August 2022 Portfolio Review

My portfolio is up 102% as of writing on 8/19/2022 from when I started tracking my results on 1/1/2020. This means that, $100 invested in the ExponentialDave portfolio on January 1, 2020 would now be worth $202. Meanwhile my benchmark, WCLD, is up 20% since January of 2020, and the S&P 500 is up 31% since January 2020. For the period from January 1st, 2022 through 8/19/2022, my portfolio is down 53%, meanwhile WCLD is down 40%, and the S&P 500 is down 11%.

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Monthly YTD performance at the end of each month:

• Jan 2022: -24%

• Feb 2022: -28%

• Mar 2022: -30%

• Apr 2022: -46%

• May 2022: -59%

• Jun 2022: -61%

• Jul 2022: -57%

• Aug 2022: - 53%

As I look at these monthly results, I try to keep this in mind from the wise Brian Feroldi:

Part of being a successful long term investor means not getting discouraged when results are choppy and inconsistent. 5 steps forward and 3 steps back is still great progress. My plan is to stick with what has worked for myself and those who came before me, investing in the highest quality companies and holding on for the long term.

On monthly updates:

Between June 2021 and May 2022, I knocked out 12 monthly reports in a row, which I'm quite pride of. They are neither quick nor simple to put together.

Unfortunately work has picked up significantly for me the past few months, which has kept me away from my typical monthly updates. I will try to update when I can, but I'm not expecting myself to get back into a monthly cadence.

Current Positions vs Previous Positions as of Last Update:

On my cash position:

From approximately the end of 2021 through the present, cash was a better investment than the S&P 500, it was better than gold, much better than growth stocks, and better than bonds. For the time being, I'm keeping my cash as a diversification, and I intend to dollar cost average into my typical growth stock portfolio over the next year.

On valuation:
Relative to last year, valuations are still quite low. But they have risen significantly since their lows earlier this year. Much of the gains have taken place just in the past couple of weeks.

The grid below emphasizes how much each stock has risen from its low. Most lows were hit around May of this year.

Although it’s 8/20/2022 as of writing, and the stocks have receded somewhat since 8/9/2022, it’s still pretty wild how much things have risen from the absolute pits we saw just a few months ago.

The next grid is based on price/sales multiples which shows just how far things have fallen from all time highs seen last year. Everything is still very cheap! I'm pretty happy to be dollar cost averaging into these companies at such bargain prices.

SELLS:
I sold out of ZoomInfo entirely because its revenue growth decelerated to 42% YoY organically. It was indicated in my May 2022 report that I was considering exiting ZI. Quite simply, I think their revenue growth is just too low when I have other companies growing much faster.

Earnings Analysis
BILL.COM

The economy is in a recession, but nobody told Bill.com, who reported a terrific quarter. Core organic revenue growth was 13% QoQ, a big improvement from the 2% it was last quarter. On a YoY basis, core organic growth was 71%.

Transactions revenue growth picked up to 17% QoQ, another big improvement from the previous quarter when it was 4% QoQ. DBNRR was 131% vs 124% in the comparable quarter last year. The company attributed this to "success driving adoption of variable price payments".

NG gross margin was 84%, up from 80% in the comparable quarter last year. This is terrific, but the company did make comments on the call which alluded to this margin improvement not being a permanent fixture. Rather, it is the outcome of fortunate short term variables that the company can't necessarily promise for the long term.

The guide for fiscal year 2023 is for 52% revenue growth. Considering the current macro environment, I think this is fantastic, and I was honestly expecting it to be much lower. Now, their forecast for fiscal Q1 of 2023 is less inspiring, coming in at 5% QoQ. It's more in line with guidance they gave in 2020 than it is from the sort of guidance we got in their blow out year, 2021.

Worth noting, the company did indicate they saw reduced levels of spend going through their platform in particular from larger customers. They said their guide reflects this.

Another important thing to mention about their guidance, is that they are expecting non-GAAP net income of $45m on the high end for the upcoming fiscal year. This is a pretty big deal considering they've never posted a non-GAAP profit (per the 8 quarters of data I have). It’s good to see their business showing some leverage.

One of very few weak spots was organic subscriptions growth, which was only 6% QoQ. That is two weak quarters in a row on this metric. It's important though not to expect perfection from any one company, and this one lackluster result does not make Bill.com a bad investment.

Bill.com can be considered a more complex business to analyze because of its combination of SaaS revenue and subscription revenue, its recent acquisitions, and its weird but cool float revenue (which is highly dependent on interest rates and actually benefits from rising interest rates). But I don't want to over-analyze this one, because what we have here is a founder led SaaS business with nearly best in class revenue growth, a sticky product which saves customers large amounts of time, improving profitability metrics, and a track record of conservatism and beating their own guidance.

DATADOG

Datadog didn't deliver a subpar quarter relative to most other companies, however, Datadog did deliver a subpar quarter relative to the high bar it has set for itself over the past 3 years of its life as a public company.

12% QoQ revenue growth makes this the fifth worst quarter Datadog has ever reported. And its guidance for next quarter is 2% which is by far their worst guidance ever. This could of course be sandbagging, and frankly we expect it from Datadog.

For those of you who think I'm being overly harsh to Datadog since it was only one bad quarter, I'd also like to point out that Q1 was a relatively weak quarter as well. I looked past that since Q1 was weak in 2021, thinking that they may rebound the same way they did in Q2 2021.

Additionally, we saw enterprise customer growth slow to 8% QoQ. DDOG hasn't given us enterprise customer growth that low since Q2 of 2020.

And the last bit of bad news was that billings and subsequently free cash flows were a miss in my opinion. Billings dropped QoQ 11%, which is highly unusual for DDOG, and FCF dropped substantially from $130m in Q1 2022 to $60m in Q2 2022. I was hoping this was a seasonal drop, but actually if you look back to 2021, there was not a similar drop off from Q1 to Q2.

Personally, I try not to read too much into secondary metrics such as billings, free cash flows, and RPO. As a growth stock investor, revenue growth is more important to me. However, when revenue growth is decelerating as it is with Datadog, and profitability metrics deteriorate, it starts to make the bigger picture sour.

I think this will turn out to be a blip, and Datadog will course correct. I'm still a big time bull of Datadog, and by no means am I considering selling out of DDOG entirely. That said, I currently have a whopping 24% of my portfolio invested in DDOG. Now I would like to probably cut it in half to a normal size position.

The thing is, I also don't want any more cash, and I don't really want to add to any of my other positions. So I am going to see how earnings season shakes out and make my decision in due time.

Bright spots: $84m net income on a non-GAAP basis and it was almost profitable on a GAAP basis.

CLOUDFLARE
Revenue growth was 11%, which is pretty typical for Cloudflare. This was a 3% beat over their guidance, which is somewhat of a small revenue beat for them. On the other hand, guidance for next quarter was on the strong side of normal at 7%.

Free cash flows recovered mightily to -$4.4m from the previous quarter when they were an astounding -$64.4m. I think this explains some of the 25% after earnings pop we got. After Q1 results, some people freaked out over the bad cash flow numbers (even though management had warned us in Q4 that we would see a drop in FCF's in Q1). Now that the FCF numbers are back to normal, some investors jumped back in.

The other noticeable improvement came in enterprise customer growth, which grew 14% sequentially, whereas in Q1, we saw 9% sequential growth.

More business as usual areas: non GAAP net income was $0.3m, not much changed from last quarter's $3.5m. Non-GAAP gross margins were 79%, and DBNER ticked downward 1% to 126%.

Wrapping Up

We have accelerated quite a bit from the lowest of lows seen earlier this year. There is always no telling in the short term where we're going to be next, but I am very optimistic about what our returns will be from here in the long term. Thanks for reading!