Market Overview
We reiterate our bullish call that the highest-quality names have likely bottomed. This thesis stems from the fundamental financial performance of the names we have been tracking. As these companies have delivered high-quality earnings reports, their positive financial results have de-risked the process of investing in these great businesses. They are worth owning today, to hold well into the future, making it a compelling time to invest in areas like cloud computing, enterprise and SME software, semiconductors, financial technology, and cryptocurrency.
The multi-month decline in prices have increased the expected return of these assets.
Today is a favorable time to begin to put cash to work. As a result, we are initiating coverage of Okta, Inc and adding the stock to our portfolio. Finally, we have added several new names to our watch list and will be releasing comprehensive coverage of several new companies and cryptocurrencies in the upcoming report.
New Investment Recommendation - OKTA
After the Company’s most recent earnings release, we are publishing a BUY rating on Okta, Inc (OKTA). OKTA delivered an outstanding quarter during a difficult macro environment, raising their expected 2022 guidance. This is exactly the type of company that we look for. Let’s dig into what the company does and why they are well positioned to benefit from increasing digital trends.
OKTA offers cloud-based digital network management software. The company is the market leader in identity management, meaning they offer the best way to ensure secure digital interactions with employees and customers. They are the market leader in multi-factor authentication services, single-sign-on, API management, and onboarding for thousands of companies worldwide.
This software is essential to how large companies operate today, thus making it increasingly difficult to cut back on spending in areas like enterprise software where Okta resides. Enterprise “software as a service” (SaaS) business models are sticky, generating recurring annual subscription revenue, offering a great lens into the future by measuring key metrics like remaining performance obligations to gain insights into expectations of future performance.
OKTA continues to increase both revenue and profitability at a significant pace. Despite macro headwinds, the company is still seeing significant demand for their software. As a result, we are BUYING A QUARTER and expect the total portfolio weighting to be 10% of the Cabot SX Crypto Advisor Equity Portfolio.
Key Catalysts:
- OKTA trades at just 10X TTM revenue; OKTA is currently at a bargain price with historical multiples for this sector trading at over 20X forward revenue
- OKTA has increased their TTM revenue by 62% to $1.5 billion and continues to grow quarterly revenue at over 65% (Source: Pitchbook)
- Dollar-based retention rate in the trailing 12 months was 123%, up more than 300 basis points
- Remaining Performance Obligations (“RPO”) totaled $2.71 billion, up 43% year over year. Current RPO, expected to be recognized over the next 12 months, was $1.41 billion, up 57% year over year
- Okta’s total customer count was 15,800, up 48% year over year. Customers with more than $100K in Annual Contract Value increased 59% year over year
- Price to book of 2X is extremely compelling
- Low float/shares outstanding of 150 million tradeable makes the stock subject to significant price appreciation as institutional buying is likely to increase as the company moves closer to profitability.
Portfolio Update
We are increasing our exposure to equities and crypto as valuations have declined, making expected future returns higher on a risk adjusted basis. We are currently recommending only a handful of high-quality assets that we expect to outperform the broader markets over a longer horizon.
For our crypto “pure play” portfolio, we are currently offering recommendations to begin positions in Ethereum (ETH), Polygon (MATIC) and Ethereum Naming Service (ENS). These positions are largely predicated on the continued success of the Ethereum network. Ethereum is the global, industry-leading Layer One blockchain solution for distributed computing projects.
Ethereum enables creators to build and engage in digital commerce through the use of smart contracts, a technology created by Ethereum to allow for blockchain-based transactions to take place at scale. Ethereum continues to dominate all other blockchain projects in terms of fees generated on the network (revenue proxy) and total engagement. ERC-20 is the industry standard for tokenized assets, as the world becomes increasingly digital, more people have turned to the Ethereum network.
Crypto Portfolio
Ethereum (ETH)
Ethereum is continuing to experience growth in key metrics like users, transactions, and fees generated on the network. Ethereum network transaction volume is increasing as more projects continue to build on the platform, attracting more users. Ethereum remains the industry leader, demonstrating high switching costs, as projects continue to choose ETH to run their decentralized applications. Recommendation – BUY A QUARTER
Ethereum Name Service (ENS)
Ethereum Name Service (ENS) aims to make it easier for users to operate on Ethereum. ENS is similar to GoDaddy, allowing investors to purchase a domain name for their public address and web address. ENS aims to become the go-to naming protocol by making web3 usernames that can be utilized across multiple blockchain networks over time. This process is what many describe as interoperability – moving across blockchains (for example, Ethereum blockchain and Bitcoin blockchain). These domains can be bought and sold across the blockchain!
Users and businesses are used to traditional web addresses. Users of blockchain technology will likely prefer what they already know instead of having to utilize a long phrase of letters and numbers. ENS will help to overcome this friction and improve the user experience.
Companies are increasingly beginning to offer “sign in with Ethereum.” ENS is helping improve this authentication process for companies.
Valuation
ENS is now trading at a 7.6x price/sales ratio, well below its historical average and the historical multiple for software, which often trades around 20x P/S. In our view, today represents an attractive entry point for ENS token (Source: Dune Analytics).
The ENS governance token (crypto), created on the Ethereum blockchain, enables participants to propose changes within the organization, much like voting rights are afforded to members of a traditional company board.
ENS has a low supply of 100 million tokens, making it an attractive investment if adoption continues to increase – buying pressure will move the price of ENS quickly. Recommendation – BUY A HALF (of total intended position)
Polygon (MATIC)
Ernst & Young, a member of the “big four” public accounting firms currently auditing numerous public companies is working with Polygon on Project Nightfall. They are aiming to make some of their clients Ethereum information private, which could be more suitable for large company’s specific use cases. Due to competitive advantage, many companies do not desire their information posted to a public blockchain. EY is using Polygon to help with this large project that could apply to things like, supply chain management, NFT marketplaces, and aims to be finished with the project by 2023. This could give EY an advantage over competitors such as Deloitte, in their ability to service companies looking to gain exposure to web3.
Polygon is a Layer Two scaling solution for the Ethereum network. Polygon helps to alleviate congestion and reduce latency and costs for running projects on ETH.
Key Metrics:
- More than 19,000 decentralized applications now on its network, a 500% increase from 3,000 dApps in October
- Polygon now serves over 8,000 monthly active teams, up from over 6,000 in January and just a few thousand in October
- Sixty-five percent of the teams were built entirely on Polygon, whereas thirty-five percent were built on Ethereum
- Processed over 3.4 billion total transactions
- 135 million unique user addresses
- Over $5 billion in assets.
A key catalyst for Polygon adoption and acceleration has been partnerships – Polygon has forged ahead with industry leaders like Facebook (Meta), EY (consulting), and Alchemy (web3 infrastructure).
Since partnering with Alchemy, the number of Polygon apps has increased by more than 95x. Alchemy provides key support in web3 infrastructure and platform capabilities, working alongside Polygon to resolve and prevent problems as they occur at the developer level. This partnership has served as a valuable flywheel and competitive advantage for MATIC.
Turning to trading dynamics, over 650k MATIC tokens have been removed from circulation since their recent network upgrade at the beginning of 2022. These key growth and trading metrics coupled with the recent MATIC price decline has made MATIC an attractive, long-term, risk-adjusted investment opportunity at today’s price level. Recommendation – BUY A QUARTER
| Ticker | Original Weight | Price | Price at Rec | Performance | Rating |
| ETH | 15.0% | 1,863.83 | 3,444.22 | -45.89% | BUY A QUARTER |
| ENS | 2.50% | 11.88 | 10.22 | 16.24% | BUY A HALF |
| MATIC | 1.25% | 0.63 | 0.678 | -7.82% | BUY A QUARTER |
| APE | — | 6.26 | — | — | WATCH |
| SOL | — | 42.23 | — | — | WATCH |
| HNT | — | 10.60 | — | — | WATCH |
| STEPN | — | 1.005 | — | — | WATCH |
Equity Portfolio
Okta, Inc (OKTA)
Okta sells solutions for identity and access management. Okta’s software offerings contain products to protect and enable employees, contractors, and partners, while customer identity and access products securely enable an organizations’ customers to use applications. Okta’s software solutions are cloud-delivered, and its integration network gives customers security protection and access across a wide variety of applications that are critical to business and government needs. The California-based company went public in 2017 (Source: Pitchbook). Recommendation – BUY A QUARTER
Nvidia Corporation (NVDA)
NVDA is an American multinational technology company based in Santa Clara, California. The Company designs software and graphic processing units (GPUs) for high performance computing, artificial intelligence, and gaming. In our view, NVDA is well positioned to benefit from continued cryptocurrency adoption, as well as global cloud-based commerce. NVDA is the global leading fabless semiconductor designer for these applications. Recommendation – BUY A QUARTER
ProShares Bitcoin Strategy ETF (BITO)
Bitcoin is digital property. BTC is quickly becoming the reserve currency of the digital era, as other DeFi protocols, traditional companies, and institutional investors continue to purchase Bitcoin to serve both as a form of collateral and a store of wealth. The inherent properties of BTC make it a highly desirable asset in today’s period of high inflation. BTC has 1/10 the market capitalization of gold.
Fidelity recently announced that they are adding the ability to purchase Bitcoin in 401k accounts. This is a significant move by the industry giant. Currently, 23,000 companies use Fidelity to administer their retirement plans. This is extremely bullish for the crypto asset class, as current investor exposure to BTC is under 5%.
In our view, the easiest and best way to gain exposure to BTC is through BITO in a traditional brokerage account. Recommendation – BUY A QUARTER
Arista Networks (ANET)
Arista Network designs and sells multilayer network switches to deliver software-defined networking for large datacenter, cloud computing, high-performance computing environments. ANET is positioned to benefit form workloads transitioning to the cloud. Acceleration in the digital economy, partially powered by increasing web3 and cryptocurrency adoption will benefit Arista. Recommendation – BUY A QUARTER
| Ticker | Original Weight | Price | Price at Rec | Performance | Rating |
| Proshares Strategy Bitcoin ETF (BITO) | 2.50% | 19.57 | 25.93 | -24.53% | BUY A QUARTER |
| Arista Networks (ANET) | 2.50% | 103.59 | 105.00 | -1.34% | BUY A QUARTER |
| Nvidia (NVDA) | 2.50% | 187.86 | 188.20 | -0.18% | BUY A QUARTER |
| Okta Inc. (OKTA) | 2.50% | 95 | 95 | — | BUY A QUARTER |
| Concord Acquisition (CND) | — | 9.94 | — | — | WATCH |
| Galaxy Digital (GLXY.TO) | — | 7.47(CAD) | — | — | WATCH |
| Unity (U) | — | 42.84 | — | — | WATCH |
Watch List
Solana (SOL) – more centralized but powerful Layer One blockchain solution focused on gaming and NFT applications.
Bored Ape Yacht Club (APE) – ETH-based, Layer Two cryptocurrency used to power the Bored Ape Yacht Club’s emerging metaverse ecosystem.
STEPN (GMT) – play to earn cryptocurrency used to incentivize health and wellness.
Helium (HNT) – decentralized blockchain network for internet of things devices (IOT). Users who operate Helium hotspots mine and earn rewards in Helium’s native cryptocurrency HNT.