Latest Positions: The Cloud Revolution Stocks

Here is a Part 2 of 5 of the list my latest personal portfolio positions and most of the hedge fund positions with updated commentary and ratings for each position, including a couple Trade Alerts.

Well, that was another rather amazing day at the markets, with Tesla and Virgin Galactic leading the way higher. I am getting increasingly cautious but not outright bearish. Feet-to-fire, I’d expect the markets are near the top of a trading range here, but again, we aren’t trying to make big money by gaming the stock market’s short-term moves.

The ratings for each stock go from 1 to 10, 1 being “Get out of this position now!” and 10 being “Sell the farm, I’ve found a perfect investment.” The positions that are bolded are those that I consider to be “core” holdings and am unlikely to ever sell out of them entirely.

Longs –

• (Cloud Revolution)
  • ZM Zoom (7) – I added Zoom after the coronavirus crisis started hitting and the lockdown and self-isolation started happening, but to be sure, I’d looked at Zoom before and wanted to buy it, but just couldn’t get my arms around its valuations at the time. And another reason I didn’t own it before the Coronavirus Crisis hit is that I was worried that Zoom is in some sense just sort of like Skype 2.0 or something. I had a hard time getting my head wrapped around the competitive advantages of being a video streaming platform, but Zoom has spent the money, built the technology, built the platform that other than these other competitors just can’t compete with. So now it looks pretty clear to me that Zoom has become the de facto standard, and that’ sone of the reasons we bought it. Every office, every university, every school, if they’re working at all, are doing it virtually. If it’s not a retail outlet or a grocery store, but just something where people have to interact face-to-face such as with attorneys, conference meetings, etc — we’re going virtual, and so Zoom is probably the best pure play on that. The valuation’s insane though. It’s way too high. That said, since the company’s user base just went from 10 million a month to 200 million a month, whatever we thought its valuation used to be is no longer the case since the analysts’ future earnings estimates are probably way too low.  And even the coronavirus crisis subsides, there’s going to be a lot more videoconferencing done. We’re all going to get more accustomed to this. We’re going to be doing a lot more interactions over these videoconferences. I’m not sure Zoom will pull back if the quarterly report and guidance are as strong as they might be with the kind of user growth this company has just seen and if analysts then have to go re-paradigm their Zoom growth model and I am holding this newly built-up core position steady for now.
  • WORK Slack (7) – Slack… It’s pretty clear that everybody’s using Zoom, but it’s less clear if everybody’s using Slack. That said, the user growth here has been explosive too. And like with Zoom, I think Slack as a collaboration platform is becoming the de facto standard. I don’t think Microsoft Teams, the Microsoft competitor to Slack, is going to be able to knock Slack out long term, because I, for one, am never going to get on Microsoft platform by choice, and I don’t think most people will. I think the collaborative platform needs to be more agnostic to whatever the underlying technology is and Slack has focused on its open ecosystem from its start. Microsoft certainly has built their apps like their Slack competitor to be as platform-agnostic as they can be, but it’s still Microsoft and they can’t ever stop trying to lock people in and sequester their services. So I think Slack is a good company long term. Its valuation, now that it’s gotten that close to $30 is also very high. These stocks can drop 30, 40, 50% and they’re still pretty fairly valued, so it’s not like we can go hey, this is a no brainer. That said, both Slack and Zoom can grow revenues and gross margins in coming quarters and as they start to monetize all their new customers, the analysts will likely have to raise their models of the future. I’d buy more Slack below $20 but other than that I plan on sitting tight with my existing position.
  • DOCU Docusign (8) – What I like best about Docusign more than our other Coronavirus Crisis Cloud stocks is that the company has built itself around this one idea of making digital document signings easier, which is something that requires both parties to trust the platform. And because Docusign is so widely accepted as a standard already, it’s already hit a critical mass of trust in the world. And whenever somebody sends a pre-filled out form to “Docusign” (it’s already truly a verb that means exactly what the word sounds like — signing a document) that person is then added to the Docusign community so the user base grows even more accepted in a virtuous cycle. Valuation here, like with Zoom and Slack, is very high if you use pre-Coronavirus Crisis user base estimates. But those numbers might not be meaningful if there is a sudden bump in the exponential growth of the use of digital signatures now that we’re going to be more accustomed to use them. So I like Docusign here, and I haven’t made it as large of a position as I’d like so I might look to buy more of this one soon.
  • SQ Square (7) – The Square Cashapp has hit critical mass. I think it’s displacing Venmo as Venmo is like Zoom in the mobile payment app business and Square is like Zoom.  I tell people these days that if you want to just figure out how to buy bitcoin as quickly and easy as possible, just go use the Square Cash app and then you can figure out the rest of where you’re going to store it and all this stuff later. Square Cash app is the real deal. Square has clearly done a great deal of establishing themselves as one of the de facto standard point of self-checkout technologies, platforms. That being said, how many small businesses are closed right now? How many coffee shops that use the Square point of sale solution that Square gets a cut off every time you buy coffee at that shop? That business has clearly disappeared as the Covid-19 lockdown has shuttered all those small business customers of Square’s across the country.

    So Square’s estimates for this year are off the table. Revenues, whatever the growth they thought it was going to be, are not going to be there. Their revenue could be flat. It could be down depending on how long the small businesses around the world are shut down. And so it’s tough to get a sense of the company’s valuation for now because of that. If you look at Square on a valuation basis over the next year or maybe even 2021, it looks pretty expensive. If you look out three or five years and you assume that the world gets back to normalish, then Square is cheap right here. If the Cash App can keep growing and actually benefit from the Coronavirus Crisis trends then that would obviously make the valuation compelling here. Your risk-reward analysis has shifted though, because it used to be you were betting on Square beating the competitio, having a better platform, easier technology, critical mass. Now you’re betting on an economic outcome that is not guaranteed. This stock has been wildly volatile, even moreso than the broader market with its swings up and and down in 2020. This is another one that I was nibbling back when the market was bottoming on March 18 and its up more than 50% off those lows. I’d rather trim it than chase it here but I am holding a core position steady.

  • NVDA Nvidia (7) – Oh I struggle with Nvidia. The company’s technological dominance in most of its core industries makes it a continued must-own for a Revolutionary Investor. Nvidia’s data center revenue jumps 43 percent to nearly a billion dollars when it reported its latest quarterly report in February, right before the world shut down for Covid-19, and obviously spending on data centers will continue to grow as a result of people using ever more video conferencing, social networking, TV streaming, etc no matter what the post-Coronavirus Crisis world looks like. That said, Nvidia’s got a lot of economic-cycle exposure as most chip companies do and that keeps me from getting too excited about it right now, obviously. I’d nibbled some Nvidia on March 9, and I’ve trimmed it back down again now on this bounce.
  • TSM Taiwan Semiconductor (8) – Either Taiwan in completely under-reporting their official Covid-19 cases, or the country has remarkably remained relatively free of the virus. Likewise, Taiwan Semiconductor appears to be running its factories and even reported that March revenues totaled $3.78 billion, marking a 43% rise from a year ago and a 22% increase from February. This under-reported fact is perhaps one of the biggest reasons behind the big bounce off the bottom in the chip stocks, many of which are TSM customers. I’m just holding this core holding steady for now.

Here’s a screenshot from a video my daughter Lyncoln (who’s a Jedi padawan) and I made to keep you grounded. I told her what Yoda taught me, “In a dark place we find ourselves, and a little more knowledge lights our way.”