This was a busy earnings week for my portfolio holdings so I am writing a short earnings blurb for four of my holdings that reported in the previous week. I have picked all four of these to outperform the market in the next 3 years.
Zoom Video Communications
The first one to report was Zoom Video Communications. Unless you have been living under a rock for the past year and a half, you probably would have used Zoom for one of your meetings. This reflects in their numbers as well. Every quarter I update this table for all my holdings. I track cash flows and expenses as well. But for the purpose of this blog, I will track the revenue growth of my holdings because over time, revenue growth is a great predictor of business success.
Zoom Revenue Growth and Year-Over-Year Growth
|2020||$122m(103%)||$146m (96%)||$167m (85%)||$188m (78%)||$623m(88%)|
|2021||$328m (169%)||$664m (355%)||$777m (367%)||$883m (369%)||$2.65B (326%)|
When you are looking at this table, keep in mind that the calendar year 2019 is Fiscal Year 2020 and so on. Therefore, the pandemic in March 2020 will be reflected in the Year 2021 numbers. Year Over Year Growth during the pandemic looked like this: 169%, 355%, 367% and 326%. That is stunning! Companies in the real world do not grow like this. This is extraordinary. Revenue more than quadrupled from $623m to $2.65B in twelve months. They pulled forward growth of three years in less than a year.
However, one of the downsides of growth like this is that there are a lot of expectations built-in. They cannot keep growing at these rates. In fact, at the end of Q1 2022, Zoom has guided for a 50% growth in their yearly revenues which would have been awesome by itself but it is paltry, compared to 326% (their previous year growth). Call it the curse of high expectations, the stock price of ZM reflects that. ZM is almost a $100B company trading at 30 times their previous twelve month sales. However, they are generating so much cash flow from their business and they have Zoom phones and Zoom rooms as their next growth driver. Can they grow from here? I am not selling my shares because I am happy with a company that conquered the world in the last 12 months and still will manage to grow more than 50% after that in the next twelve months.
Reckless prediction: I predict that Zoom will launch a new line of business in the next 3-5 years that will become a growth driver for their business. I base this prediction on the fact that Zoom has so much data about its millions of users and large amounts of Free Cash Flows.
The second company that reported its earnings last week is DocuSign (DOCU). Most of us know DocuSign because of its electronic signature features but you would be surprised by the number of enterprise products that DocuSign has launched in the last 18 months.
DOCU Revenue Growth and Year-Over-Year Growth
|2020||$214m (37%)||$236m (41%)||$250m (40%)||$275m (38%)||$974m (39%)|
|2021||$297m (39%)||$342m (45%)||$383m (53%)||$431m (57%)||$1.5B (49%)|
The reason I find DocuSign numbers impressive is that not only are they growing at a fast rate, the rate of growth is also accelerating. For example, their previous four quarter growth rates look like this- 45%, 53%, 57% and 58%. Usually, as numbers grow bigger the percentage growth gets smaller (see other three companies listed in this article). DOCU is the outlier in those terms. Perhaps that is the reason, DOCU stock was up close to 20% the day after it released their earnings.
Other numbers for DocuSign were also great. They are acquiring more customers. Their free cash flow quadrupled compared to Q1 2021. Their gross margin increased as well. They are launching new products at a fast pace. We are in the process of buying a new home this year and I have used DocuSign for my construction loan and the closing process and I don’t think I will ever go back to signing documents in ink. DocuSign stock has sold off in recent months because people are labeling this as a Work-from-home (WFH) stock and thinking that people would stop using DocuSign once life goes back to normal. I do not agree with that assumption. I will be adding to my DocuSign position in the coming weeks.
The third company that reported in the previous week is MongoDB. You may not have heard of this company before as it is mostly a business-to-business company. MongoDB is a database that is built for the cloud and it can store anything. I am not a technology guy so I really don’t understand the technology but I do understand the numbers and I can see the story and growth through these numbers. Perhaps this article will help you in understanding the advantages of MongoDB.
MDB Revenue Growth and Year-Over-Year Growth
|2020||$89m (78%)||$99m (67%)||$109m (52%)||$124m (44%)||$422m (58%)|
|2021||$130m (46%)||$138m (39%)||$151m (38%)||$171m (38%)||$590m (40%)|
Even though the revenue growth rate for MongoDB is decelerating I am not worried for two reasons. First, it is still comfortably above the 20% growth rate that I look for. Second and more important, MongoDB launched a new product called Atlas about five years ago and they predict that Atlas will make up the majority of their revenues in the long-term. At present, Atlas is contributing more than 50% of their revenues and grew revenues at 73% in the latest quarter. This is a company that is focused on land and expand meaning land as many new customers as possible and once they have acquired those customers, those customers would keep spending more and more on their platform. I will be adding more to my MongoDB position as well. Market was pretty excited about Q1 2022 earnings and MDB stock was up 15% the day after the company reported its results.
The fourth and last company that reported this week is Crowdstrike. This is one of my biggest portfolio positions. Crowdstrike is in the business of providing cyber-security for the companies operating in the cloud. They use Artificial Intelligence (AI) to prevent security attacks on their customers and they work with all major clouds. Let’s look at how they have grown their revenues in the past couple years.
CRWD Revenue Growth and Year-Over-Year Growth
|2020||$96m (103%)||$108m (94%)||$114m (98%)||$152m (89%)||$601m (92%)|
|2021||$178m (85%)||$199m (84%)||$233m (86%)||$265m (74%)||$1.05B (75%)|
If you compare Q1 2020 revenues for CRWD and MDB, you will notice they are almost at the same volume ($96m vs $89m). Now look at their yearly revenues and the Q1 2022 revenues. That is what a difference between ~80% growth and ~40% growth looks like in two years. The market certainly recognizes that and has assigned a higher multiple for CRWD than MDB. Moreover, that is probably the reason that CRWD shares are falling after they announced their earnings compared to MDB and DOCU which were up significantly. However, long-term I am pretty happy with the results announced by CRWD and will keep holding my position while I build out my position in DOCU and MDB.
All companies go through a stage in their lifecycle where they will transition from a hyper-growth company to a consistent-growth company. ZM and CRWD are going through that transition stage right now whereas DOCU is still experiencing hyper-growth and MDB is somewhere in the middle. I am happy to own all four of these for the long-term.