Note from the editor: Thank you to everyone who has joined this substack. I now have more than 300 subscribers after going live on November 1st. Not bad?
If you’re new, I only do a portfolio update once a month. The mid-month update is a thought piece on investing, and since it’s the last one for the year I wanted to provide my thoughts regarding investing in 2022.
If you want more timely portfolio updates you can follow me on Twitter. But be warned, I like to post funny GIFs, memes, videos, and other nonsense. I mean it’s Twitter, right?
I have no idea where markets will head in 2022.
This is why I am not paying attention to estimates for the indexes, or most macroeconomic forecasts. While these types of predictions may capture headlines and do serve a purpose at the national planning level, for a stock picker they are no more valuable than reading tea leaves.
What’s important is to stay focused and remember that I don’t invest in indexes, I invest in hyper-growth businesses.
As a look forward to next year, the key investment themes that I am tracking in 2022 are as follows:
Cloud Computing and Infrastructure: This is the number one area that I will continue to look to for investments next year. In addition to all the public Saas companies like DataDog which I currently have in my portfolio there are still a number of great companies that are private that have yet to go public. The most notable is payments darling, Stripe which has been rumored to be looking to go public for some time, will 2022 be the year that they do?
Digital Entertainment and Advertising: This space is experiencing a significant transformation with iOS 14.5 privacy restrictions now in place and Google Chrome’s plan to eliminate cookies moved to 2023. It’s hard to predict exactly what will happen with third-party advertising, but I believe these changes make Search Engine Marketing attractive since it’s unaffected by it. I currently own SEMrush and I will look for other opportunities, maybe PubMatic?
Financial Technology: This has been an exciting area in 2021 and I expect to continue to be in 2022. I still hold shares in Upstart and Affirm and expect them to continue to grow. SoFi is another popular pick that I just started a small position in as expect their business to pick up in 2022 as the moratorium on student loan repayment comes to an end. I also like Square, which is now Block, and the card payment issuer Marqueta.
Retail and Ecommerce: I have a large position in the luxury secondary retail marketplace RealReal, and expect retail and e-commerce next year to pick up as supply issues are sorted out. The results of this Black Friday were interesting, consumers are shopping less in-person and opting for in-store pick-up or delivery as their primary purchase method. This will favor players that can thoughtfully combine quality in-store and e-commerce user experiences.
Solar and Electric Vehicles: Currently no investments here. I did own Tesla at one point, but the valuation is a bit rich, to say the least. This is an exciting space, positioned for real growth, not just hype. Traditional automakers like Ford, General Motors, and Volkswagon are making significant progress but not what I typically invest in. Startups like Rivian are interesting, but too speculative for me at this stage but I am monitoring their progress.
But What About Multiples?
Much has been written about valuation and multiple expansions. Now with the big pullback, we’ve seen recently, multiples are still elevated over historic norms, especially for Saas leaders.
Does this matter? Yes. I believe that multiples do matter, but not quite as much as some think. With levels this elevated, it’s more of a factor now for me than it was for two years ago. But I don’t let it drive my decision-making, in spite of the hyperbole that I get from CNBC.
Instead of thinking about multiples, I remain focused on evaluating businesses and identifying ones with future hyper-growth potential. Over the long term, businesses that can maintain growth are rewarded by the market. Even if the multiples are sky-high.
An example of this is Snowflake (SNOW) which has held up well during this recent drawdown. Why has it held up? Because Snowflake is A) a fantastic company with a big moat and B) will continue to grow at 80%+ YoY for a long time. There are very few companies growing at this rate. And this pullback gave me a buying opportunity to start a small position in Snowflake.
Think about this for a second (it’s math so bear with me apes):
If a business is growing revenue at 50% YoY for four quarters in a row, at the end of that period the business is now 50% larger. If it can maintain this 50% growth rate for another eight quarters, by the end of year three, annual revenue will have grown 125% over year one. No wonder Einstein called compound interest is the eighth wonder of the world? (Here it is in a spreadsheet, you’re welcome.)
What this means for valuations is a business growing this fast can grow into an oversized market cap over time.
But if growth slows, lookout. When a richly valued hyper-growth slows down, it will crash the stock. This is what happened with Zoom (ZM). If growth slows too much, revenue may never catch up with the valuation.
This is why stocks that don’t have annually recurring revenue streams tend to be more volatile and valued at lower multiples than Saas companies (I am looking at you, fintechs). With a non-Saas business revenue can come up short in a quarter, and a high flyer will get crushed, if it outperforms next quarter it will rocket back up. It also makes it more challenging to estimate future performance.
Here is a great thread on Twitter from Jared Sleeper on this same topic.
I expect multiples next year to stay sky-high on great stocks. A great company will always be richly valued by the market because there are just too few of them and too many investors chasing that growth. That’s what growth investing is all about.
What’s Currently on My Watchlist?
Here is my full watchlist for December. Not all of these are stocks are ones that I intend to purchase. I change it frequently. I keep this list updated with anything that I think is interesting, noteworthy, or want to keep tabs on. This is just the most current snapshot to give you a sense of what I am looking at. I bolded what I own across all my portfolios.
Fintech
Affirm (AFRM)
Marqueta (MQ)
Dlocal Ltd (DLO)
Sofi (SOFI)
Square (SQ)
Upstart (UPST)
Crypto
Coinbase (COIN)
Saas Core
Google (GOOG)
Microsoft (MSFT)
Amazon (AMZN)
VMWare (VMW)
Snowflake (SNOW)
Saas Office Productivity
Asan (ASAN)
Monday (MNDY)
Saas Measurement
Amplitude (AMPL)
Braze Inc. (BRZE)
Saas Financial
Bill.com (BILL)
Saas Developer Tools
Confluent (CFLT)
DataDog (DDOG)
Gitlab (GTLB)
Atlassian (TEAM)
Saas Security
Cloudflare (NET)
SentinalOne (S)
Zscaler (ZS)
Crowdstrike (CRWD)
Metaverse/Entertainment
Roblox (RBLX)
Retail/E-commerce
RealReal (REAL)
Target (TGT)
Ad-tech
SEMRush (SEMR)
(Does anyone know of a simple tool to share stock watchlists with? Comment below.)
I Know You Want Predictions, So Here it Goes
It’s the end of the year and it’s a popular tradition for newsletter writers to make wild predictions as to what will happen next year.
Below are my well-thought-out, information-based forecasts that I have a high degree of confidence will happen in some way, shape, or form.
The Labor Shortage Becomes Even More Acute: My best guess is that in the long-term automation and changes in expectations will curb the labor shortage, but in 2022 it will get worse. Immigration will remain historically low as concerns about COVID-19 continue to restrict travel and this will have a huge impact on the labor pool. As the economy recovers the labor needs in hospitality and most services areas will only get more acute. This will drive wages through the roof and keep inflation elevated. I don’t think this will be good for any labor-intensive business, the wage increases potentially will eat into any profits. Expect to continue to pay exorbitant amounts to take an Uber at peak times, and you’ll be satisfied just to get any service in a restaurant or cafe. (No positions here, I have avoided everything in this space including restaurant POS systems stocks like OLO, LSPD, and TOST.) Addendum: The more I think about this, the more I think labor shortages are going to be a much bigger issue for years to come. It’s ironic to think that a few years ago the prevailing logic was AI would take all the jobs. Well, it appears the reverse is happening, we will need AI and automation to fill all the openings. My thoughts on this are out of scope for this column. But I will come back to this topic at some point. It has huge implications regarding investments.
Tesla Stock Doubles: Controversial no matter which side one takes, and Time Magazine’s Person of The Year does seem like a top. Yes, this stock is massively overvalued. But my sense is that the only thing that would crush Tesla shareholder fanaticism is the disappearance or removal of Elon. No one thinks that will happen in 2022. Tesla has a huge lead in the EV space and with new factories coming online 2022 will be a record year for EV production and for Tesla. I am on record as a huge fan and supporter of all of Elon’s projects. I am currently not a shareholder and believe the price is just too high, there are other bets that I would rather put my money on. (No position in TSLA, RVN, or any auto/EV stocks.)
The Pandemic is Over by Year-End: I need to be honest and let you know that this isn’t my prediction. It’s the prediction of the CEO of Moderna. His hypothesis is that over the next twelve months either people will get vaccinated and that will protect them from the disease, or they will come down with COVID, which will provide natural immunity and protect them from the disease. No one knows with any certainty exactly what will happen or when. But if history is a guide, there is eventually a tipping point where the disease starts to run out of hosts to infect and the infection rates slow. This did happen with the 1918 pandemic, and interestingly that disease does still exist as the H1N1 virus in the form of Swine Flu, it’s just not as much of an issue. (No position in MRNA.)
Regulation Comes to Crytpo: Regulators will scrutinize crypto companies more closely in 2022. Given the convergence of off-shore banking with crypto, I think there is a huge risk that new regulatory hurdles in the U.S. effectively kill many early-stage crypto startups. The SEC is already asking questions and sporadically intervening. Coinbase will almost certainly emerge as the winner. They have both the resources and incentives to comply with any new laws. Regulatory compliance is always great for incumbents, it will be a competitive advantage for Coinbase and an expensive hurdle for new startups to overcome. (No position in COIN or any crypto.)
Rapid Fire Predictions
These rapid-fire predictions have a much lower chance of occurring, and maybe will someday be taken out of context to show how foolish I am. I am good with that.
Stripe Goes Public in Q1: Totally possible, many thought it would happen this year. But my guess is now Q1, 2022. (No position, but would like one.)
RealReal Gets Acquired by eBay: If their businesses accelerate, as I believe it will, there is a chance this happens. (I have a position in REAL.)
Apple Acquires Square: Wrote this before the Block announcement. I am already wrong about this. No way this happens now. (No position.)
Someone Buys Robinhood: Not sure who. They will struggle as interest in stock trading declines with life returning to a new normal. (No position.)
Upstart Takes Off Again: The auto-loan product has a lot of potential next year as car sales take off as the chip shortage ends. (I have a position in UPST.)
Peloton Trades Sideways: Hard to see what the catalyst is for them. I think they are relegated as a slow-growth niche offering for a long time. (No position.)
Overall it’s been a great year for investing and but also it’s great to have had life return to something closer to normal. With shops open, vaccinations widely available, and an end to lockdowns at least in the U.S., this year easily beat 2020, there is no doubt about that. I am excited to see what 2022 has in store.
Please, everyone, enjoy themselves over the holiday. See you in 2022.
Bonus Section
A few links to content I have been consuming.
The Infallibility of Human Greed by Deliberate Capital
Three Steps to the Future by Ben Evans
David Rubenstein interview with Masayoshi Son from 2017
There are millions of jobs, but a shortage of workers from CNBC
DISCLAIMER: Nothing here is investment advice. It’s provided for entertainment purposes only. Do you’re own due diligence and make investments decisions based on your own research and not my writing.