Portfolio updates and general thoughts (March 11, 2021)

It’s been a while since I’ve written a long-form post about my portfolio and general thoughts, so here goes:

How I’ve Changed

As many of you know, there’s been a dramatic shift in my thinking around portfolio construction. Heavily influenced by Buffett and especially Munger, I once swore by concentration, and one of my previous blog posts elaborated on my (previous) thoughts on it: https://liviamcapital.substack.com/p/how-i-approach-portfolio-construction

A few months ago, I read a paper written by Brad Slingerlend (@bradsling) of NZS Capital and as I was reading it I could feel my mind change; it was a formative moment for me. It challenged everything I thought I knew about investing and made me consider that my previous concentration mandate was non-optimal, especially in these dynamic times.

I highly recommend reading the paper here but essentially it recommends having a portfolio split into two halves; the first with a few resilient & optional businesses and the second with many smaller optional-only positions, while squeezing out the resilient-only businesses. As a result of reading this paper and thinking through its ideas, my portfolio went from 5 positions to over 25.

Portfolio Update

Selling Datadog, Crowdstrike, Snowflake, JFrog, and Cloudflare

I recently sold out of Datadog and CrowdStrike, both of which I still think are phenomenal businesses. Datadog has a large opportunity in observability and APM and its growth is highly correlated with public cloud growth of AWS, Azure, and GCP, which we all know has a very long tailwind. Crowdsrike is a leader in endpoint security which should also benefit in the next decade. There’s no doubt both businesses will be highly cash flow generative in due time. The issue is valuation.

You can see in the chart above that Salesforce IPO’d in 2004 (approximately 17 years ago) at a ~$4/share and ~16 PS and has returned about 29% annually since then or almost 55X (!!), a phenomenal performance. Well, Datadog is trading at a 45 PS and Crwodstrike is trading at 58 PS. You might say, well 55/3 means Datadog would still return 18X in 17 years (~20%). Sure, but that’s only if either of those does as well as Salesforce has for 17 years.

I also sold out of Snowflake, JFrog, and Cloudflare. I like all of these businesses but I’m trying to get supernormal returns, and in my opinion, those businesses promise average returns at best. At the right price, I would certainly be a buyer again.

Recent adds:

Wix, Twitter, JD, Tencent, Baba, Etsy, & 4477 (Base Inc)

Wix:

Wix payments grew 382%, a clear indication of “ROOTMO” given Wix is trading at 16 P/S. Credit @bradsling for the idea of ROOTMO: “resilience + out of the money optionality”.

Professor Kalkyl @Prof_Kalkyl

$WIX Q4'20🔥 Revenue +38% Collections +35% Business Solutions ARR +46% Creative Solutions ARR +24% GPV +126% Wix Payments +382% Take Rate 1% (0.5%) *1.25-1.30% 2021E Also.. it's Pat Dorsey's second largest position (~16%), which he added to a lot (+21%) in Q3.

Twitter:

My hangup with Twitter has always been around monetization. Advertising is a difficult business without scale, especially at the top of the funnel. Well, Twitter recently announced Tipping and Super Follows which will help users monetize their Twitter accounts, hence creating a flywheel of more engagement -> MAUs -> Advertising revenue, etc. Twitter expects revenue to double in three years and the valuation is not demanding. It’s also good to see Twitter moving fast and having some success with new products like Spaces, a Clubhouse clone.

Bill Brewster @BillBrewsterSCG

Spaces —-> followers —-> commerce —-> Twitter coin (h/t @ElliotTurn) Then some circular flywheel thingy. If you open your eyes you can see something in front of you. Obvious question is whether it’s priced it. I’m going with no.

JD:

A Chinese e-commerce powerhouse trading at a very reasonable valuation with two things that I like: 1) exploding EPS and 2) tons of optionality with JD Health and JD Logistics, etc:

Slingshot Capital @SlingshotCap

If I normalised JD Retail margins at 3.5% and marketplace margins at 25%, I'd get $5.45B of operating profit for FY2020. Or using $5.35B of FCF generated in FY2020. If you do a forward projection using a modest growth rate of 20%, it's ridiculous for a high quality co like $JD.

Tencent:

WeChat is ubiquitous in China, and Tencent’s core business of gaming, media, advertising, and cloud is formidable. Their investment portfolio may be equally impressive, however. It’s a remarkable business in so many ways:

Trung Phan 🇨🇦 @TrungTPhan

Tencent’s investment portfolio is nuts: • Gain of $120B in 2020 (6x profit) • 1100 private cos and 100 public cos • Deployed $80B on portfolio over the years —> now worth $280B CC: @packyM

Alibaba:

A wide moat business growing at 34% with a very undemanding valuation of 26 P/E. Lots of optionality with e-commerce and cloud:

Value Investigator @value_invest12

Alibaba‘s growth drivers $BABA

Etsy:

I highly recommend reading John Huber’s thesis on Etsy in the Graham and Doddsville newsletter:

John Huber @JohnHuber72

I talked with the Columbia Business School students for the latest edition of Graham and Doddsville Newsletter. We discussed Saber's investment approach as well as our investment in $ETSY. Thanks to CBS for having me! Enjoyed the conversation.

4477 (Base Inc):

This is my second investment in a Japanese business, my first being Mercari.

Will Schoebs @willschoebs

The latest Japan Business Insights post discusses BASE, a 🇯🇵 "all-in-one" $SHOP, $ETSY & @stripe w/Q220 sales up 177% YoY, BASE is powering the success of the emerging ranks of 🇯🇵 "solo-preneurs” & SMB creators building the digital backbone of 🇯🇵 japanbi.substack.com/p/base-japans-…

japanbi.substack.comBASE: Japan’s “All-In-One” Shopify, Etsy & StripeWith Q220 aggregate GMV & sales increasing by 133% & 177%, respectively, & its valuation up ~9x since March 2020, this “gem” has been discovered...though is the best yet to come?

Thoughts on interest rates and inflation:

I’m certainly not an expert on marco-economics (or anything else for that matter), but I found this paragraph from NZS Capital to be useful in helping me shape my thinking around rates, inflation, and the future:

https://www.nzscapital.com/news/nzs-capital-q4-2020-update

My current portfolio:

These are businesses I love right now, but I change my mind daily. I highly recommend you do your own due diligence. You will not be able to copy conviction.