I ended last month’s post with the following:

‘Well next month can’t be any worse, can it…?’

Though I was at the time referring to stock market returns, if applied to global affairs my comment couldn’t have been more sadly wrong. While discussion of military conflicts is well beyond the scope of this newsletter, it would be remiss of me not to mention Packy McCormick’s Ukraine post which contains several links to donate to those in need in the country, and highlights this comprehensive Notion page which details wider help that can be provided.

Market-wise, it’s been another topsy-turvy month. After all the noise in equities over the past few weeks, it was nice to have some real business action, with the majority of the portfolio holdings having reported earnings in February. At the risk of jinxing it, I count myself lucky that so far I’ve avoided some of the worse sell-offs in growth names… whether that will continue, who’s to say?!

As the beaten-to-death Benjamin Graham quotation goes: ‘In the short run, the market is a voting machine but in the long run it is a weighing machine.’ In this vein, I thought I’d compare the top 10 EV/NTM SaaS revenue multiples highlighted in Jamin Ball’s informative Clouded Judgement newsletter from his first weekly update (19th June 2020), the year-ago period (late February 2021) and the most recent data. The respective periods are shown from left to right below. I’m curious to see which businesses are present on all ocassions (i.e. which businesses does the market feel have justified high valuation over time, even after recent drawdowns) and how much overlap there is with my portfolio.

[Jamin Ball SaaS comparison.png]

It’s interesting to note that of all businesses listed, only Zscaler, Cloudflare and Bill.com appear on each occasion (Snowflake was not public at the time of the first update). I’ll leave any inferences to the reader. Also of note considering the recent narrative around the market favouring profitability is the appetite over time for names with increasingly negative operating margins. While these comparisons don’t occur over a long-enough timeline to draw any meaningful conclusions, they do give some insight into market sentiment in individual companies. It’ll be interesting to run them again in a couple of years.

While there have been some severe beat-downs amongst individual growth names following the release of their Q4 21 reports, the market has generally rewarded business results that have acted as a reminder that ‘digital transformation’ (amongst other tailwinds) isn’t suddenly going to stop. This has resulted in continued bifurcation between the high-multiple and average SaaS businesses. Edited highlights below.

Business Updates

Datadog - 10/02:

  • Biggest sequential quarter-over-quarter revenue increase as a public company (21%).
  • Strong guide for Q1 - high-end of guidance implies 71% beat (given management’s tendency for conservatism and their typical guidance beat, I’m expecting this will come in nearer $360M for ~80% YoY growth). Full year guide for 48% YoY but again, likely to exceed this by some margin.
  • Operating cash flow increased to 35% of revenues & gross margins increased to 80% (as high as they’ve ever been).
  • Third sequential quarter of 12% increase in customer adds.
  • Now achieved FedRAMP moderate-impact authorisation which allows selling of their products to the majority of civilian agencies.
  • They’re seeing increased consolidation over the entire platform though the default sales motion still leans towards unbundled/land & expand.
  • Shipping Cloud Cost Management Product next year - Datadog themselves will be amongst the first users (this came after a question regarding the bump in gross margins, which perhaps hints that high-70s GM is durable long-term. Explanation for bump this quarter was ‘efficiencies in cloud costs’).
  • Continued focus on scaling the team over 2022.

Cloudflare - 10/02:

  • Acceleration in revenue - joint highest ever growth of 54% YoY and guiding similarly for Q1. Fifth straight year of 50% or greater growth. Have now had 12 public quarters, with growth never below 48% YoY for any one quarter. Full year guide for 42% at high-end. As with Datadog, expecting this to be beaten, though not by as wide a margin.
  • Operating expenses crept up to 45% of revenue - something to keep an eye on.
  • 33% operating cash flow margin and first quarter of positive FCF though management are keen to point out profitability is not a priority currently and instead want to continue to heavily re-invest in the business. Negative cash flows expected for next 2 quarters before return to positive FCF in H2 22.
  • At least 7 innovation weeks planned for 2022.
  • DBNRR increased to record 125% but enterprise customer adds notably slowed sequentially from recent mid-teen growth to 12.4%
  • More than 20% of enterprise deals now include Workers.
  • No customer larger than 5% of revenue.
  • Seeing regular wins with Workers vs AWS/GCP/Azure equivalents. More to come on Workers improvements during Q1.
  • Acquired Vectrix, a Cloud Access Security Broker - allows visibility and control over data stored in SaaS applications.

Upstart - 15/02:

  • Blow-out quarter of 252% YoY growth. FY net income of $137M on $849M revenues.
  • Grew income from operations 111% QoQ to $60.4M. 20% Operating margin.
  • 52% contribution margin.
  • Not so clear that last quarter was an indication of slowdown. Perhaps it was the anomaly?
  • “it suggests you’re witnessing the creation of an industry-defining category”. Comments don’t get much more bullish than this…
  • $4B in loan transactions. Partners originated almost 500,000 loans. 42 banks and credit unions. 7 lenders with no minimum FICO score required.
  • > 2/3rds of hires made outside of California and Ohio in Q4.
  • Accomplished meaningful scale in auto-lending already. Now comparable to personal loan funnel in 2019. Expect $1.5B in auto loan transactions in 2022.
  • ‘Think of ourselves as an internet brand focussed on personal finance’.
  • 495000 loans up 305% YoY, representing 400,000 new borrowers, both prime and hidden-prime.
  • Hiring was slower than desired.
  • Expecting negative sequential growth in Q1 22 - seasonality (tax refund season). Expect 148% growth at midpoint ($305M high-end), CM 46%; NI $22M, Adj. NI $52M.
  • Expect $1.4B FY22 (65% YoY), CM 45%, Adj. EBITDA 17%, $1.5B auto loan volume.
  • $400M share buyback.

Airbnb - 15/02:

  • Strong revenue growth of 78.4% and maintained >80% Gross Margins
  • $54M in net income. FCF for the year was 36% of revenue (24.6% in quarter). Strong guide of >66% rev growth for Q1.
  • Adj. EBITDA $333M, 22% margin.
  • In last year, 150 upgrades to service - used as explanation for best year in company history despite the pandemic (isn’t it more attributable to the optimisation of the business in 2020?)
  • Almost half booked nights in Q1 were for stays of 1 week or longer. 1/5th were 1 month or longer.
  • Wording sounds as though Average Daily Rate (ADRs) may moderate slightly this year, leaving some upside in EBITDA.
  • Expecting less of an improvement in overall expenses in 22 vs 21, guide is flat for EBITDA.
  • 33% of hosts this Q were prior guests.
  • On service fees and take rate - there is ‘no question’ they have the opportunity to increase take rate on the guest and host side (regardless of fee discontent amongst customers?)
  • Sees distinct use-cases for Airbnb and hotels and doesn’t see them necessarily as competing. Will invest in partnering with hotels over long-term but not immediate focus.
  • Planning to pay for RSU tax obligations with $1B cash.
  • 25% more nights booked for the summer travel season than in 2019.

Monday.com - 23/02:

  • Strong YoY growth of 91% but slowest sequential quarter as a public company.
  • Guide for Q1 Op Loss is concerning (~-45% of revenue)
  • Maintained huge marketing spend (~73% of revenues)
  • NDRR >10 users improved to 135%, all users now over 120%
  • Expanding from one product into a product suite. Monday WorkForms and Monday Canvas announced. WorkForms captures data (think Google Forms). Canvas is basically FigJam (with fewer features and currently in beta).
  • 1,064 employees at EOY. Up 51% YoY. Continue to have ambitious goals for hiring in future.
  • WorkForms and Canvas are funnels for the broader Monday.com project management app. Places where people may start projects.
  • 70% of the deals ‘there is no competition - people using spreadsheets, emails and powerpoint…’ That sounds a lot like competition to me.
  • Several >$1M deals for first time.
  • Seeing less churn and more expansion within some users - explains 119% NRR -> 136% in 10+ users.
  • Regarding S&M - continued investment in headcount, increasing quotas, increasing partner channels & customer success management group.
  • Expanded KPMG partnership - where Monday don’t have sales-people, partners are becoming a very meaningful contribution to ARR. 150 channel partners globally.

Coinbase - 24/02:

  • Huge Q4 - strong increases in MTUs, trading volume and assets on platform.
  • Sequential quarterly revenue more than doubled as did net income.
  • Bitcoin now 25% of assets down from 44% last year.
  • Crypto assets on Coinbase represented 11.5% of total crypto market vs 12.2% at end of Q3.
  • Guiding for Q1 sequential decrease in MTUs and total trading volume. Lower crypto prices will drive lower revenue in Q1. Transaction expenses in low-mid 20s. Op ex $1.2-$1.3B
  • MTUs up over 4x YoY
  • 10x increase in sub revenue YoY. $214M in Q4.
  • Low-end of range the full-year adjusted EBITDA loss would be no more than $500M vs the $7B in cash currently held.
  • CFO basically says they’re bullish on the stock at these levels… Brian says they try not to think about it too much and have a long-term view. I’d prefer they didn’t mention it at all.
  • Say that there appears to now be a ‘path to registration’ for lending product as a result of some of the recent enforcement actions.
  • They view DAOs as the Delaware C Copr of the crypto economy (yeah, I know). They want to help users create DAOs and support ancillary services (conducting votes, arranging payroll, taxes etc.)
  • They roughly want to operate the business at breakeven, smoothed out over multiple years if there are up and down cycles.
  • Marketing efforts are going to be quantitatively driven as with Super Bowl ad.
  • Adding institutional access to ETH2 this year.

YTD return vs benchmarks

(Index source: Koyfin)

Portfolio Nasdaq S&P 500 FTSE 100
-14.4% -12.77% -8.22% 1.07%

Portfolio

Holding Ticker(s) Weighting (%)
🐶 Datadog DDOG 22.7
❄️ Snowflake SNOW 16.0
💸 Upstart UPST 13.7
🦅 Crowdstrike CRWD 11.3
🗂 Monday.com MNDY 6.4
🕸 Cloudflare NET 5.3
🪙 Coinbase COIN 4.7
⚖️ Zscaler ZS 4.6
🏡 Airbnb ABNB 4.1
🔐 SentinelOne S 3.9
💰 Cash - 7.1

Adjustments

Upstart:

Not a huge amount to report on here. They had an amazing quarter and given their favourable valuation I heavily increased my position however the price appreciation in the past few days has lofted the holding to a higher concentration than I would like.

Monday.com:

Along with the market, I found Monday’s results left a lot to be desired. The revenue growth is spectacular, no doubt, but the amount that is being sacrificed in other areas of the business in order to achieve it concerns me. It was my expectation that S&M would continue to fall as a percentage of revenues but it remained ~73%. As management also indicated a return to heavier operating losses next quarter and emphasised that they would continue to spend heavily given they are in ‘land-grabbing’ phase I balanced their results versus some of the other portfolio names growing at a similar rate, yet profitably and decided to further trim my position. Its days in my portfolio could be numbered.

Coinbase:

Coinbase’s allocation has been cut in half since last month - not so much because my conviction was hurt by their recent earnings (the opposite is true) but more because I realised they were inappropriately sized given the size of the execution risk here. I’m also far from a fan of Brian Armstrong’s tendency to get himself into hot water online, which was on display again this month. Despite this reservation I expect to hold Coinbase for a long time to come given my expectation that adoption of cryptocurrencies will continue to grow and Coinbase will maintain or increase their market share.

Zscaler:

A new addition to the portfolio, I kept an eye on Zscaler’s earnings report last week as it’s a name I’ve owned in the past and was keen on entering again after their recent impressive results. As luck would have it, the market decided their latest stellar report, where they grew yearly revenues 63%, RPO 90% and FCF 63%, wasn’t worth getting out of bed for and shares dipped 20%. I happily bought a larger-than-usual starter position. While it does compete directly with Cloudflare in some areas cloud security should be a large enough arena to hold both.

Concluding Remarks

Given my track record, I think I’ll skip predictions this month…