March 2022 Portfolio Review

Welcome to my March 2022 portfolio update! My portfolio is up 205% as of writing on 3/24/2022 from when I started tracking my results in January of 2020. This means that, $100 invested in the ExponentialDave portfolio on January 1, 2020 would now be worth $305, which is slightly more than a triple (3x). Meanwhile my benchmark, WCLD, is “only” up 58% since January of 2020, and the S&P 500 is only up 38% since January 2020. For the period from January 1st, 2022 through 3/24/2022, my portfolio is down 29%, meanwhile WCLD is down 21%, and the S&P 500 is down 6%.

Monthly YTD performance at the end of each month
Jan 2022: -24%
Feb 2022: -28%
As of writing on 3/24/2022: -29%

2020 Performance: 225%
2021 Performance: 30%
Cumulative Performance 1/1/2020 – 3/24/2022: 205%

Note, I do not expect to ever make 225% again, and my goal is 30%-40% annually. Of course, no promises that I will get 30%-40% every year.

Current Allocation vs Allocation as of Last Portfolio Update on 2/21/2022:

Conviction Levels:
First Tier: DDOG
Second Tier: BILL, NET, ZS, SNOW, S, MDB
Third Tier: MNDY, ZI

Risk/Reward Categorization
Higher Reward, Higher Risk: SNOW, MNDY, S
Higher Reward, Lower Risk: DDOG, BILL
Lower Reward/Lower Risk: ZS, ZI, NET, MDB

SELLS:
I completely sold out of Amplitude soon after my last monthly report, as I indicated I probably would in the report. For more info on why, check out my February update.

On the portfolio’s performance lately:
The portfolio is obviously not where I want it to be this year. If you look from February to March, it looks like my portfolio was pretty steady, ending February at down 28% and edging downwards to -29% in March. In reality, March was nothing short of violent! In fact, on March 15th, I was down 47% for the year. So effectively, if I had started the year with $100, I would have only been left with $53, and now, at a 29% loss, I am back up to $71. Although I am still down a lot, going from $53 to $71 is actually about a 34% gain. Not bad!

A lot of people were going to cash at the lowest point (and still are). I have a long ways to go to hit my goals, and I am down a lot YTD, but I have decided firmly that selling out to cash now is probably a horrible decision for me. Everyone’s different and we all have our own individual financial goals and risk tolerances. I know people who sold to cash. I respect their decisions, but for me personally I think we’re getting an incredible opportunity in hypergrowth stocks right now.

I have no idea when we will start seeing a return to normalcy in growth stocks, but we were clearly in a panic (probably still are), and I do not sell in panics.

On Stock Options
They are performing substantially worse than my overall portfolio. Luckily most of them are expiring in 2024, so there is ample time for them to come back. In general, their performance is varying from down a little (my DDOG options are down 6% cumulatively) to almost completely worthless (my MNDY options are down between 68% and 91%). When I purchased MNDY options, only December 2022 expiry was available.

Options are great only when you are extremely confident in the underlying stock and the timeline/expiry of the option. Otherwise they are basically weapons of mass destruction for your portfolio. My saving grace was that I never let them occupy more than 15% of my portfolio, even when times were very good and I kept doubling and tripling whatever money I put into Upstart options. In the future, I will probably use much more stringent criteria before deciding to buy options.

COMPANY SPECIFIC ANALYSIS

MongoDB
For my latest analysis on MongoDB, feel free to check out my new YouTube video here:

SNOWFLAKE
Snowflake has grown revenues between 19% and 23% QoQ every quarter going all the way back to Q3 2019. And in this quarter… it only grew at 15% QoQ. Some people may look at this and freak out, but I think you have to look at the context. Q3 2021 featured particularly high growth, coming in at 22.9% QoQ, whereas previously in the year it was growing more like 19% or 20% each quarter. So in hindsight, it looks like maybe some bigger deals got pulled into Q3 that almost could have gone into Q4, if things had been timed differently.

What else was bad? Well, Snowflake is still somewhat newly public, and we have seen them give us guidance 7 times. 5 of those times, they guided for 12% for the upcoming quarter, and one time they guided for 13%. But this time, they only guided for 8%. So guidance for next quarter is comparatively weak. Additionally, they guided to 66% growth for 2022, which, when compared with the triple digit growth of 2021, is a big slow down.

Importantly, they gave us context about why growth may be weaker than normal in the upcoming quarter and year. Specifically, they introduced a new performance enhancement which is causing customers to be able to do more work at a lower cost. Here is the relevant description from the conference call:

“No two customers are the same, but our initial testing has shown performance improvements ranging on average from 10% to 20%. We have assumed an approximately $97 million revenue impact in our full year forecast, but there is still uncertainty around the full impact these improvements can have.”

I want to emphasize that this is Snowflake’s estimate. And we know they are conservative with their estimates. So it likely won’t even impact revenues as much as they say it will (but yes, it could impact more than they say it will). And the point of these performance enhancements is to promote customers to do even more work on Snowflake. In other words, this is a long term, accretive mindset.

The last weak point was that customer growth slowed down to 44% YoY, a big step down from where it was just four quarters ago, when customer growth was 73% YoY. I don’t think this is that important, because it’s the big customers that drive most of Snowflake’s growth, which I will get to shortly.

Ok, so I’ve gone on at length about what I thought was bad. What was good then? Well, basically everything else. Million dollar customer growth was 139% YoY and 24% QoQ. This is why I’m okay with overall customer growth slowing, so long as million dollar customer growth is strong.

RPO growth was exceptional, coming in at 95% YoY and 44% QoQ. DBNER was the highest it’s been in the last 8 quarters, coming in at 178%. It will come down a lot this year due to the enhancement I mentioned previously though. Product Non-GAAP gross margin came in at 75%, up from 70% in the comparable quarter last year. And adjusted free cash flow came in at $102m, up from $17m laster year.

Key quotes from the latest earnings call:

In fiscal 2022, the number of stable edges grew 130% year-on-year. 18% of our growing customer base has at least one stable edge that is up from 13% a year ago. Snowflake’s Data Marketplace listings grew 195% this year, now with more than 1,100 data listings from over 230 providers.

ExponentialDave: Data sharing is a key part of the Snowflake investing thesis, and this is solid progress.

So as I said, we did see kind of a little bit more of a holiday effect going into January, whether people were taking longer vacations, I don’t know, but we did see it return to more normal in January. And you do see about 70% of our work is really driven by machines, the other 30% is humans and that machine and we can see that machine layer stays consistent on a daily basis and it’s the human interaction that changes. And we did see a decrease in human interaction early in January, which leads us to believe people were taking vacations.

ExponentialDave: I thought about this to see if it passes the smell test. The 70/30 split makes sense I think, and perhaps due to covid people were taking longer vacations in Q4 2021 (when they were less afraid) than they were in Q4 2020 (before the vaccines, people were too afraid to take vacations).

But I will say, definitely, our net revenue retention will go down next year because of all these improvements. It will stay above 150, but it’s not going to stay in the 170s.

MONDAY.COM
Monday.com had a pretty good quarter that was not quite as good as what Monday.com has historically done. Getting super nit picky, revenues grew at 15% QoQ or 91% YoY, whereas they have previously grown between 17% and 20% QoQ for each of the five quarters inclusively between Q3 2020 and Q3 2021. So top line growth was a smidge disappointing, but not enough to make me worried.

We’ve never had a full year’s worth of guidance given from Monday.com before, so it’s hard to compare the 54% guide they gave us to put things in context. We can only suspect it is conservative based on how they’ve been doing quarterly guidance. But it needs to be said that 54% is a big come down from 2021’s growth rate. Of course they are sandbagging, but to what extent? We will have to tune in to 2022’s earnings reports to find out. If they don’t keep growth over 70% for 2022, that will be a huge slowdown from the 91% growth they drove in 2021. So I am sort of hoping that they beat their annual guide by 16%, which is a lot to hope for from a company that hasn’t given us any annual guide before (since Monday just IPO’d last summer).

Recall, a few quarters ago, it was obvious Monday.com had a profitability problem. MNDY has shifted towards a clear path to profitability in recent quarters, a trend which continued into this quarter. We saw non-GAAP net loss improve from -$25m to -$12m this most recent quarter, NG operating margin improved from -47% to -10%, and adjusted free cash flow swung to positive $10m from -$12m.

Additionally, NG gross margin continues to be best in class, coming in at 90%, and net retention rate for customers with more than 10 users came in higher than ever at 135%, up from 130% in the preceding quarter.

All in all, hindsight is 20/20, this stock should have been a lower conviction than I’ve been giving it. This was a pretty solid quarter with questionable full year guidance. Quick reminder that the best companies intend to beat and raise this guidance for the next three quarters. Assuming all goes according to plan, it is possible and maybe even likely that they grow over 70% this year.

Key quotes from latest conference call:

“Customers with more than 10 users now account for 72% of our ARR, up from 63% a year ago.”

“we have expanded the partnership we have with KPMG and signed a Strategic Alliance Agreement with the firm. This alliance leverages the business insights of KPMG with the low-code/no-code technology of monday.com to build enterprise-grade solutions that empower KPMG member firms across the world to deliver strategic operating models to customers on top of an agile work operating system.”

“But then we have over a 130 different business use cases where you see different types of businesses from manufacturing plants that use monday to run their operations to clinical trial research, to really any kind of business out there and also 70% of our customers come from non-tech segments like not tech companies. So, we see a really wide spread usage of monday throughout those different verticals and through horizontals”

“our business model based on the ARR is 70% or more now actually it’s coming from annual subscription and 30%-ish is coming from market subscription.”

ExponentialDave : This is actually a critical difference between Monday.com and many other SaaS companies I invest in. 30% of Monday.com’s business is on a month to month, or what they call a “Market” subscription. This gives them significantly less visibility into the upcoming year’s forecast. The smart thing to do, if you are on the finance team at Monday.com coming up with guidance, is to be even more conservative. I would imagine this is precisely what happened.

“We see that 70% of the deals, we see literally no competition. People use spreadsheets and emails and PowerPoint, and usually we replace those.”

ZSCALER
Zscaler had what I thought was a pretty average quarter relative to what Zscaler historically does. Before this quarter, they had been on fire, growing at a much higher QoQ clip than usual. In this quarter, their QoQ growth rate came back down to earth to be more in line with what we saw in prior years, but YoY growth still managed to tick upward a bit to 63%. And guidance for next quarter is pretty good relative to what they historically go with, coming in at 6%.

Million dollar customer growth came in at 85% YoY, which is terrific, although QoQ million dollar customer growth of 12% this quarter and 11% the quarter before that suggest a pretty big come down in YoY million dollar customer growth is imminent.

Enterprise customer growth (spending >100k) was pretty good as well, coming in at 47%.

Profitability metrics are overall positive and not changing much. Non-GAAP gross margin was 80%, very comparable to where it was last year. The company has been non-GAAP profitable and FCF positive for a while. There was not much variation in profits from the comparable quarter last year, but FCF continues to fluctuate quarter to quarter. I don’t find this concerning.

Key quotes from latest earnings call:

Our flagship ZIA offering has been growing very well as we continue to expand our cyber and data protection services. ZPA has emerged as our second flagship offering, supporting millions of users and the majority of our Global 2000 customers.

As I have highlighted before, there are two reasons why enterprises are selecting Zscaler. One, we are the only proven cloud security provider with a proxy architecture that inspects TLS encrypted traffic at scale to deliver superior security. [Two,] We connect users to applications and not to the network, eliminating laterals at moment. This is a core principle of zero trust architecture that can’t be achieved by next-gen firewalls or cloud VPNs.

Our Zero Trust Exchange processes over 210 billion transactions in line and prevents more than seven billion security and policy violations per day

ZPA product revenue was 17% of total revenue.

Americas represented 51% of revenue, EMEA was 35% and APJ was 14%. APJ continues to be our fastest-growing region with revenue growth of 16%.

Our strong customer retention rate and our ability to upsell the broader platform have resulted in a high dollar-based net retention rate which was again above 125%

Analyst: If I look at the billings growth and 59% growth at this scale is obviously very impressive. It was a little bit below sort of the usual seasonality and the 70% type billings growth that you guys were doing over the last four quarters. So I’m just curious, when we think about billings at this scale, is there anything that we should be mindful of in terms of seasonality going forward, or anything that was perhaps one-timey a year ago, or last quarter when we think about billings growth in relation to revenue growth over the next four quarters?

Remo Canessa: So 59% billings growth, as you mentioned, is absolutely outstanding. If I take a look at Q2, if there’s one area that didn’t perform at the level that we bought it with, it was federal. Federal was low single-digit of our new and upsell business.

Now why is that? It’s just the budget constraints basically. So our feeling is that, federal will be a big portion, or a substantial portion of our business. We got the FedRAMP certification. Also, we’ve built up a strong team with the relationships. So – but to call out one thing in the quarter that I would say, was didn’t comment as we expected would be federal. It was low single digits.

And if you take a look at our RPO growth year-over-year, it was about 90% and CRPO growth was 79%. What we’ve always called out when the RPO growth rates and CRPO growth rates are going just triple digit, we brought back investors and said billings is the best way to look at our business. And when you take a look at RPO and CRPO, they’re more sensitive to the timing of large deals, the timing of renewals, contract durations and other specific terms. It’s for these reasons that we want — we feel the people should be looking at billings versus RPO or CRPO.

ExponentialDave: I appreciate the transparency here and that Remo is willing to tell us that billings is a truer KPI than RPO, even though RPO is doing comparatively better than billings. Personally, I am always partial to the revenue growth numbers, but it’s important to look at other KPI’s besides just revenue.

Analyst: I want to ask about billing growth because the stock is going down on lower billing growth than buy-side expectations. So you grew billing around 71% pretty stable the previous four quarters. This quarter it was much better than guidance, but it was lower than what we’ve seen in the previous four quarters. So that’s 59%. And then the guidance for the year is 46% more or less. So the question is, how should we think about billing growth? What can you say about this quarter? Why is it lower than previous four quarters? And then what’s the explanation, or what are the puts and takes for the following few quarters? Thanks.

Remo Canessa: Yes. I mean great question. Well four quarters in a row at this scale that 70% plus is outstanding is that sustainable? It’s very hard to sustain that when you get to the size that we are. 59% billings growth is outstanding. If you take a look at some of our prior quarters, duration plays into that top line billing growth. If you look at short-term billings growth, it was 61%. And so if you go back in prior quarters, you’ll see that’s a 61% short-term billings growth it’s a pretty good number a very good number.

ExponentialDave: I love the question from the analyst (Tal Liani). It is straight to the point about what was allegedly causing the stock price to drop after hours. With a direct question like that, I think Remo had an opportunity to really give us a good reason, and I don’t think his answer was all that great. He’s blaming the law of large numbers (yawn) and duration. It would be helpful to talk specifically about what caused duration to be unfavorable.

SentinelOne
SentinelOne’s guide came for the upcoming fiscal year came in at 81%, substantially stronger than any other company I follow. The quarter they just reported was pretty good as well, with revenue growth of 17% QoQ. This is a step down from recent quarters, where they grew between 19% and 22% for the past five quarters. I think we just have to accept some bumpiness, even in SaaS names. Especially when revenue growth on the whole is still fantastic, coming in at 119% on a YoY basis. Businesses don’t usually grow in perfectly predictable ways.

Especially notable was that enterprise customer growth spending > 100k continued its break neck growth with 25% growth QoQ and 137% growth YoY. DBNER was almost as high as ever at 129%.

Non-GAAP gross margin continues to be on the high side of normal for SentinelOne, coming in at 66%.

Profitability metrics continue to improve, with NG operating loss margin arriving at -66%, a big improvement from -104% last year. NG net loss worsened somewhat on a YoY basis to -$44m, from -$32m in the prior year. This is fine by me since NG operating loss margin improved.

Key Quotes from latest Earnings Call:

We added a record number of $100,000-plus ARR deals, a record number of million dollar-plus ARR customers and closed our largest ever net new customer contract, one of the most influential and leading global Internet companies

I’m pleased to share that we ended the fourth quarter with double-digit year-over-year improvement in both our gross and operating margins. Our gross margins expanded 12 percentage points year-over-year, and our operating margin improved 38%

Our 2-way technology integrations with Zscaler, Mimecast, ServiceNow and many others demonstrate top-tier vendors working together as part of the Singularity ecosystem.

Our revenue guidance for Q1 implies that we should be at or better than typical Q1 net new ARR seasonality, which has been down between 25% to 35% sequentially in the past 2 years.

I want to be clear, Attivo is not currently factored into our fiscal ’23 guidance at this time. We expect to incorporate their financials into our outlook after the deal closes on our next earnings call.

They concluded their quarter ended December ’21 with over 300 customers and ARR of approximately $30 million, growing north of 50%. For calendar year ’22, the current forecast for the business is to deliver revenue of approximately $40 million for the full year

ExponentialDave: 50% growth is a little disappointing for me, especially considering SentinelOne is organically growing triple digits. So this Attivo acquisition would likely decelerate revenue growth, but the good news is that SentinelOne will probably do over $400m of revenue in 2022, so this new acquisition would account for a pretty small percent of revenues.

Wrapping Up
As always, thanks for reading this far! Let me know in the comments what you think of the report, Substack, or whatever comes to mind.