Luke's Global Fund achieved a return of -15.6% (in constant currency) return over the month of March, and a 29.9% gain to date for FY21 on a constant currency basis. Our International benchmark ended March up slightly over the month, with the S & P 500 returning 2.4% for the month of March, and 28.9 % for the financial year to date.
Our portfolio as at March 31, 2021:
The sell down of growth companies continued in March, with our entire portfolio impacted. We decided to take the opportunity to transform our portfolio over the month, selling out of low conviction investments, hedge positions, and cash, and deploying the proceeds. The positions sold were Alteryx, which is attempting a pivot to the cloud under the guidance of a rather stretched CEO, and Base Inc, which reported decelerating growth, with Shopify improving its offering in Japan. These two companies have uncertain futures ahead of them, and we considered there are better options for our capital.
We deployed the cash into Snowflake, Sea Ltd, and Datadog Inc, over the month, which have fallen 46%, 28%, and 35% respectively from their recent highs. The three companies are not cheap by any means, however, we consider they are attractively priced as they have the following features that we look for:
· Have servant leaders, that walk the talk, and have demonstrated execution success.
· Market leading disruptors.
· High barriers to entry, & strong competitive advantages.
· Small market share in a significant and rapidly growing market.
· Low / No debt.
· High (or expanding) gross margins, and revenue growth in excess of 50% per annum.
At the end of the month the revamped portfolio has a weighted average revenue growth rate of 69% per annum. Even if the average EV/S of our portfolio compresses a further 30% over the next year, our portfolio will still achieve market beating returns.
Over the month, three companies released quarterly results, as follows:
Sea Ltd (SEA)
Sea Ltd reported revenue was up 101.6% year on year (YOY) for Q4 2020, at $1.6 Billion USD. Operating cashflow was $185 M USD, up from -$27 M USD in the previous corresponding period. Key takeaways were:
Digital Entertainment bookings were $3.2 BN USD, up 80.3% YOY.
E-commerce (Shopee) revenue was up 160% YOY to $2.2 BN USD.
Digital Payments (SeaMoney) business growth continued, with mobile wallet payments exceeding $2.9 BN USD over the quarter, with 23.3 million quarterly paying users of the mobile wallet services.
Sea Ltd appears to have stolen a march on rival Alibaba, in South East Asia, and now has a tremendous opportunity to build on this early success, after Alibaba’s stumbles.
Crowdstrike Holdings (CRWD)
Crowdstrike reported another strong quarter, with revenue increasing 14% on the prior quarter, 1480 new customers, and generated $292 million free cashflow for the year compared to $12.9 million in the prior year.
Crowdstrike acquired Humio during the quarter, a leading provider of cloud native, observability and log management software, creating the opportunity to expand the Falcon platform into these areas.
Crowdstrike have guided for revenue growth in the order of 50-55% for 2022, which looks to be conservative guidance, given strong growth in revenue per customer, as customers increase the number of platform modules they use over time.
Snowflake Inc. (SNOW)
Snowflake reported remarkable numbers for a business of their scale. Some of the key takeaways:
116% revenue growth year over year to $178.3 million for the quarter.
Net revenue retention rate of 168%
Remaining performance obligations (backlog) of $1.3 Billion, up 213% year over year.
The above results don’t tell the full story. We believe the Snowflake business is like no other business in our portfolio. They have a product that has a number of competitive advantages, unusually high revenue visibility, and a powerful network effect. Here are some of our key takeaways from their earnings call:
The Snowflake CEO has a vision of the future, where data is moving in an orbit, flowing between partners and stakeholders, enabling people not to just analyse data in silos, but address data across a very broad orbit, consisting of internal, and external data, to drive the best decision making and outcomes. Snowflake enables the sharing of data with zero latency and friction, which no other platform can do at scale.
Data sharing on Snowflake Data Cloud increased 51% over the quarter (420% annualised). Data sharing is a key issue for customers, and the ease, reliability, and safety inherent in the Snowflake platform is a key consideration for new customers. A good case study is Blackrock, as it was a key consideration for Blackrock in their transition to the cloud, as they can see the opportunities of being able to share their data with partners , customers, and stakeholders. Now Blackrock stakeholders that want to interact with Blackrock’s Alladdin platform need to be Snowflake customers to get the most efficient access to the Alladdin platform.
Snowflake Marketplace data consumption increasing 48% over the quarter (380% annualised). New users of marketplace over the quarter included Zoominfo, Western Union, and Foursquare. The CEO claims they have reached critical mass of adoption, which is now generating a powerful network effect.
Snowflake claim to be the only provider that can consistently, at scale, move customer workloads from legacy providers to the cloud. Traditionally, this is an incredibly complex task, which Snowflake appear to be the best in class at addressing.
Snowflake have incredibly high visibility of their revenue pipeline. As an example of this, they were able to advise Net Retention Rate will be above 160% for FY2022, noting it takes at least 6 months to onboard a new customer, with recent Fortune 200 signings not expected to generate any revenue until the second half of the coming financial year.
The Snowflake platform enables business intelligence software, such as Tableau, and Power BI to operate at scale with minimal latency, reducing customer time, cost, and resources.
Historically, customers have had to manage data processing capacity, due to capacity constraints. With Snowflake, capacity is no longer a limitation for customers, whereby capacity can be scaled to meet demand. It is quite a change for customers, who have “literally bottled up data capacity for generations” (CEO quote).
Customers report that after their transition to Snowflake, they are spending half the money for 10 times the amount of work. Snowflake is releasing significant capacity and resource restraints, resulting in the release of pent up demand.
Customers report that Snowflake Inc. is the second largest line item in their budget behind the public cloud.
“What data sharing does is drive stickiness and drives consumption” – quote from CFO.
Snowflake is trading on an EV/S ratio of 50-55. We consider this to be fair value, and the table below demonstrates out thoughts on the future value of the business:
Our investment thesis is Snowflake will maintain exceptionally high revenue growth rates over the next 5 years, due to very high revenue retention rates, and a powerful network effect that will drive demand for year to come. The EV/S ratio will fall, but we expect revenue growth will more than offset this fall.
KEY LEARNINGS THIS MONTH:
This month was a reminder of our strategy – To buy, with the intention to hold for the long term, companies that demonstrate significant competitive advantages, in nascent industries in the early stages of adoption, led by management that are servant leaders, with a proven track record of execution. The key hallmarks of such businesses are hyper growth rates +40% revenue growth per annum, with high or increasing gross margins that enable the businesses to scale rapidly with little capital.
The sharp fall in our portfolio over recent months has not changed the conviction in our investing strategy, nor the companies we have invested in. We cannot predict what may happen in the near term, but we are confident our portfolio will outperform the market over the long term.
If you have any opinions on the companies we hold, or would like to know more about our investments, we would love to hear your feedback.
Regards,
Sean
Comentários