This is the first portfolio update of 2023. At the end of January, none of my portfolio companies had reported their results yet. I typically like to wait until all or most of my companies have reported before putting in the effort to write a lengthy update. I was also on vacation during the last few days of January. So, I may not always write a portfolio update each month. In between portfolio updates, I sometimes post my allocations on Twitter– @gauchorico. Those who are interested can check there.
PRIOR PORTFOLIO UPDATES
PORTFOLIO PERFORMANCE
The year didn’t start off great, and the portfolio fell 6.6% during the first week of the 2023 (YTD low was on 5Jan at -6.6%). The portfolio and most growth stocks rallied in January and into the beginning of February. The portfolio’s YTD high was on 2Feb at +11.9%, and this was in spite of the large 30%+ cash position which is a drag on performance when the portfolio is rising. The portfolio ended January at -3.4% YTD compared with the S&P 500’s -6.3%. The outperformance was brief. The portfolio ended February at +2.5% compared with the S&P 500’s +3.7%.
Was 5Jan the low for the portfolio or will there be another leg down?
| DATE | GauchoRico Portfolio (YTD) | S&P500 Total Return (YTD) |
|---|---|---|
| Jan23 | -3.4% | -6.3% |
| Feb23 | 2.5% | 3.7% |
| 3Mar | 1.7% | 5.7% |
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% |
ALLOCATIONS
| 3/3/23 | 2/28/23 | 1/31/23 | 12/31/22 | |
|---|---|---|---|---|
| SNOW | 22.0%^* | 23.3%^* | 22.0%* | 21.0%* |
| BILL | 13.0%* | 12.0%* | 11.6% | 6.9% |
| TTD | 9.8% | 9.5% | 8.5% | 7.8% |
| MELI | 9.1% | 9.0% | 8.7% | 6.4% |
| ENPH | 6.5% | 6.2% | 1.9% | 0.7% |
| LNG | 3.3% | 3.1% | 3.0% | 3.0% |
| DDOG | 2.0% | 1.9% | 14.0% | 14.2% |
| CLFD | — | — | 4.4% | 5.9% |
| CRWD | — | — | 0.1%* | 0.2%* |
| Cash | 34.5% | 34.9% | 26.3% | 34.1% |
The allocation details described below are as of the end of February 2023. Two of the seven positions in the portfolio are leveraged with long-term call options. BILL: of the 12.0% allocation, 11.9% are shares and 0.1% are Jan2025 $100 calls. SNOW: of the 23.3% allocation, 21.7% are shares, 0.1% are Jan2024 $300 calls and 1.1% are Jan2025 $155 calls. Note: there are some rounding errors in the preceding shares/call options splits. The portfolio is comprised of 1.3% in long call options, 64.2% in shares, and 34.5% cash.
PORTFOLIO CHANGES
Changes since 31Dec 2022
- CLFD: added ~2% prior to earnings. Sold entire position after earnings.
- CRWD: sold remaining tiny position in late February.
- BILL: added about 4% allocation about $100/share.
- ENPH: added about 1.3% allocation in January and added about 4.8% allocation after earnings.
- DDOG: sold all but 2% allocation after earnings.
- SNOW: added 1.3% allocation of Jan’25 $155 calls in late February.
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.
CLFD (reported results on 2Feb)
CLFD was a new position in the portfolio that was initiated in December. I added to it in January prior to earnings. In my last portfolio update I wrote that CLFD had a reasonable P/E given its growth rate. The Q1 (December quarter) results were underwhelming. Specifically, there were three problems for me in the report. First, revenue for Q1 was $86M and only $78M of that was organic. The December quarter does have seasonality, but this Q1 was the first in three years where there was a sequential decline of organic revenue. Second, revenue guidance was reaffirmed but not raised; I was expecting a significant raise. Last fiscal year, the Company raised guidance significantly (by a minimum of 9% and as much as 19%!) after each quarter. Third, CLFD’s CEO said the following on the earnings call:
Over the past 3 years, our customers ordered products early in their deployment schedules to stay ahead of any supply chain challenges as they plan their fiber bills. These advanced orders led to growth in our backlog, which reached record levels by the end of fiscal year 2022. Our customers have moved to staging less equipment in their yards and have now begun ordering according to more normalized seasonally driven deployment schedules. We believe this trend will continue in 2023 as customers readjust their ordering planning to our improved product lead times and try to match their order timing to their deployment schedules.
Cheryl Beranek, CLFD CEO in 2Feb 2023
So, we have a) lower revenue, b) revenue in 2022 was “inflated” and seemingly taken from 2023, and therefore, c) uncertainty what the revenue growth rate will be going forward. It’s highly likely that the growth rate for CLFD will be far lower than I had expected, certainly for this fiscal year and maybe going forward as well. Therefore, I sold my position. I’d estimate that my foray into CLFD cost me about 4% of my portfolio’s value. While it’s unfortunate that I bought a fair amount of shares at what I thought was a nice discount to the recent secondary offering, it’s better to take the loss than to hope the growth beyond this year will be strong.
BILL (reported results on 2Feb)
BILL was first added to the portfolio in November 2022. I added to the position in January. BILL is the most complicated company to analyze quantitatively because a) there have been several large acquisitions and b) BILL has both several revenue streams (plus those from its acquisitions) as well as different types of customers (i.e. Divvy customers, core customers, and customers on-boarded through BILL’s banking and accounting partners). Therefore, it’s challenging if not impossible to unravel BILL’s true revenue growth rate. BILL’s growth rate was coming down anyway, but last quarter BILL’s customers, most of which are SMBs, tightened their belts resulting in weak Total Payment Volume (TPV). Management doesn’t know when spending by BILL’s customers will improve, but 2023 could continue to be a tough year. On the bright side, BILL earned a record amount of revenue from their float (i.e. the money that BILL holds on behalf of its customers) due to high interest rates, and BILL was able to swing to profitability and deliver record cash flow. BILL’s troubles seem to be fully the result of a tough economic environment and not any missteps by management. When the fear subsides and corporate spending patterns return, BILL should be just fine. BILL is a hold in the portfolio, but the allocation is a bit higher than I’d like so I may trim some shares into any strength.
ENPH (reported results on 7Feb)
I first bought a small trial position in ENPH when the shares were trading around $265. I added some in January after the shares fell to around $220. Finally, I added a more significant allocation the day after earnings. ENPH is most known for its microinverters used in rooftop solar systems, but the Company also develops and sells energy storage systems and is developing a bidirectional EV charger; note that ENPH acquired an EV charger company (ClipperCreek) at the end of 2021. Solar is rapidly displacing fossil fuels as an energy source as the solar manufacturing cost curve continues to come down and makes solar a lower and lower cost source of energy. In many places solar is now competitive with fossil fuels. Similarly, electric vehicles are increasingly displacing ICE vehicles, and this will create a large amount of demand for electricity as electricity demand will displace a significant amount of gasoline demand. So, I very much like the long-term trends that favor ENPH. Now, let’s have a look at the most recent quarter.
It was a strong quarter with 75.6% revenue growth, $237M in free cashflow (144% growth!), 31.7% in operating income, and 32.7% free cashflow margin. Gross margin for the quarter was 43.8%, not SaaS-like but well above their financial model target of 35%. Gross margin was aided by product mix in the quarter (55% of microinverters were IQ8 which are their newest and lowest cost inverters); I think we can expect margins to at least stay at their current level as newer generation products will have higher margins than older generations (i.e. IQ8 higher margins than IQ7). Customers continued to love Enphase’s products and services as evidenced by their net promoter score of 71 (up from 70 in the prior quarter). Managing manufacturing capacity is critical particularly when the business is growing so fast. ENPH works with contract manufacturers. ENPH exited Q4 with capacity to make 5 million microinverters with plans to exit Q1 with 6 million microinverter capacity and end 2023 with a capacity of 10.5 million microinverters. Assuming the Company executes on these plans, ENPH will be able to ship enough to meet demand. The only weak spot were some headwinds in the U.S. as some installers are being cautious given the macroeconomic environment. ENPH trades at a TTM P/E of 46 (not cheap), but earnings are growing rapidly (earnings grew 91% from 2021 to 2022). ENPH trades at EV/TTM FCF of 44.6, and FCF is growing even faster than earnings (2022 FCF grew 121% over 2021). In summary, ENPH is a profitable hypergrowth company with several long-term trends in its favor.
TTD (reported results on 15Feb)
TTD delivered a weak growth quarter, barely beating revenue guidance but beating adjusted EBITDA guidance by 7%. However, by comparison to the overall advertising market which showed negative growth, TTD’s performance was stellar. The market liked the earnings report so much that the stock jumped 25%. TTD is taking share and CTV growth continues to outpace linear programming. When advertising budgets expand again, TTD revenue and earnings growth should tick up nicely.
DDOG (reported results on 16Feb)
Going into the earnings results, DDOG was the portfolio’s second largest holding. Given the revenue deceleration of the cloud hyperscalers and the cloud workload optimization by their customers, it’s no surprise that DDOG also decelerated. What was surprising is that even though the revenue numbers for Q4 were in the expected ballpark, the recent deterioration of the business and management’s outlook for FY23 came in much worse than expected. Customer optimization is really taking a toll on DDOG’s business. While I do believe management (and the management teams of the hyperscalers as they are saying the same thing) when they say that this optimization by customers will end at some point, I think DDOG will probably have a few tough quarters ahead. The FY23 guidance of 25% revenue growth suggests a very steep decline in growth. When the share price didn’t sell off very much after the earnings results were announced I took the opportunity to sell most of my shares. I still like DDOG’s business, and I may well build up my allocation again, but, for now, I’m mostly sitting on the sidelines. DDOG had decent customer growth, customers continue to adopt more and more of their products, and the R&D team is busy churning out new products. So the business is far from broken and I would expect a reacceleration in growth when the optimization period is over.
MELI (reported results on 23Feb)
MELI reported another quarter, and the business keeps growing at an astonishing rate. Revenue grew 56% in constant currency to $3B. Much of the growth is still from its rapidly eCommerce business with GMV growing 35% in constant currency while the FinTech business line grew 80% in constant currency (TMV growth of +121% off-platform). MELI said that they’re being conservative with issuing credit as their credit portfolio remained stable at $2.8B; yet, the annualized interest rate on their credit portfolio (after losses) was 48%. The FinTech business while growing fast and continuing to juice MELI’s growth is the one to watch for excess risk; so far, management is doing very well with their underwriting; last quarter the accounts past due fewer than 90 days declined as a percentage of the credit portfolio. MELI is also profitable with an EBIT margin of 11.6%. After this latest result, I see no changes in allocation are necessary.
SNOW (reported results on 1Mar)
SNOW, my largest and highest conviction position for the long-term, reported Q4 results on Wednesday. Going into earnings, I thought that SNOW’s business might have the best chance to hold up well during these uncertain times. That’s because many of the workloads run on Snowflake are making the customer money on a net basis (or they’re at least ROI positive on the savings with respect to saving on expenses). The earnings results were not as positive as I expected. Although SNOW beat Q4 product revenue guidance by 2.8%, the guidance for FY24 was reduced from 47% to 40%. Ouch. Management had issued FY24 guidance after Q3FY23, something that’s not typically done, and a quarter later they backed off of that guidance. The reason CFO Sacrpelli gave for the updated guidance:
The change in existing customer purchasing behavior, lower-than-expected new logo bookings and slower expected ramp from our youngest cohorts has led us to reevaluate our FY ’24 outlook.
CFO Scarpelli on 1Mar earnings call for Q4 FY2023
CEO Slootman expanded on the reasoning by revealing that SNOW only closed 90% of its orders that had a chance of closing. Normally, the Company closes 140% of the potential orders because unexpected orders normally come in and close. Additional comments alluded to big changes in how management teams across SNOW’s customers are tightening their belts due to macroeconomic uncertainties. To summarize, SNOW’s customers are being very cautious with spending and limiting long-term spending commitments. SNOW’s products are consumption based (as opposed to annual subscription based) so customers can elect to reduce spending and spend as they go rather than entering into long-term consumption contracts. On the bright side, SNOW’s customers are still consuming (and spending on SNOW), but they are electing to pay for short periods of time. Newer customers are electing to move more slowly and cautiously when deciding to add new workloads. All of this gives SNOW much less visibility into how the spending patterns will unfold going forward. Given this, SNOW had little choice but to cut the guidance for FY2024.
SNOW’s other key performance indicators were strong. Customer additions were not abnormal and quite good. SNOW added 43 customers who spend $1M or more (now 330). SNOW added 19 new Global 2000 customers which is a little light, but these G2K customers additions are lumpy from quarter to quarter. The data sharing metrics were excellent and on track: added 133 new Powered by Snowflake customers (up to 822), stable edges increased by 93% y/y, data marketplace listing increased 136 to 1838, and the percentage of customers with stable edges ticked up from 22% to 23% of customers. All good. Data sharing is one of the primary reasons Snowflake is sticky so it’s great to see that growth there is still strong. SNOW generated $215M in adjusted FCF in Q4 and $520M in TTM FCF. At the current share price of $135, the EV/FCF multiple is 83.7 and the EV/S multiple is 21.1. These are trailing multiples, and they’re high. Even after including the recent quarter’s growth, SNOW’s valuation is one of the highest in technology. The valuation has always been high primarily because 1) the revenue growth has been so high, and 2) investors believe that growth will be durable for many years. So does the Q4 result mean growth is slowing way down and that its durability is now in question? Well, it seems pretty clear that FY24 is going to see growth take a big step down (just based on the Company’s own guidance). But what about when we’re past the uncertainty of a pending recession or after the recession? My opinion is that growth will be durable for many years. The collective investors seem to agree because the stock only sold off 12% the day after SNOW heavily cut its guidance. For me to remain interested in SNOW as an investment, I need to believe that SNOW will be on a very long high growth trajectory like Google and Amazon did in in the two decades between 2000 and 2020. SNOW enables data to be turned into actionable knowledge, and I look forward to the time when AI/computers will be granted spending authority for positive ROI activities. When that happens, I expect an avalanche of growth.
ALLOCATION ADJUSTMENTS
After an earnings cycle, it’s useful to take stock of the portfolio and the allocations, and I’ve made some adjustments to the portfolio during and after this last earnings cycle. Sold CLFD. Sold most of DDOG. Added to ENPH. Maintained SNOW, TTD, and MELI. I think my BILL allocation is a bit high, but I’m not inclined to sell any at these prices. Also, at 34.5%, the cash allocation is much higher than I’d like it to be. For the most part, I’m comfortable with the allocation sizes of the companies already in the portfolio so I don’t want to increase any. Thus, I’m still on the lookout for new companies to add to the portfolio.
FINAL THOUGHTS
Things are definitely slowing down for many companies including some of the portfolio companies. Growth will naturally slow down as companies get larger and mature. Part of our job as investors is to try to look past temporary slowdowns to better times. I do expect some businesses to accelerate when times are booming again. Others will overcome weakness in the economy and the tightening of the credit cycle because their markets are exploding. It’s important to always make good decisions, but sometimes patience will pay off in the long run.
Recently, there have been some breakthroughs in artificial intelligence. The public has caught on to this, and some investments are being bid up. Nevertheless, there will be opportunities in this field, and in some cases disruption could happen fast. I still think SNOW will be a big beneficiary of the AI boom because access to the best/most data will enable AI to do amazing things.
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.