There are companies that have been growing and there are companies about which we can say they seem to be completely dominating their market(s) on which they focus. Tinker (aka on Saul’s Investing Discussions on the Motley Fool) has been beating the drum on avoiding companies that are cheap and that it’s ok to invest in companies that are expensive but are clear winners. When I think about my portfolio and which companies to buy, which to keep, and which to sell, I try to look through the lens of investing and allocating more funds to the clear winners. Sometimes it seems obvious that a company is winning, but sometimes a company can be growing very fast yet it’s not completely clear to me whether they are currently winning and whether they are likely to keep winning. Let’s have a look at some companies.
Winners in My Portfolio
AYX
It is my largest holding at 34.9% allocation. This allocation has grown without adding any new shares (or call options) since early November. In my opinion, they are clearly winning in their market. To me all signs point in the same direction: 1) management commentary (not seeing any competition), 2) financial metrics (growth, growth acceleration, margins, customer growth, land and expand (DNE), G2K customer growth all point to no resistance from competitors), and 3) assessment of the market dynamics should no signs of any competitors. Add a huge untapped TAM that is expanding then you have a recipe for much growth and success ahead.
CRWD
It is my second largest holding at 15.3% allocation. My confidence is not as high as it is with AYX because there are competitors. However, I added to my CRWD significantly in December. The financial metrics (growth, customer acquisition, progress to profitability, and the seemingly effortless ability to sell and cross-sell to customers are outstanding) point to a product/solution that is being adopted very rapidly and with little resistance. One can contrast this with ZS which is struggling to add customers due to the competition and top down (all or none) selling approach. This tells me that CRWD is currently winning. Since it is a competitive space with multiple competitors, we need to monitor the situation closely for signs that the winning continues or slows.
MDB
It is my third largest holding at 10.1% allocation. The metrics have been great yet in the past few quarters they have deteriorated somewhat and there are signs that growth may be slowing. Yet, it seems to be a clear winner in the no-SQL DB market….not the only winner but a clear winner. A winner is a massive, rapidly growing market. I think it’s safe to say that the market will keep growing and it will be massive. Therefore, MDB should be around to reap the benefits. I plan on stocking with it even if growth slows significantly in 2020.
OKTA
It is my fourth largest position at 8.6% allocation. It is the clear winner in their market (zero trust sign-in). Growth is a bit slower than some of the other positions that I hold but their clear winner status keeps me invested in it.
So the above companies are those that I don’t see myself selling out of in the near future. The following companies are lower confidence positions as their winning dominance is either not currently completely clear or, in my opinion, I’m not sure whether they will be able to maintain dominance.
TTD
It is my fifth largest holding at 6.5% allocation. Growth has been inconsistent, sometimes really good and other times slower. They are the winning company in programmatic advertising. That market is not huge yet but it should grow. Can others in the future do what TTD currently dominates? I don’t know if they will be successful. How fast will programmatic advertising grow? I’m not sure. So to me their winner status is not as clear as it is for AYX or MDB or OKTA.
SMAR
It is my sixth largest position at 5% allocation. From the beginning I’ve been in SMAR for the financial metrics. I’ve been telling myself that I keep in it as long as the growth is there. Do they completely dominate their market. I don’t really know. But it seems to me that they might be replaceable. But for now they are having great success in acquiring new customers and their growth has been consistent. So every quarter I check the financial and decide whether I want to keep my position.
ZM
ZM is my seventh largest position at 4.2%. Growth and profitability progress are amazingly high which demonstrates that they are efficiently taking share from competitors. Yes, there are competitors but customers are moving away from Cisco’s WebEx and to Zoom. This is a good situation but not as good as AYX rapidly expanding in a greenfield opportunity. This is because I can look at AYX and say it is likely that the situation will be the same in 3 years. With ZM it’s not clear to me. For how long will the rapid growth continue? I don’t know, but I intend to stay in it while the growth is so great.
GH
It is my eighth largest position at 3.6%. I just bought it last week so it’s a new position for me. It is completely different that my other holdings. Different industry with high regulation and monopoly (for a time) situation due to intellectual property protection. I’m in it for the growth, the untapped disruption of a huge market, but I realize that failure to get FDA approval in the coming months can make this one a dog. It’s a risk-reward bet but I’m not going to make it a huge position with the FDA decision coming.
DDOG
It’s my ninth largest position at 3.3% allocation. Of course, the financial metrics are amazing and this demonstrates that they are winning. But they are not the only dominant player like AYX and OKTA, and I am not confident that they will keep winning for an extended period as we have seen that customer preferences can change quickly in their target markets. Also, when I ran the rosiest of rosy 5 year projections with a likely value after 5 years, I came up with a 15% CAGR assuming a $40 per share starting price. Thus, DDOG is expensive even for the best possible growth. For these reasons, I am keeping DDOG a small position.
ROKU
It’s my smallest position at 1.3%. It’s really a starter position. They are competing with Amazon. I don’t have visibility on how the competitive landscape will play out.
So along with great financial metrics, I greatly weigh my view of market dominance when choosing my positions and when determining how much to allocate to each.
Other Winners (not in my portfolio)
TWLO
They seem to me to be dominating their market. They will be around as a dominant company for many years. They seem like a clear winner. But with TWLO I’m not sure that the shares will appreciate as rapidly because they massively diluted themselves with the slower growing SendGrid acquisition. Also, their CEO’s misleading statements about growth has disqualified them as a holding of mine.
SHOP
They are another clear winner. They are completely dominant as the place for merchants to run their online stores. They company will continue to grow and get bigger and bigger. I’m just not sure how much opportunity there is for the shares to increase as they are very highly valued.