This is the final portfolio update of 2023. The last of the portfolio companies reported their results several weeks ago. I’ve been traveling and occupied with other activities so this report is a few weeks delayed. As I’ve previously mentioned, I intend to post portfolio updates quarterly. 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 last portfolio update included returns through the end of August when the 2023 outperformance over the S&P 500 expanded. The portfolio peaked on 7Sep at +30.5% YTD, and the outperformance also hit at YTD high at 13.2% above the S&P 500’s YTD. September and October were not good months for the portfolio’s performance dropped from the 7Sep YTD high, bottoming at the end of October at +7.4% YTD. November was a great turnaround month with the portfolio recapturing all of the October losses as then some. The rally continued into December with the portfolio hitting new YTD highs on several days in December with a peak of +35.6% on 27Dec.
| 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% |
| Sep23 | 19.2% | 13.1% |
| Oct23 | 7.4% | 10.7% |
| Nov23 | 24.2% | 20.8% |
| Dec23 | 33.9% | 26.6% |
Calendar 2023 turned out to be an above average year for the portfolio even if it seems like a small consolation in light of the terrible 2022. The portfolio has now been continuously tracked for seven years now with the results as follows:
| Year | Return | Cumulative Return |
|---|---|---|
| 2017 | +61.6% | +61.6% |
| 2018 | +55.9% | +152.0% |
| 2019 | +41.8% | +257.3% |
| 2020 | +245.6% | +1134.7% |
| 2021 | +27.7% | +1477.3% |
| 2022 | -71.4% | +350.5% |
| 2023 | +33.9% | +503.0% |
The seven year CAGR (compounded average growth rate) of the portfolio calculates to +29.3%. It’s certainly a long-term result that I can be very pleased with. Assuming that the portfolio tracking began at the bottom of a major portfolio and market drawdown (at the start of 2017) and assuming also that we’ve now navigated past the next major portfolio/market drawdown (2022), this means that the portfolio has completed a full cycle from bottom to bottom and come out of the other side of the second bottom. We have yet to see whether the bottom of the cycle was indeed in 2022, but, as of today, it certainly appears that that the worst is probably behind us. Looking at the weekly portfolio data points, the portfolio reached near bottom in May 2022 and more or less stayed there (with some fluctuation) for about a year (until May 2023). Since May 2023, there has been a clear upward trend for the portfolio.
In hindsight, things always become more clear. An explanation for the huge ~80% drawdown from the portfolio’s peak in October 2021 might go as follows: fiscal stimulus and easy monetary policy together with already high growth rates (revenue for the portfolio companies) and further boosted by accelerated digital transformation and some temporary pandemic distortions helped fuel investor demand for enterprise software and other growth companies (i.e. elevated valuations). Much of the business growth was real and sustainable, but some of it was temporarily boosted. We then saw a rapid deceleration in growth, tightening monetary conditions (i.e. rapidly rising short-term interest rates by central banks), and a collapse in valuations. The result was that most so-called growth investments lost between 50% to 95% of their market capitalizations. Now, it appears that central banks are done tightening and will soon begin to ease off on the brakes. It also appears that pandemic distortions are dissipating. Of course, not all of these growth businesses were of the same quality and some have already attained new all-time high stock prices while others never will. As stock pickers, we must always try to determine which companies will continue to perform from today on so that long-term investment returns can be generated. This means avoiding holding on to companies (stocks) only because they are still down a lot with hope of recouping paper losses. Instead, we should be willing to hold on to only those companies that we think will do the best.
Of course, there are exceptions to always trying to keep investment dollars in the best companies. This latest drawdown was very severe and long-lasting so much so that it can change an investor’s mindset and priorities. I wrote about this concept in another blog post. Those who have been following my writings for several years have probably noticed some shifts to my investment style. Today, I hold a significant cash position. I also now place more weight on holding companies that I believe have a dominant and unassailable market position (e.g. TTD and MELI) even if they are growing more slowly than other companies that I could own. My largest allocation positions are now much lower percentage than they were a few years ago (12% positions are the large ones whereas 30%+ positions were in the portfolio previously). I still use some options but overall the portfolio is not leveraged. While my style is still aggressive, it’s much less aggressive than it was previously. The previous aggressiveness served me very well during the 2017-2021 period but hurt me greatly at the end of 2021 and in 2022. These changes are not only due to the experience of big drawdowns but also the result of the realization that 1) a certain amount of wealth is enough and should not be risked, and 2) I’m into the second half of my life and I’d prefer slower wealth accumulation with smaller percentage maximum drawdowns. What this means for people who read my blog posts and track my allocation decisions is that my choices are no longer primarily based on maximizing my investment returns. I still aim to beat the market index, but it’s likely that my outperformance may be smaller in good times and less underperforming in bad times. I do expect to fully recover to the portfolio’s previous all-time of 18Oct 2021, but I’ve accepted that it will probably take several years to achieve.
ALLOCATIONS
| 12/31 | 11/30 | 10/31 | 9/30 | 8/31 | 7/31 | 6/30 | 5/31 | 4/30 | 3/31 | 2/28 | 1/31 | 12/31/22 | |
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| CELH | 11.9%^** | 12.4%^** | 15.2%^ | 15.2%^ | 17.9%^ | 13.0%^ | 9.3%^ | 5.7% | — | — | — | — | — |
| MELI | 11.8% | 13.1% | 13.1% | 10.7% | 12.5% | 9.4% | 9.5% | 8.4% | 9.7% | 9.7% | 9.0% | 8.7% | 6.4% |
| NVDA | 10.6% | 11.7% | 11.8%* | 15.7%^ | 4.9% | — | — | — | — | — | — | — | — |
| AXON | 10.4% | 10.0% | 12.1% | 11.8% | 12.5% | 10.1% | — | — | — | — | — | — | — |
| ELF | 10.2% | 11.7% | 8.9% | — | — | — | — | — | — | — | — | — | — |
| SNOW | 9.8% | 11.0% | 11.0% | 10.4% | 10.6% | 10.8% | 11.5%* | 14.4%* | 22.6%^* | 23.6%^* | 23.3%^* | 22.0%* | 21.0%* |
| TTD | 7.3% | 7.7% | 9.0% | 8.9% | 9.1% | 10.9% | 10.7% | 11.0% | 11.3% | 10.3% | 9.5% | 8.5% | 7.8% |
| CRWD | 7.1% | 7.1% | 7.3% | 6.2% | 6.0% | 6.3% | 7.7% | 8.5% | 5.6% | — | — | 0.1%* | 0.2%* |
| TSLA | 4.0% | 4.6% | 4.5% | 4.0% | 2.1% | — | — | — | — | — | — | — | — |
| AEHR | 3.2% | — | 0.7% | 9.9% | 9.8% | 10.4% | 3.7% | — | — | — | — | — | — |
| WW | 0.5%^ | 0.4%^ | 0.5%^ | 0.6%^ | 0.5%^ | 0.4%^ | — | — | — | — | — | — | — |
| DDOG | — | — | — | 2.8% | 2.9% | 5.4% | 4.9% | 4.8% | 2.8% | 1.8% | 1.9% | 14.0% | 14.2% |
| 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 | 13.4% | 10.7% | 5.9% | 3.9% | 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 31Dec 2023. Two of the 11 positions in the portfolio are leveraged with long-term call options. CELH: of the 11.9% allocation, 7.55% are shares and 4.35% are Jan2025 $48.33 calls, Jan2025 $56.67 calls, Jan2026 $50 calls, and Jan2026 $51.67 calls. WW: of the 0.5% allocation, 0.3% are shares, 0.2% are Jan2025 $15 calls. The portfolio is comprised of 4.5% in long call options, 82.1% in shares, and 13.4% cash.
PORTFOLIO CHANGES
Changes since 1Sep 2023
- AEHR: sold some after earnings; sold the rest between 30Oct and 1Nov. Bought back 18Dec and 29Dec.
- AXON: trimmed on 20Oct and 13Nov.
- CELH: added shares 30Oct; swapped shares to LEAPS and LEAPS to shares at various times. Trimmed LEAPS on 27Dec.
- CRWD: trimmed on 13Nov.
- DDOG: sold position on 10Oct.
- ELF: added on 5Sep, 10Sep, 12Sep, 13Sep, 30Sep, 1Nov, and 2Nov; trimmed 15Nov, 29Nov, 13Dec, 18Dec, and 29Dec.
- MELI: trimmed on 7Sep, added on 20Oct.
- NVDA: added and trimmed several times.
- SNOW: trimmed on 13Nov, 5Dec, and 18Dec.
- TSLA: added on 8Sep and 18Sep. Trimmed 19Dec.
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 5Oct)
AEHR reported results on 5Oct. The results were a disappointment because I expected the Company to raise its full-year guidance (it doesn’t provide quarterly guidance). Instead, they maintained their guidance and continue to state that they expect to add several new 5%+ customers before the end of this fiscal year. Yet, the CEO, on the earnings call, was practically begging its prospective customers to get their orders in. Certainly, this seemed like a mixed message. While it seems that silicon carbide is needed for EVs and EV share of the automobile market will only continue to increase over the years to come (in fact, I think EVs will completely displace ICE vehicles in the coming 15 years), the intermediate term looks increasingly unclear for AEHR. AEHR’s main customer (OnSemi) provides AEHR with 88% of its revenue. This customer concentration is a risk, and news keeps coming in on delays to EV rollout plans from car manufacturers other than Tesla. These other auto companies are in quite a pickle because their businesses are totally reliant on ICE cars which are a dying breed; meanwhile, Tesla has repeatedly lowered its price to make its EVs comparable in price to ICEs. So, the legacy auto manufactures can’t make a profit on EVs and their legacy business is on the path of going away. These delays in EV projects will only delay their pain, but for AEHR, these delays are affecting its business. Unfortunately, my delay in deciding to exit AEHR cost me because the stock dropped significantly. In the end, I decided to take the loss and redeploy the capital into ELF and CELH (see below).
I changed my mind about AEHR in late December after the Company received its first gallium nitride (GaN) order from a customer. It shows that some of AEHR’s talk is translating into real business. We’ll see how AEHR’s business progressed when we see the November quarter’s results (expected some time in January). I don’t intend to increase my allocation in AEHR higher than a 5% position, and I currently consider my position in AEHR somewhat speculative.
TSLA (reported results on 18Oct)
TSLA is a relatively new position, and I added to it prior to earnings and immediately after earnings. My investment in TSLA is a bet that the Company will succeed in achieving full autonomy. Either TSLA will achieve this goal or it won’t. If it does not succeed, TSLA will still continue to make profits and grow its automotive business. Yes, TSLA is very highly valued for just an automotive company, its results can fluctuate from quarter to quarter (like last quarter due in part to some plant retooling to prepare for production modified/improved models), and Elon can be a bit of a wildcard. I don’t expect to get a great return on this investment if TSLA does not achieve full autonomy for its vehicles. But if TSLA does get to Level 4 or Level 5 autonomy then its entire install base of vehicles instantly adds value to the Company as these cars can be upgraded with a software enabled chauffeur. TSLA is currently charging $12,000 for FSD (full self driving) on its vehicles; this is the price for something that is not yet full self driving. When FSD actually works, it will cost a lot more than $12,000…maybe $50,000, $4000 per month, or $200 per day. Such pricing will command software-like margins and add billions per year. On the Q3 earnings call, Elon said that Tesla just brought online a cluster of 10,000 Nvidia H100 GPUs. Not only do these state-of-the-art computing chips cost $30,000 a piece (good for NVDA–see below) for a total of $300M spent on NVDA, they demonstrate the level of resources and commitment that TLSA is putting into FSD.
ELF (reported results on 1Nov)
ELF reported results on 1Nov and the business continues to execute and grow rapidly. Revenue grew 76.1% y/y marking the third quarter in a row with above 75% growth. The company added more than $25M to cash on the balance sheet with FCF of $26.5M. Gross margins remained stable at 45.7%. ELF continues to sell into the U.S., U.K., and Canada markets and has now added Italy as its newest geography. ELF relies heavily on social media and influencers to achieve its sales and marketing objectives. This seems to resonate with younger demographics as shown by ELF’s market share gains.
These days it’s rare to find companies that are growing revenue above 50%. ELF has the opportunity to grab further market share but these gains will have increasingly diminishing returns as it will get harder and harder to gain more share when the share is higher. ELF can also expand into new geographic markets. Finally, ELF can continue to introduce new products in new categories. All of these growth vectors might allow ELF to grow rapidly for a while longer, but I do expect ELF’s growth to slow at some point. While I’m keeping the allocation large, I’ve sold off all of the shares that I added opportunistically during the selloff immediately after the 1Nov earnings results were released. I’ve continued to trim and may trim more if the shares keep rising.
MELI (reported results on 1Nov)
MELI just keeps delivering great results quarter after quarter with Q3 FY23 showing acceleration in a number of metrics. Net revenue was up 69.1% y/y to $3.76B (was up 57.2% y/y in Q2), total payment volume (TPV) was up 121.2% y/y (was up 96.6% y/y in Q2) with TMV growth of 145% off-platform (+129% y/y in Q2), and GMV was up 59.3% y/y to $11.3B (was up 47.2% y/y last Q to $10.5B). In USD, MELI’s revenue was up 39.8%. Net income was up 131% with an 18.2% operating margin, both sequential improvements. Advertising is still growing above 70% for the sixth quarter in a row and rose to about 1.7% of GMV. With such great and still improving results, it’s hard to complain. Yes, MELI has a lot of moving parts with all the business lines, geographies, and different currencies, but the business continues to be so dominant and grow so quickly that I consider my position almost on autopilot. Latin America continues to have strong growth opportunities for e-Commerce, shipping, and payments/banking. I’m not concerned at all about my investment.
CELH (reported results on 7Nov)
CELH reported another great quarter with Q3 revenue growing 104.4% y/y to $384.8M, gross profit growing 147% y/y to $194M, and non-GAAP adjusted EBITDA growing 318% to $104M! Growth is now decelerating and the change to Pepsi as CELH’s main distributor is about to be lapped which will speed the deceleration further. But the full benefits of their Pepsi distribution are yet to be realized as Pepsi continues to add locations in the U.S. CELH will now begin to expand internationally with the first new country to be added in January (Canada). CELH’s international revenue comprise a minuscule 3.5% of revenue. By comparison, Monster Beverage (MNST) has about 40% of its sales outside the United States. It’s still an open question whether CELH’s success in the U.S. market will be repeated in international markets, and a different customer response there would mean that my expectations would need to be changed. I see this as the biggest risk currently, but my current assumption is that CELH and Pepsi know what they are doing and so far execution has been excellent. Also, Pepsi’s comments about their CELH partnership during their latest earnings conference call are encouraging.
CELH share prices have not responded positively to their Q3 earnings results as I would have expected. The shares have shown relative weakness (compared to the overall stock market and compared to my other holdings). I have continued to increase my leverage on CELH by selling shares and adding long-term call options. As the shares rise back up, I intend to reverse this leverage. Furthermore, as shares rise I also intend to reduce my allocation for I don’t view my CELH investment as one that I see myself holding for more than a couple of years. One explanation for share price weakness could be the possible liquidation of shares held by the estate of the late Mr. DeSantis (major shareholder). Apparently, the descendants of DeSantis intend to liquidate their position in CELH. If this is true and occurring then the share price weakness could be a fleeting, temporary effect of such liquidation.
AXON (reported results on 7Nov)
AXON delivered another strong quarterly result on 7Nov. Revenue growth was stable at 32.7% y/y while operating expenses grew more slowly than top line growth. AXON continues to dominate its markets and there’s plenty of room to grow in those markets. There’s lots of room left to grow (see slide 15 of the latest investor presentation). AXON’s ARR growth continued to accelerate to 53.6% as AXON continues to derive an increasing fraction of its revenue from SaaS products.
AXON’s shares have risen sharply and are currently sitting with 1% of the all-time high. AXON remains a high conviction position in the portfolio.
TTD (reported results on 9Nov)
TTD revenue growth accelerated sequentially from 21% in Q1 to 23% in Q2 to 25% in Q3. TTD beat revenue guidance by 1.7%, the smallest in three quarters. While TTD continues to be highly valued, the Company continues to gain share. It will benefit from election spending which should provide a big boost starting about now through early November 2024. Streaming content providers like Netflix are adding ad-supported subscription options. Amazon recently announced that its Prime subscribers will begin to see ads. This only helps TTD. I continue to like TTD’s position in the market and its prospects to greatly benefit from several big trends in the advertising market. These trends/shifts have been discussed for a long time and they continue to play out. I like TTD long-term and I intend to hold a position, but the valuation keeps me from holding TTD as one of my largest allocations. The largest risk might be a possible recession which would likely impact advertising spending overall. Some people talk about a pending recession, but, unless employment weakens significantly, it’s difficult to get a contraction because employees continue to have funds to fuel spending.
NVDA (reported results on 21Nov)
Expectations for Q3 were high for NVDA.
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 predominantly 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! NVDA delivered $18.1B which was a 13.25% beat. Guidance for Q4 was for $20B. Regulation by the U.S. government is blocking sales of some products to China and other countries which could affect about 25% of NVDA’s historical business. While these restrictions aren’t impacting sales currently (NVDA has a backlog so sales that would have gone to China and other export banned countries can be reallocated to other customers), long-term NVDA’s business can be impacted. Also, the risks that I outlined in my September 2023 portfolio update remain in place. I did trim some shares in December, but my NVDA allocation remains large. I continue to believe that the opportunities for NVDA outweigh the risks.
CRWD (reported results on 28Nov)
On 20Sep, CRWD updated its long range financial model with the following changes: increased subscription gross margin and decreased expenditures to both the sales and marketing and the general and administrative lines; these changes result in a 10% improvement to operating margin (22% to 32%) and a 6% improvement to FCF (32% to 38%). This was an unexpected change to an already great set of targets that had already be largely realized. Given the magnitude of the changes to a scaled and mature business, CRWD should have been immediately worth more after the announcement.
For Q3, CRWD’s business continued to execute and deliver excellent results. Total revenue and ARR grew 35% and subscription revenue grew 34% showing a slight deceleration of about 1.5-2% depending on the metric. FCF margin was 30%, but the cash didn’t change materially because cash was used for CRWD’s acquisition of Bionic. It’s good to see that CRWD can make acquisitions to enhance its competitive position without massive share dilution, without encumbering the Company with debt, and without materially affecting the Company’s cash war chest. While CRWD is now a slower growing company that it was when I first bought shares, I believe it’s still going to be a good investment going forward.
SNOW (reported results on 29Nov)
In Q2 SNOW’s business began to show signs of stabilization. That continued into Q3 and the first half of Q4 as stated by management on the earnings call. It’s been a long dark winter holding onto SNOW and the high growth SaaS companies. Most of the hyperscalers (AMZN and MSFT) showing decent results, and it now seems that the SaaS companies that have consumption based business models (SNOW, DDOG, and MDB) are seeing customers finally increase their consumption.
The financials and KPIs for Q3 show that things are progressing “on-track”. Product revenue grew 34% y/y, product gross margin was 78%, and adjusted free cashflow was 15%. Net revenue retention rate decelerated to 135%, but this is expected given that it’s a lagging metric and customers had been cutting back. Furthermore, nine of SNOW’s top 10 customers grew spending sequentially. SNOW’s Snowpark product grew consumption 47% sequentially, and consumption of unstructured data grew 17x y/y with 30% of SNOW’s customers processing unstructured data in October. Most of the world’s data is unstructured, and SNOW enabling customers to make use of this type of data should help accelerate SNOW’s revenue growth. Looking ahead, I see a couple of other drivers for future revenue acceleration: 1) SNOW has been busy adding new products that will become generally available over the coming quarters; these products will provide additional consumption by the customer base, and 2) AI workloads and customers’ thirst for implementing these workloads using the best available data should drive a wave of accelerated consumption on Snowflake. In summary, with continued signs of stabilization and the prospect of the evolving and increasing need for data, SNOW’s business is well positioned for 2024 and beyond. I’ve trimmed my SNOW allocation as the shares rose in November and December, but I intend to keep SNOW a large position.
More on the Portfolio’s Allocations
The allocations in portfolio can be broadly placed in three buckets. First, there are very dominant businesses which would be very difficult to disrupt; these are growing the top line at reasonable rates but not the fastest in the portfolio, they are highly profitable or FCF positive, and are lead by strong visionaries who are executing very well on their visions; these companies include MELI, AXON, TTD, and CRWD; in aggregate they make up 36.6% of the portfolio. Second, I have hypergrowth companies that I’m holding for now while they grow fast; I consider these opportunistic investments that I don’t see myself holding for more than a couple of years (maximum, maybe much less); I hold CELH and ELF as investments in this bucket, and, together, they comprise a 22.1% allocation. Finally, I hold a few companies that are dominant but also have a chance to really take off if artificial intelligence has a larger impact than the market expects. These companies are NVDA, SNOW, and TSLA, and, collectively, they represent 24.4% of the portfolio. The other two small positions in the portfolio are AEHR (3.2%) and WW (0.5%), and they are somewhat speculative.
FINAL THOUGHTS
The Fed has all but signaled that it will not raise interest rates further. The expectation is now that the next change to policy will be the easing of monetary policy. This shift in expectations has already had a very big effect on stocks and valuations. Provided that pandemic distortions continue to unwind and inflation continues to fall, growth investments will likely come into to favor again. It’s quite possible that 2024 could be a great year for investors. Of course, there’s no sure thing, but falling rates should boost valuations. On the other hand, some believe that the Fed has overtightened and that it may already be too late to avoid a severe economic recession. Many called for a recession in 2023, and it didn’t happen as the job market showed incredible resilience which helped keep GDP growth strong. I think 2024 will be a really interesting year. We’ll see what happens…
In addition, 2023 showed some rapid technological advances in the area of AI. Everyone is talking about it, and investments related to AI have increased greatly in value. NVDA is a poster child for this, but its business results are so far backing up its rise in share price. The hardware is the first wave of investment into AI; software, applications, data, and other areas of investment will follow after the hardware for AI has been installed. I believe that AI will continue to advance rapidly providing opportunities for investors, productivity gains to economies, and boosts to economic growth. Overall, I think AI is still far from bubble territory, although an AI bubble could likely form in the future. The portfolio is positioned to benefit from AI as advances unfold.
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.