July 2021’s Portfolio Reveal – What Changes Were Made and Rationale?

Thank you to all the readers who read my Portfolio Reveal article published in March. The response has been better than I expected! The article discusses how my investment strategy has evolved since I started investing 3 years ago, my portfolio reveal and the reasons why I hold certain stocks in my portfolio. You may read the article to find out more. In this article, I would like to provide some updates to my portfolio ever since this article got published 3 months ago.

Changes in Portfolio

The image below shows my portfolio allocation as of today. I have been cleaning up my portfolio over the past month by reducing and selling my less conviction stocks and ETFs, overweight stocks by allocation and added new positions.

One mistake that I have made is to continue averaging down my existing positions to reduce my average cost price, to the point that it has become overweight in my portfolio. I should have channeled the funds to initiate new positions to further diversify my portfolio instead so that i can capture the opportunity of picking good companies at attractive valuation.

For example, DBS was considered an overweight position as it constituted about 20% in my portfolio, before selling half at $30. My selling price was slightly below my targeted price of $30.69 – $31.71 mentioned in my article where I analysed DBS’ result. I was conflicted initially as it was meant to be treated as a dividend stock but a look at my portfolio allocation shows that it constitutes 20% of my portfolio. I aim to have all my positions equally allocated in my portfolio with some positions having higher allocation as they are my highly convicted stocks.

Nonetheless, selling helped me to recycle the proceeds from selling less convicted stocks and ETFs and overweight stocks to add new positions, which I will explain in the next section.

PATH (UIPath)

Many employees encounter loss in productivity as they have to constantly execute manual, time-consuming and repetitive tasks to get their work done. Productivity loss could ultimately impact a company’s bottom line. There are many automation software available in the market but the main target audience for such software is developers and engineers but not employees directly involved in executing the actual work being automated. This resulted in employee’s productivity, innovation and satisfaction to suffer. 

UIPath provides customers with a robust set of capabilities to discover automation opportunities and build, manage, run, engage, measure and govern automations across departments within an organisation. Its platform enables employees to quickly build automations for both existing and new processes. Its platform leverages the power of AI, based on computer vision to enable its software robots to learn from and replicate workers’ steps in executing business processes and perform a vast array of actions as a human would when executing business processes. This drives continuous improvements in operational efficiencies and enables companies to deliver on key digital initiatives with greater speed, agility, and accuracy.

As of 30 April 2021, UIPath has more than 8500 customers where 65% of its customers are Fortune Global 500. It has 1105 customers with at least $100k in ARR, an increase from 1002 a quarter ago and 104 customers that account for at least $1 million in ARR, an increase from 89 a quarter ago. This shows that UIPath is widely used in big companies around the world, and that UIPath has room for organic growth with its customers 

I initiated a position in UIPath after being impressed by its strong net dollar retention rate and market leadership.

What I like about this company is the fact that it has a strong net dollar retention rate of 145%, this means that even if UIPath were not able to sign new customers up, UIPath’s ARR will increase 45% YoY from its existing customers. That’s impressive organic growth from its existing customers. In fact, in the latest earnings call, management has emphasised that it continues to have a very strong and best-in-class and expansion model where 80% of ARR growth comes from existing customers and remaining 20% from new customers. This is because automations on UIPath’s platform can be built, consumed, managed and governed by any employee who interacts with computers, it could result in more employees in the organisation using its product in the long run.

In its earnings call, management has emphasised its market leadership position in a few ways. Firstly, Forrester Wave named UIPath as a leader among 14 vendors in Robotic Process Automation. In Forrester Wave’s evaluation, UIPath received the highest ranking in current offering strategy and market presence. Secondly, management also shared that its leadership position in the industry has enabled its ARR to grow by 64% YoY, as it added more revenue in 2020 than its top nine competitors combined. This resulted in UIPath gaining market share from competitors. Even though UIPath is a leader in the industry, UIPath has barely scraped the surface of its industry as it estimates its total addressable market is over $60 billion while it recorded $653 million of ARR. Therefore, UIPath believes there’s ample room for it to drive durable long-term growth.

UPST (Upstart Holdings)

Upstart is a leading, cloud-based artificial intelligence lending platform. It utilises AI on its platform to aggregate consumer demand for high-quality loans and connects it to Upstart’s bank partners. Since its launch, its bank partners have originated more than 620k personal loans that generated more than 9 million repayment events. 

The difference between UPST and a bank in lending out loans is the way they determine credit score. Most banks use simple, rules-based systems that consider a limited number of variables. On the other hand, UPST’s model incorporates more than 1.6k of variables and a growing training set of data from repayment events. This leads to higher approval rates and lower interest rates at the same loss rate. This is evident from a study conducted where UPST’s model approved about 2.7 times more borrowers at the same loss rate as loans given out by several large banks in the US.

The main reason why I initiated a position in UPST is that I saw how utilising AI can improve its operating metrics such as Conversion Rate. Conversion Rate has been increasing from 8.1% in 2017 to 13.1% in 2019. In addition, Conversion Rate has been increasing for three quarters straight from 15% to 22%. This means that UPST is able to approve more loans from all loan enquiries. 

Also, as UPST expands its business into Auto Loan, so will be its total addressable market. With the expansion, its total addressable market opportunity will now increase from $92 billion to $718 billion. UPST growth opportunity is immense as UPST is barely scraping the market as it only facilitated the origination of $3.5 billion in unsecured personal loans, or less than 5% of the total market. With the expansion and acquisition of Prodigy, it enables UPST to speed up the penetration into auto loans thus UPST has a long runway of growth and I am confident that it will be a multibagger in years to come. 

APPS (Digital Turbine)

Digital Turbine is a one stop mobile growth and monetization platform that simplifies content delivery and delivers it directly to the device. Its platform enables frictionless app and content discovery, user acquisition and engagement, operational efficiency and monetization opportunities. As of May 2021, Its platform has been adopted by more than 40 mobile operators and OEMs and about 600 million devices have its platform installed on the device. 

Prior to its acquisitions, Digital Turbine only offered pre-installed apps services for its advertisers. Whenever a phone is booted for the first time, users will be prompted to install a few apps on their new device and Digital Turbine receives a cut from advertisers for every successful install. However, Digital Turbine would not be able to receive recurring lifetime revenues, if not its acquisitions of Mobile Posse, Ad Colony, Appreciate and Fyber. WIth the acquisitions, Digital Turbine is now a one-stop mobile growth and monetization platform that is well-positioned to tackle the ever growing mobile media advertising market. 

TSM (TSMC)

TSMC is the largest pure-play foundry in the world, focusing solely on manufacturing customers’ products. In 2020, TSMC manufactured 11,617 products for 510 customers, covering a wide range of applications used in mobile devices, high performance computing, automotive electronics and the internet of Things. It enjoys a market share of 57% in the foundry market and a 90% market share in the advanced technologies of below 10nanometer. 

As Moore’s Law states that the number of microchips would double every two years, chips will be more advanced than ever. I am confident that TSMC would be able to maintain its leadership position in the advanced technologies segment which it defines as chips that are 7nm and below. This is because TSMC has a market share of 90% in the segment and large investments have to be made in order for other foundries to advance into smaller chips. By the time other foundries are able to advance into smaller chips, TSMC would be way more ahead in manufacturing even smaller chips. Therefore, TSMC is in the forefront in this segment. 

The industry is also being supported by the structural increase in underlying semiconductor demand as the multiyear megatrend of 5G and high performing computers related applications are expected to fuel massive increase in computation power and greater need for energy-efficient computing. Such applications require leading-edge technologies, in which TSMC is in the forefront in this segment. Furthermore, the pandemic has also fundamentally accelerated the digital transformation, making semiconductors more pervasive and essential in people’s lives. TSMC is confident that with its technology leadership and manufacturing excellence, it is well positioned to capture the structural growth from the favourable industry megatrend. 

Therefore, I believe that TSMC is an attractive and relatively safer investment to hold for the longer term.

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One thought on “July 2021’s Portfolio Reveal – What Changes Were Made and Rationale?

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