With all that's going on in the country right now, between the coronavirus disease 2019 (COVID-19) pandemic and the upcoming local, state, and national elections in November, you might have missed what's arguably the most important date for investors of the third quarter: August 14.
Roughly a week and a half ago (Aug. 14) marked the deadline for money managers with at least $100 million in assets under management to file Form 13F with the Securities and Exchange Commission. A 13F provides a snapshot of what stocks money managers were holding, as of June 30, 2020, as well as what they purchased and sold during the previous quarter. In other words, it's an under-the-hood look at what the brightest minds on Wall Street have been up to during an exceptionally volatile time for the stock market.
Of particular interest is how billionaire money managers threw their weight around in the tech sector during the second quarter. It's no secret that tech stocks have been leading the market higher for months, making tech a logical parking spot for billionaires during the second quarter. The question being, which tech stocks did they fancy?
With 13Fs now filed, we know the answer. The following three tech stocks were absolutely bought hand over first by billionaire money managers during Q2.
The first stock that successful money managers couldn't stop buying in the second quarter is cybersecurity solutions provider CrowdStrike (NASDAQ: CRWD). Chase Coleman's Tiger Global Management added nearly 4.8 million shares, with Larry Fink's BlackRock and Jim Simons' Renaissance Technologies boosting their respective stakes by 3.93 million and 1.8 million shares. In total, 13F filers upped their aggregate holdings in CrowdStrike by 22% from the sequential first quarter to 135.6 million shares.
Billionaires don't have to look far to find data points that are going to attract them to CrowdStrike. Its number of subscribing customers has grown by triple digits for three consecutive years, and 91% of the company's revenue in the most recent quarter was generated via subscriptions. As a reminder, subscription revenue tends to be high margin (78% adjusted gross margin in Q1 2021), very predictable, and it leads to low client churn.
Perhaps the most telling aspect of CrowdStrike's success has been the scalability of its cloud-based Falcon security platform. As of the fiscal first quarter of 2021, better than 55% of its customers had four or more cloud module subscriptions. Since CrowdStrike's business model is built on clients adding new subscription services over time, the fact that it's seen the percentage of its clients with four or more cloud modules jump from 9% to over 55% in only three years is a testament to the quality of its services.
With margins improving, sales skyrocketing, and cybersecurity solutions growing in importance because of COVID-19, Crowdstrike has been a no-brainer selection by billionaire money managers.
If there's a theme to be seen here, it's that billionaires had their heads in the "cloud" this past quarter. Software-as-a-service star Datadog (NASDAQ: DDOG), which provides cloud-based infrastructure and application performance monitoring solutions for enterprises, was a clear favorite among top-tier money managers. BlackRock added 4.68 million shares, Renaissance Technologies bought 1.8 million shares, and Tiger Global Management scooped up 1.08 million shares. Overall, 13F filers increased their collective stakes in Datadog by 44% from the sequential first quarter to 127.8 million shares.
As is the case with most cloud-focused companies, we were already seeing a shift into a remote and/or shared work environment well before COVID-19. However, the pandemic has really accelerated this shift and forced companies to adapt. In other words, it's the perfect environment for Datadog to thrive.
This is a company that delivered 68% revenue growth during the coronavirus-impacted second quarter from the prior-year period, and managed to increase its large customer count to over 1,000 (a 71% jump from the prior-year large customer count). Datadog defines larger customers as providing over $100,000 in annual recurring revenue. Similar to CrowdStrike, Datadog is winning over new customers, but is seeing its greatest margin expansion from its existing clients adding on new services.
After producing $362.8 million in full-year sales in 2019, Wall Street is looking for Datadog to approach $1.5 billion in full-year sales by 2023. For those of you keeping score at home, that's a compound annual growth rate (CAGR) of 42.6%. This is what rightly has successful money managers excited.
Did I mention that cloud-based companies were hot during the second quarter? Edge cloud platform Fastly (NYSE: FSLY) saw BlackRock pick up 1.99 million shares, had Jeff Yass' Susquehanna International buy almost 256,000 shares, and saw Ken Griffin's Citadel Advisors increase its stake by more than 142,000 shares. All told, aggregate ownership by 13F filers in Fastly jumped 46% from the sequential first quarter to 55.3 million shares.
Keeping with the theme, Fastly has been a key beneficiary of the work-from-home trend that's swept the country since the coronavirus pandemic upended the traditional office space. Fastly's cloud solutions are stepping in to ensure that content is being delivered to end users as quickly, efficiently, and securely as possible. And based on the company's growth rate, it would certainly appear that it's gained the trust of a number of big businesses.
During one of the worst quarters for economic growth in U.S. history, Fastly delivered a 62% increase in year-over-year sales. It also produced an acceleration in dollar-based net expansion rate of 137% in Q2 2020, up from 133% in Q1 2020. This implies that Fastly's existing clients are not only sticking around, but they're buying additional services and spending more money. Perhaps unsurprisingly, this subscription-based model where more money is being spent by existing clients saw its adjusted gross margin expand to 61.7% in Q2 2020 from 55.6% in the prior-year quarter.
Although Fastly isn't yet profitable, Wall Street doesn't seem to care. It's growing exceptionally fast, retaining its existing customers, and landing some brand-name clients. With an expected CAGR of roughly 32% through 2023 (based on Wall Street's consensus estimate), it's becoming a must-own tech stock.
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