News of the Week (April 4-8)
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News of the Week (April 4-8)
CrowdStrike; SoFi Technologies; Upstart; Penn National Gaming; PayPal Holdings; Match Group; Meta Platforms; The Boeing Company; Duolingo; Nanox; My Activity
Today's Piece is Presented by FTX.US:
1. CrowdStrike -- Investor Briefing and Forrester
a) Investor Briefing Notes from Co-Founder/CEO George Kurtz:
Impact Level 4 (IL-4) Defense Agency Authorization:
CrowdStrike was issued “Provisional Authorization to Operate” at Impact Level 4 (IL-4) by the federal government this week. CrowdStrike’s Cybersecurity and Infrastructure Security Agency (CISA) and FedRAMP wins announced in previous months came as a bi-product of IL-3 clearance for CrowdStrike which freed it to serve civilian agencies. To serve defense agencies, vendors need level 4 clearance -- which CrowdStrike now has. Translation? This paves the way for Falcon Platform deployment within defense-based agencies of the federal government so CrowdStrike can now protect “Controlled Unclassified Information” (CUI).
The firm is already well on its way to a dominant market share within large enterprise endpoint security and now the public sector is looking ripe with low hanging fruit for CrowdStrike to pick. These clearances also work to build commercial client confidence in the firm's technology -- federal approval processes like this one are intense.
Endpoint market share gains -- per IDC:
Calendar 2019: 7.9% share (4th vendor overall)
Calendar 2020: 12.2% share (1st vendor overall)
First 6 months of 2021: 14.2% share (1st vendor overall)
Long Runway:
CrowdStrike is 35% penetrated in its original enterprise niche (over 7,500 employees)
65% of the Fortune 100
51% of the Fortune 500
26% of the Global 2000
CrowdStrike is 3% penetrated within the mid-market segment (251-7,499 employees)
CrowdStrike is under 1% penetrated within the SMB segment (5-250 employees)
CrowdStrike is under 1% penetrated within the Public Sector
Even within CrowdStrike’s existing base of customers, there’s an opportunity to more than triple its ARR solely via module cross-selling.
Market Growth:
CrowdStrike’s Total Addressable Market (TAM) at its 2019 IPO was $25 billion. At that time, it expected its market to reach $44 billion by 2023. Now -- through a series of organic product launches and acquisitions -- it estimates its market size this year to be $58 billion: 32% and 12 months ahead of its previous projection. Leadership now sees a clear pathway to a TAM of $126 billion by calendar 2025.
Random notes:
CrowdStrike is the only software company with over $1 billion in trailing 12-month revenue, trailing 12-month revenue growth over 60% YoY and a free cash flow margin over 30% -- no other company with these credentials has a free cash flow margin over 25%.
Time to remediate and reboot continues to differentiate CrowdStrike as its exclusive cloud presence allows for real-time data collection while other vendors -- with cloud and legacy on-premise operations -- use a Batch Mode approach with far heavier data requirements.
Managed Security Service Provider (MSSP) growth continues to outpace expectations and so does the free trial programs it now offers. These are 2 lead-generating keys for aggregating SMB business to make CrowdStrike more successful and efficient within that niche.
MITRE (a non-profit organization supporting federal research) named CrowdStrike #1 with a 100% score for “prevention and stopping breaches” as well as “the XDR leader.”
Another MITRE study on “detection and protection” depicted SentinelOne as ranking ahead of CrowdStrike. This study does not penalize vendors as heavily for inundation with false positives. CrowdStrike's lack of this false positives issue (which takes up a security team's time and attention) has been key to its enterprise market share gains.
Kurtz also highlighted the e-commerce platform that CrowdStrike has built to seamlessly offer all of its modules. This shop fosters zero-friction module purchasing and on-boarding to raise conversion and up-sell activity.
“While the competitive landscape has been cluttered, today CrowdStrike stands in a class of its own in driving superior outcomes. And we are still in the early innings and taking share. We believe CrowdStrike is a generational platform company with a fundamental advantage over others in the market today.” — CrowdStrike Co-Founder/CEO George Kurtz
b) Investor Briefing Notes from CTO Michael Sentonas:
MITRE:
“Our perfect MITRE score is a great story about our capabilities. Our identity protection capabilities (thank you Preempt acquisition) stopped the attack in its tracks. CrowdStrike had to be asked to turn off its identity protection service just so MITRE could run the rest of its test. And we still got a perfect score.” — CrowdStrike CTO Michael Sentonas
Humio:
“We’ve re-engineered log management from the ground up with index-less management to collect structured and unstructured data to make exploring anything blazing fast at massive scale.” — CrowdStrike CTO Michael Sentonas
CrowdStrike talks about this log management opportunity as perhaps more greenfield than it actually is. Datadog is surely an elite, seasoned competitor and there are many others doing great work in the observability space. Still, it’s hard (impossible really) to ignore the fantastic success Humio has had under CrowdStrike to date. Revenues for the segment quadrupled year over year in 2021 (small base but still impressive).
Mandiant partnership announced:
Mandiant will now readily offer CrowdStrike’s threat detection and response tools in tandem with its security consulting services. There is some redundancy within the two product suites, but the companies still see a lot of benefits from working together. A key hurdle for optimizing hack remediation is what Washington Post describes as “splintered responders and reluctance to share intelligence within vendors.” This relationship will help ease that friction.
c) Investor Briefing Notes from CFO Burt Podbere:
New targets:
At CrowdStrike’s previous investor briefing, it had “illustrated” (they’re careful to not call this formal guidance) a path to over $3 billion in annual recurring revenue (ARR) by calendar 2024. Now, it expects to get there in calendar 2023. Furthermore, the company offered a calendar 2025 rough outline of over $5 billion in ARR. Considering the company’s track record of uniform under promise and overdeliver, this should be a somewhat safe assumption. The result would represent a minimum 4-year CAGR of 31% which is quite strong given its scale. Note that this estimate considers no M&A and CrowdStrike’s fortress balance sheet certainly affords it the opportunity to add more inorganic growth to its future operations.
From a profitability perspective, CrowdStrike has already eclipsed its long term gross margin, G&A and free cash flow margin goals -- it expects to remain above these targets. Some people rightfully point out that deferred revenue will contribute less to free cash flow for CrowdStrike as growth inevitably slows over the long term. While that is accurate, unit economics, and so net income margin, will continue to briskly improve which should more than offset that headwind. The company is confident that it already has the operational leverage to reach its operating and net income margin targets today but is instead choosing to invest in more growth. Podbere added that the firm now sees more “upside” to its long term margin targets beyond calendar 2025.
On customer traction:
It now takes $4.6 million and $2.2 million in ARR to be a top 25 and top 100 CrowdStrike customer respectively. Both of these metrics have more than 10Xed over the last 5 years.
New customers are landing with an average of 4.7 modules vs. 4.3 YoY and 2.0 in calendar 2016.
The firm expects its dollar-based net retention rate (DBNRR) to stay above its target of 120% going forward. DBNRR = YoY revenue growth from the same base of clients.
d) Forrester
A week after Forrester named CrowdStrike as one of four incident response leaders within the cybersecurity industry, it received another, perhaps more notable accolade -- this time within Endpoint Detection and Response (EDR). The company scored perfectly on 75% of the criteria metrics and placed furthest up and to the right (so best) on Forrester’s chart. The report ranked CrowdStrike 1st in all three of its categories: Current offering, strategy and market presence. Microsoft and Trend Micro ranked 2nd and 3rd in all three categories with SentinelOne ranked 4th.
This accolade is not only important for reiterating CrowdStrike’s ability to prevent and manage breaches at the endpoint, but for a new, exciting growth vector as well: Extended Detection and Response (XDR). XDR leverages EDR as a base while injecting more 3rd party data sources from other pieces of the security and software chains to allow endpoint coverage to extend beyond the endpoint. Data-sharing partners in CrowdStrike's "XDR Alliance" like Zscaler, ServiceNow and many more help make this a reality.
Considering all of this, a strong XDR offering relies on a strong EDR core to best augment and extend the utility and reach. Think of EDR as chicken tenders and XDR as your favorite dipping sauce -- the better the chicken tender (EDR), the better the sauce (XDR) is going to be on it. CrowdStrike has the best EDR base in the world according to this report.
“Falcon is the most tested platform in the space and our results speak for themselves.” — CrowdStrike Co-Founder/CEO George Kurtz
All of this incremental XDR data ingestion and telemetry requires seamless scalability and data compression to effectively pull off. According to George Kurtz, Humio’s “compression algorithms exceed all competitors on the market which means it’s also more affordable.” Customers had been asking CrowdStrike for a better, more affordable solution for years and the Humio acquisition was the result. There’s a reason CrowdStrike paid 50X sales for it.
2. SoFi Technologies -- Student Loan Update, Board of Directors Right-Sizing & an APY Boost
a) Student Loans
The Biden administration extended the student loan moratorium through the end of August. As refinancing federal student debt is SoFi’s largest and most cash generative segment, this will weigh on 2022 results. To get ahead of this, management updated its 2022 guidance which is now:
$1.47 billion in sales vs. previous guidance of $1.57 billion.
$100 million in EBITDA vs. previous guidance of $180 million.
Q1 2022 guidance is unchanged as SoFi had assumed the moratorium would be in place through May.
The team is now assuming that this moratorium will be extended through the end of 2022 and that is reflected in the updated estimates. While this is surely frustrating, there are a few notes on this that I want to highlight:
Despite SoFi’s largest segment operating at 50% of normal volumes for 2022, it still expects 45% revenue growth and a tripling in its EBITDA generation (with doubling margins).
I’m encouraged to see that the team assumed the extension through the end of 2022 rather than the updated end of August timeframe.
With midterms around the corner -- which SoFi cited as a reason for the extension -- it’s likely that political theater will lead to this extension to foster goodwill from voters.
Good job ripping the Band-Aid off rather than peeling it off one extension at a time.
This demand headwind is entirely independent of the utility that SoFi’s federal re-fi product creates. This is not a matter of diminishing market share or eroding demand, it’s an industry-wide pause that will be lifted at some point in the future.
When this demand channel turns back on, the YoY growth comp headwind we are currently dealing with will morph into a lucrative tailwind.
b) BOD Right-Sizing
In other news, SoFi announced that 3 of its board members are stepping away. With SoFi’s Board of Directors at 13 before this announcement (the public company average is just above 9), this will right-size the board to "drive the company’s next phase of growth." Per the press release, "given all that SoFi has accomplished, this marks a natural point to continue the transition of its Board in regards to its size and composition over time.”
c) APY Boost
Finally, SoFi’s Annual Percentage Yield (APY) offer on savings accounts for direct deposit customers just got even better. Its previous 1% rate (33X the national average) is now 1.25% (42X the national average). For context, Goldman Sachs’ Marcus is currently running a national ad promoting its APY of 4X the average national rate. Many assumed SoFi's 1% APY would be a temporary marketing tool to drive user growth. This announcement makes the perk seem more permanent. Click here to read why I think this is so important.
3. The Trade Desk -- Gartner Accolade
For the 3rd straight year, Gartner (a market research and consulting firm) named The Trade Desk as a leader in its latest ad-tech study. It received top marks for Completeness of Vision and ranked just behind Google and Amazon in ability to execute.
There's no other open internet demand side advertising platform that comes all that close to The Trade Desk in this report. In addition to this recognization, the coinciding critical capabilities report ranked The Trade Desk #1 in the categories of Media Plan Creation, Campaign Piloting, Automated Campaign Optimization and Campaign Result Analysis. It tied for first in Channel Support and Service, Support and Partners and Targeting and Measurement Modes. For campaign setup, The Trade Desk ranked 6th which was its weakest category.
Gartner highlighted the following strengths for this advertising company:
Clients praising the frictionless user interface, seamless and effective targeting and straightforward 1st party data on-boarding.
A holistic view of campaign performance and all relevant key performance indicators (KPIs) across the numerous channels that an advertiser participates in.
Broad access to inventory with no supply-side biases.
Gartner highlighted the following areas of needed improvement:
The generation of campaign performance reports is "not as intuitive" as it could be.
Little focus on up-fronts and linear TV.
This is intentional as the shift to CTV continues to be brisk.
Relatively high cost for use.
This is despite things that it called out like predictive clearing which allows agencies and advertisers to leverage all of The Trade Desk's expertise to better forecast impression pricing and avoid over-bidding.
Click here for my deep dive into The Trade Desk's business.
4. Upstart -- KBRA Data & Proxy Statement Highlights
a) KBRA Data
There were some great inquiries I received this week about recent Kroll Bond Rating Agency (KBRA) new issue reports and Cumulative Net Loss (CNL) rates. These inquiries were centered around CNL rates on its newest transactions showing signs of underperforming Kroll’s current expectations. While this situation is not ideal, there are a few notes I wanted to add to provide more context:
The comparison on these new deals judges current CNL rates vs. current CNL rate base case expectations as well as the trigger rate. In older new issue reports, KBRA solely compared current CNL rates vs. the trigger rate (the maximum allowable loss rate before triggering a liquidation event).
Considering this, older comparisons were far easier for Upstart to clear than the updated disclosure.
None of the newer deals are seasoned enough yet to cast judgement. You’ll notice that all older deals in the reports continue to handsomely outperform. This is why overall CNL estimates for each transaction have not risen on any Upstart transaction. All are either lower than or equal to (a good thing) initial base case loss projections.
This is not a red flag to me, but it could turn into one if these trends persist and/or worsen over time. Upstart needs to continue delivering relative outperformance on its loans vs. comparable alternatives (like it has done across various macro-backdrops to date) to continue generating the results it has enjoyed. I’ll be keeping a close eye on this.
b) Proxy Statement
Proxy statement ownership highlights:
Dave Girouard owns 14.5% of the business vs. 17.5% YoY
Paul Gu owns 2% of the business vs. 2.6% YoY
Sanjay Datta owns 1.25% of the business vs. 1.2% YoY
All directors and current officers own 18.87% of the company vs. 25.2% YoY.
In February 2022, Upstart approved a 687,500 restricted share grant to Paul Gu which will vest through 2029. Considering how imperative Gu is to Upstart and its operations, I’m actually happy to see him get paid. He deserves it and I’d like to see him stick around with the company for the next several years. This helps make that possibility more probable.
Click here for my Upstart deep dive.
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5. Penn National Gaming -- Oh Canada
Penn’s theScore Bet product is now live in Ontario -- a Province with a population that would make it one of the ten largest states in The USA.
While Penn National Gaming has found early success with leveraging its Barstool Sports brand in the United States, Score Media will take the lead in Canada. Its slick, vertically integrated user experience (UX) and its position as the number 1 sports news app in that country make market share gains within sports gambling quite feasible. The product leverages Score’s decades of data aggregation to free betters to tap into all of this relevant information and stats via “BET MODE” within the app. The debut includes online casino games as well in partnership with Evolution Games.
“Today is momentous as we finally can participate in regulated gaming in our home country. We applaud the Ontario government for its leadership. We’re excited to offer our longtime users an integrated media and betting experience unlike any other.” — Score Founder/CEO John Levy
This week, Toronto-based theScore Bet signed a 10-year exclusive partnership with The Toronto Blue Jays to make it the “Official Gaming Partner” of that major league ball club -- both on-site and online. Score is The Blue Jays’ first gaming partner. Together, the two will create a Score-branded sports bar and restaurant within the stadium to “serve as an entertainment hub for fans.” Score also gains ample, exclusive in-stadium and external marketing rights.
“This monumental partnership with theScore Bet offers compelling new ways for fans to be part of the game.” — President/CEO of the Blue Jays Mark Shapiro
6. PayPal Holdings -- New Product & a Mixed Survey
a) New Product
PayPal launched its new “Cashback credit card” in partnership with Synchrony. When using this card, customers will earn 3% cash back whenever paying with the card and 2% for all other purchases where Mastercard is eligible for payment. Users of the existing 2% Cashback card will be moved over to the 3% program with no action needed. The card comes with no annual fee or category restrictions.
Other notes:
The firm also launched a refreshed “user interface within PayPal’s app and via web” for the card to simplify and enhance access to rewards, goods and payment schedules.
There's a $100 one-time cash back bonus on first $500 spent with the card.
“Our customers shopped across 34 different categories last year showcasing the diversity of their needs. We wanted to build a credit product that was flexible and better matched rewards with their spending habits regardless of spend category.” — VP of PayPal Consumer Credit Susan Schmidt
b) Apple Pay
Apple Pay has officially (barely) passed Venmo as the favorite payment method among teens according to a Piper Sandler survey. PayPal’s digital wallet and Cash App round out the top 4. PayPal is the top-ranked BNPL option among teens -- ahead of AfterPay and Affirm. Apple Pay and PayPal are close partners, but they also compete for payment volume and clearly Apple is finding success here.
Click here for my PayPal Deep Dive.
7. Match Group (MTCH) -- Partnership
Verizon’s digital wireless carrier -- Visible -- and Match Group announced a new, joint promotion. Match Group’s Tinder had already debuted a wedding date feature within its explore tab to expand into that close adjacency. Now -- based on “singles too often on the giving end of wedding gift registries” -- the two are building a “Singles Registry” to send and receive presents from other singles. This feature will be actively promoted on Tinder, OkCupid, Plenty of Fish and Match and available at VisibleSinglesRegistry.com. Participants can easily build-out wish lists with a clear, singles theme.
Click here for my broad overview of Match Group.
8. Meta Platforms (FB) -- Various News
Facebook’s outgoing CTO -- Mike Schroepfer -- is moving on to focus his life’s mission on combatting climate change. Schroepfer will remain in a part-time role with the Head of Facebook Hardware Andrew Bosworth assuming the CTO role. Bosworth has been with the company for 16+ years.
Meta Platforms is developing non-blockchain digital currencies to juice its e-commerce presence in a way that offers the path of least regulatory resistance (RIP Libra).
These tokens will also be eligible for consumer lending as well as to incentivize creators to produce within the Family of Apps.
Rumors are that the new currency will be called “Zuck Bucks” (I hope that’s not accurate).
This comes after Zuckerberg announced that Instagram will debut some NFT products.
A new survey out of Piper Sandler revealed that teens prefer TikTok and Snap over Instagram and Facebook -- but they still spend the most time on Instagram out of all 4.
9. The Boeing Company (BA) -- Various News:
China Eastern Airways -- in conjunction with the U.S. National Transportation Safety Board -- is still working to uncover the cause of the crash in China last month. Boeing has 140 737 MAX jets ready to deliver to Chinese customers when regulators allow that to happen. This crash could certainly delay things further depending on the cause.
Boeing announced new and deepening partnerships with all 3 public cloud providers to transition its on-premise data centers to cloud storage. This could be a meaningful long term margin tailwind for the firm -- but that will take years to play out.
Air Lease ordered 32 more 737 MAX jets from Boeing. It now has an order backlog of 130 planes. Demand for travel is quickly recovering which bodes extremely well for new plane demand. High oil prices also help motivate new orders as these models are far more fuel efficient.
10. Duolingo (DUOL) -- Insider Buying
Durable Capital Partners can’t get enough shares of Duolingo. The 10%+ owner just added 9% (AKA $25.6 million) to its position this week. This simply continues a long series of accumulation events from the firm this year.
Click here for my Duolingo Deep Dive.
11. Nano-X Imaging (NNOX) -- Factory
Nanox’s South Korean chip factory is open, on schedule. The plant will manufacture its Xray chips and will be fully ramped up in the coming months. The chips will come with a kilo-voltage peak (KVP) of 20-120 while traditional machines range from 50-120. Lower means less radiation.
Click here for my broad overview of Nanox.
12. Cannabis Industry News -- Mainly Per Marijuana Moment
Cannabis Sales in Illinois returned to month over month growth in March. Total revenues rose to nearly $131 million representing 14.9% growth vs. February 2022 and roughly 20% growth YoY.
Maryland Governor Larry Hogan indicated that he will allow a cannabis legalization bill to be implemented if voted through by Marylanders this year. He will not stand in the way like other Governors have tried to do.
Treasury Secretary Yellen is "extremely frustrated" that cannabis banking reform has not been passed. Me too.
The latest budget from New York's Representatives would allow for cannabis companies to be exempt at the state level from 280E. This would help lower effective tax rates by allowing cannabis companies to deduct ordinary business expenses from their state (not federal) tax bills. The 280E federal tax provision currently prevents them from doing so.
Montana cannabis sales in March set a new monthly record of $25.7 million.
Senator Schumer is set to release his latest attempt at federal cannabis reform in the coming weeks and is supposedly attempting to work across the aisle to get it done. Recently, the House of Representatives passed a broad reaching cannabis reform bill called the MORE (Marijuana Opportunity, Reinvestment and Expungement) Act. The Senate will not pass that bill as is but we'll see what Schumer comes up with this month.
The House of Representatives passed a bill to expand federal cannabis research.
Oklahoma and South Carolina continue to take small steps towards cannabis reform.
13. My Activity
I added to SoFi Technologies twice during the week. My cash position remains at roughly 10.3% of holdings.