place great importance on moats, as they make a business more resilient and set it up for long-term success and growth durability.

In the case of Samsara, there are certainly other competitors in the market. However, the company provides three interesting points of differentiation, aka, moats:

• Single, integrated platform: Samsara does not only provide "point solutions" like many of its competitors that address only specific use cases. Instead, it allows customers to fully integrate their asset operations into the platform and gain valuable insights and digitization.

• Data & AI moat: With nearly 6 trillion data points, 50 billion API calls processed, and 50 billion miles driven for analysis annually, Samsara sits on a large mass of data. It uses this data to power its AI models and continuously increase value for customers. Also an interesting AI investment. 🤖

• Partner Ecosystem moat: Samsara's App Marketplace is growing and includes over 220 integrations that are heavily used by its larger customers. Additionally, the IoT company has many insurance and OEM partners in its ecosystem.

Samsara seems well-positioned and benefits from technology and ecosystem leverage. However, the IoT space is not a hidden gem, and other companies (such as Aeris, for instance) also want their share of the cake. Therefore, the moat needs to be followed closely going forward.

Fortunately, the market is large and mostly not very digitized yet. This brings us to the next point.

Large Addressable Market & a 10x Growth Runway

Samsara operates in a large and fast-growing market. According to estimates, the Total Addressable Market (TAM) for 2024 will be $97B, with a Compound Annual Growth Rate (CAGR) of 21% between 2021 and 2024. Samsara is likely to grow faster than the overall market, as it focuses on core physical asset operations while also having potential in adjacent areas if necessary.

In addition to secular tailwinds such as digitization, compliance, and increasing efficiency, Samsara is also benefiting from several technological tailwinds.

Besides that, Samsara has a comparatively small market cap of around $10B, so technically it is easier for it to 10X than, let’s say, Salesforce (around $190B).

Speaking of market cap, let’s unpack Samsara’s valuation:

After experiencing a strong 67% year-to-date increase, Samsara is not considered a cheap stock, with a forward-looking enterprise value-to-sales ratio of 11.6. This is arguably lower than the valuations of TradeDesk, Snowflake, or Cloudflare. However, it is still priced higher than CrowdStrike or Monday, which show similar growth as Samsara but have more profit and a longer history.

Considering the large total addressable market and growth potential, I believe Samsara's valuation is still reasonable. If you are seeking similar growth metrics at a lower valuation, I think CrowdStrike and Monday could be quite interesting options.

Execution: Effective Go-To-Market motion & (Product) Strategy

Go-to-Market Strategy and Execution

Samsara has been showing healthy development in Sales & Marketing spending as a percentage of revenue, which has led to the acquisition of more customers with less $$$. In their latest report, they mentioned elongated sales cycles but reported no changes in their pipeline. (Does this sound familiar? 😱)

Samsara isn't only using its sales force to target (large) customers, but it also benefits from a strong partner ecosystem, especially with insurers who act as referral partners. Insurance companies benefit from Samsara because it helps them resolve claims more quickly and effectively. Insurers don't have the technology, access, and data to do it themselves.

Therefore, Samsara has formed mutually beneficial partnerships with many, including large, insurance companies.

Product Strategy and Execution

Samsara seems to have a very customer-centric product strategy and focuses on driving adoption and value creation above monetization at all costs. An example of this:

An analyst asked if IOT plans to become a digital record company and monetize that (records meaning that truck drivers must keep records of their driving times, and Samsara is allowing them to digitize that): “[…] price and package the platform to best align with what our customers need and how they want to consume it. But today, there are no plans to break that out and monetize it separately. We're trying to drive adoption and really get customers to get as much value from this data as possible because that's ultimately what makes us essential as a system of record, is to be that source of data to have a high-quality clean data, and that has value for the customer and then we can also do things like better train AI models and other benchmarking data sets behind the scenes with that.”

Additionally, adoption metrics indicate that Samsara is successfully fulfilling its mission of providing maximum value. The number of adopted modules, used workflows, digitized documents, and logged reports are all significantly outpacing revenue growth year over year. This suggests that Samsara is currently generating more value than it charges for, providing a cushion for future revenue momentum.

Samsara is also continuing to invest in its ecosystem and product integrations, such as with OEMs and payroll, which is particularly important for its data moat and enterprise customers. Speaking of customers…

Customer Activity, Expansion & Retention

Samsara’s customer metrics look very promising and outgrow current and projected revenue and ARR, which is a positive indicator for me:

• $100K Customers:

  • Samsara added 124 large customers in Q4, resulting in a total of 1,237. This cohort grew 53% YoY and is now making up 48% of our total ARR (up from 45% a year ago).

• $1M Customers:

  • It added 5 super large customers in Q4 and now has 51, representing 65% YoY growth of this cohort.

• Added a record of new logos Q4, core customers (>5K in ARR) are now more than 19,000.

• New customers represented 51% of net new ACV in Q4, up from 44% in the same quarter last year.

• DBNRR was 125%+ for large customers and is expected to remain above 120+% throughout 2024, given macro uncertainty.

Especially the large customer metrics are a positive result. Well, this is not by chance:

• Samsara made significant investments in its product development to make the platform “enterprise-grade”. That means integrations, scalability, flexibility, and security, are all built into the product.

• Sales & Marketing investments: The go-to-market motion in the large customer segment is very different from the midmarket, and Samsara made the adjustments necessary.

Another noteworthy highlight was Samsara's first $1M ARR government deal. The public sector is interesting for Samsara, as it involves many complex, large, physical operations. Once some US states implement Samsara's platform, it can serve as a reference.

However, the sector also has challenges, such as longer sales cycles and the need for additional integrations. Nevertheless, the public sector could become one of Samsara's top 10 industries not only in the US, but also in Canada, Europe, and Mexico.

Risks

An obvious risk for all companies is a decline in the moat and strengthening competition: According to the company, competition remains consistent with previous quarters.

Samsara differentiates itself by “being a modern platform, a platform where the majority of our customers now are using multiple apps, which is exciting to see. And it's also – we're differentiated in the sense that we're open in the number of integrations that we offer, which is now up over 220.”

However, we cannot exclude emerging competition, potentially also from the OEMs themselves (e.g. Scania). In this case, however, I expect Samsara still has the data moat advantage, as well as the equivalent of a “multi-cloud compatibility”, which I like to see in my other software stocks. Meaning, it is compatible with multiple OEMs, systems, insurance, and other third-party parties involved.

Another noteworthy risk is that Samsara's services are not purely software-based and rely on some hardware components, which are manufactured in Taiwan. While Samsara claims to have very good relationships and visibility into its work with multiple suppliers, there is a risk of geopolitical issues, supplier concentration, and supply-chain problems. This is the most important risk that needs to be considered.

My Thoughts & Investment Decision

Overall, I view Samsara as a great addition to my portfolio: The company enjoys many SaaS-like benefits, such as high growth, scalability, recurring revenue, and high gross margins. Yet, it provides some diversification in that it

• sells into a different budget (operations versus IT budget),

• provides a quick and easily quantifiable ROI (easier to prove than SaaS),

• is emerging in a massive worldwide TAM that is largely undigitized so far.

The company has shown relatively durable growth, yet it surely is no fully resilient, 100% YoY-growing magic pill. Despite not having achieved non-GAAP profitability yet, Samsara is on a clear path toward profitability.

While there are risks related to potential supply chain issues and competition, I appreciate Samsara's deliberate and customer-centric strategy, which positions them for future success.

Although Samsara's valuation may not be cheap after a 67%-YTD run-up, I prioritize investing in great companies rather than solely focusing on valuation. With a large TAM and strong market position, I see a lot of future potentials to grab for Samsara.

For now, I have a 2% starter position and may opportunistically increase it to 5%.

And here you have it.

Thanks so much for reading and Happy Investing. May the market force be with us (or, the right mindset)!

*Information and visuals are sourced from the latest (and a couple of previous) reports by Samsara. Disclaimer: This text is for entertainment purposes only and does not represent any investment advice, stock buying or selling recommendation, or any other financial advice. So please always do your own due diligence and make your own decisions. See our disclaimer for more details.

**Please note: This text is based on the information available at the time. Investment decisions can change at any time based on new information, and I cannot promise to update all information in retrospect.

Why?

Now I see clearly: SaaS, software, digital transformation - it was all just hype.

It’s dead. Now what?

The future of investing: Toilet paper. That's right, you heard it here first! The demand for toilet paper is constantly increasing.

The best part? It's a recurring revenue model! With the rise of bidets and other alternatives, however, the competition is fierce.

But never fear, because I have identified the top toilet paper companies with the best growth potential. Charmin, Cottonelle, and Scott are just a few of the companies that I believe will dominate the market in the years to come. So, if you want to get in on the ground floor of the next big thing, start investing in toilet paper today.

With a population of 8 billion people on earth, its TAM is incredibly large.

Wake up, sheeple: Everyone needs to wipe something.

It’s here to stay (until April 1st of next year).

Okay, let’s get serious 😃

What a turbulent March!

• Nearly all companies issued low full-year guidance.

• DataDog had an outage for one day.

• Sadly, SVB went bankrupt—the market feared the next banking crisis.

• Rising interest rates—the market worried even more.

• Investors losing faith in software-as-a-service companies.

Let’s take a step back and categorize everything into two groups.

The noise bucket:

• DataDog outage for one day—Even the most successful tech companies like Microsoft experience outages sometimes.

• SVB went bankrupt—We likely won’t see another global financial crisis like in 2007. Times change and the world today is different. The next crisis will likely play out differently, not the same as before. Tweeting stock charts from 2007 and 2001 alongside today’s charts won’t make the same outcome more likely.

• Higher interest rates—The market always worries when rates increase, as they have for over 100 years. But as long as the overall economy keeps improving, stock prices will rise over the long run. For investors thinking longer-term, over 3 years, don’t worry about short-term rate hikes.

The "what you can control" bucket:

• Lower full-year guidance from all companies—Prolonged sales cycles and budget scrutinies are causing companies to guide more conservatively than ever.

• Investors losing faith in software-as-a-service (SaaS) businesses—Understandably, it's challenging in this environment to determine which companies will succeed in the end.

Let's think about this a bit: I see more and more investors shifting away from typical SaaS business models to other opportunities.

And I'm wondering:

• Am I too stubborn to stick with my boring tech companies?

• When is it time to change direction significantly?

• Do I fail to adapt quickly enough?

Believe me, I don't want to end up following just one path, one industry, or one business model, realizing too late I should have changed. I want to be a successful investor in 30 years—looking back at returns that outperformed my benchmarks! So, maybe it's time to rethink what kind of investor I am.

What I'm Not:

• Only investing in tech, SaaS, software, or any single sector - though I focus on them since they often represent the best businesses

• Only considering a single metric like growth - that's not sustainable

• Practicing GARP (Growth At A Reasonable Price) - I'd miss the best businesses

• A trader - I believe long-term investing in successful companies will outperform any trading

In short, I don't invest in just one industry or metric. I seek the best businesses for the long run, not just reasonable growth at a low price or short-term trading.

What I believe in:

Investing in the best, high-quality businesses. What makes a business high-quality?

To me, it means having:

• Strong fundamentals: high-profit margins and metrics like growth, profitability, cash flow, and increasing customers.

• A predictable growth model: recurring revenue, for example.

• Great leadership: A visionary founder-CEO invested in the company's success and a strong executive team.

• A positive company culture: Employees approve of the CEO and enjoy their work.

• Sustainable competitive advantages: Characteristics that help a company maintain an edge over competitors.

• Durable growth: Likely resulting from the above attributes. A large market, the ability to continually release new products, and layered periods of rapid growth produce consistent growth.

High and durable growth, coupled with strong quantitative and qualitative attributes, is my ultimate definition of quality.

Because enduring, durable, sustainable, [insert synonoum] growth - not growth at all costs - signifies more than rising revenue. It shows:

• There is demand.

• Customers eagerly desire the company’s products.

• The company is doing something right.

Investing in durable and sustainable growth is a bet on humanity solving problems, progressing, evolving, and improving the world.

The top digital companies—those offering products and services related to data and software and driving digital transformation —are still excelling in all of the above areas.

It’s not a dying industry like oil, tobacco, or newspapers. Cloud and Software are insulated from trade wars and overseas manufacturing issues. It reduces costs for enterprises, which is ideal for economic uncertainty. And despite weaker fundamentals from macroeconomic effects, data and software will continue to improve our world.

These are the high-quality companies I want to invest in.

And that’s what I am: An investor in sustainable growth, investing in our future.

But what about new opportunities and why are the best new businesses so hard to find?

Let me ask: Must we always seek the next big thing? Because sometimes it might be better to stick with what you have, as long as they keep performing well.

I understand: Valuations and market caps differ from a few years ago and The Law of large numbers continues increasing while growth rates decrease.

Yes, company valuations were lower before 2019. They increased once the market seemed to finally “get it.” Then it overreacted.

Now, it’s overreacting again but in the opposite direction. Higher interest rates, inflation, and wars in Europe don’t help. But eventually, those issues will resolve, and the best, sustainable companies will remain. My job is to identify and invest in them. I see this as an opportunity, even without new, immediate exciting opportunities arising.

However, why aren’t exciting new companies launching?

It can’t be because digital transformation, data, software, and buzzwords are dead, right?

The reason the best new companies are staying private is that hot startups and unicorns don’t want to go public in this environment.

Consider this: As a CEO, would you want a 5x valuation now or triple your valuation in 1-2 years?

Though the outlook seems bleak now, VC firms have ample cash on hand, ready to invest. Once economic conditions improve, countless opportunities will emerge.

Remember: Cloud Software Spending is Not Immune, But It is Resilient:

46% of executives expect tech budgets to increase in 2023, 60%+ next year, and 80%+ in 5 years, despite macro pressures (source).

I'm content to wait several more quarters for improved performance while investing in high-quality, durable businesses with ample opportunities ahead.

Remaining flexible and open-minded is key, but impatience proves perilous.

My Portfolio in March 2023

The goal of this portfolio review is to help you understand how I think about investing, see what I'm doing, and help me learn. I hope this review is useful for you!

This review has 4 parts:

1. How my investments did compared to the overall market

2. How my money is invested and how strongly I believe in each investment

3. The changes I made last month to invest in new opportunities or reduce risk

4. Updates on the companies I invested in

Disclaimer: This portfolio summary is for informational purposes only and does not constitute investment advice. Everything expressed here is just my personal opinion. I am not a professional, so please don't follow me blindly as my perspectives could lead to incorrect conclusions.

1. How my investments did compared to the overall market

Timestamp: 3/31/2023

2. My Portfolio

Tier 1: Champions receive my highest conviction due to excellent company performance and execution. They typically have a 15+% allocation.

Tier 2: Contenders are either rising stars with good performance but lack full confidence, or past champions with declining performance. They range from 5 % to 15 %.

Tier 3: Bench—These positions are either new ones I want to monitor/become familiar with or fallen angels I retain for some reason.

3. The changes I made last month

Added: The Trade Desk

The Trade Desk reported solid earnings in February and I continued increasing The Trade Desk over the month as I planned to raise it to ~7%. The rationale remains the same as mentioned in my previous portfolio summary:

• Gaining market share and outperforming peers (32% platform growth vs 8% sector growth)

• High margins (50% EBITDA margin, 25% free cash flow)

• Large total addressable market ($1 trillion vs $175 billion for linear TV)

• Connected TV tailwinds, Netflix opening, shopper market supporting re-acceleration

Added: Monday

Monday reported solid earnings in February and I kept adding more during the month to increase my position.

Recap:

• Monday was one of the few reporting companies that surprised me positively. Many analysts congratulated them on the quarter.

• Sequential revenue growth stabilizes and the full-year guide looks decent to me when considering the adverse macro effects.

• Though, they expect a further decline for DBNRR by the end of 2023 due to the macroeconomy headwind.

Added: CrowdStrike

I liked CrowdStrike's confident tone in the earnings call and strong Q4 results, including:

• 47.9% revenue growth to $637.4M, exceeding expectations.

• 20.4% growth in remaining performance obligations to $3.4B.

• 42.9% operating cash flow margin and healthy customer metrics.

• The sequential increase in Net New ARR by 11.9% instead of the projected 10% decline.

I expect revenue growth to accelerate in Q3, as CxOs anticipate tech budgets will increase in 2023, especially for cybersecurity. Though I don't foresee major revenue beats for 1-2 quarters, growth should pick up by Q3. My confidence increased after that strong earnings report. I increased my position.

Added: DataDog

After markets plunged on March 10 due to fears of another potential banking crisis (SVB), I added DataDog below $65. I believe Datadog will show accelerating revenue growth in the coming quarters, so at these levels, Datadog seems undervalued.

Recap: Overall, while DataDog's guidance indicates slower growth ahead, I remain bullish. They continue adding customers at a steady rate and existing customers are spending more. Key metrics still look good. Conservative guidance likely reflects uncertainty, not declining trends. DataDog should see strong growth beyond 2023 due to new products and market opportunity. Though 50% growth may not last, 25% seems too pessimistic. I'll reassess after Q1 but am optimistic for now.

Added: BILL

I added several times after the SVB incident when the price dropped below $70. I believe that Bill is vastly undervalued at that point, given its forward EV/s of just 7 and small market cap of $8b. When looking at BILL's projected >50% YoY revenue growth, it provides a decent risk/reward.

4. Company Reviews

Note: To keep it concise, only companies with noteworthy updates might be included.
Absolute numbers relate to last quarter's earnings release. Metrics are adjusted values (Non-GAAP).

Snowflake

What they do: Provides data storage, management, and sharing for the cloud
Confidence tier: Champion
Type of revenue: Consumption-based
Cash: $5.1B
TTM revenue: $1,938.8M (product)
Market cap: $45B

→ Read my most recent full review here

Thoughts on Snowflake’s customer acquisition and GTM strategy

Snowflake's primary focus is to acquire the largest enterprise businesses in the world: the Global 2000.

Why?

Each new Global 2000 customer is worth far more than any other customer. This is due not only to higher revenue potential but to data gravity.

Almost every major business likely works with a Global 2000 customer.

Think of Global 2000 customers as stars in a solar system. The smaller customers, $100K and $1M customers, are like planets orbiting those stars due to the star's strong gravity. These smaller "planets" need access to the shared sunlight —the shared data— to survive, so they get pulled into that ecosystem: Snowflake's powerful network effect.

Here’s Snowflake’s development of acquiring Global 2000 customers:

Due to the small total number of very large G2k customers, significant volatility is involved in the quarterly numbers. Snowflake cannot acquire G2k customers at an increasing rate as with smaller customers, of which there are countless businesses worldwide.

Snowflake mentioned G2k customer sales cycles are one to two years, extremely long sales cycles: "They will be lumpy in terms of when we land them".

Add elongated sales cycles from the current environment on top of that (which G2k customers are also part of, I assume) and they still acquired 19 G2k customers last quarter.

Of course, I would like to see Snowflake gain G2k customers at an increasing rate, but I'm fine with the progress. They consistently continue acquiring those customers, and consistency will pay off long-term.

Noteworthy insights in March

• Forbes released an interesting article outlining how Snowflake benefits from large customers in the long term.

• Battery, a VC firm, published an insightful report on Cloud Spend. Based on that, Data Warehouse Providers like Snowflake should be a top priority in the next 12 months and onwards.

Recap and Conviction

Snowflake reported strong revenue and profitability growth in Q4. Product revenue was $555.3M, up 54.4% year over year. They guided to 6.3% quarter-over-quarter growth next quarter. Full-year 2024 product revenue is expected to grow 40% to $2,705M.

The operating income margin is projected to reach 6% in 2024, representing $173M. The free cash flow margin is forecast to be 25% or $722M.

Customer growth slowed but large customers expanded spending. The net revenue retention rate declined to 158% due to customer optimizations, still best-in-class. Newer customers adopted Snowflake more slowly, slowing overall growth.

Snowflake repurchased $2B of stock and expanded its AWS partnership to better serve customers.

I believe spending on Snowflake's services can rebound quickly and maintain a cautiously optimistic outlook on Snowflake's business and growth opportunities despite lowering its revenue forecast for the fiscal year 2024. Quarterly revenue increases can fluctuate due to Snowflake's consumption-based business model and seasonality.

I see no issues with Snowflake itself and believe its growth thesis remains intact for 2024 and beyond, citing its large scale, strong free cash flow, and continued high growth despite macroeconomic headwinds and tailwinds from digital transformation likely to rebound.

Abonnieren jetzt

Sentinel One

What they do: Cybersecurity firm catching up with CrowdStrike
Confidence tier: Contender
Type of revenue: Seat-based (Endpoints)
Cash: $1.2B
TTM revenue: $422.16M
Market cap: $4.4B

My Take on the Latest Earnings

Revenue was $126.1M, up 92.1% YoY and 9.4% QoQ, with a net new ARR of $61.3M. Q1 revenue guidance is $137M, suggesting 10.2% QoQ and 77.6% YoY growth. FY2024 revenue guidance is $640M, suggesting 54.6% YoY growth, with ARR guidance of 47% YoY growth. Sentinel One's cloud security solution more than doubled QoQ and contributed about 15% of quarterly ACV. About 30% of revenue is from EMEA.

Sentinel One’s Go-To-Market strategy is noted as the reason for still being cash flow negative, but the Q1 operating margin guide and FY2024 gross margin and operating margin guide show positive trends.

Sentinel One added 750 customers, reaching a total of 10,000, and added 78 $100k+ customers. The dollar-based net retention rate was 130+%, and the gross retention rate improved. The company added a record number of Global 2000 enterprises, and ARR per customer continued to increase. MSSP partners performed well.

Sentinel One expects customers to remain cost-conscious, but has seen increased win rates and was recognized as a leader in endpoint protection platforms. They plan to focus on product innovation in endpoint and cloud security, and expanding platform capabilities. They have a strong Glassdoor rating and employee retention and expects dilution to slow in FY2024.

After delivering strong 92.1% year-over-year revenue growth, the initial market reaction to earnings was muted. I assume analysts’ fiscal year 2024 revenue estimate of $651.26 million versus the company’s lower-than-anticipated fiscal guidance of $640 million was the reason. The stock price increased about 7% during the confident and uplifting earnings call, which felt slightly oversold.

Compared to SentinelOne’s 9.4% sequential growth, CrowdStrike’s 9.7% sequential growth at 4 times the revenue seems strong. To maintain conviction in SentinelOne, I want to see an acceleration in sequential growth soon, as their smaller size is an advantage. That said, the market is big enough for many players, so I avoid reading much into comparisons.

Viewed in isolation, I liked the results. The valuation suffers from a lack of profitability. I remain concerned about negative profitability and excluding the revenue from the acquired company Attivo, Organic slowed to 9%, S&M expenses increased, and absolute cash flow is not improving, indicating Sentinel One must work hard for customers.

Despite that, the trend toward profitability from a margin perspective remains on track, which is mission-critical for them, though absolute negative cash flow metrics must improve soon. $1.2 billion in cash provides enough runway.

I didn’t change my allocation and don’t plan to. Lack of positive profitability mutes conviction, though the relatively small market cap below $5B indicating an easy double in share price intrigues me to buy more, which I resist.

Key metrics I’ll watch closely and want to see improve in particular: $100,000+ customers, dollar-based net revenue retention, and cash flow.

Crowdstrike

What they do: Leading cybersecurity firm with a "mission to protect customers from breaches”
Confidence tier: Contender
Type of revenue: Seat-based (Endpoints)
Cash: $2.71B
TTM revenue: $2,241.27M
Market cap: $30.5B

My Take on the Latest Earnings

I liked:

• The upbeat and confident tone of the call. Several analysts congratulated them on their strong performance.

• Revenue was $637.4M, up 47.9% year over year, and 9.7% quarter over quarter, which exceeded my expectation of $634.48M and accelerated sequentially, so I'm pleased with that.

• The remaining performance obligations were $3,368.49M, up 20.4% quarter over quarter. Wow!

• Strong profitability and cash flows, especially the 42.9% operating cash flow margin while still investing in future growth.

• Healthy customer adds and customer retention metrics: Added 1,873 subscription customers, reaching 23,019, up 41% YoY, and 8.9% from last quarter. The Dollar-based Net Retention Rate was 125.3%, and customers using 5+ modules was 62%. Though, I'll keep a close eye on customer adds since Crowdstrike now focuses more on the lower end of the market, meaning more small and midsize businesses with lower average contract values.

• Instead of a 10% quarter-over-quarter decline in quarterly annualized recurring revenue growth, they delivered an 11.9% quarter-over-quarter increase!

The problem is the guidance again, driven by budget scrutiny and longer sales cycles.

Last quarter my $1 million question was: Competition or macro? I believe we got the answer.

The new big question: When will this end?

Here is my thesis: Crowdstrike has a seat-based subscription model. I interpret the stabilization of sequential metrics as a slowdown in layoffs, which is good for seat-based subscription model businesses like Crowdstrike, indicating the endpoint market is not saturated and the market has stabilized.

However, this does not mean we should expect further quarter-over-quarter acceleration, as businesses are not currently hiring more. So, I assume we'll see minimal beats for another 1 to 2 quarters and possibly acceleration again in Q3.

I believe assuming Q1 revenue of $690M, 8.3% quarter over quarter growth with a 1.7% beat is realistic and "prudent." I try to make conservative assumptions (and if these sound too conservative, it's time to trim) - the last thing I want is a negative surprise every quarter.

I also assume Crowdstrike will achieve around 40% revenue year over year at the end of FY2024 (with some luck), more would be very optimistic.

I added after-earnings.

Zscaler

What they do: Cybersecurity firm that provides services secure user-to-app, app-to-app, and machine-to-machine communications over any network and any location
Confidence tier: Contender
Type of revenue: Subscription-based
Cash: $1.91B
TTM revenue: $1,348.1M
Market cap: $15.6B

My Take on the Latest Earnings

Zscaler's earnings results puzzle but the negative market reaction after-hours does not surprise me.

The situation: Zscaler delivered a good quarter. Strong revenue growth, great cash flow and profitability. While revenue came in at $387.60M, 51.7% YoY, 9% QoQ, exceeded expectations, calculated billings growth slowed, leading management to guide for weaker revenue growth in the future. Full-year revenue guidance was raised slightly, but calculated billings guidance remained largely unchanged. Remaining performance obligations growth has also slowed since Q1, raising concerns. Zscaler mentioned they helped some customers increase subscription commitments “a couple of percentage points”. I assume ~3-4%.

The company had a gross margin exceeding 80%, an operating income of $48.8M, a net income of $57.6M, and earnings per share of $0.37. Operating cash flow was $89.48M, and R&D expenses rose to $56.19M. S&M expenses increased to $180.55M, while G&A expenses were in line with prior trends.

Customer growth was so-so: 30 new $1M customers, okay. 120 new $100k customers, their lowest in 2 years. Still, this is the case for every company too—that's fine. The Dollar-based Net Retention Rate remained at 125%.

Zscaler is seeing its largest sales pipeline ever, but sales cycles are taking longer due to extra scrutiny and approvals required. The company is on track for $5B annual recurring revenue and 60% of revenue comes from upselling existing customers. They face more competition at the lower end of the market but perform well at the high end, where their value is well understood.

Will revenue growth stay above 30% in FY2024? Am I okay with lower future growth if I expect steady, reasonable growth for years?

Undoubtedly, Zscaler remains an excellent business. However, I have difficulty envisioning their revenue growing significantly above 30% a year from now.

That being said, my evaluation may be biased by their underperformance in billings growth, which could be having an undue influence on me. I have never really observed a pattern in revenue growth following the performance of calculated billings.

The following article on calculated billings is an interesting read and mentions, "In short, calculated billings can only be a good indicator of future performance if all other factors (i.e. pre-billed subscription duration, the weight of professional services in total revenue, the timing of renewals, etc.) remain constant, which is rarely the case in the technology industry."

I am considering giving less weight to calculated billings and instead focusing on other metrics. However, the other metrics (customer growth, RPO) were not as strong as I had hoped, which is why my position will remain the smallest one.

Bill

What they do: Simplifies, digitizes, and automates complex back-office financial operations
Confidence tier: Bench
Type of revenue: Transaction- and Subscription-based
Cash: $2.7B
TTM revenue: $857.03M
Market cap: $8.1B

Recap and Conviction

Bill reported on the revenue and guidance for Q2 2023. The company's total revenue was $260M, which is a 66.2% YoY increase and a 13.1% QoQ increase. Float revenue was $28.9M, an increase of 2588% YoY and 92.7% QoQ. Core revenue was $231.1M, an increase of 48.6% YoY and 7.7% QoQ. Subscription revenues remained consistent with the past 3 quarters, while transaction revenue experienced a slowdown due to macroeconomic conditions. Divvy revenue was strong. The company provided weak guidance for Q3; however, it is expected to be conservative until the macroeconomic situation improves.

Bill experienced strong non-GAAP profitability due to opportunistic float revenue and operational excellence. This increased gross margin and significant growth in operating income, net income, operating cash flow, free cash flow, and EPS. The company also has $2.7B in cash on hand, and it is expected to have even stronger profitability in the next quarter.

Bill added 10,700 customers, although the actual QoQ customer growth rate was 2.8% without the Financial Institution segment. Revenue per transaction increased by 3.5%, and Divvy added 1,900 customers, bringing the total to 24,700 Divvy customers. Divvy customers deliver the highest revenue per transaction, and total transactions for Divvy increased by 77.4% YoY and 10.6% QoQ.

Bill announced several updates, including the acquisition of Finmark, a $300M buyback program, and the launch of an SMB-focused solution with the new bank partner BMO. Financial institutions currently contribute 4-5% of revenue, but the company expects this to increase in the long term. The company also has a 12-month payback period, which is positive for a SaaS business.

While standalone Bill is still growing, its organic revenue growth has slowed down. However, Divvy, one of Bill's businesses, is experiencing strong growth in terms of both the number of transactions and revenue. Divvy has the highest revenue per transaction at $9.21.

Although FI customers are growing the fastest, they do not contribute significantly to the revenue. Therefore, I will continue to focus on developing Divvy metrics, which is my main reason for holding Bill. Bill's low subscription-based revenue makes it more volatile in terms of revenue growth and less predictable.

On March 10th, Silicon Valley Bank collapsed, which scared investors [timeline]. Some believed that this would be the second banking crisis since the pattern repeated in 2007. However, events like that rarely repeat twice, and I don't believe it will happen this time. Just two days later, the U.S. government announced that it would backstop all SVB deposits.

Bill reacted very fast and professionally to the incident by announcing what they are doing about it. In short, of the $2.6 billion corporate cash held at multiple financial institutions, only $300 million was held at SVB, which will be recovered. Additionally, of $3.3 billion cash held in trust on behalf of Bill's customers (FBO Funds), $370 million was held at SVB, which Bill believes a significant portion will be recoverable.

Furthermore, Bill announced that it would expand its commitment to SMBs Impacted by SVB Events, allowing customers who are also SVB customers to maintain business continuity, including a 3-month free trial to try the BILL platform.

Management's reaction and initiatives following the SVB event increased my confidence in management and made me think that it was skill rather than luck that they weren't affected by the SVB collapse. Well done!

As noted by Bert Hochfeld, I maintain confidence in Bill's projected >50% YoY revenue growth [source]. I added several times after the SVB incident when the price dropped below $70 since I believe Bill, with a forward-EV/s of just 7 and a smaller market cap of $8b, is vastly undervalued at that point and provides a decent risk/reward.

Appendix

Earnings Calendar

Until next season.

My Watchlist

• MongoDB

• Duolingo

• Samsara

• Docebo

• Gitlab

• Okta

My Previous Portfolio Summaries

• February 2023

• January 2023

• December 2022

Thank you for reading.

Happy Investing, everyone!

Disclaimer: This text is for entertainment purposes only and does not represent any investment advice, stock buying or selling recommendation, or any other financial advice. So please always do your own due diligence and make your own decisions. See our disclaimer for more details.