After the market’s relatively benign start to 2023, the collapse of Silicon Valley Bank and Silvergate this month certainly shook things up! Thankfully, following initial uncertainty over what this meant for tech start-ups globally, US regulators stepped in to guarantee all deposits. Though initial fears that SVB’s failure could spark contagion proved unfounded (Credit Suisse’s wobble aside). That last sentence was written about 2 days before Credit Suisse were hastily sold off to UBS. Needless to say, it caused a fairly large mess as business depositors world-wide scrambled to make sure their cash reserves were safe and bond-holders re-read the terms and conditions . It did raise some interesting points for public market investors:

  • Has the Federal Reserve raised rates too quickly? Are there more shocks to come?
  • Have the majority of public companies exercised an appropriate level of risk management when divvying up their bank deposits? Roku shareholders were given some food for thought…
  • Does this even matter, given the apparent guarantee of government rescue for depositors?

[SVB Risk Officer.png] Who needs a Chief Risk Officer anyway! Source: Nongaap Investing Substack.

Fortunately, things seem to have settled down for now - let’s hope it stays that way. The whole debacle hasn’t encouraged me to reconsider my ‘avoid investing in banks’ policy! Maybe that will change in future but for now, the unpleasant cocktail of regulatory pressure, intense competition and operational complexity is enough to dampen my interest.

Business Updates

Returning to the start of the month, March kicked off with the final set of Q4 portfolio earnings updates, as both Snowflake and Crowdstrike reported their fourth quarter results.

Snowflake

Snowflake’s quarter was not well received by investors, in part due to the 40% product revenue guidance for the next fiscal year, after growing it 120%, 106%, and 70% annually for the past 3 years. That’s quite a slowdown, though largely a result of Snowflake’s business model: their consumption-based pricing allows customers to dynamically adjust usage depending on price sensitivity, versus subscription models that rate revenue over the course of their contract agreements, providing greater visibility into the quarters ahead. In the current environment, that sums to a painful drop in ‘22 growth and a gloomy outlook for ‘23 for Snowflake:

Q4 bookings underperformed versus our expectations, pipeline conversion in the final two weeks of the quarter diverged from historical norms. International territories drove the largest underperformance relative to plan and multiyear bookings declined 15% year-on-year. While we are not okay with this outcome, customers’ bookings behaviour does not dictate their consumption patterns. - Mike Scarpelli, CFO

Though management re-iterated their (frankly, ridiculous) fiscal 2029(!) revenue target, it perhaps serves as a reminder that this is a long-term story that will inevitably be subject to lumpy quarters along the way. Nevertheless, the high level bets here remain; continued growth in cloud adoption; increase in overall data volumes; greater demand for data insights. Snowflake is well positioned to benefit from these trends:

Assuming AI delivers, data analyst efficiency is only heading in one direction

On a more positive note, free cash flow margin for the year came in at 24% (and 35% for the quarter). I do question how conservative the 25% (adjusted) guide for the same metric next year is, given the commentary on operating margins:

In terms of relationship between operating margin and free cash flow, well, definitely as your operating margin expands, I expect our free cash flow to expand. But the operating margin will expand at a more rapid pace given it’s a much lower number, and we will update the longer-term model as part of our Investor Day in June. - Scarpelli, Q4

Then again, given the expected drop in growth, operating margins are going to have to improve! To further attempt to soften the outlook blow, a $2B stock buyback was announced. I wonder how good a use of funds this is seeing as these repurchased shares are just offsetting some of the crazy levels of stock-based compensation (~40% of revenues)? Better than nothing, I suppose!

The biggest Snowflake concern is (and, excluding stock compensation, always has been) the price. With a 15x EV/S multiple it’s just about the most expensive stock in the software universe. Yet there’s enough there in terms of tailwinds to believe it might be justified. I wish my cost basis was as low as current prices…

Crowdstrike

[CRWD ARR Growth.png] A lovely example of quadratic growth

Crowdstrike turned in another stellar quarter. At this point, the trend in ARR growth is so consistent that it’s kind of boring! The TL;DR of this quarter was; gradually slowing revenue growth; dependably great FCF margins (33%); slightly improved (GAAP) operating margins for the year (-8%); more competitive displacement of Microsoft:

But I think when you look at the competitive positioning, just as an example, in IDC’s Modern Endpoint Security Market Share, as I pointed out, we’re 17.7%. And we gained 3.8 percentage points, which is more share gain than any other vendor, including outpacing Microsoft. - George Kurtz, CEO

There were also details of their recent partnership with Dell (which isn’t factored into guidance):

The Falcon platform is now offered through Dell’s global go-to-market organization via several avenues, including a traditional resell agreement on device for new purchases made through Dell’s direct sales team and as the cornerstone to Dell’s managed cybersecurity service offering.

[CRWD - The 4th Platform.png] The quest to become the 4th great SaaS platform

The overarching question for Crowdstrike is whether a cybersecurity platform can have the longevity of the ‘category-defining’ platforms. Though the overall market is huge, their solutions will need to keep pace with the constantly evolving nature of the sector, whilst defending against the next round of upstarts. They’ve successfully fended off SentinelOne up to now (who seem to be known as the cheaper, not quite as good option) but are also operating in the formidable shadow of Microsoft. For now, there are no signs of a blip, with record customer additions in Q4 and solid ARR guidance for the next year (low-30%).

YTD return vs benchmarks

(Index source: Koyfin)

Portfolio Nasdaq S&P 500 FTSE 100
28.05% 16.75% 7.03% 1.03%

Portfolio

Holding Ticker(s) Weighting (%)
Nasdaq 100 XNAQ 29.0
Cloudflare NET 7.8
Crowdstrike CRWD 5.4
Snowflake SNOW 4.8
Alphawave AWE 4.3
Adobe ADBE 3.8
Twilio TWLO 3.3
Datadog DDOG 3.1
AMD AMD 2.8
Amazon AMZN 1.4
Cash - 34.4

Adjustments

Two new additions to the portfolio this month: Adobe and Alphawave.

Adobe

I’d been keeping tabs on Adobe for a while and after the pullback in share price following news that the DoJ plans to block their Figma acquisition, started a small position. While Adobe’s market positioning would benefit greatly should the deal go through, from my layman’s point of view, it seems a pretty nailed on anti-competitive case, even if Adobe themselves are projecting confidence:

Adobe remains confident in the facts underlying the case, and based on current process timing, we believe the transaction continues to be on track for a close by the end of 2023. - Shantanu Narayen, CEO - Q1 ‘23

The core business remains a juggernaut, with 87% gross margins and 34% GAAP operating margins for 2022, growing FX-adjusted revenue 14% year-over-year. Adobe are also well positioned to benefit from the hottest trend of the moment, with the recent announcement of its own generative AI model, Firefly:

I think a lot of the noise that you’re actually hearing are from companies who don’t have a model, who don’t really have the core data. All they’ve done is they’ve built a workflow. They built some sort of workflow and they’re like, “Hey, we’re now in the AI generative space.” The fundamental models, whether it be a text model or a visual model, there are 3 or 4 companies on the planet that actually have the capability and the science to do that. And Adobe has this unique opportunity and that we can both do the model, which is Firefly. - Narayen, Adobe Summit, March 20th

With all the hype around, I’m wary of considering AI a fundamental part of a thesis for any investment, but Adobe does appear to be in the relatively unique position of potentially benefitting from the trend whilst minimising the threat of lawsuits due to their vast stock library.

Alphawave

Alphawave is a very recent buy, but one that I think offers the best risk/reward of all my current holdings. I came across it after a well-respected semi analyst, Doug O’Laughlin mentioned it on Twitter. It’s a UK-listed business run by a former Intel vice-president, who has previously founded and sold two very similar companies in the fabless intellectual property space. I’d thoroughly recommend the following articles to get up to speed with the technical details:

The opportunity here is two-fold:

  • Potential for revenue expansion following OpenFive acquisition
  • Share appreciation whether or not above happens, as investors realise existing business is not a fraud.

As highlighted in both pieces, the share price cratered following a Financial Times article showing an contract between Alphawave and a company run by a key shareholder, along with ties to the Sutardja family, who were previously ousted from Marvell’s executive team in suspicious circumstances. Although Alphawave has now addressed these concerns, shares are still priced as though they’re going out of business.

Other Adjustments

The only other changes this month were reductions in my Datadog and Amazon positions in preparation for the start of the new UK tax year next week - I intend to buy both back.

Closing Remarks

Next month’s post will likely be a tad shorter, as in addition to the lack of earnings updates, I’m planning an additional short post on AI.

Until next time!