Monthly Company Review
Software Analysis of $CRWD, $DDOG, $SNOW, $S, $GTLB.
Welcome to April!
It’s springtime, the dawning of a new season. I hope the season brings you much peace and happiness amidst so much chaos in society. This writeup is a mini shallow dive into 15-companies, discussing their recent earnings reports and business updates.
I hope this company review serves as a mini-review of different emerging tech companies. Going forward, I plan to do a bi-monthly company review. This is likely more helpful since it allows one to encapsulate a couple of business updates into one piece. Secondly, I have had a big personal update which will constrain my time from being able to go deep into these companies every month (I will share this update by June’s review!)
Lastly, I know some people subscribed to see my industry analysis on cybersecurity, AI/ML, and a few sectors. Don’t worry, I’m working on an interesting project that will allow me to publish this report in a more expansive and informative way in my next update in June, I’ll announce it. Stay tuned.
Now, let’s discuss the current market situation and portfolio. This is the best meme that describes the last three months for investors versus the three months of Q3 2021. Everyone disappears when the market declines instead of people embracing the good prices the market brings with a decline.
AMD:
I have a large position in AMD primarily due to the solidity of their business model and the low volatility of the stock (especially in the current market condition). Semiconductor players like AMD (or Nvidia/TSMC) are going to be some of the most important companies coming out of this period of uncertainty. Their financial profile is almost flawless, not to mention they bought back almost $8b of shares in February. There are so many tailwinds in gaming, computing, networking, PCs, etc that should continue to drive future growth and profits for AMD. If the market uncertainty reduces, I’ll likely reduce my big position and reallocate it to other emerging players in the portfolio.
Fortinet:
There is a similar theme for Fortinet. I have a large position primarily because of the low volatility vs. outperformance of the stock, especially amidst the market volatility. My business thesis is that Network cybersecurity continues to be an important, if not the most critical aspect of all major corporations during this period of heightened uncertainty in Ukraine. Fortinet is positioned strongly across the enterprise to benefit from the increased cybersecurity spending from companies to protect their networks and firewalls. Fortinet has one of the best financial metrics with regard to revenue growth and operating margin profile. The bonus aspect is that the stock’s beta is a huge advantage/hedge. It continues to remain one of the best performing SaaS companies this year. I have no reason to reduce until we’re completely clear of any major volatility, similar to AMD. The key financial metrics for FTNT can be found below:
Crowdstrike:
Cybersecurity is one of the most important and most-discussed topics amongst executives and business leaders. Crowdstrike fits well into these conversations.
Crowdstrike had a strong quarter. They grew revenue by 66% YoY and they generated over 30% Free Cash flow margin. Their guidance suggests 45% YoY which means they will likely come close to 55% while growing to over $2.billion in sales. This is an incredible feat on a large scale for them to grow this fast despite being getting bigger.
Below are the key metrics from their earnings report:
Brad Freeman (@StockMarketNerd) has done a good job of analyzing and providing relevant commentary, so I would not provide much of an analysis. Crowdstrike analysis.
During these volatile markets where cybersecurity is playing such a pivotal role, I want my largest holdings to be steady companies that are well-established, have strong business models, and are mission-critical. I want to combine companies with proven business models, decent growth, and profitability and mix them up with emerging upstarts within software. As a result, this is why I hold a high position in Crowdstrike.
Snowflake:
The big splashy analytics company had an interesting quarter, to say the least. I have provided my earnings analysis below, but the tl:dr of the report is that snowflake expects slower revenue growth in 2022 primarily due to a software improvement that will reduce customers’ ability to consume more on the platform. It’s important to remember that this improvement will attract future customers because it will make the platform even more competitive and highly performant. Investors who desire Snowflake have to accept short-term pain for long-term gains.
In this market, I want to own companies that are essential, mission-critical, and importantly that have a superior competitive advantage that will enable them to sustain high revenue growth over a long period of time. Snowflake has taken the right steps. Below are key financial metrics for the company as of the last report (blue representing the metrics from the recent quarter):
My full analysis and commentary of the following metrics can be found below here:
In general, the quarter was good. The business continues to show strong momentum, albeit a short pause while they improve. I’ll note that Snowflake has started generating meaningful free cash flow and the valuation is the cheapest it has been since it went public. This bodes well for decent future returns.
Additional analysis is available on : Muj’s (hhhypergrowth) Snowflake analysis.
Peter Offringa put together a superb free analysis on snowflake’s tech and earnings
I created another discussion about Snowflake’s dollar-based net retention rate, link can be found by clicking here.
Finally, Peter Lynch once gave a piece of advice that says “Invest in what you know & see around. Always ensure the long-term growth rate is greater than the P/E Ratio you pay. Any business that manages to keep a 20% growth rate for 20 years will reward shareholders with a massive return, even if the stock market overall is lower”
I cannot help but think that Snowflake falls into the category of companies that can grow over 20% for a very long-time, therefore, I’ll remain long.
Datadog:
Datadog had one of the best quarters among all software companies. They are one of my highest conviction names. One of the best fun facts about them is that they grew revenue by almost 80% in this recent quarter while growing sales and marketing by only 40%. This is a high level of operating leverage and value capture.
The key metrics can be seen below - The acceleration and key metrics describe the strong result. (Green represents an acceleration).
Key notable lines from their earnings report:
“Our dollar-based net retention rate remained above 130% for the 18th consecutive quarter. Our customers expanded the usage of our largest products meaningfully. And we're very pleased to report that our newer products added about $100 million in ARR in 2021. These are the newer products we launched in 2019, which excludes core infrastructure, core APM, and log management.”
Datadog continues to hold one of the best sales efficiency metrics amongst software companies. The company continues to rapidly innovate and continue to release products that customers really need. In this recent quarter, they added the most customers ever in a single quarter: 1300 customers. Additionally, customers using 4+ products grew from 22% to 33% over the past year.
“Our go-to-market teams delivered a strong quarter in new logos and new logo ARR. We added 1,300 customers sequentially, a new record for us. And new logo ARR was also a record and included our largest ARR land ever, as Olivier discussed earlier. CFO David Obstler.
Datadog continues to advance its desire to become a key cybersecurity player in the observability industry. Additional drivers of future revenue are that they recently achieved the FedRAMP Moderate status which will enable them to win more government contracts. One additional point is that their recent partnership with AWS will continue to provide broader exposure to the Datadog product amongst Amazon’s larger customer base which should continue to drive large revenue.
Muji @ Hhhpergrowth newsletter provides a thorough analysis of Datadog’s report, here
Additionally, Jiggy’s substack provides some great context, here.
Datadog is currently one of my highest conviction names. If it becomes cheaper due to market conditions, I will be happy to buy more.
Gitlab - (deep-dive available):
Gitlab is a new position. I have created an extensive deep-dive that can be found by clicking on this Gitlab (deep-dive report by Francis). This is a new experiment, instead of providing a full writeup within this already long report, I have created an external for people interested in reading (let me know if this is helpful).
Gitlab is a company that provides a DevOps platform that provides the ability to develop, secure, and operate software in one platform. The platform allows for collaboration amongst developers, IT, operations, security, and business teams to deliver business outcomes. The ultimate goal of DevOps is to allow teams to collaborate and work together to shorten the development lifecycle. Gitlab is one of the few dominant players in software development and DevOps. The company’s product is incredibly sticky, mission-critical, has multiple flywheel effects, and is extremely popular amongst all developers.
Below are the key financial metrics for the business that shows the reason I am bullish on their future prospects. I have provided full commentary on the financial metrics in the deep-dive link here.
Overall, this is a business that I believe will continue to grow for multiple years.
D-local (deep-dive available):
DLO is the fastest-growing international payments company. D-local is a payments company that facilitates global merchants to receive and make online payments (both cross border as well as locally) in emerging markets across Latin America, the Middle East, Africa, and Asia. They already boast of large big tech companies such as Microsoft, Amazon, Spotify, Goggle, Netflix, Nike, Expedia, and many more. I have created a deep-dive that is available here, click here.
I created a Twitter thread where you can also read more about the business by clicking the tweet below:
Below are the key financial metrics for the business: There are only a few businesses that can have this much growth and profits.
Overall, DLO is a high conviction business for me. This is a business that checks all the marks for the key elements I expect from my businesses: high revenue growth, a strong moat, high-profit margins, and a high dollar-based net retention rate which proves out the high business value proposition.
Bill.com:
Bill.com is a provider of cloud-based solutions that automates SMB back-office operations through a hybrid software and payments model. Some of the best large investors and institutions have positions within Bill. There is a strong reason.
Bill helps accountants and back-office operation staff automate costly and time-intensive back-office functions such as accounts payable (AP) ad accounts receivable (AR) functions - primarily the manual and paper tasks surrounding these processes. Additionally, they provide payment services, employee spend management (through Divvy), and invoice management (through Invoice2go). The business makes money through a subscription service. This is a highly sticky business with a powerful go-to-market distribution model and a very strong competitive position within its industry.
I have done extensive analysis and this is a thread that outlines everything. My Analysis of bill →
SentinelOne:
SentinelOne is an endpoint protection cybersecurity company. They are very similar to Crowdstrike, but I have a high level of conviction in the business (despite negative margins) because there many different evidence that shows SentinelOne has the best product within the EPP/EDR security market.
I have done an analysis of their business which can be found in the thread below:
Below are the key financial metrics:
The results were good. They appear to show that a few deals got pushed from Q4 to Q1. Their recent quarter had a small blip but their forward guidance of over 80% YoY revenue growth for 2022 suggests there would be no slowdown yet.
My analysis of their recent quarterly results can be seen below - I created a thread highlighting some quick notes from the report at the airport. Please feel free to read it here:
A major highlight of the quarter was that they acquired a company called Attivo.
Additionally in the quarter, they added a record number of $100K plus ARR customers and closed their largest-ever net new customer contract (one of the most influential and leading global internet companies.) They have made important partnerships with ZScaler, Mandiant (acquired by Google), and Mimecast. The future is bright, the important thing is that they need to find ways to improve their margins, generate more free cash flow from their large enterprise deals, and maintain consistent growth at a scale similar to Crowdstrike. I remain very convinced in SentinelOne’s future growth prospect especially with the current volatility in the cybersecurity space due to the tensions happening in Europe.
Confluent:
This was business as usual. Confluent saw an acceleration in revenue growth for their last Q4 quarter to 71% and QoQ growth of 16%. All the metrics can be seen below. The market was worried about their somewhat tepid growth guidance of 55% for the upcoming year, but based on the comments on management on the call around the large contracts they had been winning and their RPO growth of 91%, we have some guidance to suggest that their guidance was conservative. Confluent cloud continues to grow fast (211% growth), they saw a huge jump in their new customer growth (65% YoY and 15% QoQ) and finally, a strong DBNRR of 130% - All pointing towards a strong outlook. Key metrics highlighted below:
Below are my commentary and analysis of the key metrics from the recent earnings report below.
Overall my conviction remains strong in this business. On the technology side, we know that there continues to be strong traction for their managed cloud solutions product as data continues to grow exponentially. Finally, the best evidence of my conviction can be seen in the spending intent of executives as of April 2022, ETR’s research of Fortune 2000 companies showed a big spike that points towards continued increased spending on confluent’s platform into Spring 2022, link here.
Affirm Holdings:
Affirm is currently a mixed bag. The much-anticipated partnership with Amazon doesn’t appear to be showing high marginal benefits to their business (at least just yet). Their total GMV sales grew 114% (boosted by transactions on Amazon), but the business was only able to capture 361M in revenue (which was a 76% YoY rev. growth). This is a 38-pts spread. I had hoped for growth closer to >80%. Their profitability also worsened in the current quarter. The business showed some strong gains in customer growth and engagement. Below are the key metrics:
In this Twitter thread, please find my full commentary and analysis of the last quarter.
Overall, my conviction is low on Affirm because most of the results and value capture are not happening as I had hoped especially because of the high costs of their large partnerships. However, I hold a small position because I am a firm believer in the Founder’s ability to continue to transform the business. Secondly, Buy-Now-Pay-Later continues to show meaningful progress as a real payment method and, Affirm’s vertically integrated business is in a good position to capture a meaningful share of this market.
Wrapping up:
In this edition, I won’t be able to go deep into Cloudflare, ZScaler, and Palantir due to time constraints. Beyond Palantir where my conviction is lower due to its slower growth and deteriorating margins due to dilution, I have a high level of conviction in Cloudflare and ZScaler especially as cybersecurity is the major order of today’s news. More updates in future writeups.
Watchlist: MQ, BRZE, HCP, MDB.
Conclusion.
Over the past months, I have done more reflection about holding businesses that are mission-critical and are showing real signs of improving their profitability and producing cash. Yes, I own a couple of businesses that are unprofitable, but based on my analysis, many of these companies have good basic unit economics that proves they can be profitable within the nearest future. A friend Investing City shared some comments with me that I wanted to share to wrap-up:
“Investing is about how much value a business is providing and how much of that value the business is capturing. Understanding these two dynamics is much more difficult than if there is a negative in front of the operating income line but it’s much more important. Value creation is all about the value prop of the product or service. Value capture is more about the hard numbers like the cost to acquire a customer and how valuable that customer is in the future. All businesses can essentially be reduced down to a price per unit and units sold. The underlying margins of each unit are called unit economics”
These are important components to think about when analyzing businesses. Overall, this market downturn has been a humbling experience for everyone. Atleast for myself, but it’s been a great teacher of lessons. However, I know that this is a great period to own stocks when they are hated by everyone. During bull markets, the human mind is programmed toward waiting for corrections, but when they come, everyone runs away.
"Everyone has the brainpower to make money in stocks. Not everyone has the stomach. "In dieting and in stocks, it is the gut and not the head that determines the results." - Peter Lynch.
Thank you for reading. This compilation takes some time, so I hope it’s valuable. Let me know ways I can improve it for subscribers and feel free to send your questions and leave a comment. I look forward to sharing some personal updates/projects that will lead to a more expansive company analysis for all my subscribers in June.
Have a great April!
bro, thank you very much for all your work.
one thing which felt a bit strange - you mentioned Peter Lynch's quote and use Snowflake in the same paragraph. like, have you seen Snowflake's PE multiple?
“Invest in what you know & see around. Always ensure the long-term growth rate is greater than the P/E Ratio you pay. Any business that manages to keep a 20% growth rate for 20 years will reward shareholders with a massive return, even if the stock market overall is lower”
This was excellent, thanks for the valuable insight and review.