First Portfolio Review
Company review, decision-making and analysis.
Happy New Year!
“Life is a journey, not a race. Investing is a marathon, not a sprint.” - Context for the photo.
As we all have New Year’s resolutions, I have decided to take on the new challenge of sharing my portfolio decisions and company analysis transparently. I am hoping this monthly reflection help to structure out my thoughts and rationale especially in a year where things will be difficult for Growth/SaaS style Investing. I’d hope this monthly recap helps people find new ideas, provide my subscribers with a little company deep-dive, and lastly, everyone provides me with some feedback on my thought process.
Every second weekend of the month (around the 10th of every month) you can expect to receive this review. I will put effort into these monthly reviews with the hope that they provide some value-add to myself and everyone.
I manage two different portfolios. It’s important I provide some context to the natures of these portfolios, so everyone understands my decision-making process through the year. My style is to find rapidly-growing software companies where the company fundamentals and competitive moat align with the valuation. My investment strategy is to buy and hold for the long term. However, my strategy also involves selling a company when my thesis is broken since I can’t predict if such a company will become the next Amazon or Apple.
Portfolio 1: This is my core personal portfolio. It’s geared towards long-term bets. Funds that I don’t need in the near future, so I am likely to be more patient and long-term oriented. I’m slightly more passionate about the companies here.
Portfolio 2: This is a family portfolio (OPM). I’m ‘fairly’ conservative here with an asterisk. Strategy is a long-term buy-and-hold AC with companies with little risk and high-upside. However, I carefully monitor performance and will occasionally have ‘unusual’ high-quality companies here that are Non-SaaS. My goal here is performance.
Format: I will only comment on the Top 10-13 relevant companies across both portfolios as I don’t bore everyone to a lengthy monthly review. The structure for every company is to discuss a) Company’s competitive advantage since I believe this is durable for LT growth. b) The key catalysts for the stock/growth c) The key metrics that matter for the stock/move the thesis. It’s irrelevant to focus on everything.
Key decisions in the month:
Buys: FTNT on Jan. 10; Increased DDOG, UPWK, ZS, PLTR, and DLO in Jan.
Temporal Exits: AMPL, SE, and MNDY in December, BILL on Jan. 9. Nothing fundamentally wrong, just portfolio re-positioning. I will likely revisit/re-enter a few of these after Q4/Q1 earnings season.
Future plans: Add more CFLT and S amidst volatility.
Context: Not all my portfolio allocations represent my conviction levels. Most of the following positions have just grown into their various sizes and positions throughout the year. This is something I’ll likely adjust through volatility in 2022.
Company Review by Conviction:
Datadog is an application and infrastructure monitoring software company. They provide their software to IT departments and development operations teams to help them monitor and observe their wide range of infrastructure. My thesis is that Datadog’s product is mission-critical for IT teams, not a luxury because of the huge costs associated with downtime or a crash in IT systems during operations. Secondly, Datadog’s high level of product innovation coupled with one of the best SaaS unit-economics.
Key stock catalysts: First, the company’s rapid product release and innovation cadence are one of the best amongst SaaS companies with that it drives their TAM and provides additional revenue channels. Secondly, Datadog has strong relationships with the developer community. Hence, as a result, they are generally able to release products that their clients “want” and they have been successful in driving their dollar-based net retention rate which continues to drive acceleration in their revenues (NTM Growth is 41% at $1.41Billion). Gartner estimates that only 5% of applications are monitored as of 2020 meaning many more companies need this software. The total addressable market is over $53B. Lastly, this is the most recent datapoint in 2021 that shows the current market share and the opportunity/huge runway ahead for DDOG to take away marketshare from incumbents.
My financial investment thesis:
The company has had a compounded revenue growth of >70% YoY over the last 4-years. They are the most sales efficient amongst their competitors with a CAC Payback period of <8x times. They’ve maintained consistent net-dollar retention of over 130%+ over the last 5-years. They are profitable with 11% EBITDA Margins and 15% FCF Margins while rapidly still accelerating growth.
SentinelOne is an endpoint and workload management software cybersecurity company that protects devices and users from fraud. My investment thesis is that S1 is an emerging endpoint cybersecurity company that has a technically superior product to many of its peers as evidenced by world-leading firms. Global research firm, Gartner ranks them as a Leader in endpoint protection. MITRE Corporation (A leading non-partisan cybersecurity agency funded by the US Govt to rank security products) ranked SentinelOne’s product as more superior relative to Crowdstrike and 29 other endpoint detection vendors in threat detection, resolving issues, speed to reaction, and the provider with the most automated features. Secondly, SentinelOne is showing evidence of making their product more automated in detecting cybercrimes, responding faster, and finishing the job with less human intervention. Automation is a strong competitive advantage over its competitors due to the shortage of IT Cybersecurity professionals. This automation will drive long-term improvements in Gross and profit margins. This is all impressive for a relatively young company like S1.
Key catalysts for the stock: On the financials, the company has been growing at triple-digit growth rates + accelerating its revenue on a quarterly basis while improving gross margins, losses & FCF (Though still at a large number). S1 is drastically narrowing down its losses and based on the superior product, there is no reason not to expect future operating leverage as indicated with the architecture of S1’s product.
The financial metrics that drive my thesis are indicated below:
Later next month, I will be writing a deep dive on SentinelOne prowess in cybersecurity. This is a link to my in-depth thread and a Twitter Recording with some experts (If you need the recording, let me know).
Affirm is a Buy-Now-Pay-Later Fintech provider. My key thesis is that Affirm has a strong two-sided network for consumers and merchants. There is a powerful network effect and rewarding incentive mechanism for both parties. Affirm has great technological capabilities for underwriting and facilitating payments. They have a reputable founder who has built phenomenal businesses in the past with high credibility.
Key catalysts for the stock: Stronger partnership integration with Amazon and Shopify during 2021 holiday sales should drive strong revenue, triple-digit merchant, and customer growth over the next upcoming quarters. They guided for 62% growth which didnt factor any of the following partnerships. Key recent risks: Recently, there has been news circulating that from the news was released that few people are not replaying their loans and there are many rumors about the chances of high-default rates. However, much of this information is selective info and they do not have a large sample to make their data points sufficient/valid. We need to wait for the next earnings to monitor the results. I am no longer planning to add to my position right now, but I continue to be focused on Affirm’s financial execution and my confidence in Max Levchin.
I have conducted multiple research and analysis into Affirm can be seen in the thread below. This is my Affirm Deep-dive - A Deep Dive Exploration into Affirm's Competitive Moats. Finally, this is a compilation of my analysis and work on Affirm and the BNPL Ecosystem.
Confluent runs an Open-Source, data management and a messaging data platform called Apache Kafka that helps data teams manage the flow and direction of information in the enterprise. My investment thesis is built on the fact that CFLT is a highly sticky product with very high switching costs. Before a large enterprise decides to adopt CFLT, there is a high amt of foundational architectural analysis that goes into such decisions which generally means the sales cycle can be longer, but the outcome is a very high customer lifetime value. Confluent has a high mindshare and brand cognitive reference amongst the average developers which is a high competitive advantage over competitors. Apache Kafka has a large developer community which can make the product a bottom-up sales funnel (developer-centric) or top-down (CTO decision) which makes the GTM easy. Finally, though one weakness for CFLT is the fact that they are not top of the CTO budget list, my thesis is that as companies continue to experience a high amount of data, they would need CFLT. For more, read my full confluent thesis link:
Key Stock Catalysts: The key stock catalysts is the rapid acceleration and adoption of Confluent’s cloud product. CFLT beat last quarter’s earnings result by over 10% and raised guidance by 13%. The cloud business suggests that they are winning market share rapidly amongst open-source tools.
This is a good segway into their Financial execution. The Cloud execution is the primary thesis for CFLT long-term as it drives significant unit economics and is the key metric to watch. CFLT accelerated their cloud growth from 118% in 2020 to over 246% YoY Growth rate in 2021. CFLT accelerated top-line growth and all the metrics seen below.
Key Financial Metrics:
ZS provides enterprise-wide, zero-trust, and SASE (Secure-Access Service Edge) cybersecurity solutions for large corporations. Zero-trust security architecture is simply ensuring that users are required to log in/get permission to access any company’s application or systems. ZS’s product is built for companies that have distributed workforce scattered across the globe and/or employees that are working remotely from home that need to be secured on the cloud/or to a company’s network. My investment thesis is that enterprise security with cloud-native architecture is required amidst the growing cyber hacks. ZScaler has built a global network merch ZIA & ZPA to allow a company to secure all their SaaS application. My thesis for paying for ZS’s high valuation is that they have a superior competitive advantage as one of the first-movers in ZTNA since they built an entire cloud-native zero-trust product. ZS’s product also has high switching costs, strong bird-eye view coverage of a company’s network. As remote work continues to be vital, Cloud computing grows and security continues to remain top of mind, ZScaler products will only continue to be in high demand. Renowned Gartner continues to rank them *significantly* as the outright leader above their competitors due to an excellent security SASE/ZTNA product and their enterprise go-to-market strategy. This is a fantastic deep-dive into Z-Scaler by SaaS expert Hhhypergrowth Muji.
The financial metrics below support the investment thesis.
They have surprisingly compounded over 50%+ growth since 2018/19 and now have achieved almost 70% year-over-year business growth on $1B in ARR. Additionally, accelerating top-line revenue and RPO growth, improving margins, and strong free-cash-flow as seen below.
Palantir Technologies builds advanced data analytics software for government and large institutions. My investment thesis is based on Foundry and Gotham’s advanced technological capability in the enterprise for driving data-driven decision-making. Palantir’s competitive moat in that they have a full-stack AI vertically integrated stack, high switching costs, data network effects, and scale economics. I’ve written extensively on Palantir and my thesis, so read more about my core thesis in this One-pager report or read all my previous analyses on Palantir.
My current issues/risks I’m watching in 2022: Palantir has done a good job releasing new products to help drive their growth, but they are lagging. As seen below, Palantir’s growth is beginning to slow most especially when compared to relative peers within the big data and analytics industry like SNOW. Secondly, if the company will not show signs of operating leverage (most especially reducing their high stock-based compensation) then revenue growth should be growing rapidly grow. However, we’re seeing the opposite.
Key Financial Metrics:
I’ll be patient to see how they execute over the upcoming quarters, but as part of my investing process, I want a company to have a clear path towards positive EBITDA margins while rapidly growing. I will continue to monitor things.
AMD is a key provider for chips and semiconductors for computer GPU data centers, PC CPU Markets, Cloud, Graphics, and Gaming consoles. Major secular tailwinds combined with a company that is leading in each market. I have over 30% position in AMD as I believe it will be impossible to lose money on such a critical player in the world’s digital transformation. Lisa Su is a phenomenal and underrated world-class leader and engineer.
Additionally, I believe that Meta’s (Facebook) recent announcement that they have chosen AMD as their partner for their Meta transformation is a big deal. Metaverse spending will grow significantly and highly benefit AMD. Secondly, there continues to be a significant demand for semiconductors going into 2022. The financial metrics are all the items I need on a company’s financial statements. Finally, as mentioned portfolio 2 is ‘only relatively conservative’, so I prefer to park my money into a decently large, no-brainer company with multiple catalysts. Strong gaming catalyst - Advanced Micro Devices (AMD) "Big Navi" products sell between $299 and $399, well above previous AMD products that retailed for $150 to $200Advanced Micro Devices (AMD) "Big Navi" products sell between $299 and $399, well above previous AMD products that retailed for $150 to $200.
The financial metrics indicate the company’s impressive performance:
Upwork is a marketplace company that provides freelance services to Enterprises and Independent freelancers. My investment thesis is that Upwork is the category leader in the freelance and Gig Economy. They have one of the best moats in consumer tech in that they have a high network effect and high brand presence/mindshare within the Freelance economy globally. My key catalysts thesis revolves solely on the fact that they are penetrating the enterprise with aggressive new product launches and strong Go-to-Market sales motion for ‘land and expand’ within the enterprise. They are currently ramping up their sales executives. They’ve launched new enterprise features that should drive better growth in 2022. We are already seeing this happen with the acceleration of their enterprise growth moving from 96% to 100% to 107% over the last three quarters. Lastly, the last two employment reports suggest that self-employment has grown, so I’m hoping Upwork captures some of this boom.
Key Fundamental metrics: Enterprise growth will continue to drive revenue growth. We have already seen some execution as they have been accelerating their enterprise clients as outlined earlier. They have been experiencing revenue growth acceleration and a modest deceleration in the past quarter. I continue to remain optimistic about Upwork’s future growth trajectory. I' will be monitoring the following metrics next quarter.
Silvergate exchange is a financial infrastructure bank for banking and they provide critical solutions for digital currencies. They are a custodian of Bitcoin and Ethereum deposits. They provide an infrastructure that enables the facilitation of real-time USD transfers between hedge funds/institutions and crypto exchanges to enable digital currencies transactions. They are the number one leader in this rapidly growing market. The SEN exchange has high strong network effects.
Their SEN exchange facilities not only payments, but funding and lending capabilities that critical companies such as Coinbase, Gemini, Binance rely on Silvergate.
Silvergate has a partnership with Meta (Facebook) to be the sole issuer and manager of the single-dollar, stable digital coin Libra project by Facebook. This is also part of project Diem which is Facebook’s goal of creating a new digital currency. The differentiator between Diem and popular cryptocurrencies like Bitcoin (BTC) is that Diem is backed by government currency. Long-term, Diem is meant to stabilize the new offering and ensure secure global transactions. This is a high-quality way to play my long-term bull case for Cryptocurrencies.
Key catalyst for the stock/growth will continue to be digital currency growth, the bank’s multiple levers for growth, (interest, non-interest income, as well as securities sales) and continued earnings growth.
The key financial metrics: can all be found below. I won’t spend much time on them but observe the high-EBITDA margins and the top-line growth acceleration. Based on analyst forecast, SI should continue to grow over 50% over the next 3-years.
Grid Dynamics Consulting:
Grid Dynamics is a leading provider of SaaS technology consulting in Cloud, Data & Analytics, Agile software development, and digital transformation for Fortune 1000 corporations undergoing digital transformation. The firm is similar to well-known consulting firms like Accenture, Deloitte, or lesser-known, but incredibly successful digital firms like Globant (GLOB) and/or EPAM systems.
Grid Dynamics’ competitive advantage is that the firm is focused/has expertise on Cloud and Data AI/ML with an extensive network of engineering talent. They serve Enterprise software companies. They boast of top clients such as Apple, Google. The critical role that GDYN plays is to support many of the cloud companies we own/know in their digital transformation efforts. Forrester ranks them as one of the leaders in software development service providers. Recently, they were announced as AWS Advanced Consulting Partner and earlier in November named a Google Cloud Expertise premier partner. They play a key role as move to the Cloud.
Key catalysts for growth: I expect continuous QoQ accelerating growth over the next two quarters as a result of new contracts and logo signed last quarter (Customer growth is growing around 42% year-over-year). There has been a high number of institutional ownership in the company (over 236%) i.e. over a 100% growth compared to last year.
Key Financial metrics: Observe there has been a revenue top-line growth acceleration. Recent revenue was $58 million in the third quarter of 2021 which was up 22% on a sequential basis and 120% on a year-over-year basis. The core organic growth was 67% year-over-year. Overall, this is a trial position as it is relatively small. However, as the cloud, AI/ML, and Enterprise tech continue to grow rapidly, I expect GDYN to ride that secular enterprise Cloud and Data momentum.
Fortinet is a leader in cybersecurity solutions to a wide variety of organizations, including enterprises, security service providers, and small businesses. My investment thesis is built on the foundation that Zero-trust and networking-based Cybersecurity is going to be one of the biggest challenges faced by modern enterprises. I started a position Fortinet because of their leadership in networking architecture (SD-WAN) security solutions. Due to Fortinet's long experience in hardware, they’ve built a core strength in networking than many peers and have a strong competitive advantage in software-defined networking (the new way that Apps are being built today on VM’s) and Zero-trust. Gartner ranks them as a leader in WAN Edge solutions. Gartner believes that 50% of orgs will have a SASE strategy by 2025 (vs 5% in 2020). They also predicted that SASE + SD-WAN initiatives will be adopted by 60% of orgs (vs 10% in 2020), see full Gartner report. FTNT is well-positioned than many companies. See much of the evidence here.
Fortinet offers an extensive set of cloud-delivered security services that can be added to products such as web or email security on the public cloud. Additionally, There are companies who are choosing to keep some of their data on-prem, as a result, Fortinet benefits from many companies who have hybrid-cloud architectures. They are strong in security-driven networking, zero-trust access, Cloud security, and security operation services. Finally, they have a formidable product that should drive core growth - Fortigate app which is growing over 149% year-over-year. This is a great thread that breaks down Fortinet.
Financial Metrics: Fortinet has one of the best financial metrics in the SaaS industry from a top and bottom line. I’ll let you review everything. Just note the company is positioned to accelerate revenue growth over the next upcoming quarters.
Core Watchlist/Likely Next Buys:
SaaS: Bill.com, and/or Cloudflare.
Fintech: Sea Limited, Toast, or Marqueta.
Best wisdom pieces learned in the month:
In future editions, I will share the best wisdom I learned/read during the month. In the meantime, feel free to read about an amazing investor I learned about during 2021 - Saul’s Investing.
I also spent sometime reading about Yen Liow, a growth equity SMID fund manager of Aravrt Global in New York. I enjoyed reading about his philosophy of growth investing by hunting for horses and exploiting volatility. This is a doc that outlines his methodology. This video Interview delves into the different edges of investing and the importance of truthful self-awareness for Investors.
Mental Decision-making/Process lessons in the month:
Every month I share an area that I struggled with as an investor. During the volatility of December, I was challenged to re-evaluate my convictions. It made me realize the importance of doing your own deep due diligence and if you don’t, bear markets expose an individual. You cannot borrow conviction. The market is an expensive place to learn such a mistake.
Secondly, I learned I need to further refine my process volatility. When the market goes lower, many things become cheap and I’ve found it difficult to assess equally-weighted apple v oranges. This will be important this year where we face multiple rate hikes.
Looking forward - Next Edition:
Future Portfolio Review:
In next month’s portfolio review editions, I’ll go deeper on Crowdstrike, AI vision semiconductor-Ambarella, and EM Fintech player, D-Local.
Confluent, Upwork and watchlist candidate, Cloudflare report earnings on February 10, so my next portfolio review will come out the weekend of Feb 13 where I’ll provide an in-depth earnings analysis and finally, going forward, you can expect, I will go deeper into each of these companies as well as my sell decisions. This was my first review and I didn’t want to make this review extensively long.
This is a reflection exercise each month to help refine my investing process. Hope it adds some value to its readers. I look forward to sharing my future thoughts. I’m always open to your feedback on better ways to make this review better
My Next Issue on Substack
I will be compiling the best of the best lessons that I have learned on SaaS Investing to outline a playbook for investing and finding the best SaaS companies especially in a difficult macro-environment. The version will be released next week.
Please feel free to subscribe for future versions. Add feedback/questions/comments. Thank you for reading.
Please note that this article does not constitute investment advice in any form. This article is not a research report and is not intended to serve as the basis for any investment decision. All investments involve risk and the past performance of a security or financial product does not guarantee future returns. Investors have to conduct their own research before conducting any transaction. The author owns shares. The author no business relationship with any company mentioned in this article