This is the second portfolio update of 2023. The last of my portfolio companies, CRWD, reported results this past week.
PRIOR PORTFOLIO UPDATES
PORTFOLIO PERFORMANCE
This year is turning out to be an interesting year with a handful of companies showing tremendous strength, some even posting triple digit returns. However, most companies haven’t fared well so far this year. The portfolio closed May up 11.1% compared to the S&P 500’s YTD up 9.6%. The portfolio still has an 18.2% cash position and has had between 18% and 35% cash throughout 2023; therefore, the YTD outperformance over the S&P 500 during 2023 would have been greater had the portfolio been fully invested. Given the tough 2022, an 11.1% YTD gain is tiny but it’s a start.
| DATE | GauchoRico Portfolio (YTD) | S&P500 Total Return (YTD) |
|---|---|---|
| Jan23 | -3.4% | -6.3% |
| Feb23 | 2.5% | 3.7% |
| Mar23 | 3.3% | 7.5% |
| Apr23 | -0.7% | 9.2% |
| May23 | 11.1% | 9.6% |
| 2Jun23 | 14.4% | 12.4% |
Weekly Performance
| DATE | GauchoRico YTD | S&P500 TOTAL RETURN YTD | DELTA |
|---|---|---|---|
| 01/06/23 | -6.1% | 1.5% | -7.6% |
| 01/13/23 | -1.0% | 4.2% | -5.2% |
| 01/20/23 | -1.5% | 3.5% | -5.1% |
| 01/27/23 | 4.9% | 6.1% | -1.3% |
| 02/03/23 | 3.0% | 7.9% | -4.8% |
| 02/10/23 | 1.2% | 6.7% | -5.6% |
| 02/17/23 | 3.0% | 6.5% | -3.5% |
| 02/24/23 | 0.6% | 3.7% | -3.0% |
| 03/03/23 | 1.7% | 5.7% | -4.0% |
| 03/10/23 | -5.1% | 0.9% | -6.0% |
| 03/17/23 | -3.7% | 2.4% | -6.1% |
| 03/24/23 | -3.4% | 3.9% | -7.3% |
| 03/31/23 | -3.3% | 7.5% | -4.2% |
| 04/06/23 | -0.7% | 7.4% | -8.2% |
| 04/14/23 | 0.5% | 8.3% | -7.8% |
| 04/21/23 | 2.5% | 8.2% | -5.6% |
| 04/28/23 | -0.7% | 9.2% | -9.9% |
| 05/05/23 | 2.2% | 8.3% | -6.1% |
| 05/12/23 | 5.5% | 8.1% | -2.6% |
| 05/19/23 | 8.0% | 9.9% | -1.9% |
| 05/26/23 | 8.2% | 10.3% | -2.1% |
| 06/02/23 | 14.4% | 12.4% | 2.0% |
ALLOCATIONS
| 5/31/23 | 4/30/23 | 3/31/23 | 2/28/23 | 1/31/23 | 12/31/22 | |
|---|---|---|---|---|---|---|
| SNOW | 14.4%* | 22.6%^* | 23.6%^* | 23.3%^* | 22.0%* | 21.0%* |
| ENPH | 12.5%^ | 11.7% | 10.3% | 6.2% | 1.9% | 0.7% |
| BILL | 12.2% | 11.2%^ | 11.4%^ | 12.0%^ | 11.6% | 6.9% |
| TTD | 11.0% | 11.3% | 10.3% | 9.5% | 8.5% | 7.8% |
| CRWD | 8.5% | 5.6% | — | — | 0.1%* | 0.2%* |
| MELI | 8.4% | 9.7% | 9.7% | 9.0% | 8.7% | 6.4% |
| CELH | 5.7% | — | — | — | — | — |
| DDOG | 4.8% | 2.8% | 1.8% | 1.9% | 14.0% | 14.2% |
| VTLE | 3.3% | 2.4% | — | — | — | — |
| TMDX | 1.6% | — | — | — | — | — |
| LNG | — | 1.9% | 3.1% | 3.1% | 3.0% | 3.0% |
| CLFD | — | — | — | — | 4.4% | 5.9% |
| Cash | 18.2% | 19.9% | 30.3% | 34.9% | 26.3% | 34.1% |
The allocation details described below are as of the end of May 2023. Two of the ten positions in the portfolio are leveraged with long-term call options. ENPH: of the 12.5% allocation, 11.1% are shares and 1.4% are Jan2025 $155 calls. SNOW: of the 14.4% allocation, 14.3% are shares, 0.1% are Jan2024 $300 calls. The portfolio is comprised of 1.7% in long call options, 80.9% in shares, and 18.2% cash.
PORTFOLIO CHANGES
Changes since 3Mar 2023
- CRWD: restarted a position and added several times.
- LNG: sold small position in May.
- VTLE: bought small position in April and added in May when I sold LNG.
- CELH: started position before Q1 earnings; added after earnings.
- ENPH: added in late March/early April and after earnings.
- DDOG: added to position.
- SNOW: reduced position significantly; sold Jan’25 $155 calls; still largest holding.
- TMDX: started position in early May.
EARNINGS RESULTS
Since the last portfolio update, all portfolio companies reported their latest quarterly results. I’ll go through them in the order that they reported results.
ENPH (reported results on 25Apr)
ENPH reported 64.5% revenue growth for Q1 FY23. Non-GAAP gross margin continued to expand to 45.7%. Free cash flow grew 148% y/y, and the Company’s FCF margin was 30.8%. New and better batteries for the storage of energy produced by the solar systems and a bi-directional EV charge should be available later this year and next year. All sounds pretty great. Why did the stock drop 25% after the earnings result?
ENPH’s U.S. business is being impacted by high interest rates as homeowners will pay more for systems that are financed. There’s also a perception issue with California’s new net metering law. Europe’s business is still growing great. Management issued guidance of $750M in revenue for Q2; note: ENPH doesn’t issue full year guidance. This revenue guidance would deliver 41.5% revenue growth for Q2. Likely, the guidance combined with the comments about the challenges in the U.S. market caused the stock to drop. Even with the recent increase in the stock price (from about $155 to $182), ENPH trades at a multiple of 31x TTM FCF. Considering that the company is growing revenue above 40%, the stock is not expensive unless growth really starts decelerating. Europe is continuing to show great strength, and, as Europe’s proportion of ENPH’s revenue increases, the overall company’s growth rate will be supported. The new products will also help later in 2023 and 2024 to support growth. Furthermore, demand for electricity and for storage of energy (batteries) will increase as electric vehicles increase their share of the market. Demand for electricity will continue to displace demand for gasoline as the global fleet of EVs grows and the fleet of ICE vehicles shrinks.
I increased my position in ENPH after the stock dropped following the Q1 earnings release.
TMDX (reported results on 1May)
I took a small position in TMDX the day after the Company reported its Q1 results. I had previously analyzed TMDX but decided to pass for a number of reasons. First, while revenue growth has been and continues to be very high, I expect growth to slow at some point. Second, I didn’t see opportunity for significant growth internationally as there is a competitor in Europe and there’s no obvious effort to expand in Asia. Third, while kidney is the largest transplant market (TMDX is not yet approved for kidney), kidneys are less fragile and more resilient when on ice than hearts, livers, and lungs; therefore, the value difference between TMDX’s organ transport system compared to other transport systems is not as wide for kidney as it is for heart, liver, and lung. Fourth, the overall market for transplantation is not growing as fast as it is for the markets targeted by my other portfolio companies (i.e. increase of people needing transplants isn’t growing fast compared to say the creation of new data). For these reasons, I took only a small position, and I have no intention of adding to the position. So why did I take a position at all? Last quarter, TMDX grew revenue 162% y/y. As long as revenue grows at these high rates, I’ll likely keep my small position. I’ll monitor the growth each quarter and will likely keep the small position if the Company keeps delivering.
MELI (reported results on 3May)
MELI reported another very strong quarter (Q1 FY23). Net revenue was up 58.4% y/y to $3B, total payment volume (TPV) was up 96.1% (TMV growth >100% off-platform) to $37B, and GMV was up 43.3% to $9.4B. Each of these growth rates is in constant currency and is a sequential acceleration (over Q4 FY22)! In U.S. dollars, MELI grew 35% (difference being due to inflation and exchange rate changes). The Fintech business grew 46% in U.S. dollars (96% in constant currency), and MELI continues to manage the credit risk well with the non-performing loan ratio continuing to fall (now at 9.5% and down from 10% sequentially). MELI continues to dominate in Latin America and perform above my expectations. I see no reasons to change my allocation.
DDOG (reported results on 4May)
I had sold most of my DDOG shares right after the Q4 FY22 earnings announcement because the shares didn’t decline much. Several weeks prior to the Q1 FY23 announcement I added back some shares (after the shares had declined significantly) because I believe DDOG’s challenging times will be short-term and because I expect DDOG will be a big beneficiary of increased cloud computing workloads for years to come.
For Q1, growth continued to decelerate to 33% growth, down from 44% sequentially. The other key performance indicators (KPIs) were good enough. However, optimization of cloud spend continued as it has for the past several quarters. Eventually, optimization will ease and growth should reaccelerate. Management continues to see no change to their optimistic long-term outlook. To realize the productivity and other benefits of AI, organizations will continue to move workloads into the cloud and develop new applications that will need to be monitored and protected. This is where DDOG will benefit. For these reasons, I’m continuing to hold a position in DDOG.
BILL (reported results on 4May)
Going into Q3 earnings, I was concerned that BILL’s weak January quarter would extend into the April quarter. These concerns were not realized. While BILL’s customers, which are predominantly SMBs, continued to operate their businesses with tight purse strings, BILL delivered an excellent Q3 with 63% revenue growth, an 87% non-GAAP gross margin, and a 31% FCF margin. Customer growth was excellent with 15,200 BILL stand-alone customers added representing 35% y/y growth. Of these, 3700 were from the direct and accounting channels while 11,500 were from their banking partner channel. If BILL can perform this well 1) during a challenging marco environment which should hit SMBs especially hard, and 2) during the Silicon Valley Bank crisis to which BILL had considerable direct exposure which BILL handled swiftly and superbly, then BILL is positioned extremely well for the time when macro improves and all their customers (including all the new ones that were added) return to normal spending patterns. Fortunately, I didn’t sell shares prior to earnings, and, after seeing these results, I decided to keep my entire BILL allocation.
TTD (reported results on 9May)
TTD grew revenue 21% y/y. The TTD earnings calls continue to sound the same to me. As usual, 1) CTV is growing fast, gaining in importance, and outpacing the overall market, 2) TTD continues to gain market share, and 3) UID2 continues to gain traction. TTD recently launched the TV Quality Index which helps advertisers quantify the quality of experience and brand relevance that consumers are having. TTD continues to lead the industry in developing innovations that enable advertisers better target ads, quantify a campaign’s effectiveness, and discover improved pricing.
TTD’s growth has slowed but the advertising market has been in a bit of a slump. TTD continues to take share and is increasingly well positioned to resume higher growth when companies spend more on advertising again. The stock price has run up quite a bit, and TTD currently trades at about 72 times TTM FCF which is expensive even considering that growth should rebound. I may decide to trim the position a little into this stock price strength.
CELH (reported results on 9May)
CELH is a new position which was started in early May (prior to earnings). CELH is an energy drink company that’s growing very rapidly. Last year, CELH entered into a distribution deal with Pepsi; this deal, which is in the process of getting implemented, is driving CELH’s huge growth. Monster Beverage was one of the best performing stocks of the last decade. Investors in CELH may be investing in CELH because they believe that CELH can do with PepsiCo what MNST did with Coca-Cola distribution-wise. So far CELH is in the process of rolling out distribution with Pepsi in North America. There are plans to expand more heavily into international markets in 2024. This leaves open the strong possibility that the recent explosive growth will extend into the rest of 2023 and 2024.
SNOW (reported results on 25May)
I went into earnings with SNOW as my largest allocation holding, but I had been trimming the position a fair amount. Unfortunately, SNOW didn’t deliver a great quarter. The full year revenue guidance was cut for a second quarter in a row: 47% after Q3 FY23 to 40% after Q1 FY24 and now down to 34% after the latest quarter. Management reported that growth stalled after Easter. Customers are continuing to be hesitant about making spending commitments because they have lower visibility about their own businesses. CFOs are getting involved and setting limits to spend on SNOW even when business leaders want to spend. SNOW’s management isn’t banking on any improvement in 2023 so they’re prudently taking down the guidance. If things do turn around sooner then there’s upside. Because SNOW operates on a consumption model, customer spending can be easily cut back during challenging times. This also means that customer spending can return very quickly once the customers’ outlook becomes more clear. As Slootman stated, cycles like these eventually run their course and the long-term outlook for SNOW remains unchanged. I tend to agree with this. Computing, increasingly driven by AI, is rapidly changing the world, and data is a key prerequisite to enabling AI to transform data into knowledge and then into better business decisions. SNOW enables organizations to utilize their own data as well as the data of their partners (via the various data cloud ecosystems that SNOW has built) and the data in the public domain. As an investor, I have a vision that SNOW will continue to successfully execute its plan to facilitate the movement of more and more data into its ecosystem thereby creating ROI positive and improved competitive advantage opportunities for its customers. I see that utilization of data from its various sources and forms with all of the regulatory, compliance, privacy, and security hurdles that SNOW enables their customers to step over will increasingly add value to customers making adoption of SNOW more essential. SNOW is one of the most expensive publicly traded software stocks so holding on through this current storm can be challenging and frustrating as an investor. Many investors I know have sold out of SNOW based on the past two earnings reports and the still sky high valuation. I completely understand their decision because staying invested at these levels requires an investor to look several years into the future and still believe that SNOW will execute and deliver on its vision without a current or future competitor outflanking SNOW or taking too much of the available market.
Data sharing is one of the aspects of Snowflake that makes their offering sticky. Data marketplace listings grew more slowly in Q1 showing 29% y/y growth but only 3% sequential growth. However, the Company added 149 customers to the Powered By Snowflake program which represented 128 y/y growth and 18% sequential growth. The proportion of customers with stable edges increased from 23% to 25% during the quarter. In Q1 1500 customers (or 18% of customers) utilized Snowflake for AI, ML, and/or data science workloads representing a 91% y/y increase; I expect that we’ll see further improvement in the quarters and years to come.
A big part of SNOW’s focus is to make it faster and easier to get customer data into Snowflake, and, once in, make that data as easy to manipulate and to turn into actionable knowledge. SNOW is not only developing capabilities and enhancements in-house but also acquiring companies that will speed up its product roadmap. The ease of use factor of Snowflake is a strong differentiator against DataBricks which I believe will help SNOW win the lion’s share of workloads. In addition, so far in 2023, SNOW has acquired four companies (Myst, Mobilize.net, LeapYear, and Neeva (announced)) and their collective 320+ employees. These acquisitions are being made without making a dent in SNOW’s cash war chest which hasn’t materially changed in the past 11 quarters. In addition, SNOW has no debt and minimal share dilution. In essence, SNOW’s growth is now primarily funded by cashflow generated by operations; it’s a beautiful thing when a high growing company can fund its growth solely from the CFFO. Adjusted FCF in the quarter was 46% of revenue! And on top of that there’s a share buyback.
The financial metrics in the quarter weren’t outstanding. SNOW grew product revenue by 50% y/y which while high is a slowdown from 84% growth a year earlier and 110% two years earlier. Customer growth slowed in Q1 as well: +4.3% sequentially and +29% y/y. RPO only grew 31% but this could be affected by customers electing shorter duration commitments. Current RPO was 57% of $3.4B so we can expect SNOW to book at least $1.94B in revenue during the next four quarters (this assumes gets no new business). As I’ve mentioned above, the financial metrics and the customer acquisitions during the quarter were underwhelming. Being an investor in SNOW will definitely require a lot a patience. I expect my patience will pay off several years in the future.
CRWD (reported results on 31May)
I had completely sold out of CRWD based on their Q3 FY23 result. After the Q4 FY23 result, CRWD’s business showed a tremendous bounce back; it was almost as if that Q3 didn’t happen and all the doom and gloom forecasted by management on the Q3 call didn’t materialize. I started buying back into CRWD and had built the portfolio’s allocation back up over 8% going into the Q1 FY24 earnings. So how did the Q1 FY24 result turn out?
Revenue growth was 42% showing continued deceleration. CRWD is still experiencing an elongated sales cycle, increased deal scrutiny, but resilient demand. CRWD continues to win 80% of deals when going head-to-head against MSFT. The deal win rate against other competitors remained similar to previous quarters. CRWD also reported a very solid sales pipeline. They are continuing to see reduced contract duration which can partly explain the RPO weakness. We are definitely in a tough environment; however, considering the challenging macro, CRWD is executing very well. The key metrics are showing continued strength. Non-GAAP gross margin on subscription revenue expanded to 80%, a record. The Target Operating Model target FCF was increased from “30%+” to “30-32%+” during CRWD’s investor update on 4April; this was the first change to the Target Operating Model in about two years. CRWD delivered another quarter of 33% FCF; while Q2 is typically the lowest FCF quarter and this trend will be more pronounced this year, CRWD maintains that the Company will hit 30% FCF margin for the full year because there’s strong confidence for a very strong second half. CRWD didn’t report their total subscription customers which they’ll report annually going forward. The percentage of customers using six and seven modules continued to tick up (percentage using five modules stayed flat). Dollar-based net retention continued at >120%. The net ARR increase actually decreased y/y and management warned that the first half of FY24 would continue to show this headwind.
Kurtz spent a considerable amount of time talking up AI. The main points were that 1) CRWD has been using AI since the beginning of the Company, 2) AI will make threat actors more powerful so cyber security companies should also use AI to counter them, and 3) AI is most useful with the best and most data and CRWD is getting the most data with trillions of data points added regularly (and 10+ years of data). Interestingly, the only competitor mentioned by CRWD was MSFT. SentinelOne which is heavily focused on automation and AI was never mentioned; SentinelOne’s Purple AI was announced a day after CRWD’s Charlotte, and SentinelOne is showing how mismanaged their company is. CRWD also announced receiving IL5 authorization from the U.S. Department of Defense which is expected to boost sales into the federal sector. Overall, CRWD continues to execute very well, and, while the growth is continuing to decelerate, future prospects continue to look bright.
VTLE
VTLE is the one company that I haven’t mentioned. It’s a small oil company that I don’t plan to keep for that long. I also moved my investment in LNG into VTLE. The bet here is that oil prices will go back up because I expect that we’ll 1) see more production cuts from oil producers (this happened today with Saudi Arabia announcing a 1 million barrel per day cut starting in July and extending through the end of 2024), and 2) we won’t see a severe recession. I could be wrong. I expect to sell my shares once oil prices go back up.
FINAL THOUGHTS
AI is all the rave these days. Any company that mentions AI seems to see its stock price rise. I’ve been searching for AI-specific investments for several months now. I looked at NVDA when its shares were around $150, but I concluded that it was too expensive. Several years ago, I was invested in NVDA but I sold out after their boost from crypto faded. I had written a lot about NVDA several years ago when NVDA was less than a $100B company; I thought it would become a trillion dollar company. That day has arrived, but, unfortunately, I didn’t participate in this >10x run. NVDA is now benefiting from the gold rush of organizations adding the hardware needed to develop AI. This hardware push will be followed by an even bigger push to develop software and applications that utilize AI. There will be some lag because this happens, but I’m confident that it will happen. And some of the companies that I already own will benefit. These include SNOW, DDOG, CRWD, and the adoption of the cloud should be boosted as well. I guess these are my AI bets given that I can’t identify any pure plays at a reasonable valuation.
After almost a year of a large cash position, in April I started putting more of my cash back into the market. The cash position is now below 20% and I may soon take it down as low as 10%. This change is intentional because I’d rather suffer another leg down than miss a big uptrend once we see inflation roll over, monetary policy loosen, and the war in Ukraine end. I think it’s highly possible that all three could happen soon and with little advanced notice. If not soon, I think all are inevitable giving me more reason to be more fully invested. I’ve been following the Russian invasion of Ukraine since the beginning, and, in the past several weeks, the commitment from Ukraine’s supporters has expanded dramatically. I think the outcome is now inevitable, and it’s possible that it can happen fast. I’d take the under on the war being concluded before the end of 2023. How would the markets react? We can’t be sure of that, but we know that the markets don’t like uncertainty.
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.