NFLX – Paul Vs The Market

Saying goodbye to some old friends

June 3, 2021 paul.essen Comments 1 comment

Note: This post was started a few weeks ago, so some of the numbers quoted below may be slightly off now, but the overall sentiment remains the same.

The past few months have been rough for the Freedom Portfolio. The S&P 500 is up, the NASDAQ is roughly flat, but the Freedom Portfolio has lost about a third of its value. I’m not at all panicking. I’ve been through periods like this before and despite this being the second such drop of a third in value in the past 17 months, my portfolio is still up 2.5x in that same time period.

What I am feeling, though, is a great sense of envy. I’m seeing a bunch of companies I am really bullish on that are on sale. Teladoc (TDOC) and Fiverr (FVRR) for 50% off? Redfin (RDFN) at 40% off? Mercado Libre (MELI), Etsy (ETSY), Zoom (ZM), and Square (SQ) 30% off? Yes, please.

The problem is that, because I don’t try to time the market, I am fully invested at all times. I don’t have “dry powder” to deploy to take advantage of these dips in some of my favorite companies. If I want to buy shares in something, I need to sell shares in something else. I spent weeks going over my positions and mentally tallying pros and cons and re-evaluating my investing theses (hopefully that’s how you spell the plural of “thesis”). Eventually, I came to the unavoidable truth:

It was time to say goodbye to my positions in Amazon (AMZN) and Netflix (NFLX).

Selling the rest of my shares in these incredible companies was emotionally very difficult (hence why it took me weeks to compose my thoughts to get this post finished). These two companies, along with Disney (DIS), are/were my longest tenured positions at 7-8 years. It was just 3 years ago that I wrote a few thousand words confidently explaining why Amazon was my largest holding. Netflix was the subject of one of my favorite things that I have written, along with an integral part of one of the most important investing lessons I have ever learned. Until a few months ago, I couldn’t have conceived of selling the rest of my shares.

However, as much as it may have been emotionally difficult, I do think it was logically the correct decision. Another way to think about nostalgia for these companies is to consider it anchoring bias. The investing thesis that I had for these companies 7 and 8 years ago isn’t nearly as relevant now and lots of things have changed. Amazon is no longer the only name in ecommerce and cloud computing, just as Netflix is no longer the only game in town for streaming original content. In fact, it was pretty remarkable how similar the reasons were for why I could convince myself that it was time to part ways with these companies:

Both companies recently had their trailblazing founders step down as CEO. Reed Hastings and Jeff Bezos would probably both be on my Mount Rushmore of innovative entrepreneurs of my lifetime and both were huge reasons why I was bullish on both companies continuing to be innovative in the future. In fact, in my write-up of Amazon, I had specifically mentioned Jeff Bezos stepping down as my #1 worry about the company (I also feel the need to pat myself on the back and point out that 3 years ago I said, “it wouldn’t completely shock me to see him step down to a smaller role in the next 5 years”). I have no doubt that Andy Jassy and Ted Sarandos can keep both companies executing well, but I do have serious concerns regarding whether they will be willing to make the same big, bold moves as their predecessors. That was a major red flag for me.
Both companies just had incredible years where they likely pulled forward a ton of business. Netflix made no secret that their incredible growth in 2020 was undoubtedly aided by COVID induced lockdowns which left people with little else to do but binge watch shows. Amazon likewise saw crazy ecommerce growth for obvious reasons. I would be shocked if we ever saw the kinds of revenue growth for Amazon and subscriber growth for Netflix in the future that we saw in 2020.
Both are seeing increased competition. Microsoft Azure has proven to be a very formidable competitor to AWS and has won some major contracts over AWS. Netflix is seeing the old media companies coming out swinging with impressive offerings like Disney+.
Both companies are starting to change from the types of companies they were just a few years ago. Amazon famously had the mission statement of: “We seek to become Earth’s most customer centric company”. Yet their recent push into advertising threatens that mission statement. Netflix used to be a “subscriber growth at all costs” kind of company, which served it well for becoming the dominant video streaming force in most of the countries on the planet. However, now that a lot of the low-hanging subscriber fruit has been picked, it seems to be slowly transitioning to a company slightly less concerned with growth and slightly more concerned with making money. That’s not a bad thing at all, but it is a significant change from my original investment thesis.

Those are just a few of the reasons. I could go on. I don’t know if it helps to dwell on the past, though. And that’s what Amazon and Netflix have become now: the past. Instead, let’s talk about the future and the positions I added to (or started) with the funds freed up from closing out my Amazon and Netflix positions:

Added to Snowflake (SNOW): I wanted to buy shares of Snowflake at IPO, but the price had a crazy run-up in the days before and on IPO day itself. As a result, I decided to pass and wait to see if a better opportunity presented itself. Now, with shares trading below where they did on the day of IPO, the valuation seems much more palatable. Happy to add some more at this level and might be looking to add even more since even with this add it is still a Millennium Falcon level position.

Added to Redfin (RDFN): Redfin is down nearly 50% from recent highs and yet I am just as bullish as ever on the company. They continue to execute well and all of their growth metrics continue to look great. Their comprehensive suite of services means they can offer a clear better solution to many of their competitors. They still only have a little over 1% of the fragmented real estate market and is still around 1/5th the size of Zillow (Z). There is still a ton of upside left with this company and I think it still has 10x potential.

Added to Teladoc (TDOC): Teladoc is down more than 50% from recent highs and is now trading close to pre-pandemic levels. That seems crazy to me, especially considering that they merged with Livongo since then. There’s a lot of pessimism around Teladoc’s future growth prospects and how much of a moat they have, especially in light of companies like Amazon (AMZN) entering the space, but my conviction remains unshaken. I believe telemedicine is not just a flash in the pan that will fade away post-pandemic, and I think the Livongo acquisition will help Teladoc offer a unique way to help patients between doctor’s visits. Thrilled to be able to add at these levels.

Added to Etsy (ETSY): Etsy is down about a third from recent highs. Some of that is a reaction to some perceived disappointing growth forecasts from their recent earnings report. I can understand the concern, as there’s still an open question of whether Etsy will continue to be a major player in a post-pandemic world and if they can attract customers outside of holidays and special events. I think they can, and are well positioned to play an “anti-Amazon” role of offering personalized and unique products. Etsy is still just a tiny bit over 1% of the size of Amazon, which seems crazy.

Added to Nano-X (NNOX): This comes with a bit of an asterisks. I added to my Nano-X position prior to earnings when it was down over 50% from recent highs despite having announced FDA approval for its single source digital X-ray. After my add, there was a handful of disappointing news that came out during earnings which had me regretting my buy. I’m not selling right now, but I’m also not adding anything else. I need to see a little bit better execution before I increase my position size.

Added to Skillz (SKLZ): Skillz is down almost 2/3rds from recent highs. As near as I can tell, the biggest reasons seem to be that there have been some short reports and some concerns over a CFO transition. The CFO transition bears some watching, but assuming the company isn’t an outright fraud, then the growth numbers seem solid and the investment thesis remains intact for me. This seemed like a good opportunity to buy shares at a big discount from where I first started my position. It’s still a relatively high risk position, but I’m comfortable with it since it is also still a small Millennium Falcon level position for me.

Added to Fiverr (FVRR): Fiverr is down almost 50% from recent highs. Fun fact: of all my current positions, Fiverr is the one where I have lost the most money in absolute dollar amounts. That might cause some to question the wisdom of increasing the position. I am undeterred. Fiverr just recently put up an incredible earnings report and the platform looks as healthy as ever. I remain incredibly excited about the future of the company and, at only a $6 billion market cap, I think there’s still a long runway for growth ahead of it.

Added to Axon (AXON): Axon is down by about a third from recent highs (notice a pattern yet?). Like many of the above, Axon just reported great results and there’s no clear business reason for such an extreme drop. I’m happy to add more at these levels.

Started position in Celsius (CELH): This might seem like an odd addition. Really? An energy drink company? How exciting is that? Well, let me introduce you to one of the best performing stocks of this century, a company that has outperformed companies like Apple, Google, and Amazon with a 70,000% return. Interested? That company is Monster Beverage (MNST). Clearly Celsius doesn’t quite have the same upside at this point seeing as it has already been a 10 bagger and is already a $4 billion market cap, but the point stands that amazing returns can come from unexpected places. This is a favorite among many people I follow on Twitter and I’ve heard encouraging first hand accounts from people I know. Celsius is growing fast, but still has a tiny percentage of the market. Monster Beverage has a market cap that is 10x larger, so it could be argued there is still 10x potential for this company despite how far it has already grown. Excited to start a position and possibly add more if the opportunity presents itself.

So, those are the big changes in my portfolio. I’m sad to say goodbye to Amazon and Netflix, although I am excited about the companies I added to (and the prices I added them at). And who knows? Maybe one day I’ll buy shares of Amazon and Netflix again. Never say never.

The Freedom Portfolio – April 2021

April 10, 2021 paul.essen Comments 3 comments

Sorry about the lateness for this quarterly update. Apparently dealing with the re-starting extra-curricular activities of a 6 year old and an 8 year old while helping to take care of an infant soaks up a lot of time. Who knew?

I had a lot of feelings of Déjà vu during this most recent quarter. The obvious and most recent comparison is to the sudden market crash in February and March of last year. Here is what I wrote during my April update of that year:

Just a month ago, I was watching the Freedom Portfolio have a scorching start to the new decade thanks to the incredible run of companies like Tesla (TSLA). I was even wondering if I might be able to talk about how the portfolio had managed to double over a mere 15 months. That kind of thinking seems patently ridiculous now.
For those unaware, this past month has seen the fastest market drop in history as COVID-19 (aka, Coronavirus) has brought the US economy to a screeching halt. The volatility has been extreme, and it has gotten to the point where I don’t even blink when multiple positions in the Freedom Portfolio are up (or down) 20%+ in a day. Redfin (RDFN) was recently up 20% and 30% in back-to-back days and is still down something close to 50% in the past month alone. So I’ve very quickly had to shift my mindset from one of, “Isn’t the market an amazing way to generate wealth?” to “Don’t panic! This kind of thing happens sometimes”.
The Freedom Portfolio – April 2020

A very similar thing happened this past quarter: The Freedom Portfolio was absolutely on fire early in the year and at one point was up close to 30% in just a little over a month! Then, everything fell completely apart and by the time the quarter was over, the Freedom Portfolio was down 5% from the end of 2020. That doesn’t sound too bad, but it looks even worse compared to the 6% gain for the S&P 500 and it is positively atrocious if you measure the drop from that high of early February. Measured from that high, it’s a drop of almost 30%, which rivals the massive collapse from last year. The big difference, of course, is that it was pretty clear in 2020 that stocks were tanking as a result of the global pandemic and the resulting lock-downs which were devastating segments of the economy. It’s not nearly as obvious what is going on now in 2021.

Which is why this past quarter actually reminds me even more of the very first quarter of the Freedom Portfolio. Before I started the Freedom Portfolio in October of 2018, the companies I had invested in had gone through a prolonged period of performance where they were crushing the market. Then, at almost the exact time that I launched the Freedom Portfolio, and seemingly without any solid reason, those companies started to crash. If you look at a chart of the NASDAQ around that time you can clearly see the dip (although it is also dwarfed by the performance since then. My second post after the initial launch of the Freedom Portfolio was written on October 9th and entitled: A rough start for the Freedom Portfolio – But I’m not worried. The very next day I wrote this: The Freedom Portfolio is down over 5% today – I’m not even thinking of selling anything.

Unlike in 2020, there wasn’t any obvious reason for the big pullback in the tech heavy growth stocks that I favor. There were plenty of theories, though. Some think it’s a rotation from growth to value. Others think it’s due to rising treasury yields. Still others think it’s because many of these stocks will suffer when the economy reopens. Frankly, I don’t really care what the reason is, I just care if the companies that I am invested in are executing and if I continue to have faith that they will execute in the future. Nothing in the past few months has significantly changed my mind about that.

Here is where I normally post an updated chart of my returns versus the S&P 500 since the inception of the Freedom Portfolio. My guess is that your eyes are usually drawn to the right-hand side for the most recent returns, but this time I encourage you to look at the far left, where you might see a slight dip. That slight dip represents that horrible first quarter that I was describing above. It’s pretty incredible how it looks so small and unimportant when you zoom out and look at the long term. I look forward to this quarter also fading into insignificance when I look back years from now.

One more thing: Here are my top 7 holdings from that first quarter along with their returns over that quarter (yes, all of them but Tesla were negative):

Amazon (AMZN): -26%
Netflix (NFLX): -29%
Shopify (SHOP): -17%
Walt Disney (DIS): -7%
Tesla (TSLA): +9%
MercadoLibre (MELI): -15%
Square (SQ): -44% (!)

I still own every single one of those companies. I encourage you to compare those numbers above with the numbers below (particularly the numbers since inception) to get an idea of how even a company that was down 44% after one quarter can still rebound to be a big winner.

Ticker	Quarterly Change	Change Since Inception
FVRR	9%	12%
TSLA	-8%	1003%
SE	14%	627%
MGNI	51%	-16%
ZM	-11%	122%
ETSY	17%	95%
DMTK	12%	9%
CRWD	-9%	89%
SQ	3%	128%
RDFN	-1%	269%
FUBO	-9%	-5%
SHOP	1%	590%
TTD	-16%	206%
SWAV	28%	143%
ROKU	2%	164%
TMDX	118%	25%
MELI	-10%	341%
TDOC	-9%	112%
JD	-2%	225%
NNOX	-9%	-3%
BFLY	-12%	-27%
AXON	22%	91%
NVCR	-18%	153%
AMZN	-3%	55%
NFLX	0%	42%
SKLZ	5%	-16%
DIS	4%	60%
SNOW	-18%	-21%

Notable Performers

This section might get a little boring and repetitive because even though there have been some big moves this past quarter (both up and down), as I noted above, much of it seems to have less to do with how the companies have performed and more to do with outside factors like sector rotations. Still, it’s worth checking in with big winners and losers to make sure the thesis is still intact.

Best Performers

Axon Enterprises (AXON): 22% gain: A 22% gain is nice, but Axon was up roughly 75% just a few months ago. That big gain seemed to be in response to some pretty nice earnings that they reported in the most recent quarter. Why has it dropped since then? I have no idea. Axon shouldn’t suffer at all from the economy re-opening and if anything police body cameras seem like they would be more important to the new Presidential administration compared to the last. I’m just as bullish on this company as ever and fully expect it to be an outperformer in the coming years.

ShockWave Medical (SWAV): 28% gain: It was a surprisingly volatile quarter for Shockwave. Up until a day or two before the quarter ended, Shockwave was virtually flat for the quarter until they provided an update on the launch of their coronary IVL system which caused the stock to pop. Why? Possibly because they are expecting their revenue growth in the first quarter of 2021 to grow triple digits compared to the first quarter of 2020. That’s pretty impressive and indicates the bull thesis remains on track.

TransMedics Group (TMDX): 31% gain: TransMedics group was actually up more than 60% for the quarter, but I didn’t start my position until a month or two ago so I didn’t capture all of those gains. The company is still awaiting FDA approval for its device so there isn’t much to report, although they did recently make some progress on the FDA front. This is one to definitely just hold and not worry about too much until any news comes out on FDA approval.

Worst Performers

Butterfly Network (BFLY): 27% loss: Like TransMedics group, my Butterfly Network position was started mid-quarter, although this time it meant my losses were bigger. There’s not much to say here either. This position is a super speculative (and small) bet on ultrasound devices that could attach to a smartphone and be useful in telemedicine. Big swings in the short term are not only not a surprise, but to be expected. I still plan to hold on to see how this plays out.

Snowflake (SNOW): 23% loss: I really wanted to buy some shares of Snowflake at the IPO but the run-up in price was just insane. After peaking late last year, though, the stock has been on a steady march downward despite the company putting up some pretty solid earnings. After it got back to its immediate post-IPO price (and the lock-up periods look to have all expired), I decided the time was right to dip my toe in. I still think the future is bright for this company, even if the stock price could continue to fall in the short term as the valuation returns to a more sane level.

Changes in the Portfolio

The Freedom Portfolio – April 2021

Here is where the Freedom Portfolio stands now. Need a reminder of what these terms mean? Check out: Defining my Terms. A few notes:

Tesla dropped from being a Babylon 5 level position to an Enterprise level position. Some of this had to do with the stock dropping, but more of it had to do with me trimming the position. I still love Tesla’s future and I hate getting hung up on valuation, but even I had to admit that Tesla’s valuation was getting a little out of control. I feel much more comfortable with it being an Enterprise level position right now.
Amazon dropped from an Enterprise level position to a Serenity level one after I sold half my shares on the announcement that Bezos was stepping down as CEO. I was also starting to get a little concerned with just how much larger Amazon could possibly get seeing as it is getting close to a $2 trillion company. I think it will be a solid performer going forward, but I’m pondering whether I want to free up that cash to use on a company with more upside.
Teladoc and Square moved up from Serenity level positions to Enterprise level positions. Both seemed to have earned it by holding up better this quarter while the overall value of the portfolio went down.
Nano-X, Zoom, and Fiverr moved up from Millennium Falcon level positions to Serenity level positions in much the same way: thanks to sucking a little less than the rest of the portfolio this part quarter.

Ticker	Company Name	Allocation
SHOP	Shopify	Babylon 5
MELI	MercadoLibre	Babylon 5
SE	Sea Limited	Enterprise
TSLA	Tesla	Enterprise
TDOC	Teladoc	Enterprise
SQ	Square	Enterprise
RDFN	Redfin	Serenity
FVRR	Fiverr	Serenity
TTD	The Trade Desk	Serenity
NVCR	NovoCure	Serenity
ROKU	Roku	Serenity
AMZN	Amazon	Serenity
ETSY	Etsy	Serenity
JD	JD.com	Serenity
NFLX	Netflix	Serenity
ZM	Zoom Video	Serenity
DIS	Walt Disney	Serenity
CRWD	CrowdStrike	Serenity
NNOX	Nano-X	Serenity
FUBO	FuboTV	Millennium Falcon
TMDX	TransMedics Group	Millennium Falcon
SWAV	Shockwave Medical	Millennium Falcon
AAXN	Axon Enterprises	Millennium Falcon
DMTK	DermTech	Millennium Falcon
SKLZ	Skillz	Millennium Falcon
MGNI	Magnite	Millennium Falcon
SNOW	Snowflake	Millennium Falcon
BFLY	Butterfly Network	Millennium Falcon

That’s the recap of the Freedom Portfolio for the first quarter of 2021. Here’s hoping the second quarter is a little better.

Estimating Upside: Part 1 – The Slow Growers

March 24, 2021 paul.essen Comments 5 comments

I’ve said it many times, but I’ll say it again: 2020 was a hell of a year for the Freedom Portfolio. The portfolio as a whole was up 175% with a number of individual positions tripling or more. That’s many years of growth all squeezed into a short period of time. As a result, it felt like time to try to take a step back and see if my investment thesis for these companies still holds. For many of my positions, the upside that I am looking for is a 5-10 bagger over the next 5-10 years. However, with some of those companies already doubling or tripling, is that upside still there, or should I be looking for better opportunities?

To answer this question, I’m planning on going through each of my holdings over the coming weeks/months. For each holding, I intend to figure out what I think is the maximum reasonably upside that could be expected from the company over the next 5 years. Why 5 years? Because I am a long term investor who always enters a position with the intention of holding it for 5+ years (even if that sometimes doesn’t happen) and because trying to project out any further than 5 years seems way too difficult at the current pace of innovation.

For each position, I decided to place it into one of three groups:

Slow Growers: Companies that can 2x to 3x over the next 5 years – a 15% to 25% compound annual growth rate (CAGR)
Medium Growers: – Companies that can 4x to 7x over the next 5 years – a 32% to 48% compound annual growth rate (CAGR)
Fast Growers: – Companies that can 8x to 10x over the next 5 years – a 52% to 58% compound annual growth rate (CAGR)

Part 1 is dedicated to the slow growers, with the plan for parts 2 and 3 to be released in the coming weeks/months. For each company, I will list the current-ish market cap as well as what that market cap would look like 5 years from now after a potential double or triple.

Note: There’s been a fair amount of market volatility lately, so it feels worthwhile to note that these market caps were pulled on March 11th.

Let’s go.

Amazon (AMZN) – Now: $1.5 trillion – Then: $3 to $4.5 trillion

It’s a little hard to wrap my head around how much larger a $1.5 trillion market cap company can get. On one hand, it’s already massive with big expectations of growth already baked in. On the other hand, it still feels like there’s a lot of runway left with cloud computing, ecommerce and advertising and Amazon seems to have a really strong advantage in all three of those business lines. A 15% to 25% CAGR might seem a little conservative for such a relentless innovative and strong business like Amazon, but it would also represent them adding 5 Walmarts (WMT) or 10 Exxons (XOM) worth of market cap, which feels pretty significant.

Verdict: Amazon is so large that it’s hard to imagine there’s a tremendous amount of upside left in it, but at the same time there might not be a company out there which I am more confident will be a market beater going forward. I’ve already trimmed some of my position after Bezos stepped down as CEO. I don’t see any reason to sell any more in the near future.

Tesla (TSLA) – Now: $650 billion – Then: $1.3 to $1.9 trillion

Again, this is hard to wrap my head around. A mere car company with a market cap over $1 trillion? As any Tesla bull will be quick to say, Tesla is more than just a car company and is poised to be a major player in not just all sorts of transportation (EVs, autonomous, taxis, ride-sharing, etc), but energy as well. I think Tesla is well positioned to be a leader in a lot of those areas, but what is that worth? Even if you combine the market caps of the top car manufacturers AND Uber and Lyft AND toss in an Exxon for good measure, you don’t get to $1 trillion right now. Even if Tesla disrupts transportation and multiple other areas like I think they could, it feels like a stretch to say they can grow much beyond a low-to-mid $1 trillion market cap over the next five years.

Verdict: I’ve mentioned a few times that, despite still being bullish on Tesla, even I couldn’t justify the valuation over the past few months. I’ve trimmed a decent amount recently and feel much more confident with the size of my position now and see no reason to change it any more in the near future.

NovoCure (NVCR) – Now: $13 billion – Then: $27 to $40 billion

Seeing the market cap of NovoCure was a bit of a surprise to me. When I first bought shares of NovoCure in 2017 at about $18 a share, it was a much smaller company. I knew it had been a pretty great performer, but it still surprised me to see that it had grown to such a large market cap. I still think there’s a big opportunity in front of NovoCure to use their Tumor Treating Fields to treat a wide variety of cancers and, importantly, the treatment can be used in addition to others so competition should be less of a factor. Still, it’s a little tough to see them growing much beyond the $30-40 billion range unless they find a way to expand TTF beyond cancer treatment, which I don’t quite see happening.

Verdict: Novocure has some pretty clear catalysts that are also on a pretty clear timeline. I love the technology, but I could see a scenario in the coming years where I start to redeploy capital to other companies unless they discover new potential uses for TTFs.

Disney (DIS) – Now: $357 billion – Then: $714 billion to $1 trillion

I continue to be amazed by how Disney stock has not only held up during a pandemic which has obliterated virtually all of their main revenue drivers, but has actually hit new highs. Obviously a lot of that has to do with how incredibly fast their streaming services have grown both domestically and internationally. I have no doubt that Disney will be the strong number two to arise globally in the coming years. Still, it seems like a lot of optimism is already baked in to the share price. What happens if park re-openings take longer than expected, the movie pipeline takes some time to get replenished, and Disney+ growth slows down?

Verdict: I love Disney, but there’s no doubt it has lower upside than a lot of my other companies. As a result, I actually recently trimmed my position some (see below) to add to some companies that hopefully have more upside.

Netflix (NFLX) – Now: $232 billion – Then: $463 to $695 billion

A double or triple over 5 years is really strong growth, but it almost feels like an insult to predict it for Netflix seeing as it has gone up nearly 6 fold over the previous 5 years. It does feel like it’s finally time for their growth to slow down some, though. Netflix long ago saturated the US market and it feels like it has snagged most of the low hanging international fruit as well. There’s still some growth to be had, but much of it will be coming from cheaper plans in countries like India. Additionally, their competition has finally gotten serious about transitioning to online streaming which will undoubtedly limit their ability to raise prices as much as they have been. The rumors of them cracking down on password sharing is one more sign that they’re looking for other levers to pull to get some growth. Still, Netflix remains the global leader in a streaming trend that is still yet to fully play out and that doesn’t seem likely to change. This still feels like an easy market beater going forward.

Verdict: I won’t lie: nostalgia plays a huge role in why I continue to hold Netflix. It was one of my first purchases and has been one of my biggest winners. I almost feel a sense of loyalty to the company. That’s not the only reason I hold it, but I would be lying if I said it didn’t play a role. I could see myself selling some more in the future, but it’s hard for me to imagine ever selling all of my shares.

Square (SQ) – Now: $110 billion – Then: $220 to $330 billion

Like NovoCure, the market cap of Square surprised me a bit. When I first purchased shares in 2018 at $58 a share, the market cap was around $20 billion. My hope then was that Square could grow beyond just being the little dongle for swiping cards for small and mid-sized businesses and could become a major player in digital payments with the Cash App and move into many banking services as well. The former seems to have arrived and the latter looks to be getting closer. Even though Square has grown a ton, I still feel like there’s decent upside left. PayPal, Visa, and Mastercard have market caps between $300 and $500 billion and if bitcoin continues to show strength, there’s no reason why Square can’t double or triple from here.

Verdict: This is one I will be keeping a close eye on. It feels like Square has a lot of potentially huge catalysts (Cash App moving into banking services, bitcoin, NFTs through Tidal) and I do think Dorsey is brilliant, but he’s also eccentric and undeniably distracted. If some of those moonshots look like they’re not panning out or taking longer than expected, I might consider trimming my position some.

Transactions

Sold some Disney (DIS): As mentioned earlier, there’s been a ton of volatility recently and a lot of my positions have seen some pretty massive haircuts. I always remain fully invested and don’t keep cash around, so if I want to “buy on the dip” I need to sell something else first. Because Disney has held up fairly well during this volatility, I decided to trim some so that I had cash to deploy elsewhere.

Bought more Fiverr (FVRR) and FuboTV (FUBO): I’ve made no secret how much I have been loving Fiverr lately and so when it dropped nearly 40% recently I took the opportunity to add more shares. FuboTV was a smaller position that saw a move that was almost as big so I decided to add a bit to FUBO as well.

Your Thoughts

What do you think? Am I too pessimistic on the above companies? Or is a potential double or triple still too optimistic? Please let me know in the comments if you agree or disagree and, more importantly, why. Thanks!

Jan 2021 Portfolio Tweaks

January 26, 2021 paul.essen Comments 0 Comment

Looks like the stock market in 2021 is picking up where the 2020 stock market left off. Maybe one day I’ll write about the day I almost bought some $7 Gamestop (GME) calls in August of 2020 and do the math to figure out exactly how much of a gain I lost out on. Maybe it will top my previous biggest investing mistake that I made with Netflix (NFLX) which at last check was at $2.3+ million.

I’ve made a few tweaks to the Freedom Portfolio over the past few weeks and wanted to briefly outline my thought process below:

Sells

Tesla (TSLA) – Tesla has been so difficult for me to deal with. I strongly believe in letting my winners run and doing so has paid off handsomely with companies like Shopify (SHOP) and not doing so has been incredibly painful (see: Netflix example above). At the same time, I find the current valuation to be completely indefensible and am having an incredibly difficult time seeing how there can still be a significant amount of upside left at these levels. And yet, every time I have trimmed my position, the stock continues to go up. The simple fact of the matter is that I am uncomfortable letting Tesla grow to be too big of a position in my portfolio, which is why I have continued to trim. It still remains a Babylon 5 level position (RIP, Mira Furlan), but I intend to keep trimming for now to avoid letting it get to be too large.

Fastly (FSLY) – I haven’t felt like I’ve had the time to do any deep dives into any of my holdings lately and, as a result, I haven’t mentioned the P.A.U.L. System recently. However, I absolutely have still been using my system to mentally score my positions. When it came to Fastly, I had been getting more and more concerned the “Understanding” score. Put simply, I found that I couldn’t articulate why Fastly was better or even different from Cloudflare (NET), one of its main competitors. Without that level of understanding, it’s hard to have high conviction, and so I decided it was time to redeploy that capital into higher conviction picks.

Buys

Zoom (ZM) – Over the past 3 months, Zoom has fallen around 30% from its all time highs. Presumably the reason is because people think that once everybody is vaccinated and COVID is “over”, that Zoom won’t be nearly as ubiquitous. I think that could be short-sighted and an over-simplification. I believe that the lockdowns have permanently altered some business behavior and that a certain level of video conferencing that didn’t exist before is here to stay, and I believe Zoom is the primary beneficiary of that. For that reason, I wanted to take advantage of the dip in price.

Etsy (ETSY) and Fiverr (FVRR) – I initiated these positions last year based on the idea that a growing “side-hustle” movement and maturing ecommerce space would greatly benefit these companies. The more research that I do, the higher my conviction has grown on these two companies and I wanted to increase my position size. Both companies are now solidly Serenity level positions.

Nano-X (NNOX) – Despite being excited about the potential with Nano-X, I had decided to not add to my position because a series of short reports had me wondering if there was a possibility that the company was a fraud. The jury is still out, and likely will continue to be out until FDA approval either comes or doesn’t. A decision is expected in the first half of 2021. Until then, though, I’m becoming less and less concerned over the idea that the company is a complete fraud. As a result, I added slightly to my position, although it remains a Millennium Falcon level position.

Skillz (SKLZ) and fuboTV (FUBO) – Two new positions that I have added to try to get additional exposure to live sports streaming and online gambling. Both are tiny positions and if my conviction grows (or the position does), then I might consider writing more about what excites me about the companies. For now, though, I just wanted to get a little skin in the game.

The Freedom Portfolio – January 2021

January 7, 2021 paul.essen Comments 3 comments

Between the kick-off of Fantasy Investing 2021, my recklessly bold predictions for 2021, and just things like being commissioner of fantasy football leagues which are winding down and enjoying the holidays with my family, the end of December is already a pretty busy time for me even without having to write up a new quarterly recap. Also, I feel like it’s still fair to use the excuse of a newborn baby sucking away time.

Anyway, I apologize in advance that this one is a little short. You can probably expect a little bit more of an abridged quarterly recap in the fourth quarter going forward.

Let’s start out with updated performance:

And here’s a look how each individual position performed over the past quarter and since the inception of the Freedom Portfolio.

Ticker	Quarterly Change	Change Since Inception
NNOX	90%	6%
ROKU	66%	164%
TSLA	57%	1053%
NVCR	54%	227%
MELI	50%	387%
CRWD	48%	114%
DIS	47%	54%
TTD	44%	273%
SWAV	38%	95%
ETSY	35%	67%
RDFN	30%	270%
FVRR	30%	-2%
SQ	29%	116%
AAXN	28%	63%
SE	24%	512%
JD	12%	238%
SHOP	7%	580%
NFLX	3%	44%
AMZN	1%	61%
TDOC	-9%	130%
FSLY	-11%	48%
ZM	-30%	128%

I’ve run out of ways to describe how 2020 was in terms of investing performance for the Freedom Portfolio. It was simply amazing and I don’t expect to ever be able to replicate those results again. So instead of focusing on the positives, I wanted to touch on a few (investing) negatives from 2020.

Magnite (MGNI): I was pretty excited about Magnite (formed by a merger of Teleria and the Rubicon Project) at the beginning of the year, so much so that I made it one of my picks for my fantasy investing 2020 portfolio. At the same time, my conviction in the company was low, so it was a pretty small position for me. Some poor performance earlier in the year along with some management changes shook my conviction and I ultimately sold in June. About 6 months later, the stock now is sitting around 4x where I sold it. It’s possible I was too quick to sell Magnite, and it might be time to take another look at the company.

Jumia (JMIA): Jumia is a very similar story. I had high hopes for the “Amazon of Africa” since many of my other ecommerce companies were thriving during COVID related lockdowns. I sold in September after some mediocre results made me question if the company would be able to seize the opportunity. Since then, the stock has gone up 5x. I’m still not convinced I necessarily made the wrong call, though. Time will tell. I’ll be keeping my eye on it, but have no plans to buy shares again any time soon.

Notable Performers

Just going to briefly touch on the best and worst performer this past quarter.

Best Performer

Nano-X (NNOX) – 90% gain: Interestingly, Nano-X was on my “worst performers” list last quarter. There’s honestly not much to say here. A series of short reports pummeled the stock in Q3 and the stock bounced back from that in Q4 (thanks in part to a live demonstration that was streamed in December). This is still a highly speculative company where so much rests on FDA approval to disprove the majority of the short thesis. I’m still optimistic, but the plan is to hold off making any buys or sells until there is more clarification from the FDA.

Worst Performer

Zoom Video (ZM) – 30% loss: This is almost the reverse story to Nano-X. Zoom peaked a few months ago (shortly after the start of Q4) after some absolutely incredible earnings reports. Since then, it has dropped a fair bit, presumably on positive vaccine news and because people are worried about Zoom’s place in a post-COVID world. I am not worried at all, and Zoom is on my list of companies I am interested in adding to if/when I have cash available.

Changes in the Portfolio

The Freedom Portfolio – October 2020

Here is where the Freedom Portfolio stands going into 2021. Need a reminder of what these terms mean? Check out: Defining my Terms. A few notes:

Mercado Libre moved up to a Babylon 5 level position on the back of an incredible 50% gain over the past quarter
Crowdstrike moved up to a Serenity level position on the back of some additional buys and a nice 48% gain during the quarter
Fastly fell to a Millennium Falcon level position after falling 11% during a quarter where the rest of the portfolio increased almost 30%.

Ticker	Company Name	Allocation
SHOP	Shopify	Babylon 5
TSLA	Tesla	Babylon 5
MELI	MercadoLibre	Babylon 5
SE	Sea Limited	Enterprise
AMZN	Amazon	Enterprise
RDFN	Redfin	Serenity
TTD	The Trade Desk	Serenity
TDOC	Teladoc	Serenity
SQ	Square	Serenity
NVCR	NovoCure	Serenity
ROKU	Roku	Serenity
DIS	Walt Disney	Serenity
JD	JD.com	Serenity
ETSY	Etsy	Serenity
NFLX	Netflix	Serenity
CRWD	CrowdStrike	Serenity
FSLY	Fastly	Millennium Falcon
FVRR	Fiverr	Millennium Falcon
ZM	Zoom Video	Millennium Falcon
NNOX	Nano-X	Millennium Falcon
SWAV	Shockwave Medical	Millennium Falcon
AAXN	Axon Enterprises	Millennium Falcon

That’s the 2020Q4 recap of the Freedom Portfolio. Thanks for following, and here’s to a prosperous 2021 for all!

Recklessly Bold Predictions for 2021

December 22, 2020 paul.essen Comments 7 comments

One year ago, I made a set of bold predictions for what 2020 would bring.

I, like the rest of the world, had no idea what was coming.

Had you told me in advance that we would be seeing a worldwide pandemic that would be leading to months long lockdowns across the globe that would devastate parts of the economy, then I would have told you that my predictions were going to be laughably wrong. Perhaps the only thing more unexpected than the pandemic was how markets have seemed to react to it. Somehow, against all odds, I had an incredible hit rate on my overly bullish predictions.

Note: I know there’s still a little over a week left in 2020, but I generally run my bold predictions from mid-December to mid-December so it doesn’t overlap with my quarterly recaps and fantasy investing so I’m going to call most of these a little early. Some of these numbers were pulled a few days ago and thus might be slightly out of date by the time this post is published.

2020 Predictions

Disney and Netflix both gain 20%+

The Prediction: Disney (DIS) goes from $144.63 to $173.56 and Netflix (NFLX) goes from $323.57 to $388.28.

Mixed: With COVID-induced lockdowns leading to a lot of people stuck at home, Netflix was able to pull forward a lot of growth and had no problem at all blowing past my 20% prediction, ending up with a roughly 60% gain for the year. The bigger shocker is Disney. Despite the pandemic wrecking most of their main business lines (movies, theme parks, live sports, cruises), Disney is somehow still in the running at an 18% gain as of this writing. That’s technically a loss for now (although I’m totally counting it if Disney crosses the line before the end of the year), but considering everything that has happened this year, this feels like a moral victory at least. I’ll take an 18% gain after the year Disney has had.

I’m just as excited as ever about Disney going forward. Their theme park and live sports businesses should eventually rebound and while movies is still a bit of a question mark, their Disney+ initiative has been a monstrous success and presents them with a powerful alternative way to monetize their movies and IP. I was especially impressed by the volume of content they are preparing for the coming years and their plans to expand the Star brand internationally and incorporating the Fox content into Disney+. As for Netflix, I’m ever so slightly less bullish on their prospects for strong growth going forward, which is why I trimmed my position some this year. I just worry about how much more they can expand internationally and how much more they can raise prices. I still think they can be a market beater going forward, which is why I still own shares, but I just don’t feel like they will be beating the market as much as they have in the past.

Square will add $20 to its share price

The Prediction: Square (SQ) goes from $62.56 to $82.56.

Win: This one wasn’t even close. Square went crazy in 2020 and ended up adding $170 to its share price… or 8.5x more than I predicted.

It’s pretty incredible to see a company which is probably best known for its terminals utilized by small and mid-sized food establishments do well during a pandemic which has hit those businesses hard. It makes sense, though, once you realize that Square also has a strong play in the digital wallet space with its Cash App. I remain bullish on the company going forward, but the stock has obviously run up a lot and there’s a lot of optimism baked in at this price so I’m clearly not seeing a repeat of this performance in 2021 and wouldn’t even be surprised if it underperformed the market for a stretch while the business fundamentals catch up to the valuation.

Redfin will add $20 to its share price

The Prediction: Redfin (RDFN) goes from $21.14 to $41.14.

Win: Another one that wasn’t that close. Redfin added $60 to its share price in 2020, or 3x my original prediction. That 270% gain is almost as good as Square’s 280% gain for the year.

Again, a company whose mission is to “Redefine real estate in the consumer’s favor” might not seem like an obvious beneficiary lockdowns put in place in reaction to a global pandemic, but it’s not too hard to see why Redfin was a big winner once you look a little deeper. Real estate is being disrupted, and the old model and incumbents are facing serious challenges from new competition that can offer things like lower commissions, virtual tours, instant offers, concierge service, and much more. Between OpenDoor and Zillow, there’s a lot of competition in this space, but I still think Redfin is the most complete challenger and should continue to benefit from low mortgage rates and the migration of people out of cities and into the suburbs as remote work gets more common.

Bonus Prediction #1: Bitcoin to $20k

The Prediction: Bitcoin will hit $20k (duh).

Win: After crashing with the rest of the market in March of this year (so much for a store of value that is uncorrelated with equities), bitcoin had a slow but steady march upward for the rest of the year. It hit the $20k threshold with plenty of time to spare on December 16th and currently stands at a little over $23k.

It’s hard to say anything too intelligent about where something as speculative as bitcoin might go in the future. What I can say is that between historically low interest rates and increases in the monetary supply, it has been fairly unprecedented times for the Federal Reserve, the US economy, and the dollar. I worry a lot about inflation and the future of the US dollar as a reserve currency, and as a result I see a lot of potential in bitcoin. It might never get to a place where it can serve as a currency, but at this point I don’t believe it has to in order to provide a decent return. Bitcoin can still absolutely go to zero, but I also think the sky is the limit as well.

Bonus Prediction #2: Somebody will buy Nintendo

The Prediction: That Nintendo would get acquired by another company in 2020.

Loss: You can’t win ’em all. With the upcoming console cycle refresh and the big emphasis put on gaming by a lot of the tech giants (Alphabet, Amazon, Apple, Microsoft, etc), I thought there could be a ton of interest in acquiring Nintendo and their unmatched gaming IP. I don’t think it would be a stretch to say that any of those above companies that managed to acquire Nintendo would instantly become a gaming powerhouse and potential leader in the space. It didn’t happen in 2020, but I still think there is a chance this gets done in the coming years.

2021 Predictions

Shopify will become 1/8th the size of Amazon

If you’ve been following this blog at all this year (or even just read the results above), you should have a pretty good sense of what a ridiculously good year this has been for the holdings in the Freedom Portfolio and even the market in general. As a result, I’m a little gun-shy predicting any big absolute gains in 2021 and am more keen on making some predictions on relative gains (ie, one company vs another).

For all the crazy run-up that Shopify has had over the past 2 years, it’s still “only” around a $145 billion market cap, which is around 9% the size of Amazon. Shopify is fond of casting themselves as “arming the rebels” against the “Empire” that is Amazon.

Amazon has lots of other business lines (AWS and advertising in particular) that help set it apart from companies like Shopify, but I do believe 2020 showed that ecommerce is too big for Amazon alone to own. I suspect Shopify continues to aggressively take ecommerce market share away from Amazon and grows to become 1/8th the size of Amazon. Assuming no growth in Amazon at all in 2021, that would equate to a roughly 40% gain for Shopify in the coming year. Obviously, if Amazon grows at all, that’s even more growth required out of Shopify.

Etsy will grow to 3% the size of Amazon

This is piggy backing on the same concept above. Again, understanding that Amazon goes well beyond just ecommerce, I was still shocked to discover just how much smaller than Amazon Etsy was. Etsy is currently 1.5% the size of Amazon. Put another way, Amazon is over 60 times larger. As mentioned before, I think 2020 is the year we find out that ecommerce is larger than a single company, and I believe Etsy is one of the big beneficiaries. Etsy getting to be 3% the size of Amazon sounds reasonable, but it would mean the stock doubles in 2021 (assuming Amazon stays flat). I look forward to seeing if that can happen.

Mercado Libre plus Sea Limited market caps combined to $300 billion

The ecommerce trend continues. I still believe we are in the early innings of the transition to ecommerce and I believe that is especially true for some of the more developing markets in Latin America and Southeast Asia. Both markets have large populations with growing middle classes where internet access is also growing. Bonus? Both companies are also moving strongly into digital wallets and other business lines.

Right now, the market cap of both companies combined is around $187 billion. I believe the combined market caps of both companies can reach $300 billion in 2021, which would be an average of a 60% gain. That’s a pretty strong gain for a year, but it also pales in comparison to the nearly 400% and 200% gains respectively that Sea Limited and Mercado Libre for 2020. Regardless of where they end up in 2021, I believe the future is bright for both companies.

Either Fiverr or Redfin will double

Redfin and Fiverr are companies that both had a particularly ridiculous 2020. Redfin has more than tripled and Fiverr is up over 9 times. At the same time, both companies still seem very small to me compared to their total addressable markets. I believe both companies are capable of doubling in 2021, but for the purposes of this particular bold prediction, I am just predicting that one of them will double. Both companies currently have market caps of under $8 billion, so even after potentially doubling they would still be a fairly reasonable size.

Somebody will acquire Teladoc

Teladoc is certainly no stranger to acquisitions to fuel its growth, most recently with their acquisition of Livongo. And yet despite all of that growth, Teladoc is still a dub $30 billion company. At the same time, there are a bunch of deep-pocketed technology companies like Amazon and Apple that have indicated a desire to get into the healthcare space. Both companies could easily afford to get a huge head start by acquiring Teladoc. There are also companies in the healthcare space which would love to get a boost in telehealth.

I think the odds are probably against Teladoc getting acquired, but as a bold prediction, I think it fits pretty well.

What do you all think? Do you like my picks, or did I completely miss the mark? Do you have any bold predictions of your own? Let me know in the comments!

Disney no longer content to play second fiddle to Netflix in streaming

December 11, 2020 paul.essen Comments 0 Comment

I sometimes get people asking me why I have Disney (DIS) in a portfolio which is otherwise filled with a bunch of “growth” companies. I can understand being confused, as compared to other companies in the Freedom Portfolio like Shopify (SHOP), Tesla (TSLA), and Square (SQ), Disney hasn’t quite had the same growth over the past couple of years. Apparently TV networks, movie production, and theme parks isn’t quite as flashy as electric vehicles and leading an ecommerce revolution against Amazon (AMZN).

One of the main reasons I was a big believer in Disney was because I felt they had untapped potential to really leverage their amazing IP if and when they decided to get into the streaming game. There was a stretch a year or two ago where Netflix (NFLX) and Disney were neck and neck in terms of market capitalization, and as much as I loved Netflix, I thought that was pretty incredible considering Netflix was solely online streaming and didn’t have the other business lines like ESPN and ABC and theme parks and everything else that Disney could lean on.

Disney had their investor day yesterday and made it very clear that they are committed to streaming in a huge way and not at all content to concede first place to Netflix (including some seemingly targeted remarks and quality over quantity and carefully curated content). They announced a mind-boggling amount of new content, including 10 new Marvel series, 10 new Star Wars series, and 15 new Disney Animation / Pixar series. They also spent a fair bit of time emphasizing their overseas ambitions with their Star branding and how that will appeal to markets like India and Latin America.

Previously, it seemed like everybody was taking for granted that Netflix would be the clear #1 streaming service in the world for the foreseeable future. That narrative might be starting to change. Back in 2019, Disney was projecting 60 million to 90 million global subscribers by 2024. Yesterday, they upped that projection to 230 million to 260 million. That is incredible.

The market seems to be appreciating what a focused Disney is capable of today, with the stock up nearly 14% as of this writing. That’s a pretty hefty move for a relatively stable stock like Disney, but I think it is warranted. If Netflix is worth a $220 billion valuation for being a leading international streaming service, then Disney certainly deserves significantly more than that considering its superior intellectual property and other business lines.

Long Disney. This is a stock I would love to ultimately gift to my kids when they are old enough to start investing themselves.

The JIB is down to one

December 7, 2020 paul.essen Comments 0 Comment

A little over two years ago, I wrote about three Chinese companies that I was very bullish on. At the time, talk of FANG stocks and BAT stocks were all the rage, so I cheekily dubbed my three companies “the JIB”. Here are how those baskets of stocks have performed since I wrote that article (numbers from December 3rd):

The JIB (up an average of 110%)

JD.com (JD): Up 292%
Baozun (BZUN): Up 22%
iQiyi (IQ): Up 17%

FAANG (up an average of 98%)

Facebook (FB): Up 99%
Apple (AAPL): Up 152%
Amazon (AMZN): Up 95%
Netflix (NFLX): Up 69%
Alphabet (GOOG): Up 76%

BAT (up an average of 64%)

Alibaba (BABA): Up 87%
Baidu (BIDU): Down 20%
Tencent (TCEHY): Up 127%

Not too bad, if I can be permitted to toot my own horn for a moment. I did end up selling my position in iQiyi earlier in the year, though, so my own personal return on the JIB is slightly different than what is laid out above. Still, I’m fairly proud of how the JIB has managed to hold up against the much more highly touted FANG and BAT stocks.

But as you may have noticed, the gains for the JIB were a bit uneven, with both Baozun and iQiyi returning less than 25% while JD.com did the heavy lifting with a nearly 300% return. As mentioned before, I sold iQiyi earlier in the year when it looked like their competition was getting to them and I think it has become time to say goodbye to Baozun as well. The hope with Baozun was that it could be the “Shopify of China” and benefit from riding the same trends that Shopify has. For whatever reason (trade war, bad execution, etc) that just hasn’t quite come to pass. Growth has been okay, but nothing near what other ecommerce companies have seen during COVID, and recently I’ve found myself wanting more and more to redeploy those funds into a new idea.

That new idea is Fiverr (FVRR), and I now have a new Millennium Falcon level position in it. I’ve used the service in the past to find an artist to illustrate my book, Penny Invests, and was pretty impressed by the wide variety of services provided. I believe they are well positioned to ride the trend of entrepreneurship, the gig economy, remote work, and people looking for side hustles.

A few other tiny shifts to the portfolio to report (none of these changes affect what size of a position they are):

Sold a small bit of Tesla (TSLA) – I’m still a huge believer in the company, but the valuation is getting a little ridiculous even for me and even with the addition to the S&P coming up, I feel like this stock has a lot of optimism baked in already. I wanted to take a tiny bit off the table to bolster a few other positions, such as:
Buying a bit more of Zoom (ZM) – Zoom has nearly doubled since I originally bought it earlier in the year, but it is also down almost 30% from recent highs from a few months ago. I’m beginning to see the optionality still ahead of Zoom even after the pandemic is over and the recent pullback seems like a bit of an overreaction to vaccine news. I think Zoom survives just find in a post-pandemic world and still has room to thrive and flourish.
Buying a bit more of Crowdstrike (CRWD) – Crowdstrike recently had a pretty impressive earnings report and it reminded me that I wanted to add a little bit more to my position. Sometimes it is as simple as that.
Buying a bit more of Nano-X (NNOX) – Nano-X recently did a live virtual demonstration of their technology and while I didn’t quite think it was the same slam dunk as many did, I was suitably impressed and think the chances of it being an outright fraud are lower than before. It felt like a safe time to add a bit to my position.

Netflix: A company in transition

October 27, 2020 paul.essen Comments 0 Comment

Netflix (NFLX) released their 2020 Q3 earnings last week. Here are some of the high level numbers:

Revenue of $6.44B (up 22.7% year over year)
Net subscriber additions of 2.2 million vs. forecast of 2.5 million
Q4 guidance of 201.15 million global streaming paid memberships (an increase of 20.4% year over year)

The market apparently wasn’t very impressed by the miss on subscriber additions, as the stock is down around 8% since earnings came out. I honestly thought it was a pretty solid quarter, considering they had warned us about all of the subscribers that had ben pulled forward due to Coronavirus. Taken as a whole, this year has been a pretty stellar one for subscriber growth. However, I do believe this most recent quarter might be showing us that Netflix is a company in transition.

Previously, when I was judging how Netflix was performing as a company, it was almost solely on their ability to grow and gain new subscribers. A common criticism of the company was that it was spending too much money but I was willing to excuse that as long as the subscriber count kept growing at a brisk pace, and it did. And while subscriber growth was still pretty great this year thanks to international markets and the pandemic, I believe we’re starting to see signs that the days of stellar growth are beginning to come to an end.

Netflix breaks their numbers down by 4 regions. Here is the subscriber growth over the past 4 quarters by region:

UCAN (United States and Canada) – Up 8% y/y
EMEA (Europe, Middle-East and Africa) – Up 31% y/y
LATAM (Latin America) – Up 24% y/y
APAC (Asia-Pacific) – Up 62% y/y

As you can see, subscriber growth in its most mature markets (United States and Canada) was pretty slow. And while growth in the EMEA and LATAM regions was strong, the real superstar was APAC. In fact, the APAC region was responsible for 45% of new subs in the most recent quarter. With the United States pretty much saturated and Europe/Africa/Latin America unlikely to see growth acceleration, it is looking like the Asia-Pacific region is going to be relied on for much of Netflix’s future growth. With 60% of the world’s population, that doesn’t seem like a terrible place to be.

However, I do wonder if the Asian market might be the toughest fight for Netflix yet. They don’t have the streaming video market to itself anymore, and the competition is either already established or charging hard. China has a number of incumbents like former Freedom Portfolio holding iQiyi (IQ) and Netflix has never been able to really make inroads there. India is promising, but Disney (DIS) already has somewhat of a head start by virtue of their ownership of Hotstar and its 300 million active users. Netflix has had to introduce cheaper, mobile-only plans in India in order to gain traction there, which is part of the reason why their average revenue per user (ARPU) is lower in Asia than it is in other markets.

That brings up another concern: pricing power. For awhile, Netflix enjoyed tremendous pricing power as the only game in town and many people talked about how much of a deal it was (especially compared to traditional cable bundles). That’s no longer the case. Cable cutting is accelerating, which lessens the impact of that comparison. Netflix has started to lose some of its most popular programming like The Office and Friends. Disney has launched their competing offering at a much lower price point to gin up interest. There are even fairly compelling free competitors like Peacock. It’s hard to envision Netflix being able to significantly raise its prices anytime in the near future in the face of such competition.

It’s absolutely not all doom and gloom, however. As I mentioned earlier, Netflix is a company in transition. So if it is transitioning away from growth, what is it transitioning to?

Positive free cash flow!

Partially due to production of new content being shut down, the company has actually reported three consecutive quarters of not just positive free cash flow, but increasing positive free cash flow. Netflix is beginning to show its critics who were concerned over its spending and debt that it can make money once it decides to slow down on spending. And with over $8 billion in cash on the balance sheet, they don’t even expect to have to raise any capital this year.

I don’t expect the increasing free cash flow to continue as production that has been shut down due to Coronavirus starts back up, but it is encouraging to see what Netflix’s second act might look like once it has fully transitioned away from subscriber growth at all costs.

All of that is a long-winded way of saying… I’m trimming my Netflix position some, and using the proceeds to add to my Etsy (ETSY) and Crowdstrike (CRWD) positions. I still think Netflix is a wonderful company with a lot of growth ahead of it, and I am still holding the majority of my shares (keeping it at a Serenity level position), but I just think its growth prospects have dimmed a tiny bit.

I haven’t really done much with P.A.U.L. scores lately, but I thought it was worth revisiting what I wrote about Netflix when I scored it back in October of 2018. Back then I gave them a 4 for “Long Runway”, which I would probably bump down to a 3 now, but the biggest drop might be the “Alternatives” score of 5 that I had previously given them. Netflix started off as a DVD by mail company which then disrupted itself by transitioning to online streaming and finally reinventing themselves again by moving from licensing content to developing their own. Now that they are in the midst of conquering international markets… what is their next step? Previously, I was confident there would be one. Now, I am not so sure. There might not be a next chapter for Netflix, and founder and CEO Reed Hastings stepping back somewhat into a co-CEO role with Ted Sarandos might be a symbolic way of showing that the company has reached maturity.

Netflix is probably the company that I have the longest history with, having originally bought shares all the way back in 2004. And every time in the past that I have sold my shares of Netflix, I have regretted it. As I’ve mentioned more times than I can remember, the initial bunch of shares that I bought almost two decades ago would have been worth roughly $2 million now if I had just held onto them. That’s an eye opening lesson. It’s not just shares bought a long time ago either. Most recently, I sold some shares of Netflix last July at around $328 a share. All it has done in a little over a year since is go up 50%. I think there is a very, very good chance that I will end up regretting this sale as well. If that happens, it won’t be the worst thing in the world as I will still have the majority of my position.

I want to be very clear that even though I am trimming my position some, I still think Netflix has a ton of growth in front of it and I’m still a big believer in it being an outperformer over the next 5+ years. I’m just not quite convinced it has the same levels of upside that it did before. Time will tell.

The Freedom Portfolio – October 2020

October 5, 2020 paul.essen Comments 4 comments

It’s the two year anniversary of Paul vs the Market and the Freedom Portfolio. Like last year, I thought I would take this opportunity to replace my quarterly recap with a little bit of a longer look back where I go over the performance of the Freedom Portfolio since inception.

Last year, on the one year anniversary, I wrote:

“I just wish it could’ve coincided with a better performing quarter. The third quarter of 2019 was brutal, and saw the Freedom Portfolio essentially give back all of the gains from the 2nd quarter. The Freedom Portfolio was down 10.5% for the quarter, compared to the S&P being up around 1.7%. I’m still up versus the market year-to-date 22.9% to 20.5%, but am now back to losing to the market since inception (October of 2018) -4.1% to 3.9%.”
The Freedom Portfolio – October 2019

What a difference a year makes. And what a surprising difference this year has made.

2020 is shaping up to be the best investing year I’ve ever had. I would consider either of those to be amazing returns for a single year.

Quarterly Returns: The past two quarters alone, the Freedom Portfolio saw gains of 73% and 30% respectively compared with gains of 21% and 9% for the S&P 500. (+52 and +21 percentage points for the Freedom Portfolio)
2020 Returns: The Freedom Portfolio is up 115% year-to-date versus 5% for the S&P 500. (+110 percentage points)
Yearly Returns: Since the above quote (ie, October 2019 to October 2020) the Freedom Portfolio is up 146% versus 15% for the S&P 500. (+131 percentage points)
Returns since inception (October 2018): The Freedom Portfolio is up 143% to 20% (+123 percentage points), which is a compound annual growth rate (CAGR) of 55%

For the visual learners, here’s what those returns look like:

As you can see, the past few quarters have been simply amazing for the Freedom Portfolio, and what makes it doubly amazing is that this has happened with the backdrop of COVID-19 and the havoc it has wrought on the economy.

Because I know there are skeptics out there who think the stock market is akin to gambling or that investing in individual stocks is just like throwing darts at a dart board, I always try to be careful with my usage of terms like “luck” when I discuss my investing results. I have a lot of exposure to ecommerce companies in the Freedom Portfolio because I believe ecommerce is a trend that hasn’t played out yet and still has a long way to go, especially in international markets like Latin America and Southeast Asia. It was a conscious decision to be overweight in those types of companies. At the same time, I don’t mind at all admitting that I was fortunate that those ecommerce happened to benefit greatly from the lockdown measures enacted by governments to combat COVID-19.

It wasn’t just ecommerce. Teladoc (TDOC) and Livongo (LVGO) rode the telemedicine wave while Netflix (NFLX), Roku (ROKU), and Zoom (ZM) benefitted from people staying home and working from home respectively. Even companies like Square (SQ) and Redfin (RDFN), while initially seeming like they would be impacted by harm done to small businesses and the real estate market, seem to have rebounded with a vengeance because of their strength in digital payments and virtual home tours. About the only company in the Freedom Portfolio which was really slammed by COVID is Disney, and even they had Disney+ to help keep sentiment relatively positive during this time.

Here’s a look how each individual position performed over the past quarter and since the inception of the Freedom Portfolio two years ago.

Ticker	Quarterly Change	Change Since Inception
TSLA	99%	602%
SHOP	8%	516%
SE	44%	375%
LVGO	86%	359%
ZM	85%	218%
MELI	10%	215%
JD	29%	199%
RDFN	19%	169%
TDOC	15%	152%
TTD	28%	142%
NVCR	88%	111%
SQ	55%	62%
AMZN	14%	56%
FSLY	10%	59%
ROKU	62%	51%
CRWD	37%	39%
SWAV	60%	43%
NFLX	10%	33%
AAXN	-7%	21%
ETSY	10%	15%
DIS	12%	6%
BZUN	-15%	-34%
NNOX	10%	-45%

While Sea (SE), Livongo, and Zoom have been amazing performers over a relatively short period of time and that is awesome, I wanted to talk specifically about the two best winners in the Freedom Portfolio: Shopify (SHOP) and Tesla (TSLA), and how they drive home two important investing lessons for me:

Don’t be afraid to invest in a company which has already run up
Don’t be afraid to hold onto winners as long as your investing thesis still holds true

While the Freedom Portfolio officially started in October of 2018, I actually first bought shares of Shopify back in January of 2017 (the return since then is somewhere in the neighborhood of 2,200%). It’s been a spectacular investment for me, but it also very nearly didn’t happen. I have a very clear memory of thinking that I had missed the boat with Shopify back in 2017. The stock had already nearly doubled and I was wondering how much further it could go. I decided to take a chance with a relatively small position that in less than four years has turned into by far my largest position in the Freedom Portfolio.

I almost didn’t hold on long enough for that to happen either, though. A little over a year ago, I wrote about how I was taking a risk on Shopify because I was concerned over the huge run-up in stock price even though “the investing thesis is stronger than ever”. I ended up not selling, and it’s a good thing I did, because the stock has tripled since then. Tripled!

Lesson confirmed: Don’t be afraid to let your winners run.

Tesla taught a slightly different lesson. I first bought shares way back in 2015, with the total return since then around 680%. You might notice that isn’t too far off from the return since late 2018. That’s because the stock was basically flat for the first 4 years that I held onto it, and was even down from my initial purchase price as recently as mid-year 2019.

During that time, there was a ton of noise surrounding Tesla as a company and as a stock (some of it coming from the CEO himself). Plenty of very smart people were predicting the company would go bankrupt. There were a lot of very legitimate concerns about dilution and margins and valuation and missed deadlines. However, if you believed that electric vehicles were the future and that Tesla possessed a huge advantage over legacy automakers in terms of battery technology, self-driving software, and charging networks, then it was hard to ignore the progress that Tesla was making despite consistently missing deadlines, some erratic behavior from the CEO, and turnover in management. Finally, in late 2019 and early 2020, the market seemed to catch on that the legacy automakers were in real trouble and that it’s entirely possible that Tesla isn’t just some tiny upstart, but might be the future of automobiles (and more?).

The lesson? Sometimes it can take years for the stock price to catch up to how the business is performing. Don’t be impatient. If the company continues to execute and grow and the investment thesis remains intact, then eventually the market will catch on.

Now that that is out of the way, let’s get into some other notable performers for the Freedom Portfolio since inception.

Notable Performers

Best Performers

Sea Limited (SE): Much like with my Shopify story above, I wondered if I had missed the boat with Sea Limited when I first bought shares in 2019 because it had already tripled. At the time the market cap was around $15 billion, which seemed high for a video gaming company just starting to dip its toe into ecommerce and digital payments in a mix of countries where it was up against competitors backed by deep pockets such as Alibaba (BABA).

I’m so glad I did.

As mentioned earlier, COVID has obviously helped to accelerate ecommerce and digital payment adoption around the world, but Sea has also done an incredible job of executing across the myriad of countries that they operate in and have seemingly started to pull away from their competitors across the board. Their gaming business also continues to impress as it makes inroads into Latin America and India.

Sea is probably the company where my conviction in it has increased the most over the past quarter. Here’s a fun fact: Out of all the current holdings in the Freedom Portfolio, Sea is the company on which I have spent the most money buying shares as I have been adding to it on the way up over the past year or so. It has become a large enough position to where I probably won’t be adding to my position anymore going forward, but I am really looking forward to seeing how they execute in the coming quarters and years.

Livongo (LVGO): Livongo has been a wild ride. I hadn’t bought shares until early this year and yet in that short amount of time it has already returned roughly 360%. I was so thrilled to see how this company was growing and riding the wave of remote healthcare.

Then the announced merger with Teladoc happened.

Initially, I was crushed, and not just because both stocks dropped on the news. It seemed like such a bad fit and I couldn’t understand why Livongo was getting acquired at such a low premium. It stung all the more since it happened right as they announced an incredible quarter that I expected to cause the stock to pop even more.

Now that I’ve had more time to digest the news, I’m warming up to the merger, though, and can understand why it was done and how the companies complement each other. In fact, I’m starting to get excited about the prospect of the newly merged company being a true powerhouse in the future of remote healthcare.

I’m holding off on making any decisions in terms of buying or selling shares of either company until the merger goes through and we get some insight into how the newly combined entity is performing, but I am cautiously optimistic.

Worst Performers

Nano-X (NNOX): This comes with a major astericks considering that just two days after the close of the third quarter, Nano-X surged more than 50% on news that it was going to offer a live demonstration of its Nanox.ARC System later in the year. Now that I have sold Jumia (JMIA) and Kushco (KSHB), Nano-X is easily my most speculative investment.

The Muddy Waters short report on Nano-X is concerning to me, since they have a pretty good track record in sniffing out problems with companies. At this point, I think I will just be sitting on my position (neither buy or selling) until we get any news on FDA approval. Hopefully this works out, but if it doesn’t, the position is small enough that I am comfortable with the idea of the stock going to zero.

Baozun (BZUN): Baozun has been a baffling investment for me. It has been a perennial under-performer in the Freedom Portfolio. Not only is it down 17% since inception, but it is down even more compared to the S&P 500 during that same time period. The US/China trade war has undoubtedly been a problem, but the company has also been in the midst of transitioning to higher margin products and away from a more capital intensive distribution model. Despite all of this, the company continues to grow.

To be honest, my conviction in the company is starting to waver. However, I don’t want to make any hasty decisions (see my comments about being patient with Tesla above), and the growth story is still intact. I plan on holding on for a few more quarters to see how the transitions play out and to see if US/China tensions ease. But if an exciting new opportunity comes along, Baozun might be one of the first companies that I consider selling.

Disney (DIS): It’s no surprise why Disney has struggled over the past year or so. Despite it being a very diversified company, almost every single major revenue generator for the company has been completely shut down by COVID-19. Obviously theme parks and cruises have been hugely impacted. Their movie business has also been put on hold as theaters are largely shut down and the Mulan experiment in releasing their blockbusters straight to digital has seemingly flopped. Even ESPN has been affected by the postponement and cancellation of sports. About the only positive for Disney during this time has been Disney+, their streaming service, and that doesn’t generate nearly as much revenue as their other business lines. And all of this happens right after Disney took on a lot of debt in order to purchase a lot of Fox assets. Frankly, I’m a little surprised Disney isn’t down even more.

I’m still a big believer in Disney. I believe their theme park and movie businesses will rebound. I believe they have a ton of growth left in Disney+ and a huge international opportunity in front of them. Yes, they might not have the same amount of upside as many of the other companies in the Freedom Portfolio, but there’s nothing wrong with the occasional slower and steadier grower.

Changes in the Portfolio

In the past, I had written about the buys and sells of the previous quarter in my quarterly recaps. With this quarter, I tried something new and decided to write up short posts soon after I made any changes to the Freedom Portfolio. As a result, there’s nothing additional to share here, so I will simply link to the posts that I wrote detailing my buys and sells during the quarter:

The Freedom Portfolio – October 2020

So here is where the Freedom Portfolio stands at two years. Need a reminder of what these terms mean? Check out: Defining my Terms.

A few notes before moving on to the full breakdown:

Teladoc and Livongo are on track to merge. While I have no reason to think the merger won’t go through, they are currently still separate companies, so I am treating them as such. If I treated them as a combined entity, they would be an Enterprise level position.
Since last quarter, Tesla has moved from an Enterprise level position to a Babylon 5 level position. That’s what tends to happen when a stock doubles in 3 months.
Likewise, MercadoLibre moved from a Babylon 5 level position to an Enterprise level position. It’s not MercadoLibre’s fault. It was up 10% for the quarter, which is a perfectly respectable gain. The rest of the portfolio just did a little better.
Baozun dropped from a Serenity level to Millenium Falcon level position. While this was mostly due to poor performance, it also perfectly mimics my lessening confidence in the company (as described above).
Lastly, Fastly (see what I did there?) moved from a Millenium Falcon level position to a Serenity level position, largely because I added to my position as I got more confident in the business.

With all that being said, here is the Freedom Portfolio as of October 2020:

Ticker	Company Name	Allocation
TSLA	Tesla	Babylon 5
SHOP	Shopify	Babylon 5
AMZN	Amazon	Enterprise
SE	Sea Limited	Enterprise
MELI	MercadoLibre	Enterprise
LVGO	Livongo Health	Serenity
JD	JD.com	Serenity
RDFN	Redfin	Serenity
TDOC	Teladoc	Serenity
TTD	The Trade Desk	Serenity
NVCR	NovoCure	Serenity
SQ	Square	Serenity
FSLY	Fastly	Serenity
ROKU	Roku	Serenity
NFLX	Netflix	Serenity
DIS	Walt Disney	Serenity
ZM	Zoom Video	Millennium Falcon
CRWD	CrowdStrike	Millennium Falcon
SWAV	Shockwave Medical	Millennium Falcon
AAXN	Axon Enterprises	Millennium Falcon
ETSY	Etsy	Millennium Falcon
BZUN	Baozun	Millennium Falcon
NNOX	Nano-X	Millennium Falcon

That’s the two year recap of the Freedom Portfolio! While 2020 hasn’t been the greatest year in many ways, it has at least been a pretty great run for the Freedom Portfolio. More than ever, I am excited to see what the future holds for the companies I have invested in. Thanks, as always, for following me on my journey to beat the market.