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Volatile earnings; Trimming Tesla to add to Teladoc

Volatile earnings; Trimming Tesla to add to Teladoc

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The past week has been a bit hectic (and the coming week looks to be even more so), so I haven’t been able to cover earnings season as much as I would have liked, but I wanted to get something quick out even if it was entirely too short and inadequate.

A number of Freedom Portfolio companies reported earnings this past week and while there were a few blemishes (looking at you, Fastly (FSLY)), I was ultimately very pleased with what I saw at of those companies. I was particularly encouraged by the incredible results from the eCommerce plays: Shopify (SHOP), Amazon (AMZN), and Etsy (ETSY). I’m really looking forward to seeing what these companies can do over the coming holiday season.

So why did nearly all of the companies which reported great results drop on earnings and fall a ton on Friday? It’s always hard for me to predict short term market movements, but some of it is undoubtedly due to pessimism surrounding the increase in Coronavirus cases around the world and the new lockdown measures being enacted. I believe some perspective is also in order:

  • Shopify (SHOP) is up roughly 140% YTD
  • Novocure (NVCR) is up roughly 40% YTD
  • Teladoc (TDOC) is up roughly 140% YTD
  • Livongo Health (LVGO) is up roughly 350% YTD
  • Fastly (FSLY) is up roughly 200% YTD
  • Etsy (ETSY) is up roughly 170% YTD
  • Amazon (AMZN) is up roughly 60% YTD

That is incredible performance across the board for under a year. It is not at all surprising to see some profit taking after even the best of earnings reports after run-ups like that. Contrary to popular belief, stocks don’t always go up and I am absolutely not concerned to see some of these stocks pull back a bit after the amazing run they have had. Not only is the long term thesis still intact, but I think these earnings reports have largely confirmed them.

Between Coronavirus, the US Presidential election, and the holiday season, I expect a lot of volatility in stocks over the coming months. My plan is to be laser focused on what the companies I have invested in are doing and to do my best to tune out the noise. I do not plan on doing any buying or selling based on who wins the election or weekly Coronavirus numbers or other macro conditions. If something happens that fundamentally changes my investment thesis in one of my companies, then I will act.

With that being said, I do have one tiny allocation change to report on. I am trimming my position in Tesla slightly (it remains a Babylon 5 level position) in order to add slightly to my Teladoc position (keeping it at a Serenity level position, although with the merger with Livongo going through, the joint company will be an Enterprise level position). It is a small tweak, with the change in allocation representing roughly 1% of the portfolio. My thinking was largely based around valuation. I love the optionality and runway for Tesla, but the valuation is somewhat crazy right now and it seems to already be priced for total domination of the car market. I still think it will be a market beater going forward, but wouldn’t be surprised if the growth was a little more muted in the coming years.

Originally, I hated the Teladoc / Livongo merger, but I have done a complete 180 after being convinced by some very smart people on Twitter who had some great insight into how the companies can complement each other going forward. Despite the growth that both companies had already seen in 2020, I think much of that momentum can and will continue over the coming years. As such, I wanted to slightly increase my position. I’m not thrilled over a lot of Livongo management leaving the newly combined company, but I also don’t think it is a deal breaker and I do trust Teladoc management to be able to integrate the new acquisition. Really interested in seeing what kind of growth numbers the newly combined company can put up in the coming quarters.

Selling Spotify; Snowflake too expensive

Selling Spotify; Snowflake too expensive

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The much-anticipated Snowflake (SNOW) IPO (initial public offering) was this past week, and despite having been burned a bit recently by jumping into an IPO too soon (hello, Jumia!), I was pretty set on at least dipping my toe in for Snowflake since I was so excited for it.

Then, over the course of around 24 hours, the price per share basically tripled.

Needless to say, I’m definitely holding off on buying any shares for now. I’m still going to keep Snowflake on my radar, particularly a few months from now when the lock-up period expires. If we get a pretty significant pullback (and I think it would have to be close to a 50% pullback at this point), then I might take the plunge.

In anticipation for possibly buying some shares of Snowflake, I had sold my shares of Spotify (SPOT). I had bought because I was intrigued by the moves they were making in the podcast space by signing such huge draws like The Ringer and Joe Rogan. I thought having those programs could be a key differentiator that would let them stand apart from Amazon Prime Music or Apple Music or other competitors. I even had dreams of them possibly becoming the Netflix of podcasts.

None of that seems to have happened yet. In fact, it doesn’t seem like Spotify has much of a plan at all when it comes to podcasts yet. I still have some minor concerns that Spotify has the necessary visionary leadership to transform itself into something greater. It doesn’t help that right after they acquired Joe Rogan’s material (a figure they had to have known was mildly controversial) it was discovered that some of his past episodes were no longer available. If they’re planning on censoring a figure like Rogan, that would seem to immediately lessen his appeal.

Since I wasn’t able to get in on Snowflake at a reasonable price, I used some of the proceeds from the sale of Spotify to add to my Nano-X (NNOX) position after it took a tumble in the wake of a short report by Citron Research (check it out here). I always love to hear intelligent bear cases for the companies I hold, and I tried my best not to completely dismiss Citron’s concerns without giving them their due, but it was a little hard given their history with companies in my portfolio. The most egregious is probably back in October of 2017 when Citron had released a short report on Shopify (SHOP) with a price target of $60 (check it out here). Not only did Shopify never even come close to hitting $60, but it is now at ~$900 (or 15X larger than Citron’s price target). So while I always try my best to take any criticism seriously, I am not at all worried about the short report by Citron and was instead happy to get some more shares of Nano-X at a lower price. The rest I will keep in reserve (for now) to deploy a little later.

Closing out Jumia and Yext; Starting positions in Nano-X and Etsy

Closing out Jumia and Yext; Starting positions in Nano-X and Etsy

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Over the past week, I made two changes in the Freedom Portfolio involving closing out two Millennium Falcon level positions and redeploying the cash to open up two new positions.

Jumia (JMIA) – I really love ecommerce companies in developing markets and have largely had success with them in the past with companies like Mercado Libre (MELI) and Sea Limited (SE). So when I heard about a company that some were calling “The Amazon of Africa”, I was intrigued. In retrospect, I think I probably got a little too carried away in IPO hype and jumped in before seeing if the company could put up consistent growth and show a path towards profitability. I was prepared to be patient with Jumia as long as it looked like they were moving in the right direction, but that no longer seems to be the case. Plenty of other ecommerce companies have flourished during Coronavirus related lock-downs, but Jumia has continued to struggle. Previously I had dismissed concerns that Jumia, while operating in Africa, wasn’t even an African company (they are based in Europe). Now I am beginning to wonder if there is something to that.

Either way, I had lost my conviction in Jumia. I’ll be keeping an eye on it, but for now, I am closing my position.

Yext (YEXT) – Chalk this one under “you can’t borrow conviction”. I often had a hard time seeing what people were so excited about when it came to Yext as an investment. Growth seemed unimpressive and the total addressable market didn’t seem as big to me as some others thought it was. Still, since I knew so many investors who I respect who really liked the company, I had decided to start a small position. The hope was that my conviction would increase as I learned more about the business. But that never happened, and so after about a year of middling returns, I decided to cut bait.

Nano-X (NNOX) – This is a small, purely speculative position which in my mind replaces the small and purely speculative position that Jumia once filled. Nano-X (or Nanox, it’s a little unclear the proper spelling) has a vision for completely re-imagining X-rays and helping to make them more available throughout the world to help improve preventative care. They believe they have a radical new way to reduce the cost of X-rays by an order of magnitude and are aiming for a 1 x 1 x 1 plan which would provide a least 1 X-ray scan per 1 person every 1 year to help improve medical outcomes across the globe. If they are successful, the upside would be incredible, but there also remains substantial risk that they simply won’t be able to achieve what they hope they will be able to. I’m starting this one off as a Millennium Falcon level position, but will be keeping a close eye on it and will not hesitate to add to my position if I see solid progress.

If you are interested in learning more, I encourage you to check out the short video on their website.

Etsy (ETSY) – As I mentioned before, I love me some ecommerce companies. The problem has always been that I largely viewed them as winner-take-all situations in most regions. For the longest time, it seemed like Amazon (AMZN) was the big winner in the United States and that nobody would ever be able to compete with their size and scale. That appears to be starting to change. Not only are traditional retailers like Walmart starting to be able to compete with Amazon online, but so are other ecommerce companies like Wayfair (W) and Etsy (ETSY).

I see three things going in Etsy’s favor right now:

We’ve seen Shopify have tremendous success playing the role of the “Rebels” to Amazon’s “Empire” as more and more merchants are growing weary of relying on Amazon’s marketplace to sell their goods and, in some cases, even competing with Amazon’s own products or competitors paying more to advertise their products. I believe the idea that Amazon is the only place to go to find things online is beginning to be questioned by more and more people. I think Etsy can take advantage of that.

I have also seen some push back lately in terms of fake reviews and cheap knock-offs being passed off as the real thing on Amazon. Etsy seems to have the air of being more authentic as it seems like the items are being sold by more trustworthy mom and pop business instead of faceless mega-corporations trying to cut corners whenever possible.

Maybe it is my imagination, but there also seems to be more and more a movement towards side hustles and entrepreneurship lately. I think that movement also benefits Etsy as more and more people try their hand at starting their own business and selling things online. More sellers attract more buyers and the network effect strengthens.

For all of those reasons, I have started a Millennium Falcon level position in Etsy as well.

Selling some Livongo; Buying more Sea and Fastly

Selling some Livongo; Buying more Sea and Fastly

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In my latest Freedom Portfolio update, I mentioned: “Going forward, I’m hoping to try to write short pieces explaining my trades within a week of me making them, instead of saving them all up for the quarterly recaps.” in that vein, here is my first trade since my last quarterly update.

A few days ago, Livongo announced some pretty incredible earnings that were unfortunately immediately and completely overshadowed by the shocking announcement that they were being acquired by / merging with Teladoc (TDOC). Investors were largely not pleased with the news, with both companies dropping 10-20% in the days following the news.

I have to admit that my first reaction was crushing disappointment, even though I own both Teladoc and Livongo. Why? In short, because I felt like Livongo had a long runway still ahead of it and that this Teladoc merger was in effect stealing some of that upside away from me. I was prepared for the possibility that Livongo would be acquired by another company, but I figured that it would be for a decent premium and the premium for this deal was relatively small. To add insult to injury, instead of getting a pop in the stock price from the great earnings report, I was seeing two of my positions have a sizable drop.

But I’m a long term investor, and as I spent more time thinking about it, I started warming up to the merger more. I still don’t really understand why Livongo management made the decision they did and still don’t think it was the best move, but I’m also perfectly willing to admit they knew something or saw something that I didn’t. Either way, the new combined Teladoc / Livongo entity would seem to be a powerful entity in what could be a new normal of remote healthcare.

However, if the merger goes through (and using current prices), the new combined Teladoc / Livongo entity would likely go from two separate Serenity level holdings to a single massive Babylon 5 level holding. That felt a little too large to me, so I thought I would take this opportunity to trim my Livongo holdings some (still having more than tripled from where I purchased despite the recent drop) to redeploy that capital elsewhere.

For weeks, I had been wanting to add to my Sea Limited (SE) position as I’ve gotten more and more excited about the potential growth for the company during this COVID pandemic. And with Mercado Libre (MELI) reporting earnings early next week, this felt like as good a time as any to get a purchase in, so adding to my Sea position was a no-brainer for me. With the new purchase, Sea has now become an Enterprise level position for me, which feels about right.

With the rest of the cash, I added to my much smaller Fastly position. I had started my position about two months ago and have been impressed by the company so far. They had a big drop after earnings this week (down roughly 30% over the past few days), which feels like a bit of an overreaction to the news that Tik Tok (which might get banned in the United States) is responsible for 12% of their revenue. I increased my position. It’s still a Millennium Falcon level holding, but now it’s a much larger Millennium Falcon level holding.