All the portfolio companies have now reported their results. I’ll go over some of the highlights and my thoughts below. Well, 27Jan was not the bottom of this huge drop that began after 18Oct 2021. I was wrong about that. The volatility in the portfolio and the markets in general have continued, and I continue to hang on tightly while the portfolio swings wildly. I’ve been through huge drops like this on several previous occasions: the 2001 dot.com bust, the 2008/2009 financial crisis, and my 2015/2016 disaster. This drop is on par (percentage-wise) with those previous declines. I’ve recovered from each of these past selloffs, and the recoveries’ durations were much shorter than I had expected. For younger investors who haven’t been through this before, do not despair for time is our friend. I’ve often said that this style of investing will result in 50%+ drops at some point. It’s inevitable. It’s easy to say that one can take a 50%+ hit, but when it actually happens, it turns the theoretical into reality. Only then will someone truly know if this style of investing is for them. Also, investing in hyper growth stocks doesn’t need to be an all-or-none endeavor; it’s easily possible to invest a sub-portfolio in hyper growth companies. For those who continue with this approach, one of the most important things to remember is that we are stock pickers. Some hyper growth companies will widely succeed while others will fail. Some of these companies will succeed but won’t turn out to be good investments. Our job is to analyze company by company and to make bets on the companies that will not only succeed but also be good/great investments. We must make distinctions. We must also change our minds and our portfolio composition when we get new information that we believe will affect the future outcome.
In this update, I will skip the Notable Days for the Portfolio and the Weekly Performance sections. I’ll add these back in future updates.
PRIOR PORTFOLIO UPDATES
PORTFOLIO PERFORMANCE
| DATE | GauchoRico Portfolio (YTD) | S&P500 Total Return (YTD) |
|---|---|---|
| Jan22 | -31.7% | -5.2% |
| Feb22 | -32.6% | -8.0% |
The portfolio ended February slightly lower than the end of January. The first half of March showed continued volatility. As of 18Mar, the portfolio was down 37.9% YTD while the S&P 500 was down 6.1% YTD. Thus, the gap between the GauchoRico portfolio’s YTD return and the S&P 500’s remains very wide at -31.8%.
ALLOCATIONS
| TICKER | 3/18/22 | 2/28/22 | 1/31/22 | 12/31/21 |
|---|---|---|---|---|
| DDOG | 33.4% | 35.7% | 36.8% | 31.7%* |
| ZS | 16.0%* | 16.2%* | 12.6%* | 4.3%* |
| CRWD | 14.1%* | 8.3%* | 6.4%* | 5.9%* |
| MNDY | 10.5%^ | 9.1%^ | 26.0%^ | 27.5%^ |
| SNOW | 10.0%** | 18.1%** | 18.4%** | 15.5%** |
| S | 5.4% | 5.1% | — | — |
| NET | 4.0% | 3.9% | 3.2% | — |
| UPST | 3.7%* | 4.6%* | 3.5%* | 14.7%* |
| AFRM | — | — | 3.8% | 7.4% |
| Cash | 6.8% | 2.3% | -5.6% | -4.0% |
Five of the eight positions in the portfolio are leveraged with long-term call options. CRWD: of the 14.1% allocation, 9.9% are shares and 4.2% are Jan2023 $190 calls. ZS: of the 16.0% allocation, 15.0% are shares and 1.1% are Jan2023 $280 calls. SNOW: of the 10.0% allocation, 8.7% are shares and 1.3% are Jan2024 $300 calls. MNDY: of the 10.5% allocation, 10.0% are shares, 0.6% are Dec2022 $250 calls. UPST: of the 3.7% allocation, 3.0% are shares and 0.8% are Jan2023 $330 calls. Note: there are some rounding errors in the preceding shares/call options splits. The DDOG, S, and NET positions are all shares. The portfolio is comprised of 7.9% in long call options, 89.2% in shares, 6.8% cash, and -3.9% in short put options.
PORTFOLIO CHANGES
Changes since 31Jan 2022
I haven’t made many changes since the last portfolio update, and I’ll explain my rationale for my allocations later in this update.
- SNOW: Decreased my SNOW allocation from about 18% to about 10%. Unfortunately, I made this change after the Q4 results were announced.
- CRWD: Increased my CRWD allocation from about 8% to about 14% after the Q4 result.
- MNDY: Decreased MNDY shares in advance of their Q4 earnings announcement.
I’ve also made some changes to my leverage and cash position. I’ve had some leverage (including long call options, negative cash (margin), and short put options) in place for most of this selloff that began in late October 2021. Since the last portfolio update, I’ve reduced all three forms of leverage.
Long calls: I closed half of the long calls on CRWD and used the proceeds to buy CRWD shares; although the conversion did not change my CRWD allocation, it lowered the number of shares that I control.
Short puts: Exposure from short puts was reduced slightly. Losses from short puts have increased the decline of the portfolio since the last peak on 18Oct 2021.
Cash/margin: Margin was eliminated, and cash was increased. This change will reduce the rebound when the portfolio’s stocks increase. On the other hand, the cash will provide a long runway to ride out this slump (see Final Thoughts section).
PORTFOLIO COMPANIES EARNINGS
All eight of my portfolio companies reported earnings results since my last portfolio update. Below are some highlights and my thoughts about each company following the results. I’ve arranged them in order by the earnings result date.
DDOG (Q4 FY2021 reported on 10Feb):
DDOG reported Q4 FY2021 for the period ending 31Dec. Going into Q4, DDOG had been showing improving financial metrics. Revenue growth for the past four quarters was 51.3%, 66.8%, 74.9%, and 83.7% in the most recent quarter. Furthermore, Q2 guidance was for 70.9% but DDOG has beaten guidance by an average of 9.15% over the past four quarters. If DDOG were to beat by that average for Q2 then the revenue growth would further accelerate to 86.4% y/y. For the full FY2022 period, DDOG guided for 49% growth which is significantly higher than the 39% growth DDOG guided for at the end of last year. Yet, DDOG delivered full year growth of 70.5% on that initial 39% growth guidance.
Other financial metrics and KPIs showed continued strength. Non-GAAP gross margins have remained high and stable between 77% and 80% during each quarter for the past two years. This is an indication that competition is not eroding DDOG’s pricing power and that customers are satisfied to continue paying DDOG for what they see as valuable products and services. Revenue growth and the maintaining of high gross margin combined with improving efficiencies have enabled DDOG to exhibit continued operating leverage; this has been most notable during the past 12 months during which DDOG’s non-GAAP operating margin improved significantly: 10%, 10%, 13%, 16%, 22% for the quarters from Q4 2020 through Q4 2021. CFFO and FCF continued to grow as well with Q4 2021 marking the highest ever at $106.7M. In fact, FCF for FY2021 grew 201% over the prior year! This growth in operating leverage and cash generation is in spite of massive continued investments in R&D and Sales and Marketing. Year over year customer growth (33% overall, 64% customers >$100K ARR, and 114% customers >$1M ARR) and 18 consecutive quarters of DBNRR >130% show that 1) customers are happy (spending more and more with DDOG), 2) new customers are flocking to DDOG, and 3) DDOG’s new products are being successfully introduced and sold.
I can’t find anything wrong with DDOG’s performance and execution. I think Q4 was as close to a flawless quarter as one can find, and, in the context of the recent preceding quarters, things look even more positive on a backward-looking basis. So what about the continued prospects going forward?
Clearly, the financials and KPIs show incredible strength and no slowing. As an investor, I love it when the numbers (evidence) line up with management’s rhetoric. A mismatch in this regard can spell coming trouble. The rhetoric can also give an indication of what’s to come. Not only has DDOG’s rhetoric matched the Company’s performance, it also offers great optimism for what we can expect in the coming quarters.
For investors or prospective investors who haven’t heard or read the last few earnings calls/transcripts, I’d suggest looking them over. Specifically, I’d pay attention to what management said in response to questions about changes in the market and competitive landscape and what DDOG might do differently. The answers are almost universally that things haven’t changed, things are working great (might experiment with some things), demand remains strong, etc. There seem to be zero indications that DDOG might slow down anytime soon.
NET (Q4 FY2021 reported on 10Feb):
NET reported Q4 FY2021 for the period ending 31Dec. Despite the large share price drop, NET remains expensive, just a bit less so now. In Q4 2021, NET’s revenue growth accelerated slightly to 53.7% (from 51% in the prior quarter and from 50% in the year ago quarter). For the past two years, NET’s revenue growth has been trending up ever so slightly. There have been so many new products and services introduced so investors’ expectation (mine included) is that revenue will accelerate more significantly at some point. Significant federal government business could come in the back half of 2022 so that could help juice the growth rate. I’d also expect for the growth runway to be quite long considering NET’s increasing TAM. Yes, NET is my slowest growing portfolio company, and, with the high valuation, I’ll keep the allocation small (until the Company can prove that it can grow faster).
UPST (Q4 FY2021 reported on 15Feb):
UPST reported Q4 FY2021 for the period ending 31Dec. I explained in my last portfolio update why I reduced my allocation. I still believe that UPST has great potential but by no means is UPST’s success assured. There are also many risks that could derail UPST’s ambition of being a behemoth fintech company. For Q4, UPST delivered another great quarter with 252% y/y revenue growth, continued profitability, and even authorized a new (and first of its kind for UPST) $400M share buyback. Clearly, management is signaling that it believes its share price is cheap and its future bright. But UPST’s own confidence doesn’t remove the existence of the many risks, some of which are beyond the Company’s control. Will UPST’s artificial intelligence algorithms perform well enough under various stages of the economic cycle? Will UPST’s personal loan business hit saturation? Will lenders’ confidence in the the efficacy and predictive value of UPST’s AI underwriting remain durable? Will UPST’s new initiatives into auto, mortgage, small business, etc. repeat the success seen in personal loans? Will UPST be able to continue to securitize loans underwritten by its AI algorithms? Will investors continue to be willing to fund purchase loans powered by UPST? These and other questions cannot be answered today, and investors will need to watch how the answers unfold. So, yes, UPST is growing fast, is profitable, and has great potential as it tackles to disrupt gigantic markets, but the risks of failure or business performance stagnation will remain for the foreseeable future. Therefore, the prudent choice for me is to maintain a small position in this high-risk/high-reward investment.
MNDY (Q4 FY2021 reported on 23Feb):
MNDY reported Q4 FY2021 for the period ending 31Dec. I previously had a large position (>25% allocation) in MNDY because the company had been demonstrating superb revenue growth (>90%) and customer acquisition along with a relatively reasonable valuation (compared to other hyper growth SaaS companies). However, there were and still are several significant risks that should have tempered my enthusiasm to allow for such a large allocation. I corrected this allocation “problem” by selling some shares in advance of the earnings release.
The key questions that I have are 1) will growth continue strongly enough, and 2) will MNDY be able to show enough operating leverage (particularly on the Sales & Marketing expense line) to become a profitable cash producing business. So far the growth has been above 90% y/y, but the 54% full-year guidance for 2023 may not leave enough room for beats and raises to continue the recent growth trajectory. Customer growth has been strong and the Company will be introducing new products so perhaps growth will continue to be stronger than recent guidance suggests. Spending on R&D and G&A are already at reasonable levels, but S&M expenses remain elevated at 73% of revenue (same as Q3 FY2021); this metric needs to improve significantly so we better start to see operating leverage resume. Such improvement may not come in Q1 because MNDY spent a fortune on their Super Bowl advertisement.
MNDY is definitely a company with a lot of opportunity, but its future as a successful, highly profitable business is not as assured as my portfolio companies with higher allocations.
ZS (Q2 FY2022 reported on 24Feb):
ZS reported Q2 FY2022 for the period ending 31Jan. Revenue growth continued strongly and accelerated slightly sequentially from 61.7% to 62.7%. It appeared that investors were disappointed (stock dropped significantly after the results were announced) by the calculated billings growth which dropped to 58.6% growth from the low 70%s. The company said that the U.S. federal government business was lighter than expected, but we can expected this federal business to improve: there’s much focus on cybersecurity, and ZS has the highest FedRAMP certification. The guidance for next quarter (Q3) was for 54% revenue growth and a 5.5% beat would maintain revenue growth achieved in Q2. To me, it appears very likely that ZS’s slight revenue growth acceleration will continue, particularly in light of security spending tailwinds.
The table below shows ZS’s target operating model and how the Company has been performing and scaling its business to achieve the target.
| Long-Term Target | Q2 FY22 | Q1 FY22 | FY21 | FY20 | FY19 | FY18 | |
|---|---|---|---|---|---|---|---|
| non-GAAP GM | 78-82% | 80% | 81% | 81% | 80% | 82% | 80% |
| S&M Exp | 33-37% | 50% | 48% | 47% | 48% | 47% | 59% |
| R&D Exp | 15-17% | 15% | 16% | 15% | 15% | 15% | 19% |
| G&A Exp | 7-8% | 7% | 6% | 7% | 8% | 9% | 11% |
| Op Margin | 20-22% | 9% | 10% | 12% | 9% | 11% | -8% |
| FCF Margin | 22-25% | 12% | 36% | 21% | 6% | 10% | 1% |
The non-GAAP gross margins have been steady and strong for years showing that ZS offers its customers differentiated and sought after products and services. As companies scale, the operating expenses should come down as a percentage of revenue until the target is reached. Some companies can never scale and/or reach profitability. For investors, it’s very important to distinguish companies the will be able to scale and reach profitability from those that will not. In a previous post, I’ve written about how I evaluate and monitor companies in this regard. The above table shows that ZS reached its operating targets for R&D and G&A about three years ago; all of the operating leverage has already been squeezed out of those two expense categories. Sales & Marketing is still running at a level that’s 13-17% above the target model, and it hasn’t been showing any signs of leverage (for S&M) for more than three years. Other SaaS companies like DDOG (23.3% spent on S&M in Q4 FY21) and CRWD (32.6% sent in S&M in Q4 FY21) have scaled their S&M operations more effectively. Why the discrepancy? There could be several reasons. DDOG seems to be in a league of their own in terms of customer acquisition cost (CAC), but DDOG is very R&D intensive as the company spends much on R&D (DDOG spent 28.6% of revenue in R&D compared to ZS’s 15% of revenue). Also, both DDOG and CRWD sell many modules making expansion selling to customers much less costly. Also, CRWD and DDOG make very effective use of partners such as AWS to complement their own S&M efforts. ZS has historically sold large deals which can extend the sales cycle, increasing CAC. ZS is a smaller company ($859M in TTM revenue compared to CRWD’s $1452M and DDOG’s $1029M) and may need more time to scale. Whatever the reason or combinations of reasons, ZS presently has a less efficient S&M organization that requires future realization of operating leverage if the Company is to reach its operating model target. It’s something to watch in the quarters ahead.
SNOW (Q4 FY2022 reported on 2Mar):
SNOW reported Q4 FY2022 for the period ending 31Jan. Going into the report, I saw SNOW as the clear category leader in its data cloud market. Growth had been incredibly high, and I expect growth to continue at very high levels for many years to come. The valuation has already been among the highest, if not the highest, of the publicly traded hyper growth software companies. For me, the reasons for holding this high valuation company has been that I expect the growth runway and the total addressable market to be much higher than many other investors expect. Furthermore, as I’ve described in several past portfolio updates, I see data sharing as a huge growth vector. So let’s see how did SNOW do in Q4 FY2023.
SNOW delivered 101% total revenue growth (102% product revenue growth), which was a little lower than I had anticipated but still within the acceptable range. A software consumption business model, like SNOW’s, can post more lumpy results than a software subscription model. Thus, I don’t get overly concerned when the results are a little lighter than I expect as fluctuations are to be expected. The full year FY2023 guidance for product revenue growth was for 67%. A year ago the Company guided for 84% growth and hit 102% growth (product revenue). Many investors will assume that growth will likely slow to 85-90% for FY2023. This is the likely reason for sharp stock price drop after the Q4 earnings release.
SNOW also reported that throughout calendar 2023 the Company will make improvements that will improve customers’ utilization efficiency by 10-20%. In other words, customers will be able to do more with the same computations effort (cost). The company assumed a $97M revenue hit from these efficiency improvements during FY2023, so the guidance would have been for 75% without this change. In the long-run, the efficiency improvements will drive more use cases and workloads to Snowflake. As investors, we can expect such improvements periodically. Efficiency improvements such as this one and the prior storage cost improvement expands the total addressable market and raises the barrier to entry for competitors.
I continue to believe that data sharing will provide huge growth ahead for SNOW. SNOW reported some metrics related to its data sharing. There are now 285 companies that are “powered by Snowflake”; that’s up 110 companies sequentially! Data Marketplace listings grew by 195% in FY2022, the company now has more than 230 data listings providers, up 15% sequentially. The number of stable edges grew 130% during the fiscal year. On 17Mar, SNOW launched the Healthcare & Life Sciences Data Cloud that will enable secure and private data sharing among its users; this new data cloud also allows users to meet all regulatory and compliance standards in the heavily regulated healthcare industry. Healthcare/Life Sciences joins the Financial Services Data Cloud and the Media Data Cloud as the third data cloud on Snowflake. We can expect SNOW to create new data clouds for its other industry verticals. I continue to be pleased and satisfied with SNOW’s progress in the area of data sharing, and this is an important reason why I think that others are still underestimating SNOW’s future growth and potential.
SNOW is also making great progress to profitability, realizing operating leverage and cash flow as the Company scales (see figure below).
In the most recent quarter, SNOW’s adjusted FCF margin was 27%, and the full-year guidance is for 15% all while SNOW continues to invest heavily in growth. SNOW is on a good path to attain increasing levels of profitability.
Despite SNOW’s good performance, I cut my allocation from about 18% to about 10%. I think the lower allocation is more appropriate given the still high valuation of SNOW shares.
CRWD (Q4 FY2022 reported on 9Mar):
CRWD reported Q4 FY2022 for the period ending 31Jan. Going into the report, CRWD’s revenue growth had been decelerating in the face of what should have been strong tailwinds from increased emphasis on cybersecurity. I had postulated three possible explanations for the revenue growth rate decline. First, competition from other vendors notably SentinelOne (S) and Palo Alto Networks (PANW); could these competitors be landing customers that might otherwise land with CRWD? S’s numbers are getting larger each quarter, so perhaps S is finally having a noticeable impact on CRWD’s growth. Meanwhile, PANW’s next generation business is gaining traction. Second, CRWD may be facing the law of large numbers. Third, CRWD may have gotten a boost from the early days of the pandemic when many businesses added new endpoints (i.e. more devices needed for the work-from-home workforce); this boost could have made for tough year-over-year comparisons. Whether the growth slowdown from the mid-80% level to the mid-60% level can be attributed to one factor or multiple factors, as investors we want to see a stoppage of the growth decline or better yet a reversal. I’ve been more patient with CRWD than some other investors who sold their positions. However, my patience was starting to wear thin as I had significantly reduced my position.
I was pleased and somewhat relieved when I saw the Q4 FY2022 result. The year-over-year revenue growth sequence (oldest to most recent) was 85.8%, 74.2%, 70.1%, 69.7%, 63.5%, and 62.7%. So has the growth rate decline stopped? The initial FY 2023 revenue guidance was for 49% growth; for FY 2022 CRWD had initially guided for 51% growth yet the Company delivered 66% growth. Thus, the guidance certainly makes a mid-60% growth for FY2023 feasible and likely; and that’s without factoring in a significant bump in federal government business which represents upside.
| Long-Term Target | Q4 FY22 | Q3 FY22 | Q2 FY22 | Q1 FY22 | FY21 | |
|---|---|---|---|---|---|---|
| Sub Rev GM | 77-82%+ | 79% | 79% | 78% | 79% | 79% |
| S&M Exp | 30-35% | 32.6% | 36.6% | 37.9% | 38.7% | 43.5% |
| R&D Exp | 15-20% | 17.2% | 18.5% | 19.1% | 19.9% | 21.7% |
| G&A Exp | 7-9% | 8.4% | 7.8% | 8.8% | 8.3% | 9.5% |
| Op Margin | 20-22%+ | 18.7% | 13.3% | 10.5% | 9.8% | 7.7% |
| FCF Margin | 30%+ | 29.5% | 32.5% | 21.8% | 38.7% | 33.5% |
The above table shows CRWD’s long-term target operating model (last updated by the Company on 8Apr 2021). CRWD has made steady progress in getting to its target. In Q4, the last operating expense category (S&M) fell into the target range, joining R&D and G&A which had already reached their targets several quarters ago. It’s impressive that S&M improved by 400 bps in one sequential quarter; we’ll see if CRWD can maintain this S&M spend percentage going forward. It’s also impressive that CRWD’s S&M team has become more efficient which could suggest that competition is not currently impacting its customer acquisition efficiency (a good sign for investors who were concerned that competition might be affecting the speed and cost of acquiring new customers). Essentially, CRWD is now a scaled business throwing off lots of FCF. Of course, not all hyper growth companies will be able to fully scale and reach this level of FCF generation.
The latest result has me convinced that CRWD is back on track and that growth is unlikely to significantly slow in FY2023. A dominant mid-60% (with upside) grower with ~30% FCF margins deserves more than a mid-sized allocation in the portfolio. The real question now is for how long can CRWD maintain its revenue growth rate; that’s a risk for its valuation can take more of a hit if the top line growth resumes its slide. I don’t think that’s going to happen and after the Q4 result, I increased my allocation significantly.
S (Q4 FY2022 reported on 16Mar):
S reported Q4 FY2022 for the period ending 31Jan. Going into the Q4 FY2022 (and in general), I had main three concerns about S. First, S operates in a more competitive environment than some of my other other portfolio companies; thus, S’s growth can not only be dampened by competitors soaking up available TAM but also be make customer acquisition more costly. CRWD faces the same issue, but CRWD is currently the category leader which is the second issue with S: S is not the dominant company in its category (SNOW, ZS, CRWD, and DDOG are all the undisputed category leader). I don’t see S usurping CRWD as the category leader, but its revenue growth and other growth metrics have been superb enough to keep me invested. The third and final concern was (is) the highly negative operating margins. This raises the question whether S can sustain high growth for long enough to achieve profitability and high and increasing levels of free cash flow. The first and second concerns can only compound the third concern for if S isn’t the dominant competitor then it will be more difficult and more costly to win customers and new ARR. For these reason, I doubt whether S will ever be allowed to become a large position in my portfolio. However, as long as growth remains astonishingly high and as long as the Company makes good progress toward profitability, I can make an argument for keeping a small position. So how did S do in Q4 FY2022?
S delivered on the top line with 120% year-over-year revenue growth. The sequence of revenue growth for the past 5 quarters (most recent last) was 96%, 108%, 121%, 128%, and 120%. Other growth metrics, including ARR, customers, customers over $100K ARR, customers over $1M ARR, and net retention rate, all remained very solid as well. Q1 guidance was strong as well with 100% growth guided at the top end. Full year guidance was 81% with four opportunities for beat and raises. No signs of trouble at all. S also made significant progress on its path toward profitability, improving its non-GAAP operating margin from -104% in Q4 2021 to -66% in Q4 2022; the sequence of operating margin for the past five quarters (most recent last) looks like this: -104%, -127%, -98%, -69%, and -66%. S has recently made a series of partnership announcements and announced a new acquisition (Attivo Networks) that’s designed to extend S into adjacencies (identity security) and expand the TAM by $4B. In conclusion, with the Q4 FY2022 result, S continued to maintain growth while improving its operating margin. Guidance suggests that this will continue on both counts. The competitive market dynamics coupled with S’s lack of dominance will subject S to a small position in the portfolio (so long as its growth continues to be outstanding and its march toward profitability continues).
ALLOCATION DECISIONS AND DISCUSSION
Above I’ve reviewed and discussed each of the portfolio companies. For the most part, the companies that have high allocations in the portfolio have four characteristics: 1) high growth (and continued into the future), 2) profitability, 3) dominance within its target markets, and 4) a durable competitive advantage. DDOG and CRWD have positive earnings per share and most of the others are cash flow positive. In general, starting in January and since then, I increased the concentration into companies that meet the four characteristics (DDOG, ZS, CRWD, and SNOW) and reduced the concentration of the more speculative companies (UPST, AFRM, and MDNY) even if they have more potential.
DDOG is a clear outlier in performance and future prospects, and its allocation deserves to be the highest. However, a 1/3 allocation is high, probably too high, and I expect to reduce the allocation at some point purely to manage risk. I believe that CRWD is back on track so I adjusted its allocation significantly upward. ZS’s allocation is higher than CRWD’s mainly because I believe that ZS has less competition that could affect its future performance. I reduced SNOW because I decided that it was too high given its high valuation; should SNOW’s growth slow significantly, its share price could be susceptible to further declines; however, I continue to believe that SNOW’s long-term future looks bright due to the huge addressable market and durable competitive advantage; a 10%-ish valuation seems appropriate. I significantly cut MNDY’s allocation for the reasons I stated above (see MNDY in the previous section); allowing the prior high allocation was a mistake. NET, UPST, and S all deserve a small allocation for the reasons that I discussed in the previous section.
The portfolio remains invested solely in hyper growth companies. In the long-run, I will likely allocate a portion of my portfolio into non-hyper growth investments as I will seek to avoid another huge drop. This decision would be more of a reflection of my personal circumstances of already having attained enough assets; thus, I would be willing to accept a lower long-term CAGR. But, today is not the time for that decision because the big drop has already occurred and the risk-reward for my hyper growth companies is currently too great.
FINAL THOUGHTS
At the end of my last portfolio update, I wrote that I was optimistic about my portfolio and the companies within it as I looked forward. So far, I’ve been wrong about that. My portfolio currently sits below the end of January 2021 level, and the ride between then and now has been extremely volatile. In addition, much has changed in the world in the past seven weeks. Perhaps it’s more than the world is now more aware and focused on what’s happening geopolitically. I feel that the world has gotten a lot more unstable, and I bring this up here because the events that are unfolding in the world are affecting how I view risk and, in turn, how I make some allocation and investing decisions. I have decided to increase my cash buffer mostly to position myself to cover my expenses for several years should things come off the rails.
What’s happening in Ukraine is particularly frightening, especially since it’s happening in full view of the world’s media. The tragic events in Ukraine are horrifying and almost unbelievable, and I don’t want to minimize the suffering that’s occurring because that is far worse than the indirect impacts (on my portfolio) that I’m about to discuss. Going into the crisis supply chains were already disrupted from the pandemic; this was a significant contributor to the inflation that the world is seeing now. Well, I think that we’re going to see more supply chain issues coming, and more inflation as a result. Companies have now seen how harmful it can be to business when supply chains get disrupted. Perviously, companies optimized based on lower costs, so much was outsourced to China and other more efficient and low cost manufacturing locations. Russia’s invasion has shown the world what a dictator will do to protect his power. What would China do to stay in power? Probably what China’s authoritarians fear the most is losing their grip on power. It’s important to consider China here because China manufactures so much of the world’s physical goods. Fortunately, the economic prosperity of their citizens is one of the most important factors in retaining power (and authoritarian rule); an unhappy population may rise up. But companies will now weigh the security of their supply chains much more heavily than before. Thus, I expect more companies will move production closer to their geographic markets and to countries that have a low risk of government interference. This transition will take time and increase costs until automation can be developed and implemented to once again lower production costs. We are also seeing major disruptions in the energy and food sectors as the much of the world’s GDP moves away from Russian petroleum and replaces food and fertilizer productions from Russia and Ukraine. I think we can expect more inflation as a result. Who knows what else will develop in the coming weeks and months. SaaS companies are not directly exposed and impacted my most of these shocks to the world’s economy, but there could be indirect effects and unforeseen problems.
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.