Leverage Point Portfolio Update
November 2021 YTD Return: +97% (+70% vs. the S&P)
Note: Sending this out a day early since many are off today (in the U.S. at least) for Thanksgiving. I know you all need something to nerd out on with markets closed today. I sure do.
Year To Date Leverage Point Portfolio vs. Benchmarks:
NASDAQ +25%
S&P +27%
Leverage Point Portfolio +97%
Sell off are always painful.
Even if I look at the big picture and see I am up over 90% for the year.
That’s an incredible result and I should be very satisfied with it. But, I did like being up over 128% better last month. Who wouldn’t?
For this downturn, I did not want to be left holding the bag. We’ve had an incredible run for two straight years. While I have no idea where markets are headed, I know a good thing when I see one. Stocks don’t normally double, or triple in two months. I locked in big gains this month. I sold almost half of what I own once we got into earnings and I saw some of the reaction was negative in spite of incredible results.
I Sold Most of Upstart and Half of Affirm
Earnings triggered a big sell-off in Upstart, even though they posted 250% revenue growth and almost doubled earnings. It seems crazy, but expectations were apparently too high for this company. The lesson I learned from this was that no matter how much analysis and research one does, you will never have complete information.
I had over 50% of my portfolio in just two names (UPST and AFRM) going into earnings. Once I saw Upstart tank in after hours, I sold off most of my position in the morning to lock in my profits.
Affirm posted earnings the next day, and I decided to hold onto my full position. I gambled that the market would like Affirm’s earnings report, which they did and it spiked up 20%. I sold half of the position my Affirm position the morning near the all-time high. Still hold a sizable position here.
I Sold Completely Out of Sea
I hesitated on Sea and decided to hold after reading the ER. But the stock took to tumble. When it hit a price that was below where it was six months ago I sold out of my entire position. While I tried to convince myself that the e-commerce growth story was still intact, the reality was:
The entertainment business with Garena was flat. No plans for new games? The only idea they have is a high-definition version of Free Fire? Why are they not buying up studios and developers trying to find a new hit?
E-commerce growth was strong with gross merchandise value up 80.6% YoY, but where is the growth going to come from next year? Launching in small Eastern European countries won’t sustain it.
What is the strategy with the payment platform? I looked closely at it and it’s simply a clone of AliPay. While this is useful in some markets how does this grow? What is the plan? There are a lot of players in this space.
That’s enough with the selling. What am I buying?
RealReal is the Real Deal
I got exactly what I was looking for with their ER.
It was right there in black and white in the earnings presentation, “Supply ramped during Q3: REAL’s unique business model largely insulated from supply chain shortages and certain of the inflationary impacts facing many retailers.”
BINGO.
RealReal posted what I thought was a great ER this month.
GMV of $368 million increased 50% and 46% compared to Q3 2020 and Q3 2019, respectively
Gross profit per order improved $4 Y/Y to $94 per order
Total revenue of $119 million increased 53% and 46% compared to Q3 2020 and Q3 2019, respectively
What I like most about RealReal is there is essentially no competitor in the upscale luxury resale business. The only serious one is a private French company called Vestiaire Collective, which provides a similar service. But with only 3 million members to RealReal’s 20+ million membership, it’s clear who is winning.
Keep in mind that ThredUp and Poshmark do not authenticate products and focus on a low-margin mass audience (Note: eBay is now authenticating). Not a great business.
In my opinion, the upscale and affluent nature of ReaReal customers means the sky’s the limit when it comes to just how much the average order value can increase. It’s similar to the ‘whales’ that exist in online gaming.
The future of RealReal is not in finding a lot more customers, but it’s about moving up the market, better servicing the fashionistas that love the service.
Amped About this New Stock in the Portfolio
When this company went public, I passed on it. But, with the release of their first earnings report as a public company, Amplitude (AMPL) caught my attention.
What stood out was hyper-growth, with revenue of $45.5M, up 72% year-over-year. On their investor’s call, the team was confident enough to give 40% growth as guidance for all of next year. Very few companies feel comfortable providing guidance like that at the end of Q3.
But what do they do? (Sorry, you’re breaking up…)
Amplitude is an enterprise product analytics company. If this doesn’t excite you, you’re not alone. At first, I dismissed it as well. Why? There are a lot of analytics tools out there and many of them are free. Google Analytics is probably the first one that comes to mind. There are also direct competitors who are still private like Heap, or MixPanel, plus a slew of marketing analytics tools. How could amplitude be that much better?
What convinced me that Amplitude was doing something unique was the impressive list of customers like Intuit, Walmart, Instacart, and Square. I also liked that they are displacing Adobe analytics, and with 26% of the Fortune 100 already customers there is plenty of room to grow. Here are a few stats from the ER.
Revenue of $45.5M, up 72% year-over-year.
Number of paying customers grew 54% year-over-year to 1,417.
311 Customers with over $100K ARR and 22 Customers with over $1M ARR.
Dollar-based net retention rate at the end of September 30, 2021, was 121% compared to 119% at the end of September 30, 2020.
Their full investor presentation from their last ER can be found here.
C'est La Vie for Marqueta
This stock is volatile, I just couldn’t catch it at the right moment and so I gave up. It still might be a great pick, but I just took a small loss and moved on. I believe the reason it’s so volatile is the market has trouble valuing it. The revenue model is activity-based, not subscription-based. It’s hard to predict where this is going quarter to quarter. Files this under one to look at in 30 days.
The Rush is On
I took a small position in SEMRush. They are a recently public search engine marketing Saas provider for SMBs and mid-market companies.
Why this under-the-radar company? My thesis is that marketers will be forced to invest more into search marketing in 2022 because it will be unaffected by the privacy changes that have reduced display ad targeting effectiveness on both iOS and Chrome. Google just had a blowout quarter, while Snap and Facebook did not. So there is some data to support this thesis.
The company had some solid numbers in the last ER:
Third Quarter Revenue of $49.3 million, up 53% year over year.
ARR of $199 million as of September 30, 2021, up 47% year over year.
Dollar-based net revenue retention of 124% as of September 30, up from 121% in the previous quarter.
Leverage Point Portfolio YTD by Month:
Jan: +20%
Feb: +28%
Mar: +1%
Apr: +11%
May +13%
Jun +33%
Jul +34%
Aug +66
Sep +99%
Oct +120%
Nov +97%
Core Portfolio Holdings:
DDOG 21%
CASH 25%
REAL 15%
AMPL 15%
ASAN 11%
AFRM 8%
UPST 4%
SEMR 1%
Summary of Investment Thesis by Company
Below is a concise summary of each company and why they are in my portfolio, in my own words. No corporate jibber-jabber, or regurgitating of marketing.
What they do: Enterprise-grade product analytics system that is used to optimize and improve the full user experience.
Why I own it: Guiding for 40% growth for 2022 and expect them to exceed that given their confidence in closing $1M+ customers.
What’s unique about them: They provide recommendations that make analytics actionable. This is the real reason anyone cares about analytics.
When would I sell: If customer acquisition slows for any reason it would be problematic for the stock, particularly whales.
Notable News: Opening a data center in Europe is interesting and to me signals they are in the process of adding a bit European customer.
What they do: A full suite of tools to manage and grow organic traffic to a website across a variety of search engines.
Why I own it: Steady growth is just under 50% and I think there is potential to accelerate as more marketers adopt search in 2022.
What’s unique about them: No competitor offers the full suite of tools in one package and a competitive price point like SEMRush.
When would I sell: It’s possible that growth slows as adding new customers in 2022 gets harder as they increase market share.
Notable News: They launched an App Center that allows other third-party integration to market their tools to SEMRush customers.
What they do: AI-powered lending platform that partners with financial institutions to determine credit worthiness for personal or auto loans.
Why I own it: YoY is still an incredible 250% and with more banks dropping FICO they are on being the new standard.
What’s unique about them: Technology is far superior to competitors and gives them a competitive advantage over other lending tech.
When would I sell: Growth could stall out for a variety of reasons in 2022. I am watching marketing costs and the concentration risk with CreditKarma.
Notable News: They publicly released a version of the auto lending platform which should sustain growth in 2022.
What they do: Project management and productivity tool for businesses that provide maximum flexibility across multi-team workflows.
Why I own it: Growth has been accelerating recently with the increased demand for better tools to enable cross-team collaboration with WFH.
What’s unique about them: They have a flexible product and a strong culture, the CEO maintains a 100% approval rating on GlassDoor.
When would I sell: I want to see enterprise customers of over $50K continue to grow. If that was to stall or slow down that might be a sign to sell.
Notable News: They released a new set of features called the Enterprise Work Graph, obviously inspired by Facebook’s social graph.
What they do: Affirm is the market leader in BNPL (Buy Now Pay Later), an alternative to credit cards with better rates and instant approval at checkout.
Why I own it: Massive growth from recently closed partnerships with all major U.S. e-commerce players including Shopify, Amazon, Walmart, and Target.
What’s unique about them: Technology is superior to competitors and the pipeline of product updates is strong most notably Affirm Card offers.
When would I sell: I am closely following active customers and the average number of purchases. I want to see those two grow substantially.
Notable News: Announced Target is now a partner and offers the ability to use BNPL on all the items in a given e-commerce shopping cart.
What they do: Observability platform for engineers to monitor systems, databases, and other technologies to get data to improve performance.
Why I own it: Core infrastructure data products like this have high switching costs and once implemented rarely are removed.
What’s unique about them: With more than 350+ integration options competitors don’t seem to be able to offer the same level of extensibility.
When would I sell: The company is now approaching a $50B market cap and that could just make hyper-growth harder to sustain.
Notable News: There is a great post here on Software Stack Investing detailing all the new updates and features.
About Me
I have worked in internet media and technology on the business side my entire career. I live in the SF Bay Area and focus on investing in what I know, high-tech growth companies. I try my best to stay in my circle of competence.
Investing Style
I like to buy small positions, this gets me focused to learn about a company. Then I sell, or I add to it over time in small increments depending on a variety of factors. Some positions I hold for years, others for only a few months. My goal is CAGR. Not 10-baggers and I try hard not to fall in love with a stock. My aim is to maximize my returns and I have no allegiance to any particular method or style of approach.
My portfolio is concentrated and I aim to hold a maximum of 10 stocks at the same time. The fewer the better. My goal is to consolidate around my highest conviction picks while looking for new opportunities to cycle into.
I sell on a dime. Which is a massive advantage of retail investing. If there is something I don’t like, I don’t take any chances and I just sell. This is why I take a small position at first and test drive my ideas. If for whatever reason I change my mind, I just take the loss (or gain) and move on. Sometimes, I just decide I want more cash for peace of mind and sell. I can always get back in at a later date if I want.
I have an obvious bias to SF Bay Area high-tech companies and for good reason, it’s an ecosystem that I know well and like. I think it gives me a slight edge, beyond the numbers when investing.
Things I look for in a business to invest are:
Sustainable competitive advantage: This can be superior technology, but it can also be brand, business strategy, or even company culture.
Massive growth runway: The companies I like to invest in have a large total addressable market (TAM) and no obvious ceiling or limit.
Great management with a clear vision: While not exclusively founders, I like management with a track record who can clearly articulate their vision.
Are in hyper-growth mode: Revenue should be growing at least 50% YoY and can be sustained. If it can accelerate, that’s even better.
I have unique insights into it: I look for businesses that I have a personal connection with. Maybe a product I use? Or management I have met and liked.
A business vertical I know well: I focus on businesses and eco-systems I understand intimately and it’s why I have avoided areas like biotech.
And what I avoid:
No Chinese companies: The SEC’s own guidelines say they are limited in their ability to enforce regulations in China.
No penny stocks: I avoid companies that are under $1B in market cap. Those stocks are too easy to manipulate given the low volume and float.
No stocks on non-U.S. exchanges: Maybe I just haven’t found the right pick, but in general, I avoid foreign listing as they are harder to manage.
Overall Returns Since February 2020
Portfolio returns since I started closely tracking it in February 2020 is 312%.
DISCLAIMER:
This post is simply an end-of-month summary. Positions can change immediately. With or without notice. Do not make decisions based solely on my writings. Do your own due diligence and make your own investment decisions. Rember that predictions are hard to make, particularly when they are about the future.
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