It’s been one of those months where I’ve been quite happy to involve myself in everything but investing! I wonder why… not to say that there haven’t been any changes made or news to cover - far from it - but there’s not much left to do in this market aside from sitting tight and waiting out the pain.

With no sign of inflation abating or any indication that central banks are about to lift off the rate-increasing accelerator, the trip to the centre of the earth could be a long one though however it plays out, I’m thankful that I’ve experienced the covid highs and the current lows only a few years into my investing timeline. As painful as it may be in the moment, I’m not sure I could have asked for a more action-packed period in the markets or for more lessons to be handed out in such a short span of time!

Business Updates


Datadog started the month off with a typically strong Q1 report - 82% topline growth and operating margin turned in at 23% of revenues. There was impressive growth in free cash flow too with FCF margin now up to 36% from 33% last quarter (and 22% in the year-ago quarter!). Overall, this was a ‘nothing to worry about’ quarter, which is more than you can ask for at the moment! Some further notes:

  • Guide for Q2 possibly slightly lower than expected (~70% YoY assuming similar beat to this quarter) but coming up against tougher comps H2 22.
  • Improved gross margins to all-time-high 81% and 4th quarter in a row of 12% increase in $100k customers.
  • Announced acquisition of Hdiv Security. Provides vulnerability detection at run-time. “Hdiv’s rate of false positive is very low”.
  • 8-figure upsell with next-gen fintech company (possibly Upstart based on ‘explosive growth’ description?), largest ever ARR deal.
  • Began shutting off service to 200 Russian and Belarusian customers in early Q2 but contribution to revenue is ‘immaterial’.
  • GM’s still expected to be high 70s in mid-long term.
  • Had not yet returned fully to in-person meetings, events or fully back in the office - implication is that this has now occurred - confirmed later (NA & EMEA employees returned to office at end of Q1, APAC employees will during Q2).
  • Best ever quarter of hiring in Q1. Trade shows and employee travel picking up in Q2. Expect these to impact on margins by ~300-400 bps.
  • $3M impact in Q2 due to taxes on Sqreen acquisition. Expecting CapEx as % of sales to double vs 2021.

Later in the month, they announced a couple of platform updates including enhancements for Kubernetes users, OpenTelemetry Protocol support and separately the achievement of AWS Education Competency Status. While none appear to be major news, the latter announcement should further enhance Datadog’s status as a valued AWS partner, which can’t hurt as it’s the cloud host of choice for the majority of customers.


After some initial concern upon reading Snowflake’s Q1 report (despite the Q4 22 guide indicating as much, the drop from 102% revenue growth to 84% in one quarter, after maintaining 100+% for their first 8 quarters as a public company, took me slightly by surprise), further study and listening into the earnings call brought some reassurance.

My reading of the latest quarter is that there was unexpectedly low consumption on the part of some of Snowflake’s larger customers as a result of the current macro conditions (i.e. they cut back on Snowflake workloads) but they were able to impressively demonstrate operating leverage regardless with a (slightly ridiculous) 40% FCF margin… more notes below:

  • NRRR has remained very high at 174%, slight drop from last quarter.
  • RPO grew 82% to $2.6B, 53% to be recognised as revenue in the next 12 months.
  • Acquisition of Streamlit closed.
  • Pharma customers estimates that use of Snowflake will accelerate time to market of new drug by 3 years.
  • Stable edges grew 122% YoY, 20% of custs have at least one stable edge.
  • Data marketplace listings grew 22% qoq.
  • 425 Powered by Snowflake partners - 48^ QoQ.
  • ‘Snowflake is not a growth at all cost company’.
  • Consumer facing cloud companies consuming ‘less than we anticipated’. As long as ‘they are impacted by macroeconomic headwinds their consumption will be impacted’.
  • Summit conference expenses will largely be incurred every Q2 in future.
  • Expect product revenue of $10B, 78% product gross margin, 20% operating margin and 25% FCF margin for fiscal 2029 - personally I think this is slightly ridiculous. How can a management team possibly estimate with any level of precision the state of the business in 6 years(?!), particularly one that repeatedly reminds investors that they are NOT a SaaS business (and presumably therefore have less predictable earnings)
  • April saw weakness in week-over-week growth in revenue per customer. Understandably more cautious about the full year given current macro.
  • Frank makes the case that the workloads within Snowflake are not optional for their customers. They are part of their core business processes.
  • Not aware of a single customer opportunity that was lost over pricing.

They later announced a data-sharing integration with Amplitude (one of the few public SaaS collapses I’ve managed to avoid - don’t look at the year-to-date chart…).


Can I skip this one?

It was the inverse of Snowflake’s report: initially promising, before quickly revealing itself to be a complete disaster with a couple of major red flags. Below are my ‘initial impressions’ bullet points:

  • Solid revenue and contribution margin.
  • Substantial negative FCF due to for-sale loans addition to balance sheet. 🚩
  • Guided down from $1.4B to $1.25B for full year. 🚩

At this point, without listening to the call I was already in favour of selling out of my position for the following reasons:

  1. They took loans onto their balance sheet, something that they had previously sworn against and which is completely at odds with the purpose of the company: a technology platform to assist with the delivery of loans without taking on any associated credit risk themselves.
  2. They revised guidance downwards for the full year, which is a complete no-go as a ‘growth’ business. An implicit rule for public ‘hypergrowth’ businesses is that sandbagging is built into the guidance in order to account for any unexpected slowdowns during the quarter/year. To reduce guidance by $150M before attributing it to being caught out by the aggressive nature of the Federal Reserve in response to current macro conditions seems a large misstep for a company that should be intimately familiar with credit markets.

Having said that, I still wanted to give management a fair hearing before making a decision. Notes below:

  • More than 500 dealerships on Upstart + 57 banks and credit unions. Adding a lender each week. 11 lenders with no minimum FICO score in their policies.
  • 11,000 auto refi loans in Q1 - > 2x all of 2021.
  • “It’s become clearer just how aggressive the Fed will be”…. (they’ve been signalling since Powell was rehired at the end of last year).
  • Avg loan pricing has increased more than 300 bps since October. Lower approval rates for applicants. Blaming performance of loans on stimulus.
  • Publicly tested small dollar loan product in past few weeks.
  • Looking to upgrade their programs to adjust for macro changes that are ‘embedded in the (current) models’
  • ‘We know the drill’
  • Used balance sheet to ‘smooth fluctuations in funding of corporate loans’. Loans declined in valuation due to rising interest rates.
  • Average loan size up 18% QoQ.
  • Decline in contribution margin a result of the ramp in auto lending, which is still contribution negative.
  • Sales & marketing and customer operations outgrew revenue.
  • Slower hiring than targeted.
  • ‘Additionally, we have started to selectively use our capital as a funding buffer for core personal loans in periods of interest rate fluctuation where the market clearing price is in flux’. 🚩
  • Balance of loans up to $604M from $261 in Q4.
  • ‘Non-trivial risk of recession potentially later this year’ (CFO) used as pre-text for earnings forecasts - this is then directly contradicted by Girouard later in the call: “we’re not – in no way predicting a recession or anything like that. It’s not really our job to do that” 🚩
  • Reversal in delinquency has been stable for 60 days.
  • ‘I think it would be fair to say that our platform, its ability to react to the new market-clearing price, it’s probably not as nimble as we would like’. Ouch… forced to step in with balance sheet to bridge gap - my take: until upgrades arrive that allow their AI to respond to rapid rate changes, they will have to use the balance sheet. They don’t place a cap on how much they are prepared to take on.
  • Don’t expect average loan amount to go back to pre-covid levels.

Can’t polish a turd…

While this was by no means a good earnings call, there were a couple of (literal) positives such as net income and EBITDA, though both were a step down from Q4. Overall though, the call unfortunately did nothing to persuade me to hold onto my position and if anything had the opposite effect.

Upstart has provided a valuable lesson in position sizing. I made this comment in my January update:

In hindsight, I’d let my position in Upstart grow beyond my level of conviction

The lesson that I should have learnt at the first time of asking was to maintain a position size in line with my conviction, paying particularly close care in times of volatility. This time around, Upstart’s relative stability as everything else was falling caused it to make up a larger percentage of my holdings than desired going into earnings and made the subsequent loss bigger than it should have been had I maintained position-sizing discipline. Better to learn the hard way than not at all!


Cloudflare’s quarter was similar in tone to Datadog’s. Another ‘business as usual’ report!

  • Great growth again - 54% YoY though dipped back to negative FCF.
  • Strong outlook for next quarter too - should be very similar to this quarter in terms of growth. Nice bump in FY outlook.
  • Best ever DBNRR of 127% and very strong customer additions.
  • > $100K customers up 53% YoY to 1,537. 58% of revs derived from these. > $500K up 68%, > $1M up 72% (though smaller base for both). 12 custs > $5M. No customer more than 5% of revs.
  • Have a heavy bias for internal development but started out as Area 1 customer before acquiring. 98% of their team chose to join Cloudflare - there is one remaining that hasn’t (out of 105 total, according to Google)… Prince comes across as cocky when talking about their tech.
  • ‘Going head-to-head with Zscaler and Palo Alto Networks more and more, and we like our win rates when we do’
  • In one deal, AWS’s team advised a customer to use Cloudflare instead of AWS.
  • R2 open beta next week (w/c 09/05).
  • US 53% of revenue (56% YoY), EMEA 26% of revenue (57% YoY), APAC 14% of revenue (31% YoY).
  • Total customers grew 29% YoY.
  • Strong hiring quarter. 42% increase YoY.
  • Reminder that intention is to keep operating income at breakeven going forward.
  • Decrease in FCF primarily due to unique withholding tax payment of $30M. Still expected to be positive in H2 22.
  • YoY traffic growth across network of 75.8% and QoQ of 15.9%
  • Protecting SMTP traffic was a blind spot for CF that Area 1 now covers as a one-click proxy solution.
  • FED Ramp approval on the way. Process now behind them.
  • Partnership with CrowdStrike and Ping Identity recommended for use by The White House.
  • CF used by 20% of top million sites.
  • More and more traffic that passes through Cloudflare is APIs.
  • On macro concerns; “can’t imagine a company that is better positioned.” Not a ‘nice to have, but a must-have’. Prince thinks it ‘might be a challenging period for companies over the next period to come’.
  • Acquisition of Area 1 reflected in guidance.

Cloudflare followed up their earnings report with ‘Platform Week’ which contained the usual flurry of product news and announcements for which they are well known. The highlight was the announcement of D1, Cloudflare’s first foray into the world of databases which appears to be a unique offering amongst its competitors and emphasises the recent expansion into markets outside security. Interesting moves!

YTD return vs benchmarks

(Index source: Koyfin)

Portfolio Nasdaq S&P 500 FTSE 100
-54.56% -22.14% -12.98% 0.17%


Holding Ticker(s) Weighting (%)
🐶 Datadog DDOG 21.9
❄️ Snowflake SNOW 17.5
🕸 Cloudflare NET 15.9
🦅 Crowdstrike CRWD 12.2
🕹 TakeTwo TTWO 8.6
🔐 SentinelOne S 8.4
🔁 MongoDB MDB 6.5
🛍 Amazon AMZN 6.0
💰 Cash - 3.0



Calling May a fairly drastic month of turnover for the portfolio would be an understatement… After Upstart’s clanger of a quarter, they were swiftly axed from the roster along with Coinbase, who I perceived as being too risky to hold in the current environment (especially considering the recent Luna blow-up).

Also gone are, Zscaler, Gitlab and Airbnb. The latter two were small positions that I was happy to sell out of for what I believe to be better opportunities but I’ll expand on the first couple:

Monday I sold out of prior to their (pretty solid) earnings report as I don’t view their platform as a core product for business operations if we are to head into a recession, as now seems increasingly likely. To me, project management software is something companies can afford when things are good but could easily be identified as an area to cut back on when it comes to crunch time. Of course, I could be completely wrong and I’ll be keeping a close eye on their upcoming reports to see how their year plays out.

Zscaler’s dismissal was a result both of lack of competitiveness when attempting to win deals versus Cloudflare (mentioned in CF’s latest earnings) and the desire to hold only the highest quality software names heading into a tougher macro period. Zscaler’s emphasis on FCF is something that should serve them well going forward but they can’t match Cloudflare on pace of innovation, mission, and long-term focus even if the latter are not currently prioritising profitability. Having said that, Zscaler’s report this month was one of the strongest in the SaaS space so far for Q2 and I certainly won’t rule out owning their shares again in future.


In fact, when taking into account all of the SaaS names that have reported this month, the results (with the exception of Upstart) haven’t been too shabby at all, especially when compared with the beatdowns we’ve seen in other sectors like e-commerce. So why reduce my exposure in favour of Amazon, TakeTwo and MongoDB?

In Amazon’s case I felt the price had dropped to the point where the risk:reward offered a high chance of success - the market has assigned a price that assumes AWS growth will stall, rather than continuing to grow at 30+% as it has done in recent years. Given the tailwind of digital transformation and their dominant position as the leading cloud vendor, that’s a bet I’m willing to make even taking to account the increasing losses from the remainder of the business.

TakeTwo is a stock I’ve been keen to own for a while now, as they own some of the most valuable IP in the gaming space, have a veteran CEO in Strauss Zelnick and are only a couple of years away from what has the potential to be the biggest game launch of the 2020s (GTA VI). There are some question marks over the price paid for the recently-closed Zynga acquisition but the move into mobile is shrewd and should further diversify revenue away from longer-cycle game developement for consoles that carry greater risk in the event that sales targets are missed.

Aside from the valuation, the MongoDB purchase was a reaction to the strength of Atlas, their multi-cloud platform that now accounts almost 60% of their revenue. While I’m hoping to see profits in the near future, the steady rate at which MongoDB have increased revenue while maintaining costs at a closely-managed level draws parallels with Datadog’s financial discipline. There may be a similar story ready to play out here.

Closing Remarks

It looks like another action-packed month coming up with a fair few shareholder conferences and analyst days so I’ll be picking through those to see if there are some interesting nuggets to unearth. There are also a few Q1 earnings reports to come, with Crowdstrike in particular one that I’ll be watching with interest to see whether they continue the trend of solid Q1 security SaaS reports.

Before I sign off, a couple of links that made for interesting reading this month:

Until next time!