It’s been a turbulent quarter for the tech sector, with the hyperscalers reporting slowdowns and Amazon, Cloudflare, Twilio and Datadog all releasing updates. In this month’s portfolio update, we review the Q4 earnings reports, compare my portfolio’s YTD returns to relevant benchmarks and discuss the adjustments made in light of recent developments.*

*Yes, this summary was written by AI. Yes, I’m fully AI-pilled.

Business Updates

Q4 summary: the earnings slump has arrived, but it’s not as bad as expected.

Amazon - Q4 Earnings, 2nd February

If the Q3 ‘22 updates from the hyperscalers were the first sign of a cloud slowdown, Q4 confirms that it’s not going anywhere for the moment:

Cloud YoY growth - Q3 ‘22 (%) YoY growth - Q4 ‘22 (%)
Amazon Web Services (AWS) 27 20
Microsoft Azure (constant currency) 42 38
Google Cloud Platform (GCP) 38 32

Amazon had a particularly rough quarter, with AWS growing at its lowest level ever, its operating margins heading in the wrong direction (down to 24.3%) for the 5th consecutive quarter, and the potential for a quarterly decline in AWS sales for Q1 ‘23:

“So far in the first month of the year, AWS year-over-year revenue growth is in the mid-teens.”

“We are not focused on trying to optimize in any one quarter or any one year, we’re trying to build a set of relationships in business that outlast all of us. And so if it’s good for our customers to find a way to be more cost effective in an uncertain economy, our team is going to spend a lot of cycles doing that.”

Despite sales growing 9% during 2022 (Amazon’s now bringing in half a trillion dollars in sales revenue annually), they posted a net loss for the year for the first time since 2014 as their rapid expansion of fulfilment centres over the covid period has come back to bite. After almost two years in the CEO role, it’s safe to say Andy Jassy has overseen a particularly tough period in Amazon’s life as a public company and is now managing the consequences of decisions made in one of the toughest operating environments of the past decade, many of which weren’t his. That gives him the benefit of the doubt for a while, but the next 12 months will be crucial in building trust with shareholders.

He’ll have been cheered slightly by the news that the Federal Trade Commission didn’t sue in time to block Amazon’s One Medical deal, allowing it to close for $3.9B towards the end of the month.

Overall, I’m still happy with Amazon’s place in the portfolio. While it’d be more convenient to hold shares of a spun-off AWS, the diversification offered by the (much larger) consumer retail side of the business is a welcome addition to the extreme software-heavy nature of my holdings.

Cloudflare - Q4 Earnings, 9th February

Continuing the theme of pronounced slowdowns, Cloudflare reported earnings that came in a sliver above the high-end of their guidance, confirming that the almost mechanical consistency of their YoY revenue growth has finally come to an end:

[NET Q4 22 Revenue Growth.png] Not a bad run…

Unfortunately, despite the improvement in free cash flow (12% FCF margin) during the quarter, DBNRR ticked down for the fourth consecutive quarter to 122% and sequential >$100K ARR customer additions were the slowest since Q1 2020 (7%).

“while our gross renewal rates remain as high as ever, like others in the industry, we’re seeing customers take longer to sign new and expansion deals with us. Procurement departments are definitely in the mode of measure two or three times before cutting one.”

Perhaps more alarming is the overall trend in annual operating expenditure when compared to revenue. Cloudflare spent as much as a proportion of revenue in 2022 as they did in 2021; the trend of increasing operating leverage over time has stalled:

Year YoY Revenue Growth (%) GAAP Op Ex as % of Revenues
2019 49 116
2020 50 101
2021 52 97
2022 49 97

“We are committed to incremental equity compensation dilution well below many of our peers, targeting less than 3% net burn rate annually.”

I’m expecting the relative level of stock-based compensation to come down in 2023 but I can’t say I’m surprised that short interest has risen in line with the stock in recent weeks, as NET is now the second most expensive SaaS name out there on an EV/Revenue basis.

The guide for full year 2023 is positive though: 37% at the midpoint, taking into account the usual conservative guidance, means we’re likely to see at least low-to-mid 40s growth.

“Specifically, despite a notable improvement in our pipeline exiting 2022 as compared to with the first half of the year, we have assumed the increase in sales cycle, which we observed in the second half of last year, continues in 2023 and have, therefore, incorporated close rates below recent historical lows.”

Twilio - Layoffs, Q4 Earnings, 15th February, & 8K Change

Just before earnings, Twilio announced their second round of layoffs: 17% of employees, after 11% were let go in September. Alongside this (and presumably as an indication of the tough environment), CEO, Jeff Lawson voluntarily cut his salary in half, Twilio Recharge (an employee perk that allowed a month-long paid sabbatical every three years) was axed and Aidan Viggiano was announced as CFO. Separately, it was announced that Twilio would be split into two distinct business units going forward: Twilio Communications (focussed on efficiencies, growing margin) and Twilio Data & Applications (focussed on growth), along with the news that Eyal Manor, Chief Product Officer will be leaving as of February 28th. Phew… And that was just the first intriguing 8-K Twilio filed this month! More on the second later.

Earnings themselves were, overall, fairly positive. Management clearly indicated that they have ‘got the message’ with regard to profitability and posted non-GAAP income for the quarter, while news that at least some of the substantial amount of dry powder on the balance sheet is to be put to use in the form of a $1B share buyback was also welcome:

“The Board has authorized a share repurchase program of up to $1.0 billion, and we intend to purchase up to $500 million in the next six months. Ordinarily, I wouldn’t consider a buyback the best use of our balance sheet. But this program reflects our confidence in the business and our belief that our current share price undervalues our position in the market today and the long-term opportunity ahead, while still leaving us with a strong balance sheet to execute our strategy.

I will also be personally buying approximately $10 million of Twilio equity in the open market when the trading window opens.”

Slightly less well received; organic revenue slowed heavily from 32% in Q3 to 21% and the guide for 14% YoY growth at the high-end for Q1 ‘23 is rough, albeit tempered by a positive non-GAAP profit outlook. Just enough there to justify cautious optimism.

Things really started to get interesting over the last few days though, with an 8-K filed on February 23rd, firstly laying out cash bonuses for the executive team relating to 2023 non-GAAP operating profit targets (which, ok, seem fairly meaningless given they’re non-GAAP) but curiously, also including changes to the ‘Senior Executive Severance Plan’:

Guarding against activist investors, about to sell, or nothing...?

I’m erring on the side of changes being made as a result of the recent leadership structure shuffles but this may be worth watching closely for any further developments.

Datadog - Q4 Earnings, 16th February

Back in line with the theme of Q4, Datadog’s quarter initially looked a bit of a stinker. Year-over-year revenue growth dropped to a lowest-ever 44% and continued the apparent alarming deceleration over the course of 2022:

2022 DDOG YoY Revenue Growth (%)
Q1 83
Q2 74
Q3 61
Q4 44

Zooming out, this appears a result of the slowing quarterly revenue growth started during the covid slowdown 2 years ago. As cloud spend optimisation relaxed throughout 2021, growth accelerated versus easier 2020 comparisons. The reverse has proved true this year:

[DDOG YoY Revenue Growth.png] At some point, the fun stops. The question is when…

With that in mind, as bad as the 29% high-end Q1 guide looks (bearing in mind the usual sand-bagging, this will likely come in nearer 35%), it’s not totally unexpected.

It strikes me, reading this back, that I’ve taken a fairly glass-half-full approach, further confirmed by the earnings call:

“We’ve seen customers having multiple rounds of layoffs, for example, or having to adjust multiple times what they’re doing with their business. But what we see in general is that the fastest thing they can do to have an impact on their bills is to adjust some of the data they send in logs or in APM.”

“We think they’re done, and that’s – and we see them start growing again. But it’s too early to call it for the rest of the customer base as, again, they’re all going through fairly different things and different scale.”

Probably the least reassuring Olivier Pomel has sounded on a call (but far better than dressing it up). It looks as though 2 straight years of more than 130% Dollar-based net retention is under threat too (though only if the assumed Q1 revenue beat doesn’t materialise):

“Implicit in that guide is below 130 [% DBNRR for Q1].”

I’m torn on Datadog as a whole. It’s undoubtedly a very good business and has been an excellent stock too over the past couple of years. As it is priced at the moment though, with growth looking patchy over the next few quarters, it’s hard to see a path to decent returns.

YTD return vs benchmarks

(Index source: Koyfin)

Portfolio Nasdaq S&P 500 FTSE 100
19.57% 10.07% 3.93% 4.27%


Holding Ticker(s) Weighting (%)
Nasdaq 100 XNAQ 29.4
Datadog DDOG 5.7
Snowflake SNOW 5.3
Crowdstrike CRWD 5.2
Cloudflare NET 4.3
Amazon AMZN 4.3
Twilio TWLO 3.6
Cash - 39.7


I took advantage of February’s software run-up and aggressively trimmed most of my SaaS positions in line with my reasoning in November’s update, and also cut back slightly on my index ETF holding. There’s probably some anchoring bias going on here; a 20% gain seems pretty good in contrast to last year.

Twilio was the largest adjustment. The price reaction to earnings inflated its position in the portfolio to a point I was unhappy with, however I may have been slightly overeager to trim: one to review! Snowflake was hacked down for the same reason.

The only new position this month is a small purchase of AMD stock - yes, this is partly a play on the recent boom in AI, but it’s also a bet on Lisa Su continuing to steal market share from Intel, an area in which she has had massive success, since being appointed CEO in 2014.

Closing Remarks

[Blog-post Sign Off.png] That was easy! Feel free to pick your favourite sign-off!