News of the Week (May 9-13)
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News of the Week (May 9-13)
The Trade Desk; Duolingo; JFrog; Olo; Lemonade; GoodRx; Meta; Upstart; CrowdStrike; Cannabis; Macro, 2022 & My Activity
Today's piece is brought to you by Commonstock:
1. The Trade Desk (TTD) -- Earnings Review
“In our current environment, our demonstrated ability to invest in growth and self-fund our high growth rates through profitable long term cash flow generation sets us up well for the future.” — CFO Blake Grayson
a. Demand
The Trade Desk guided to “at least” $303 million in revenue while analysts were looking for $304.3 million. It posted $315.3 million, beating its expectations by 4.0% and analyst estimates by 3.6%.
More demand context:
Q4 is always The Trade Desk’s best quarter of the year by a sizable margin.
The Trade Desk will have one of its toughest YoY growth comps next quarter due to the 100%+ growth in Q2 2021 from a demand backlog unwind as the ad market recovered post-pandemic shock.
This was its fastest YoY Q1 growth rate in 4 years... on a much larger revenue base.
b. Profitability
The Trade Desk guided to approximately $91 million in EBITDA while analysts were expecting $92.4 million. It generated $121.0 million in EBITDA, beatings its expectations by 33.0% and analyst expectations by 31.0%.
More margin context:
GAAP Operating Margin in Q4 2021 was hit by $158 million in stock-based compensation paid out to Co-Founder/CEO Jeff Green for meeting performance benchmarks. Operating margin was 33.6% without this charge.
There’s $616 million left in this package which will vest through 2026.
GAAP Net loss of $15 million in the quarter (4.8% margin) resulted from this as well.
Margins continue to be slightly propped up by temporarily lower OpEx via the virtual environment it’s still partially operating in.
Going forward, The Trade Desk expects to lean more heavily into growth and see normalizing OpEx which could lead to slowing or flattening margin expansion in 2022 and 2023.
“With a large available market in front of us, we see significant opportunities ahead and continue to be motivated to invest thoughtfully in the business, placing high importance on hiring to support growth which enables us to keep distancing ourselves from the competition.” — CFO Blake Grayson
The Trade Desk eclipsed $1 billion in cash & equivalents for the first time during the quarter. It has no debt.
C. Guidance
Q2 2022:
Analysts were looking for $364.7 million in revenue while The Trade Desk guided to “AT LEAST” $364 million.
Analysts were looking for $126.6 million in EBITDA while The Trade Desk guided to $121.0 million, missing expectations by 4.6%.
The anticipated sequential EBITDA drop is due to the aforementioned OpEx normalization and pressing down harder on the gas pedal to take more market share thanks to the company’s excellent margins and balance sheet.
The Trade Desk does not guide to annual results.
d. Conference Call Notes from Co-Founder/Co-CEO Jeff Green
On the quarter:
The Trade Desk continues to grow well in excess of even the most optimistic digital advertising growth forecasts (14% from Zenith) as it continues to take more market share.
The secular tailwind that is the shift to digital advertising was strong enough to deliver an across-the-board beat and overcome inflationary and supply chain challenges weighing on marketing spend aggression as well as the war in Ukraine temporarily impacting European ad spend.
“The Trade Desk is firmly established as the default DSP for the open internet and we are well-positioned to grow and grab share regardless of the macro environment.” — Co-Founder/Co-CEO Jeff Green
On CTV rapidly embracing AVoD:
“I have spent many of the last 10 years publicly predicting Netflix and everyone else would eventually show ads. Netflix’s announcement to make ads part of their future and so many other great things are happening in CTV. I can’t think of a time that the TV landscape had more positive changes in a short period of time.” — Co-Founder/Co-CEO Jeff Green
Because CTV ads are only purchased and shown to logged-in viewers, this is the perfect environment for selling data-driven ads… this is likely why it’s The Trade Desk’s fastest growing segment.
In just a matter of months Disney+, HBO Max and Netflix all announced broader intentions to introduce ad-supported pieces to their streaming businesses. As a reminder, Netflix leadership explicitly told us on their last call that they weren’t interested in building programmatic capabilities internally -- like Amazon is doing -- which is great news for The Trade Desk.
Furthermore, Green was rather excited about Discovery now owning Time Warner as he called their team “one of the savviest in programmatic advertising.” The Trade Desk has intimate advertising relationships with both Disney and HBO Max -- Green is “extremely confident” in developing deep relationships with every streaming platform.
With the three streaming titans all quickly embracing ads, this places added pressure on everyone else to mirror the enhanced programmatic targeting capabilities to keep from falling behind in terms of return on ad spend (ROAS). For reference, advertisers will pay roughly 3X more in cost per mille (CPM) if there’s a “reasonable chance those viewers are interested.” Smaller publishers can’t really afford to miss out on this and also can’t afford to build programmatic bidding platforms on their own. Enter The Trade Desk.
“As more premium CTV supply comes online, we have more than enough demand to satisfy it. We could not be more excited about what the Netflix, Disney+ and HBO Max shift means for AVoD supply… Demand is really off the charts with the move away from cable. The new CTV inventory is desperately needed with demand already lined up. These CTV players can’t alienate users. They have to provide relevance and they have to provide very few ads. So that means we’re going to see scarcity for as far as we can see into the future.” — Co-Founder/Co-CEO Jeff Green
“We started to see movement towards ad-funded CTV early on in the pandemic, but I think we’re seeing even more of it now.” — Co-Founder/Co-CEO Jeff Green
On UID2 upgrading the internet and Google:
A theme of the earnings call was “upgrading the internet” by shifting it from opt-out to opt-in -- giving consumers the ultimate choice of who is allowed access to their 1st party data. This requires that about 10% of users are logged in, in order to effectively target -- which The Trade Desk has consistently been well above thus far. CTV -- where all ads are programmatic -- greatly helps here.
Google’s degradation of 3rd party cookies merely amplified the pressing need for Unified ID 2.0 (UID2) (which is the open internet identifier The Trade Desk created) and its usage of phone numbers and emails rather than cookies to responsibly, granularly and effectively track consumers across any internet environment.
Green on UID2:
Green discussed the reliance that a steady supply of free, premium content has on advertising. At the same time, consumers are quite sensitive to ad load and repetition which makes effective identification to avoid these issues all the more important. UID2 ensures this can still be done in a way that respects and protects identity -- it can track and place ad impressions without ever sending a piece of sensitive, identifiable data to the advertiser or agency.
Green further added that on-boarded publishers are already enjoying rising CPM due to their impressions becoming more valuable with the enhanced visibility, measurability and ultimately return on ad spend (ROAS) that UID2 provides.
UID2’s freeing of safe and scalable first party on-boarding along with The Trade Desk’s Solimar ad-platform and its retail relationships all equip the firm with a data marketplace that -- according to Green -- “has the potential to be the largest in the world.” Additionally, a recent marketplace design refresh has led to higher ROAS for its clients.
For a final note, while The Trade Desk built UID2, it intentionally does not own it. The firm is fixated on avoiding conflicts of interest (even though it is starting to encroach on supply side utility) and this is one of the ways users are guaranteed that the service is unbiased.
Mediavine case study:
This agency handles ads for 8,500 publishers. It opted in to UID2 and saw:
CPMs double
Enhanced privacy with the same level of identification.
On OpenPath:
Open Path -- which is The Trade Desk’s channel for publishers with their own yield management capabilities to directly access inventory -- is off to a good start:
“In the days following the OpenPath announcement, we had more than 100 inbound inquiries from major publishers looking to join the initiative.” — Co-Founder/Co-CEO Jeff Green
Interestingly, adoption of OpenPath frees publishers to activate their own first party data and to connect that to the demand side to ultimately enhance overall targeting efficacy. This, in turn, makes impressions worth more to advertisers which ends up boosting publisher revenue from ad sales as well as ROAS for advertisers. I know that The Trade Desk likes to say it isn’t doing yield management so this isn’t technically competing with the supply side. If it looks and acts like a duck, it’s a duck -- this is a certain degree of supply side intrusion.
On EUID -- Europe UID:
“UID2 is an open-source project and EUID is a version of it to meet the specific needs, including regulatory, of the market… Building a specific version allows us to give partner reassurance that data will not leave Europe -- even for international companies. EUID is the most GDPR-compliant identity solution in the market today.” — Co-Founder/Co-CEO Jeff Green
e. Notes from CFO Blake Grayson
On Solimar:
Solimar adoption is over 80% with “continued promising results.” The team is now all but guaranteeing adoption will reach 100% by year’s end.
On the retail media business:
“We are seeing green shoots in our retail media business, with Q1 representing our first full quarter of operations in this space. We’ve brought on more retail partners and are cautiously optimistic as spend continues to ramp.” — CFO Blake Grayson
The Demand Side Platform (DSP) that it built for Walmart “did really well in its first full quarter” with 200+ large brand advertisers opting into test budgets.” The measurement marketplace is working wonders to connect ad dollars to sales to enhance the value of these retailer impressions for all stakeholders. As a reminder, it has also signed on Walgreens, Gojek, Home Depot, Target and many, many more to partner in a similar capacity. This is a massive opportunity for the company in my biased opinion and its entirely ahead of it.
On channel contributions -- all unchanged sequentially:
Video = about 40% of sales (including CTV which is its fastest growing segment).
Mobile = about 40% of sales.
Display = about 15% of sales.
Audio = about 5% of sales.
More notes from Grayson:
It continues to take meaningful CTV share in Europe. Spend in Europe struggled in Q1 but “through April had recovered with a little room to improve.” This is far more upbeat commentary than we’ve heard from some of the other global advertisers this quarter.
Midterms are shaping up to be “the biggest political cycle ever. The Trade Desk thinks it could even outpace the 2020 Presidential cycle. That’s not normal for midterms.
Just like in 2020 and amid previous downturns, The Trade Desk thrives when CMOs have to tighten their budgets and focus on maximizing ROAS wherever possible. That’s exactly what this company does so well. Hence the upbeat forward guidance.
Noted that Google entered the upfront fold this year and scheduled theirs at the same time as Disney did which “is no way to win friends.” This fed into a larger theme of strenuous relationships between tech giants and content creators -- they’d rather work with The Trade Desk.
“Media companies are leaning into partnerships with us in ways like never before partially because we are not trying to compete with them and don’t own any content.” — CFO Blake Grayson
f. My Take
This would have been a surprisingly good quarter if the company didn’t post surprisingly good quarters every three months. With all of the macro-headwinds weighing on overall advertising spend growth, chief marketing officers seemed to once again flock to The Trade Desk for objective, transparent and precise campaign optimization.
At the company’s peak valuation in early 2021, it sported a sales multiple over 40X. Now, it likely sports an earnings multiple of under 40X. There are few firms that I see as having such high likelihood of sustainably brisk and profitable long term compounding, and I plan to take advantage of this severe multiple compression at my typical slow pace. It could always get cheaper, but I’m happy to own this company at this price for the long term.
2. Duolingo Earnings Review:
a) Duolingo Demand
Duolingo guided to $77 million in sales with analysts expecting $77.5 million. It generated $81.2m in revenue, beating its expectations by 5.4% and analyst estimates by 4.8%.
More demand context:
This is the first time Duolingo broke its DET and advertising revenue out into separate buckets.
Subscribers as a % of MAUs is Duolingo’s most important key performance indicator (KPI) for revenue growth.
Duolingo thinks its subscribers as a % of MAUs can eclipse the roughly 12% that dating apps enjoy on average — there’s a long way to go.
The second quarter is supposed to be Duolingo’s weakest of the year. It didn't get the memo.
b) Duolingo Profitability
Duolingo guided to a loss of $4 million in EBITDA with analysts expecting a loss of $3.8 million. Duolingo generated $3.9 million in EBITDA, sharply beating expectations.
Analysts also expected a GAAP loss of $0.57 per share for the quarter. Duolingo posted a GAAP loss of $0.31, sharply beating expectations.
More margin context:
Gross margin outperformance was attributed to better retention and lower app store fees charged by Google.
DET is a drag on overall margins. Its outperforming growth is a short term margin headwind.
Sales and marketing fell from 36% of revenue to 18% of revenue YoY (and absolute dollars spent actually shrank YoY).
Duolingo’s vast word of mouth growth engine frees it to side-step external marketing dollars so it can pour more funding into product enhancement. This is my thesis playing out.
R&D as a % of revenue also fell, but remained quite elevated at 37% of sales vs. 41% YoY.
OCF margin was greatly propped up by $14.5 million in stock-based compensation during the quarter.
Without this benefit, OCF margin for the quarter would have been 7.5%. Keep in mind this is also the entire source of the company’s net loss. So as we move away from IPO-based awards and heavy hiring activity over time, NI margin and OCF margin should converge.
C) Guidance
2022:
Duolingo previously guided to $337 million in revenue while analysts were expecting $338.6 million.
It updated its revenue guide to $353.5 million, representing a 4.9% raise vs. its own previous guidance and a 4.4% raise vs. analyst estimates.
Duolingo previously guided to a loss of $3 million in EBITDA for the year while analysts were expecting closer to a $2.8 million loss.
Duolingo now expects to generate $1.5 million in EBITDA for the year, sharply beating expectations.
The company’s Q2 2022 guidance similarly outperformed across the board.
Duolingo has $577 million in cash on hand and no debt. Based on this, it likely trades around 166X free cash flow if we assume no margin expansion (overly pessimistic) and no more guidance raises. Keep in mind that it is entirely focused on spending all gross profit dollars on more growth rather than letting those dollars flow down the income statement. It trades for around 11x gross profit.
d) Notes from Co-Founder/CEO Luis von Ahn
On word-of-mouth and competition:
“We have no reason to believe there’s going to be a slowdown. Our user growth numbers are accelerating. We are not a pandemic story like other digital educational services. Furthermore, we are product driven. A lot of these other companies spend a lot of their resources on marketing. We spend on making excellent products that work and grow via word of mouth.” — Co-Founder/CEO Luis von Ahn
Duolingo’s elite brand awareness allows it to predominately focus on product improvement rather than external marketing spend. The word of mouth growth that its products foster creates a wildly efficient and sticky growth lever, accounting for the vast majority of Duolingo’s demand growth. This focus on product manifests itself in thousands and thousands of split (A/B) tests to gauge user reactions to one variable change at a time. This split testing was credited for the outperformance Duolingo delivered in every single relevant metric. For evidence, see its rapidly shrinking marketing expense as a percent of revenue above (18% of sales vs. 36% of sales YoY) paired with outperforming demand. Great combo.
Broad-based outperformance was also attributed to:
The aforementioned compounding benefits from its extensive split testing, first and foremost (the rest of the factors are really an effect of this).
A rise in annual subscribers as a percent of total subs -- this implies annual subs make up more than 85% of total subscribers -- offering Duolingo excellent visibility.
Its thriving family plan was given credit for this which has enjoyed a doubling of its penetration rate since the start of 2022.
Social features are also helping to drive more engagement and traffic via building a stronger sense of community, sharing and also competition.
63% of its daily users have a week+ long streak vs. 54% YoY. Shares per day from Duolingo to social media platforms are up 140% since January of this year!
Word of mouth continues to make up over 90% of its user growth.
Paid influencer campaigns are thriving in Southern Asia and Brazil.
It seems that Durable Capital Partners knew what it was doing over the last several months while aggressively scooping up company shares.
On 2022 plans:
Its premium subscription -- Duolingo Plus -- is being re-branded to “Super Duolingo.” This will have all of the same features but with a “sleeker, more colorful interface. Duolingo is also upgrading its home screen to mirror level paths common in games (see below). The content will not change. This will guide users on a more structured journey to nudge them in the direction of preferred learning material order to maximize efficacy. Users often complained about “confusion pertaining to how to progress through Duolingo.” More expected benefits include:
This will give Duolingo a more structured sense of how to “teach better” to enhance its lesson plans.
Faster subscriber and user growth.
The Super Duolingo addition is intended to bring the subscription theme more in line with the gamified Duolingo culture. Conversely, the updated home screen is expected to have a far more directly material benefit to growth like past updates have all yielded.
Finally, keep in mind that travel is a large use case for Duolingo users -- especially internationally which really has not normalized since the pandemic struck. It will eventually, and that tailwind is entirely ahead of the company. Yes, it benefits from more screen time which COVID-19 aided with. Still, its travel use case and a deep, deep presence in K-12 makes a normal world quite favorable for Duolingo… as you can see via soaring user and revenue growth on the heels of the pandemic.
On The Duolingo English Test (DET) and new products:
The product is now used by 3,600 higher education programs worldwide vs. 3,000 YoY.
“We believe that the future of standardized assessment is online, and our ongoing innovation continues to make us a pioneer in the field.” — Co-Founder/CEO Luis von Ahn
Duolingo released encouraging results from a peer-reviewed study on DET. Per the report, DET overlap rate (repeat rate for questions) sat at 0.62% which is one of the best rates in the industry. These rates can push 10-15% which makes cheating and illicit access to answers far more likely. DET solves for this.
e. Notes from CFO Matthew Skaruppa
“I do just want to mention that the world is obviously uncertain with what’s going on with war, inflation, interest rates and all of those things. We’ve taken a prudent approach to guide for the rest of the year given the uncertainty.” — CFO Matthew Skaruppa
Duolingo ABC and Math are not part of the 2022 guide. Duolingo -- like it always does -- will take time to monetize these new products to make sure that they are as close to perfect as possible.
On external marketing:
The company’s New Year’s campaign in Q4 2021 and into Q1 2022 “generated more bookings and new subscribers than ever before."
The Russian invasion led to a 513% increase in people learning Ukrainian from the start of the war to the end of the first quarter. Some are doing so in show of support while others do so to welcome refugees -- especially in Poland and other parts of Europe.
“While it’s wonderful to know that Duolingo can help in times of crisis, it’s not our intention to profit from moments like this. We donated the ad revenue from people studying Ukrainian to Ukrainian relief funds and waived Duolingo English Test fees for Ukrainian students.” — Co-Founder/CEO Luis von Ahn
f. My Take
It’s hard to imagine this report going much better than it did. Standing ovation from me. Not many companies can deliver rapid demand growth while marketing spend rapidly shrinks. Duolingo continues to do so.
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3. JFrog (FROG) -- Earnings Review
a. JFrog Demand
JFrog guided to $61.3 million in sales with analysts expecting roughly the same. It posted $63.7 million, beating expectations by 3.9%.
More demand context:
Price hikes will contribute about $7.5 million in added revenue for 2022. Without this benefit in the quarter, growth would have been roughly 37% YoY. Price hikes did not impact its cloud offering.
The company reiterated its investor day guidance of 30%+ growth for the foreseeable future.
JFrog Complete -- its full enterprise product suite -- now = 35% of sales vs. 29% YoY.
Cloud is now 26% of sales vs. 23% YoY.
b. Profitability
JFrog guided to breakeven EPS and non-GAAP operating income with analysts expecting roughly the same. The company posted $543,000 in operating income and $158,000 in net income -- both slightly beating expectations. The company continues to invest all gross profit dollars back into growth with surgeon-like precision. It's in an extremely similar place compared to Duolingo and also Olo in terms of its growth/spend journey. All three are naturally high margin business which allows for more aggressive spend.
More margin context:
2021 gross margin was 84.1%. It thinks it will end up between 84%-85% gross margin for 2022 and then fall back closer to 80% going forward as cloud scales at lower gross margin than on-premise.
Deferred revenue -- like with most younger SaaS companies -- powers the difference between cash flow margins and income statement margins. Stock based compensation is also contributing. Excluding SBC, FCF margin was 3.8%.
JFrog has $428 million in cash on its balance sheet and no debt.
c. Guidance
2022:
JFrog previously guided to $274 million in sales for the year, roughly in line with analyst estimates of $273.2 million.
Frog raised its guidance to $277.5 million, beating its previous estimate by 1.2% and analyst expectations by 1.8%.
JFrog also previously guided to breakeven non-GAAP operating income and earnings per share.
JFrog reiterated that profitability will trough in Q2 and improve thereafter.
JFrog’s weighted average diluted shares outstanding will grow by 2.9% this year as IPO-related options continue to vest and as JFrog aggressively hires new talent.
Customer growth should be above the 10% level it posted in 2021. This was a Q&A question to which Shlomi Ben Haim promptly responded “yes.”
JFrog’s Q2 revenue guidance was slightly ahead of expectations while its profit KPI guidance was slightly below. I’m focused on the full year guide -- which JFrog has been able to consistently raise over the quarters.
Based on 2022 and 2023 estimates and using conservative free cash flow margin assumptions of 6.0% this year 9.0% next year -- JFrog trades for around 70X 2022 free cash flow and about 32X 2023 free cash flow. For a 30% grower with long term FCF margin goals of 30%, I think this is reasonable… but it could always get more reasonable in our current environment.
d. Notes from Founder/CEO Shlomi Ben Haim
On GitHub and GitLab (Source code players in DevOps) competition:
“Our solution coexists with source code management. No organization will stop using source code management or scale without managing the full binary life cycle. Regarding their road map, I keep hearing that they are planning to do what we do. In none of our sales conversations are we hearing people migrating to these solutions. Artifactory is solid as a rock. Our security is far more advanced and mature to protect binaries in a level than both cannot provide. This isn’t just about putting a nice scanner over your binary repository… Our security solution is setting a new standard in the market. Scanning isn’t enough as organizations understand they need a holistic solution to secure the software supply chain.” — Founder/CEO Shlomi Ben Haim
Shlomi doubled down on previous commentary that its Microsoft Azure relationship was still far more of a partnership than competition since Microsoft bought GitHub.
There are use cases (mainly those needing immense scale) where binaries (0s and 1s) thrive and there are use cases where source code thrives. This is not a matter of one or another, it’s a matter of use case and most firms have needs for both.
On macro:
Things like Log4J and Spring Shell -- broad software supply chain breaches -- are headaches for all stakeholders… except for JFrog. This is exactly when it gets to showcase its remediation, distribution, runtime and security prowess by resolving these issues far faster than anyone else can. For Log4J specifically -- which coincided with the holiday season -- employees of impacted companies spent weeks manually sifting through impacted binaries, but JFrog did it for its clients in a fully automated fashion to greatly expedite time to normalization for those clients.
JFrog continues to see outperformance in development project growth which accelerated to 15% YoY despite macroeconomic headwinds building for many industries. Software -- as a large cost and time savor -- is somewhat immune to these forces (the businesses, not the stock prices).
More notes:
JFrog’s initial developer, bottom-up selling approach morphed into a hybrid approach last year with its rapid hiring of an enterprise, top-down sales team. It’s now shifting to marketplace and channel partners to uncover a new growth vector. Marketplace specifically is 10-15% of its sales and “rapidly growing.”
It partnered with AWS for Games during the quarter.
JFrog debuted support for “Dart” -- Google’s rapidly growing programming language. This was a frequent request from customers that it was “happy to meet.”
It released a contextualized capability in JFrog’s platform to nudge DevSecOps teams towards preferred, efficient remediation activities.
Outperforming cloud growth is being driven by uptake across its full product suite -- as the 131% net dollar retention rate (and rising) hints at.
It added $900,000 in net new ARR between two large customer wins in (a European automaker who is using JFrog for self-driving and an American software manufacturer).
JFrog also signed its largest cloud contract ever during the quarter with a prominent semiconductor and industrial software firm to supercharge their planned digital transformation.
Vdoo continued to drive more zero day vulnerability ID-ing than any other firm.
A story on why JFrog is so useful:
“To elaborate on the pain firms have with distributing software, consider a small, global company developing 1 application. That must run in 20 different locations across the world. Each location requires different software versions to address export controls and to comply with regulation. The firm has to manage this across all locations every time new software is released. Now, take a large firm and multiply that exponentially. JFrog continues to onboard customers to meet these challenges with JFrog distribution.” — Founder/CEO Shlomi Ben Haim
e. Notes from CFO Jacob Schulman (who looks exactly like Axe from Billions)
“Customer churn remained minimal and consistent with historical trends. We continue to explore additional opportunities to further monetize the value we provide to our customers... Our 30%+ revenue growth expectation for the foreseeable future remains intact even without the benefit from the on-premise pricing increase.” — CFO Jacob Schulman
He believes the baseline growth rate for cloud is in the mid 50% range but there’s variability via some revenue being usage-based.
f. My Take
It’s always nice when analysts ask questions like “what went so well” during earnings calls. This was an excellent quarter for the company. It continues to entrench itself as the go-to manager of binaries/software packages in terms of deliverability from source code to endpoint, immensely scalable storage and easy access and security. There’s a reason why this company calls bellwethers like Fidelity, Citi, Broadcom and so many more iconic firms clients. I added this week.
4. Lemonade (LMND) -- Earnings Review
a. Demand
Lemonade guided to $42 million for the quarter while analysts wanted $43.3 million. It posted $44.3 million, beating its expectations by 5.4% and analyst estimates by 2.3%.
It also guided to:
$407.5 million in IFP -- it posted $419 million, beating expectations by 2.8%.
$93 million in GEP --it posted $96 million, beating expectations by 3.2%.
b. Profitability
Lemonade guided to a loss of $67.5 million in EBITDA with analysts expecting the same. It posted a materially smaller than expected loss of $57.4 million, beating expectations by 19.4%. Analysts were looking for a loss per share of $1.44. It lost $1.21, beating expectations by $0.23.
More margin context:
The loss ratio remaining well above its reiterated long run goal of under 75% is the result of two things:
Inflation (its impact on insurers is explained at the top of section d).
New product growth outperforming its more mature products. New products always debut at peak loss rates.
Q1 2021 is when the “Texas Freeze” happened which resulted in rapid claims growth and poor quarterly margins and loss ratios. The YoY margin comp is very easy (solid QoQ expansion is notable and real).
In Q3 2020, Lemonade conducted an accounting policy change that prevented it from recognizing premiums ceded to re-insurers as revenue which had been inflating the top line.
This boosted gross margin as the company began dividing gross profit by an abruptly smaller number. Conversely, EBITDA margin was hit as the negative EBITDA metric was divided by an abruptly smaller number.
IFP and GEP were not impacted — while revenue growth temporarily halted and has since resumed — which is why I used those 2 metrics for demand trends.
c. Guide
2022:
Lemonade had previously guided to:
$203.5 million and raised that forecast by 1.4% to $206.5 million.
Note that analysts expected $217.3 million in revenue BUT Lemonade’s guide does not include $35 million in Metromile revenue expected to be enjoyed in 2022. Including this contribution, Lemonade would be looking for $238.5 million -- 9.7% ahead of estimates.
$535 million in IFP. It raised this by 0.9% to $540 million.
$425 million in GEP. It raised this by 0.7% to $428 million.
An EBITDA loss of $282.5 million. It revised this to $272.5 million for a 3.5% improvement.
It also lowered its stock-based comp guide from $80 million to $60 million.
It raised its CapEx guide from $10 million to $14 million.
d. Notes from Co-Founder/Co-CEO Shai Wininger
On inflation:
Inflation -- like many other insurers called out -- is beginning to weigh on loss ratios. Lemonade’ ability to change pricing (which is only legally automated in a few states) takes time. At the same time, claims paid out immediately react to inflationary pressures -- hence the margin headwind. Lemonade can’t immediately charge more, but it has to immediately pay more.
Reinsurance is what is insulating them from this pressure -- as well as new product debuts that always start at loss ratio peaks -- and it why the company still outperformed its top and bottom line expectations.
The company expects to have its new rates filed and live for 100% of its business sometime in the coming months.
On loss ratios:
“When it comes to loss ratios, our internal dashboards show increasingly profitable cohorts with every passing month.” — Co-Founder/Co-CEO Shai Wininger
“The new business generated during Q1 is expected to have a lifetime loss ratio comfortably within our 75% target.” — Co-Founder/Co-CEO Shai Wininger
e. Notes from Co-Founder/Co-CEO Daniel Schreiber
On skin in the game & losses:
“The majority of our family’s wealth is in this stock and I expect that to be true for many years to come.” — Co-Founder/Co-CEO Daniel Schreiber
“You look at our losses and it looks like we’d been selling dollars for $0.90. That’s not the case. Costs are all borne upfront since we tend to predominately acquire customers through D2C advertising. We take the acquisition cost hit right at the beginning which is compounded by the fact that the first year’s loss ratios are always the highest. Since we’re growing fast, a substantial portion (about 33%) of our business is still first year customers.” — Co-Founder/Co-CEO Daniel Schreiber
On Lemonade’s AI secrecy/ambiguity:
“Information on our AI that helps our investors also helps our competitors. Lemonade is closely watched by the rest of the industry. While our detailed filings are public, our detailed results are not and that makes it harder for competition to know which aspects of our business to copy.” — Co-Founder/Co-CEO Daniel Schreiber
f. Quick notes from CFO Tim Bixby
The vast majority of the OpEx growth is based on rapid hiring. Headcount grew 76% YoY to 1,162 but this growth has since slowed as Lemonade’s teams are now largely in place.
It grew by 20% over the last 6 months.
Lemonade continues to expect 2022 to be its peak year of EBITDA losses.
Renters continues to decline as a percent of premiums.
The company’s LTV/CAC is now “around 3x” vs. previous disclosures of “solidly above 2x.” Good news.
Lemonade is still extremely well capitalized with $1.01 billion in cash and equivalents -- more than 70% of the total funding it has raised since inception.
g. Shareholder Letter Notes
Growing with customers and auto:
This was the first quarter where all Lemonade products were available (only in Illinois and Tennessee).
Double product users outspend single product 3-1 with triple at 7-1 and quadruple at a 9-1 contribution.
Annual dollar retention rate in Illinois is 90% vs. 82% for Lemonade as a whole. Tennessee “has yielded similar results” but it’s still too early there to comment.
Premiums per bundle customer rose 140% YoY while premiums per 1 product user rose 61% YoY.
Most Tennessee and Illinois car sales to existing Lemonade customers with 0 added CAC.
Lemonade expects auto to accelerate its home insurance business as consumers generally expect to be able to bundle the two at a discount.
“From a cost perspective, we’ve [incurred] a significant amount of the cost to support the car product. The product development, customer experience and claim support teams are all in place and the premium flow is still in its early stages. A lot of that investment has been made.” — CFO Tim Bixby
Board changes:
Caryn Seidman Becker is stepping down to focus on her new IPO CLEAR and her position as BOD of Home Depot. Joel Cutler is stepping down amid “serious health issues.” Lemonade is now searching for 2 new board members.
h. My Take
Two things are true here:
This was a fine quarter that pleasantly surprised me.
Lemonade’s wildly aggressive spending habits and clear prioritization of growth over profit is hated in today’s market.
I’m not looking to add to this name as of now, but I am removing it from my “hot seat” amid the strong performance and would add if prices got depressed enough. Gross profit multiples don’t work in 2022 and that’s all we have to work with here. At the same time, the company’s strong balance sheet, expanding margins and reiteration of peak losses coming in 2022 were all notable positives to me. I’m comfortable holding on to my small position.
5. Olo (OLO) -- Earnings Review
a. Olo Demand
Olo guided to $41.8 million in quarterly revenue with analysts expecting roughly the same. It posted $42.8 million, beating expectations by 2.4%.
More demand context:
This is Olo’s last quarter of difficult pandemic comps. It expects revenue growth and its other demand metrics growth to meaningfully accelerate going forward.
Olo leadership expects $ based net revenue retention to recover back to 120%+ starting next quarter. Stimulus and lockdowns greatly boosted order volumes and this is the hangover effect. Olo also lapped the final quarter of operating under its previous DoorDash agreement. Both impacts are now in the rear view.
The company collects volume-based revenue for mainly off-premise (although that’s changing) dining. The pandemic was a large demand tailwind; a bottoming YoY growth rate of 18% and a 60%+ 2-year revenue growth CAGR as a trough works for me.
It now has “more than 600” restaurant brands vs. “more than 500” QoQ and “more than 400” when it went public last year.
b. Olo Profitability
Olo guided to $800,000 in non-GAAP operating income and posted $1.7 million, sharply beating expectations. Analysts were also hoping for $0.00 in earnings per share. It earned $0.01 per share.
More margin context:
GPM compression was driven by costs to support growth but mainly the Wisely and Omnivore acquisitions.
Olo had planned investments for the second half of the year that it now won’t need to make due to the Omnivore acquisition. So some operating expenses were pulled forward.
Olo expects profitability to meaningfully ramp in the second half of the year.
“Longer term, we do expect to see some improvement in gross margins as we continue to integrate Wisely and Omnivore.” — CFO Peter Benevides
C. Guidance
2022:
Olo had previously guided to $195 million in revenue with analysts expecting $193.9 million.
It raised its outlook by 0.5% to $196 million, representing a guide that is 1.1% ahead of analyst estimates. Wall Street was looking for a guide down. No such guide down came.
Olo reiterated its non-GAAP operating income guide of $8.2 million for a 4.3% margin.
The guide assumes no material Olo Pay contribution despite it now being commercially available and the strong early signs. The team thinks it’s “a quarter too early” to assess the impact. This means any material 2022 contribution would lead to revenue upside.
Olo’s Q2 guidance was very slightly better than expected.
d. Notes from Founder/CEO Noah Glass
On digital hospitality:
Digital hospitality refers to a brand unlocking and using all available (non-personally sensitive) consumer data to -- in Glass’s words -- “up-level the guest experience to treat every guest like a regular.” Wisely and its purpose-built customer data platform (CDP) and holistic, granular consumer profile building will be a large part of continuing to bring this vision to life.
On Olo Pay:
Glass was notably excited about the “standing room only” Olo Pay breakout session at the company’s Beyond4 event this year (which added $1 million in incremental OpEx YoY). Highlights included customer praise for forgoing fraud and chargeback fees from legacy vendors that are often larger than the entire basket size. Olo’s end-to-end, 12-module digital ordering platform allows for sidestepping a large chunk of these fees.
Olo’s borderless pay solution (which allows for single click checkout at any Olo restaurant) is also receiving a warm welcome with “4 panelists indicating intent to deploy Olo Pay due to chargeback and fraud prevention and borderless pay.” Olo Pay quadruples Olo’s revenue opportunity per order. This is a big deal for the company.
WaBa Grill Olo Pay Case Study:
Reduced friction through payment card industry compliance help (and so higher conversion rates).
Lower fraud and chargeback rates.
A more seamless guest experience plus higher authorization rates (again raising conversion rate) with Apple and Google Pay available as well as broad card acceptance.
“Olo is the gateway into whatever credit card processor the brand is using for card-present restaurant transactions… previously when there was a refund or a chargeback, customers had to administer it in 2 different systems -- their credit platform and the Olo dashboard. That goes away with Olo Pay. With this, they can manage refunds, chargebacks and all things payments within the Olo dashboard. So it’s a single platform to manage the entire digital ordering business… it’s not there to compete with Apple or Google Pay and it doesn’t require that the brand has to completely rip and replace whatever processor(s) their operators are using. It’s purely about the digital order experience -- making that a seamless experience for the consumer and also simplifying things on the operator side.” — Olo Founder/CEO Noah Glass
Leadership Changes:
Diego Panama was named as the firm’s new Chief Revenue Officer. He’s currently LiveRamp’s Chief Commercial Officer and was a Director at Endeavor before then. Chief Customer Office Marty Hahnfeld is retiring.
On Convenience Stores:
Olo entered the multi-unit convenience store vertical during the quarter which represents another 55,000 location opportunity just in the United States. It singed on Kwik Trip as a new customer of its ordering module.
On customers winning with Olo and Olo module wins:
Nando’s implemented Olo’s on-premise ordering module as its “exclusive dine-in ordering system.” It saw a coinciding 500% spike in digital ordering volume over the last 12 months.
Bojangles and El Pollo Loco added Olo’s new marketing automation and CDP modules that came from the Wisely acquisition… within weeks of the deal closing.
On Olo Sync:
Olo debuted its Sync Module. This is a listing management service that frees restaurants to sync real-time, always accurate menu items to 50+ digital publishers in an omni-channel fashion. This should ideally be a boon to restaurants’ direct businesses which means more access to customer data and higher margins.
e. Notes from CFO Peter Benevides:
On costs:
As I prefer with younger growth companies, R&D continues to lead the way for Olo’s operational spend. It’s stable at 30% YoY. G&A is at 28% of sales vs. 26% YoY, but Olo has now lapped incremental IPO costs and expects this to fall going forward. Sales and marketing spend also rose sharply from 10% to 14% YoY to support growth initiatives.
Olo continues to prioritize growth over profitability in the near term and is comfortable operating at near break-even profitability due to the levers it knows it can pull to enhance profitability, its growing economies of scale, a strong gross margin and $463 million in cash and equivalents on the balance sheet with no debt.
Concentration risk fading:
DoorDash accounted for 19.3% of Olo revenue in 2020 and 16.7% of revenue in 2021. During this past quarter the largest Olo customer (so probably DoorDash) accounted for 13% of its revenue vs. 25% YoY.
f. My Take
Olo’s team delivers every quarter and this performance was no exception. Mr. Market doesn’t want fast growing companies with breakeven profitability today -- but I fully believe prioritizing product road map and demand over maximizing margins now is the correct approach. Still, considering how out of favor that strategy currently is, I’ll continue to accumulate at my typical slow pace.
6. GoodRx (GDRX) -- Earnings Review
a. Demand
GoodRx guided to $200 million in Q1 2022 sales with analysts expecting $200.6 million. The company posted $203.3 million in sales, beating its expectations by 1.7% and analyst estimates by 1.3%.
GoodRx guided to 80% pharma manufacturer solutions revenue growth and 50% subscription revenue growth and handsomely beat those expectations. Prescription transaction revenue (PTR) growth of 16% was 100bps below its 17% guidance. PTR continues to underperform while everything else picks up its slack.
More demand context:
GoodRx raised subscription pricing for select cohorts during the period.
MACs are likely not actually flat, GoodRx just continues to round to 6.4 million. Regardless, growth has sharply slowed over the last 6 months.
GoodRx continues to be confident in getting back to and sustaining growth in the mid 20% range.
The sequential manufacturer decrease was “expected via budget allocations that are seasonal in nature.”
b. Profitability
GoodRx guide to $58 million in adjusted EBITDA with analysts expecting $58.7 million. It posted $64.7 million, beating expectations by 11.6% and analyst estimates by 10.2%.
Analysts were looking for $0.08 in EPS. GoodRx posted $0.10, beating expectations by $0.02 or 25.0%.
More margin context:
GoodRx’s EBITDA margin compression is largely a factor of its growing telehealth offering which it sells at cost to feed the rest of its businesses. Other new product launches and aggressive hiring are also both contributing.
GoodRx “did not reduce pace of investment during the slower growth period.” This hits margins today but puts them in a better competitive position tomorrow.
GoodRx is “committed” to returning to 40% EBITDA margins -- its rapidly growing, higher margin branded manufacturers solutions will be a big part of this.
OCF margin compression was attributed to “timing of certain prepaid expenses and collection of A/R.”
c. Guidance -- 2022 & why the 2nd consecutive quarterly swing & miss:
Last quarter GoodRx sharply guided down 2022 expectations. This quarter it removed those expectations altogether and added that it was unlikely it would hit the previously offered targets. Disappointing to say the least.
During the quarter, a large grocery chain decided to renegotiate all PBM contracts simultaneously which led to none of these PBM prices being accepted at the counter. I believe this is Kroger, but commentary surrounding this not impacting Gold while Kroger has a Gold program makes me a tad uncertain about that. GoodRx successfully pivoted users to other chains and was able to maintain “consistent new user growth.” But still, existing users who were used to just going straight to the counter to enter their discount code are now getting a rude awakening and GoodRx will suffer as a result. PBMs are the source of the vast majority of GoodRx’s pricing points which greatly cut into the volume it was doing with Kroger. Kroger offered better pricing than most other chains which led to it over-indexing in terms of its revenue contribution to GoodRx. In Q1, the impact was immaterial but it will cost GoodRx $30 million in revenue if the issue is not resolved before quarter’s end -- which GoodRx’s guide assumes it won’t be.
Pricing re-negotiations happen constantly between PBMs and pharmacy chains. Discounts grow and grocery chains gain share, then they often get bold and demand less discounting which erodes share. This push and pull churns and churns. What was uniquely disruptive about this event was Kroger’s decision to make these contract negotiations all at the same time.
This prompted many -- including myself -- to develop concern over whether or not Kroger was shifting its business model to cut GoodRx and PBMs out of the equation and if others would follow suit. Management doesn’t believe this to be the case and added that negotiations between Kroger and PBMs are rapidly progressing even in the last few days. GoodRx is facilitating some of these discussions. The company also expects this to have 0 long term impact on its growth or market shar. Despite this, GoodRx’s position in the value chain became slightly more precarious to me and there’s no way around that.
As a result of this $30 million hit, GoodRx guided to $190 million in Q2 2022 revenue vs. expectations of $216 million. Importantly, this is not impacting the subscription or branded manufacturer businesses. During Q2, GoodRx expects prescription transaction revenue to shrink YoY while subscription revenue grows around 65% and pharmaceutical manufacturer revenue doubles. One bright spot was potentially large pharmaceutical manufacturer deals close to signing that could offer “upside” to the guidance. An expedient grocer issue resolution would surely help as well.
I’m quite frustrated with the team for their last few quarters of underperformance and them waiting to tell us about this until the earnings call. I prefer CEOs like SoFi’s Anthony Noto who immediately get out in front of issues likes student loan moratoriums with updated guidance in real-time. Having said all of this, I’m not selling or trimming. At 16x EBIT and 24x earnings, this is priced for a slow death. I don’t believe that to be the case considering GoodRx’s growing savings rate leads and its thriving ancillary businesses. Regardless, there’s been too much disappointment to continuing adding to this name and I have ultimately decided to place it on my hot seat/do not add list. Performance must improve for me to continue accumulating.
“We’re not aware of any other issues and we believe this situation is unique… when these issues pop up, there’s a strong incentive for everyone to get it resolved.” — Co-Founder/Co-CEO Trevor Bezdek
d. Notes from Co-Founder/Co-CEO Trevor Bezdek
On the GoodRx Gold subscription price hike:
“New subscriber acquisition and existing subscriber retention are both performing at or better than expectations and we are rolling out the remaining increases for existing Gold Subscribers. This will be completed in the second quarter.” — Co-Founder/Co-CEO Trevor Bezdek
e. Notes from CFO Karsten Voermann
On the post Covid-19 recovery:
Voermann continues to tell us that the cumulative impact of 2+ years of less prescription starts means it will take significant time for new cohorts to replace that lost business for this largely recurring revenue business. Cold and Flu season still has not returned to pre-pandemic levels.
On founder awards & buybacks:
$477.8 million out of the $533.3 million in total founders awards have now been issued. This was a $13.9 million charge vs. $30.1 million YoY and will continue to consistently fall.
GoodRx used up about one-third of its $250 million buyback program during the quarter.
Shareholder letter notes:
GoodRx health users use discount codes 34% more often than the rest of GoodRx’s consumers.
GoodRx’s take rate remains stable or rising.
GoodRx’s Walgreens marketing campaign and its CVS minute clinic appointment booking integration are just two of many plans to strengthen retail relationships.
f. My Take
See section c of this piece of the article for my reaction and plan.
7. Meta Platforms (FB) -- Reality Labs
Like many other companies such as Uber and Amazon have recently hinted at, Meta Platforms is expected to make cuts to its planned Metaverse investments in the very near future. CTO Andrew Bosworth informed employees of that plan this week. To be candid, I love this news. I wholeheartedly believe in the family of apps and feel as though heavy ad stack investments and the seasoning of Reels will yield attractive and growing cash flows in the years to come. I don’t mind speculative investments -- Meta’s track record and balance sheet affords it with that luxury -- but this was getting out of hand. Look for this to place upward pressure on Facebook’s margin guidance via the lowered costs in 2022. This comes just one week after news circulating around it slowing its engineering hiring pace.
In other interesting news, the Federal Government began circulating a report on potentially banning data transfers from the United States to China. It’s unclear how this would impact TikTok, but preventing that service from functioning in the U.S. would be a massive boon to Facebook’s business. It’s hard to overstate how big of a tailwind this would be. For now, it’s just speculation.
8. Upstart -- 10Q Wrap-up, Bridge Funding and my Thoughts Going Forward
Upstart ran into some growing pains this quarter. The results were fine, but guidance underwhelmed and its need to fund about $100 million from its balance sheet to ensure proper price clearing was unwelcome to say the least. I loathed this piece of news. Yes, Upstart was impacted by a more aggressive move in the 2-year T-bill yield than we’ve seen in over a century, but the model is supposed to outperform across ALL macro-environments. It had not built in the automation needed to adapt to rapid 2-year yield changes and this funding need came as a result. Upstart is not a bank. I do not want Upstart to be a bank. I want Upstart to be the wonderfully asset-light supporter of legacy bank and credit union underwriting.
I will say that this news was amplified by also having to store auto loans on its balance sheet for R&D purposes as that product ramps. This was expected. But still, that was only 75% of the funding needs -- leaving us with that extra $100 million in funding . Again, this is unacceptable.
So what now? I do not operate with a one strike and you’re out frame of mind. Yes, Upstart swung and missed in dramatic fashion, but that was only strike one in my view. Still, we have a company profitably growing by 47% through the toughest year in its existence and sports an earnings multiple below 20X. Daunting macro-headwinds will once again shift to tailwinds and Upstart will again enjoy the tide that lifts all boats… but I don’t really care about that. My thesis was Upstart delivering relative outperformance while times are toughest to build lender retaining trust. This doesn’t break that thesis but does make it more fragile than I assumed it to be earlier in the week.
The report wasn’t all bad. Its partner roster and their retention habits were both quite positive. But the focus will rightfully be on bridge-funded loans Upstart originates to generally less traditionally worthy borrowers. This is exactly what went so wrong in 2008, so the panic is understandable -- but I still believe it’s overdone.
Bridge funding must prove to be a one-off event vs. a theme going forward for me to stick with this company for the long term.
My friend was able to chat with a VP from the firm during the week and was kind enough to share the conversation with me. The takeaways:
Upstart was not required to issue the $100 million in funding but it did so to promote institutional confidence. (Still not good at all).
Upstart does not anticipate any more need for bridge funding in 2022 but did not rule it out if somehow the 2-year yield move is matched during this period.
It expects to be able to sell the $100 million in loans through ABS markets during this quarter.
Credit agency data shows Upstart’s Q2 ABS volume actually holding up quite well despite fears that it’s losing access to that market. This doesn’t consider what kind of pricing Upstart’s partners are getting on these loan pools but it’s encouraging to see deals continue to be placed regardless.
I’m extremely annoyed and less optimistic. And I’m not ready to give up on this one or even pause accumulation, although I will continue to nibble at an extremely slow pace. If bridge funding proves to be a stubborn theme, I will be out.
Finally, Upstart releases concentration risk data in its 10Q after its earnings reports. Here are the highlights:
Cross River Bank originated 52% of Upstart’s volume in the quarter vs. 56% YoY. In terms of revenue, it represented 46% of Upstart’s sales vs. 60% YoY. Finwise picked up some of this revenue -- representing 31% of sales vs. 25% YoY.
In terms of accounts receivable concentration, two other firms represented 38% of accounts receivable vs. 60% YoY.
9. CrowdStrike (CRWD) -- Case Study
Virgin Hyperloop/CrowdStrike’s Falcon platform case study:
Lowered security costs by 75%. As CrowdStrike’s product is more expensive than most, this is powered by agent consolidation that the company delivers.
Malware occurrences fell from daily to rare.
Remediation time shrank from 8 hours to 2 days down to under an hour.
10. Cannabis News
Two dozen Senators signed & sent a letter to House & Senate leadership asking for SAFE Banking in the upcoming COMPETES bill. Get it done.
Ohio will not have cannabis legalization on the ballot in 2022. It could be voted on in 2023.
Governor Gavin Newsom proposed eliminating California’s cannabis grow tax in his latest budget proposal. This would be fantastic news.
7/10 Americans support legalization -- per a YouGov survey of 1,500 Americans.
Delaware is inching closer to legalization
Michigan Cannabis sales grew 27% YoY to $195 million in April. Illinois Cannabis sales grew by 14.5% YoY and continued its moth over month growth. Colorado cannabis sales reversed a trend of sequential declines (still down YoY).
11. Macro, 2022 & My Activity
The consumer price index (CPI) came in at 8.3% YoY price growth vs. 8.5% last month. While we seemed to have potentially peaked, there were some concerns when looking under the hood. Used car prices cooled off while wage and housing inflation -- which are far more stubborn pieces of the measurement -- continued to build incremental month-over-month steam. Fed chair Jerome Powell re-affirmed expectations for consecutive 50 bps rate hikes to combat these price increases while other Fed officials mirrored this sentiment. There was not much more talk about 75 bps hikes.
This turbulence, monetary normalization and CPI cooling will take some time to play out. With:
Money being taken out of the economy (Fed balance sheet de-levering will ramp to $100 billion a month).
Cost of capital rapidly rising.
Several large companies planning to slow hiring amid underwhelming forward guidance.
Credit spread widening.
Decade-high mortgage rates.
Continued supply chain issues.
Surprisingly low levels of Consumer Confidence out of the University of Michigan.
... the signs are abundant that we are slowing down. Still, the Federal Reserve is committed to raising rates -- as it should be -- to fend off high inflation which is its core mandate along with employment which is quite strong. It is likely that this hawkish policy will eventually lead to an economic slowdown.
This is frustrating but it’s simply a feature of economic and stock market cycles. We will get to a point where Fed policy will stop being so aggressively hawkish as their tools begin to work, but that could take a while.
So? I’m doing a few things:
Continuing to slowly add into thriving firms with shrinking forward multiples as I cannot time bottoms.
I am doing this accumulation at a slower pace than cash infusions are hitting my account. This is by design as I’m comfortable with cash build over the next several months while macro-turbulence plays itself out.
Obsessing over company performance to identify exactly which firms I think are still worthy of holding through this downturn.
We are getting there, but sentiment turning and monetary normalization takes time to get there -- it won’t happen overnight. Even if there’s not much more downside for high growth land (which I don’t think there is) a long period of turbulent chop would be quite common to form bases for the next bull market. And while that plays out, there will surely be convincing, aggressive bear market rallies (like we saw later in the week). I’ll personally avoid accumulating into these while waiting for renewed multiple compression to nibble. Could I miss the bottom? Absolutely (and probably). Do I care? No.
Crypto coins and NFTs are collapsing which (not to sound insensitive) is quite healthy as a sign of froth beginning to work its way out of the market. I’ve been looking for that as a sign of healthy normalization, and it now has come.
The tide will turn over the coming several quarters, and I’d rather have a 20%+ cash position when it’s clear that, that has happened rather than aggressively adding today in hope we’ve found a bottom. Hope is not a strategy.
To put it bluntly, 2022 has been absolutely brutal. More than 1/3 of Nasdaq names are setting new 52 week lows with the NYSE pushing 30%. I say this to highlight that you are not alone. Every growth/disruptor/innovator stock has been absolutely crushed. It’s up to us to rationally assess this indiscriminate selling to gauge which companies represent the bath water being healthily thrown out… and which are the babies.
I added to the following companies during the week:
Olo
Duolingo
GoodRx
JFrog
SoFi
& yes… Upstart
Note that Progyny had an investor conference this week that I did not have time to get to. I will publish the highlights next week. Considering it just had an earnings report, there shouldn’t be too much new to report.