This is the third portfolio update of 2023. The last of my portfolio companies, CRWD, reported results this week. I’ve made significant changes to the portfolio (which I will explain below). Again, I’ve switched to writing portfolio updates every three months or so (timed after my portfolio companies have reported their latest results). For more frequent updates on my portfolio composition, you can follow along on Twitter where I post my allocations more frequently (@gauchorico).
PRIOR PORTFOLIO UPDATES
PORTFOLIO PERFORMANCE
The portfolio grew slightly from the end of May to the end of June while the S&P 500 grew significantly during that month. By the end of July, the portfolio’s YTD return had slightly surpassed the return of the S&P 500. And by the end of August, the portfolio had significantly surpassed the YTD return of the S&P 500. The portfolio ended August at a YTD high (+28.4%) versus +18.7% for the S&P 500.
| 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% |
| Jun23 | 12.6% | 16.9% |
| Jul23 | 21.6% | 20.6% |
| Aug23 | 28.4% | 18.7% |
| 1Sep23 | 28.5% | 18.9% |
ALLOCATIONS
| 9/1 | 8/31 | 7/31 | 6/30 | 5/31 | 4/30 | 3/31 | 2/28 | 1/31 | 12/31/22 | |
|---|---|---|---|---|---|---|---|---|---|---|
| CELH | 16.5%^ | 17.9%^ | 13.0%^ | 9.3%^ | 5.7% | — | — | — | — | — |
| MELI | 12.1% | 12.5% | 9.4% | 9.5% | 8.4% | 9.7% | 9.7% | 9.0% | 8.7% | 6.4% |
| AXON | 11.8% | 12.5% | 10.1% | — | — | — | — | — | — | — |
| SNOW | 9.9% | 10.6% | 10.8% | 11.5%* | 14.4%* | 22.6%^* | 23.6%^* | 23.3%^* | 22.0%* | 21.0%* |
| NVDA | 9.9% | 4.9% | — | — | — | — | — | — | — | — |
| AEHR | 9.3% | 9.8% | 10.4% | 3.7% | — | — | — | — | — | — |
| TTD | 8.5% | 9.1% | 10.9% | 10.7% | 11.0% | 11.3% | 10.3% | 9.5% | 8.5% | 7.8% |
| CRWD | 5.5% | 6.0% | 6.3% | 7.7% | 8.5% | 5.6% | — | — | 0.1%* | 0.2%* |
| DDOG | 2.8% | 2.9% | 5.4% | 4.9% | 4.8% | 2.8% | 1.8% | 1.9% | 14.0% | 14.2% |
| TSLA | 1.8% | 2.1% | — | — | — | — | — | — | — | — |
| WW | 0.4%^ | 0.5%^ | 0.4%^ | — | — | — | — | — | — | — |
| BILL | — | — | 10.3% | 13.5% | 12.2% | 11.2%^ | 11.4%^ | 12.0%^ | 11.6% | 6.9% |
| ENPH | — | — | — | 11.7%^ | 12.5%^ | 11.7% | 10.3% | 6.2% | 1.9% | 0.7% |
| VTLE | — | — | — | 3.5% | 3.3% | 2.4% | — | — | — | — |
| TMDX | — | — | — | 1.9% | 1.6% | — | — | — | — | — |
| LNG | — | — | — | — | — | 1.9% | 3.1% | 3.1% | 3.0% | 3.0% |
| CLFD | — | — | — | — | — | — | — | — | 4.4% | 5.9% |
| Cash | 11.6% | 11.0% | 12.6% | 12.1% | 18.2% | 19.9% | 30.3% | 34.9% | 26.3% | 34.1% |
The allocation details described below are as of 1Sep 2023. Two of the 11 positions in the portfolio are leveraged with long-term call options. CELH: of the 16.5% allocation, 12.2% are shares and 4.3% are Jan2025 $145 calls. WW: of the 0.4% allocation, 0.2% are shares, 0.2% are Jan2025 $15 calls. The portfolio is comprised of 4.5% in long call options, 84.1% in shares, 11.6% cash, and -0.2% short puts.
PORTFOLIO CHANGES
Changes since 2Jun 2023
- AEHR: first buy on 12Jun; added multiple times.
- AXON: first buy on 18Jul; added multiple times.
- BILL: sold position after Q4 earnings.
- ENPH: sold position after Q2 earnings.
- CELH: added shares and Jan’25 $145Cs.
- DDOG: reduced allocation by 1.5% to add to SNOW.
- MELI: added opportunistically.
- NVDA: first buy on 9Aug; added multiple times.
- SNOW: added 1.5% allocation after earnings; sold remaining Jan’24 calls.
- TMDX: sold position before earnings.
- TSLA: first buy on 2Aug; added 18Aug.
- VTLE: sold position.
- WW: started small speculative position.
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.
AEHR (reported results on 13Jul)
AEHR is a new position. The Company develops testing systems for silicon carbide semiconductors which are used for applications that require the chips to be resistant to high temperatures and where a chip failure can be very costly. Imagine the cost of replacing a chip embedded in an electric vehicle (EV). The failure rate is high enough that the industry tests every chip as part of the manufacturing process. AEHR is the main supplier of silicon carbide chip testing equipment to semiconductor companies that provide chips to the EV market. AEHR is small enough at $1.5B market cap and the EV market will grow many multiples over the coming decade; thus, AEHR has room to run particularly if silicon carbide chips will get used in additional markets.
AEHR reported Q4 FY23 on 13Jul. Revenue was $65M for the year. The Company is entering the new fiscal year with $40M in effective backlog, and they guided for at least $100M in revenue for FY24 which is 54% growth. Semiconductor companies can be cyclical, but, since AEHR is targeting the EV market, the disruption of ICE vehicles should provide a secular tailwind for silicon carbide chip testing.
ENPH (reported results on 27Jul)
After ENPH’s Q1 results, the CEO said that ENPH’s installers would be able to adapt to the high interest rate environment. Clearly, he was mistaken, and it’s now clear that potential residential customers of solar systems are sensitive to paying more for financing these systems. ENPH now has to work off the excess inventory present in the channel which will affect business growth for the net couple of quarters. While I still like ENPH as a business (great long-term growth for solar adoption, offerings with great product-market fit, and a high margin, strong FCF business), I don’t think ENPH is going to do great again until interest rates begin coming down, the timing of which is still unknown. Therefore, I sold all of my shares. I may look to reenter ENPH as an investment once rates are lower and dropping.
TMDX (reported results on 3Aug)
I sold the entirety of my small TMDX position before the earnings results. Yes, the revenue growth is very high, and that’s what initially attracted me to the Company. However, I always had concerns about the future durability of the growth, lack of international expansion, and the ceiling on the TAM (total available market) due to the finite number (and slowly growing) of humans that need transplants. Yes, the number of people who need transplants still exceeds the number of accessible organs that could potentially be used, but as TMDX grows, the Company gets increasingly closer to the ceiling. Now, we have learned that TMDX is running up against a logistical bottleneck; that is, TMDX doesn’t have access to enough transport flights to move all the organs where the recipients are located. Thus, TMDX is buying an airline to circumvent this bottleneck. Not only does this move highlight the friction to growth that TMDX has, but it also veers TMDX into the logistics/transportation business which is outside its core competency.
MELI (reported results on 3Aug)
As usual, MELI reported another very strong quarter (Q2 FY23). Net revenue was up 57.2% y/y to $3.4B, total payment volume (TPV) was up 96.6% (TMV growth 129% off-platform) to $42.2B, and GMV was up 47.2% to $10.5B. Each of these growth rates is in constant currency. In U.S. dollars, MELI grew net revenue 31.5% (difference being due to inflation and exchange rate changes). The Fintech business continued to demonstrate considerable strength while also showing a NIMAL (net interest margin after losses) spread of 36.8%; credit risk due to loans made by the Fintech segment was a risk that I called out when I first took a position in MELI last year; so far so good. Net Income was $558M, up 123% y/y with a 16.3% operating margin. MELI continues to exhibit very strong growth at scale in a market that it heavily dominates with offerings in eCommerce, shipping, payments, lending, and more recently advertising and insurance. Advetising has grown net revenue greater than 70% for the fifth consecutive quarter reaching 1.6% of GMV. MELI has and continues to dominate because of its scale and superb execution in a geographic market that is underserved. Yes, MELI is more difficult to analyze with all the various geographies, currencies, and business lines; I focus most on the top level consolidated results remembering that MELI is a well run and dominant competitor in a market that is both underserved and rapidly growing. The TTM P/E (based on a share price of $1343) is 90, and the P/E (based on the most recent quarter times four) is 65. While the P/E is quite high, the EV/FCF (TTM) assuming a $1343 share price is only 15.3. I plan to continue to hold MELI as a high allocation position.
DDOG (reported results on 8Aug)
DDOG reported Q3 results on 9Aug. Revenue growth slowed to 25.4% y/y (it was 74% four quarters ago). Customer acquisition slowed to the lowest level since the first COVID quarter in 2020. DBNER was still above 120%, but, prior to this quarter, it had never been below 130%. By these measures, DDOG is still in a slump. On the positive front, DDOG continued to release new products, additional features for existing products, and new integrations. The percentage of customers using 2+, 4+, and 6+ products increased again. DDOG is pushing hard with new products and tools for AI applications. Non-GAAP operating margin was 18.9%, and free cashflow margin was 27.5%. Management reported that optimization showed signs of subsiding while bookings were strong.
DDOG continues to invest heavily in R&D while operating a very efficient sales and market machine. DDOG’s high operating margin and free cashflow generation demonstrate the strength of the business model. Long-term DDOG should benefit from monitoring of AI applications once the wave of AI applications begins to hit enterprises. I plan to retain a position in DDOG for this last reason; however, I trimmed DDOG after SNOW’s earnings in order to add a little to SNOW. While I see both companies being future beneficiaries of AI, I think SNOW will be a bigger and more reliable beneficiary.
CELH (reported results on 8Aug)
CELH reported a stellar Q2 with revenue growing 112% y/y to $326M, gross profit growing 168% y/y to $159M, and non-GAAP adjusted EBITDA growing 357% to $78M! Yes, CELH is GAAP profitable with minimal stock-based compensation (CELH granted only $11.2M in SBC for the first six months of 2023). CELH continues to leverage its distribution partnership with Pepsi through expansion in the U.S. which has enabled the Company to double its estimated market share to 8.6% (as of 6/18/23). CELH is continuing to gain share on the number one (Monster Beverage) and number two (Red Bull) market share leaders in the energy drink category. Based on Neilsen consumer surveys, CELH’s sales growth continues to accelerate. The first three surveys in Q3 indicate y/y sales volume growth of 161.8%, 164.5%, and 165.0% for the four week periods ending on 15Jul, 29Jul, and 12Aug, respectively. So, indications are that CELH grew sales of the retail channel at about 165% for the first half of Q3. Note: CELH’s other channels (such as Amazon and the big club stores such as Costco) are growing more slowly. Last Q3 (2022), CELH had domestic revenue of $179.5M; if CELH actually manages to deliver 120% growth, then we could be looking at a $411M Q3 revenue number. From what I could find, it seems that analysts are expecting $352M in Q3 revenue and an implied $362M in Q4 revenue. We could be in for a big revenue beat when CELH reports earnings in seven or eight weeks.
Do I have any concerns about CELH? Well, it seems clear that this pace of growth will eventually slow down, and the slowdown will likely be significant. This year CELH is expanding because of the enhanced distribution that the Pepsi partnership brings. This will likely be mostly complete in the next few quarters. In 2024, CELH plans to expand internationally also using Pepsi as its distribution partner overseas. International is currently less than 5% of revenue, yet it has the potential to be more than 1/3 of sales. Monster Beverage (MNST), the best comparable company to CELH and a mature version of CELH, had 37% of its sales outside the U.S. in 2022. CELH has stated that it will expand internationally in 2024 and 2025 so international growth offers investors a continued avenue for growth after Pepsi’s distribution benefit has been largely completed in the U.S.
CELH currently trades at an EV/S multiple of 11.2 (using the last quarter’s sales times four) with sales growth of 112% (most recent quarter). CELH’s enterprise value is $14.6B. By comparison, MNST has an EV/S of 8.7 with sales growth of 12% (most recent quarter). MNST has an enterprise value of $58.35B. As CELH matures into a slower grower with more revenue, its EV/S multiple should compress closer to MNST’s EV/S multiple. By the end of 2023, MNST’s sales should be between five and six times higher than CELH’s sales. By the end of 2024, MNST’s sales may only be four times higher than CELH’s sales. However, the low disparity in EV/S between MNST and CELH offers more upside for CELH shareholders. My current opinion is that CELH will likely be a good investment well into 2024; of course, the higher CELH shares rise, the less room for further gains. CELH remains the largest position in the portfolio.
AXON (reported results on 8Aug)
AXON is a new position since the last portfolio update. I built a large position prior to the Q2 earnings on 8Aug. AXON develops, markets, and sells tasers, body and vehicle cameras, and subscription based software solutions primarily targeted at law enforcement markets. AXON is the dominant market leader for its categories of products for the law enforcement markets. Over the past several years, AXON has been increasing the proportion of its business that provides a recurring revenue stream. First, the software business is SaaS-based and is growing faster than the overall business. Second, the TASER business is now predominantly recurring revenue. Since AXON’s customers are government funded and in law enforcement, their budgets are resistant to fluctuations due to the business cycle; this gives AXON’s revenue another layer of stability. AXON’s revenue growth is still above 30%, and based on the estimated penetration of its markets (see figure below from AXON’s August 2023 investor slide deck), AXON has reached nowhere near saturation. There’s lots of room left to grow.
Even after the recent share price run up to $215, AXON’s TTM EV/S ratio is 11.6. After the latest earnings result, the shares did not immediately move up so I took the opportunity to add more shares to the portfolio.
TTD (reported results on 9Aug)
TTD revenue growth accelerated sequentially from 21% in Q1 to 23% in Q3. TTD also beat revenue guidance by 2.7%. Next quarter, we’re very likely to see further revenue growth acceleration as next quarter’s guidance is already for 23% growth, and the Company will likely beat their guidance. The narrative remains the same: TTD is gaining share, ad spending continues to move away from linear TV and toward connected TV, and TTD’s UID2 identity continues to become a standard. Ad spending will eventually recover which will give TTD a tailwind, and next year the U.S. will have another major election and with it a lot of additional ad spending. TTD got pricey, and I did trim several times since the last portfolio update. But I like TTD’s dominant position in CTV which is where the ad industry is increasingly headed.
BILL (reported results on 17Aug)
BILL had a disappointing December 2022 quarter then a surprisingly promising March quarter. The latest quarter (June 2023) left me with three concerns: 1) the next year is going to be tough, 2) BILL has always had a lot of moving parts making its business relatively challenging to analyze, and, with inconsistent results from quarter to quarter, my confidence in the business is lowered, and 3) float revenue is helping to carry the overall business further masking the weakness in subscription and transaction revenue; as interest rates decline, so will float revenue.
While BILL beat revenue guidance for Q4 (July quarter), the guidance for fiscal 2024 (ending June 2024) was only for 23% growth at the top end. This follows a year in which BILL grew revenue 65%. To make matters worse, this guidance includes float revenue which is elevated due to high interest rates. I think BILL’s partnership with Bank of America has some red flags. Subscription revenue from this partnership are getting pushed out to next year. This was one reason for the weakness in subscription revenue. The BofA partnership may be a good long-term deal for BILL, but the agreement to push out subscription revenue to BILL could also be a signal that BILL has less leverage than Bank of America; thus, the deal might not be so lucrative for BILL. I sold my entire BILL position the day after earnings; the stock price, while it was down in after-hours and premarket trading, was actually up in the regular session so I was able to get out for a price that I thought should have been lower.
SNOW (reported results on 23Aug)
SNOW had their annual conference at the end of June. The highlight was the fireside chat with NVDA CEO Jensen Huang and CEO Frank Slootman. The key point from SNOW’s perspective is that, in order to be most effective and useful, AI requires data. Not just any data, but data that’s reliable, accessible, and the best. The saying “garbage in, garbage out” applies here. Of course, this concept is being repeated over and over again (most recently during SNOW’s Q2 earnings conference call). Customers who want to even begin to make AI useful first need to get their data into the cloud where it can be easily accessed, manipulated, and shared. There is a mad rush among enterprises to begin experimenting with AI. The first stage of this mad rush is to get the computing in place to build large language models; this first stage is clearly visible by looking at recent NVDA GPU (the best available chips for AI) sales into the data centers (see below where I discuss NVDA). The acceleration in NVDA GPU sales into the data centers is mind boggling. SNOW’s management team is forecasting a lag of about six months before data center begin to see NVDA’s sales turn into working compute in the data centers. They also believe that in about six months (during 2024) SNOW will begin to see the AI wave start to benefit its own sales. We will see whether it’s actually this soon or if it takes longer, but I believe that SNOW will be a major beneficiary of AI investment, AI development, and AI applications.
SNOW’s Q2 FY2024 results were released almost two months after their annual conference. For several quarters, SNOW’s results have been affected by a tough environment in which customers are taking more time to make purchasing decisions, optimizing their workloads, and cutting back on Snowflake consumption. This is continuing but management reported that they are seeing improving conditions. Perhaps the hard times are beginning to come to an end. In Q2, revenue growth continued to decelerate; here are the past seven quarters of growth (most recent last): 101.7%, 84.5%, 83.1%. 67.3%, 54.4%, 49.6%, and 37.3%. SNOW continued to add customers: 370 customers representing 4.5% sequentially and 25% y/y and 49 Global 2000 customers added for a total of 639. Non-GAAP gross margin hit a record high of 78%. Adjusted free cash flow margin was 13.1%, but Q2 (and Q3) are typically the lowest FCF quarters for SNOW.
With SNOW’s business showing signs of stabilization and next year’s anticipated boost from AI beginning, revenue growth reacceleration could well arrive in a few quarters. I plan to continue holding a large allocation in SNOW for the foreseeable future.
NVDA (reported results on 23Aug)
NVDA is a new position in the portfolio, but it’s one that I once owned years ago. I looked at NVDA again starting last Fall, but, unfortunately, I didn’t buy any shares because I thought that the valuation was too high. I only recently changed my mind about the valuation which I now see as not excessive at all assuming that NVDA can continue to deliver the explosive growth that it has recently shown in its data center business segment. This change of heart will require some explaining because why would I think that the shares were too expensive at $130 in January and not too expensive at about $500 today?
The world is moving to implement AI, specifically the large language models for applications in generative AI. While it’s still not completely clear what all the use cases and applications will be, enterprises are scrambling to put in place the necessary hardware, which right now are only NVDA’s most advanced GPUs, to build large language models. Demand outstrips supply and thus NVDA is selling all that can be manufactured. What has happened to NVDA’s data center business in Q1 and Q2 has been astonishing with GPU demand and revenue soaring. Revenue in Q1 was $7.2B which was down 13% y/y, but the company offered Q2 guidance of $11B and delivered $13.5B which was up 101% y/y! Then after Q2, NVDA guided for $16B in revenue for Q3! If NVDA manages to beat the Q3 guidance by $2B, this would represent 203% y/y growth. Almost all of this growth is driven by the data center segment due to demand for GPUs for AI. Similarly, the adjusted EPS is exploding higher with some investors estimating that NVDA could hit $20/share in earnings next year; I think it’s feasible that NVDA could achieve even higher earnings next year if the Company manages to get their manufacturing partners to ramp up production faster.The forward P/E at $20 in EPS would be about 25x which is incredibly low if NVDA can hit $20/share and if demand doesn’t fall off soon there after. The Company stated multiple times that they have great visibility into demand, and they’re doing everything they can to get production ramped quickly. CEO Huang stated that there are two separate drivers for demand: 1) demand for GPUs for AI, and 2) a multiyear refresh of CPUs in data centers converting over to GPUs. According to Huang, this second driver is the replacement of about $1T in hardware which will take several years to complete. I’m betting (by owning a large allocation in NVDA shares) that demand and growth will remain very strong for at least a couple of years.
Owning NVDA doesn’t come without some risks. First, demand could drop off as many customers are pre-ordering and over-ordering due to the scarcity of GPUs. Second, further export regulations could crimp demand. Third, a hot conflict over Taiwan could essentially shutdown production at Taiwan Semiconductor Manufacturing Company (NVDA’s main manufacturing partner).
CRWD (reported results on 30Aug)
CRWD was the last of the portfolio companies to report results. Their Q2 FY2024 results were good enough for me to maintain a mid-sized allocation. The company is fully scaled (little to no more operating leverage left to extract), shows stable revenue growth in the mid-30%s, continues to throw off free cashflow, and maintains a leadership position in the crowded cyber security market. Customers are steadily adopting more and more modules shown by the percentage of customers using 5+, 6+, and 7+ modules: all ticked up a percentage point in Q2. Kurtz stated that customers are looking to consolidate vendors and that CRWD is a beneficiary. Annual recurring revenue grew 7% sequentially and 36.9% y/y. Overall, CRWD performed well given the tough macro environment that’s continuing to persist. This leaves a chance for continued mid-30%s top growth going forward and perhaps a chance for some reacceleration should the macro start to improve. While the cyber security market should continue to grow given that the world marches on a path to digitize and move workloads into the cloud, the market is competitive without one clear dominant market leader. I really like companies that dominate their market. Examples of portfolio companies that dominate are MELI, NVDA, and TTD. Therefore, I’ll either keep CRWD as a mid-sized allocation or eventually cut it from the portfolio.
TSLA
I bought a small position in TSLA (new position). The Company is outrageously expensive if all they ever do is earn revenue and profits from vehicles. My investment is based on the notion that TSLA will solve the autonomous driving challenge which would provide very high margin revenue from software sales. There’s also the possibility that some of TLSA’s other efforts (i.e. energy business or robot business) will pay off. I don’t expect that I would invest more than a 4% allocation in TSLA.
More on the Portfolio’s Allocations
I’ve made significant changes to the portfolio since the last portfolio update (about three months ago). Four positions, including two large ones, that were in the portfolio at the end of May are now gone. These are BILL, ENPH, TMDX, and VTLE. I’ve also added three new large positions (AXON, NVDA, AEHR) and three smaller positions (TLSA and WW). Last, I’ve added to CELH (increased conviction) and MELI (opportunistically).
FINAL THOUGHTS
The portfolio’s cash allocation is now at the lowest point since June 2022. I’ve been more comfortable deploying that cash recently because I’ve become more convinced that the portfolio’s lowest point (since the October 2021 all-time high) was set on 9Nov 2022 at -83.3% from the peak. The portfolio is now 33% above that trough. I deployed much cash in May and June of this year, and I’m on the lookout for opportunities to deploy more. While I don’t know whether the market will take another leg down, I’m more willing now to wait things out if that does occur. The Fed’s interest rate hiking cycle is likely near its end if it’s not already at the end. Whether inflation gets tamed without a recession or whether a recession triggers the Fed to ease, it sure seems like the portfolio may be in store for either some stability or a rally. Of course, I could be wrong. The marco tide will turn favorably sooner or later, but in the meantime, I’m continuing to seek out and invest in companies that have secular tailwinds at their back.
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.