Portfolio2021-03-07T21:00:35+00:00

Portfolio

Next Gen Cloud

Aims to get significant exposure to the excessive growth of cloud computing, edge computing, business cloud, database systems, and cloud analytics tools provided through SAAS, IAAS, and PAAS models. This portfolio represents a section of the equity portion of my investment portfolio.

Investment Focus

Cloud Security

Edge Computing

Business Cloud

Database Systems

Cloud Security

Outline

# of Holdings: 15-20
Inception: Feb. 2019
Focus: Cloud Computing
Rebalancing: Quarterly
Type: Actively managed – Equity

Overview

This portfolio aimed to get significant exposure to the excessive growth of cloud computing, SAAS, IAAS, and PAAS has seen over the past two years and to exploit the vast potential for growth over the coming five years. I aim to include only the stocks that I see as having the highest potential for exponential gains over the coming half a decade, focusing on beating the returns of the Nasdaq 100 and SKYY (First Trust ISE Cloud Computing Index Fund).

The portfolio’s initial goal was to grow its value of $20,000 (Feb 2019) to $100,000 over seven years (CAGR – 25.85%). However, given COVID 19 and the explosion in adopting the cloud, the new target is $150,000 by 2025 (CAGR – 33.35%).

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Performance

View a summary of the portfolio’s holdings further down this page and a detailed breakdown of each company using the button below

explore portfolio holdings

Note: Due to the extreme concentration of technology stocks within this portfolio, the portfolio is likely to experience sever volatility over the short term. This portfolio has an outlook of at least 4 years, this is not a diverse or risk limited portfolio and as such should not be followed in any capacity.

Note: The above chart is indexed from the- 14th February 2019. Although the portfolio was first created on this date a significant portion of the portfolio was held in long market (Nasdaq 100) positions until late 2019. 2019 results are not represent vie of the historic performance of the current positions prior to January 2020.

Current Holdings

The table below represents the portfolio as of 20th February 2021. The table is updated at least once per month to account for rebalancing of the portfolio. Any new additions or removals from the portfolio will be documented in articles linked above and will include any relevant research to support the decision.

Update: With market conditions within the high growth tech sector highly volatile I have trimmed positions in a number of stocks including Fastly, Cloudflare, Twilio and Five9. I intend to add back these shares once market risks from rapidly increasing debt yields and a the risk off sentiment towards potential bubbles within growth tech subside.

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Ticker Company Dated Added Holding Average Price Cost Basis Last Price Market Value Unrealised Profit
FSLY Fastly Inc. 07/05/2020 85 $32.88
NET Cloudflare Inc. 18/03/2020 100 $24.60
ZS Zscaler Inc. 16/09/2019 35 $47.72
SPT Sprout Social Inc. 11/06/2020 90 $27.08
CRWD CrowdStrike Holdings Inc. 03/10/2019 30 $75.95
HUBS HubSpot Inc. 14/02/2019 10 $166.18
TWLO Twilio Inc. 14/02/2019 10 $109.46
MDB MongoDB Inc. 06/06/2019 10 $142.53
FIVN Five9 Inc. 14/02/2019 18 $53.55
DDOG Datadog Inc. 03/10/2019 30 $40.53
ESTC Elastic N.V. 27/08/2019 18 $75.91
NOW ServiceNow Inc. 14/02/2019 5 $235.33
PD PagerDuty Inc. 07/05/2020 50 $23.39
COR CoreSite Realty Corporation 14/02/2019 10 $100.93
NCNO Ncino Inc. 15/01/2021 12 $73.26
SVMK SVMK Inc. 09/04/2020 35 $13.33

IEX Cloud, prices updated live during market hours

Note: The above table represents a fixed point in time, the charts above represent the portfolio in its full form. The table above is only updates once there has been a significant change in the portfolio.

Key Considerations

Although not following a set of in stone rules, the portfolio still follows some guidelines and general principles to help maintain high-quality growth stock with strong fundaments for the coming years. Below are several key indicators used to determine the attractiveness of the cloud stocks within the portfolio.

Pure Cloud Plays

All the companies included in my portfolio could be classed as pure cloud plays (companies whos revenue is almost all derived from offering a service or product related to the cloud). This is a reasonably clear rule. The portfolio aims to provide my investment portfolio with next-gen cloud names. This rule aims to rule out investing in firms such as Amazon, whose revenue, although primarily cloud-based, has significant exposure to other markets, in Amazon’s case, consumer goods.

Large Total Addressable Markets (TAMs)

Clearly, a company with a large TAM (the total market demand for a product or service) benefits more potential clients. Cloud has seen its TAM explode over the past ten years as adoption ramps up; this fast-growing TAM provides companies in the industry tremendous potential revenue growth. When selecting companies for the portfolio, I put significant weight on both the TAM size and the rate at which it’s growing. Growing your product or service into a market with a continuous stream of new potential clients proves significantly easier than expanding in a market where there is little growth where most potential clients are already using your product or that of a competitor. Cloudflare estimates its TAM will grow from $32 billion in 2018 to $47 billion in 2022, a CAGR of ~10% compere this to US retail, where these been a CAGR in TAM (Total US retail sales) of only 3% over the last eight years (excluding 2020). To be included in the portfolio, companies must have both a large TAM fast-growing TAM and a product that can capture a significant portion of the market going forward.

PEG Ratio

The price/earnings to growth ratio (PEG) is a companies price/earnings ratio divided by its earnings growth. A PEG ratio of less than one is generally considered to demonstrate good growth value and is the biases for the growth at a reasonable price (GARP) investment strategy. While many of the portfolio firms continue to have negative earnings making the resulting PEG ratio unusable, monitoring PEG ratios going forwards as profitability is achieved is critical. PEG ratios highlight companies where growth may have become highly-priced and reduce the position or where the opposite is true and increase the position.

P/S ratio

The price/sales (p/s ratio) indicates the value that markets have placed on each dollar of revenue generated. Generally, a low p/s ratio would indicate that a company could be undervalued, while a high p/s ratio would imply the opposite. What is considered a high or low p/s ratio is unique to the industry the company operates. While p/s ratios in the autos sector generally range between 0.5x and 1.0x, the semiconductor industry sees much higher p/s ratios of between 10x and 20x. While p/s is a robust measure of valuation, it needs to be considered with debt in mind. A company with high debt on the verge of bankruptcy could have seen a drop in its p/s ratio (caused by a drop in the market value of shares while revenue is little affected by the high debt), making it appear a more attractive investment than it truly is. As with all these measures discussed, they all must be considered in conjunction with one another and not in a vacuum.

Gross Profit

Gross profit (GP), or the profit made after the deduction of the cost to produce the product from revenue, provides an insight into the profit potential of the underlying products or services. In the cloud sector, GP is often in excess of 70% due to the low cost of production, including low-cost server hosting and distribution channels compared to the price charged. The price charged way in excess of the cost of production reflects high research and development cost, marketing costs and the return on investment of the IP of the software or service provided. GP can highlight companies struggling to turn high revenue into a profitable service, and GP below 50% in the software industry is a cause for concern (depending on the service or product).

Net Dollar Retention Rate

Net dollar retention rate (NDRR) is the percent of revenue you retained from the prior year after accounting for upgrades, downgrades, and churn (the rate at which customers cancel their recurring revenue subscriptions). My general guide to NDRR is that below 100% is poor. The company’s customers are choosing downgrades and cancelling subscriptions over keeping the service or upgrading, if there is little evidence of acknowledging this issue and plan to improve NDRR, then this is a big red flag. Between 100% and 120% is okay; the firm sees some growth; if NDRR is in this range and trending up, it could signal a significant performance and revenue improvement. Over 120% the firm is experiencing significant growth, and current customer satisfaction will create lead generation for new business. NDRR is a key performance indicator for cloud companies and takes the forefront in decisions to add companies to my portfolio.

Real Estate Exposure

On a short end note, I have maintained atleast 5% of the portfolio for REITs related to the cloud these usually include datacenter owners and providers. Although often people think of the cloud as an online space with no real being, in reality the internet and its services are provided by a network of thousands of datacenters across the globe without witch the cloud would not exist. Exposure to this real estate network not only provides more diverse exposure to the cloud beyond software and hardware but also significantly reduces the risk profile of the portfolio with exposure to assets that provide a set income schedule.

Ticker Company Market Capitalisation Price/Sales Ratio Revenue Growth TTM Gross Profit Margin TTM Net Dollar Retention NDR Date
FSLY Fastly Inc. $5.77 17.24 34.80% 54.62% 143% Q4 2020
NET Cloudflare Inc. $36.42 74.15 51.30% 69.06% 119% Q4 2020
ZS Zscaler Inc. $32.13 53.19 59.60% 55.74% 122% Q4 2020
HUBS HubSpot Inc. $27.92 27.38 41.40% 74.17% 102.3% Q4 2020
SPT Sprout Social Inc. $4.98 33.84 33.70% 68.44% 110% Q4 2019
CRWD CrowdStrike Holdings Inc. $60.73 59.36 70.10% 64.54% 124% Q4 2020
NOW ServiceNow Inc. $115.34 24.63 30.00% 73.08% N/D
MDB MongoDB Inc. $23.3 33.76 39.40% 64.41% N/D
PD PagerDuty Inc. $3.47 14.75 27.70% 80.43% 119% Q3 2020
FIVN Five9 Inc. $12.29 22.82 45.00% 53.30% 107% Q3 2020
ESTC Elastic N.V. $13.64 21.36 43.70% 73.75% 130% Q4 2020
DDOG Datadog Inc. $34.3 50.24 51.30% 70.58% 130% Q4 2020
COR CoreSite Realty Corporation $5.7 8.95 7.00% 61.00% N/A
TWLO Twilio Inc. $68.78 31.70 61.70% 46.08% 139% Q4 2020
NCNO Ncino Inc. $6.3 28.34 39.50% 52.34% 147% Q4 2020
SVMK SVMK Inc. $3.14 7.94 15.90% 74.86% 100% Q4 2020

IEX Cloud, prices updated live during market hours

Risk

As with any investment portfolio, this Next-Gen Cloud portfolio comes with significant risk areas that jeopardise the attainment of the goal return stated above of 33.35%. Due to several key risk areas mentioned below, the short-term value change of my portfolio can be extremely volatile. I will aim over the coming months to discuss here some of the risk management techniques I have in place in my investment portfolio and how they are applied to equity positions listed above.

Below is the Sharpe Ratio for both the Next-Gen Cloud portfolio and its two main benchmarks. These figures, however, have been significantly skewed by abnormally large and continuous returns over 2020 after the initial drop in march due to the ongoing COVID-19 crisis.

QQQ  SKYY  Portfolio
Sharpe Ratio 1.55 1.55 2.69

Below are several key risk areas considered when building the portfolio. Going forward, I aim to document and discuss my techniques to manage some of these risks and mitigate losses arising from them.

Geographic

Currently, the portfolio only contains companies listed and whos HQ’s are within the united states. This produces significant geographic risks, including economic risks including high levels of unemployment, natural disaster risks and market risks, including significant market sell-off driven by events such as changes to tax policy or trade wars. Going forward, I aim to increase the portfolio’s exposure to foreign markets and aim to have at least 30% of the portfolio’s assets in foreign companies by the end of 2021.

Industry

The portfolio is only exposed to the technology sector and, more specifically, the cloud. The portfolio will see significant losses if the expansion of these industries does not meet expectations. Situations, where the industry performance will negatively affect the portfolio include but are not limited to weaker than expected take-up in cloud computing, a move away from cloud technologies to an alternative system, a reduction in customer business performance as the economy reopens from the COVID-19 pandemic, increases in equipment costs including server renting and server hardware (especially in the event of at capacity chip or flash memory production), and negative impacts on adoption caused by significant highly public security breaches (although not applicable to the security segment of the portfolio). Although this concentration into one industry causes significant risks to the portfolio (as seen in spring 2021), the portfolio does not make up all of my investment portfolios. This diversification issue is significantly reduced with alternative investments.

Cloud sector

Cloud companies face intense competition, both domestically and internationally, which may harm profit margins. Cloud companies may have limited product lines, markets, financial resources or personnel. The products of cloud companies may face rapid product obsolescence due to technological developments, and frequent new product introduction, unpredictable changes in growth rates and competition for the services of qualified personnel. Failure to introduce new products, develop and maintain a loyal customer base, or achieve general market acceptance for their products could have a material adverse effect on a company’s business. Companies in the cloud sector are heavily dependent on intellectual property, and the loss of patent, copyright and trademark protection may adversely affect these companies’ profitability.

Small Market Cap

With the portfolio focusing on medium to micro-market capitalisation firms, there is significantly higher exposure to highly volatile earnings and revenue (with some firms marking significant losses) compared to higher capitalised firms. These firms also have narrower product lines, fewer financial resources, less management depth and experience and less competitive strength. Share prices tend to be far more volatile, and their markets less liquid than firms with larger market capitalisations causing significant swings in share prices.

Market

The value of the portfolio’s assets will fluctuate with the markets the assets trade-in. The value of the portfolio’s positions may decline rapidly and unpredictably, simply because of economic changes or other events, such as inflation (or expectations for inflation), deflation (or expectations for deflation), interest rates, global demand for particular products or resources, market instability, debt crises and downgrades, embargoes, tariffs, sanctions and other trade barriers, regulatory events, other governmental trade or market control programs and related geopolitical events. Any of these events could cause the portfolios underlying companies significant fundament difficulties, and as such, I maintain a keen eye on both US and global market conditions and react accordingly

Currency

The portfolio is held in USD. As such, the p ortfolio has significant currency risks for non-dollar denominated investments. Currently, the portfolio only holds US-listed companies (a risk listed above); however, I plan on expanding to other countries to help improve geographic diversification and reduce risk. When assets priced in foreign currency are added to the portfolio, I will purchase a matching (as close as possible) position in currency futures between the assets traded currency and USDs to reduce currency risks. This use of futures is discussed in my retail currency hedging article linked above.

The Cloud

In broad terms, the cloud encompasses a global network of data centres, completing tasks for an end-user or business as an alternative to using compute power on the end-users device. The cloud provides almost all online services from streaming video on Netflix, storing data in Microsoft One Drive, calculating company payrolls through salesforce or, posting and viewing tweets on Twitter. A vast array of businesses operate within the cloud, from network security firms, content delivery firms, and data centre/server providers to creative software providers accounting platforms and social media.

Since the early 2000’s, firms seeking to move to remote operation and provider services over the web have been moving to the cloud. As global internet connectivity continues to improve and security increase, more and more firms have moved part or all of their operations to the cloud and opened up an enormous industry for related services and products.

There are generally four ways the cloud is delivered to the end-user.

  • The public cloud is the first of the two main types of cloud infrastructure. As the name implies, this cloud is shared by many users. It provides services that most people use every day, including Zoom, Netflix, Twitter, etc. This type of cloud is often provided on either a subscription or pay as you use bases and is dominated by Amazon Web Services, Microsoft Azure and Google Cloud.
  • The private cloud is the second most popular cloud system for companies. The critical difference between public and private cloud is a private cloud built either on-premises or in a private data centre and used by only one company. Key providers in the private cloud space include Hewlett Packard Enterprise, VMware, and Oracle. These providers offer both hardware in servers and software ranging from security and database systems to content delivery and optimisation.
  • Hybrid cloud refers to a combination of both public and private cloud. This often proves the best option for larger companies or governments, allowing for cheaper public cloud operation of non-critical operations and private cloud for critical and sensitive operations.
  • A community cloud is usually shared between the same organisation’s multiple arms, such as various government arms sharing one central data centre.

These types of cloud are provided using one of the three methods below. Often firms operate within one of these sectors, although large firms such as Amazon, Microsoft or Google operate in all three and often provide a full suite of cloud services.

  • IAAS

The first tier and the base for all cloud offerings is infrastructure-as-a-service (IaaS). IaaS provides the nuts and bolts for a business wanting to operate in the cloud. An IaaS provider offers the actual server space for storage, computing, networking, and security. Notable IaaS companies include Amazon, Microsoft, Google, IBM, and VMware. Companies that don’t operate their own cloud infrastructure host their services on another company’s IaaS.

  • PAAS

Many tech companies tout their software “platforms.” Sometimes this is a generic term for their overall suite of software, but as it pertains to the cloud, a platform-as-a-service (PaaS) enables software developers to build, manage, and deploy applications. PaaS is built on top of an IaaS service, and many of the abovementioned IaaS providers also operate as a PaaS as well. Some software providers, like Salesforce for example, offer a PaaS in addition to SaaS (see below), as they allow developers to custom build apps using a set of tools. Another notable example of a PaaS is communications company Twilio (NYSE:TWLO).

  • SAAS

Built on top of IaaS and PaaS is the end result of the cloud, the applications themselves. Companies that operate and sell software applications are known as software-as-a-service (SaaS) providers. SaaS outfits build and provide ready-to-use apps for a wide variety of both business and consumer tasks. Often the most visible part of the cloud to everyday consumers, notable SaaS apps many people run daily are Netflix and Spotify (NYSE:SPOT) for entertainment and Microsoft Office 365 and Salesforce on the business productivity end of the spectrum.

Edge Computing

Edge computing is a networking philosophy focused on bringing computing as close to the source of data as possible in order to reduce latency and bandwidth use. In simpler terms, edge computing means running fewer processes in the cloud and moving those processes to local places, such as on a user’s computer, an IoT device, or an edge server. Bringing computation to the network’s edge minimizes the amount of long-distance communication that has to happen between a client and server.

What is the network edge?

For Internet devices, the network edge is where the device, or the local network containing the device, communicates with the Internet. The edge is a bit of a fuzzy term; for example a user’s computer or the processor inside of an IoT camera can be considered the network edge, but the user’s router, ISP, or local edge server are also considered the edge. The important takeaway is that the edge of the network is geographically close to the device, unlike origin servers and cloud servers, which can be very far from the devices they communicate with.

What differentiates edge computing from other computing models?

The first computers were large, bulky machines that could only be accessed directly or via terminals that were basically an extension of the computer. With the invention of personal computers, computing could take place in a much more distributed fashion. For a time, personal computing was the dominant computing model. Applications ran and data was stored locally on a user’s device, or sometimes within an on-premise data center.

Cloud computing, a more recent development, offered a number of advantages over this locally based, on-premise computing. Cloud services are centralized in a vendor-managed “cloud” (or collection of data centers) and can be accessed from any device over the Internet.

However, cloud computing can introduce latency because of the distance between users and the data centers where cloud services are hosted. Edge computing moves computing closer to end users to minimize the distance that data has to travel, while still retaining the centralized nature of cloud computing.

To summarize:

  • Early computing: Centralized applications only running on one isolated computer
  • Personal computing: Decentralized applications running locally
  • Cloud computing: Centralized applications running in data centers
  • Edge computing: Centralized applications running close to users, either on the device itself or on the network edge

What is an example of edge computing?

Consider a building secured with dozens of high-definition IoT video cameras. These are “dumb” cameras that simply output a raw video signal and continuously stream that signal to a cloud server. On the cloud server, the video output from all the cameras is put through a motion-detection application to ensure that only clips featuring activity are saved to the server’s database. This means there is a constant and significant strain on the building’s Internet infrastructure, as significant bandwidth gets consumed by the high volume of video footage being transferred. Additionally, there is very heavy load on the cloud server that has to process the video footage from all the cameras simultaneously.

Now imagine that the motion sensor computation is moved to the network edge. What if each camera used its own internal computer to run the motion-detecting application and then sent footage to the cloud server as needed? This would result in a significant reduction in bandwidth use, because much of the camera footage will never have to travel to the cloud server.

Additionally, the cloud server would now only be responsible for storing the important footage, meaning that the server could communicate with a higher number of cameras without getting overloaded. This is what edge computing looks like.

What are other possible use cases for edge computing?

  • Edge computing can be incorporated into a wide variety of applications, products, and services. A few possibilities include:
  • IoT devices: Smart devices that connect to the Internet can benefit from running code on the device itself, rather than in the cloud, for more efficient user interactions.
  • Self-driving cars: Autonomous vehicles need to react in real time, without waiting for instructions from a server.
  • More efficient caching: By running code on a CDN edge network, an application can customize how content is cached to more efficiently serve content to users.
  • Medical monitoring devices: It is crucial for medical devices to respond in real time without waiting to hear from a cloud server.
  • Video conferencing: Interactive live video takes quite a bit of bandwidth, so moving backend processes closer to the source of the video can decrease lag and latency.

What are the benefits of edge computing?

Cost Savings

As seen in the example above, edge computing helps minimize bandwidth use and server resources. Bandwidth and cloud resources are finite and cost money. With every household and office becoming equipped with smart cameras, printers, thermostats, and even toasters, Statista predicts that by 2025 there will be over 75 billion IoT devices installed worldwide. In order to support all those devices, significant amounts of computation will have to be moved to the edge.

Performance

Another significant benefit of moving processes to the edge is to reduce latency. Every time a device needs to communicate with a distant server somewhere, that creates a delay. For example, two coworkers in the same office chatting over an IM platform might experience a sizable delay because each message has to be routed out of the building, communicate with a server somewhere across the globe, and be brought back before it appears on the recipient’s screen. If that process is brought to the edge, and the company’s internal router is in charge of transferring intra-office chats, that noticeable delay would not exist.

Similarly, when users of all kinds of web applications run into processes that have to communicate with an external server, they will encounter delays. The duration of these delays will vary based upon their available bandwidth and the location of the server, but these delays can be avoided altogether by bringing more processes to the network edge.

New functionality

In addition, edge computing can provide new functionality that wasn’t previously available. For example, a company can use edge computing to process and analyze their data at the edge, which makes it possible to do so in real time.

  • To recap, the key benefits of edge computing are:
  • Decreased latency
  • Decrease in bandwidth use and associated cost
  • Decrease in server resources and associated cost
  • Added functionality

What are the drawbacks of edge computing?

One drawback of edge computing is that it can increase attack vectors. With the addition of more “smart” devices into the mix, such as edge servers and IoT devices that have robust built-in computers, there are new opportunities for malicious attackers to compromise these devices.

Another drawback with edge computing is that it requires more local hardware. For example, while an IoT camera needs a built-in computer to send its raw video data to a web server, it would require a much more sophisticated computer with more processing power in order for it to run its own motion-detection algorithms. But the dropping costs of hardware are making it cheaper to build smarter devices.

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