August was a tremendous month. My portfolio was up 14% for the month and hit an all-time high for the year with a YTD return of 40.62%! It seems Fed’s easy monetary policies combined with Jerome Powell’s solid navigation of a tapering timeline to mitigate a “taper tantrum” has enabled growth stocks to continue to surge. Not to mention, August was a big earnings month, so lots of earnings resulted in my core positions making material moves. Sadly, not all of them were in my favor.
As I mentioned in a previous post about August mid-month portfolio changes, I sold out of Fiverr completely and trimmed Etsy $ETSY. I also added aggressively to Cloudflare $NET and DataDog $DDOG. It seems for the most part, those were wise decisions, at least in the short-term. I also continued to add to my Upstart $UPST position since they completely obliterated expectations.
Some more earnings came out this week. One in particular that I will call out before discussing other things is Zoom Video Communications $ZM. Zoom reported earnings on Monday, August 30 and their earnings report was not good. I’m glad I took the liberty to trim 25% of my position before earnings back when it was in the $390’s since I was getting antsy about stocks that had really benefited from COVID (i.e. $PTON, $ONTF, etc.). When Zoom Video announced earnings and I was inputting the earnings into my spreadsheet, I noticed the guidance was abysmal and quickly sold the remainder of my position at $323. I suppose this was the right thing to do since $ZM proceeded to tank 15%+ the following morning and now stands at $292 or so. I honestly do believe $ZM will dig themselves out of this “post-COVID transition” per the CFO, but it might take a few quarters and the opportunity cost of holding onto a that is in a transition phase is fairly significant given how well the market has performed this year.
What about Buy & Hold?
I’ve always been more of a buy & hold kind of investor but I’ve learned that you can definitely get more alpha if you analyze earnings reports and are agile in your re-allocations. For example, when I sold out of Pinterest $PINS due to poor guidance on July 30th at $58.90, I used the proceeds to buy Global-e Online $GLBE at $67 and Upstart $UPST at $125. Fast forward a month and Pinterest still is at $57 or so and Global-e is at $77 and Upstart is at $240. Who knows what will happen in the 6-12 months, but at least for now, I’m becoming more comfortable with re-allocating when earnings disappoint, especially if it’s a big disappointment since that generally weighs on the stock price for the quarter. I do believe that Pinterest will have a good future in the coming years (Their ARPU has a ton more upside), but it may take a few quarters to “figure” things out, and the market can be very unforgiving until they do. Essentially the long-term thesis for Pinterest remains intact but there are short-term headwinds that might chip into overall return potential.
Another tidbit, a few years ago, I decided to invest in Snap, inc. $SNAP and while the stock has performed very well when I first invested between $10-15, it took a few years for $SNAP to take off and there was a lot of opportunity cost in waiting so long. I could have invested in several other better-performing companies in the interim and while I may have missed the initial pop from $SNAP, I would have still done okay if I had purchased $SNAP later.
This is all basically trying to say that while the buy & hold philosophy definitely works and has proven to be a way to compound returns (just look at Amazon, Starbucks, Netflix, and Shopify), there is something to be said about being ruthless with your allocations and investments that might give you an additional edge on the market if done appropriately. For those that don’t want to take the time to analyze earnings reports but to just invest in solid companies, that’s perfectly fine and most likely is the better way to invest more often than not since you don’t suffer the tax consequences of re-allocations nor the headache of constantly thinking about the right allocation.
Economic News
As noted above, Jerome Powell’s speech at Jackson Hole seemed to calm the markets about any concerns about the Fed increasing interest rates anytime soon. It’s interesting watching how the markets react to Jerome Powell these days vs. when he first started. I remember there were quite a few times when he first started a few years back that he just pissed off the markets with hawkish language. This is what caused the markets to crash 20% back in 2018 when the Fed increased interest rates again in December and Jerome Powell didn’t do enough to calm the markets.
The August manufacturing PMI report came in at 59.9 which was an increase from July, so it means that there continues to be expansion in the overall economy.
The August jobs report was pretty mediocre, which may be a boon for the stock market since the economy is not flying hot which will likely mean the Fed not be so eager to taper their monthly purchase of bonds and potentially pushes back the prospect of interest rate increases (which of course assumes that Jerome Powell is correct in his assessment that inflation is transitory).
Raising Cash & Stock Valuations
I’m still raising cash here and there. I wish I could just sell half of my portfolio sometimes to re-allocate more aggressively but the capital gains hit would not be pleasant. I think tech stock valuations are still pretty frothy and the rally we’ve seen since May 13 has been incredible. My portfolio is up 90% from the bottom that we saw in mid-May 2021.
Crypto Rally
Both Bitcoin and Ethereum have had quite the run in August, with Bitcoin up a solid 25%+ and Ethereum up nearly 50%. Ethereum finally released EIP-1559 on August 5 and this resulted in a huge rally in Ethereum. There were a lot of naysayers and people spreading FUD about crypto mining going to be super unprofitable after EIP-1559 was released, but they couldn’t have been farther from the truth. My daily ether mined probably went down 10-15%, but the increase in Ethereum’s price easily made up for it and then some. In fact, Ethereum’s rally to ~$4,000 has resulted in me reaching breakeven on my investment in mining rigs in a little 4 months!
Portfolio Update
S&P 500 return YTD: 21.58%
My portfolio YTD: 40.62%
What a wild year, in mid-February 2021 I was up nearly 40% and then there was a huge sector rotation that resulted in my portfolio dropping ~30% and then we bottom in mid-May and we’ve seen a surging tech rally where I hit an ATH at the end of August. Don’t get me wrong, I am very aware of how scary the tech rotation was but I chose to stay invested and even went into a decent amount of margin debt to double down on my higher conviction picks. I believe that strong business fundamentals and earnings will eventually overcome short-term volatility regardless of how stomach-churning the volatility is.
Since January 2020, my portfolio is up 344.25% vs. the S&P’s 43.95%. That means $100 invested in my portfolio in January 2020 would be worth $444.25 vs. the S&P’s $143.95! This is why I invest in fast-growing growth stocks because you can achieve significant returns.
Portfolio Breakdown
| UPST | 16.1% |
| CRWD | 15.2% |
| DOCU | 10.8% |
| DDOG | 8.4% |
| SNAP | 5.0% |
| ZI | 4.9% |
| MELI | 4.5% |
| ETSY | 4.5% |
| NET | 4.4% |
| ROKU | 4.3% |
| NVDA | 3.2% |
| ENPH | 3.1% |
| TEAM | 3.1% |
| LSPD | 3.1% |
| CROX | 2.8% |
| SEMR | 1.4% |
| BTC Mining Companies | 1.6% |
| SHOP | 1.2% |
| TWLO | 1.1% |
| GLBE | 1.0% |
| < 1% Positions | 0.10% |
Portfolio Notes and Q2 2021 Earnings Recaps
Upstart $UPST – Upstart announced their Q2 2021 earnings on August 10 and they blew expectations away and I took the liberty to add to a lot since the new trailing twelve months of revenue (TTM) reduced the EV/S multiple of Upstart pretty significantly due to the lapping of Q2 2020 which was the start of the pandemic.
Upstart’s Q2 revenue came in at $194 M which was a 1,018% YoY increase and 60% sequentially. Mind you, this is on top of a 40% sequential revenue gain in the previous quarter. They had guided for $160 M in Q2 with $600 M in annual revenue in Q1. So they beat the high end of their guidance by 21% which is huge but they then increased annual revenue guidance to $750 M which is a 25% increase! Most companies increase guidance by 2-5%, but to increase it by 20% in Q1 and to increase it again by 25% in Q2, this is a company that is absolutely crushing it.
Zoom Video Communications $ZM – Ugh. It always sucks when a 5%+ shits the bed. Fortunately as I mentioned above, I was able to get out when the stock was only down 6% or so after hours which was nothing compared to the 15%+ drop it experienced the following day.
Zoom’s Q2 was actually not that bad. They beat the top-end of their guidance by 3%, to finish the quarter with $1.02 B in revenue, which was 54% YoY and 6.8% sequentially. However, their Q3 guidance was a shocker: $1.01-1.02 B in revenue for Q3 and $4.02 B for the fiscal year. This means that revenue would be down to flat QoQ and the YoY for Q4 would be 16%. This is a HUGE slowdown from the 191% they saw in Q1 and the 368% they saw in Q4 of 2020.
All of their business customer metrics also slowed down. Customers > 100k slowed down to just 131% YoY with 14% sequential growth which is down from the 21.6% sequential growth it saw in Q1. Customers with 10+ employees grew to 504,900 which was only 36.4% YoY and 1.6% sequentially. It seems possible that in Q3, they could see elevated churn which might result in a sequential decline in 10+ employee customers.
This was a pretty abysmal quarter imo and so I decided to cut Zoom loose and take the insane tax hit (My lowest cost basis was $68).
CrowdStrike $CRWD – I wasn’t in love with CrowdStrike’s Q2 results especially given some of the cybersecurity tailwinds (at least headlines) we’ve been witnessing. It wasn’t bad enough to necessarily trim since how many stocks are growing 65-70% with TTM revenue of $1 B+ but it was definitely something I’m keeping an eye on.
Summary:
- Revenue was $337.7 M, up 70% YoY and 11.5% sequentially (down from 14% in Q1, but Q2 is historically their worst quarter and services grew only 1.1% sequentially)
- Subscription revenue was $315.8, up 71.4% YoY and 13.6% sequentially (down from 14.9% in Q1)
- Operating Margins were 10.5%, up from 3.9% LY and 9.8% in Q1
- FCF margins increased to 21.8% of revenue vs. 16.3% in Q2 and down from 38.7% in Q1
- Customers increased to 13,080, 80.9% YoY and 14.5% sequentially (down from 15.4% in Q1)
- RPO increased to $1.68 B, so this was up 14% sequentially vs. 8.2% in Q1
- NRR remained 120%+ (likely low 120s)
- ARR grew to $1.34 B up 69.4% YoY and 12.6% sequentially
- Gross Margin ticked down a bit from Q1 to 76.3%
- Guidance was for $365.3 M on the high end which is 8.2% sequentially and 57% YoY, they will likely beat by 4% or so which will likely mean 63% YoY growth and a slight acceleration in sequential revenue growth. Anything less than that would be a red flag imo.
As you can see, CrowdStrike is still growing fast but slowing down which is a red flag given their relatively high multiple. Q2 was a tough quarter for most companies, so the fact that some companies like DataDog, ZoomInfo, Sprout Social and Asana announced such stellar quarters indicates to me that these are some exceptional businesses.
DocuSign $DOCU – DocuSign for a period of time was my number one holding which makes sense since my initial cost basis was around $40-45/share and they’ve grown tremendously in the past few years. Their Q2 earnings report was disappointing, so I proceeded to sell 25% of my position after hours. Of course, DocuSign proceeds to jump 6% the next trading day. Wah wah.
Let’s take a look at the numbers:
- Revenue grew to $511.8 M, up 49.6% YoY and 9.12% sequentially, a slight acceleration vs. Q1. I guess I was expecting more, especially since their subscription revenue only grew 52% YoY and 9% sequentially which was down from 10.2% in Q1
- Enterprise customer adds grew to 148k, up 49.5% YoY and 8.8% sequentially vs. Q1’s 8.8%. This was not bad but then you see their > 300k customers grew 37% YoY and only 6% sequentially vs. Q1’s 12.4%
- Total customers grew to 1.05 M, up 40.2% and 6.3% sequentially vs. 10.8% in Q1
- FCF margins increased to 31.6% vs. 26.2% in Q1, so this was nice
- Operating income also stayed relatively flat around 19.5% vs. 19.9% in Q1, these are strong operating margins, so good to see it in the near 20% range.
- NRR was down slightly sequentially to 124% YoY vs. 125% in Q1
- Billings was the primary reason why I trimmed 25%, it grew to $595.4 M, up 46.8% YoY and 12.9% sequentially, but guidance was only $597 which was only up 0.3% sequentially, but their Q4 guidance was up 18.9% sequentially from Q3, so it appears Q3 is not going to be great but Q4 will look a lot better. I think I’m still trying to better understand how DocuSign’s billings growth impacts analyst’s POV on the stock. I personally thought after seeing the bad Q3 billings guide that the stock would tank but after I reviewed the annual guidance, I realized how lumpy their business can be with billings.
- Revenue guidance was $532 good for 38.9% YoY and 3.9% sequentially, this is their lowest sequential revenue guide in the past year or so, so that was a little alarming and their revenue beat was their lowest yet too.
Overall, not a great report (imo), but CEO Dan Springer still believes the company has years of high growth ahead, so with COVID potentially stabilizing and with their secondary product offerings still ramping up, there could be a good future ahead. I’m still bullish on DocuSign, just not a 10%+ position anymore.
Peloton Interactive $PTON – I guess I was right in my decision to sell out of my Peloton holdings back when it was $120-130? Yay? Peloton’s Q4 earnings report (their FY ends in June) was very very very bad. Revenue came in only slightly ahead of estimates at $936.9 (down 25% sequentially but this was baked in the stock price already due to the tread recall). However, the kicker that surprised everyone was their Q1 guide of only $800 M which is only 5.5% YoY and down 14.6% sequentially. Their FY ‘22 guide of $5.4 B was decent but still well below expectations and is the reason why the stock has sold off 15% since their report.
Ultimately, this company is trying to position itself as a content and tech company and while I think that in the long-term this is very possible, it’s going to take a few quarters to get back on track imo. Subscription revenue is only 30-35% of their go-forward revenue, so they will be subject to the whims of their hardware sales which seems to be incredibly lumpy in a “Post-COVID” world.
Their connected fitness gross margins continue to tick down and overall gross margins have dropped from low-mid 40’s to 27% in Q4. It will likely tick up as they move past the treadmill recall issues but there are still a lot of red flags or unknowns with this company and this is why I decided to sell my entire position.
Asana $ASAN – I hate this stock. Not because it’s a bad company or anything like that. I hate the fact that I keep missing my opportunity to buy into this company. This is when “waiting for the dip” can end up a huge missed opportunity. I’ve been waiting for a better entry price since $44 when the CEO bought shares of the company. Now the company is trading at $90+!
Their Q2 report was pretty incredible. Everything accelerated for the most part (besides profitability which is a running gag with these project management software companies). Revenue accelerated from 60.7% YoY in Q1 to 72.1% YoY in Q2. Sequentially revenue increased 16.7% YoY which was a huge acceleration from 12.2% in Q1.
> $5k customers accelerated and > $50k customers accelerated. Revenue guidance was decent too (not as high as I’d like, but still solid). When I saw the stock was just treading water after hours I bought a 0.5% position but ended up selling it the next morning due to the stock dropping from 10% pre-market to 3% and of course after I decided to sell my position since I’ve always been skeptical of their multiple and their lack of operating leverage, Asana’s share price accelerates to $94. Oh well.
Bitcoin Mining Companies (Riot Blockchain and Marathon Digital) – I’ve been fairly flippant about my investments in Bitcoin mining companies. I am bullish on Bitcoin and Ethereum, but I’ve always been skeptical in investing in mining companies, largely because I figure I can do better just by investing in the cryptocurrency itself. This changed after I reviewed $RIOT and $MARA’s earnings reports.
Both companies have invested heavily in mining equipment and have thus seen some big increases in their hash rates. I was skeptical in previous quarters about whether or not these deliveries would make it on time and if they could actually achieve their forecasted hash rates but it seems both companies have.
I’ll speak specifically about Marathon Digital largely because I am more bullish on them. Marathon Digital increased their revenues by 10,000%+ YoY in Q2 from $0.28 M to $29.3 M. They mined 654.3 bitcoins in the quarter and are on pace to double that in Q3 to around 1,400 (They mined 442 in July and 470 in August). Assuming bitcoin stays range-bound between $40-50k in the next year and Marathon Digital continues to increase their hash rate faster than bitcoin’s difficulty level (The difficulty level decreased significantly after China basically kicked out all bitcoin miners back in late June/early July), they should continue to accelerate their revenue. Based on my forecast, Marathon could potentially double or triple their revenue from $180-200 M this year to $400-600 M next year. Assuming their multiple continues to compress as their growth rate slows, Marathon Digital could potentially be worth around $180/share by end of 2022 assuming everything goes as planned. Who knows, hence why mining companies’ allocation in my portfolio is still tiny.