SNOW, ZS, CRWD & S
2022 is a year I am happy to usher out at the end of this month and unfortunately one that will share the gruesome spotlight with two other poignant years that are seared in my mind and mark severe financial turmoil…2000 and 2008. Alas, this one is government induced and therefore more surprising and infuriating…but I digress. I have little doubt 2023 will yield a significant reversal.
Four of our companies reported earnings the past week:
SNOW (Snowflake) is firing on all cylinders and is the one company in my portfolio that I feel could one day achieve a trillion dollar market cap. It is my largest position now at 17% and I’ve added some the past few days on the recent drop. Revenue in their Q3 release was $523m with a guide for next quarter of $540m…both solid, though not the great surprise we had last quarter. That said, there was a LOT to like in other metrics: Customer growth was very strong in an otherwise challenging macro environment, including 28 new global 2000 customers, a record for them. Gross margins continue to tick up nicely (71.3%) and they have the highest NRR of any company I own (or know of right now) at a stratospheric 165% . Stable pipeline, growing RPO’s now exceed $3B and steadily increasing and impressive CFFO and FCF position them very well going forward. Data management is the future of decision making. Snowflake is leading this charge and their CEO Slootman is among the best at articulating and driving this behemoth forward. While the stock is half its IPO price, I consider it a gift to be able to add at these prices.
ZS (Zscaler) did not disappoint and reported solid results. I had hoped for a nice surprise, but this is certainly not a flailing business and they stand to do very well next quarter, though Q3 will a tough comp. I am torn with their billings and RPO’s in a normally tough quarter, but also heard on the call several times from the CEO and CFO both that Q1 deals ramped up late in the quarter and bode well for Q2, that they have a strong pipeline, business is spread well across all geographies and they are balanced between new and existing customer growth. Their FedRamp approval (federal government contracts) is unmatched by any other vendor out there and they have approval for 12 of the 15 agencies, which portends a large amount of coming work. This company is a strong swimmer that is just being swept out with the riptide of 2022, but will survive and come back to thrive. I will continue to hold my 7% position.
S (Sentinel One) results today were decent, though slightly missing my own personal expectations. They remain my fastest growing company, but were a little light on revenue and guidance and are showing some cracks in their new ARR (only $49m) for a company this small growing at their pace. Their call shed some light on ARR and anecdotally they were able to assuage any concerns for now. $115.3m revenue was only a couple percent light of what I expected, but combined with a few million lighter guidance and for a company that has not yet reached orbit (NOT profitable or cash flow positive), I have less patience. $100k customers grew 99%, the slowest ever, but their margins continue to improve and they stated they expect another 25% improvement in their operating margins. Never easy and infinitely harder in this macro environment. I’m not saying that I’m not concerned or watching them closely, but they had enough anecdotal explanations going forward, that I could see this simply being a tiny blip caused by macro-economic slowdown. which will change and switch back when the cycle changes. It is certainly not clear-cut, but this is more like a slight hiccup than a stumble and fall, and I don’t think it changes their trajectory. It’s also the smallest company I own, and the one I think could probably double the fastest from here. If, for example, they did close to three or $4 million worth of business a couple days after the quarter (as the CEO stated on the call), and have a incredibly strong pipeline, and continue to gain traction with new product integrations, and continue to move up market and have 134% NRR, etc….then this was just a blip and next quarter they could be right back on track if the macro pressure subsides. In the meantime, the macroeconomic forces alone could cause this to retrace 50% higher. Note: This isn’t a 20% or even a 10% investment for me, but I don’t see a broken company here. I still see a really fast growing company, well-positioned, no debt, lots of cash that stands to benefit when the macro pressure subsides. With a $4b market cap company with $1.2b in cash and 106% relatively blistering growth? Just 10 years ago there’s not a single one of us who would not have been salivating over a company this strong. Holding my 7% position.
CRWD (Crowdstrike) is the challenge for me as they clearly encountered macro headwinds and stumbled. I expect a lot more from them. On the one hand, they have “entered orbit” (a.k.a. profitability) and showed tremendous strength on the bottom line as a more mature company with record cash flow of $243m in operating and $174m in FCF, nice gross and net profitability; however, on the other hand, they were easily the most disappointing for me on the top line, falling woefully short for the quarter and with their future guidance. They exhibited both slower penetration into SMBs and lower customer adds, the worst numbers posted in many quarters. These future growth indicators are worrisome. They had been my stalwart for years and I’ve owned them through the pandemic. While they are (relatively) still growing like crazy when compared to mere mortal companies, they exemplified the macro FED-induced slowdown and the recession (I would argue we are already in) at a time I thought they would lead the charge. And for the first time I can recall, they registered q/q sequential declining ARR, also not a good harbinger for beating expectations next quarter. I have sold a third of my position, as I reserve oversized positions for companies firing on all cylinders, and am monitoring the overall atmosphere to decide how to proceed. Endpoint detection has not boded well for either CRWD or S, whereas Zero trust has served PANW & NET much better. Long term CRWD will do fine and survive, but short term they present real concerns for me, which is why I chose to reduce my position.
In May I wrote that it was impossible to predict how long these macro headwinds could continue to pummel our great companies…weeks, months, years? Who knows? 6-months later, I have to believe we are very close to the end as the overall markets bottomed and have created a base since June to start to build on. We have seen at least one +19% up day in our portfolio (among others) and several retests at all time lows for the year…May 11, June 14 and November 9, among others. I’m trying not to fight the man-made riptides and simply to stay afloat on sturdy vessels that will survive in the long-term. Buffett continues to teach us that surviving the “buffeting” winds to fight another day is one of the most critical of all investing habits. I hope the seas subside and we get some calmer winds (and waters) soon. None of these companies did horribly this quarter, in and of themselves, but no company can make progress swimming against the ebbing tide of the tsunami that the FED has created, combined with the QT and massive amounts of money being pulled out and kept out of the economy right now. Consumer sentiment is at all time lows and fear has gripped many investors, which may prove a very poignant contrarian indicator itself. We can only hope Powell’s recent implications that the FED will begin to slow down their rate hikes will finally come to fruition in the fast approaching December meeting, but we could be in for continued pain in the overall markets as layoffs ramp up, the recession takes hold and Winter sets in. One stoic consolation: At least we are not being bombed daily by Russia in the freezing Northern climate of Ukraine, fighting for our sovereignty without heating, food or family around us. We are truly blessed to have the freedom to read and write this article with full bellies, safe and warm in our homes, and to be able to celebrate Christmas together with our families.
Cheers & Happy Holidays!
-Poleeko
