What an investing year! We started 2022 with indexes at or near all-time highs and have ended the year closer to the levels of 2 years ago. It’s been a year full of lessons, the biggest of which has personally been the importance of studying market history for clues. As Mark Twain once said:

“History doesn’t repeat itself, but it often rhymes.”

Speaking of which, as it usually does every 4 years the World Cup consumed a huge amount of my attention as my hopes were raised, and then dashed, by England’s latest and greatest (ah well, there’s always 2026). Between that and taking some time off work to gather with family for the holidays, the only significant time I’ve spent on investing this month has been on the thesis for the latest addition to the portfolio - more on that further below.

I did however, come across an interesting dataset in late November. Someone had compiled a list of all tickers comprised within the S&P 500 as of 31st January 2008. Given the surprising difficulty of finding data like this without stumping up some cash, I thought I’d use it to do a quick and dirty analysis to determine the longevity of stocks within the index and for those that had survived, whether many had beaten the market.

The results show the difficulty of investing in individual stocks: of the 500 stocks listed, only 229 or 46%, were still in the index as of the end of November (acquired/failed/fallen out of index). Of these 229 stocks, only 81 (35%) beat the index. That meant your chance of picking a random S&P 500 stock at the beginning of 2008 and beating the market over a 14 year holding period was just 16%. Of course, starting from 2008 will likely skew the data somewhat(!) and you would hope that if you choose to pick individual stocks you have better odds than random chance of selecting stocks that will outperform the index but it’s an interesting thought experiment nonetheless.

[Top S&P Gainers.png] The top gainers in the dataset. Number 3 is a business that sells paint…

YTD return vs benchmarks

(Index sources: Koyfin, )

Year Portfolio Nasdaq S&P 500 FTSE 100
2022 -56.15% -32.97% -19.46% -0.71%
2021 35.12% 21.39% 26.89% 14.30%
2020 151.27% 43.64% 16.34% -14.34%

Portfolio

Holding Ticker(s) Weighting (%)
Nasdaq 100 XNAQ 45.3
Snowflake SNOW 10.5
Twilio TWLO 10.0
Crowdstrike CRWD 7.5
Datadog DDOG 6.5
Cloudflare NET 5.8
Amazon AMZN 4.5
Cash - 9.8%

Adjustments

The main adjustment this month was the introduction of a new position: Twilio. On the surface, the stock currently appears to be a value trap; it’s down 80% year-to-date (one of the worst-performing SaaS stocks), has been heavily sold off by hedge funds and its stock-based compensation over the last year amounts to almost 10% of its current market capitalisation. While few tech stocks have fared well this year, Twilio’s price has been driven further down than most due to their reluctance to focus on profitability; they haven’t had a profitable quarter to date as a public company. This was a barely tenable position in the era of easy money - now that we’re re-entering a period of focus on near-term cash flows, the market views it as unacceptable.

However, underneath the surface there is a business far healthier than its enterprise value (~$6B) would suggest. It’s hard to look past the ~$4B in cash on the balance sheet and ~$1B in debt. This gives Twilio a significant buffer if unprofitability were to continue. On this front, it’s abundantly clear from their Q3 earnings call, November investor day, and follow-up conferences that management are laser-focused on Non-GAAP profitability in 2023:

“I think the reality is that, at our size and scale, kind of the #1 conversation that we’ve been having with investors for some time is that, well, at a nearly $4 billion run rate, like it’s time to be a profitable company. We obviously agree with that. And I think we’ve been saying for a while now that we intend to be a profitable company in 2023.”

CFO, Khozema Shipchandler - Wells Fargo TMT Summit, November 30th

It’s not as if the overall growth of the business has stalled either. I’ve included some slides from the recent 2022 Investor Day to illustrate Twilio’s current revenue drivers and their 2023 and longer-term outlook.

[Twilio Revenue Breakdown p2.png] Revenue Profile - Investor Day, 2022

[Twilio Historical Revenue Growth.png] Historical Revenue Growth - Investor Day, 2022

[Twilio Financial Outlook.png] Financial Outlook - Investor Day, 2022

Far from a terrible business! Their position as the global leader in the communications platform space can’t hurt either. When we turn to valuation though, things really start to look interesting. To give an illustration of how far the stock has fallen out of favour, here are Twilio’s EV/S multiples over the past few years:

2018 2019 2020 2021 Current/LTM
21.4x 14.3x 33.9x 11.2x 1.7x

This tells us that the market views a lower multiple as appropriate given Twilio’s slowing growth, lack of profitability and the currently unfavourable macro environment for tech businesses, but it’s not much use in isolation.

In an attempt to understand the assumptions baked into the current share price, I adjusted MBI’s reverse DCF model to map out a base case whereby Twilio’s growth stalls to 30% and below from 2023 onwards with significantly reduced gross margins in their messaging product (which management is currently pushing to increase) and a longer-than-anticipated path to profitability.

This process leads me to believe that one would need to take what seems an unrealistically bearish stance on the future of the business in order not to see profit from these levels. This comes with the caveat that stocks are not priced rationally (in the short-term, at least) and a catalyst will be required in order for the stock price to head north. In this case, I believe this comes in the form of actual demonstration of profitability.

Closing Remarks

I’m going to use this space this month to recommend the one piece of investment writing recently published that I view as essential reading: Sea Change by Howard Marks.

Also, for further though-provoking - but lengthier - investment reading, I can’t recommend ‘Poor Charlie’s Almanac’ enough. I’ve been dipping in and out of it over the holidays. As Warren Buffett’s right-hand man, there can’t be many more qualified than Charlie Munger to dish out timeless investing (and life) advice. For someone so skilled in the art of investing, his strong focus on behavioural psychology is a lesson in itself.

With that, I’m off to eat some more mince pies. Happy holidays to those who celebrate and see you in 2023!