Portfolio Updates & Q2 2021 Earnings Recaps – Etsy, Fiverr, DataDog, Cloudflare

Earnings season is winding down but my top few positions have yet to report: CrowdStrike ($CRWD), DocuSign ($DOCU), Zoom Video Communications ($ZM) and Upstart ($UPST). Besides Upstart announcing next week, the rest won’t announce until the last week of August if not in early September. So I am eagerly awaiting their results.

Q2 earnings have been positive for the most part with a few surprises that have resulted in me making some very significant portfolio adjustments.

Etsy ($ETSY) Q2 Earnings Recap

Etsy released their Q2 earnings report last week and it wasn’t great news:

  • Revenue went from +141% YoY in Q1 to +23% in Q2, a dramatic slowdown. It wasn’t necessarily a “surprise” since management in Q1 stated that Q2 would be tough. I suppose I was still expecting them to hit the top end of their guidance which they normally did, but they did not. What’s worse is that guidance for Q3 wasn’t that much better, with revenue only increasing 16.3% on the top end of their guidance.
  • GMS growth also slowed down pretty dramatically, going from 132% to 13% and guidance was much of the same at $3 B at the high end which is still 13.9% growth.
  • Active Sellers on the platform increased 34% and 11% sequentially and active buyers grew 41% YoY but fell slightly sequentially.
  • Take rate increased YoY but fell sequentially slightly to 17.4%

I’ve been a big Etsy bull for a long time and I’ve ridden the stock from $8 to $178, but this quarter definitely made me frustrated. Q1 was pretty surprising and Q2 was pretty much the same news. It wasn’t necessarily the worst quarter, and they do have a lot of potential tailwinds going into Q3 with Back to School and Weddings starting to come back plus their recent acquisitions should help.

I think Etsy should be fine long term, but I trimmed my position and will likely continue trimming. I think I’ll probably keep Etsy at a 2-2.5% position going forward given tax considerations (I think most of the bad news has been baked in) until I see better business results, but it’s definitely on a short leash right now.

Fiverr ($FVRR) Q2 Earnings Recap

Fiverr ($FVRR) also released their Q2 earnings report last week and the results for Q2 were actually decent, but their forward guidance was really bad:

  • Revenue grew 60% YoY, 10% sequentially, this is strong growth especially facing a tough comp of 82% YoY growth last Q2.
  • Take rate increased from 27.2% to 27.8% QoQ and increased 0.8% vs. LY
  • Gross Margin increased QoQ from 84.1% to 84.4% and was flat YoY
  • Active buyers increased 43% YoY which is nice but sequentially it was a pretty big slowdown, dropping to 5.3% vs. 4 straight quarters of double digit sequential growth
  • Spend per Buyer continues to grow well, increasing 22.8% which is a nice uptick
  • Fiverr Business now makes up 5% of their business which is huge since it was just released pretty recently
  • Promoted Gigs hit $1 M in revenue, again a nice gain given how recent the product release was
  • 10% operating margin which is the best they’ve seen
  • Now comes the bad part: Revenue guidance of of just 38% YoY which is actually down 4% sequentially and annual guidance was reduced from $302-308 M to $280-288 M!

Whenever a company reduces guidance, you’re in for a bloodbath the next day and that’s what we saw, with Fiverr tanking 20% since the market now views Fiverr as a 30-35% grower vs. a 50%+ grower.

Due to this terrible earnings report, I basically sold out of my entire Fiverr position and paused all future recurring investments. To be clear, this was not the company that I initially thought I had invested in. I thought I was investing in a business that was accelerating their revenue growth and a 50%+ grower which it seems was starting to happen with their Q2 ‘20 to Q1 ‘21 earnings reports. Then Q2 ‘21 came in and yikes. I get that the re-opening is slowing things down now that people are traveling again, but people still need to work, so did all of the freelancers just decide to take vacation at the same time? 

There’s a lot to like about Fiverr, they are still growing revenue in the 30% range, they have a small market cap, and they are innovating a lot with Promoted Gigs and Fiverr Business. Plus they have new partnerships with Salesforce and Wix. However, given their reduced guidance and the CEO totally not seeing this coming (to raise guidance aggressively Q1 only to take it back the following quarter), I am skeptical of what the near-term future looks like and I don’t want to be invested in a company with such a cloudy future when I have other companies that I’m invested in that continue to generate strong performance.

You might be wondering why I’m choosing Etsy over Fiverr, and I think that’s largely due to valuation and my trust in Etsy’s management vs. Fiverr. I’ve owned Etsy for years and I really like what they do and the space they’re in and there aren’t many competitors in the space. Fiverr on the other hand has Upwork and potentially LinkedIn as big competitors and it just seems there’s just a lot of question marks around the business right now. I wouldn’t be surprised if they missed guidance in Q3. Red flags are red flags and Fiverr definitely has some right now. Who knows, they may ultimately rebound aggressively next quarter but hope isn’t an investing thesis and hoping for a turnaround isn’t something I’m interested in.

DataDog ($DDOG) Q2 Earnings Recap

Wow, what a phenomenal quarter! Revenue accelerated like crazy sequentially which resulted in huge YoY growth and all other business metrics look great. This is a business that continues to crush it quarter after quarter and deserves its premium valuation especially given the huge surge in revenue growth this past quarter. Let’s review the numbers:

  • Revenue grew to $233.5 M, up 66.8% YoY and 17.6% sequentially, this is the biggest sequential revenue growth they’ve seen since Q4 of 2019.
  • > $100k ARR customers increased to 1,610, up 58.6% YoY and 12% sequentially. Definitely strong growth for sure in this customer cohort.
  • FCF margins continue to stay elevated in the high teens at $42.3 M or 18.1% of revenue
  • Operating margins were 13.2% for the quarter, the best ever for them as they continue to see some significant operating leverage.
  • Gross margin ticked down 400 basis points, but per the earnings call: “The year-over-year decrease in gross margin was due to investments in our product and platform innovation. We expect gross margin in the mid- to long term to be consistent with our historical performance.” Their historical performance is around 78-80%, so I’m not too worried about the gross margin decline.
  • Q3 and annual guidance was also very strong. They guided for $248 M on the high end which is 6% sequential growth which they should easily beat given their history of beat & raise quarters and their annual guidance was $938-944 M which was another 6% increase. I wouldn’t be surprised if they surpassed $1 B in revenue this year if they can fit in another quarter like this with 17% sequential revenue growth.
  • DBNRR was > 130% for the 16th consecutive quarter and they had some huge upsells, one specific upsell was with a next-gen financial services company and that upsell was 8-figures!

I added to my DataDog position rather aggressively after this report and wrote October 2021 put options at $125 for income or to acquire shares if there’s some volatility from now until October. I wish I hadn’t written covered calls earlier, but it is what it is, I’ll likely close them out later. Regardless, what a strong quarter. Very impressive. DataDog is now a 7%+ position.

Cloudflare ($NET) Q2 Earnings Recap

Cloudflare had a solid Q2 earnings report and it was a gift that the stock was down nearly 7% after the report since after doing a quick take, I added to my position so it’s now just north of 4%. A lot of people I follow allocate a significantly higher percentage of their portfolio to Cloudflare and I just can’t do it given my concerns with valuation. Stock share appreciation for the most part is a function of revenue growth and multiple expansion and when a multiple expands too much, it will put a ceiling on share appreciation. 

Clearly we haven’t found Cloudflare’s EV/S ceiling since they entered Q2 earnings with a 75+ TTM EV/S, but I wouldn’t be surprised if we’re close which then means share appreciation will be determined by revenue growth which needs to combat multiple compression. What Cloudflare demonstrated with their Q2 earnings report is that they still have the ability to compound 40-50% revenue growth for at least a few more years given their accelerating sequential revenue growth and YoY growth. I just don’t see this company slowing down anytime soon.

Taking a look at the numbers and results:

  • Revenue of $152.4 M, up 52.9% YoY and 10.4% sequentially which is an acceleration from 9.7% last quarter
  • Paying customers grew to 126,735, up 31.8% YoY and 6.3% sequentially, just about in line with last quarters 7%
  • The big one that I was very happy to see was their large customers (> $100k in revenue) grew 70.8% YoY to 1,088 and 15.1% sequentially, an acceleration from Q4 ‘20 and Q1 ‘21. It’s important to note that they added nearly as many > 100k customers in the first half of the year than they did all of last year!
  • Operating margin continues to improve, albeit slowly. It’s now -2.6% YoY with sequential improvements in operating leverage across Research & Development, General & Administrative and Sales & Marketing. Per the earnings call, they are still investing aggressively in their business but they anticipate they will reach breakeven in Q1 of 2022 which is exciting!
  • Gross margin increased sequentially to 78.0% vs. 77.7% last quarter and 76.8% last year. Always good to see gross margins tick up.
  • Their US & EU business make up nearly 80% of their business and sequentially, their revenue growth has accelerated and is only being held back by their APAC business which actually saw a slight deceleration QoQ.
  • DBNRR was 124% which is a slight increase from 123% last quarter and has been improving for the past 4 quarters. What’s even better is that during the earnings call, the CEO said: 

I will say that there might be some noise in the dollar-based net retention number where we definitely have worked hard to get it above 120% and we think that that’s great. We’re not satisfied with where it is. There may be from quarter-to-quarter a little bit of noise in that metric. But we do think that over time we can continue to improve that metric.

AMAZING. The CEO is not satisfied with 124% DBNRR which is their best DBNRR they’ve achieved in the past 4 years. I love it. What a rockstar of a CEO who continues to push his team.

During the call, they announced that they have made some good progress on FedRAMP certification and should be fully FedRAMP certified by the first half of next year. This should be a nice tailwind for the business with additional government contracts and provides credibility with private companies evaluating Cloudflare as a vendor.

The CEO also noted: 

So, we continue to see that customers are taking more of our products as we launch products we’re really building out that engine makes it so that we can very quickly our new products into our existing customer base and have them adopted. And that — again, I think that that is — it is very difficult to compete with us once we get customers to understand the power of using the broad platform that we have.

Basically what this means is that their product is very sticky as customers continue to use more and more of their products which means more upsell opportunities, strong recurring revenue and potentially higher DBNRR growth.

All in all, a solid quarter. While I consider myself a techie, I will 100% admit that I don’t fully understand everything they’re doing but the business fundamentals and trends all look very good and if anything, improving. This is the type of company I want to be invested in.

Final Remarks

One thing that I’ve learned from investing and still learning is that if the story changes or if there’s a lot of question marks around something, it’s best to get out and re-evaluate later. For example, I don’t know what will ultimately happen to Fiverr, I figure they will turn it around faster than some other companies that report poor results, but why bother guessing when there are other companies that continue to outperform?

I had written a post about when to sell a stock back in February and I used Fastly as a case study. Well, let’s see what’s happened to Fastly in the past few quarters:

Let me be clear, I was definitely not smart of enough to have sold the stock at its peak of $136.50, I actually sold between $65-95 since I figured they would rebound after a quarter or two, they did not. After a few quarters of dismal results, I decided to move on and I’m glad I did since who knows when Fastly will start turning things around. I might miss a 20% spike up when they finally do, but when will that spike happen? It could happen when the stock is at $20 which would be another 50% drop from where it’s at today. ?‍♂️

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