Now all of my companies have reported their Dec or Jan quarters. The companies that reported results since my 12Feb portfolio update will be discussed in detail below.
PRIOR PORTFOLIO UPDATES
PORTFOLIO PERFORMANCE
| DATE | GauchoRico Portfolio (YTD) | S&P500 Total Return (YTD) |
|---|---|---|
| Jan | 3.1% | -1.0% |
| Feb | -1.2% | 1.7% |
| Mar | -13.2% | 6.2% |
The last ATH for the portfolio was on 12Feb, the date of my last portfolio update. Since then the portfolio and high growth stocks in general experienced a major selloff. This was the fourth major selloff for the portfolio since 2018, and I wrote about these selloffs in a recent post. In a matter of about three weeks, the portfolio dropped 34.8% from the 12Feb high and hit YTD low of -22.8% on 8Mar. The portfolio recovered a little before falling again, yet it has not yet breached the 8Mar low (29Mar the portfolio stock at -19.0% YTD); on the last day of March, the portfolio rallied 6.6% to close March down 13.2% YTD and 26.1% below the ATH set on 12Feb.
Options Trading
Most of my activities are investing, but I do some options trading. I also use options for investing, but I define options trading as trades of less than three months. Long-term options investments are embedded in my investment returns. In Q1 2021, my options trading was slightly profitable yielding a 1% return (on my entire portfolio). Therefore, the options trading slightly buffered my losses in Q1 2021, and the portfolio would have been down 14.2% YTD instead of down 13.2% had I done no options trading at all. In fact, it was a very tough Q1 for options trading as I rarely bet on downside moves. The harvesting of time value and the relatively strong first half of Q1 managed to slightly overcome the steep losses from the growth stock selloff in the second half of the quarter. For a more comprehensive summary of my Q1 2021 options trading, click here.
Higher Highs and Lower Lows
Note that the GauchoRico portfolio is leveraged with LEAPS and with margin in the form of short put options; thus, the highs and lows of the portfolio are amplified when compared to a stock-only portfolio comprised of the same allocations.
Benchmark Comparison
By comparison, the S&P 500 and the broader market did not decline so the portfolio is now lagging the S&P 500 by 22.0% on a 2021 YTD basis. In fact, the S&P 500 touched an intraday ATH on 31Mar.
2021 Notable Days for the Portfolio
Below are some of the notable days in 2021. Particularly noticeable is how quickly the portfolio dropped and how quickly it can recover.
| Date | YTD Return | Notes |
|---|---|---|
| 01/27/21 | -2.2% | local bottom |
| 02/05/21 | +12.6% | new ATH |
| 02/08/21 | +14.0% | new ATH |
| 02/09/21 | +16.6% | new ATH |
| 02/10/21 | +16.8% | new ATH |
| 02/11/21 | +17.8% | new ATH |
| 02/12/21 | +18.3% | new ATH (current ATH) |
| 02/25/21 | -3.4% | -6.3% on the day |
| 03/03/21 | -6.3% | -7% on the day |
| 03/04/21 | -13.6% | -9.2% on the day |
| 03/05/21 | -17.1% | -4.1% on the day |
| 03/08/21 | -22.8% | -6.9% on the day |
| 03/09/21 | -11.0% | +15.3% on the day |
| 03/11/21 | -4.3% | +9.6% on the day |
| 03/18/21 | -10.2% | -6.7% on the day |
| 03/24/21 | -15.6% | -8.6% on the day |
| 03/29/21 | -19.0% | close to 3/8/21 trough |
| 03/31/21 | -13.2% | +6.6% on the day |
Weekly Performance
| DATE | GauchoRico YTD | S&P500 TOTAL RETURN YTD | DELTA |
|---|---|---|---|
| 1/8/21 | 6.5% | 1.9% | 4.6% |
| 1/15/21 | 6.4% | 0.4% | 6.0% |
| 1/22/21 | 10.2% | 2.4% | 7.9% |
| 1/29/21 | 3.1% | -1.0% | 4.2% |
| 2/5/21 | 12.6% | 3.6% | 9.0% |
| 2/12/21 | 18.3%* | 4.9% | 13.3% |
| 2/19/21 | 14.2% | 4.2% | 10.0% |
| 2/26/21 | -1.2% | 1.7% | -3.0% |
| 3/5/21 | -17.1% | 2.6% | -19.7% |
| 3/12/21 | -6.3% | 5.3% | -11.6% |
| 3/19/21 | -7.7% | 4.5% | -12.3% |
| 3/26/21 | -15.8% | 6.2% | -22.0% |
ALLOCATIONS
| TICKER | 3/31/21 | 2/12/21 | 1/31/21 | 12/31/20 |
|---|---|---|---|---|
| CRWD | 27.7%* | 31.2%* | 31.2%* | 31.5%* |
| NET | 15.2% | 17.7%* | 17.9%* | 17.8%* |
| LSPD | 13.2%^ | 6.2%^ | 4.8%^ | 3.3% |
| DDOG | 12.9%* | 10.3% | 10.7% | 10.4% |
| ZM | 12.3%* | 11.6% | 11.5% | 11.0% |
| UPST | 5.7% | 2.7% | —- | —- |
| DOCU | 5.6%* | 12.6% | 16.2%* | 16.4%* |
| PTON | 4.0% | 3.7% | 4.0% | 4.2% |
| SNOW | 3.0% | 0.7% | 0.5% | —- |
| GOLD | 1.7% | 1.2% | 1.4% | 3.0% |
| BPRMF | 1.2% | 1.3% | 1.3% | 1.4% |
| NEM | 1.1% | 0.9% | 1.0% | 1.0% |
| Cash | 1.2% | 1.0% | 0.8% | 0.7% |
The LEAPS and other call options on CRWD, LSPD, ZM, DDOG, and DOCU will amplify the portfolio’s gains to the upside. This form of leverage is not without risk; for the most part, these options positions (LSPD calls excepted) could be worthless if the underlying shares do not rise within the next 21 months, and if the shares rise less than about 35% then I would have been better off owning shares instead of options. My CRWD position is currently extremely levered with almost all of the position’s value in call options; it reflects how much conviction I currently have in the company’s prospects. LSPD is the next most levered position in the portfolio with about 1/3 of the position’s value in the form of 17Dec calls; I consider these ITM LSPD call options the most risky of my calls because there are less than nine months prior to expiration. DOCU is the next most levered position in the portfolio with the 2023 LEAPS comprising about 2.5% of my portfolio. The DDOG LEAPS comprise 2% of the portfolio, and the ZM LEAPS comprise about 1% of the portfolio. In aggregate, about 31% of the portfolio is in the form of LEAPS/calls; since about 8% of the portfolio is comprised of the CRWD Jan22 $60 calls, which behave like shares because they are so deep ITM, I consider my portfolio to have about 23% of its value in call options and 77% in straight stock. I saw the ~35% pullback as an opportunity to lever up, and I intend to unwind a portion of this leverage once I feel that the positions in the portfolio receive a more decent valuation.
PORTFOLIO CHANGES
Changes since 12Feb2021
- Sold all SNOW prior to earnings then bought back the sold shares plus more during the last week of March
- Sold all BAND to add to higher conviction positions during selloff
- Sold some DOCU shares to buy 2023 DOCU LEAPS ($190 and $210 strikes)
- Sold all CRWD shares to buy 2023 CRWD LEAPS ($175 and $210 strikes)
- Sold all CRWD Jan22 $50 calls to buy CRWD Jan23 $170 and $175 calls
- Added to ZM position by buying 2023 LEAPS ($300 strike)
- Sold some DDOG shares to buy 2023 LEAPS ($65 and $75 strikes)
- Reduced NET by selling all NET 2022 call options
- Added LSPD shares and uncapped all 17Dec call spreads by buying back short calls when the share price dipped into the $50s; recapped some of the call options after the share price recovered to the mid-$70s; then uncapped the calls after LSPD fell again
- Added a small amount to UPST
- Added a small amount to PTON
- Added DDOG shares
- Temporarily exchanged DOCU shares for CRWD to harvest a tax loss (plan to reverse the trade after 30 days); DOCU would otherwise have about 2.6% added to its allocation
PORTFOLIO COMPANIES UPDATES
Since the last portfolio update, BAND, ZM, SNOW, DOCU, CRWD, and UPST reported their results. My thoughts about the LSPD, PTON, DDOG, and NET results can be found in my 12Feb Portfolio Update.
BAND (reported 25Feb)
BAND reported the 31Dec quarter on 25Feb. The quarter contained about 2 months of acquired company VoxBone. In addition, the results also contained some other temporary contributors to growth including political spend and pandemic tailwinds. Therefore, the 82% revenue growth in Q4 will not be so high in subsequent quarters. Voxbone adds a nice international opportunity for growth. BAND continues to be an attractive company with strong growth prospects, excellent execution, and fiscal discipline by management. Its valuation is considerably lower than other SaaS companies, but its growth rate is also lower than my other portfolio companies. BAND is not a top dog in its market. I don’t think, given all of the above, that it would be a mistake to keep BAND in the portfolio. However, during the growth selloff, I decided to sell my shares and move the proceeds into higher confidence, more dominant companies.
ZM (reported 1Mar)
Overall, I was very happy with ZM’s Q4 results. The high guidance and the Zoom Phone traction are VERY encouraging. I’m keeping ZM a large holding in my portfolio.
ZM annual FCF run rate about $1.5B so EV/FCF is about 61. ZM will likely grow revenue at around 50%+ this yr. Comparing this valuation to CRM when CRM was growing revenue 25-30% (2014-2018), CRM had an EV/FCF multiple range of 30-50. ZM seems like a strong buy to me.
At this point, valuing ZM on a FCF multiple makes more sense than trying to value it on EV/Sales. FY22 revenue growth guidance is 43.6% which the company will probably raise 3 times (after Q1, Q2, Q3). Growth will likely be 50-60% for FY22.
I keep hearing that ZM is a WFH stock. I disagree. It’s a work from ANYWHERE stock. I think Zoom Phone adoption will accelerate strongly as employees head back to the office. I expect this to support revenue growth in FY22 (current year) and FY23.
While OnZoom’s future success is still an unknown, I look at it as a free roll opportunity that could help keep revenue growth strong in FY23 and FY24. But I think substantial OnZoom revenue in FY23 will be unnecessary for the stock to do well.
SNOW (reported 3Mar)
SNOW delivered another spectacular quarter. Revenue growth was 117% last quarter holding in a steady range for the third quarter in a row. For SNOW, revenue is a lagging indicator, maybe by six months or more. DBNER was 168%, and management forecast it to remain above 160% for the entire year. Bear (a.k.a. PaulWBryant) on Saul’s Investing Discussion board wrote a nice analysis of what’s probably to come for SNOW. SNOW’s monetization of the growth in data is really only limited by the value that SNOW’s customers can extract in the form of knowledge creation and ROI. Therefore, it’s difficult to determine SNOW’s true potential or to calculate what its shares “should” be worth, but it’s a large number, and SNOW warrants a position in the portfolio.
DOCU (reported 11Mar)
DOCU reported a solid Q4 with an accelerating 56.8% revenue growth. The growth has been accelerating throughout the pandemic in the following sequence (most recent is last): 37.6%, 38.8%, 45.2%, 53.5%, and 56.8% with the quarters entirely encompassing the pandemic bolded.
DOCU has been considered by many as a WFH stock, and some investors worry that growth will dramatically slow as the world gets back to normal. Management has guided that growth will dip below the pandemic-fueled numbers and settle somewhere between 2020 and pre-pandemic levels. Furthermore, some investors have argued that DOCU has conquered the world, and the easy growth is already in the bag. The new initiatives won’t be large enough to move the revenue growth needle in 2021; management has, in fact, stated the same.
First, DOCU is not a WFH stock although the company has clearly benefited from COVID-19. Second, DOCU is totally dominant within its main market (electronic, remote signing of documents) with 70%+ market share. This market has enormous greenfield growth available for DOCU’s grabbing. I expect there to be plenty of growth available before DOCU’s more nascent products need to move the needle. DOCU will likely have another 50%+ revenue growth year FY22.
DOCU is already a cash-printing machine with the following operating margin sequence (most recent quarter last): 8%, 8%, 10%, 13%, and 17%. DBNER has been ticking up in each of the past 3 quarters with the most recent quarter at 123%. The company is getting close to one million customers.
CRWD (reported 16Mar)
CRWD reported another great quarter, growing revenue 74%. With the Sunburst hack affecting several hundred thousand organizations, I thought CRWD’s revenue growth rate might accelerate from the mid-80%s to 90%+. While that didn’t happen, CRWD remains uniquely positioned to very quickly deploy cloud-native security solutions that should patch any vulnerabilities regardless of an organization’s size and complexity. Here’s what CEO Kurtz said about that on the earnings call:
While it is challenging to measure specific pipeline effects events like SUNBURST may have, we do not believe it was a significant contributor to our strong Q4 results. We do believe it has raised awareness at the Board level and will serve as an additional tailwind to the industry over the long term.
George Kurtz, CEO — during Q4 2021 earnings call
So during 2020 CRWD has been seeing tailwinds from the accelerating work-from-anywhere shift, and now CRWD is about to see a new sustained tailwind from the heightened concern around the devastation that security breaches can cause. In fact, CRWD has a number of important drivers for further growth.
- Land and expand: As of 31Dec, the percentage of customers with 4+, 5+, and 6+ modules was 63%, 47%, and 24%. These percentages have been steadily increasing but still have room to grow. Also important is the number of modules that CRWD has available to sell and cross-sell. Kurtz disclosed in an interview on 31Mar that CRWD now has 19 modules. With the recent acquisitions of Humio and Preempt Security, we can expect that the pace of new mode deployment will only accelerate.
- Available international growth: Only 28% of CRWD’s 2020 revenue was from outside the United States leaving a large opportunity for international growth.
- Room to grow in enterprise: CRWD currently has 58% of the Fortune 100 companies and 35% of the Fortune 500 companies so there’s still room to capture more. Notable customer wins in Q4 2020 were Proctor & Gamble, Salesforce.com, and Pfizer.
- Security spend insufficient: IDC, the market research firm, states that companies should spend 5-10% of their IT budget on security. CRWD and IDC estimate that the spend was only a tenth of that level, leaving a huge growth opportunity for security vendors like CRWD.
CRWD continued to exhibit operational leverage. Its operating margin continues to advance as shown by the following quarterly sequence (most recent quarter is last): -23%, -19%, -13%, -4%, 1%, 4%, 8%, and 13%. The long-term target for operating margin is 20%+ so there’s still a fair amount of room to exert more leverage. Leverage plus hyper growth will lead to higher and higher cashflow. The profitability progression that CRWD is displaying is something that we want to see in our investment companies.
The superb execution, the remaining untapped and expanding opportunity, and the multifaceted tailwinds all combine with CRWD’s dominance and competitive advantage in its markets to give me a very high level of confidence that CRWD’s business growth will continue unabated for some time to come. I believe that CRWD is significantly undervalued and it remains by far my largest holding.
UPST (reported 17Mar)
UPST’s 31Dec quarter and its 2021 guidance seemed to surprise the market. Although the shares had sold off significantly from the February 2021 high, the shares almost doubled the day after earnings. The company guided for 84% revenue growth for Q1 2021 and revenue 114% growth for the full year (2021). There was a major stumble in Q2 2020 when credit tightened up substantially near the beginning of the pandemic; thus, a major part of the growth in 2021 will simply be a recovery to the previous growth trajectory as stated by CFO Sanjay Datta on the earnings call:
The first is that part of the growth we have been and are currently experiencing is simply the business catching up to where the technology has improved to over the past year. So in a sense, we are recovering to where we otherwise would have expected to be absent the impact of the pandemic.
Sanjay Datta, CFO UPST – Q4 2020 Earnings Call
It’s nice to see UPST’s business not suffer any permanent damage from the pandemic. It’s also nice to see UPST, despite being such a high growth business, already posting profits. And the adjusted EBITDA is forecasted to grow in 2021.
UPST recently announced that they entered the auto loan market, and, on the day of the earnings release, UPST doubled down with the announcement that it will acquire Prodigy to help borrowers refinance mid-priced to luxury car loans. The car loan market is several times larger than the unsecured personal loan market that UPST first began to serve.
UPST’s great progress on revenue growth and increased profitability show me that UPST does not need any giant bank customers to continue its rapid growth. To date, UPST has only acquired small and medium sized banks (no national banks) as customers; however, they have only acquired 13 bank customers, and 63% of their 2020 revenue was concentrated with one bank (CRB). This was down from 80% in 2019 but still comprises significant customer concentration risk. On the other hand, the CRB customer concentration shows the huge untapped potential of UPST. Expanding business with their other 12 customers could boost sales enormously. They could acquire new customers, and they could branch out into other lending segments. UPST also announced that they will be offering loans in the Spanish language; the Latino demographic is a large and growing segment in the United States.
The risks are too high for me to build UPST into a large position in the portfolio. But the potential is large, and I’m willing to let the position grow larger without adding more capital. I limited my investment to 3% of my portfolio, but the position grew to exceed 6% (currently at 5.7%) with the recent share price explosion. I’m content to let the value rise and fall while I wait to see if UPST can grow into a giant.
BPRMF (brief update)
I have been invested in Blue Prism since last July. The RPA market is very fast growing, and BPRMF is one of a handful of companies in the space. At the time, BPRMF was the best available company to buy. Market leader UiPath was and still is private. However, last week UiPath filed its S-1, signaling that it intends to go public soon. UiPath is only 6 years old and in FY21 (ended 31Jan) it had $608M in revenue and $580M in ARR run rate with revenue growth and ARR (run rate) growth of 81% and 65%, respectively. The dollar-based net retention rate was most recently 145%. They have almost 8000 customers with more than 1000 contributing greater than $100K in ARR. This is just incredible.
While we don’t know at what valuation UiPath will go IPO, we do know that the valuation, as of their most recent private financing round (Series F for $750M), was $35B. This was two months ago. A large round this close to the IPO is an opportunity for the private investors to get more shares ahead of the IPO (or make a quick buck) so the valuation at the IPO (pre-IPO money) will likely be at least $50B, if not more. A $50B valuation will give PATH a TTM EV/S multiple of 82. By comparison, BPRMF with about 95M shares outstanding (estimate) and $195M revenue in FY20 (as of 31Oct 2020) has a TTM EV/S multiple of 8.5. That’s a 9.7x discrepancy! Clearly, UiPath is a more dominant company with about 4x as many customers, a higher growth rate, a higher DBNER, etc. But should UiPath have 9.7 times as high of a multiple? Jason Kingdon, CEO of Blue Prism, has complained about this valuation discrepancy, and Blue Prism is exploring options for a primary listing on a U.S. stock exchange. London investors are giving BPRMF absolutely no love. Is a revaluation of Blue Prism coming soon with the pending UiPath IPO? Even if UiPath does deserves a 3x higher multiple for its higher growth and top dog status, BPRMF would see its shares more than triple on a valuation reset. This is why I’m still holding my position in BPRMF.
FINAL THOUGHTS
All the companies (except Blue Prism which only reports results every 6 months) in the portfolio reported outstanding results. How can an investor not be pleased with the progress and the results? The second half of February and March were brutal months for the portfolio. As is often the case, the ~35% selloff occurred right after a series of new portfolio ATHs in the first half of February. Some ask when will the slide stop and when will the stocks recover to their previous highs. No one can know for sure, and I certainly don’t claim to have any special forecasting ability. However, given the outstanding results that each of my portfolio companies just posted and given what I believe will be at least another two great years of performance (i.e. business fundamentals), I believe that great things are likely to continue. Yes, valuations of these companies have expanded in recent years, and a reset contraction could happen. It’s possible, and I can’t be sure if valuations are resetting. But if the revenue growth and operating leverage continue as I expect then even significant valuation compression can be overcome within two years or less. This is the bet that I’m continuing to make by staying invested, and the leverage (by converting shares to options as described above) that I added during March is a doubling down on that bet. Time will tell how this will work out for the portfolio, and I most certainly will be making adjustments as conditions change and new information gets revealed.
I expect to post the next portfolio update in early May after the first portfolio companies release their March 2021 earnings reports.
The opinions, thoughts, analyses, stock selections, portfolio allocations, and other content is freely shared by GauchoRico. This information should not be taken as recommendations or advice. GauchoRico does not make recommendations and does not offer financial advice. Each person/investor is responsible for making and owning their own decisions, financial and otherwise.