End of Month Update April 2022
Well, that was a rubbish month wasn’t it?! Markets have continued to fall over the past month as pressure mounts on the federal reserve to increase the rate at which they increase rates with tech stocks in particular largely falling as a group - often a sure sign that the macro backdrop is cause for the decline rather than information driven by business news/performance.
It's not hard to find cheap stocks, it's hard to have money left to buy them.
— Jerry Capital (@JerryCap) April 26, 2022
If I could summarise investing in April 2022 in one tweet.
That’s left us in an interesting spot with regard to valuations. With markets as they are currently, there’s a temptation to categorise many software names as ‘cheap’. The issue with this is the point of comparison used to determine good value; looked at alongside mid-2021 valuations, many of today’s SaaS stocks could be perceived as bargains; this also seems to be the case when compared to the pre-covid state of play (scroll to the ‘Update on Multiples’ section for pre-2020 graphs). However, it’s important to remember that both periods were defined by extremely low interest rates. The number one question is what happens to rates now?
The Fed now have to attempt to thread the needle between increasing interest rates enough to keep a lid on inflation (if they aren’t already acting too late) and keeping enough momentum in the economy so that a recession is avoided. As there is some debate over the extent to which central bank policy can curb inflation (the cause of which is out of their control), whether or not you are buying stocks for the long-term right now essentially boils down to whether or not you believe capitalism can quickly and effectively solve the issue of heavy supply-chain disruption in order to alleviate the inflation problem. It’s arguable that even in a situation where we have both high inflation and high rates, software businesses are some of the best placed to weather the storm due to their stellar margins (nobody mention stock-based compensation…)
That’s certainly an argument that I’d make and given that SaaS businesses are currently at their most attractive valuations since late 2019/early 2020 despite a much clearer and rosier outlook in comparison to that period, I’m bullish on the risk/reward they currently offer.
Then again, what do I know? I’m reminded of these words of wisdom from Terry Smith, alluded to at the end of January’s update - I think I’m more likely to experience investing success by remaining invested than convincing myself that I can both predict the future and profit from those predictions. Who forecast this year’s events at this stage last year?
Business Updates
After a manic March, April was a quieter month in terms of company news though there were still a number of interesting announcements:
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Airbnb announced that they are now a ‘work from anywhere’ company and the CPO at Coinbase was quick to offer advice on lessons learnt (“Look, we’re remote too!”)
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Coinbase themselves launched their NFT marketplace beta - having explored it for a few minutes my cursory impression is that it’s very similar to OpenSea. They also announced Coinbase Intelligence, a compliance product aimed at enticing corporations who may be reluctant to take the crypto plunge.
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Not content with only powering Apple’s VPN service, Cloudflare now appear to have partnered with Microsoft to bring the tech to their Edge browser.
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Crowdstrike held an in-depth investor briefing - the MITRE evaluation details were particularly impressive (Crowdstrike had to disable their identity protection module to allow the test to proceed).
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Datadog made its security monitoring product GA and announced new capabilities for its AI engine
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In the strangest update this month, SentinelOne partnered with a tennis player. They also promoted their current COO, Nicholas Warner, to President and hired a new COO, Vats Srivatsan, who previously worked as Chief Strategy Officer at Palo Alto Networks.
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Upstart’s Auto Retail VP made some bullish comments on the roll-out of their auto loans platform - ‘Rohrssen said dealerships have been choosing Upstart loans for customers at eight times the rate it expected.’
YTD return vs benchmarks
(Index source: Koyfin)
| Portfolio | Nasdaq | S&P 500 | FTSE 100 |
|---|---|---|---|
| -33.15% | -21.23% | -13.31% | -21.23% |
Portfolio
| Holding | Ticker(s) | Weighting (%) |
|---|---|---|
| 🐶 Datadog | DDOG | 19.6 |
| ❄️ Snowflake | SNOW | 17.1 |
| 💸 Upstart | UPST | 14.3 |
| 🦅 Crowdstrike | CRWD | 9.8 |
| 🕸 Cloudflare | NET | 8.0 |
| 🔐 SentinelOne | S | 8.5 |
| 🗂 Monday.com | MNDY | 6.9 |
| 🪙 Coinbase | COIN | 5.2 |
| 🛑 Zscaler | ZS | 5.1 |
| 🔁 Gitlab | GLTB | 3.3 |
| 🏡 Airbnb | ABNB | 1.9 |
| 💰 Cash | - | 0.2 |
Adjustments
As briefly mentioned in the March update, due to the start of a new tax year here in the UK, it made sense for me to transfer shares from a general investment account to an ISA which was an ideal time to reflect on position sizing.
The net result was an increased position in SentinelOne and Upstart (both as a result of increasingly attractive valuations in contrast to their recent excellent earnings updates) and selling some Airbnb shares as I feel more comfortable holding SaaS businesses, which come with the benefit of more reliable and predictible earnings. I also opened a new position in Gitlab following their impressive Q1 report.
Closing Remarks
With big tech having now reported, May kicks off with a number of portfolio companies reporting their Q2 results:
- Airbnb - 3rd
- Cloudflare - 5th
- Datadog - 5th
- Coinbase - 10th
Given the recent beat-downs, I wouldn’t be surprised if we get some strong price reactions on even moderately good news, though that’s perhaps wishful thinking! Either way I’ll be watching with interest to see whether the uncertain macro environment has caused any change of narrative.
Until next time!