May 2021 - Luke's Global Fund Performance Update
Luke's Global Fund achieved a return of 6.4% (in constant currency) return over the month of May, and a 40.1% gain to date for FY21 on a constant currency basis. Our International benchmark ended May flat over the month, with the S & P 500 returning 0.1% for the month of May, and the benchmark is up 35.0% over the financial year.
Our portfolio as at May 31, 2021:
In May the portfolio experienced extraordinary volatility, and was down approximately 15% on May 15 for the month. However, the transition away from the high growth tech sector to value / cyclical companies appeared to run out of steam around mid-May, and we were fortunate to acquire Upstart Holdings as this very time, after what could only be considered, stunning results quarterly, which led to a significant short squeeze in the name over the second half of the month.
Over the month, many of our holdings reported, including:
On May 6, Datadog announced Q1 2021 revenue $198.5 million (previous guidance: $186 million) USD, up 51% on prior corresponding period. Datadog continued to invest and expand its offerings, driving strong growth in revenue per customer, with the number of customers with ARR greater than $100k USD increasing to 1437, an increase of 50% over past 12 months.
Upstart Network (UPST)
On May 11, Upstart reported revenue was up 90% year on year (YOY) for Q1 2021, at $121 million USD. Income from operations was $15.6 M USD, up from $0.6 M USD in the previous corresponding period. Key takeaways were:
· 96% of revenue is fees from banks or provision of services, with no credit exposure.
· Loan conversion rate has grown from 11% in 2019, to 22% is 2021, as the AI algorithms improve over time.
· $43 M in operating cashflow for the quarter.
· Guiding for 30% revenue growth quarter-on-quarter for Q2, and the CEO guided that this pace of will continue into Q3 an Q4.
· Upgraded guidance for the full year by $100 Million to $600 million in revenue of the full year.
· In the conference call, the CEO reported a lengthy backlog of projects gives him great confidence improvements in sales throughput, and he reported he sees no competitors on the horizon.
· Their recent acquisition, Prodigy, will allow Upstart to bring Upstart’s AI enabled loan platform to car dealerships across the country, expanding their addressable market significantly, into a market with significant inefficiencies in the loan approval process.
On May 18, Sea Ltd reported total GAAP revenue of $1.8 Billion USD, up 146.7 % on the previous corresponding period. Gross margins improved, and EBITDA was $88.1 million USD, up from -$69.9 million in PCP.
Digital Entertainment division reported accelerated revenue, on the back of their hit game, Free Fire, which was the highest grossing mobile game in Latin America, Southeast Asia, and India, with average bookings per user at $1.70 USD, up from $1.3 USD in the PCP.
E-Commerce reported GAAP Revenue of $922.3 Million USD, up 250.4% year-on-year. However, the division continues to report considerable losses, with EBITDA of -$412.9 M USD, as Sea Ltd pursues market share and scale.
On May 26, Snowflake reported product revenue growth of 110% (previous guidance: 94%) year over year to $214 million for Q1 of 2022. Margins jumped to 72%, up from 66% in the comparable quarter last year. Management indicated in the long term, this number could trend towards the mid 70’s. The net revenue retention rate was 168%
A key part in the Snowflake investment thesis is not just its ability to store and process data, but also to make data sharing easier than ever before through Snowflake marketplace. The company reported the number of edges (customers sharing data with external to the Snowflake platform) in this quarter grew 33% quarter-on-quarter. The more edges get made and used, the more useful (and sticky) Snowflake’s platform becomes. The ease and sheer amount of data sharing further enables the value of the data to grow exponentially.
Remaining Performance Obligations (RPO) grew 7.4% over what is traditionally the quietest quarter for RPO growth.
Snowflake guided for up to 92% year-on-year product revenue growth for Q2 2022.
PORTFOLIO CHANGES FOR THE MONTH
Following a positive report from Bert Hochfeld on Upstart Network, and a remarkable Q1 2021 report, we considered Upstart Network was a rare investment opportunity. We consider Upstart was a superior investment to Blue Prism (competitive challenges, negative cashflow), sold the remains of the Gold ETF, and trimmed Crowdstrike Holdings to raise cash.
We built a full position in Upstart (5%), and added more over the month, as short sellers drove the share price down to less than $85 per share. Subsequently, a short squeeze, resulted in the share price reaching $150 by the end of the month.
We also added to Snowflake, and opened a starter position in marketing/CRM platform Zoominfo.
KEY LEARNINGS THIS MONTH:
This month, we saw a rare investment opportunity, a profitable, hyper growth business, facing little competition, priced at a very attractive forward price earnings ratio of 50. We acted decisively, and committed a considerable portion of our funds, to take full advantage.
In our experience, if you find 1 or 2 outstanding investment opportunities per year, and take a meaningful investment position size, it can absolutely transform your investment performance. It is early days, but we think Upstart is one such opportunity. However, we will trim our holdings in Upstart to around a 10-12% position, as we consider the investment is relatively risky, given Upstart's high customer concentration that will take time to for it to ameliorate.
If you have any opinions on the companies we hold, or would like to know more about our investments, we would love to hear your feedback.