Skip to main content
No. of Recommendations: 312
My portfolio at the end of Nov 2020

Here’s the summary of my portfolio at the end of November. As usual, for my own convenience, I report during the last weekend of the month. Monday the 30th will thus be pushed into next month. Please note that when I discuss company results, I almost always use the adjusted values that the companies give.

November was a slightly quieter month as far as the size of the swings. As you remember my portfolio finished last month (October) up 174%. To my surprise it then finished the next week at up 211%. That’s a pretty big number and to help you understand it, it means the portfolio was at 311% of what it started with, just over triple. Amazingly, by the next Tuesday it was back down to up 169%, following a major sell off of our stocks. That sounds like a lot of drop in a few days, but falling from up 211% to up 169% was actually only a 13.5% fall. (269/311 = .865). The portfolio then started rising again and it finished November at 317% of where it started the year (up 217%, and again a triple), which was also a new high monthly close (see my monthly closes in the table below).

I have to say that I have never, in any previous year, been up over 200% in a year (that is, tripled my portfolio in a year), or even finished any month up 200% year-to-date, and it really and truly astonishes me. It’s almost embarrassing! Please don’t expect me to duplicate this, or anything like it, every year. It just aint gonna happen!




MY RESULTS YEAR TO DATE

My portfolio closed this month up 216.7% (at 316.7% of where it started the year)! Here’s a table of the monthly year-to-date progress of my portfolio for 2020.


End of Jan + 21.3%
End of Feb + 22.9%
End of Mar + 13.4%
End of Apr + 33.3%
End of May + 73.6%
End of Jun + 115.9%
End of Jul + 135.1%
End of Aug + 132.9%
End of Sep + 184.3%
End of Oct + 173.8%
End of Nov + 216.7%





HOW DID THE INDEXES DO?

Here are the results year to date:

The S&P 500 (Large Cap)
Closed up 12.6% YTD. (It started the year at 3231 and is now at 3638).

The Russell 2000 (Small and Mid Cap)
Closed up 11.2% YTD. (It started the year at 1668 and is now at 1855).

The IJS ETF (The S&P 600 of Small Cap Value stocks)
Closed down 3.1% YTD. (It started the year at 80.4 and is now at 77.9

The Dow (Very Large Cap)
Closed up 4.8% YTD. (It started the year at 28538 and is now at 29910).


These four indexes
Averaged up 6.4% YTD.


Then we have the Nasdaq, made up of tech stocks, a real outlier this time, which started the year at 8973 and is now at 12206, and is up 36.0% (30% more than the average of the others and 23% higher than the highest of the other indexes).


If we throw the Nasdaq in we get an average for the five indexes of up 12.3%. Even that up 12.3% is miniscule though compared to the up 216.7% that my portfolio was up, and I know of other board members who were up even well more than I was.

How often have we heard that no one can beat the indexes? That stock picking is a waste of time and effort? That we will all “return to the mean”? That “books have been written that prove it!” Well, guess what, Folks, the books are wrong!

And if you look at the past years you will see that picking our “overvalued” stocks has done ENORMOUSLY better than investing in cheap, or “undervalued” stocks.

Again, my results are without using any leverage, no margin, no options, no penny stocks, no fancy stuff, just investing long in great individual companies. And I’ve told you each month what my positions are, and what proportion of the portfolio they are, so anyone who doubts it can check for themselves. And I’m no genius. Plenty of other people on the board have done about the same, and some even a lot better .

To simply state my goals, I'm merely trying to measure my performance against that of the average return for an investor in the stock market, and combining those five indexes should give a pretty good approximation.




THOUGHTS ON TRADITIONAL EV/S, AND WHY EV/S HAS NOTHING TO DO WITH OUR COMPANIES

I posted this the last two months, but I think it is so basic and important that I should post it again this month. After all, I still get questions about valuation regularly.

Some who are new to the board seem almost personally offended that I don’t calculate EV/S on any of my stocks, and that I don’t pay attention to it, or to the fact that all our stocks usually have EV/S ratios which are very high by traditional EV/S standards.

I don’t have the answer to what is “overvalued,” but I know that traditional EV/S ratios have NOTHING TO DO with our companies! Our companies are profoundly different than the companies that EV/S was traditionally used for. Why? Here are some reasons:

First of all, a company with 70% to 90% gross margins is worth a much higher EV/S ratio than a company with 30% or 40% gross margins because each million dollars of sales is worth so much more to the company in take home dollars.

Just think about this for a minute. If you have 85% gross margins, a million dollars in sales is worth $850,000 to you. If you have 42% gross margins (still quite acceptable), the same million dollars in sales only brings you $420,000. Now really think about that. How can you put the same million dollars in the denominator of EV/S and expect to get a sensible value? Our company with an 85% gross margin is naturally worth twice the EV/S of a normal company with a 42% gross margin, other things being equal.

And a company with a 28% gross margin (believe me, there are plenty of those too, in the real world) only keeps $280,000 out of that million in revenue. How can you put the same million dollars in revenue in the denominator of EV/S for all three of those companies??? Our company with 85% gross margin is naturally worth three times the EV/S sported by the 28% gross margin company, other things being equal… But… other things aren’t equal!!!


Secondly For a company that is leasing software that becomes integrated into the core of the customer’s business, and with a subscription model that brings in recurring revenue, each million dollars of sales today is not just for this year. It’s for next year too, and the year after, and the year after that, and…. pretty much forever. No one, simply no one, is going to tear out a system that is core and essential to the smooth running of their business, and that would disrupt their entire business to pull out, to save a few dollars. It ain’t gonna happen folks.

Okay now, you have a million dollars of sales this year that will, for all practical purposes, be there next year, and the year after too and new sales next year will be an extra bonus added on. When you put that million dollars into the denominator of the EV/S equation, what do you have to multiply that million dollars by to take into account all those future years of recurring revenue? By three? By four? By five? That sure brings down the real EV/S for our SaaS companies, doesn’t it?

Compare it to a clothing manufacturer (just for instance). It sells 100,000 coats this year, but has no idea if it will sell 100,000 coats next year, or even 50,000 (maybe another brand will be in fashion). Recurring revenue on a subscription sure beats the heck out of that, doesn’t it? At first glance that clothing company example may seem irrelevant. But no, the EV/S of maybe 3 or 4 that it carries, has helped to shape the idea in your head of what a EV/S normally is. But if the clothing company's EV/S is 3, if one of our companies has the same revenue (the same S in the denominator), what should its EV/S be? Four times that? Six times that? Ten times that?

Thirdly. But wait! Our companies also have a dollar-based net retention rate maybe averaging 125% or so. That means that this year's sale revenue isn’t just going to recur next year, but it will be 25% bigger next year, and bigger the year after that. Well of course a company with a 125% dollar-based net retention rate of recurring and growing revenue will have a higher EV/S ratio, than a normal company with the same revenue, the same S value, down there in the denominator, which may not even be there at all next year … (duh!)

Fourthly. And then there is growth rate! Well, of course a company that is consistently growing revenue at 50% to 70% is going to have very high EV/S ratios, because in just two years a consistent 60% growth rate means they will have more than two and a half times as much revenue as they have now. That’s in just two years!

And in three years, more than four times the revenue they have now!

And in four years, more than six and a half times the revenue they have now! That will sure bring that EV/S ratio down, won’t it? I won’t go beyond four years but that’s enough. (You won’t believe it but a fifth year will bring the revenue to more than ten times what you started with. Obviously they don’t need to keep a 60% growth rate to really push up their revenue! That S in the denominator is going to grow rapidly.)

Fifthly, and finally, of course a company that is leasing a software solution that every enterprise on the planet needs, and that the vast majority don’t have yet, and that all those companies will keep indefinitely once they install it, will have a higher EV/S ratio than a company selling a product that anyone can put off getting a new model of, or stop buying for the duration of a recession, etc.

Here’s the key to this: You can live another year with your old cell phone, or computer, or car, or raincoat, or refrigerator, or kindle, or ski jacket, or your old factory, or whatever, without buying a new one next year, but once you lease this software, you keep leasing it indefinitely, no stopping for a year.) If you think about that and understand it, you’ve gotten the message!

And of course, of course, of course, companies that have ALL these features…

70-90% gross margins AND
a subscription model with recurring revenue AND
125% net retention rates AND
growing revenue at 50% to 70%, AND
selling products that all enterprises need …

are going to have very high EV/S rates (…duh), and I don’t know what is high, but I will NEVER sell out just because the price has gone up, and because some people think the EV/S is too high. I just don’t know where these companies will ultimately end up. Sure I didn’t buy into SNOW when it opened at three times the planned IPO price and during day one got up to $319 (four times the planned IPO price), but that was just a crazy feeding frenzy, and I wasn’t going to pull money from my high confidence positions to buy into it.

My decision about my confidence in a company is based on gross margin, recurring revenue, growth rates, dollar-based net retention rates, necessity to their customers, dominance in their field, my confidence in management, and how all that looks to me for the future. Traditional EV/S simply doesn’t enter the equation.




LAST FOUR MONTHS REVIEW


August. I sold out of Alteryx for what I think are obvious reasons, keeping just a half percent position to keep it on my radar. I reduced Fastly and increased Cloudflare to equalize the positions. I added small amounts of Alteryx money to Datadog, Crowdstrike, and Zoom, as well as to Cloudflare.

Okta issued quarterly results, which seemed strong and steady to me. Notably, operating income, net income, EPS, and free cash flow, were all positive numbers, up from losses the year before. Adj gross margin and adj subsciption gross margin at 78.9% and 82.8%, were the highest they have ever been, RPO was up 56% yoy, net expansion rate was 121%, up from 118% a year ago, etc.


September I made very few buys or sells as I was out of action with a fractured shoulder, and busy with doctors’ appointments and physical therapy. I did sell out of my remaining ½% position in Alteryx, and trimmed Zoom twice when it got over 30% of my portfolio (it’s grown to be back over 30% again), and added some to Fastly and a little to Cloudflare. On Wednesday morning I also pulled some cash out of the market permanently and put it into my emergency family fund.


October. I was more active this month. In the first two weeks I took what is now an 11% position in Docusign, mostly using money I was trimming from Zoom (see below). In the second week when I was up 236%, I pulled a little bit more cash out of the market permanently and put it into my family emergency fund. This money will not be reinvested in the market. I got it by selling 4% of the number of shares in each of my positions to keep the relative sizes of the positions unchanged. In the third week of the month Fastly delivered an incredibly negative pre-announcement, at the same time Cloudflare was announcing two weeks worth of announcements of what seemed like dozens of stupendous new products. I exited Fastly and put most of the money into Cloudflare at about $56.50. This has been adequately discussed on the board already. Luckily, and with no foreknowledge, I had sold about 15% of my Fastly at $129 to try to even out my Fastly and Cloudflare positions. This was before Fastly preannounced. I started selling the rest of Fastly in the aftermarket at $95, but sold most of it at about $89.50, for an average price of about $90.50. It finished the month at $63.50. I also added a little Crowdstrike during the month. I sold my Okta down from a 7.5% position at the end of last month, to a 5% position, due to the chorus of “It’s slowing down!” but I don’t expect to sell any more at all. I bought a tiny 0.7% Snowflake position, with tiny buys starting at $245 and ending at $268. Since then it’s been up to $297 and right back down to $250 where it is now. Finally, last month I trimmed Zoom twice when it got over 30%, but it ended September at 31% anyway. I said I’d trim it again and I trimmed it down this month to about a 23% position to bring it in line with my other highest confidence positions, Crowdstrike and Datadog.


November. Our stocks sold off near the beginning of this month with what was called a “market rotation,” which means “for no discernable reason.” It seemed to be buying cyclicals and airlines, and hotel stocks and cruise ship companies, and selling the companies that are doing well, and was stimulated by reports of effective vaccines. That’s not investing, it’s just speculating on hope for a turnaround. Most of our companies are now back from that sell off and up to, or close to, their alltime highs, by the way.

I added to Cloudflare a couple of times during the month, but not a huge amount, having added so much in October when I sold out of Fastly. Cloudflare is now in 3rd place in my portfolio with a 19.5% position, and up 32% from that large October purchase at $56.50, and is at new highs.

Crowdstrike has also been very strong and is at a couple of percent of its all-time high. Datadog got hit after a very strong quarter, and I actually bought a little as low as $82! I’ll discuss Datadog at length below. I got a chance to add a little to my Docusign at $195 to $210, which I was surprised to see as Docusign fell with all the rest of my stocks, although for no discernable reason.

I’m still out of Fastly. For those who like to keep track of those things, Fastly is still 6.9% below where I, and others, sold it, while Cloudflare, where I immediately put the money, is up 32.3% since then. That means that I have 42.1% more than I would have had if I had just held the Fastly and hoped. (1.323/0.93.1 = 1.421). Netflare is setting new all-time highs, while Fastly will have to rise 62% to get back to its high.

The message is clear: When there is an apparent disaster, give thought to getting out and putting your money to work in a higher confidence company, instead of hanging on and hoping that the company will get it figured out.

Okta also is back to within a few percent of its all time highs. I sold out of my tiny, less than 1% position in Snowflake, wanting to put my money elsewhere (it wasn’t much money of course). And finally, I didn’t buy or sell any Zoom this month, but as its price has ended up almost unchanged while the price of my other companies have generally risen, its percent of the portfolio has falled.




HOW THE INDIVIDUAL STOCKS HAVE DONE YTD

Here’s how my current positions have done this year. I’ve arranged them in order of percentage gain. As always I’ve used the start of the year price for stocks I’ve been in all year, and my initial buy price for stocks I’ve added during the year. Please remember that these starting prices are from the beginning of 2020, and not from when I originally bought them if I bought them in earlier years.For example, I bought Okta originally at $29.95 about three years ago, but I listed it at an entry price of $115.37 because that is the price at which it started 2020.

Zoom from 68.04 to 471.61 up 593.1% - and up 2% in Nov
Crowd from 49.87 to 150.83 up 202.4% - and up 22% in Nov
DataDog from 37.78 to 96.42 up 155.2% - and up 6% in Nov
Cloudflare from 34.97 to 51.97 up 113.8% - and up 44% in Nov (Bought in July)
Okta from 115.37 to 236.04 up 104.6% - and up 12% in Nov
Docu from 210.5 to 202.3 up 7.8% - and up 12% in Nov (Bought in Oct)


Granted, a lot of my gain was from Zoom, but you will note that five of my six positions are up over 100% YTD, even though my first purchase in Cloudflare wasn’t until July. Docusign, my position that is only up 8%, was only purchased in October.




POSITION SIZES

As often happens at times of great stress and uncertainty, I sold off lower conviction positions and have concentrated my funds in my highest conviction companies. I now have six positions.

My portfolio now has four positions between 18.8% and 24.7%, and they make up just under 85% of my portfolio. Keeping the number of my stocks down really makes me focus my mind and decide which are really the best and highest confidence positions.

Here are my positions in order of position size, and bunched by size groups..
.

Crowdstrike 24.7%
Zoom 21.8%
Cloudflare 19.5%
Datadog 18.8%

Docusign 11.3%
Okta 4.7%





STOCK REVIEWS

Let’s start with Zoom, currently my 2nd largest position. Zoom went from an obscure little company to a household word known by almost everyone in a couple of months. They just posted two of the most amazing quarters ever seen by man, with revenue up 169% yoy, and then up 355% yoy. Those revenues were up 74%, and then up 102%, SEQUENTIALLY! Their Adjusted Net Income in their most recent quarter went from $24 million to $275 million, and it was all like that. For example Free Cash Flow went from $17 million to $373 million, and Customers with over 10 employees grew by 458%. There is no question that they will beat estimates for the next quarter as well, and probably by a large margin. The question that none of us can be sure about is what happens when the Pandemic is finally over. We’ll have to see. And Zoom is coming out with a multitude of new products to establish themselves as a platform and not something that is easily copied. They are one of my top three positions, but I have trimmed them three times when they got over 30% of my portfolio, and I won’t let them get that large again. They report earnings at the beginning of next week.



Next is Crowdstrike, currently my largest position. Their results the last two quarters were so amazing that the only way that they could have been overshadowed was by comparing them to Zoom’s. Their most recent quarter was their Q2. Here is what Annual Recurring Revenue (ARR) has looked like for the past four Q2s: $90 million, $208 million, $424 million, and $791 million! Just look at those numbers (an octuple in three years!). Last quarter their total revenue was up by 84% and subscription revenue was up by 89%, operating cash flow was up from a LOSS of $6 million, to positive $55 million(!!!), free cash flow went from a LOSS of $29 million to a gain of $32 million, subscription customers grew 91% from 3789 to 7230, and they added 1000 sequentially. They are a high confidence position. They report earnings next week too.



Next is DataDog, the fourth of my big four high confidence companies at 18.8% of my portfolio. Their most recent quarter was their Sept quarter, reported early this month. As the results were somewhat controversial, I thought I’d give you more details than usual.


Here was the initial email I received from Seeking Alpha:

Adj EPS of 5 cents beats by 4 cents.
Revenue of $155 million, up 61.4%, beats by $10 million.
Gross margin up 3 points to 79%.
Operating margin of 9% up from consensus of 0.6%;

Guidance
Q4
revenue of $163 million, up from consensus of $155 million and Adjusted EPS of 1 to 2 cents vs. consensus of 1 cent.

Full year revenue to be $599 million up from consensus of $571 million and Adj EPS of 17 to 18 cents up from consensus of 12 cents.

Shares down 8% in aftermarket. (Saul here, now does that make any sense?)


Press Release and Conference Call (paraphrased and greatly shortened).

Revenue up 61% year-over-year to $155 million

$100,000 ARR customers, were 1,107, up from 52% from 727 a year ago. They make up 75% of revenue.

Total Customers were 13,100, up 38% from about 9,500 last year.

Dollar-based net retention rate continues to be over 130%.

Current customers always provide the majority of the growth in a quarter, with the new business adding to it.

Remaining performance obligations or RPO was $316 million

“We are pleased with our strong results, which demonstrated continued high growth at scale. The pandemic has driven organizations globally and across industries to prioritize their digital operations like never before. With eight new products and major features announced at our annual user conference, Dash, we have maintained our strong track record of innovation and extended our leadership as the most complete and cloud native end-to-end observability platform. We continue to make meaningful R&D investments toward what is a very significant long-term opportunity.”

Adj operating income was $13.8 million;
Adj operating margin was 9%.
Operating cash flow was positive $36 million,
Free cash flow was positive $29 million.
Cash, was $1.5 billion

Business highlights
• Announced 8 new products and features at our annual user conference Dash, attended by over 7,000 people in our first all-virtual event. Product announcements included:
• The introduction of the Datadog Marketplace, to enable technology partners to build applications on our platform, and allow our customers to browse, purchase and use these applications.
• The general availability of Continuous Profiler.
• Extending Synthetics to CI/CD pipelines, which enables customers to test the viability of new features earlier in the development process.
• Introducing Mobile Real User Monitoring (RUM), to enable full visibility into the performance of mobile applications, both Android and iOS.
• The general availability of Error Tracking, which enables engineering teams to aggregate, triage, and prioritize frontend application errors.
• The beta launch of Incident Management, which unifies documentation, data, and collaboration in a centralized pane of glass for DevOps and security teams when an incident occurs.
• The beta launch of Compliance Monitoring, which extends on our security solutions to proactively notify DevSecOps teams of misconfigurations and compliance drift.
• The beta launch of Recommended Monitors, a suite of preconfigured, curated, and customizable alert queries for key infrastructure technologies.

• Announced a strategic partnership with Microsoft which will make Datadog available directly from the Azure console. Azure customers will be able to purchase a Datadog plan with the ability to draw from their committed Azure spend, implement Datadog with just a few clicks, as well as manage Datadog natively from the Azure Portal. Lastly, Azure and Datadog sales teams will increase collaboration for co-selling to enterprise clients.

• Announced the extension of a strategic partnership with Google Cloud Platform (GCP). In addition to expanding the current partnership from EMEA to North America, this will extend go-to-market collaboration and deliver deeper sales alignment between Datadog and GCP.

• Achieved “In Process” status on the Federal Risk and Authorization Management Program (FedRAMP) Marketplace for moderate-impact SaaS. Datadog is currently working with the U.S. Department of Veterans Affairs and the General Services Administration (GSA), based on our earlier FedRAMP Authorization for Low Impact SaaS workloads.

• Delivered additional product innovations and integrations, including Tracing without Limits to enable ingestion of all tracing with no sampling and live search, Deployment Tracking to identify when performance issues are caused by new code deploys, a suite of DNS monitoring features to troubleshoot internal and external DNS resolution issues, and the extension of Watchdog anomaly detection to Kubernetes clusters, as well as new or enhanced integrations with AWS Step Functions, Snowflake, Slack, etc

• Recognized as a 2020 Gartner Peer Insights Customers’ Choice for Application Performance Monitoring. Datadog scored an overall rating of 4.6 stars out of 5.0 based and a recommendation rating of 91% based on 132 verified IT customers.

• Achieved AWS Outposts Ready designation, which recognizes that Datadog has demonstrated successful integration with AWS Outposts, a fully managed service that extends AWS infrastructure, AWS services, APIs, and tools to virtually any datacenter, co-location space, or on-premises facility.

Conference Call
Throughout the quarter, usage growth of existing customers was robust which was a return to more normalized levels after slower usage expansion in Q2. To be more specific, the pace of usage growth in Q3 was broadly in line with pre-COVID historical levels. As a result, we feel comfortable that some of the rationalized cloud usage from our larger customers that we saw in Q2 was transitory, as many of those customers have now returned to steady growth in multiple markets. Strength was broad-based across customers of different sizes and within different industries. However, while Q3 usage growth was back to pre-COVID levels, the weakness experienced in Q2 will still be reflected in our year-over-year comparisons for a number of quarters.

In addition to that, new logo generation continued to be robust with customer additions in line with pre-COVID levels and churn remained consistent with historical rates. Taking all of this into account, total ARR at the end of the quarter was a new record for the company making this a very successful quarter.

71% of customers are using two or more products, which is up from 50% last year. Approximately 20% of customers are using four or more products which is up from only 7% a year ago. We had another quarter in which 75% of new logos landed with two or more products, and we continue to be pleased with the uptake of our newest products, including Synthetics, RUM ,NPM, and Security.

Synthetics has now been commercially available for about a year. And today, it is used by thousands of customers, has reached eight figures of ARR and continues to be in hypergrowth.

Frictionless adoption is a key value proposition of our platform, which we expect would benefit all of our products.

Our ability to both land and expand during a time of uncertainty demonstrates our importance, as companies of all sizes and across all industries, even in the most challenged sectors, are turning to their digital operations as the most strategically important segment of their business.

We hosted DASH, our annual user conference. This was our first time hosting it in an wholly virtual format, and it enabled us to reach a broader audience of over 7,000 attendees, which was more than 5x last year's count.

We continue to see a meaningful opportunity to innovate and expand our platform and therefore plan to continue to make meaningful investments in R&D.

Saul – My Take, a very positive conference call. Here is more of what they said:

Question - I get you're not going to give us guidance right now for next year, but how are you thinking about it, and the rate of investment against that opportunity? And along with that how would you characterize the ability to hire in this environment?

Answer - Right now we are SO EARLY in the opportunity that the way we think about how to grow our teams isn't directly related to the way we think about the growth we're going to get next year. We really think of it in terms of HOW FAST we can grow our teams (!) while optimizing for both short-term and long-term growth. So WE ARE GROWING THE TEAMS AS FAST AS WE CAN basically (!), and we think there's enough opportunity to justify it. And that's true both on the R&D side and on the S&M side, and WE ARE VERY CONVINCED THAT THE OPPORTUNITY IS THERE (!)….



Saul here: (Caps were mine of course) How could they have been more positive, and how could anyone have read that and sold it down to $80 at one point? I guess the bots don't read conference calls which gives us a big advantage. However, remember that the yoy comparisons may not show it for the next two quarters. As they said several times (here are two examples):


However, while Q3 usage growth was back to pre-COVID levels, the slowdown experienced in Q2 will still be seen in our year-over-year comparisons for a number of quarters.

And

So the growth we did forego in Q2 is going to be with us in the year-to-year comparison a little bit.

Saul here again: To clarify, they say they are growing almost as fast as before, but that, because of the slowdown in Q2, the year-over-year numbers are coming off a lower base than they would have been for yoy comparisons, until they get four quarters under their belt.


They are saying that because of Q2 dropping the baseline, you can't look at yoy revenue growth for this just reported quarter, Q4 or next Q1, but should look at sequential dollars of revenue growth. Then in Q2, year over year revenue growth should return to normal. But that's just the way I interpret it.

Look at it this way, they grew revenue, in sequential quarters,

$08 million
$13 million
$13 million
$18 million
$17 million --- Q1, hit for maybe $2 million because of Covid in last two weeks of March, assuming they would have hit $19 million
$ 9 million --- Q2, hit for maybe $9 million more (full pandemic panic)
$15 million --- Q3, they are almost back in line

So they are saying that because of the (say) $9 million that they lost in Q2, and perhaps $2 million in the last two weeks of March, this quarter looks light if you look yoy. However if you put that $11 million back into the base they'd be growing off, and imagine they were growing off a base $11 million higher, the yoy, instead of 155/96 = 61%, you get 166/96 = 73% revenue growth.

And that's even though they were not quite all the way back as far as sequential dollars of growth, at $15 million, although it's a lot better than Q2's $9 million. And if they accelerate their sequential growth of revenue to $20 million in Q4, I won't worry at all about the yoy percentages.

I guess I should have also included that they onboarded about 1000 new subscribers this quarter, which is up 59% SEQUENTIALLY!!! That means they onboarded 59% more subscribers this quarter than the roughly 630 that they onboarded in the June quarter, in case anyone has a doubt that business has improved.



Cloudflare (NET) is a newly very substantial 19.5% position in 3rd place, as I put most of my Fastly money here, for reasons I’ve discussed on the board many times, and won’t repeat, and also because the stock price rose 44% since my October end of the month. As you have probably figured out from the size of my position, Cloudflare is becoming a high confidence company for me. Here are some results from the most recent quarter, as announced in November. It was an amazing quarter. Read it and pay attention! :

Revenue of $114 million, up 54%, and accerating from 48% sequentially and from 48% a year ago.

• RPO or Remaining Performance Obligations is $342 million, up 25% SEQUENTIALLY(!!!!) and up 81% yoy. (This is subscription revenue backlog).

• Adj gross margin was 77.3% down slightly from 78.9% a year ago.

• Adj operating loss was $4.5 million, or 4% of total revenue, improved from a loss of $18 million, or 24.5% of revenue, a year ago.

• Operating expenses as a percent of revenue decreased 5% sequentially, and 22% year-over-year to 81%. (Good)

• Adj net loss was $5.7 million, less than a third of the loss of $18.5 million a year ago
• Adj EPS was -2 cents, improved from -16 cents
• Operating cash flow was $2 million, up from a LOSS of $17.8 million a year ago.
• Free cash flow was negative $18 million (or 16% of revenue), improved from negative $34 million (or 45% of revenue) a year ago.
• Cash was $1.05 billion.

In two weeks last month, Cloudflare announced a staggering number of exciting new products. For more on this, see Stocknovice’s post: https://boards.fool.com/cloudflare39s-crushing-it-34646557.a...

Conference Call
About half of our new revenue in the quarter came from new logos and about half from expanding relationships with our existing customers.

None of our customers account for more than 5% of revenue. And our top 20 customers remain well under 20% of total revenue.

We've been able to hire great people. In Q2, we've received more than 40,000 applications and extended offers to a mere 0.6%. In Q3, we had over 60,000 applications and extended offers only 0.4%. We believe whatever company is able to attract and retain the best people will win.

Seeing how many businesses were struggling with the shift to remote work, in the spring we had decided to make Teams free through September 1. We had thousands of companies ranging from small businesses to fortune 500 corporations take us up on our offer. Over the course of Q3, we began conversations with all of them to transition from the free offer to becoming paying customers. We are happy with how that went. 75% of customers transitioned from free to paid accounts.

For some customers, who are still struggling to get through COVID, we allowed them to continue with the free offering until they can get their feet back under them. Teams is a very high margin product for us, so this doesn't cost us much.

It's great to see more use cases every quarter, I think we're just scratching the surface. Most use cases today have focused on performance. Over time, I expect those use cases will pale in comparison to what is a much bigger opportunity, helping customers manage the challenges of compliance. As governments around the world increasingly insist on data localization and data residency, sending all your users data back to AWS feeds for processing will become unacceptable.

They are partnering with Okta and other identity management companies and don’t expect to go into identitiy management and compete.

“Sometimes you hit on all cylinders. We had one of those quarters”.

They finished the month at an all-time high.



Docusign was a new position last month. It’s now in 5th place at 11.3% of my portfolio. The way I think about it is that, like Zoom, it benefited greatly from work-from-home, but while there is some worry expressed about Zoom falling back a little when the pandemic peters out, no business customer is going back to manual signing of ducuments, with Fedexing them back and forth over a period of days, when they can do it online. Just isn’t going to happen! On the other hand, its stock price hasn’t been rising like my other companies either. Here are some figures:

Before Covid, they averaged about 27,000 new customers per quarter plus or minus a couple of thousand or so. In the last two quarters they signed up 68,000, and then 88,000! How’s that for acceleration!

They added 10,000 enterpise customers, up from 6000 the year before. (That’a up about 67% roughly. Revenue growth accelerated to 45%, up from 41% the year before and up from 39% sequentially. Billings growth went to 61%, up from 47%.

It’s to be noted that their eSigning business is what is carrying the business right now because it is so easy to sign up someone without any need for Docusign service personnel. However their platform is slower to take off during Covid because it requires a set-up and because it costs more. Docusign will also be announcing earnings next week.



Finally, Okta is a 5% position in 6th place. A lot of people I respect have sold out because they feel it’s slowing down, but I feel that it still dominates its category with no effective competition, management is very confident, and its numbers were very respectable. Revenue was $200 million, up 43%, subscription revenue was $191 million, up 44%.

But the biggest number was RPO or Remaining Performance Obligations, which was $1.43 billion!!!! And up 56% yoy. (This is subscription revenue backlog, and that’s an enormous number, more than seven times this quarter’s alltime-high subscription revenue! I've never seen a company with that much Remaining Performance Obligation!)

Another thing I like about Okta is that, while it may not have gained as much as some of the others ytd. (It's up “just” 105% ytd so far), it just keeps a slow grind upwards and never seems to have big drops like the other companies. That seems to say that the market has confidence in it. It’s within a few percent of its all-time high.




FINISHING UP
Let me remind you first, that I have NO IDEA what our stocks will do next month. I’m terrible on predictions. But I know that the businesses of our companies will do just fine for the most part.

I feel that my portfolio is made up of a bunch of great companies. But that’s just my opinion, and I can’t say often enough that I’m not a techie and I don’t really understand what most of them actually do at all ! I just know what great results look like. I figure that if their customers clearly like them and keep buying their products in hugely increasing amounts, they must have something going for them and, as I’ve often said, I follow the money, the results. And I listen to smart people about the prospects of these companies.

When I take a regular position in a stock, it’s always with the idea of holding it indefinitely, or as long as circumstances
seem appropriate, and never with a price goal or with the idea of trying to make a few points and selling. I do, of course, eventually exit. Sometimes it’s after months, and sometimes after years, but I’m talking about what my intention is when I buy.

I do sometimes take a tiny position in a company to put it on my radar and get me to learn more about it. I’m not trying to trade it and make money on it, I’m just trying to decide if I want to keep it long term. If I do try out a stock in a small position and later decide that it’s not what I want, I sell it without hesitation, and I really don’t care whether I gain a dollar or lose one. I just sell out to put the money somewhere better. If I decide to keep it, I add to my position and build it into a regular position.

You should never try to just follow what I’m doing without making up your own mind about a stock. In these monthly summaries I’m giving you a static picture of where I am currently, but I may change my mind about a position during the month. In fact, I not infrequently do, and I make changes in the position. I usually don’t announce these changes until the end of the month, and if I’m busy or have some personal emergency I might not announce them even then. And besides, I sometimes make mistakes, even big ones! Don’t just follow me blindly! I’m an old guy and won’t be around forever. The key is to learn how to do this for yourself.




THE KNOWLEDGEBASE
Since I began in 1989, my entire portfolio has grown enormously. If you are new to the board and want to find out how I did it, and how you can try to do it yourself, I’d suggest you read the Knowledgebase, which is a compilation of words of wisdom, and definitely worth reading (a couple of times) if you haven't yet.
A link to the Knowledgebase is at the top of the Announcements panel that is on the right side of every page on this board.

For some additions to the Knowledgebase, bringing it up to date, I’d advise reading several other posts linked to on the panel, especially:

How I Pick a Company to Invest In,
Why My Investing Criteria Have Changed,
Why It Really is Different.
Illogical Investing Fallacies

I hope this has been helpful.

Saul
Print the post  

Announcements

What was Your Dumbest Investment?
Share it with us -- and learn from others' stories of flubs.
When Life Gives You Lemons
We all have had hardships and made poor decisions. The important thing is how we respond and grow. Read the story of a Fool who started from nothing, and looks to gain everything.
Contact Us
Contact Customer Service and other Fool departments here.
Work for Fools?
Winner of the Washingtonian great places to work, and Glassdoor #1 Company to Work For 2015! Have access to all of TMF's online and email products for FREE, and be paid for your contributions to TMF! Click the link and start your Fool career.